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Material Change Defense To Non-Compete Enforcement Gaining Acceptance In Massachusetts

Posted in Non-Compete Enforceability, Practice & Procedure

In a series of recent decisions by the Massachusetts Superior Court, a longstanding, but oftentimes unsuccessful, defense to the enforceability of non-compete agreements and other post-employment restrictive covenants has quietly been gaining acceptance.

Perhaps this is a result of the economy picking up and employees having increased options and mobility, or perhaps it is indicative of a growing hostility to non-competes in Massachusetts. In any event, the Superior Court has been applying the so-called “material change” doctrine — the principle that a restrictive covenant is unenforceable if there are material changes to an employee’s employment relationship after the agreement is signed — with increased frequency over the past year to void otherwise enforceable restrictive covenants. Neither the Massachusetts Appeals Court nor the SJC has interpreted the “material change” doctrine to date. As a result, these recent decisions by the Superior Court have left practitioners, and their clients, with a series of unanswered questions on the enforceability of both current and future post-employment restrictive covenants.

The material change doctrine originally appeared in The SJC’s 1968 seminal decision in F.A. Bartlett Tree Expert Co. v. Barrington, 353 Mass. 585 (1968), but its rationale has not been applied with any notable consistency until this past year. In Bartlett Tree, the SJC held that changes to the employee’s compensation and sales territory “strongly suggest that the parties had abandoned their old arrangement and entered into a new relationship,” and, therefore, the non-compete agreement “was inoperative when the defendant terminated his employment with the plaintiff.” Id., at 587-88. Subsequent decisions have applied and refined the material change doctrine, including Lycos, Inc. v. Jackson, 18 Mass. L. Rptr. 256 (Mass. Super. 2004), in which the Superior Court held that “[e]ach time an employee’s employment relationship with the employer changes materially such that they have entered into a new employment relationship a new restrictive covenant must be signed.” Id. Several other Superior Court decisions have reached the same result. See, e.g., Cypress Group, Inc. v. Stride & Assocs., Inc., 17 Mass. L. Rptr. 436, 2004 WL 616302 (Mass. Super. Ct. Feb. 11, 2004); Intertek Testing Servs. N.A., Inc. v. Curtis Strauss, LLC, 2000 WL 1473126 at *6 (Mass. Super. Ct. Aug. 8, 2000); see also ABC Cable Sys., Inc. v. Clisham, 62 F. Supp. 2d 167, 173 (D. Mass. 1999) (applying Massachusetts law); Iron Mountain Information Mgmnt., Inc. v. Taddeo, 455 F. Supp. 2d 124, 132 (E.D.N.Y. 2006) (applying Massachusetts law). As a result of these decisions, defendants began raising the material change defense with increasing frequency, but the doctrine never really seemed to gain a foothold until last year.

In 2012, the Superior Court ruled in Grace Hunt IT Solutions, LLC v. SIS Software LLC, 2012 WL 1088825 at *4 (Mass. Super. Feb. 14, 2012) (previously reported on here), that a change in management that resulted in an employee’s base salary being reduced voided a restrictive covenant. Later that year, in Sentient Jet LLC v. Mackenzie (Unreported, March 2012), the Superior Court rejected the material change defense, however, ruling that “It is not a situation where a covenant not to compete is sought to be enforced after dropping someone’s . . . base salary by 20 percent and making it unlikely they’d ever be able to make it up, as was the case in [Grace Hunt].” This seemingly narrowed the holding of Grace Hunt to situations in which an employee’s salary was reduced.

Earlier this year, however, the Superior Court ruled in the opposite direction in Intepros, Inc. v. Athy, 2013 WL 2181650 (Mass. Super. May 5, 2013). In that case, rather than decreasing the defendant’s salary, he was promoted and his salary was increased several times after he signed his non-compete agreement some 15 years earlier. Id., at *5. That was enough of a change to void his non-compete agreement, the Court ruled, because just as in Bartlett Tree and its progeny, “Mr. Athy’s employment relationship with Intepros materially changed over his many promotions. As a result, the non-competition agreement executed in 1997 between Mr. Athy and Intepros must be declared void and unenforceable.” Id. Also this year, in Rent-A-PC, Inc. v. March, et al., (May 18, 2013), U.S. District Court in Massachusetts ruled that Bartlett Tree “is a significant problem for the plaintiff. [Defendant] underwent several material changes to his employment, but he did not sign any additional restrictive covenant agreements.”

As a result of the Bartlett Tree line of cases, many employers began included material change clauses in their post-employment restrictive covenants, which provide that the agreement will remain enforceable regardless of any material changes in the employee’s employment relationship. Although no appellate level court has addressed this issue, or offered an opinion on whether such clauses are enforceable, the Superior Court ruled earlier this year in A.R.S. Services, Inc. v. Morse, 2013 WL 2152181 (Mass. Super. Apr. 5, 2013) (previously reported on here), that the existence of such a clause in a non-compete agreement was sufficient to defeat a material change defense: “[T]he parties understood that the Agreement was intended to be enforceable notwithstanding a potential change in employment responsibilities. . . . No persuasive reason is advanced by Morse for ignoring the terms of the Agreement.” Id., at *9.

Whether including a material change clause in a post-employment restrictive covenant is sufficient to defeat a material change defense remains an open issue. While it certainly cannot hurt to include such a clause, it will not necessarily carry the day. As such, until the Appeals Court and/or the SJC rule definitively on the issue, we would recommend that if an employee’s employment relationship materially changes (although that phrase remains undefined in the caselaw), he or she should be required to sign a new non-compete agreement as a condition of continued employment. Indeed, given the lack of guidance and increased focus on this defense in Massachusetts, it may be prudent for certain companies to require employees to reaffirm their post-employment obligations on an annual basis, both to remind them of their obligations and to avoid any argument that their employment relationship was materially changed. Of course, there are many other considerations that must go into in any post-employment restrictive covenant, particularly for companies with employees in multiple states, and we recommend that experienced counsel review any post-employment restrictive covenants prior to requiring employees to sign them.