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Noncompete is nullified by new contract

red pencil webA confidentiality agreement that an employee signed in 2005 in conjunction with a separate employment agreement was no longer enforceable after the employee executed a new employment agreement in 2012 that made no reference to any existing confidentiality agreement, a U.S. District Court judge has ruled.

Claiming that the plaintiff employee had breached the confidentiality agreement by disclosing proprietary information in the course of litigation over allegedly unpaid commissions, the defendant employer argued that it had intended to preserve the confidentiality agreement all along.

Because the issue of intent is a question of fact to be left to a jury, the employer contended that its counterclaim for breach of the agreement should be permitted.

Judge Richard G. Stearns disagreed.

“[T]here is no hint of such an intention in the plain language of the 2012 employment agreement that [the employer] itself drafted,” the Massachusetts judge wrote, pointing out that the court determines the interpretation of a contractual term as a matter of law unless the meaning is unclear and relies on conflicting testimony.

“The 2012 agreement states on its face that it contains ‘the terms of [the employee’s] employment’ without any reservation or reference to any other document or agreement,” Stearns said.

The 14-page decision is Meschino v. Frazier Industrial Company.

‘Material change’

Plaintiff’s counsel Pamela E. Berman of Boston declined to comment due to ongoing litigation in the case.

But John R. Bauer, a Boston business litigator with experience handling disputes over confidentiality and noncompete agreements, observed that while the plaintiff argued in his brief that the confidentiality agreement was void under the “material change” doctrine — which provides that where employment terms change materially after an employee has signed a noncompetition agreement, the noncompete is no longer enforceable — Stearns decided the case based on straight contractual interpretation.

“I think [the] decision rested … in particular on the single word ‘the,’” Bauer said.

Bauer explained that the 2012 employment agreement did not expressly state that it superseded the 2005 one, which was supplemented by the confidentiality/noncompetition agreement. But the 2012 agreement specifically stated that “the” following are “the” terms of employment.

“Judge Stearns apparently read that phrase to mean that there are no other terms of employment, including the earlier promise not to compete,” Bauer said.

While other judges may have ruled differently, Bauer added, future courts facing similar facts might rely on Stearns’ ruling. Accordingly, when employers and employees agree to new terms of employment, such as promotions, demotions or lateral changes, they need to address in writing whether any prior terms continue to apply, he said.

Rebecca Pontikes, an employment lawyer in Boston, said it is one thing to add an additional duty or to change someone’s title, but if the plaintiff in Meschino was given significantly more responsibility or greater access to confidential information than before, it is surprising the employer did not address that in the new contract.

“If the company knew enough to make him sign a new employment agreement, it seems to me they should have also known to have him sign a new confidentiality, noncompete and nonsolicitation agreement,” she said.

Pontikes said it might be enough for an employer to incorporate an existing confidentiality agreement by reference, but that would depend on the terms.

“It would at least give some indicia of intent,” she said. “But according to this opinion, there was just nothing. In that situation, the judge is correct in saying there hasn’t been any intent expressed.”

Rosario Suriano of New Jersey and Boston’s Patrick M. Curran Jr. represented the defendant employer. Neither attorney could be reached for comment prior to deadline.

New agreements

Plaintiff John Meschino started working as a sales professional for defendant Frazier Industrial Co. in 2005 and signed an agreement laying out the terms of his employment.

One of the agreement’s provisions stated that he would have to endorse a confidentiality and noncompete agreement that supplemented the employment agreement. The plaintiff executed it as required.

In June 2012, Frazier tried to get the plaintiff to sign a “conflict of interest and ethics policy” that, among other things, sought to prohibit him from revealing or disclosing confidential information to outsiders.

The plaintiff refused to sign because he believed the provisions were vague and overly broad. Nonetheless, Frazier continued to employ him.

That October, the plaintiff signed a revised employment agreement for the position of district sales manager. The agreement made no reference to the 2005 agreement and apparently did not indicate that it was merely a modification to be incorporated into the 2005 agreement.

According to the plaintiff, the agreement also materially altered the conditions of his employment, including a change to his salary and his commission structure.

Unlike the 2005 agreement, which stated that he would be required to endorse an enclosed confidentiality agreement, the 2012 agreement contained no clause either renewing the 2005 confidentiality and noncompete agreement or referencing any new confidentiality agreement.

In January 2015, the plaintiff sued Frazier in Superior Court seeking to recover an alleged $164,000 in unpaid commissions. In support of his claim, he attached copies of the relevant commission statements to his complaint.

Frazier removed the case to U.S. District Court on diversity grounds a month later, and the commission statements became part of the public record.

In August, Frazier moved to impound the statements, claiming they contained confidential business information.

The judge allowed the motion. In response to the plaintiff’s objections, the judge noted that while the impoundment would not prejudice the plaintiff’s ability to rely on the documents in prosecuting his complaint, public disclosure of potentially confidential information could prejudice Frazier.

Frazier then sought to impound the attachments to the original Superior Court complaint, and the plaintiff once again refused to consent.

Asserting that the plaintiff’s refusal constituted a breach of the confidentiality and noncompete agreement he signed in 2005, Frazier responded by filing for leave to bring a barrage of counterclaims against the plaintiff, including breach of the confidentiality agreement, breach of the duty of loyalty, bad faith, misappropriation of trade secrets, and violation of the Computer Fraud and Abuse Act among others.

Contract interpretation

In opposing Frazier’s motion, the plaintiff argued that the 2012 agreement materially altered the conditions of his employment and, under Massachusetts law, restrictive covenants such as the one in Meschino are unenforceable once there has been a change in the employment relationship.

Stearns, however, did not address whether the “material change” doctrine applied in the case. Instead, he noted that how contractual terms are to be interpreted are up to the court as a matter of law unless the meaning of the terms are unclear and depend on conflicting testimony.

That was not the case here, the judge said.

Though Frazier argued that it meant to preserve the 2005 confidentiality and noncompete agreement when the plaintiff signed the 2012 employment agreement, the latter agreement gave absolutely no indication that that was the case, Stearns said.

In fact, the judge said, the 2012 agreement plainly stated that it contained “the terms” of the plaintiff’s employment without making any reference to other documents or agreements.

Accordingly, as a matter of straight contractual interpretation, Stearns found that the confidentiality and noncompete agreements were no longer operative.

Meanwhile, with regard to the substance of Frazier’s allegations, Stearns concluded that while the plaintiff’s refusal to consent to have the commission statements impounded “may have been motivated more by spite than principle, he was under no obligation to agree to Frazier’s demands.”

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