As a general matter, courts and statutes tend to be more permissive of non-compete agreements in the context of the sale of a business. However, exactly how far does this permissiveness extend? Can companies and workers make their own definition of a business sale to make it more likely that a non-compete agreement will be enforced? A recent case in Massachusetts addressed this issue, cautioning employers against such moves.
Specifically, on June 8, 2022, a Massachusetts Superior Court issued a new decision interpreting the applicability of the Massachusetts Noncompetition Agreement Act (MNAA). In the case, Lighthouse Ins. Agency, Ltd. v. Lambert, the court concluded that an employer cannot circumvent the MNAA by entering into non-competition restriction in the context of the sale of a business by simply making an offer to purchase a current employee's client relationships.
By way of background, the MNAA applies to all noncompetition agreements entered into after October 1, 2018 and provides that a non-compete entered into with a current employee will be valid and enforceable only if the employee is given notice of the agreement "at least ten business days before the agreement is to be effective," and only if the agreement is "in writing and signed by both the employer and employee," is "supported by fair and reasonable consideration independent from the continuation of employment," and "expressly states that the employee has the right to consult with counsel prior to signing."
Notably however, the MNAA does not apply to restrictive covenants entered into in the context of the sale of a business or part of a business.
In the case at issue, the defendant, Jack Lambert, worked for insurance agency Lighthouse Ins. Agency (Lighthouse) from 2013 through July 2021 as a licensed insurance producer. In October 2020, Lighthouse presented Lambert with a new employment agreement, which altered Lambert's compensation arrangement. The new agreement contained non-solicitation and noncompetition provisions that restricted Lambert's post-employment activity for one year after his separation from Lighthouse. Although Lambert was a then-current employee, the 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, having been signed by Lambert the same day it was presented to him. 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. When Lighthouse customers left to follow Lambert to his new firm, Lighthouse brought suit against Lambert and filed a lawsuit, seeking to bar Lambert from, among other things, competing with Lighthouse.
The key question before the court was whether Lambert's employment agreement – namely 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 fall outside of the scope of the MNAA. This question hinged on whether a salesperson can sell their client relationships to their employer such that the employment relationship is converted into a sale of a business.
In this case, the judge 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 as of the date set forth above."
In addition, the court concluded that Lambert's employment agreement simply 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 on which Lambert had been earning commissions did not belong to him. 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. In light of this determination, the court applied Massachusetts case law regarding restrictive covenants in an employment context, which is far narrower than those applied in the context of the sale of a business. Applying the MNAA, 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 salespersons 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. If you have questions about the enforceability of your non-competition agreements, Foley attorneys are here to help.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.