A company that provides recordkeeping and administration services for qualified tuition plans was not entitled to a preliminary injunction blocking a former employee from going to work for a company that performs similar functions, a U.S. District Court judge has ruled.
The defendant employee had signed a non-competition agreement barring him from working for a competitor for 12 months after separating from the plaintiff employer. But within four months of being laid off, the defendant accepted a job with a company in another state that also provides recordkeeping and administration services for so called Section 529 plans.
The defendant’s new employer administered “529 prepaid plans,” which enable accountholders to purchase “credits” or “units” at participating colleges. The plaintiff, meanwhile, administered “529 savings plans,” which allow accountholders to choose among investment options that then invest contributions on the accountholders’ behalf.
Accordingly, the defendant argued, the plaintiff failed to demonstrate a likelihood of proving that his new employer was a direct competitor as required for enforcement of the non-compete.
Judge Denise J. Casper in Boston agreed.
“[The plaintiff] claims that recordkeeping for 529 plans ‘involves the same basic tasks: processing checks, processing enrollments, and processing redemptions,’” Casper wrote, denying the plaintiff’s motion for a preliminary injunction. “While [the plaintiff] argues that ‘[f]rom a recordkeeping perspective … [the] distinction between the two types of Section 529 plans is insignificant,’ the Court cannot say on this record that the above tasks are identical, or even sufficiently similar to constitute competition.”
The 29-page decision is Upromise, Inc., et al. v. Angus, et al.
Lack of overlap
Defense counsel Martha J. Zackin of Bellow Welsh in Boston said the decision sends a message to employers that non-compete agreements must be “very carefully tailored” and invoked only when appropriate to restrain truly improper competition.
“When I was looking at cases in order to prepare our papers, I saw a lot of decisions where if there was a small overlap [between what the former employer and the new employer do], the individual would be restrained from doing business within the small overlapped segment but not from working for the company entirely,” Zackin said. “This is a step beyond because there was no overlap at all.”
Zackin noted that there had been no solicitation of clients, no retention of confidential information, and — given the differences between the two businesses — “the technology and information is of no value to this other company, which is why [the defendant employee] went there.”
Plaintiffs’ counsel Neil V. McKittrick of Boston emphasized that Casper did not find that the two companies are not competitors for the purposes of applying the non-competition agreement; she merely determined that there needs to be further development of the facts in discovery before the issue can be decided.
“Of course, [my client] does not agree that there were actual facts in dispute as to whether [the plaintiff] and [defendant] were competitors,” said McKittrick, a lawyer at Ogletree, Deakins, Nash, Smoak & Stewart.
He further noted that the judge denied the defense motion to dismiss on all grounds asserted.
Boston employment lawyer Brian P. Bialas, who handles non-compete cases, said the ruling shows that, for federal cases in Mass-achusetts, it is not enough for employers to show that they might win in order to get a preliminary injunction. Instead, they must be prepared to demonstrate a substantial likelihood of success on the merits.
“A mere battle of affidavits where the former employer said that the former employee is competing with the former employer at his new job, but the former employee says that he is not, just isn’t enough to get a preliminary injunction,” the Foley Hoag attorney said.
The former employer must give enough detail in its affidavits to show the court exactly how the former employee is competing with it, including information that the employee cannot meaningfully contradict, Bialas added.
Bialas said he also found it interesting that the plaintiff was arguing that, should the court not grant a preliminary injunction, it should still enforce a settlement agreement that would allow the former employee to continue to do much of what the plaintiff claimed he could not do under the non-competition agreement.
“Overall, judges try to be fair when they decide motions for preliminary injunctions, so a former employer in a non-compete case should not claim that the former employee would cause irreparable harm to the former employer but then act as if he wouldn’t,” Bialas said. “A good judge will notice the inconsistency and not reward it.”
Shannon Lynch, an employment attorney at Beck, Reed, Riden in Boston, said the decision indicates the federal District Court’s willingness to recognize nuances within an industry in evaluating competition.
“Further, the court seemed to view the issue of competition from the perspective of whether the two companies were doing the same thing at the same time, rather than from the perspective of whether a potential customer would be choosing between one product or another,” Lynch said.
Plaintiff Upromise, Inc., which provides recordkeeping and administrative services to Section 529 savings plans, hired defendant Peter Angus to serve as a temporary technical projects manager in June 2002.
That August, Angus entered into an employment contract with Upromise that included a non-competition provision under which he agreed that if he left the company at any point, he would not work for a competitor for 12 months.
In 2004, Angus was transferred to Upromise Investments, Inc., or UII, a Upromise subsidiary, to handle client service functions.
Four years later, he entered into another employee contract in exchange for a $150,000 retention bonus. That contract incorporated his earlier non-compete by reference.
In February 2013, Upromise laid off Angus. That same month, he signed a $450,000 severance agreement that acknowledged he was still bound by the 2002 non-competition agreement.
After Angus left Upromise, he apparently considered starting his own business that would provide savings plan-related services to the state of Texas. He allegedly contacted defendant Intuition Systems, Inc., which also provides administrative and recordkeeping services to Section 529 plans — though it services prepaid plans rather than savings plans — to see whether it would be interested in preparing a joint bid for the Texas opportunity.
That ultimately led to discussions about Angus joining Intuition as an employee. During the conversations, Angus apparently explained to Intuition’s chief executive officer that he could not disclose confidential information about his former employer and could not solicit or provide services similar to UII until February 2014.
Angus claimed he did not believe working on prepaid plans with Intuition would violate his non-compete agreement with Upromise.
In May 2013, Angus informed UII’s president that he had accepted an offer to serve as president of Intuition’s savings division. About a week later, Upromise sent letters to both Angus and Intuition expressing concern that he would be violating his non-competition agreement by working for Intuition.
Over the next couple of months, Angus — through his attorney — apparently negotiated a settlement agreement with Upromise, at one point stating that he was “on board with” a draft that Upromise proposed. However, because Upromise demanded that Intuition also participate in the settlement, which Intuition apparently did not agree to do, Angus never signed the agreement.
UPromise ultimately filed an action in U.S. District Court alleging that Angus breached his non-competition agreement and that Intuition tortiously interfered with advantageous business relations.
The plaintiff also moved for a preliminary injunction preventing Angus from working for Intuition for a year or, in the alternative, to enforce the negotiated settlement agreement and enjoin Angus from working for Intuitive.
Casper denied the plaintiff’s motion for a preliminary injunction, stating that she could not find on the record alone that Upromise and Intuition compete against one another.
At a minimum, Casper said, the defendants had cast sufficient doubt as to whether the recordkeeping functions for each type of plan were similar enough to constitute competition.
As a result, she said, she could not determine the likelihood of the plaintiff’s success on the merits without making a factual determination of her own.
“Such determination is better left decided on a developed, undisputed record at the summary judgment state or by a factfinder at trial,” Casper said, denying the motion for a preliminary injunction.
Casper also rejected the plaintiff’s request that she order specific performance of the settlement agreement, finding that Upromise had not shown a reasonable likelihood of success in proving that Angus had actually accepted the terms of the agreement.
The judge went on, however, to deny Intuition’s motion to dismiss the plaintiff’s complaint for lack of personal jurisdiction and for failure to state a claim.