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Friday, June 19, 2009
Inside Finance Strategies
Court backs employers on noncompete agreements, mostly
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A recent decision and its subsequent modification, both authored by a highly regarded judge in the Business Litigation Session (BLS) of the Massachusetts Superior Court, may signal the direction in which the court will be heading regarding noncompete agreements in Massachusetts.
The case is EMC Corp. v. Donatelli. Issued on May 4 and modified on May 21, it is the latest noncompete decision out of the business court, and sends a clear message to the tech community that the court will neither hesitate to enforce reasonable noncompete agreements, nor necessarily enforce such agreements to the full extent written.
Initially enforcing a noncompete agreement against a senior EMC Corp. employee, David Donatelli, who resigned to take a job with Hewlett-Packard Co., which is based in California (where such noncompete agreements are not enforceable), the judge subsequently modified the decision to permit Donatelli to work for HP, on the condition that his work does not compete with, or otherwise relate to work he had done for, EMC. The decision is a positive development for tech companies and should be considered a clear warning for employees — high-level employees, in particular — who are thinking about leaving their employer to work for a competitor.
The decision is so important because most of these disputes are resolved by a quick settlement among the affected parties and, for those that do require judicial intervention, most are resolved, like this one, by a trial court judge after an initial hearing in which the court considers whether to issue a preliminary injunction restricting the employee from working for a competitor. These decisions are generally the final word because, if the preliminary injunction issues, the former employer has obtained the relief that it needs. In contrast, if the preliminary injunction is denied, the employee will be working for the competitor during the lawsuit, leaving little reason to continue the litigation. As a result, these decisions form a body of law that provides guidance to courts deciding subsequent cases.
Given this, from the perspective of a Massachusetts company — especially a technology company like EMC, whose trade secrets are likely to be among its most significant assets — the decision should provide significant comfort that, even in the current economic slowdown where jobs are hard to come by, courts will enforce noncompetes, at least against high-level employees. Equally important, even though the court did not enforce all aspects of the parties’ agreement, it went out of its way to ensure that EMC’s business interests were protected.
In that regard, the decision answers an important question that frequently arises in connection with employees who have remained with a company for an extended period. The decision makes clear that a company may require an existing employee to sign a noncompete agreement without providing anything more to the employee in exchange other than continued employment — which can end at any time. That said, the decision does not foreclose the possibility that a court would invalidate a mid-employment noncompete agreement on some other basis. For example, if Donatelli had not been such a high-level employee, the court might very well have followed some prior decisions refusing to enforce mid-employment noncompetes on the ground that they were obtained through duress.
Given that a distinction in seniority could affect the outcome of two otherwise identical cases, a high-level executive should take more from the Donatelli decision than a lower-level employee might. Senior employees should view the decision as a clear warning that the courts will enforce reasonable noncompete agreements. Of course, lower-level employees should likewise take heed of the warning.
Employees — regardless of level — should also pay close attention to the court’s ruling about the effect of accepting a job in a state that would not enforce the noncompete agreement. As the court made clear, an employee should be prepared to live with voluntarily-undertaken obligations and not assume that he can “flee the jurisdiction” to avoid them. The California court has since agreed. Accordingly, where an employee has been living and working in Massachusetts, he should be prepared to accept both the benefits and burdens of Massachusetts law.
Russell Beck is a litigation partner in the Boston office of Foley & Lardner LLP, and can be reached at rbeck@foley.com or 617-342-4031.
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