"Noncompetition Agreements" -- Newly Posted Article by Martin I. Estner, Senior Counsel
[June 10, 2009]

The purpose of this brief article is to review the status of Massachusetts law with respect to enforcement of employee non-competition clauses or agreements (referred to as “noncomp” or “noncomps”). This article is being written in June 2009 and, thus far, it has not been a good business year. Many businesses have had to lay off employees to reduce expenses. Many of these employees were already subject to noncomps at the time of their being laid off while others have been required to accept non-competition agreements as part of a severance package. Are these noncomps enforceable?

At the outset, it is fair to say that the Massachusetts courts frown on noncomps. Nevertheless, if the employer can overcome some legal hurdles, a noncomp may be enforced.

The standard for enforcement is that the former employer must prove that the purpose of the noncomp is to protect a legitimate business purpose. This phrase has been interpreted to mean exclusively trade secrets, confidential information, or goodwill in the particular case at issue. Enforcement does not necessarily result in a blanket endorsement of the noncomp. Rather, it is more common that if a court decides that it should be enforced, it means that in the particular facts and circumstances of this employer and this employee, the standard has been met.

Therefore, if in a particular case, an employer can prove that any one or more of its trade secrets, confidential information, or goodwill is to be protected by enforcement, then in the absence of equitable factors that would militate against enforcement, a court will enforce a reasonable covenant. Absent such proof, the court will not enforce the noncomp.

There needs to be some understanding of the Massachusetts courts’ definition of trade secrets and confidential information. There are six factors that courts examine to determine whether either "trade secrets" or "confidential information" is actually involved in a case brought against former employees. These factors are:

(1) the extent to which the information is known outside of the business;

(2) the extent to which it is known by employees and others involved in the business;

(3) the extent of measures taken by the employer to guard the secrecy of the information;

(4) the value of the information to the employer and to his competitors;

(5) the amount of effort or money expended by the employer in developing the information; and

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Trade secrets and confidential information must be treated as such by the employer; otherwise, rights of enforcement may be lost. In analyzing the actual information at stake and the parties' conduct in connection with such information, the court may determine that neither party truly believed the information to be confidential. Whether the employer has enforced similar noncomps against similarly situated employees may be an indication of whether the information has been treated as confidential. If an employer has permitted its former employees to work for competitors without sanction or it has outsourced the information to contractors, then it may not have treated it as confidential. Selective enforcement is a strong indication whether the parties did intend or understand that confidential information, trade secrets, or goodwill was involved.

An important point is that an employee is free to carry away from a job the knowledge and skill he or she brought to it, along with what he or she has learned during the employment. It is possible that certain employer information may be unique but not necessarily a “trade secret” or “confidential information” that is subject to enforceable protection.

Bargaining power also can be a determinative factor as to enforcement. If an employee was a high-ranking executive who had the bargaining power to negotiate the terms of the noncomp that he signed at the commencement of his employment and received a large severance, e.g., six months’ severance pay, at the time of his termination, such equality of bargaining power may mitigate in favor of the employer.

However, in the usual case, there is not equal bargaining power or there is not such a significant severance, and court findings are likely to differ in those cases.

An employer cannot lawfully attempt to enforce a noncomp to protect itself from ordinary competition. If the employee rather than the employer had generated the goodwill at issue then the employee may argue that the goodwill really belongs to the employee and not to the employer.

Even if the employer can establish that the purpose of the noncomp in the particular case is to protect trade secrets, confidential information, or goodwill, there are additional factors that will enter into a court’s determination whether to enforce the noncomp.

One of these factors is the geographic area in which the noncomp is to be enforced. A noncomp must be limited in geographic scope often not to exceed the employer’s actual customer contact. In addition, the duration of the noncomp must be reasonable. This may depend on how long the trade secrets or confidential information will remain so or remain valuable. More than two years’ duration is often excessive. A third factor, and one that is fairly technical, is that there must be “consideration” for the noncomp. The existence or nonexistence of consideration is a matter that has flummoxed first year law students for decades. It is an oversimplification but for our purposes, it is sufficient to say that consideration means something of value has been exchanged. Courts will not enforce a noncomp unless there is adequate consideration. Specifically, a covenant made by an employee after the commencement of the employment is not enforceable unless new consideration is given. However, this is not a high bar. By example, an employer’s conditioning an employee’s continued employment on his or her execution of a noncomp can be legitimate new consideration. Conditioning of the grant of a severance package on the employee’s execution of a noncomp will be legitimate new consideration. The issue of bargaining power between employer and employee discussed above may have particular relevance here.

If an employer commences a lawsuit against a former employee to enforce a noncomp, that employer will most assuredly ask the court at the outset of the case to issue a preliminary injunction or, more commonly, a temporary restraining order (a “TRO”) to prevent the former employee from engaging in the allegedly prohibited competitive activities until final resolution of the litigation. The heart of any of these cases is at this preliminary injunction or TRO stage. If the employer is unsuccessful in being awarded the preliminary injunction or the TRO, then the employee will be permitted to engage in the allegedly competitive activities pending resolution of the litigation. Because noncomps are usually of such limited duration, the noncom’s restriction will expire before the case ever is called to trial. Therefore, for all reasonable purposes, the employer has then lost the case.

A preliminary injunction (and, similarly, a temporary restraining order) is to be granted only upon a finding of: (1) a reasonable likelihood of the moving party’s success on the merits, (2) irreparable hardship to the moving party, (3) less hardship to the opposing party, and (4) no disservice to the public. The moving party (the employer in these cases) has the burden of proof on each item set out above.

“Reasonable likelihood of success” turns on the issues of whether trade secrets, confidential information, or goodwill are at issue and need to be protected by the restriction and, if so, whether the geographic scope and the duration are reasonable.

Establishing “irreparable hardship” is difficult. Allegations that were trade secrets or confidential information to come into the public domain, irreparable monetary loss would result can be a sufficient argument. Even if so, if the amount of that loss balanced against the hardship of the employee is less than the hardship suffered by the employee, then the preliminary injunction or TRO will likely fail. By example, if a former employee might be wildly successful in his competitive endeavors, but there would be barely any negative financial consequence to his former employer, then enforcement is unlikely.

Disservice to the public might be argued to exist merely because the employee may wind up on welfare, but that is arguable in all such cases. On the other hand, a better argument would exist for example were an employee working on a cure for cancer and was very close to attaining success, and enforcement of the noncomp would prevent continuation of this research for two years. That might very well be a disservice to the public.

Some states have restricted noncomps by statute. California has banned them entirely. The recent Massachusetts case, EMC Corp. v. Donatelli, involved a Massachusetts employee and a Massachusetts employer. The noncomp prohibited competition anywhere in the U.S. The employee left his position with EMC to takes a competitive position with Hewlett-Packard in California. The issue was whether an otherwise enforceable noncomp signed by a Massachusetts employee with a Massachusetts employer would be enforceable against that employee if he or she competed in California. The Massachusetts court did grant a preliminary injunction against the employee from competing against EMC in California. The reasoning had to do with expectations of the parties. More important legally is that EMC would have to go to California to seek enforcement of the Massachusetts injunction. As a matter of constitutional law, each state is obligated to give “full faith and credit” to the judicial determinations of its sister states. Yet there have been cases where the decisions of one state are so directly in conflict with the laws of another that the second state has chosen not to enforce that foreign court’s decision. This would set up a federal case, which could find itself in the US Supreme Court. For procedural reasons not germane here, the employee sought relief from the California courts that would have allowed him to work for HP in competition with EMC. The court ruled in favor of EMC, thereby enforcing the Massachusetts ruling. There is little doubt that the case will proceed further through the appellate courts of California. The case has been widely reported and is being widely watched. An internet search of the case name produced more than 75,000 hits as of the date of this writing.

In summary, for an employer successfully to enforce a noncomp in Massachusetts the restriction must protect a legitimate business interest and be reasonable in geographic scope and duration. To obtain a preliminary injunction or TRO, the employer must establish a reasonable likelihood of its success on the merits, that the employer will suffer irreparable harm, that the balance of hardships falls more heavily on the employer, and that there is no disservice to the public.


Copyright Martin I. Estner 2009

DISCLAIMER: The content of this article is not legal advice. It is intended to provide general information to the public and is not legal advice of the author or his law firm or any of its attorneys. Any opinions expressed are the opinions of the author only and may not reflect the opinions of his firm or any other attorney. The author has tried to ensure the accuracy of the content, but laws do change. It cannot be guaranteed that all of the content is complete, accurate, or current. You should not act or refrain from acting based on any aspect of this article without consulting an attorney licensed to practice in your jurisdiction.

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