Court Ruling Addresses the “Business Necessity” Rule for Non-Competition Agreements in Massachustets

In order to be enforced by a court in Massachusetts, agreements to restrict an employee’s future employment, i.e. “non-competition” agreements, must be (1) necessary to protect the legitimate business interests of the employer, (2) reasonable in time and scope, (3) bargained for between the parties and (4) consistent with the public interest.  A recent ruling from the Business Litigation Session of the Massachusetts Superior Court has clarified, if not reaffirmed, several common sense principles concerning the first element cited above, that is, the protection of “legitimate” business interests” by employers.  In doing so, the Court shed light on the illegitimacy of various justifications often relied upon by employers to seek or threaten enforcement of non-compete agreements signed by former employees.

The case is ABM Industry Group, LLC v. Palmarozzo, and the Court’s well-reasoned decision concisely exposes the empty logic behind a number of so-called “business interests” that are simply not protected by law, including:

1. Preventing an employee from using “skill and general knowledge” acquired or improved through his or her former employment.  An employer’s desire to restrict a former employee from working for competitors simply in order to prevent the employee from putting his or her industry-specific experience to use for another company is not “legitimate,” but rather an attempt to avoid or constrain lawful business competition.  The “skill and general knowledge” referenced by the Court in this case is presumably the type that could be acquired through any formal educational program available to the public in the employee’s specific field or industry, and/or through work experience, apprenticeship, residency, etc.   Although an employee cannot use the confidential information or trade secrets of his or her former employer in order to assist competitors, these terms are usually defined far more broadly in non-compete agreements than the definition actually applied and upheld by the courts in non-compete litigation.  Which brings us to our next “illegitimate” business interest…

2. Preventing an employee from utilizing his or her own memory of customer names, needs and habits in order to assist a future employer.  Although customer identities are almost always included within the definition of “confidential information” contained within non-competition agreements, the Court in Palmarozzo reminds us that such “remembered information” is not confidential because “the information itself, as distinguished from the employer’s compilation of such information into a list or database, is known to the customers and thus not kept secret by the employer.”   The employee should therefore be free to share this information with his or her new employer, though any non-disclosure language incorporated or appended to the non-competition agreement should be reviewed by the employee’s counsel in advance (which may encompass both confidential and non-confidential information). Direct solicitation of former clients by the employee is likely to be prohibited, at least for a certain amount of time post-separation, as part of a standard non-solicitation clause appended or incorporated into  most non-competition agreements.

3. Preventing an employee from using his memory of prices quoted or charged to customers.  Again, the logic behind this is straightforward:  information shared with  actual or potential customers is generally not confidential.  This applies to prices quoted or charged to customers, as well as marketing or merchandising strategies or methods disclosed to potential customers. An employee’s knowledge of sales pricing techniques or rubrics utilized by his or her former employer may be confidential and constitute good grounds for enforcing a non-competition agreement, but only to the extent that such techniques or rubrics are not generally relied upon by competitors within the field or industry in question.

4. The feared “loss of goodwill”  resulting from a former employee going to work for a competitor with vastly disproportionate market share.  The Court in Palmarozzo indicated that a company’s goodwill is not necessarily threatened by the fact that a former employee has left to work for a “competitor.” Whether or not goodwill is legitimately threatened by the new employment relationship is a question of fact based on a number of different circumstances, including:  whether or not the employee will be working in the same role or position for the competitor; the nature and extent of any business dealings between the employee and former clients since the employee’s departure; and, perhaps most importantly, the size of the competitor’s “market share” and its ability to service clients of the former employer.  In Palmarozzo, all of these factors weighed in the employee’s favor, and against enforcement of his non-competition agreement.  Mr. Palmarazzo worked as a branch manager focusing on sales for his former employer, ABM, but was hired as general manager focusing on operations for his new (and much smaller) company.  Only one former client of ABM had started doing business with Palmarazzo’s new employer between the time of his separation and ABM’s request for injunctive relief to enforce his non-competition agreement, a switch that was not prompted by any solicitation efforts of Palmarazzo.   And the undisputed evidence showed that ABM’s business focused on accounts that were much to large for Mr. Palmarazzo’s new employer to handle.

In short, employees should not assume that they are prohibited from working in the industry or field in which they have been trained simply because they have signed a non-competition agreement with their former employer.  Even a provision prohibiting employment with competitors may not be enforceable based on the circumstances.  It is critical, however, to seek review and consultation from experienced employment counsel before planning your next steps.  If you or your business have questions regarding the meaning or enforceability of any non-competition, non-disclosure or non-solicitation agreement, please contact us at (508) 381-0499.