Wednesday, September 12, 2012

Material Change in Employment Terms Voids a Non-Compete



           In Grace Hunt IT Solutions, LLC v. SIS Software, LLC, 29 Mass. L. Rep. 460, 2012 WL 1088825, 2012 Mass. Super. LEXIS 40 (Mass. Super. Feb. 14, 2012), the Court denied the plaintiff-employer’s motion for a preliminary injunction against former employees and their new employer for allegedly violating their non-compete agreements.  In denying the motion, the Court held that material changes in the employees’ terms of employment had voided their non-competes.  While the Court found that an asset purchase, in and of itself, did not void the non-competes, it did hold that changed terms of employment for the employees after the acquisition transaction were material and voided their non-competes.  The new entity, the plaintiff in this litigation, decreased the employees’ salaries by twenty percent even though it put in place a bonus program that it contended would adequately substitute for the salary decrease – a contention that the employees disputed.  Finally, of significance to the Court was the fact that the new company requested that the employees sign new non-competes, a request rejected by the employees.  

This decision showcases a recent renewal of interest in the material change doctrine, which was first articulated in Massachusetts in F.A. Bartlett Tree Experts v. Barrington, 233 N.E.2d 756 (Mass. 1968), but has come into increasing use recently.  As in Grace Hunt, in Protégé Software Servs., Inc. v. Colameta, 30 Mass. L. Rep. 127, 2012 Mass. Super. LEXIS 190 (Mass. Super. July 16, 2012), Judge Maynard M. Kirpalani found that a material change in defendant’s compensation had voided his non-compete agreement.  While both Grace Hunt and Protégé Software dealt with adverse changes, the court in Grace Hunt noted that “it is the existence of a material change in the relationship that voids the prior non-compete agreement, not the nature of that change[,]” suggesting that even advantageous changes, if material, could necessitate a new non-compete agreement.  The application of the “material change” doctrine to beneficial, as opposed to adverse, changes remains an area of controversy.  In a bench ruling in Sentient Jet LLC v. Mackenzie Judge Susan Garsh reportedly refused to endorse the notion that a positive change in the terms and conditions of employment can trigger the “material change” doctrine.  See Daniel S. Tarlow, The Material Change Doctrine and Its Implication for Non-Competes, Prince Lobel Client Alert (Aug. 10, 2012) (available at http://www.princelobel.com/news-publications-285.html) (discussing a ruling in Sentient Jet LLC v. Mackenzie).  

The “material change” doctrine is based on the premise that “far reaching changes [to an employment relationship] strongly suggest that the parties had abandoned their old arrangement and had entered into a new relationship.”  Iron Mt. Info. Mgmt. v. Taddeo, 455 F. Supp. 2d 124, 132 (E.D.N.Y. 2006) (applying Massachusetts law); See also F.A. Bartlett Tree Experts, 233 N.E.2d 756.  For other cases discussing the material change doctrine, See AFC Cable Sys. Inc. v. Clisham, 62 F. Supp. 2d 167 (D. Mass. 1999) (“each time an employee’s employment relationship with the employer changes materially such that they have entered into a new employment relationship, a restrictive covenant must be signed.”); Lycos, Inc. v. Jackson, 18 Mass. L. Rep. 256, 2004 Mass. Super. LEXIS 348 (Mass. Super. Aug. 24, 2004) (defendant-former employee failed to sign a letter which referenced a previously-signed non-compete agreement upon her promotion – the Court found that the promotion was a “material change” and refused to enforce the non-compete); See also TEKSystems, Inc. v. Fletcher, No. 10-1145, 2011 U.S. Dist. LEXIS 22227 (D. Md. Mar. 2, 2011) (refusing to enforce non-compete against employee who had been transferred to employer’s subsidiary); AFC Cable Sys. v. Clisham, 62 F. Supp. 2d 167 (D. Mass. 1999) (refusing to enforce non-compete against employee who had subsequently been promoted to sales manager).  However, the change must be material.  See Zambelli Fireworks Mfg. Co., Inc. v. Wood, 592 F.3d 412 (3d Cir. 2010) (in the context of determining the enforceability of a covenant not to compete after a stock sale the Court held that “[a] change in corporate culture alone cannot invalidate a legally binding contract.” )  

In the same vein, in Marso v. Bradford Soap Int’l, Inc., C.A. No. PB 07-6054, 2010 R.I. Super. LEXIS 96 (R.I. Super. Ct. June 25, 2010), the Rhode Island Superior Court endorsed the view in F.A. Bartlett that when parties enter into “far reaching changes in an employment agreement” it “strongly suggest[s] that the parties have abandoned their old arrangement and have entered into a new relationship.”  While Bradford did not address non-compete agreements in particular, and while the court, relying on the intent of the parties not to change their relationship, ultimately found the contract which was at issue to be enforceable, Bradford nevertheless illustrates the growing prevalence of this legal theory. 

For further information and discussion on this subject, see the following materials:

·        Daniel S. Tarlow, The Material Change Doctrine and Its Implication for Non-Competes, Prince Lobel Client Alert (Aug. 10, 2012) (available at http://www.princelobel.com/news-publications-285.html)
·        Lee Gesmer, Noncompete Unenforceable Where Employer Changed Terms of Employment, Massachusetts Law Blog (Sept. 2, 2012) (available at: http://masslawblog.com/noncompete-agreements/noncompete-unenforceable-where-employer-changed-terms-of-employment/)
·        Richard Glovsky, Labor: Employers Beware, InsideCounsel (June 25, 2012) (available at: www.insidecounsel.com/2012/06/25/labor-employers-beware)
·        Brian P. Bialas, If the Terms of Employment Change, Employees May Need to Sign New Non-Competition Agreements, Massachusetts Noncompete Law (March 15, 2012) (available at: http://www.massachusettsnoncompetelaw.com/2012/03/articles/noncompetes/if-the-terms-of-employment-change-employees-may-need-to-sign-new-noncompetition-agreements/)
·        David E. Frank, Judge Refuses to Negate Non-Competition Clause, New England In-House (June 11, 2012) (available at: http://newenglandinhouse.com/2012/06/11/judge-refuses-to-negate-non-competition-clause/)
 

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