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Noncompete unenforceable for inadequate consideration

First non-dicta ruling applying the MNAA

A U.S. District Court decision voiding a noncompete under the Massachusetts Noncompetition Agreement Act provides a “glimmer of hope” for lawyers who have been awaiting guidance on how judges will interpret the 2018 statute, attorneys say.

The MNAA, G.L.c. 149, §24L, took effect in 2018 and limits the use of noncompete agreements by, among other things , placing restrictions on the types of employees who can be bound, mandating either a “garden leave” clause or “other mutually agreed-upon consideration” on the employer’s part. But in the three years since it was enacted, there had been no written rulings applying the act in a non-dicta context.

However, Judge Timothy S. Hillman recently ruled that a noncompete that plaintiff KPM Analytics North America, a scientific instrumentation company, sought to enforce against an employee who left to work for defendant Blue Sun, a direct competitor, did not meet the MNAA’s requirements.

“[Employee Philip] Ossowski’s agreement does not expressly state that Mr. Ossowski has the right to consult with counsel prior to signing, and it does not contain a garden leave clause or another mutually agreed upon form of consideration,” Hillman wrote, granting Ossowski’s motion to dismiss.

Local attorneys said they were gratified to finally have a decision providing some indication of how courts may approach the statute.

“[The decision] provides a glimmer of hope to Massachusetts employment lawyers who have been anxiously monitoring case law for guidance on the contours of the MNAA,” said Elizabeth C. Inglis of Needham Heights.

bauer-john“We still don’t know what ‘mutually agreed-upon consideration between the employer and the employee’ means, but we know, based on Judge Hillman’s decision, that it does not include employment.”

— John R. Bauer, Boston

Boston attorney John R. Bauer added that for the past three years there has been particular ambiguity over whether a noncompete is enforceable when the only consideration the employer is providing is a job.

“We still don’t know what ‘mutually agreed-upon consideration between the employer and the employee’ means, but we know, based on Judge Hillman’s decision, that it does not include employment,” Bauer said.

Meanwhile, KPM’s attorney, Scott R. Magee of Waltham, emphasized that Hillman entered an injunction order in August against other defendants accused of trade secret misappropriation and breach of the duty of loyalty.

“The single noncompete agreement found unenforceable under the MNAA was a claim KPM conceded at the motion to dismiss hearing, and it apparently did not impact the court’s ultimate decision protecting KPM’s rights,” Magee said. “KPM continues to pursue its well-supported core claims.”

Ossowski’s attorney, William L. Prickett of Boston, could not be reached for comment prior to deadline.

The 71-page decision is KPM Analytics North America Corporation v. Blue Sun Scientific, LLC, et al.

Alleged noncompete violation

KPM, which has its principal place of business in Milford, manufactures instruments that analyze the chemical composition of common substances found in consumer products.

The company’s instruments use near infrared — or NIR — spectroscopy to provide faster results than traditional wet chemistry testing methods, and KPM relies on proprietary software to report the results of its analysis to the customer.

Blue Sun, a Maryland-based company, entered the NIR analyzer market as KPM’s competitor in 2018.

In early 2021, KPM began to suspect that Blue Sun persuaded seven of KPM’s current and former employees to misappropriate KPM trade secrets and confidential information in violation of their nondisclosure and/or noncompete agreements.

Blue Sun later hired those employees when they left KPM; the former employees apparently have used and continue to sue KPM’s trade secrets and confidential data to attract new customers and poach KPM’s existing clients and business opportunities.

KPM ultimately filed suit in U.S. District Court against Blue Sun and the seven individual employees, including Ossowski, alleging trade secrets violations, conversion and unjust enrichment.

The plaintiff also brought breach of contract claims against four of the defendants, including Ossowski, alleging violations of noncompetition agreements they had signed with KPM.

Ossowski’s 2019 noncompete agreement contained different terms than those of the other employees and, unlike theirs, was governed by Massachusetts law. He moved to dismiss the trade secrets and confidentiality claims for failure to state a claim and moved to dismiss the contract claim pursuant to the MNAA.

No consideration

With respect to the substantive trade secrets and nondisclosure violations, Judge Hillman observed that KPM failed to make any factual allegations as to whether or how Ossowski violated his nondisclosure agreement or acted on behalf of Blue Sun while employed by KPM or after his departure.

“Simply put, there is nothing connecting Ossowski to the use of KPM’s trade secrets and confidential information by himself or any other party,” Hillman wrote.

As to the noncompete claim, Hillman said, “As KPM appeared to concede at the hearing, Ossowski’s Agreement violates the Massachusetts Noncompetition Agreement.”

Hillman pointed out that Ossowski’s agreement did not expressly state that the employee had the right to consult with counsel prior to hiring, as explicitly required by the act.

Additionally, Hillman said, it was not supported by a garden leave clause or other mutually agreed-upon consideration.

Accordingly, the judge stated, “Ossowski’s motion to dismiss … is granted.”

‘Significant question mark’

Boston attorney Russell Beck, who handles cases involving trade secrets and noncompetes, said the decision is useful in that the only prior guidance from a court on how to interpret the “mutually agreed-upon consideration” requirement was dicta in NuVasive, Inc. v. Day, a 2020 decision in which U.S. District Court Judge Denise J. Casper wrote that a noncompete not subject to the MNAA because it was executed before the act took effect would have satisfied the consideration requirements of the act had it been applicable.

In that case, Casper said the employee’s consideration was his employment, including compensation, stock and access to confidential information — things not every employee would necessarily get.

“Here, in contrast, [Ossowski’s] agreement just says ‘in consideration of your employment,’” Beck said. “Given that the statute requires something more than just employment, I would have been surprised if the court came out otherwise.”

Still, Beck said, “the language ‘other mutually agreed-upon consideration’ is a significant question mark.”

David S. Rubin of Boston said the decision demonstrates that courts are likely to read and apply the act literally and mechanically.

“The act lists eight minimum requirements with which a noncompetition agreement must comply, and the KPM court refused to enforce the restriction because two of those requirements were not met,” he said. “When drafting noncompetition agreements, I think we are well advised to explicitly recite and show compliance with each of those eight requirements.”

Sean P. O’Connor, an employment lawyer in Boston, agreed. O’Connor said he found Hillman’s finding that the noncompete was unenforceable for failure to state in writing that the employee had the right to consult with counsel before signing to be particularly significant.

“That reinforces the understanding that courts will take the act’s prerequisites seriously and be willing to rely on them in finding agreements void and unenforceable,” he said.

As for the consideration issue, while Hillman potentially implied that employment in and of itself would no longer be sufficient, given that the agreement itself contained the phrase “in consideration for his/her employment by the company,” O’Connor said it was unclear whether Hillman was actually drawing such a conclusion or whether he simply found that the consideration did not meet the parameters of being “mutually agreed upon.”

Meanwhile, Bauer said that if Hillman’s ruling is followed by other state and federal judges in Massachusetts, any noncompete signed after Oct. 1, 2018, when the MNAA took effect, would be void if the only consideration the employer provided was employment.

“My guess is that there are thousands of such noncompetes out there,” he said.

But if employers in that situation try and amend their noncompetes, they would be executed in connection with the continuation — and not the commencement — of employment, which would require “fair and reasonable consideration” on the employer’s part.

“We don’t know much about what ‘fair and reasonable’ consideration means,” Bauer said. “But it very likely means far more consideration than is required for an employee noncompete signed in connection with the commencement of employment.”

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