More News on the Noncompete Front: Employers Should Still Expect Strict Scrutiny of Their Restrictive Covenant Agreements

In earlier posts, I reported on the passage of the new Massachusetts Noncompetition Agreement Act, which took effect on October 1, 2018. That Act significantly changed the law in this area, narrowing the permissible protections and imposing several new requirements on an employer who wants its employees to sign noncompetition agreements. 

While the Act did not ban noncompetition agreements altogether as certain constituencies had advocated, many commentators, including me, felt that the Act sent a dual message to employers. The first message was “you can still use noncompetition agreements if you must, but it isn’t going to be easy and they won’t be as useful as you would like.” The second implicit message was “you are better off using less restrictive agreements such as nonsolicitation agreements and nondisclosure agreements.” 

As evidence of the implicit message, the legislation provided a definition of noncompetition agreements covered by the Act as well as express exclusions: 

“Noncompetition agreement”, an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended. Noncompetition agreements … do not include: (ii) covenants not to solicit or transact business with customers, clients or vendors of the employer 

Accordingly, many employers have embraced the dual messages and abandoned the use of noncompetition agreements, but continued to have employees sign nonsolicitation agreements. 

A recent decision by a judge in the Business Litigation Session of the Superior Court in Bruett v. Walsh reminds us not to misperceive this encouragement as meaning the more limited restrictions will always be enforced. While nonsolicitation agreements were placed outside the scope of the Act, they will still be subjected to the same strict scrutiny by the courts that existed prior to the Act’s passage. Consequently, enforcement will not be a sure thing. 

David Bruett was an insurance agent who had started in the insurance business with John J. Walsh Insurance Agency. Prior to beginning that employment, he had signed an agreement whereby he agreed that he would not: 

solicit, attempt to obtain, accept, write, service or transact insurance business of any nature for any customer or account on the books of the Agency. 

Fourteen years later, Bruett left to start his own agency. Bruett scrupulously did not solicit his former customers nor did he even notify them of his new agency. Several of the customers, however, found out where he had gone and contacted him. In violation of the express language of his agreement, Bruett transacted insurance business and wrote polices for those former Walsh customers. 

Judge Mitchell Kaplan was called upon to determine whether a preliminary injunction should issue restraining Bruett from doing business with the former Walsh customers for the remaining term of the agreement. The Court noted the express language prohibiting the acceptance or transaction of business. The inquiry did not stop there, however, and the Court carefully reviewed the underlying facts and circumstances. Ultimately, the Court refused to impose that restraint, enjoining Bruett only from solicitation, something he was not doing anyway. 

Central to the Court’s reasoning was the requirement that to obtain enforcement an employer must be attempting to protect a legitimate business interest, typically trade secrets, confidential information or good will. The judge found that there were no trade secrets and only limited confidential information at issue. 

Turning to the question of good will, the Court noted that good will “is the prior history of reliability, integrity, knowledgeability, insurance experience, and prompt service that would cause present insurance clients to renew their existing insurance policies …, procure new policies … and to refer their friends and colleagues ….” The Walsh Agency had argued that this good will was its good will because it had invested the time, effort and expense to support Bruett’s development of the relationships with the customers. It was therefore entitled to protect it by the restraint requested. 

The Court did recognize that good will is typically the result of the combined efforts of the agent, as the public face of the Walsh Agency to the customers, and the management team, clerical and technical staff, who the customer may never see nor speak with. Despite noting that the company’s good will and the employee’s good will with those customers were “inevitably intertwined,” the Court drilled down to determine where the good will line should be drawn and whether Bruett should be restrained. 

In that regard, the Court’s inquiry was industry specific. It distinguished the insurance business from the business of a financial investment advisor that provides “handcrafted products.” In contrast, the Court found that the “products” of an insurance agency are not created by the agency, but rather the Agency steers the customer to the lowest price policies, provides assistance with claims and makes sure the policies don’t lapse. The Court then concluded that, by the nature of the insurance business, “most, although not all, of the good will belongs to the agent himself.” Granting the requested injunction, the Court said, would unfairly take away the good will that belongs to Bruett. The Court also noted that such restraint would impose a significant burden on the agent’s former customers who have come to trust him, not the agency, to handle their insurance needs.

As a result, the Court came down on the side of Bruett, leaving him free to do business with his former customers provided those customers had made, or in the future make, the first contact. 

Bruett does not pave new ground. It should, however, serve as a reminder to employers and their counsel that efforts at enforcing any type of restrictive covenant will occasion the same strict scrutiny that existed prior to the passage of the Noncompetition Agreements Act.   

About Rich Van Nostrand

Rich is a partner at the Firm. He has extensive experience in general civil trial work, with concentrations in business, commercial and employment litigation. He provides advice and representation in a variety of business and commercial litigation matters, including shareholder disputes, corporate dissolutions, intra- and inter-company disagreements, and intra-family business disputes. Rich also provides ongoing employment litigation and counseling services to numerous clients in the private, public and higher education sectors. In the private sector, Rich represents clients in a broad range of industries including health care, professional services, high technology, industrial and manufacturing. In addition, he is also frequently selected by litigants to assist in the resolution of their disputes as an independent arbitrator or mediator.
This entry was posted in Non-Competition Agreements and tagged , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s