Monday, September 19, 2011

Retired Associate Justice Souter Underscores the Importance of Careful Drafting of Non-Competes

In EMC Corp. v. Arturi, No. 11-1001, 2011 U.S. App. LEXIS 17834 (1st Cir. August 26, 2011), retired Associate Justice Souter authored the panel’s opinion in this diversity action in which the employer sought a preliminary injunction against its former employee, to enjoin competition with EMC, solicitation of its customers and remaining employees, and possession and use of confidential business information gained while employed. The underlying agreement restricted the former employee’s activities for one year. As the one year period had elapsed before an injunction could be issued, the District Court, while granting relief as to the confidential information, denied an injunction with respect to competition and solicitation on the ground that the one year period had elapsed.
The panel affirmed, relying on a decision from the Commonwealth of Massachusetts’ highest court in All Stainless, Inc. v. Colby, 364 Mass. 773, 308 N.E.2d 481, 485 (1974) as well as its own 1978 decision in A-Copy Inc. v. Michaelson, 599 F.2d 450, 452 (1st Cir.) in which it reversed an order enjoining competition by a former employee where said order had been issued after the expiration of a one-year period of restriction set forth in the employment contract. In A-Copy, the court stated that “when the period of restraint has expired, even when the delay was substantially caused by the time consumed in legal appeals, specific relief is inappropriate and the injured party is left to his damages remedy.” Id. at 452 (citing All Stainless).
Justice Souter did note that an employer might be able to distinguish All Stainless if the employee had taken affirmative steps to conceal his acts of breach, citing Exeter Group Inc. v. Sivan, No. 0628-BLS2, 2005 WL 1477735, 2005 Mass. Super. LEXIS 257 (Mass. Super. Ct. March 24, 2005). But, the facts here did not support such an affirmative defense.
Most telling is Justice Souter’s observation that “EMC could have contracted, as the district judge noted, for tolling the term of the restriction during litigation, or for a period of restriction to commence upon preliminary finding of breach.” Unfortunately, the underlying agreement here contained no such language.
In contrast with the law of Massachusetts, see Homan, Inc. v. A1 AG Servs., 175 Ohio App. 3d 51, 58 (Ohio Ct. App. 2008), holding that “a covenant not to compete may not expire while the enforceability of that contract is being litigated.”

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