I have been way behind, but will be catching up as quickly as I can. So, in the next several blog posts (in addition to continuing coverage of the FTC’s noncompete rule saga and other important issues), I will be providing updates on recent developments in Massachusetts restrictive covenant law (noncompetes, nonsolicits, no-recruits, etc.), trade secret law, and related issues.
Today’s update involves nonsolicitation agreements and 93A.
Last month (October 2024), in Windrose Advisors LLC v. Haase (in the Business Litigation Session of the Massachusetts Superior Court), Justice Squires-Lee denied a motion to dismiss a 93A claim based on a breach of nonsolicitation obligations. (For those not from Massachusetts, “93A” is shorthand for our statute making unfair and deceptive business practices unlawful; 93A claims arise frequently in Massachusetts restrictive covenant and trade secret cases.)
Alleged facts
As required at the motion to dismiss stage, the court recited the facts based on the allegations in the complaint. Below are the key facts, as described by the court. (Note that the factual allegations below may be disputed by the defendant, but at the motion to dismiss stage, they must be treated as true.)
The case involves defendant John Haase, one of the founders and managing partners of a wealth advisory firm, Windrose Advisors LLC (Windrose), who was terminated from the firm in August 2022.
In connection with his employment, Hasse had agreed to a three-year nonsolicitation agreement. The nonsolicit included a no-service component, prohibiting Haase from “‘deal[ing] with . . . any customer or client’ of Windrose.”
In connection with his separation, Haase entered into a separation agreement with Windrose, incorporating his nonsolicitation obligations.
Pursuant to the separation agreement, in exchange for his ownership interest in Windrose, Haase received a lump-sum payment of $4.685 million. Originally, the payment was to be $9 million, paid over the course of three years, but Haase asked for the money earlier and the parties agreed to a smaller lump-sum payment.
Two years later (in February 2024), having received the full $4.685 million payment, Haase registered defendant Mindoro Capital Partners, LLC (Mindoro) and began doing business with Windrose clients in violation of the separation agreement.
Assuming those facts to be true, the court explained as follows:
In asserting the G. L. c. 93A claim, Plaintiffs allege that Haase’s conduct took place after he was an employee and “involved marketplace relations between the parties within a business context.” Specifically, Plaintiffs allege Haase entered into the Separation Agreement and Interest Purchase Agreement with no intention of complying with its obligations; improperly demanded acceleration of the payments due under the Interest Purchase Agreement so that he and Mindoro could begin soliciting clients without concern that Haase would not receive payment for his Windrose shares; accepted payment with no intention of complying with the obligations . . . in the Separation Agreement; disparaged, defamed, and criticized Windrose to secure clients and induce them to leave Windrose and move to Mindoro; and used confidential information for the same reason. Plaintiffs allege Mindoro aided and abetted Haase in all of that alleged wrongful conduct.
(Emphasis added.)
Haase moved to dismiss the 93A claim on three grounds.
First, Haase argued that the alleged conduct fell outside the scope of 93A because it arises from his Windrose employment. The court rejected that argument, finding that the alleged conduct “does not arise solely out of the employer-employee relationship and therefore may be subject to a G. L. c. 93A claim.”
The court’s rationale is important:
In reaching this conclusion, I find that Governo L. Firm LLC v. Bergeron, 487 Mass. 188 (2021) (Governo) and Tedeschi-Freij v. Percy L. Grp., P.C., 99 Mass. App. Ct. 772 (2021) largely control the analysis. In Governo, a law firm specializing in asbestos litigation brought a G. L. c. 93A claim against former partners and their new law firm, alleging that the former partners misappropriated proprietary materials – a research library, databases, and administrative files (e.g., client lists) – during their employment, and then used the materials to assist them in their paid legal work at the new firm. 487 Mass. at 189-192. The Supreme Judicial Court concluded that the trial judge erred when, relying on the intra-enterprise exception, he instructed the jury that the former partners’ conduct during their employment with the plaintiff was irrelevant for purposes of the plaintiff’s G. L. c. 93A claim. Id. at 193, 196. In so ruling, the Court explained that “the inapplicability of G. L. c. 93A, § 11, to disputes arising from an employment relationship does not mean that an employee never can be liable to its employer under G. L. c. 93A, § 11” and held that “[w]here an employee misappropriates his or her employer’s proprietary materials during the course of employment and then uses the purloined materials in the marketplace, that conduct is not purely an internal matter; rather, it comprises a marketplace transaction that may give rise to a claim under G. L. c. 93A, § 11.” Id. at 194-196. Put elsewise, “where [employees] subsequently use[ ] . . . ill-gotten materials [obtained during their employment] to compete with their now-former employer,” they are “not shield[ed] . . . from liability.” Id. at 196.
In Tedeschi-Freij, decided a few months after Governo, a law partner left her firm but her “name was not removed from the firm’s outdoor building signage for nearly six years . . . [and the law firm] continued to use [her] name in the firm’s advertisement for years after she asked that her name be removed.” 99 Mass. App. Ct at 776. The trial court dismissed the plaintiff’s G. L. c. 93A claim finding it arose from the parties’ employment relationship. Id. at 778. The Appeals Court recognized that claims stemming from an employment relationship are not subject to chapter 93A. Id. at 779. However, it reversed summary judgment for the defendants on the G. L. c. 93A claim because the claim stemmed from the purported unlawful use of the plaintiff’s name after she and the firm were no longer in the “same venture.” Id. at 779.
I read both Governo and Tedeschi-Freij as standing for the proposition that a G.L. c. 93A claim may lie even when a dispute originates in a prior employment or intra-business relationship, where the wrongful conduct occurs after the relationship ends and is aimed at harming the former employer / entity in the marketplace. Such circumstances are alleged in the Verified Complaint.
The claims here stem from Haase’s alleged conduct after he left Windrose, after he persuaded Windrose to accelerate payments for equity interest in Windrose, and after he accepted many millions of dollars for his Windrose shares while agreeing not to solicit clients or use Windrose confidential information. Further, Plaintiffs allege that Haase fraudulently obtained an acceleration of the payments due for his Windrose shares so that he could use Windrose’s confidential information to solicit Windrose clients and compete with Windrose without the risk of losing the proceeds from the share sale. Thus, the dispute, as framed in the Verified Complaint, is not purely private and does not relate only to the terms of Haase’s employment agreement with Windrose.
The second basis for defendants’ motion was that “[a] mere breach of contract, without more, does not amount to a violation of G. L. c. 93A . . . .” (Emphasis added.) The court found that this was not just a breach of contract, but involved allegations of fraud, “namely, that Haase induced the acceleration payment for his Windrose shares so he could obtain the funds and violate the restrictive covenants without ‘concern that the money would be withheld’ when Windrose learned that Haase was violating the non-solicitation and confidentiality provisions.”
The third basis was simply that plaintiff failed “to allege that Mindoro engaged in any unfair or deceptive practices.” The court rejected that argument, noting that “Plaintiffs allege that Mindoro, through acts carried out by certain Mindoro employees, aided and abetted Haase’s breach of his contractual obligations and benefitted from his improper use of confidential information and improper solicitation of Windrose clients.”
As a consequence of those findings, the court denied Haase’s motion to dismiss.
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Of course, these types of cases are very fact-specific and should be understood as such — especially when they are decided on a motion to dismiss.
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Firm resources:
We know how hard it is to keep up with the ever-changing requirements around the country. To help, we have created the following resources (available for free):
- 50-State Noncompete Law Chart, the first of its kind and regularly updated (downloadable PDF) (to be updated for the new exemptions in Illinois and Pennsylvania);
- Chart of Noncompete “Low-Wage” Thresholds and Criteria (downloadable);
- Notice requirements summary chart, providing details for each of the 8 states (plus D.C.) that has notice requirements related to noncompetes (downloadable PDF);
- 50-State and Federal Trade Secret Law Chart, providing a comparison of the trade secrets laws nationally to the Uniform Trade Secrets Act (downloadable PDF).
- “Changing Trade Secrets | Noncompete Laws” (dedicated blog page) now provides a current detailed summary of the changing landscape of trade secret laws and noncompete laws around the country, state by state and at the federal level;
- Trade secret and other legitimate business interest protection plan strategy and checklist; and
- Ten Minute Trade Secret Training Series, currently with three training videos and one “basics” video:
We hope you find all of these resources useful. More are coming.
And please note, we are grateful for all of the input we’ve received over the years. We welcome any suggestions for improvements that you may be willing to share.
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*A huge thank you to Erika Hahn for all of her extraordinary help in tracking and monitoring all of the recent noncompete and trade secret caselaw developments.