Anti-Raiding Provision Upheld by Massachusetts High Court

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From Jackson Lewis PC, Colin A. Thakkar and Erik J. Winton discusses a recent case which upheld an anti-raiding provision in an agreement in connection with the sale of the business. Colin and Erik write:

The Automile Decision

In November 2007, Matthew McGovern (McGovern) became a founding member, as well as the Chief Financial Officer, of Prime Motor Group (Prime). Nearly a decade later, after a change in position to Vice President of Operations, McGovern was fired by Prime in connection with disagreements over the company’s future.

After McGovern’s termination, and in connection with the sale of his ownership interest in Prime, McGovern agreed not to “directly or indirectly … solicit for hire or hire [Prime employees] or encourage [Prime employees] to leave the employment” of Prime for a period of approximately sixteen months.

Following the execution of the agreement, and while the restricted period was still running, McGovern solicited and/or hired several Prime employees. In response, Prime filed suit against McGovern, seeking injunctive relief as well as monetary damages.

As an initial matter, the lower court determined that the anti-raiding provision was legal and enforceable, and that McGovern violated it. However, and not surprisingly, the court declined to reverse the hires, concluding that it could not restore the employees’ relationships with Prime, and that ordering their terminations from McGovern would be punitive to the employees without conferring any benefit to Prime. Instead, and notwithstanding the absence of a tolling provision in the agreement, the court extended the duration of the restricted period by one year.

McGovern appealed the lower court’s ruling on two grounds. First, he argued that the anti-raiding provision was invalid because it did not serve to protect a legitimate business interest. Second, he asserted that the lower court abused its authority when it extended the duration of the provision’s restricted period despite the absence of a tolling provision in the agreement. Notably, the Supreme Judicial Court, which acknowledged that it had not addressed either issue in prior decisions, transferred the appeal from the appellate court to the Supreme Judicial Court on its own motion.

The Anti-Raiding Provision Was Valid

Under Massachusetts common law, a restrictive covenant must satisfy the following conditions in order to be enforceable: (a) it must be necessary to protect a legitimate business interest; (b) it must be reasonably limited in time and space; and (c) it must be consonant with public policy. However, as the Court explained, the standard for evaluating those conditions is more stringent in a traditional employment relationship as compared to the sale of a business or a business interest. That is because the seller of a business or business interest generally has greater bargaining power than a run-of-the-mill employee, and the heightened ability to negotiate with the employer reduces the expected hardship caused by the promise.

In reviewing whether McGovern’s anti-raiding provision was supported by a legitimate business interest, the Court noted that the lower court described Prime’s business interest as a desire to prevent the raiding of employees. Per that description, the purpose of the anti-raiding provision would seemingly fall outside of the typical “legitimate business interests that may be protected … in the employer-employee context,” which both the common law and the Massachusetts Noncompetition Agreement Act limit to “trade secrets, confidential information, and good will.” However, the Court concluded that McGovern entered into the agreement in the context of the sale of a business interest, and in such context, a restrictive covenant need not be supported by the above-referenced business interests.

Notwithstanding the above distinction, the Court indicated that the anti-raiding provision was also necessary to protect Prime’s confidential information. As the Court explained, McGovern’s employment with Prime gave him “inside knowledge of the company, including its salary structure and internal management dynamics,” which he could exploit in order to solicit and hire Prime’s best employees for the benefit of his competing business. By invoking the business interest of protecting its confidential information, it could be argued that the Court endorsed anti-raiding provisions in both the traditional employment and buyer-seller contexts.

The SJC’s invocation of employee salary information as protectable confidential information is interesting, given that the Massachusetts Equal Pay Act makes it unlawful in certain circumstances to restrict the disclosure of employee compensation information. On the other hand, it is not unheard of for courts to cite an employee’s knowledge of such information as justification for the imposition of an employee non-solicitation covenant. See, e.g., Carlson Envtl. Consultants, PC v. Slayton, 2017 U.S. Dist. LEXIS 154191, *10 (W.D. N.C. 2017) (“Slayton … had direct knowledge of employee salaries and bonuses at CEC, thus making his employee non-solicitation provision particularly important, because he possessed information that could enable him to lure employees away were he to join a competitor.”).

Read the full story at Anti-Raiding Provision Upheld by Massachusetts High Court | Jackson Lewis

From Jackson Lewis PC,  Colin A. Thakkar and Erik J. Winton discuss a recent case in which a non-solicitation/anti-raiding clause was upheld as part of an agreement related to the sale of business interests. Colin and Erik write:

The Automile Decision

In November 2007, Matthew McGovern (McGovern) became a founding member, as well as the Chief Financial Officer, of Prime Motor Group (Prime). Nearly a decade later, after a change in position to Vice President of Operations, McGovern was fired by Prime in connection with disagreements over the company’s future.

After McGovern’s termination, and in connection with the sale of his ownership interest in Prime, McGovern agreed not to “directly or indirectly … solicit for hire or hire [Prime employees] or encourage [Prime employees] to leave the employment” of Prime for a period of approximately sixteen months.

Following the execution of the agreement, and while the restricted period was still running, McGovern solicited and/or hired several Prime employees. In response, Prime filed suit against McGovern, seeking injunctive relief as well as monetary damages.

As an initial matter, the lower court determined that the anti-raiding provision was legal and enforceable, and that McGovern violated it. However, and not surprisingly, the court declined to reverse the hires, concluding that it could not restore the employees’ relationships with Prime, and that ordering their terminations from McGovern would be punitive to the employees without conferring any benefit to Prime. Instead, and notwithstanding the absence of a tolling provision in the agreement, the court extended the duration of the restricted period by one year.

McGovern appealed the lower court’s ruling on two grounds. First, he argued that the anti-raiding provision was invalid because it did not serve to protect a legitimate business interest. Second, he asserted that the lower court abused its authority when it extended the duration of the provision’s restricted period despite the absence of a tolling provision in the agreement. Notably, the Supreme Judicial Court, which acknowledged that it had not addressed either issue in prior decisions, transferred the appeal from the appellate court to the Supreme Judicial Court on its own motion.

The Anti-Raiding Provision Was Valid

Under Massachusetts common law, a restrictive covenant must satisfy the following conditions in order to be enforceable: (a) it must be necessary to protect a legitimate business interest; (b) it must be reasonably limited in time and space; and (c) it must be consonant with public policy. However, as the Court explained, the standard for evaluating those conditions is more stringent in a traditional employment relationship as compared to the sale of a business or a business interest. That is because the seller of a business or business interest generally has greater bargaining power than a run-of-the-mill employee, and the heightened ability to negotiate with the employer reduces the expected hardship caused by the promise.

In reviewing whether McGovern’s anti-raiding provision was supported by a legitimate business interest, the Court noted that the lower court described Prime’s business interest as a desire to prevent the raiding of employees. Per that description, the purpose of the anti-raiding provision would seemingly fall outside of the typical “legitimate business interests that may be protected … in the employer-employee context,” which both the common law and the Massachusetts Noncompetition Agreement Act limit to “trade secrets, confidential information, and good will.” However, the Court concluded that McGovern entered into the agreement in the context of the sale of a business interest, and in such context, a restrictive covenant need not be supported by the above-referenced business interests.

Notwithstanding the above distinction, the Court indicated that the anti-raiding provision was also necessary to protect Prime’s confidential information. As the Court explained, McGovern’s employment with Prime gave him “inside knowledge of the company, including its salary structure and internal management dynamics,” which he could exploit in order to solicit and hire Prime’s best employees for the benefit of his competing business. By invoking the business interest of protecting its confidential information, it could be argued that the Court endorsed anti-raiding provisions in both the traditional employment and buyer-seller contexts. 

The SJC’s invocation of employee salary information as protectable confidential information is interesting, given that the Massachusetts Equal Pay Act makes it unlawful in certain circumstances to restrict the disclosure of employee compensation information. On the other hand, it is not unheard of for courts to cite an employee’s knowledge of such information as justification for the imposition of an employee non-solicitation covenant. See, e.g., Carlson Envtl. Consultants, PC v. Slayton, 2017 U.S. Dist. LEXIS 154191, *10 (W.D. N.C. 2017) (“Slayton … had direct knowledge of employee salaries and bonuses at CEC, thus making his employee non-solicitation provision particularly important, because he possessed information that could enable him to lure employees away were he to join a competitor.”).

Read the full story at Anti-Raiding Provision Upheld by Massachusetts High Court | Jackson Lewis

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