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Massachusetts Employers Should Implement Anti-Raiding Provisions

In Automile Holdings, LLC v. McGovern, 483 Mass. 797, 136 N.E.3d 1207 (2020), the Massachusetts Supreme Judicial Court upheld the validity of an anti-raiding provision against a former employee. This ruling is significant in light of recent trends in Massachusetts and elsewhere against restrictive covenants.

Facts and Lower Court Ruling

Matthew McGovern was a former executive and minority owner of a closely-held automotive dealership group called Prime Motor Group. McGovern was terminated from his position and signed an agreement to sell his minority stake in Prime that included an “anti-raiding” restrictive covenant. The covenant prohibited McGovern from soliciting or hiring Prime’s employees for a defined period of time. In spite of this provision, McGovern hired multiple Prime employees. Prime filed suit against McGovern.

After a bench trial, the trial court found that McGovern had breached the anti-raiding provision. Rather than attempting to restore the employees’ relationships with Prime, or compel McGovern to terminate the employees, the trial court extended the length of the restrictive covenant by one year. McGovern appealed the trial court’s ruling, arguing that (1) the anti-raiding provision was invalid because it did not protect a legitimate business interest; and (2) the trial court had abused its authority by extending the duration of the anti-raiding period. The SJC transferred the appeal to itself from the Appeals Court.

SJC Validates the Anti-Raiding Provision

Generally, restrictive covenants are only enforceable if: (1) necessary to protect a legitimate business interest; (2) reasonably limited in time and geography; and (3) consistent with the public interest. Notably, restrictive covenants entered into as part of a sale of a business are viewed more liberally than those entered into as part of an employment relationship. This is because the court expects buyers and sellers to have more equal bargaining power, legal representation, and the seller is typically paid a premium for agreeing not to compete with the buyer. This does not mean the courts will refuse to enforce an anti-raiding provision against an employee. The SJC held that the anti-raiding provision McGovern had signed is more akin to the sale of a business interest than to an employment relationship, therefore the court evaluated it less critically.

The SJC upheld the anti-raiding covenant because it prevented McGovern from using his inside knowledge to raid Prime’s key employees. McGovern knew Prime’s salary and benefits structure and internal management dynamics, and could use this knowledge to poach Prime’s employees. Moreover, the SJC emphasized that McGovern was able to sell his minority interest in Prime at a premium because he agreed to be bound by the anti-raiding provision. The SJC ruled that Prime had a legitimate business interest because of McGovern’s prior position with Prime, his present position as a competitor, and the additional consideration he received in exchange for agreeing not to raid Prime’s employees.

Extending the Length of a Restrictive Covenant is an Extraordinary Remedy

Finally, the SJC held that the trial court had abused its discretion by extending the length of the restrictive covenant for an additional year beyond the term of the agreement. The SJC found that the equitable remedy violated the general principle of Massachusetts law that parties are held to the express terms of their contract. In addition, the SJC found that Prime had failed to establish an equitable remedy was warranted. Prime had not demonstrated that monetary damages would provide inadequate relief or McGovern was unable to satisfy a damages award. As a result, the SJC found that the “extraordinary” remedy of extending the agreement’s term was unwarranted.

Takeaways

  • The SJC confirmed that anti-raiding provisions are enforceable if necessary to protect the employer’s confidential information, trade secrets, or goodwill.
  • Employers should consider implementing anti-raiding agreements when appropriate. The Massachusetts Noncompetition Agreement Act exempts “covenants not to solicit or hire employees of the employer” and agreements “disposing of the ownership interest of a business entity” from the definition of “noncompetition agreement” for the purposes of that Act.
  • Anti-raiding covenants are more liberally construed in the context of a business sale. The SJC noted that these provisions extend beyond conventional notions of client goodwill, particularly where the buyer and seller have equal bargaining power and the anti-raiding provision is supported by consideration.
  • Employers seeking to have a court extend the term of an anti-raiding covenant must establish that damages cannot be reasonably estimated or the defendant is unable to satisfy a judgment.

Contacts

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