A recent preliminary order from the US District Court of Massachusetts illustrates how courts will enforce non-competition agreements (NCAs) and other agreements restricting the activities of an employee after an employee’s termination. Despite the Federal Trade Commission (FTC) moving towards eliminating the use of NCAs nationally, this case highlights the enduring relevance of the Massachusetts Uniform Trade Secrets Act (MUTSA) (MGL Ch 93, §42-42G) and its federal counterpart, the Defend Trade Secrets Act (DTSA) in such legal disputes.

Background

The case involves a former executive at a Massachusetts’s digital sports entertainment and gaming company. He worked remotely from New Jersey, visiting the Boston-area offices every six weeks. Hired in 2020, he resigned on February 1, 2024, amid an internal investigation into workplace misconduct that began a month before his departure. On the day that the employee learned that he was under investigation, he contacted the CEO of a competing California company about a role with that company. Throughout January, he engaged in discussions with the competitor’s leadership team.

When the investigation concluded on January 26, the Massachusetts employer decided to place the employee on a performance improvement plan. They stripped him of his Senior Vice President title, reduced his incentive compensation, and denied him access to certain privileges of his employment. The following day, he accepted a job offer at the California company. On February 1, 2024, his final day with the Massachusetts employer, he initiated plans to relocate to California to begin working for the competitor.

Legal Actions Taken

Four days after the employee’s resignation, the Massachusetts employer filed a complaint and sought a temporary restraining order to enforce the agreements signed at the start of the former employee’s employment. These included a Non-Solicitation, Nondisclosure & Assignment of Inventions Agreement, and a non-competition agreement (NCA). The NCA specifically prohibited him from engaging with any competing business worldwide for 12 months, if the services he provided were related to the work he performed at the Massachusetts company in the six months before his departure.

Simultaneously, the employee challenged the validity of his employment contracts in a California state court, attempting to leverage the state’s prohibition of non-competition agreements (NCAs). He filed motions to either transfer the Massachusetts case to California or to pause the Massachusetts proceedings while the California case was resolved. Both motions were denied. The agreements explicitly designated Massachusetts as the jurisdiction for resolving disputes, and the court determined that California did not have a stronger public policy interest in the case than Massachusetts.

The issues in the California litigation did not encompass the trade secret violations addressed in the Massachusetts case, resulting in non-identical subject matters between the two cases.

In-depth findings

The court focused on the employee’s actions in January when he downloaded numerous files containing confidential information from the Massachusetts company’s computer system. He transferred a significant amount of this information, classified as trade secrets under both federal and Massachusetts law, to a Dropbox account.

Trade secrets are defined as information in any form that provides an economic advantage to its owner that is not generally known to others and is the subject of efforts by its owners to protect against its disclosure. The court found that the downloaded information qualified as trade secrets and that the employee’s actions constituted misappropriation. Consequently, the court indicated that the employer had a significant chance of success on its misappropriation claim.

Violations of non-Solicitation provision

The employee breached the non-solicitation provision of his contract by contacting two subordinates from the Massachusetts company after accepting his new position. During a deposition, he denied these interactions, but his credibility suffered as both employees confirmed the discussions about transitioning to the new company.

Enforcement and limitation of the NCA

The court upheld the enforceability of the non-competition agreement but restricted its geographical scope to the United States alone rather than globally. Consequently, the court granted relief to the Massachusetts employer, stipulating that the employee could continue his role with the competitor, provided he does not engage in work similar to the services he performed in the last six months of his tenure with the Massachusetts employer, up to his resignation on February 1, 2024.

Broader Implications for Employers

While employers adjust to the FTC’s ruling banning most non-competes, they should know that trade secret law will continue to protect confidential information that meets the definition of a trade secret.

This case involves an NCA that likely qualifies for an exception tailored to highly compensated executives. During the preliminary stage of litigation, the court did not determine whether the NCA was enforceable under the Massachusetts NCA law. However, it recognized that the employer has a substantial likelihood of prevailing on claims involving the misappropriation of trade secrets and violations of the non-solicitation provision in the executive’s contract.

For more information about NCAs or other agreements related to confidential business AIM members are encouraged to contact the AIM HR Helpline at 800-470-6277 or helpline@aimnet.org.

In addition, AIM HR Solutions is always available for detailed HR support and assistance; visit the website at www.AIMHRSolutions.com.