Enforcement of an Employee Non-Compete Provision

The pattern emerged slowly at first but soon became crystal clear. Greener Grass Guaranteed, Inc. (“GGG”), a lawn maintenance specialist, was losing customers to Lawn King, a new company owned and operated by a former GGG employee, Sam Slick, who had left GGG just a month earlier. Numerous GGG customers, whose accounts had been serviced by Slick, cancelled their GGG lawn maintenance contracts, saying that they had been approached by Slick and wanted to continue to work with him. Interviews with customers established that Slick was using confidential GGG information, including customer service records, supplier information and price quotes, to underbid GGG. It also became clear that Slick had been soliciting GGG customers to follow him to Lawn King even while he was still employed by GGG.

While a GGG employee, Slick had access to GGG’s confidential information, including methods of doing business, information about special deals GGG had with suppliers, customer lists, and prices quoted to customers and prospective customers. GGG made this information available to employees only on a “need to know” basis, made clear to its workers that the information was confidential and safeguarded it using locked rooms and computer passwords.

When Slick started working for GGG, he had signed a contract containing a non-competition covenant, barring him from working in the lawn care industry within 50 miles of GGG’s office for a period of two years, a non-solicitation provision, prohibiting him from approaching any customers whose accounts he had serviced while employed by GGG, and a confidentiality provision, prohibiting him from misappropriating or misusing GGG’s trade secrets. GGG wants to sue Slick to obtain an injunction enforcing Slick’s obligations.

These facts suggest that GGG has viable claims: for breach of Slick’s contractual obligations not to compete with GGG, not to solicit its customers and not to disclose trade secrets; for violation of the Massachusetts trade secrets law, G.L. c.93, §42; for Slick’s breach of his fiduciary duty to GGG; and for Slick’s intentional interference with GGG’s contractual and advantageous business relationships.

In order to obtain injunctive relief, GGG “bears the burden of showing its likelihood of success on the merits; that it will suffer irreparable harm if the injunctive relief sought is not granted; and that its harm, without the injunction, outweighs any harm to [Slick and Lawn King] from … being enjoined.”[1] In this hypothetical, GGG has a good chance of establishing each of these elements.

Likelihood of success on the merits.

Proof that the non-competition covenant of Slick’s contract with GGG is valid and enforceable and that Slick’s conduct violated that covenant.

To show a likelihood of success on the merits of the breach of contract claim, GGG must show that the non-competition covenant in Slick’s contract is enforceable under Massachusetts law and that he violated that provision. Such a covenant is enforceable if it is reasonable, based on all of the circumstances.[2] “A covenant not to compete is reasonable if its purpose is to protect an employer’s legitimate business interests.”[3] Where the employer has a legitimate business interest, the non-competition covenant must be reasonably limited in time and geographic scope.

Legitimate business interests which may be protected through the use of a non-compete covenant include “goodwill, trade secrets, or other types of confidential information.”[4] Goodwill is “the employer’s positive reputation in the eyes of its customers or potential customers … [and] is generated by repeat business with existing customers or by referrals to potential customers.”[5] “Goodwill is certainly a legitimate business interest that an employer is entitled to protect generally and specifically in relation to sales personnel–individuals dealing directly with the customers of the former employer in whole or in part.”[6]

Confidential information providing a legitimate basis for enforcement of a non-compete provision is a “compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.”[7]

Notably, a former employee’s work for the employer’s competitor will harm the former employer’s goodwill and interest in protecting trade secrets and confidential information, even if the departing employee does not take with him any physical documents or lists. Nor is it necessary for an employer seeking to enforce a non-compete provision to prove that the former employee, in bad faith, intends to use or disclose trade secrets or confidential information. According to the Court in Boch Toyota, Inc./Boch Toyota Honda v. Klimoski,

A departing employee may cause harm to his former employer’s goodwill by possessing confidential or proprietary business information of the former employer. All Stainless, Inc., 364 Mass. at 779-80. Whether an employee actually takes any customer or supplier lists with him is not dispositive; the employee may still be enjoined if the appropriated confidential information is merely in his or her memory. Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840 (1972). In the court case at bar, Klimoski cannot leave behind her recently gathered special knowledge of plaintiff’s operation, and in serving her new (and previous) employer she will inevitably draw upon that knowledge. In Marcom Corp. v. Orchard, 885 F.Supp. 294, 297 (D.Mass.1995), the court noted that “the harm to [the former employer] cannot be avoided simply by the former employee’s intention not to disclose confidential information, or even by his scrupulous efforts to avoid disclosure … he does not go with a tabula rasa with respect to [the former employer’s] products, its development strategies, its marketing plans, its customers and other significant business information … what [the employee] knows about [the former employer] is bound to influence what he does for [the new employer], and to the extent it does, [the former employer] will be disadvantaged.”[8]

In Empirix, Inc. v. Ivanov, 28 Mass. L. Rptr. 511, 2011 WL 3672038 (Mass. Super. 5/17/11), the Massachusetts Superior Court enforced a non-competition covenant despite the employee’s claim that the employer could not prove that the employee would disclose confidential information to his new employer. The Court said:

Ivanov’s knowledge of the competing product will inevitably or inadvertently surface during [his] employment with NetScout [new employer] because of the timing of Empirix’s recent arrival on the mobile broadband stage. He will make decisions for his competing product based on information he holds about IPXPlorer, and even without formal disclosure, thereby benefit NetScout. Under these circumstances, a court order not to disclose will not enforce Empirix’s effort to protect itself from unfair competition.

Id. at *4.

In our hypothetical, GGG has a legitimate business interest in preventing Slick from working for Lawn King or any other competing business. Slick serviced GGG customers and is in a position to solicit GGG customers, thereby harming the goodwill which GGG itself developed.[9]

Indeed, the evidence is that Slick approached various GGG customers about shifting their business to Lawn King. In addition, while employed at GGG, Slick gained knowledge of GGG’s customer lists, methods of doing business, and other confidential information and trade secrets, which are and will be highly useful to him and Lawn King in competing with GGG. Even if Slick was acting in good faith, he could not unlearn what he knows about GGG and necessarily will use that information in his work for Lawn King.

GGG should also be able to show that the non-competition provision is reasonably limited in time and geographic scope. It bars Slick from working for a business similar to or in competition with GGG, located within 50 miles, for a period of two years. These restrictions are entirely reasonable. The Court in Stone Legal Resources Group, Inc. v. Glebus said

In determining whether the time limit is reasonable, this Court will “consider the nature of the business and the character of the employment involved, as well as the situation of the parties, the necessity of the restriction for the protection of the employer’s business and the right of the employee to work and earn a livelihood.”[10]

The restriction of two years in the present case is not unreasonable.[11] Nor is the 50 mile radius of the restriction unreasonable.[12] Even if a court were to conclude that the non-compete provision was unreasonable either in time or geographic scope, GGG could argue that the court has the authority to modify the terms of the covenant so as to make it reasonable, rather than refuse to enforce it.[13]

Lawn King is a business in direct competition with GGG and is located well within the 50 mile radius of the non-competition covenant. Given that the non-compete provision is reasonably limited, the Court should enforce it.

Proof that GGG is likely to succeed on the merits of its claim that Slick and Lawn King misappropriated GGG’s trade secrets and confidential information.

To succeed on a claim for misappropriation of trade secrets or confidential business information, in violation of G.L. c. 93, § 42, GGG would have to prove that:

(1) the information in question is a trade secret, (2) [GGG] took reasonable steps to preserve the secrecy of that information, and (3) [Slick] used improper means, in breach of a confidential relationship, to acquire and use that trade secret.[14]

Massachusetts courts consider six factors in determining whether information constitutes a trade secret:

(1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the employer to guard the secrecy of the information; (4) the value of the information to the employer and to his competitors; (5) the amount of effort or money expended by the employer in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.[15]

In Network Systems Architects Corp. v. Dimitruk, 2007 WL 4442349 (Mass. Super. 12/6/07), the Court concluded that “information about the history of particular customers’ accounts, including the needs of those customers and proposals made to them” constituted trade secrets. Id. at *7. Applying the six factors above, GGG’s customer lists, its records of services provided and prices charged to customers, its supplier arrangements and its methods of doing business constitute trade secrets.[16] [17]

As discussed below, Slick and Lawn King also used improper means to acquire GGG’s confidential information, in breach of Slick’s confidential relationship with GGG. While still employed at GGG, Slick acted in furtherance of his plan to start a competing business and steal GGG’s customers. Thus, GGG can establish the elements of its trade secrets claim.

Proof that GGG is likely to succeed on the merits of its claim for breach of fiduciary duty.

An employee who occupies a position of trust and confidence owes his or her employer a fiduciary duty to protect the interests of the employer. Even employees who are not managers occupy positions of trust where they have been entrusted with confidential information. Such a fiduciary duty imposes “certain limitations on the conduct of an employee who plans to compete with his employer. He may not appropriate his employer’s trade secrets … [h]e may not solicit his employer’s customers while still working for his employer … and he may not carry away certain information, such as lists of customers.”[18]

In support of its claim that Slick breached his fiduciary duty, GGG can show that Slick was entrusted with confidential information, that he solicited GGG customers while still employed by GGG, and that he has misappropriated GGG’s confidential information and used it to benefit Lawn King.

Proof that GGG is likely to succeed on its claim that Slick and Lawn King intentionally interfered with GGG’s contractual and advantageous business relationships.

GGG may also have a viable claim against Slick and Lawn King for intentional interference with GGG’s contractual or advantageous business relationships with customers.

In an action for intentional interference with contractual relations, the plaintiff must prove that (1) he had a contract with a third party; (2) the defendant knowingly interfered with that contract; (3) the defendant’s interference, in addition to being intentional, was improper in motive or means; and (4) the plaintiff was harmed by the defendant’s actions.[19]

To prove intentional interference with an advantageous business relationship,

a plaintiff must prove that (1) he had an advantageous relationship with a third party (e.g., a present or prospective contract or employment relationship); (2) the defendant knowingly induced a breaking of the relationship; (3) the defendant’s interference with the relationship, in addition to being intentional, was improper in motive or means; and (4) the plaintiff was harmed by the defendant’s actions.[20]

To establish a claim for tortious interference, GGG need not prove that the third party would have remained in the contract or advantageous relationship with GGG absent Slick’s interference.[21]

Both Slick and Lawn King tortuously interfered with the contractual or advantageous relationships between GGG and its customers. Slick, acting on behalf of Lawn King, knew of those relationships and interfered by soliciting those customers to shift their business from GGG to his new employer, Lawn King. He also accomplished this interference by improper means: (1) by using trade secrets and confidential information (including customer lists, customer history, pricing, billing and other information) to woo customers away from GGG and (2) by acting in his own interests and those of Lawn King while he was still employed by GGG, thereby breaching his confidential relationship with GGG

Irreparable harm.

In addition to showing a likelihood of success on its claims, GGG will have to show that it will suffer irreparable harm if Slick is allowed to continue his employment with Lawn King, GGG’s direct competitor, in violation of the non-competition covenant of his employment contract, and is allowed to continue using and disclosing GGG’s confidential information and trade secrets. Massachusetts courts recognize that an employer is irreparably harmed when an employee, in violation of restrictive covenants, damages the employer’s goodwill.[22]

In addition, the employment contract may contain a provision in which the employee, Slick, acknowledges that the employer, GGG, will be irreparably harmed if the employee uses the customer contact, goodwill, or confidential information he acquires during employment against the employer’s best interests. Savvy employers will include such a provision in their employment contracts to lay the groundwork should it later be necessary to seek injunctive relief.

In our hypothetical, GGG can argue that Slick has already caused significant damage to GGG’s goodwill by successfully soliciting numerous GGG customers to cease dealing with GGG and shift their business instead to Lawn King and Slick. Slick will continue to do so unless the Court enters the requested injunction. Slick’s use and disclosure of GGG’s confidential information and trade secrets for his own benefit and that of Lawn King, also gives Lawn King the opportunity to gain a competitive advantage over GGG, thereby causing GGG irreparable harm.

In contrast, GGG can argue that Slick and Lawn King will suffer no cognizable irreparable harm if the requested injunction is entered. Of course, Slick may claim that the loss of his employment with Lawn King is irreparable harm. However, that is not a valid consideration because the enforcement of a non-competition covenant always results in restricting the employee’s ability to work and Slick voluntarily signed his GGG employment contract containing the non-competition covenant. As the Court said in Marine Contractors, 365 Mass. at 289,

The consequences of every covenant not to compete … is that the covenantor is deprived of a possible means of earning his living, within a defined area and for a limited time. That fact alone does not make such covenants unenforceable …[the employee must] establish…extraordinary hardship.

Nor does Lawn King have any legal right to employ Slick where doing so would violate Slick’s contractual obligations to GGG and/or allow Lawn King to compete unfairly and unlawfully.

Conclusion.

A company’s customer relationships and its trade secrets are among its most important assets and deserve protection. Both are at risk when an employee who has had significant customer contact and access to confidential information leaves the company. In the absence of any contractual limitation, such an employee can start a competing business and lure away the former employer’s valued customers. A carefully drafted non-competition covenant offers an important tool to protect the business from unfair competition.

[1] Merchant Business Solutions, LLC v. Arst, 2006 WL 696582, *1 (Mass. Super. 2/14/06), citing GTE Products Corp. v. Stewart, 414 Mass. 721, 722-23 (1993); Packaging Industry Group, Inc. v. Cheney, 380 Mass. 609, 616-17 (1980).
[2] All Stainless, Inc. v. Colby, 364 Mass. 773, 778 (1974).
[3] Boch Toyota, Inc./Boch Toyota Honda v. Klimoski, 18 Mass. L. Rptr. 80, 2004 WL 1689770, * 3 (Mass. Super. 6/28/04), citing Marine Contractors Co., Inc. v. Hurley, 365 Mass. 280, 287 (1974).
[4] Id.
[5] Stone Legal Resources Group, Inc. v. Glebus, 2003 WL 914994, *3 (Mass. Super. 12/16/02), quoting Bowne of Boston, Inc. v. Levine, 7 Mass. L. Rptr. 685, 1997 WL 781444, at *3 (Mass. Super. 1997), Marine Contractors, 365 Mass. at 287-89.
[6] Robert Half International, Inc. v. Buoncontri, 15 Mass. L. Rptr. 742, 2003 WL 915181, *3 (Mass. Super. 1/28/03).
[7] Stone Legal Resources Group, Inc. v. Glebus, 2003 WL 914994, *4, quoting J.T. Healy & Son, Inc. v. James A. Murphy & Son, Inc., 357 Mass. 728, 736 (1970).
[8] Boch Toyota, 2004 WL 1689770, *3.
[9] GGG can argue that the goodwill at issue is GGG’s, not Slick’s. Slick came to GGG with no experience in the lawn care business, and developed client relationships for GGG while working at GGG. Moreover, it was part of his job to create goodwill on behalf of his employer, GGG. Therefore any resulting goodwill was GGG’s. In Bowne of Boston, 1997 WL 781444, *3, the Court granted injunctive relief, stating:

[T]his Court holds that the corporate printing business does indeed involve goodwill and that the goodwill belongs to Bowne…. Bowne has shown that it has nurtured goodwill, through the work of Levine, in the customers covered by the non-solicitation agreement. Bowne provided Levine with an unlimited expense account to entertain clients on behalf of the company. Lastly, Bowne hired Levine to use his knowledge, skill and personality to cultivate relationships with clients on behalf of Bowne. In sum, the goodwill generated with respect to clients first introduced to Levine by Bowne, and new clients retained by Levine while employed at Bowne, belongs to Bowne.

1997 WL 781444, *4. (Emphasis in original). See also Prudential Ins. Co. of America v. Tracia, 2002 WL 31862713, * 2 (Mass. Super. 11/12/02); American Stop Loss Ins. Brokerage Services, Inc. v. Prince, 2001 WL 173178, *2 (Mass. Super. 2/14/01); W.B. Mason Co., Inc. v. Staples, Inc., 2001 WL 227855, *5 (Mass. Super. 1/18/01); Darwin Partners, Inc. v. Signature Consultants, LLC, 2000 WL 33159238, *4 (Mass. Super 3/24/00); HealthDrive Corporation v. Jaret, 2000 WL 33967781, *3 (Mass. Super. 2/9/00); Modis, Inc. v. The Revolution Group, Ltd., 1999 WL 1441918, *7 (Mass. Super. 12/29/99); Browne v. Merkert Enterprises, Inc., 1998 WL 151253, *5 (Mass. Super. 3/31/98); McFarland v. Schneider, 1998 WL 136133, * (Mass. Super. 2/17/98); Fortune Personnel Consultants of Boston v. Hagopian, 1997 WL 796494, *3 (Mass. Super. 12/30/97); NECX v. Hirschman, 1995 WL 1146950, *1 (Mass. Super. 8/1/95).
[10] Stone Legal, 2003 WL 914994, *5, quoting Richmond Bros., Inc. v. Westinghouse Broadcasting Co., Inc., 357 Mass. 106, 109 (1970).
[11] All Stainless, 364 Mass. at 779 (two years held reasonable); Blackwell v. E.M. Helides, Jr., Inc., 368 Mass. 225, 229 (1975) (restrictive covenant contained in real estate salesman’s employment contract which barred salesman from engaging in real estate business for period of three years in specified cities where employer had engaged in real estate business was reasonable); Frank D. Layne Assoc. v. Lussier, 16 Mass. App. Ct. 986, 989 (1983) (two years); Middlesex Neurological Assoc., Inc. v. Cohen, 3 Mass. App. Ct. 126, 131 (1975) (two years); Stone Legal, 2003 WL 914994, *5 (Court upheld a restrictions of 18 months, noting that “[I]n such a competitive area, Glebus could apply his knowledge of the confidential information and infringe on Stone Legal’s goodwill. Furthermore, courts have held that durations longer than eighteen months are reasonable.”).
[12] Sentient Jet, 2002 WL 31957009, *5 (finding reasonable “the essentially unlimited geographical reach, given that the business involved is the chartering and flying of private jet aircraft all around the country and, indeed, the world.”); Stone Legal, 2003 WL 914994, *5 (approving 100 mile radius).
[13] Kroger v. Stop & Shop Companies, Inc., 13 Mass. App. Ct. 310, 312 (1982), citing Cheney v. Automatic Sprinkler Corp. of America, 377 Mass. 141, 147 (1979) (“Rather than declining entirely to give effect to an unreasonable non-competition clause, a court may modify its terms so as to make it reasonable; i.e. onerous terms may be cut back”).
[14] Diomed, Inc. v. Vascular Solutions, Inc., 417 F. Supp.2d 137, 143 (D. Mass. 2006). See also Jet Spray Cooler, Inc. v. Crampton, 377 Mass. 159, 168 (1979); Storage Technology Corp. v. Custom Hardware Engineering & Consulting, Ltd., 2006 WL 1766434, *8 (D. Mass. 6/28/06).
[15] Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840 (1972). See also Storage Technology Corp., 2006 WL 1766434, *9; Picker Intern. Corp. v. Imaging Equipment Services, Inc., 931 F. Supp. 18, 23 (D. Mass. 1995).
[16] The information was not known outside of GGG and was known to employees of GGG only on a “need to know” basis.
[17] Further, even where information fails to qualify as a trade secret, “it may be entitled to protection as confidential business information ‘against one who improperly procures such information. The law puts its imprimatur on fair dealing, good faith and fundamental honesty. Courts condemn conduct which fails to reflect these minimum accepted moral values by penalizing such conduct whenever possible.’” Picker Intern., 931 F. Supp. at 23.
[ 8] Inner-Tite Corp. v. Brozowski, 2010 WL 3038330, *19 (Mass. Super. 4/14/10), quoting Augat, Inc. v. Aegis, Inc., 409 Mass. 165, 172-73 (1991).
[ 9] Harrison v. Netcentric Corp., 433 Mass. 465, 476-77 (2001), citing Swanset Dev. Corp. v. Taunton, 423 Mass. 390, 397 (1996).
[20] Blackstone v. Cashman, 448 Mass. 255, 260 (2007).
[21] Unitrode Corp. v. Linear Technology Corp., 2000 WL 281688, *4 (Mass. Super. 2/17/00), citing Swanset Devel., 423 Mass. at 397.
[22] Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dewey, 2004 WL 1515502,*3 (Mass. Super. 6/30/04), citing Kroeger v. Stop & Shop Cos., Inc., 13 Mass. App. Ct. 310, 316 (1982). See also Browne, 1998 WL 151253, *6; Darwin Partners, 2000 WL 33159238, *5; Modis, 1999 WL 1441918, *9; Fortune, 1997 WL 796494, *3; Bowne of Boston, 1997 WL 781444, *5.