Don't compete with work agreement
Published 06/19/08

Employment agreements, both in New Hampshire and Massachusetts, are narrowly construed to only protect the legitimate business interests of the employer including, but not limited to, the company's good will or confidential and proprietary information.

When an employee has signed such an agreement and thereafter breaches it, an employer may seek an injunctive order prohibiting the employee from continuing to violate the agreement by working for a competitor. However, obtaining monetary damages from the employee is often difficult because it generally requires the former employer to prove that it lost business or that it was otherwise damaged by the former employee's competitive behavior.

In such litigation, the former employer may be required to reveal certain financial information to his competing ex-employee as to the former employer's pricing, profit margin, or other sensitive financial information discoverable because the former employer is seeking lost profits from potential sales it claims it would have had, but for the former employee's competitive acts.

A federal court Massachusetts decision shows that in the appropriate circumstances, an employer may be able to avoid such issues by requiring employees for forfeit their last year's bonus if they have violated a non-compete agreement. In the case of GES Exposition Services, Inc. v. Anthony Floreano decided on December 7, 2007, the federal court in Massachusetts ruled that Floreano, who had violated his employment non-compete agreement by resigning and working for a competitor, had to forfeit $85,100 in bonus.

In particular, GES had an incentive plan that included a forfeiture clause requiring employees to repay any amount paid to them as a bonus within the past year if they violated the terms of the non-compete clause which was included in the incentive plan. The court noted that under Massachusetts law, a forfeiture for competition clause is enforceable, to the extent that it serves an appropriate interest of the former employer, and only to the extent that the restraint is reasonable.

In this case, Floreano received two bonus payments; one on March 7, 2006 in the sum of $14,600 and the second on March 7, 2007 in the amount of $85,100. On March 20, 2007, two weeks after receiving his second bonus, Floreano terminated his employment with GES and shortly after began working for a competitor; The Freeman Companies as General Manager for their Boston/New England market.

Although Floreano in Court sought to minimize the extent of his personal contact with GES customers, potential customers, and other external persons, the Court found the undisputed record showed the Floreano did, in fact, develop customer relationships, which would be in the legitimate interest of GES to protect. The Court further noted that retention of key employees can be another interest to protect and where Floreano could safely be characterized as a key employee of GES, as only “key executives” are eligible for an incentive plan, this forfeiture provision was reasonable in protecting a legitimate business interest of GES.

The Court then turned to whether that forfeiture clause was reasonable in its effect requiring the Court to consider the amount and nature of the forfeiture and the nature of the employee' duties and responsibilities in his former and current employment.

In this case, GES was not seeking reimbursement of the regular compensation of Floreano, but only seeking his past year's bonus and since the forfeiture clause was not triggered in the case of every employment termination, but only those where the covenant not to compete was violated, the forfeiture clause was reasonable in its effect.

The Court noted that it might have made a different ruling if this was a situation where a powerless employee was forced to accept unfavorable terms in order to secure employment. Floreano was not required to agree to a non-compete and forfeiture clause as part of his base salary package or offer of employment; rather they were part of an optional bonus plan that Floreano could have rejected with no consequences. In other words, had Floreano not signed the incentive plan, he would not have had the non-competition provision. Floreano voluntarily decided to accept compensation in addition to his salary through the incentive plan and agreed to the non-competition provision as part of receiving that bonus. Such a plan for employers may be a meaningful way not only to entice key executives to try their best while employed by the company and to stay with the company, but also to add an increased chance of enforcing a non-competition agreement with a forfeiture clause requiring the employee to give back a bonus he would otherwise be entitled to, but for his breach of the non-competition provision.

In this case, it is likely that Floreano, if he realized that a court would require him to provide the $85,100 bonus back, would have reconsidered his decision to violate the non-compete agreement and work for a competitor. Both New Hampshire and Massachusetts judges will enforce employment non-competition agreements when they are reasonable and employees should seriously analyze the potential consequences prior to violating them.

J. Daniel Marr is a director and shareholder of Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and business persons on a variety of legal issues, including employment, and advocating on their behalf. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

This information is general information and may not reflect the most current legal developments, verdicts or settlements. The information provided should not be relied upon as an indication of the actual state of the law or of future developments. The information contained on the Hamblett & Kerrigan website is for informational purposes only and does not constitute legal advice. If the information referenced may be of legal importance to you, you should consult with an attorney to provide you with legal guidance and opinion as the the effect of the current law upon your situation.