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Court Reminds That You Don’t Always Get Points For Creativity

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Attorney Harrison Oldham

 

 

 

Because there is no federal law prohibiting or limiting an employer’s use of non-competition agreements and other restrictive covenants in employment contracts, many states have enacted their own laws controlling restrictive covenant agreements within their boundaries.

 

Although many states have implemented their own unique laws, one rule that generally holds is that courts are more inclined to enforce a non-compete agreement when it is implemented in connection with the sale of a business. However, as with everything, people and companies will always attempt to push a law to its limits.One recent example came on June 8, 2022, when a Massachusetts Superior Court issued a new decision interpreting the applicability of the Massachusetts Noncompetition Agreement Act (“MNAA”). The case is Lighthouse Ins. Agency, Ltd. v. Lambert, and there, the court concluded that an employer could not circumvent the MNAA by entering a non-competition restriction in the context of the sale of a business by making an offer to purchase a current employee’s client relationships.

 

As background, the MNAA applies to all non-competition agreements entered into after October 1, 2018. The MNAA provides that a non-compete agreement between an employer and an employee will only be valid if (i) the employer provides notice of the agreement “at least ten business days before the agreement is to be effective,” and (ii) the agreement is “in writing and signed by both the employer and employee”. Further, the agreement must (iii) be supported by fair and reasonable consideration and (iv) expressly state that the employee has the right to consult with counsel before signing. However, the MNAA does not apply to restrictive covenants entered in connection with the sale of all or part of a company.

 

In the case at issue, the defendant, Jack Lambert, worked for the Lighthouse Insurance Agency (“Lighthouse”) as a licensed insurance producer from 2013 through July 2021. In October 2020, Lighthouse presented Lambert with a new employment agreement, which altered Lambert’s compensation arrangement. The new agreement contained non-solicitation and non-competition provisions that restricted Lambert’s post-employment activity for one year after his separation from Lighthouse. However, the new agreement did not follow the requirements of the MNAA – it did not state that Lambert had the right to consult with counsel, and the contract took effect immediately (without the required ten-day notice period). However, Lambert’s new employment agreement included an offer to “purchase … Lambert’s book of business” in exchange for a fixed salary with a new commission structure.

 

Lambert was terminated in July 2021 and began working for a competitor of Lighthouse less than one year later. Lighthouse filed a lawsuit against Lambert, seeking to bar Lambert from, among other things, competing with Lighthouse.

 

The critical question before the court was whether Lighthouse’s offer to “purchase … Lambert’s book of business” constituted a valid sale of a business or part of a business such that the non-compete restrictions fell outside the scope of the MNAA. In considering the question, the court pondered whether an employee could sell their client relationships to their employer so that effectively, the employment relationship converts into a sale of a business.

 

Ultimately, the court determined that the restrictive covenants at issue arose in the employment context, not in the context of the sale of a business. For one, the non-solicit and non-compete covenants were conditions of Lambert’s continued employment by Lighthouse; the contract expressly stated that its terms—which included the restrictive covenants—would “control Lambert’s employment relationship with Lighthouse”.

 

In addition, the court concluded that Lambert’s employment agreement did not constitute the sale of a business or any part of a business to Lighthouse. Though Lighthouse characterized its new compensation arrangement with Lambert as involving the purchase and sale of “Lambert’s book of business,” the court determined that the accounts did not belong to Lambert. The right to commission payments from the insurers on those accounts belonged to Lighthouse; Lambert could not sell or assign any interest in those accounts to Lighthouse or to anyone else.

 

The court applied the MNAA in light of this determination. It ultimately ruled that Lambert’s employment agreement did not contain valid non-competition provisions, and the court denied Lighthouse’s request to preliminary enjoin Lambert from working for the competitor.

 

The Lighthouse decision offers some clarity to Massachusetts employers as to the scope of the “sale of business” exception to the MNAA. The decision confirms that employees do not own and have no right to sell their client relationships, even to their employer. That said, employers would be wise to review their non-competition agreements, keeping in mind that restrictive covenants entered into as part of an employment relationship are examined more critically than those entered into as part of a sale of a business.

 


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About Harrison Oldham

Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.

Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://lonestarbusinesslaw.com/.

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