Happy 4th!
After three and a half years, we are finally seeing more cases — and more judicial decisions — involving noncompetes subject to the Massachusetts Noncompetition Agreement Act (the “MNAA”), G.L. c. 149, § 24L.
And, we now have a third and fourth decision (or fourth and fifth, depending on how you’re counting).
Background
Before getting to the new cases, some background should be helpful.
As you may recall, the MNAA became effective on October 1, 2018, and applies only to noncompetes entered into on or after that date.
As you may also recall, the first case to apply the MNAA to a noncompete was Nuvasive, Inc. v. Day, 2019 WL2287709, at *4 (D. Mass. May 29, 2019). The noncompete had the following language:
In consideration of my engagement by the Company, the compensation I . . . receive from the Company (including for example monetary compensation, Company goodwill, confidential information, restricted stock units and/or specialized training) . . . .
Although the noncompete was executed prior to October 1, 2018, Judge Casper said that the above language would have satisfied the MNAA’s consideration requirement. Of course, because the noncompete was not actually subject to the MNAA, Judge Casper’s observation was simply dicta.
Then, in 2021, we had the first non-dicta decision involving a post-MNAA noncompete: KPM Analytics North America Corporation v. Blue Sun Scientific, LLC, 2021 WL 2002581 (D. Mass. May 19, 2021). In that case, U.S. District Court Judge Hillman dismissed a claim based on a nonconforming noncompete because (1) the noncompete failed to notify the employee of his right to consult with counsel (a notification required by the MNAA) and (2) the only identified consideration, “employment by the Company,” did not satisfy the MNAA’s “other mutually agreed upon consideration” requirement.
Finally, a few days ago, I posted about a recent case — Macaroco v. Vanity Lab, LLC, C.A. No. 2173-CV-00426 (Bristol County Superior Court May 31, 2022) (White, J.) — involving a noncompete that the parties agreed was both subject to and invalid under the MNAA. That was the second decision actually involving a post-MNAA noncompete, though nothing of substance about the noncompete came from the decision. (There were plenty of other takeaways, however). Contrast this with Shinewald v. Camp Specialists LLC, C.A. No. 2181-CV-01950 (filed in the Massachusetts Superior Court on September 7, 2021). In that case, the parties agreed that the noncompete was invalid under the MNAA, and the court never had to issue a decision, much less a decision that involved the noncompete.
New Cases
Recently, we have seen several cases involving noncompetes entered into after the MNAA’s effective date. So far, however, we have seen only two new in-state decisions applying the MNAA to a post-MNAA noncompete. Those two cases, coupled with the other cases discussed below, provide additional guidance about noncompetes subject to the MNAA, as well as an indication about how courts are thinking about some related issues that frequently arise in these types of cases.
TL;DR / SR;MP
Before turning to the cases, here are the takeaways:
- Evergreen contracts do not bring pre-October 1, 2018 noncompetes into the MNAA;
- The “sale” of a book of business does not (in and of itself) convert a noncompete otherwise in the context of an employment relationship into a noncompete arising from the sale of a business as would render the MNAA inapplicable;
- Noncompetes governed by the MNAA must comply with the technical requirements of the MNAA;
- A client’s unsolicited decision to follow the former employee may indicate that the goodwill with the client belongs to the employee, not the employer;
- An employer is not harmed by the continued employment (in a noncompetitive role) of a former employee; and
- Federal procedural law preempts the venue requirement in the MNAA (at least for now).
Now, onto the cases…
First: Marion Family Chiropractic, Inc. v. Seaside Family Chiropractic, LLC
The first of the two new decisions is a decision on a motion to dismiss in Marion Family Chiropractic, Inc. v. Seaside Family Chiropractic, LLC, 2022 WL 1003963 (D. Mass. April 4, 2022) (Kelley, C.M.J.).
In that case, Marion Family Chiropractic, Inc. sued Seaside Family Chiropractic LLC, Stacy Tam, and Wesley Stubbs, “alleging that Tam left Marion Family to open Seaside Family in violation of an employment agreement, taking clients and confidential information with her.”
The relevant alleged facts are fairly simple.
Tam had signed a restrictive covenant agreement in 2007. The agreement contained a two-year, 10-mile noncompete. Marion Family Chiropractic was sold to a new owner a month later.
In 2019, defendants Tam and Stubbs formed a trust. On July 29, 2019, the trust purchased property for a new competitive venture 8.41 miles away from Marion Family Chiropractic. Tam resigned about a month later, and remained on for a 30-day notice period.
During the notice period, Tam and Stubbs created Seaside Family Chiropractic.
After the notice period, Tam left to work for her newly-created entity.
Marion Family Chiropractic claims that Tam breached her noncompete and nonsoliciation obligations, defamed Marion Family Chiropractic, and ultimately diverted 371 clients.
Defendants’ arguments all fail.
Defendants first argued that the exemptions from restrictive covenants under G.L. c. 112, §§ 12X (physicians), 74D (nurses), 129B (psychologists) evince a legislative intent to exempt all medical providers covered by chapter 112. In support of that assertion, defendants also cited a very brief, one-page preliminary injunction decision in Merolla Chiropractic, Inc. v. Jonathan Susskind, D.C., No. C01-1030, 2004 WL 4968069 (Mass. Super. Aug. 30, 2004) (Volterra, J.), which accepted that argument.
The court disagreed.
As to chapter 112, the court said as follows:
Chapter 112 includes sections applicable to dentists, opticians, optometrists, and dieticians—as well as chiropractors. None of these other sections, however, include a prohibition against restrictive covenants. The legislature clearly made a choice about which professions to protect from restrictive covenants, making it inappropriate for the court to read the protections as applying to non-enumerated professions.
As to Merolla Chiropractic, the court explained, “findings of fact and conclusions of law made by a court granting a preliminary injunction are not binding at trial on the merits.” Indeed, the court noted that later in that case, the court “granted a directed verdict for plaintiff on his breach of contract claim.”
Defendants next argued that the noncompete was not enforceable because Marion Family Chiropractic had been sold, and the employment agreement was with the former owner (d/b/a Marion Family Chiropractic). The court rejected this argument too, given that Tam’s contract permitted “successors and assigns” to step into the Marion Family Chiropractic’s shoes, that the agreement had an evergreen clause by which it renewed annually, and that Tam remained working for Marion Family Chiropractic following the change in ownership and corporate form (and the annual renewals).
Defendants also asserted that the assignment and a salary increase in 2010 each constituted material changes in her employment that would vitiate the contract. Again, the court rejected defendants’ arguments. Specifically, the court noted that the assignment did not render the contract void for the reasons noted above. As to the salary increase, the court noted that the contract specifically contemplated salary changes, and as a consequence, the material change doctrine did not apply. The court also observed that some “courts have indicated that salary changes are not material.”
Defendants’ final salvo to avoid the noncompete was that the 2019 auto-renewal (i.e., the first post-October 1, 2018 auto-renewal) brought the noncompete within the purview of the MNAA, and the agreement is unenforceable under the MNAA. The court explained the issue as follows: “[T]he court must determine whether the July 2019 renewal of the Employment Agreement created a new contract, or merely continued the parties’ existing contract.”
After determining that the contract was an evergreen contract and that Massachusetts enforces evergreen contracts, the court reasoned as follows:
Although the Employment Agreement could have been cancelled with notice, “[s]ince [defendants] do[ ] not contend that such notice was given” prior to August 2019, “the contract remained in force on its face.” . . . In addition, “the parties continued to abide by the terms of the contract.” . . . In other words, renewal did not create a new contract, but instead the existing contract—with the same terms and conditions—continued in force from year to year. Because the parties entered into the Employment Agreement in 2007 and continued performing according to the terms of the Agreement until September 2019, on the facts alleged the MNAA does not apply to the Agreement’s NCA provision.
Second: Lighthouse Ins. Agency, Ltd. v. Lambert
The second of the two new decisions is a decision on a motion for a preliminary injunction in Lighthouse Ins. Agency, Ltd. v. Lambert, C.A. No. 2284-CV-01162-BLS2 (Mass. Super. Ct. June 8, 2022) (Salinger, J.).
The key facts, as found by the court, are as follows:
Jack Lambert, a licensed insurance producer, worked for Lighthouse Insurance Agency, Ltd. from 2013 through July 15, 2021.
On October 8, 2020, “after firing seven other employees, Lighthouse asked Lambert to enter into a new employment agreement with a new compensation arrangement.” As part of the arrangement, Lambert would move from straight commission to a fixed salary with a new (reduced) commission structure. Lighthouse also offered to “purchase . . . Lambert’s book of business . . . .”
Lambert and Lighthouse signed the new agreement the day it was presented to Lambert. “The contract took effect immediately. It did not provide that the terms of the contract would take effect at some later time.” Nor did it “say that Lambert had the right to consult with an attorney before signing it. And it also did not say that Lambert was entitled to take up to ten days (or any other period) to review the contract before signing it.”
Lighthouse fired Lambert on July 15, 2021.
In late March or early April, Lambert started working as an insurance producer for Integrated Insurance Solutions, LLC.
A significant client of Lighthouse “quickly followed Lambert, transferring its insurance business from Lighthouse to Integrated. [The client’s] CEO called Lambert in early April 2022, saying that they wanted to move [their] insurance business from Lighthouse because they wanted to continue to work with Lambert.”
Lighthouse sought “a preliminary injunction that would bar Lambert from competing with Lighthouse by writing any insurance business, soliciting or accepting any business from Lighthouse clients, or using or disclosing any of Lighthouse’s confidential or proprietary information.”
Instructively, the court’s analysis started with the assessment of whether the noncompete (and really the entire agreement) arose in the context of a sale of business or an employment relationship. As to this, the court noted that that although the buyback “was described in the contract as constituting a purchase by Lighthouse of Lambert’s book of business, in fact Lambert did not own and had no right to sell his accounts . . . .” This is a critical point for restrictive covenant cases.
Applicability of the MNAA.
Most significantly for the noncompete analysis, if the agreement had constituted the sale of a business or part of a business, the noncompete would not have been subject to the MNAA. But, if it did not constitute the sale of a business or part of a business, the noncompete would be subject to the MNAA. And, if a salesperson can simply “sell” their client relationships and thereby convert an employment relationship into a sale of a business, that could profoundly alter the dynamics of a typical noncompete arrangement with a salesperson who is also an employee.
However, the court found that the “purchase” did not constitute “the sale of a business entity or substantially all of the operating assets of a business entity or partnership . . . .” Nor did it constitute “otherwise disposing of the ownership interest of a business entity or partnership, or division or subsidiary thereof . . . .”
The court explained, “Lambert was not selling a business or any part of a business . . . . [T]he accounts on which Lambert had been earning commissions did not belong to him. The right to commission payments from the insurers on those accounts belonged to Lighthouse; Lambert could not sell or assign any interest in those accounts to Lighthouse or to anyone else. What Lighthouse was really doing was converting Lambert’s continuing right to receive a share of Lighthouse’s commissions on the accounts Lambert had brought to the agency into a new right to receive a fixed salary plus a small portion of the commissions to which Lambert had previously been entitled.”
The court also observed that contract was called an “Employment Agreement,” that “[t]he non-solicitation and non-competition covenants were conditions of Lambert’s continued employment by Lighthouse,” and “the contract expressly stated that its terms—which included the restrictive covenants—would ‘control Lambert’s employment relationship with Lighthouse as of the date set forth above.’”
As a consequence, the court held that the noncompete was subject to the MNAA.
It is worth noting that had Lambert brought customer relationships with him from another company and sold those relationships to Lighthouse through a purchase and sale agreement, the court might — or might not — have viewed the transaction differently.
Nevertheless, given the court’s conclusion the noncompete was governed by the MNAA, the court observed that a noncompete “with a current employee will be valid and enforceable only if the employee is given notice of the agreement ‘at least 10 business days before the agreement is to be effective,’ and only if the agreement is ‘in writing and signed by both the employer and employee,’ is ‘supported by fair and reasonable consideration independent from the continuation of employment,’ and ‘expressly states that the employee has the right to consult with counsel prior to signing.’ G.L. c. 149, § 24L(b)(ii).”
The court therefore concluded that “[t]he non-competition agreement that Lambert and Lighthouse entered into in October 2020 is invalid and unenforceable because, by its express terms, it took effect immediately without Lambert receiving at least ten days’ advance notice, and because the new employment agreement [did] not expressly state that Lambert had the right to confer with an attorney before entering into the non-competition agreement.”
Ownership of Goodwill.
The other critical application of the court’s determination that “Lambert did not own and had no right to sell his accounts” has to do with a frequent question of “owns” the goodwill with clients or customers.
As the court explained,
In the employment context, a non-competition or non-solicitation agreement is enforceable only “to protect the employer’s good will, not to appropriate the good will of the employee.” Sentry Ins. v. Firnstein, 14 Mass. App. Ct. 706, 708 (1982). Good will is a “positive reputation in the eyes of [one’s] customers or potential customers.” North Am. Expositions Co. Ltd. P’ship v. Corcoran, 452 Mass. 852, 869 (2009). “It has long been recognized that good will may sometimes attach to an employee who maintains distinctly personal or professional relationships with customers, so that the business entity possesses little of it.” P.A. Bldg. Co. v. Elwyn D. Lieberman, Inc., 642 N.Y.S.2d 300, 301 (N.Y. Sup. Ct. App. Div. 1996); accord RE/MAX of New England, Inc. v. Prestige Real Estate, Inc., Civil Action No. 14-12121-GAO, 2014 WL 3058295, *3 (D.Mass. 2014) (O’Toole, J.) (real estate brokerage franchisor could not enforce non-compete agreement with franchisees in absence of proof that “any good will generated by the various offices is due to RE/MAX branding and methods” rather than created by “the work and personal relationships of the agents”).
The court then concluded that, “[s]ince [the client] approached Lambert and said they wanted him to keep servicing their insurance account, without having been solicited by Lambert, it appears that the good will in this client relationship belonged to Lambert, not to Lighthouse.” The court added: “Nor has Lighthouse mustered any evidence that Lambert has violated the non-solicitation covenant in any way other than accepting [the client’s] choice to transfer its insurance business to Integrated. And since there is no evidence that Lambert used or disclosed any of Lighthouse’s confidential information, Lighthouse is not entitled to a preliminary injunction enforce the non-solicitation covenant . . . .”
The court did not end there, however. The court went on to find that there was no irreparable harm to Lighthouse given that the restrictive covenants were about to expire and could not be extended for the breach. Moreover, the court concluded that Lighthouse could be made whole for the loss of the client through a damages remedy.
The existence or lack of irreparable harm arising from a client that has already moved is a frequent issue that arises in these cases. Accordingly, Lighthouse will be an important decision likely to be heavily cited by defendants.
But the fun doesn’t end there.
An analogous issue that also frequently arises in these cases involves what to do about employees who leave to follow their former colleague.
This related issue was discussed in Barton & Associates, Inc. v. Green, C.A. No. 22-0002-C (Mass. Super. Ct. Jan. 6, 2022) (Gordon, J.). Specifically, in that case, the court made the following very important point (in footnote 2):
[T]he continued retention of [the employee] is in no sense visiting any kind of harm (irreparable or otherwise) on [the former employer]. [The employee] was, without prompting or solicitation, seeking new job opportunities with multiple employers at or near the time of her hire by [the defendant]; and [the defendant] thus cannot be considered the procuring cause of her separation from [the former employer]. The Court discerns no erosion of [the former employer’s] good will with its personnel under the circumstances of this case, and nothing that would be restored by the exercise of its equitable power to remove [the employee] from her non-competitive (and harmless) employment with [the defendant].
As Professor Wally Miller used to say, “All wisdom is in the footnotes.” This is a good reminder.
Bonus: The Hilb Group of New England, LLC v. LePage
Although not a Massachusetts court decision, there is another decision interpreting the MNAA’s application to a post-MNAA noncompete: The Hilb Group of New England, LLC v. LePage, 2022 WL 1538583 (E.D. Va. May 16, 2022).
In that case, the court reviewed a 2019 restrictive covenant agreement containing a forum selection clause that mandated that any dispute be resolved in “the courts of the Commonwealth of Virginia located in the City of Richmond and of the United States District Court for the Eastern District of Virginia, Richmond Division . . . .”
Defendant LePage worked in the insurance industry for more than twenty years — always in Massachusetts. As of March 2019, LePage worked for The Hilb Group of New England, LLC (“THG-NE”), a Rhode Island corporation, with its principal place of business in Virginia.
LePage resigned from THG-NE on October 29, 2019.
Two years later, in December 2021, THG-NE sued, “accus[ing] LePage of gathering information about THG-NE clients before her resignation and using this information after her resignation to offer THG-NE clients competing insurance services.”
LePage moved to dismiss, claiming that because she lived and worked in Massachusetts, the MNAA evinced Massachusetts’s strongly-held public policy precluding enforcement of the forum selection clause. Specifically, LePage pointed to subsection h of the MNAA, which provides:
All civil actions relating to employee noncompetition agreements subject to this section shall be brought in the county where the employee resides or, if mutually agreed upon by the employer and employee, in Suffolk county; provided that, in any such action brought in Suffolk county, the superior court or the business litigation session of the superior court shall have exclusive jurisdiction.
Although “[t]he parties dispute[d] whether the [MNAA] applie[d] to the Agreement,” the Court determined that “it need not decide whether the [MNAA] applie[d] to the Agreement” because it found “the Agreement’s forum selection clause enforceable despite the [MNAA] . . . .”
As to the forum selection clause, the court reasoned as follows:
Supreme Court precedent provides that “courts enforce forum selection clauses unless it would be unreasonable to do so.” [BAE Sys. Tech. Sol. & Servs., Inc. v. Republic of Korea’s Def. Acquisition Program Admin., 884 F.3d 463, 470 (4th Cir. 2018)] (quoting M/S Bremen v. Zapata Off-Shore Co. (The Bremen), 407 U.S. 1, 15 (1972)). “This presumption of enforceability, however, only applies if the forum selection clause is mandatory rather than permissive.” Id. A mandatory clause does not just permit litigation to occur in a particular forum, it requires litigation to occur in a particular forum. Id. But a court may decline to enforce an unreasonable clause.
[A] forum selection clause may be found unreasonable if: “(1) [its] formation was induced by fraud or over-reaching; (2) the complaining party ‘will for all practical purposes be deprived of his day in court’ because of the grave inconvenience or unfairness of the selected forum; (3) the fundamental unfairness of the chosen law may deprive the plaintiff of a remedy; or (4) [its] enforcement would contravene a strong public policy of the forum state.”
Albemarle Corp., 628 F.3d at 651 (second and third alterations in original) (quoting Allen v. Lloyd’s of London, 94 F.3d 923, 928 (4th Cir. 1996)).
After concluding that the forum selection clause was mandatory, the court reasoned as follows:
First, federal law preempts Massachusetts’s procedural rules. Second, as the Supreme Court explained in The Bremen, any disfavor Massachusetts harbors towards forum selection clauses—as manifested in the [MNAA]—does not weaken the presumption of enforceability that forum selection clauses enjoy in federal court. Indeed, to allow the [MNAA] to trump the parties’ contractual choice of forum would allow provincial attitudes to dominate. Finally, no Massachusetts court has held that the [MNAA] manifests the state’s strong public policy. Thus, the enforcement of the Agreement’s forum selection clause would not go against a strong public policy of Massachusetts.
Given the above reasoning, it seems that if a Massachusetts court were to express that the MNAA’s forum selection provision evinces a strong public policy, a different conclusion could follow.
*Thank you to Erika Hahn for finding Marion Family Chiropractic and The Hilb Group of New England, and for keeping tabs on all of the others!