Fairness factor in post-employment non-competition agreements

Any employer who seeks to enforce a post-employment non-competition agreement must demonstrate that the agreement's restrictions are necessary to protect the employer's trade secrets or good will and are reasonably limited in scope and duration. E.g., Marine Contractors Co., Inc. v. Hurley, 365 Mass. 280, 287-88 (1974).

It is therefore not surprising that litigants tend to focus on those pivotal legal issues when attacking or defending such agreements; but many advocates give scant attention to the potentially dispositive equitable issue of whether one party has simply been unfair to the other.

A motion to enjoin a violation of a non-compete is a motion for specific enforcement, which is equitable relief and "not a matter of strict and absolute right." Economy Grocery Stores Corp. v. McMenamy, 290 Mass. 549, 552 (1935).

Equitable remedies are always applied "with a focus on fairness and justice" (Demoulas v. Demoulas, 428 Mass. 555, 580 (1998)) and non-competes are only enforced "in the absence of equitable factors which would militate against enforcement." New England Canteen Service, Inc. v. Ashley, 372 Mass. 671, 674 (1977).

Agreements that are "inherently unfair" (Slade Gorton & Co. v. O'Neill, 355 Mass. 4, 9 (1968)) or "unconscionable, offend public policy, or are unfair under the circumstances" (IKON Office Solutions, Inc. v. Belanger, 59 F. Supp. 2d 125, 131 (D. Mass, 1999)) are unworthy of equitable enforcement.

A court of equity looks both ways, however, and an employee should not expect judicial sympathy merely because a non-compete will have its intended effect, particularly if it is the employee who has been unfair to the employer. E.g., Sentient Jet, Inc. v. Lambert, 2002 WL 31957009, *6 (Mass. Super.) (van Gestel, J.).

The following addresses some of the equitable questions that Massachusetts courts most often consider.

1. Was the agreement imposed or negotiated?

All post-employment non-competition agreements are carefully scrutinized because they may tend toward monopoly and often result from unequal bargaining power. Kroeger v. Stop & Shop Companies, Inc., 13 Mass. App. Ct. 310, 318-19 (1982); Sentry Ins. Co. v. Firnstein, 14 Mass. App. Ct. 706, 707 (1982).

But they may be construed more or less strictly depending on the circumstances of their making (Neeco, Inc. v. Computer Factory, Inc., 1987 WL 16161, *2 (D. Mass.) (Zobel, J.)), including the parties' leverage and sophistication, whether the employee had counsel, and whether he signed the agreement "without compulsion (an element frequently not present in the employer-employee context)." Boulanger v. Dunkin Donuts, 442 Mass. 635, 640 (2004), quoting Wells v. Wells, 9 Mass. App. Ct., 321, 324-25 (1980).

An employee's "low rank in the company and her lack of bargaining power may make an otherwise reasonable restraint unreasonable." Neeco, at *2. So may an agreement that was not explained or was "buried among other papers that she was told to sign." Engineering Management Support, Inc. v. Puca, 2005 WL 1476462, *1 (Mass. Super.) (Smith, J.).

But a sophisticated executive who negotiated fair constraints for fair compensation is more likely to be held to them. E.g., Kroeger, 13 Mass. App. Ct. at 318; Acordia Northeast, Inc. v. Academic Risk Resources & Insurance, LLC, 2005 WL 704870, at * 4 (Mass. Super.) (Botsford, J.).

2. Was the agreement signed before or after the hiring?

Some non-competes are pulled from a drawer after the job is under way and presented to employees who did not agree to them when they were hired, received nothing new for them, and signed them only because they would be fired if they did not.

When an employer hopes to enforce an agreement that will be scrutinized closely in the best of circumstances, a whiff of coercion does not improve the odds. E.g., Sentry Ins. Co., 14 Mass. App. Ct. at 709; First Eastern Mortgage Corp. v. Gallagher, 1994 WL 879546, *1 (Mass. Super.) (Fremont-Smith, J.).

The Supreme Judicial Court found twice in the first half of the last century that continued at-will employment was sufficient consideration for a non-compete (Economy Grocery Stores Corp., 290 Mass. at 551; Sherman v. Pfefferkorn, 241 Mass. 468, 473 (1922)), but it has been 70 years since a published Massachusetts appellate opinion reaffirmed that principle,1 and several trial courts have recently rejected it.

Those "later decisions demonstrate that, in order for a restrictive covenant to withstand scrutiny, some additional consideration ought to pass to an employee upon the execution of a post-employment agreement." IKON Office Solutions, Inc., 59 F. Supp. 2d at 131 and cases cited. See also Rellstab v. John Hancock Financial Services, Inc., 2004 WL 1050748 (Mass. Super.) (McCann, J.).

3. Has the employer breached?

An employer that breaches its own contractual obligations frees its employee from hers. National Overall Dry Cleaning Co. v. Yavner, 321 Mass. 434, 440 (1947); New England Canteen Service, Inc., 372 Mass. at 676; Slade Gorton & Co., 355 Mass. at 9.

Common examples are unpaid earnings (National Overall Dry Cleaning Co., 321 Mass. at 440) and termination of the employment before a specified term. Ward v. American Mut. Liability Ins. Co., 15 Mass. App. Ct. 99 (1983).

4. Are the employer's hands clean?

Even if the employer has not breached the agreement, a court may decline to enjoin its violation if the employer's hands are unclean. Fales v. Glass, 9 Mass. App. Ct. 570, 575 (1980); Donaghue v. IBC USA (Publications), Inc., 70 F. 3d 206, 218 (1st Cir, 1995).

Traditionally, the doctrine applies only to the parties' conduct toward each other and only regarding the dispute at issue. Scattaretico v. Puglisi, 60 Mass. App. Ct. 138, 143 (2003); New England Patriots Football Club, Inc. v. University of Colorado, 592 F.2d 1196, 1199 (1st Cir. 1979) (The Patriots may have "done the University of Oklahoma dirt" by recruiting its coach in breach of his contract, but that does not mean the University of Colorado should be enjoined from doing the same thing to the Patriots).

However, some courts have denied or limited injunctions "where the employer was found to have engaged in the very conduct it was attempting to prohibit." Oxford Global Resources, Inc. v. Guerriero, 2003 WL 23112398, *13 (D. Mass). See Deutschmann v. Board of Appeals of Canton, 325 Mass. 297, 299 (1950).

At least one influential judge gives no weight at all to securities dealers' past sins against one another: "This is not a clean-hands business on any side." UBS Paine Webber Inc. v. Dowd, 2001 WL 1772856, *1 (Mass. Super., van Gestel, J). "The brokerage houses are the injured innocents when a broker leaves them for a competitor one week and the conspiring raider the next." Morgan Stanley DW, Inc. v. Clayson, 2005 WL 1009651, * 6 (Mass. Super., van Gestel, J.).

On the other hand, another court enforced a non-compete notwithstanding that the employer had taken the other side of the issue in a prior case; but the court rejected the notion that the employer's own hiring practices were irrelevant. EMC Corporation, 1997 WL 1366836 at *5.

5. How did the employment end?

An employer who hopes to enforce its employees' non-competes should think twice about firing them unfairly. Cruel, kind or indifferent, an at-will employee's dismissal for any lawful reason or no reason at all is not actionable. Harrison v. NetCentric Corp., 433 Mass. 465 (2001); see Richey v. American Automobile Association, 380 Mass. 835, 839 (1980).

But courts of equity do not aid parties "who themselves resort to unjust and unfair conduct." Economy Grocery Stores Corp., 290 Mass. at 552, quoting Shikes v. Gabelnick, 273 Mass. 201, 207 (1930). "An employer may act so arbitrarily and unreasonably in exercising his right of termination" that the court will not enforce the restrictive covenants that the termination triggered. Id., at 552.

A mere firing does not invalidate a non-compete (Kroeger, 13 Mass. App. Ct. at 320) but "if the discharge is inequitable, an otherwise reasonable restraint may not be enforced." Id. at 320. See also Neeco, Inc., 1987 WL 16161, at *2.

The SJC has said that if a termination was "capricious and arbitrary or unjust and inequitable, that would be a decisive factor" in denying such enforcement. National Overall Dry Cleaning Co., 321 Mass. at 439 (emphasis added).

An employer who fires a loyal employee "without just or adequate cause and in circumstances involving some humiliation to him" should not expect a court to compound the injustice by impeding her ability to earn a living. Economy Grocery Stores Corp., 290 Mass. at 551.

In contrast, when a highly paid executive moves freely from company to company, oblivious of his non-compete, a court is less likely to be moved by his pleas that its enforcement will leave him unemployed. EMC Corporation, 1997 WL 1366836, *4.

6. How much protection does the employee need?

An agreement that includes severance or other post-employment benefits that counterbalance its restrictive covenants is more palatable than one that does not. E.g., Marcam Solutions, Inc. v. Sweeney, 1998 WL 1284184 (Mass. Super.) (Neel, J.); C. R. Bard, Inc. v. Solano, 1988 WL 92469 (D.Mass.) (Zobel, J.).

A good or bad economy may also influence a court's thinking. All Stainless, Inc., 364 Mass. at 781 n. 2 (1974).

7. What about boilerplate?

An agreement's ritual incantations of fairness should be disregarded. Restrictions that bar an employee from working anywhere in the world, except in parts of Patagonia, at the only trade she knows, are not made reasonable by her "acknowledgment" that she will go forth and prosper despite them.

A confidentiality agreement cannot turn public knowledge into a trade secret merely by describing it as such (Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 277-78 (1980)), and an oppressive non-competition agreement is not fair and reasonable merely because it says so.

Endnote

1 In an unpublished opinion, Wilkenson v. QCC, Inc., 2001 WL 1646491 (Mass. App. Ct.), the Appeals Court applied the traditional rule; but unpublished opinions have no precedential value in the Appeals Court and cannot be cited as authority in unrelated cases. Purvis v. Commissioner of Correction, 29 Mass. App. Ct. 190, 192 n. 5 (1990).

James B. Conroy is a partner at Donnelly, Conroy & Gelhaar in Boston and concentrates much of his practice in employment litigation and counseling.

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