Massachusetts Noncompete Law

Can a Judge in a Divorce Proceeding Order a Spouse Not to Compete with the Other Spouse?

Brian P. Bialas — Tue, 15 May 2012 17:31:41 -0500

The answer, at least in Massachusetts, is yes. In Cesar v. Sundelin, the Massachusetts Appeals Court recently ruled that, in dividing a marital estate that includes a family business, a judge of the Probate and Family Court has the authority to enjoin the party that no longer will have any ownership in the business from operating a competing business. The Appeals Court reasoned that a business’s “good will” is part of the martial property subject to equitable distribution. Without a non-compete order, that good will would be lost or the parties would be left to compete in “recapturing” the good will.

This case shows that, just like in employment relationships, good will is important and can be protected in a divorce. When property is distributed in a divorce, good will can be protected through a “reasonable” non-compete order that is “no broader than necessary to protect the good will,” just like a "reasonable" non-compete agreement between an employer and employee will be enforced.

Hampden Superior Court Refuses to Enforce Non-Competition Agreement Because Asset-Purchase Agreement Breached

Brian P. Bialas — Sun, 06 May 2012 12:50:27 -0500

When a plaintiff tries to enforce a non-competition agreement, sometimes the defendant will argue that the non-compete should not be enforced because the plaintiff has breached another agreement between the parties. If true, this argument will often work to defeat a request for “equitable relief”—a plaintiff’s request for a preliminary injunction preventing the defendant from working for a competitor, for example—because “he who seeks equity must do equity.”

Ultimately, though, whether a non-compete is enforced at trial sometimes hinges on whether the other agreement and the non-compete are really one agreement, even though they’re separate documents. Judge Jeffrey Kinder of the Hampden County Superior Court recently refused to enforce a non-compete after a trial because the plaintiff breached an asset-purchase agreement with the defendants. See Ace Precision, Inc. v. FHP Associates Inc., No. 09-1084 (Mass. Super. Feb. 24, 2012). The asset-purchase agreement required the plaintiff not to be “in default” of the asset-purchase agreement before the non-compete could be enforced. In particular, the asset-purchase agreement stated that “[t]he shareholders of the SELLER agree to enter into a non-compete agreement with the BUYER providing that so long as BUYER is not in default of this Agreement, the shareholders will not directly or indirectly own and operate a company that directly competes with the business being sold hereunder for 2 years from the date of closing.” (Emphasis added.) When Judge Kinder found that the plaintiff was “in default” of the asset-purchase agreement because the plaintiff failed to pay royalties, he concluded that the non-compete was unenforceable.

The same issue can arise in the employment context, sometimes with a different result. For example, in Intertek Testing Services NA, Inc. v. Dash, 13 Mass. L. Rptr. 530 (Mass. Super. 2001), another Superior Court case, the defendant had an employment agreement and a non-compete with his employer, but he received a separate payment for entering into the non-compete. When the employer breached the employment agreement, the non-compete was still enforceable because it was completely separate from the employment agreement. So employers should fulfill their obligations to their employees or make sure that non-competes are separate from other agreements with their employees before trying to enforce non-competes.

Executives (and One Law Firm) Allegedly Behaving Badly

Brian P. Bialas — Tue, 01 May 2012 13:13:36 -0500

A number of cases involving former executives have received national attention recently and serve as a good reminder that trade-secret, non-solicitation, and non-competition controversies can arise at the highest level of a company. Another recent case also serves as a reminder that trade-secret claims should be filed only when there is a good-faith basis to do so. Consider the following:

In In re: High-Tech Employee Antitrust Litigation, a California federal judge refused to dismiss a class-action lawsuit alleging that Steve Jobs orchestrated a number of agreements between Apple, Pixar, Google, Intel, Adobe Systems, Intuit Inc., and Lucasfilm not to compete for engineering talent in violation of federal and state antitrust laws. Each of the six bilateral agreements under review were identical in nature, lending credence to the allegation that they were “negotiated, reached and policed at the highest levels of the defendant companies.”

AIG filed a complaint last week in California state court alleging that the former CEO of its International Lease Finance Corp. subsidiary stole trade secrets and recruited other executives to do the same when he left to start his own company after he was unable to buy the subsidiary.

Similarly, Manpower Inc. filed a complaint in California federal court last week alleging that two of its former executives who left to form a competitor stole trade secrets and took employees with them in violation of those employees’ non-compete agreements.

In a bit of a twist on the typical trade-secret case, the law firm Latham & Watkins was sued by two former employees of Latham’s client, FLIR Systems, for maliciously suing them for trade-secret misappropriation on behalf of FLIR when the employees left FLIR to start their own business. The employees allege that there was no good-faith basis to bring the original lawsuit (which they eventually won) and that the lawsuit cost their new company important business with Raytheon. The employees also filed a malicious prosecution action against FLIR.

The first three cases simply highlight how important it is for a company to act appropriately to protect its trade secrets from potential competitors who may even be at the highest levels of the company. The last case references an issue that Massachusetts case law and the Uniform Trade Secrets Act (UTSA), which has been proposed for adoption in Massachusetts, address: trade-secret claims that are brought by plaintiffs in bad faith. One Massachusetts judge characterized a claim where the plaintiff "filed suit when it sensed the possibility of a trade secret theft without having reasonably investigated whether what it sensed indeed constituted the theft of a trade secret" as a “sound shot” that was like “the dangerous practice of an inexperienced hunter to fire his shotgun immediately in the direction of any sound that appears to have been made by a live animal.” Brooks Automation, Inc. v. Blueshift Technologies, Inc., 20 Mass. L. Rptr. 541 (Mass. Super. 2006). The danger of a “sound shot” in the woods is that someone could be injured, and likewise “[t]he danger of a ‘sound shot’ in the filing of a lawsuit against a prospective competitor is that the competitor may also die a corporate death through bankruptcy or suffer serious financial injury, especially if it is attempting to procure new customers or interest venture capitalists who are wary of becoming embroiled in litigation.” In Brooks, the court awarded treble damages to the defendant on its counterclaim under Massachusetts General Laws chapter 93A partially to punish the plaintiff, and similarly the UTSA authorizes an award of attorney’s fees to a party defending against a trade-secret lawsuit brought in bad faith. Employers should pause and think about the Brooks case and the UTSA before filing any trade-secret lawsuit.

Ninth Circuit En Banc Decision Creates Circuit Split with First Circuit that Affects Employer Claims Against Employees under the Computer Fraud and Abuse Act

Brian P. Bialas — Fri, 27 Apr 2012 13:08:45 -0500

Below is an article that I wrote for the June edition of Massachusetts Lawyers Journal, the monthly publication of the Massachusetts Bar Association. It discusses an important case that interprets the Computer Fraud and Abuse Act and the split in the law that case has created with the First Circuit, which includes Massachusetts.

The U.S. District Court for the District of Massachusetts has noted that employers are increasingly using the federal Computer Fraud and Abuse Act (CFAA) “to sue former employees and their new companies who seek a competitive edge through wrongful use of information from the former employer’s computer system.” But in April, the U.S. Court of Appeals for the Ninth Circuit made such employer lawsuits more difficult in that circuit by issuing its en banc decision in United States v. Nosal. In Nosal, the Ninth Circuit determined that an employee does not “exceed[] authorized access” to information in a computer under the CFAA when he or she violates an employer’s computer use restrictions. In contrast, the First Circuit concluded more than a decade ago in EF Cultural Travel BV v. Explorica, Inc. that contractual restrictions can serve as the basis for a CFAA violation. This circuit split affects the ability of employers to maintain lawsuits under the CFAA against former employees who were authorized to access their employer’s confidential information but took that information to competitors. It also tees up the CFAA for review by the Supreme Court.

I. The CFAA

The CFAA provides for both criminal and civil liability (if certain conditions are met) when a person commits various acts involving a computer and “exceeds authorized access” or acts “without authorization” in the process. The provision under review in both Nosal and Explorica was 18 U.S.C. § 1030(a)(4), which imposes liability on someone who “knowingly and with the intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value.” The CFAA defines “exceeds authorized access” as “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” “Without authorization” is not defined. Both the Ninth Circuit and the First Circuit focused their respective analyses on whether employees “exceed[ed] authorized access” when they were permitted by their employers to access certain information on a computer, but then used that information for the benefit of competitors. But because “without authorization” is not defined, judicial interpretations of “exceeds authorized access” necessarily affect the meaning of “without authorization” as well.

II. The Ninth Circuit: Limiting the CFAA to “Hacking”

In Nosal, the defendant Nosal worked for an executive search firm and convinced several employees shortly before he left to start a competing business with him. He asked the employees to use their log-in credentials to download confidential information from the firm’s computers and to send the information to him. The employees were permitted to access the information by their employer, but were forbidden from disclosing it. Nosal was indicted for aiding and abetting the employees in “exceed[ing] their authorized access” in violation of 18 U.S.C. § 1030(a)(4). The charge was dismissed by the district court, and the government appealed.

The Nosal court, sitting en banc, affirmed, reasoning that “exceeds authorized access” should only be applied to a person “who’s authorized to access only certain data or files but accesses unauthorized data or files—what is colloquially known as ‘hacking.’” The statutory definition of the phrase supported this interpretation because “entitled” should be read as a synonym for “authorized” in the text and a broader interpretation “would transform the CFAA from an anti-hacking statute into an expansive misappropriation statute,” which the court would not presume Congress intended absent clearer language. A broader construction “would expand its scope far beyond computer hacking to criminalize any unauthorized use of information obtained from a computer.” What is more, because § 1030(a)(2)(C) punishes a person who merely “exceeds authorized access” and “obtains information from any protected computer” without intent to defraud, a broader interpretation “makes every violation of a private computer use policy a federal crime.” The court construed the statute narrowly “so that Congress will not unintentionally turn ordinary citizens into criminals” and concluded that “‘exceeds authorized access’ in the CFAA is limited to violations of restrictions on access to information, and not restrictions on its use.” Because Nosal’s coworkers had permission to access the information, Nosal was off the hook.

The dissent, citing the Explorica decision among others, noted that none of the other circuits to consider the meaning of “exceeds authorized access” read the statute the same way.

III. The First Circuit: Breach of Confidentiality Agreement Proves Excessive Access

The First Circuit in Explorica reviewed the district court’s issuance of a preliminary injunction against defendant Explorica and several of its employees pursuant to § 1030(a)(4) of the CFAA. In Explorica, an employee of Explorica and a former employee of the plaintiff, EF Cultural Travel BV (EF), revealed EF proprietary information to Zefer, a company employed by defendant Explorica, an EF competitor, in violation of his confidentiality agreement with EF. Zefer then used that information to create a computer program that “scraped” EF’s public website of pricing information, thus allowing Explorica to undercut EF’s prices.

The court ruled that the district court’s decision was not clearly erroneous because “whatever authorization Explorica had to navigate around EF’s site (even in a competitive vein),” if EF’s allegations were proven, EF likely would prove that Explorica “exceeded that authorization by providing proprietary information and know-how to Zefer to create the scraper.” In fact, “[p]ractically speaking, . . . if proven, Explorica’s wholesale use of EF’s travel codes to facilitate gathering EF’s prices from its website reeks of use—and, indeed, abuse—of proprietary information that goes beyond any authorized use of EF’s website.” Although decided in a different factual and procedural context than Nosal, as one judge in the District of Massachusetts noted, the First Circuit in Explorica “advocated a broader reading” of the CFAA than the Ninth Circuit.

IV. Conclusion: On to the Supreme Court?

The Nosal decision’s statement that a CFAA violation is limited to violations of restrictions on access to information, not use, when read with Explorica’s competing conclusion that a CFAA violation may be based on the abuse of proprietary information, crystallizes the CFAA circuit split for Supreme Court review. Violations of an employer’s contractual and computer use policies cannot be used to show a CFAA violation in the Ninth Circuit, but they can in the First Circuit. Assuming the government seeks certiorari, a decision by the Supreme Court not to review the Nosal case will have an immediate impact on employer decisions on where to file CFAA claims against former employees who may have taken confidential information. In fact, the Nosal decision adds yet another hurdle for employers filing lawsuits in California (part of the Ninth Circuit) in addition to the unenforceability of non-competition agreements as a matter of policy in that state. The circuit split is even more important because of the location of important industries: Silicon Valley and Massachusetts (part of the First Circuit) are high-tech hubs where many companies rely on highly sensitive information to stay ahead of the competition. If the Supreme Court chooses not to review Nosal, more employers will file CFAA cases outside of the Ninth Circuit.

Second Circuit Reverses Convictions in Data-Theft Prosecution and Narrowly Interprets Federal Criminal Statutes with Important Intellectual Property Implications

Brian P. Bialas — Wed, 25 Apr 2012 09:50:46 -0500

My colleague Daniel Marx has written an excellent summary and analysis of United States v. Aleynikov, a Second Circuit decision that affects interpretations of the Computer Fraud and Abuse Act, National Stolen Property Act, and Economic Espionage Act. It is available on our Security, Privacy and the Law Blog. Importantly, as Dan explains, the district court's narrow interpretation of the CFAA in that case remains good law, putting that district court at odds with the First Circuit. More on the CFAA split is available here.

Survey Reveals Generation Gap in Employee Attitudes Relating to Employer Confidential Information

Brian P. Bialas — Tue, 24 Apr 2012 14:01:01 -0500

A recent survey of 2,625 adult Americans reveals some interesting attitudes towards employer confidential information, including different attitudes depending on a person’s age. Over two-thirds (68%) of 18-34 year olds responded that it is acceptable to remove confidential information from their place of employment. This contrasts with just half (50%) of those 55 or older believing such behavior is acceptable.

In fact, 86% of those 55 and over believe someone should be fired for taking confidential information, while only 74% of those younger than 55 think the same. The survey also reveals that 40% of adults believe it is never acceptable to take confidential company information out of the office, but others think it is acceptable to do so under certain circumstances, including when the boss says it’s okay (48%), to finish a late-night project from home instead of at the office (32%), to work over the weekend or while on vacation (30%), when the information is about themselves (16%), when the boss won’t find out (2%), and when family or friends promise to keep it confidential (2%).

This survey indicates that the challenge employers face in protecting their confidential information likely will not go away on its own. In fact, with the advent of the Internet, younger generations have grown up in a culture where the free exchange of information and ideas is more efficient (and more valued) than ever before. So getting younger employees to understand the importance of protecting their employers’ confidential information after they have grown accustomed to quick and free access to videos, music, and other Internet content will continue to be a problem.

Former Intel Employee Pleads Guilty to Theft of $1 Billion in Trade Secrets

Brian P. Bialas — Tue, 17 Apr 2012 13:30:04 -0500

A former Intel computer hardware engineer recently agreed to plead guilty to five counts of wire fraud in Massachusetts federal court stemming from his theft of 13 secret documents from Intel’s facility in Hudson, Massachusetts while he was an employee there in June 2008. Biswamohan Pani became an employee of Intel in May 2003 and began looking for a new job in February 2008. He started working at Advanced Micro Devices, Inc. (AMD), an Intel competitor, on June 2, 2008, but didn’t quit working at Intel for more than a week thereafter. From June 3 to June 11, 2008, while working at both companies, he allegedly downloaded documents worth over $1 billion in research and development costs that described Intel’s new microprocessors and copied them onto a hard drive for use at AMD. The prosecutors are recommending that the judge sentence Pani to six years in jail. AMD was not charged with any crimes because it did not request the information Pani gathered and did not know what he had done.

Although only wire fraud was involved, this case serves as a good reminder that trade secret misappropriation is not only a matter of civil liability in Massachusetts, but it is a crime as well. Massachusetts General Laws c. 266, § 30(4) includes the theft of trade secrets, “regardless of value,” under the crime of larceny, punishable by up to five years’ imprisonment. Cases like this one where a huge monetary figure is involved frequently will get law enforcement’s attention.

Can You Keep a Secret?: Dispute Remains Over Secrecy of Marketing Information in Trade Secret Case

Brian P. Bialas — Tue, 17 Apr 2012 13:23:24 -0500

An interesting case decided on April 3 in Florida confirms the axiom that information that is not secret cannot be a trade secret. In Godwin Pumps of America, Inc. v. Ramer, Godwin sued its former employee, Ramer, for, among other things, trade secret misappropriation under Florida’s Uniform Trade Secret Act (see here for more on the Act). Godwin argued that there was nothing in dispute for a jury to hear on Ramer’s liability and moved for the judge to enter summary judgment against Ramer. The judge denied the motion on the trade secret claim because there was a dispute over whether the information Ramer acquired—including information on Godwin’s customers, pricing, products, and services—was actually secret. Ramer argued that information on Godwin’s products and pricing is available on the Internet, that the state government publishes information that can be used to identify Godwin’s potential or current customers, and information like that at issue in the case is routinely acquired and collected by competitors from external sources, such as customers. The court was convinced to let the case go to trial. Similar arguments have held up in Massachusetts courts. See, e.g., Campbell Soup Co. v. Giles, 47 F.3d 467, 469-70, 472 (1st Cir. 1995) (affirming denial of preliminary injunction by Massachusetts district court in trade secret case determined in part because “most of the marketing information was no longer confidential in light of its public disclosure” to customers and in published sales materials and syndicated data sources).

The lesson here is that employers should think about the confidential information a departed employee may possess before filing a trade secret claim. Former employees frequently will argue that information is not secret to defend against such claims, and sometimes those arguments are hard to overcome.

Will Massachusetts Adopt the Uniform Trade Secrets Act?

Brian P. Bialas — Thu, 05 Apr 2012 16:47:47 -0500

At my last Massachusetts Bar Association (MBA) Civil Litigation Section meeting, I learned about a bill to adopt the Uniform Trade Secrets Act (UTSA) that has been floating around the Massachusetts Legislature since late January. Forms of the UTSA have been adopted in 46 states in addition to the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Only New York, Texas, North Carolina, and Massachusetts have not adopted it.

The last action on the bill was a hearing before the Massachusetts Joint Committee on the Judiciary on February 28, 2012. Testimony before the Committee and a copy of the bill with both official comments on the UTSA and comments specific to the version proposed in Massachusetts, which is slightly different, are available here. Importantly, the bill supersedes the definitions, procedures, and remedies applied in Massachusetts chapter 93A actions (regulating unfair and deceptive trade practices) for trade secret misappropriation. The UTSA expands the definition of “trade secret” to include information that has not been “continuously used in one’s business.” It leaves in place contractual remedies (i.e., non-disclosure agreements) so long as, to the extent contracts rely on confidentiality of information, such confidentiality be determined according to the definition of “trade secret” in the UTSA. As the comments note, this addresses an anomaly in Massachusetts created by an overly restrictive definition of trade secrets which requires “continuous use” of the trade secret and employers’ need to protect by contract “confidential information” that does not meet the restrictive definition. The testimony emphasizes that the UTSA is intended to facilitate fair employee mobility to promote innovation, legitimate competition, and job creation by “clarifying what information belongs to an employer” and would limit “lawsuits alleging vague takings or enforcing employee non-competition agreements based on overly broad assertions of confidentiality.”

The testimony also addresses the bill’s effects on the “Employee Non-Compete Agreement” debate discussed here by Michael Rosen in prior posts. In particular, the bill does not change the enforceability of non-competition agreements but, “to the extent such remedies are based on confidentiality of information, such confidentiality shall be determined according to the [UTSA’s] definition of trade secret,” which, as noted above, is broader than Massachusetts common law. It also permits injunctions against former employees from working for competitors even absent a non-competition agreement if the employee would “inevitably disclose” the trade secret while working for the competitor. Such an injunction could last even longer than a non-competition agreement in order to protect the trade secret, “possibly in perpetuity.”

The UTSA has been endorsed by the MBA Business Law Section but has otherwise received a lukewarm response within the MBA. One reason litigators may not like the UTSA is because it replaces the familiar framework available under chapter 93A for multiple damages and attorney’s fees. But as the comments point out, the UTSA authorizes awards of twice the entire recovery for “willful and malicious misappropriation,” which could include “actual loss caused by misappropriation and the unjust enrichment [to a competitor] caused by misappropriation that is not taken into account in computing actual loss.” The UTSA also authorizes awards of attorney’s fees. Only actual damages may be doubled or trebled under current Massachusetts law. So a party’s recovery under the UTSA could be greater than current law. Once litigators realize this, the UTSA may receive more support.

Middlesex Superior Court Not Persuaded by Estoppel Argument in Non-Compete Case

Brian P. Bialas — Tue, 20 Mar 2012 10:00:43 -0500

A recent case decided in the Middlesex County Superior Court illustrates how not every claim of generalized “unfairness” will be sufficient to avoid enforcement of a non-competition agreement.

In A.R.S. Services, Inc. v. Baker, the defendant employee worked for A.R.S. Services, a company in the disaster restoration field, and had signed an agreement with non-competition and non-solicitation provisions, both enforceable for one year after he left the employ of A.R.S. Shortly after the employee had resigned from A.R.S., he began working for a competitor of A.R.S. and solicited A.R.S. customers for his new employer. A.R.S. filed suit against the employee and his new employer to enforce the agreement and moved for a preliminary injunction to enjoin the employee from soliciting its customers for the competitor and working at the competitor in a disaster restoration position.

Judge Murtagh of the Middlesex Superior Court allowed the motion for a preliminary injunction. The employee did not challenge the reasonableness of the agreement, but rather only argued that A.R.S. was estopped (that is, precluded) from seeking to enforce the agreement because A.R.S. materially breached the agreement by directing him to engage in acts involving “moral turpitude.” The employee alleged that, while he was an employee of A.R.S., the president of A.R.S. requested that he reduce an estimate to rebuild a home that was destroyed by a tornado. He “reluctantly” reduced his estimate. The employee argued to the court that the president’s request was improper. The court, however, ruled that there was insufficient evidence that A.R.S. and its president were engaged in any fraud or illegal activity. Rather, the employee’s “apparent disagreement with [the president] involved ARS’ attempt to minimize costs to maximize profits.”

As this case shows, binding obligations in non-competition agreements are ignored at an employee and new employer’s peril. There are legitimate reasons for a court to rule that a non-competition agreement is not enforceable, but an employee’s mere business disagreement with his former boss is not one of them.

New Case Highlights Split of Authority Interpreting the Computer Fraud and Abuse Act

Brian P. Bialas — Mon, 19 Mar 2012 08:32:42 -0500

Below is a cross-post with the Security, Privacy and the Law blog.

Employers increasingly are suing former employees who have left to join or form competing companies using the civil remedies available under the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030. They use the CFAA to prevent their former employees from using sensitive information obtained from the former employer’s computer system. The scope of the CFAA, however, is subject to hot debate among the federal courts, as highlighted by a recent case from the District of Minnesota.

In Walsh Bishop Associates, Inc. v. O’Brien, Civil Action No. 11-2673 (DSD/AJB), 2012 WL 669069 (D. Minn. Feb. 28, 2012), the court interpreted a provision of the CFAA, 18 U.S.C. § 1030(a)(2)(C), which subjects an individual who “intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains information from any protected computer” to civil liability should the plaintiff meet certain conditions. In particular, the court had to determine the scope of the phrase “exceeds authorized access,” which the CFAA defines as “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” 18 U.S.C. § 1030(e)(6). The plaintiff argued that a person exceeds authorized access by accessing information in order to use it in a manner contrary to an employer’s interests and use policies. The O’Brien court, however, concluded, among other things, that subsection (a)(2) is not based on use of information, but rather access to information. Plaintiff’s interpretation therefore could not be correct and the court had to focus on whether the defendants accessed information that they were forbidden to access instead of how defendants intended to use the information they had obtained.

Other courts, including the District of Massachusetts, have come to a different conclusion regarding this language in the CFAA. In Guest-Tek Interactive Entertainment Inc. v. Pullen, 665 F. Supp. 2d 42 (D. Mass. 2009), Judge Gorton analyzed a different provision of the CFAA that also included both the “without authorization” and “exceeds authorized access” language. See 18 U.S.C. § 1030(a)(4). The defendants argued that the CFAA applies only to those lacking initial authorization and not those who subsequently misuse or misappropriate information. The plaintiff in response argued that the employee defendant’s alleged breach of his fiduciary duty of loyalty to the plaintiff (by copying files and secretly planning a competitive venture while still employed) effectively extinguished his authorization to access plaintiff’s computers. The employee defendant’s initial authorization to access the plaintiff’s confidential information was premised on the agency relationship between the parties, the plaintiff argued, and therefore when the employee breached his duty of loyalty he ended that relationship and constructively terminated his authorization to access the plaintiff’s files. Judge Gorton agreed with the plaintiff. He determined that the First Circuit advocated a broader reading of the CFAA in EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577 (1st Cir. 2001). In that case, the court “upheld a CFAA claim against employees who had collected pricing information from their former employer’s website in order to develop a competing entity with lower prices.” Guest-Tek, 665 F. Supp. 2d at 45. The First Circuit found “that the former employees’ reliance on [plaintiff]’s pricing information reeked of use—and indeed, abuse—of proprietary information that goes beyond any authorized use of [plaintiff]’s website.” Id. (quotation and brackets omitted). The First Circuit’s analysis of the employees’ “authorized use” and “abuse” of the plaintiff’s proprietary information in Explorica, Judge Gorton ruled, undercut the Guest-Tek defendants’ plain language argument—the type of argument the court accepted in O’Brien.

These two cases show that employers can use the CFAA when employees depart to join or form competing companies, but the CFAA’s usefulness may be limited by the case law in the jurisdiction in which the employer sues. Employers therefore should consider where they can sue and the state of the law in those jurisdictions before filing suit. These cases also call attention to a split in case law that eventually may require resolution by the Supreme Court.

If the Terms of Employment Change, Employees May Need to Sign New Non-Competition Agreements

Brian P. Bialas — Thu, 15 Mar 2012 08:49:34 -0500

A case decided last month in the Massachusetts Superior Court Business Litigation Session shows once again how material changes in the conditions of an employee’s employment can void a previously signed restrictive covenant, especially when the employer gives the employee a new non-competition agreement but the employee never signs it.

The lawsuit was brought by a software management consulting firm, Grace Hunt IT Solutions, LLC (“Grace Hunt”), against two of its former employees. Grace Hunt was created from an acquisition of Grace Hunt, LLC, the company that was party to non-competition and non-solicitation agreements the employees had signed. After the acquisition occurred, Grace Hunt’s manager announced that Grace Hunt would be implementing a different compensation structure and would be imposing certain other new employment conditions on the former employees of Grace Hunt, LLC. As part of these changes, each of the defendant employees received an offer letter explaining that they each would be required to sign an enclosed “Non-Competition and Confidentiality Agreement.” The employees signed the offer letters, but none of them signed the non-competition agreements.

Later that month, one of the employees was solicited by a competing software consulting company to form a Boston office for that company, and he forwarded that solicitation on to another employee. Both employees subsequently resigned from Grace Hunt effective December 23, 2011 to join the competing company.

Shortly thereafter, Grace Hunt filed a lawsuit against the defendants and moved for a preliminary injunction to enforce the older non-competition and non-solicitation agreements. It alleged that, while still employed by Grace Hunt and afterwards, the employees solicited—in some cases successfully—Grace Hunt clients for the competing company.

Judge Peter M. Lauriat denied the motion for a preliminary injunction for several reasons. First, Judge Lauriat determined that the mere acquisition of Grace Hunt, LLC to create Grace Hunt IT Solutions, LLC did not void the older non-competition agreements. He concluded that Grace Hunt IT Solutions, LLC was not a “materially different entity” from Grace Hunt, LLC such that the acquisition would change the scope of the non-competition provisions of the older agreements.

Judge Lauriat did rule, however, that material terms of the employment relationships had changed with the acquisition. Especially significant was the fact that Grace Hunt sought to have the employees sign new non-competition agreements. This was an implicit acknowledgement by Grace Hunt that the employment relationships had materially changed after the acquisition. In particular, the compensation structure was changed to include a 20% cut in base pay. Although additional compensation was available through bonuses based on the employees’ billable hours, there was insufficient work for the employees to receive a bonus; they accordingly would receive less compensation under the new compensation structure. The employees also were required to sign the new non-competition agreements, which they did not do. Grace Hunt argued that the employees’ fringe benefits were better than before the acquisition, but Judge Lauriat ruled that “it is the existence of a material change in the relationship that voids the prior non-compete agreement, not the nature of the change.” He concluded by stating that no case applying Massachusetts law has upheld a restrictive covenant executed prior to a material change in employment terms after an employee has refused to sign a new covenant at the employer’s request. Mike previously discussed other cases dealing with the “material change” issue here.

This case serves as a warning to employers to be mindful of two things when making significant changes to employment relationships with employees subject to restrictive covenants. First, an employee’s old restrictive covenant might be unenforceable, so the employee should sign a new non-competition agreement. Second, an employer should make sure that the employee actually signs the new non-competition agreement. As this case shows, small oversights can have big consequences.

New Momentum for Noncompete Reform?

Michael Rosen — Fri, 16 Sep 2011 16:35:40 -0500

This blog has reported on efforts over the past few years to enact legislation that would either prohibit or significantly reform the law of noncompetes in Massachusetts. During 2009 and 2010, these efforts had stalled, for at least two reasons: (1) several industry organizations had been vocal in opposing any change to the status quo; and (2) Governor Patrick's administration had been unenthusiastic about reform. As described here, back in 2009, Gregory Bialecki, Secretary, Executive Office of Housing and Economic Development (a cabinet level post), had stated the following:

we don't yet see the case to have been sufficiently proven that a change in our existing laws will be a significant improvement to our innovation ecosystem . . .

On September 15, at a hearing of the legislature's Joint Committee on Labor and Workforce Development, the Patrick administration changed its position. Secretary Bialecki testified in favor of proposed legislation that would significantly restrict and regulate the enforcement of non-competition agreements in the Commonwealth. His prepared remarks are here. The reasons for this support echo the arguments that have been made previously (and until now had been unpersuasive to the administration):

economic research has shown that enforcement of non-competition can have a "demonstrable negative effect on the mobility of technology workers, especially those with advanced, specialized skills";
this hindrance of employee mobility "can adversely affect our innovation economy";
job creation tends to come in "sudden large bursts" and such explosive hiring is more difficult in a jurisdiction where non-competes are enforced;
talented employees interested in starting up new ventures are leaving the Commonwealth because of noncompetes;
noncompetes often are unfairly imposed and/or unfairly enforced; and
established large employers for which the status quo is advantageous should take a longer view and understand that the current environment is bad for the overall health of the MA economy

The statement ends by stating that there is a "pressing need for serious change." The administration is supporting the reform bill being sponsored by Representatives Brownsberger and Ehrlich, but the following statement should send chills down the spines of those who support the status quo:

If the relevant stakeholders are not prepared to [engage in a serious conversation] with a sense of urgency, then we ought to consider whether the outright elimination of enforceability altogether is the best course of action for the Massachusetts economy.

These are strong words, and clearly are intended to make clear that from the administration's perspective, change is necessary and will happen with or without the involvement of business groups that favor no change at all. Interestingly, almost all of the arguments made by the administration -- if accepted -- would justify a ban on noncompetes, rather than the reform approach.

The Latest on MA Noncompete Reform Efforts

Michael Rosen — Fri, 08 Jul 2011 07:57:15 -0500

It's time for another update on the efforts in Massachusetts -- now several years old -- to abolish noncompetes or reform the law governing their enforcement. In the past week, Scott Kirsner has focused again on this issue both in the Boston Sunday Globe and his Innovation Economy blog. He provides a very useful summary of the status of the current efforts (as well as his own anti-noncompete stance) here. Another useful resource for information on current legislative efforts and background on the law is Representative William Brownsberger's blog. Readers of this blog will recall that Rep. Brownsberger has co-sponsored a bill that would permit the continued enforcement of non-competition agreements but would impose significant substantive and procedural limitations. Most recently, the proposed reform bill has been revised to eliminate and scale back certain restrictions to which pro-noncompete business groups had objected. While those reform efforts continue into the 2011-12 legislative session, two new bills have been filed that would more or less follow the California model and prohibit non-competes in the employment context. (Rep. Brownsberger had started off with this stance back in 2009, then backed off in the face of opposition.) A bill filed in the MA House of Representatives (here) would prohibit noncompetes except in the context of a sale of business or departure from a partnership or limited liability company. A bill filed in the Senate (here) does not specifically address these exceptions but focuses on non-competes in the employment and independent contractor contexts. It's not clear that any of these reform approaches has sufficient legislative support to move forward.

Noncompete Enforced Despite Hiring Company's Best Efforts to Preserve Former Employer's Secrets

Michael Rosen — Thu, 02 Jun 2011 13:49:15 -0500

This decision by a federal judge in Massachusetts enforcing a non-competition agreement is notable for at least two reasons: (1) it presents yet another example of a court in Massachusetts rejecting an argument that California law should govern a non-compete dispute, and (2) it contains an interesting discussion of the hiring company’s substantial but unsuccessful effort to avoid the noncompete by taking steps to ensure that the new employee protected the confidential information of his previous employer.

The case, Aspect Software, Inc. v. Gary Barnett, involved an executive vice-president and chief technology officer at a technology company who left to take on a similar role at a clearly competitive company. The plaintiff and former employer, Aspect, is a Massachusetts-based company. While employment by Aspect, the defendant employee, Barnett, was based in Tennessee and Massachusetts. The new employer, Avaya, is based in California. Just before joining Avaya, Barnett moved his residence to California.

Not surprisingly, the non-compete at issue contained a choice of law provision dictating that Massachusetts law would apply to any dispute between the parties. Notwithstanding that provision, Barnett and Avaya argued that California law – which prohibits non-competition agreements except in very limited instances not applicable here – should apply to the dispute. Judge Denise Casper (who happens to be the newest judge on the U.S. District Court in Boston) rejected that argument. Citing well-established principles that a choice of law provision should be overridden only where another state’s interest in the dispute is greater than the agreed-upon state’s interest, Judge Casper found that California’s interest was either weaker than or at best equal to Massachusetts’ interest. In particular, she found that California’s interest in pursuing its policy against non-competes would not materially outweigh Massachusetts’ interest in ensuring that its contracts are enforced. She therefore applied Massachusetts law to the substantive question of whether the non-compete should be enforced.

On that fundamental issue, the most interesting aspect of the analysis (in my view) relates to the unusually careful attempt by Barnett and his new employer to ensure that Barnett would not use or disclose any of Aspect’s confidential information in his new position. One can infer that they decided that taking these steps would improve their chances in court in the event that Aspect sought to enforce the noncompete. It was undisputed that Barnett turned off his company issued Blackberry immediately after tendering his resignation, left his laptop in his office, boxed all of his Aspect property and made arrangements for Aspect to retrieve the boxes. There was no allegation that he retained any of that information or used it in his new position. In addition, Avaya included language in its employment offer and separately in Barnett’s employment agreement making very clear that Barnett was not to use or disclose any Aspect information in his new position. On top of that, Barnett’s new boss at Avaya sent him an email that provided a list of “ground rules” that Barnett was expected to follow in order to ensure that Aspect’s trade secrets and other information were not used by Barnett in his new role.

Despite these efforts, Judge Casper sided with Aspect and granted it the requested preliminary injunction. The judge acknowledged the “scrupulousness” of Barnett’s and Avaya’s efforts and credited the “sincerity” of their intent. Yet, she found that given the extent of Barnett’s experience at Aspect and the similarity between his positions at Aspect and at Avaya, it was difficult to conceive how all of the information stored in Barnett’s memory could be set aside as he applied himself to a competitor’s business. Thus, summing up the analysis, Judge Casper stated, “even taking into account Barnett’s and Avaya’s commendable efforts to protect the integrity of Aspect’s trade secrets, Aspect has carried its burden of establishing a significant risk of irreparable harm.” She therefore granted the injunction stopping Barnett's work at Avaya.

The take-away? Even the most proactive and careful hiring efforts will not avoid enforcement of a noncompete if all of the required legal factors line up in favor of the former employer.

Noncompetes and Races to Courthouses

Michael Rosen — Wed, 23 Mar 2011 10:21:52 -0500

An increasingly common scenario in the world of noncompete enforcement is the so-called “race to the courthouse,” where parallel actions are brought in separate jurisdictions about the same dispute. In one case, the former employer seeks enforcement of the noncompete. In the other, the employee and his or her new employer seek an order declaring that the noncompete is unenforceable. Many of these situations involve California as the location of the new employer. Upon hiring the employee, the California-based employer will immediately seek a “declaration” from a California state court judge (these are called “declaratory judgment” actions) that the non-competition provision is unenforceable under California law and therefore it is okay to hire the employee. The advantage of this approach is that California precedent supports a holding that would disregard the law of the state in which the employee previously worked, even if the contract contained a provision (a “choice of law” clause) stating that a particular state’s law would apply to disputes under the contract.

Often in these instances, it will be argued that the dispute should be adjudicated in the court where the first lawsuit was filed. This is sometimes called the “first filed” rule, and Massachusetts courts generally have followed it. Thus, we get a “race to the courthouse”: the party that files first gets to dictate what court will decide the dispute.

I mention all of this as background for discussion of a Massachusetts case,Ethicon Endo-Surgery, Inc. v. Pemberton and Intuitive Surgical, Inc., decided in late 2010 (but only recently brought to my attention), in which Judge Lauriat of the Superior Court’s Business Litigation Session had occasion to consider the “first filed” rule in the context of a non-compete dispute with some connection to Massachusetts, California, Ohio, New Jersey, New Hampshire and Maine.

The employee, Pemberton, had been employed by Ethicon Endo-Surgery (EES), an Ohio-based medical device company that is a subsidiary of Johnson & Johnson, a New Jersey company. Pemberton was involved first in sales and then later in educational/training activities for EES customers. He worked in northern MA, NH and Maine. He left EES in October, 2010 and was hired by Intuitive Surgical, a Delaware corporation with a principal place of business in California, where he was to be a sales manager based in the Boston area.

On his last day, Pemberton told EES he was going to work for Intuitive. The next day, Intuitive and Pemberton served EES with a California-based declaratory judgment action. Four days later, EES sued in Massachusetts state court to enforce Pemberton’s 18-month non-competition restriction.

Not surprisingly, Pemberton and Intuitive argued that the “first filed” rule required dismissal of the Massachusetts case, with the expectation that the California court would invalidate the noncompete. But based on the facts of the case, Judge Lauriat was not willing to follow that rule. As it turned out, Pemberton gave EES more than a month of notice of his departure, but he didn’t say where he was going and told EES he was still “working out the details.” He informed EES that he was going to Intuitive only on his last day of work. Meanwhile, unbeknownst to EES, weeks before his last day, Pemberton already had signed an offer letter from Intuitive and he and Intuitive already had filed a declaratory judgment action in California. They simply waited to serve the papers on EES until the day after Pemberton’s last day of work at EES.

Judge Lauriat stated that he could “not condone Intuitive’s behavior” by applying the first-filed rule. He noted that that the situation could not even be called a “race to the courthouse,” because EES didn’t even know there was a race until Intuitive and Pemberton “had already crossed the finish line and hoisted the trophy.”

So, Judge Lauriat kept the case and decided EES’s preliminary injunction motion on the merits. He rejected Intuitive’s argument that California law should trump the parties’ choice of New Jersey law in the contract, finding that either New Jersey or Massachusetts had an equal or greater interest in the dispute given the contacts with those states. He then gave short shrift to Pemberton’s argument that the companies were not competitors. He did find that the nationwide scope of the restriction was too broad, and scaled it back to Maine, New Hampshire and Massachusetts. Finally, in balancing the equities/hardships for each party, Judge Lauriat was swayed by the fact that the contract required that EES would compensate Pemberton for every month in which he could not work due to the non-competition agreement. The fact that Pemberton could have made more money at Intuitive did not change the judge’s view.

Injunction granted, despite the employee’s and new employer’s best laid plans to take advantage of California law.

The lesson? Massachusetts courts are not going to be willing to defer to a California court in a non-compete case where it appears to the judge that the parties engaged in subterfuge or manipulation to get a case filed in that state.

Federal Court Denies Injunction on Procedural and Substantive Grounds

Michael Rosen — Wed, 09 Feb 2011 18:06:58 -0500

This decision from the United States District Court in Boston, denying a request for a preliminary injunction to enforce non-competition and other restrictive covenants, is notable for a few reasons. First, the federal court in Massachusetts issues relatively few decisions involving requests to enforce noncompete and/or nonsolicitation agreements; a published decision from a federal judge -- in this case from Judge George A. O’Toole, Jr. -- is inherently of interest. More importantly, the decision, Maine Pointe, LLC v. Starr and Gestion Velocitas, Inc., addresses several procedural and substantive issues that arise with regularity in the world of noncompete litigation.

The plaintiff, Maine Pointe, filed suit and immediately sought to enjoin competitive activities by its former consultant, Peter Starr, a Canadian who operated through his own company, Gestion Velocitas (also sued as a defendant). The restrictive covenants at issue were in an agreement between Maine Pointe and the Starr’s company, but not with Starr himself (although he signed for the company).

The defendants sought to derail the injunction request first by raising a procedural barrier: that the court lacked jurisdiction to hear the case, because Starr and his company were based in Canada and never engaged in sales or other activities in Massachusetts. Maine Pointe responded by pointing to a provision in the agreement stating that Massachusetts law would apply and that litigation relating to the agreement would occur exclusively in Massachusetts. Judge O’Toole did not fully decide the jurisdictional issue, but stated that he was sufficiently doubtful about the court’s jurisdiction over Starr -- notwithstanding the forum selection provision -- that he would deny the injunction request against Starr on that basis alone. The lesson for employers seeking to enforce noncompetes? Be sure that you have a strong basis for suing in the particular court you choose. Creating judicial doubt about jurisdiction is a sure way to take the wind out of the sails of your injunction request.

Judge O’Toole also denied the injunction request against the company defendant, this time on substantive grounds. Maine Pointe’s main complaint was that the defendants had violated the non-disclosure and non-solicitation restrictions by soliciting business from two entities they previously solicited -- unsuccessfully -- while engaged by Maine Pointe. Judge O’Toole was unconvinced. He found that the evidence did not sufficiently demonstrate that the contact information defendants used to contact the prospective customers was protected “trade secrets” or “confidential information,” noting that Massachusetts courts in previous cases had held that “general information and routine data” of a company is not protectable. As to the non-solicitation issue, Judge O’Toole found that there was no legitimate interest justifying enforcement of the restriction, because there was no evidence that defendants developed any meaningful relationship with these entities -- that is, "good will" -- while engaged by Maine Pointe.

As a result, Judge O'Toole refused to give Maine Pointe any of the relief it sought.

Text of the New Noncompete Bill

Michael Rosen — Tue, 25 Jan 2011 14:10:30 -0500

Many thanks to Brad MacDougall of Associated Industries of Massachusetts (AIM) for sending along the text of the revised noncompete bill, which was filed last week. The new bill is here. As David Frank of Mass. Lawyers Weekly mentioned in his recent blog post and Lawyers Weekly reported last October, AIM had exerted pressure to block passage of the bill in 2010.

Stay tuned for information about when the bill will be considered in committee.

MA Noncompete Bill Has Been Re-filed

Michael Rosen — Mon, 24 Jan 2011 17:00:00 -0500

As confirmed here, a bill to reform the law of noncompetition agreements in Massachusetts, which died in the 2010 legislative session, was re-filed on January 19, 2011. Rep. Will Brownsberger, one of the sponsors of the compromise legislation in 2010, stated on his website prior to the re-filing that it would "look like the last generation of the bill that came out of committee with a few additional changes that reflect input we have been getting."

The text of the new bill is not yet available, but Russell Beck, an attorney who helped draft the legislation, has summarized the changes from last year's legislation on his blog. Perhaps the most significant changes are: (1) the salary threshold (which had been $75,000) has been eliminated; (2) garden leave clauses -- originally part of the legislation and then later taken out -- are back, enabling employers to impose up to a two-year noncompete if they are willing to pay for it; (3) the 10% compensation requirement as "consideration" for a mid-employment noncompete is eliminated, and in its place consideration must be only "fair and reasonable"; and (4) the safe harbors for employers to avoid having to pay attorneys' fees are expanded.

All of the changes appear to have been made to address concerns in the business community that the legislation was overly hostile to the interests of (enforcing) employers.

This blog will provide the text of the bill as soon as its available.

New Momentum to Limit Noncompetes in Massachusetts?

Michael Rosen — Wed, 19 Jan 2011 17:09:38 -0500

One of my partners, Jeff Quillen, recently brought to my attention an interesting discussion about non-competes that took place last month at a meeting of the 12x12 group. As explained here, 12x12 was formed earlier this year in an effort to drive the company formation process in Massachusetts. It consists of “12 world-class CEO’s and 12 senior partners from some of the most active VC firms in town to launch 12 new companies in the next 12 months – and in so doing, launch the career of 12 next generation great entrepreneurs.” Since it was formed, 12x12 has raised $11.5 million and funded five new companies. The group meets regularly along with an Organizing Committee comprised of thought leaders such as Desh Deshpandi (Sycamore Networks, A123 Systems), Steve Vinter (Google in Cambridge), Paul Sagan (Akamai) and Jonathan Kraft (New England Patriots), and sponsors such as Foley Hoag. (My partner Jeff Quillen is one of the regular participants.)

As described in the blog of Michael Greeley of Flybridge Capital Partners, at a 12x12 meeting last month, the group:

engaged in a surprisingly spirited debate concerning the impact of “non competes” in Massachusetts. After frankly more discussion than I imagined the common ground seemed to be coalescing around the need to soften or do away with non competes.

Jeff reports that a number of the venture capitalists in the room observed that one of the impediments to creating new, successful companies is finding capable, hard-charging entrepreneurs who have experience in a particular industry to take on a lead role in a newly-funded startup. In California, the VCs will find these people in the senior management team (typically not the CEO) of an existing company in the industry; i.e. a competitor. Non-competes present no obstacle to this approach, because California law decrees that they are unlawful. In Massachusetts, in contrast, because of the prevalence of non-competes particularly among senior people at technology companies, the VCs are forced to look for senior talent outside the relevant industry or to hire graduate students with little or no experience. This phenomenon seems to be leading to a growing recognition (at least among the 12x12 meeting participants) that non-competes in and of themselves may be a significant impediment to creating and growing new companies in Massachusetts. Some in the room were postulating that perhaps Massachusetts should follow the California model. The group is going to study the issue and continue its discussions. If the VC community in Massachusetts solidifies a stance against the status quo, it will find itself at odds with some of the larger, established companies (within and outside the technology community) that have resisted any change in the status quo.

I cannot help but observe a certain irony here given the current status of non-compete reform efforts in the Massachusetts legislature, as described in my previous posts over the past two or three years. The legislation initially filed in the spring of 2009 would have followed the California model and abolished non-competes except in very limited circumstances. The sponsors of that approach quickly concluded that there was insufficient support in the business community. They then pursued a compromise approach, whereby noncompetes would remain enforceable but various protections would be established to protect against employer overreaching. The compromise bill (which has been revised in minor ways since its introduction) did not gain passage during the last session but is expected to be re-introduced this year. The irony -- in my view -- is that even if the compromise legislation were passed in its current or similar form, it is likely that the people 12x12 are hoping to recruit for its new companies still would be subject to non-compete restrictions that would impede their hire.

Ultimately, if significant players in the VC and technology communities conclude that noncompetes truly are an impediment to their ability to form and nurture meaningful new technology companies in Massachusetts, they will need to more forcefully express that view in public -- to the Governor, their legislators, industry groups etc. -- before the legislative ship has sailed.