For some time, I have been following the evolution of the “material change” defense to enforcement of a non-compete agreement in Massachusetts. Recently, it has been gaining traction, but there are still unanswered questions.
The doctrine was first introduced in F.A. Bartlett Tree Expert Co. v. Barrington by the Massachusetts Supreme Judicial Court in 1968. However, it was not applied with any consistency by Massachusetts courts until very recently when a number of trial level courts and a Massachusetts Federal District Court held that a restrictive covenant is not enforceable if the employee’s job duties, compensation or employment relationship substantially changed between the time the employee signed the initial non-compete agreement and the time the employee left the company. In short, these courts have refused to issue preliminary injunctions to employers of former employees who have been hired by competitors on the grounds that there was not a likelihood of success on the merits (one of the critical requirements that parties seeking preliminary injunctive relief must demonstrate to the court). Although the Eastern District of New York in Iron Mountain Information Management, Inc. v. Taddeo, applying Massachusetts law, adopted the doctrine in 2006, other states have not embraced the “material change” defense.
Recent Illustrative Massachusetts Cases
In Rent-A-PC, Inc., d/b/a SmartSource Computer & Audio Visuals v. March, decided in May 2013, the U.S. District Court for the District Court of Massachusetts refused to issue a preliminary injunction against three former employees of the plaintiff Smartsource and defendant CCR Solutions, the company that hired them. The Court based its decision on the fact that the defendant employees had experienced “material changes” in their employment relationship from the time they entered into the restrictive covenants that SmartSource sought to enforce. One former employee entered into the restrictive covenants with a company that Smartsource later purchased. His job changed a number of times, first in the inventory department and then in the sales department. A second defendant employee’s duties, authority, and compensation changed significantly even though his job title had not changed. The third employee had not signed a non-compete agreement.
In Intepros, Inc. v. Athy, 31 Mass. L. Rep. 144, 2013 Mass. Super. LEXIS 48, 2013 WL 2181650 (May 5, 2013), the Massachusetts Superior Court relied on the fact that since signing the non-compete agreement, the former employee was promoted, his duties and responsibilities had changed, and his salary had increased several times.
1. When there has been a “material change” in an employee’s job or a change in ownership of the business, the employee should sign a new non-compete agreement.
2. Even if the employee is not given a new non-compete to sign under these circumstances, it may be prudent, in any event, to include a clause in the original non-compete that it is enforceable in the event that there are material changes in employee’s job, duties, responsibilities, salary or otherwise in the employee’s relationship with the company.
Unanswered Questions Still Remain
These suggested takeaways are given with the caveat that at present, the highest court of Massachusetts has not answered the following questions:
1. Is the “material change” clause noted above which is included in a non-compete agreement enough to defeat a “material change” defense?”
2. What is the definition of “material?” How much of a change is necessary to be considered “material?”
In light of this relative uncertainty, consideration of various options in each of these cases should be undertaken with advice of counsel.
If the bill recently filed by the Governor of Massachusetts to make non-competes unenforceable passes, these issues may become moot. However, pending the outcome of that bill, we suggest that employers who believe that an employee’s relationship with the company has undergone a “material change” should have the employee sign a new agreement or, at least, should consider inserting a “material change” clause into such agreements.