Insights

First Circuit Affirms Preliminary Injunction Against Massachusetts Employee Who Signed a Delaware Law-Controlled Non-Solicitation and Non-Compete Agreement

What Employers Need to Know

This April 8th decision provides five key takeaways for employers with Massachusetts-based employees:

  1. employers have the right to include a choice-of-law provision in their employment contracts that requires the application of the law of the state in which they are domiciled;
  2. courts are unlikely to find that an employee-driven change to the employment relationship is a “material change” requiring the signing of a new restrictive covenant;
  3. the Massachusetts Noncompetition Agreement Act (“MCNA”) does not apply to non-solicitation agreements;
  4. courts will not apply the MCNA to employment agreements executed before October 1, 2018, and
  5. perhaps most importantly in the midst of the COVID-19 epidemic, this opinion should serve as a reminder that whenever employers initiate a “material change” to an employee’s employment relationship, they need to have the affected employees execute new restrictive covenants.

Background 

While working for Nuvasive, Inc., (“Nuvasive”) a Delaware corporation that designs and manufactures medical products for the treatment of spinal disease, the employee signed a Proprietary Information, Inventions Assignment (“PIIA”). The employee signed the PIIA in 2018 after working for years rotating between direct employment with Nuvasive and working for its distributors. The PIIA contained provisions which proscribed competition and solicitation both during the employee’s time with Nuvasive and for one year after the end of his employment. By its terms, the PIIA provided that it should be “interpreted and enforced in accordance with Delaware law.” Several months after leaving Nuvasive, the employee joined one of Nuvasive’s competitors. Nuvasive brought suit against the employee in the United States District Court of Massachusetts, alleging, among other things, tortious interference and breach of contract. Nuvasive also sought a preliminary injunction. The District Court held that Delaware law applied to Nuvasive’s breach of contract claims. The Court further held that while Nuvasive failed to demonstrate a reasonable likelihood of success on its claims for breach of the non-compete clause, it had shown a reasonable likelihood of success on its claims for breach of the non-solicitation clause. The District Court granted a preliminary injunction proscribing solicitation by the employee. The employee then appealed to the First Circuit. The First Circuit affirmed the granting of the preliminary injunction.

What Questions Remain?

Since the case involved a pre-October 1, 2018 employment agreement, the decision sheds little light on the applicability of the MCNA. Thus, employers and their counsel will need to continue to monitor how courts interpret the relatively new statute.

Domicile Sufficient For Choice Of Law

As the First Circuit noted, Massachusetts’ “usual” choice-of-law rule provides that a contract’s choice-of-law provision governs the question of which state’s law applies. Here, the employee argued that the usual rule should not apply because Delaware had no “substantial relationship” to the parties or the employment relationship. The First Circuit rejected this contention, holding that a choice of law provision will be enforced when a company selects the law of the state in which it is domiciled.

A Reminder about the Implications of the “Material Change” Doctrine

The First Circuit provided a helpful reminder about the “material change” doctrine. This doctrine provides that every time an employee’s employment relationship “changes materially” with the same employer, the resulting conditions constitute a new employment relationship. Examples of such alterations include “cutting [an employee’s] pay”; “demoting the employee”; or “materially breaching some term of the employee’s employment contract.” As the First Circuit observed, a restrictive covenant from the prior employment relationship does not carry over to the new employment relationship, and so the employer needs to get the affected employees to sign new restrictive covenants. The facts of this case required the First Circuit to consider the apparently unsettled question of whether an employee-initiated change to the employment relationship triggers the implications of the material change doctrine. The Court declined the invitation to treat the employee’s unilateral decision to leave the employer as a “material change” that would render the non-solicitation agreement void. The Court surveyed Massachusetts precedent and indicated it was “satisfied” that while the exact boundaries of the doctrine were unsettled, the doctrine did not extend this far.