Massachusetts Employment Law Letter

Who called first? Doesn’t matter!

Employers often seek business protection by requiring employees to enter into agreements that restrict their post-employment business activities.  In the sales context, these agreements frequently prohibit the former employee from soliciting former customers for a period of time.  When employees disregard their obligations under the agreement, an unfair competition lawsuit may follow, pitting the former employer against the departing employee.  Quite often the new employer is also dragged into the fray.  The employee’s defense is often straightforward:  “I didn’t solicit any customers, they came to me and I simply accepted their business.” Is this defense enough to get around the non-solicitation agreement?  A recent decision from the First U.S. Circuit Court of Appeals (whose rulings apply to Massachusetts employers) suggests that employees may have difficulty relying on this line of reasoning. 

Jumping ship

For nearly a decade, Brian Harnett worked as an account executive for CTI, a provider of customized IT solutions.  CTI regarded its business model as proprietary and required employees, including Harnett, to execute non-solicitation and non-disclosure agreements when they started working.

In October 2012, Harnett went to work for OnX, a competitor of CTI.  His non-solicitation agreement prohibited him from doing business with customers he sold products to while employed by CTI.  Harnett did not initiate any direct contact with former customers, but his new employer sent out an e-mail blast to its contact network, announcing Harnett’s hiring.  The list included many customers of CTI, some of whom Harnett had worked with directly.  A few of CTI’s customers contacted Harnett, and he wasted little time pursing their business.  He set up meetings with these prospects and gave them pricing information.  Following the meetings, Harnett had periodic contact with the prospects and internal discussions with folks at OnX about bringing them on board.  One former customer even entered into a contract with OnX for IT services.

Time to sue

CTI learned about Harnett’s sales related activities and was not pleased.  CTI filed a lawsuit against Harnett alleging that he had violated the non-solicitation agreement he signed while working for CTI.  CTI also filed a motion seeking injunctive relief, which is an order from the court that would have put an immediate halt to Harnett’s poaching activities.

In response, Harnett argued that he was not in violation of the agreement because he didn’t initiate contact with the customers:  he was simply accepting their business after they reached out to him!  The lower court did not buy Harnett’s argument.  It granted the former employer’s motion for injunctive relief, preventing Harnett from doing any business with CTI’s customers.  The court also ordered OnX to withdraw certain bids that Harnett had worked on.  Harnett then appealed the decision to the First Circuit Court of Appeals.

“First Contact” argument not a winner

In a lengthy and detailed decision, the Court of Appeals upheld the decision of the lower court ordering Harnett to stay away from CTI’s customer base and requiring him to withdraw bids that he had prepared.  The Court rejected a “first contact” rule that would allow former employees to bypass non-solicitation covenants where a customer had made the initial contact.  Instead, the fact that the customer made “first contact” is just one factor that courts should consider in drawing a line between solicitation and accepting business.  The nature of the business is another important factor that mixes into the equation.  Where the sales process is streamlined, and initial contact usually means a quick sale, the employee’s reliance on the “first contact” rule might carry the day.  However, where the sales process is sophisticated, and the products require custom tailoring, as it was in this case, the first contact typically requires another level of enticement before the parties enter into a formal business transaction.  It was precisely this type of enticement that Harnett unlawfully engaged in.

The court also pointed out that the initial contact was actually made by Harnett’s new employer when the e-mail blast was distributed.  The customers reached out to Harnett in turn because of the e-mail blast.  Such “targeted mailings” may also cross the line into impermissible solicitation, particularly where the advertisement does little more than announce that a person has switched teams.  The case is Corporate Technologies, Inc. v. Harnett, et al. (1st Cir. 2013).

Bottom line

This case is refreshing for businesses in an era where post-employment restrictive covenants are harder and harder to enforce.  It is also a cautionary tale for employers who encourage and perhaps even participate in an employee’s breach of a non-solicitation agreement.  The fact that former customers are the ones to make first contact with the departing employee does not relieve him or her from obligations under the non-solicitation agreement.  Follow up activities that entice the customer and lead to a sale down the road are also likely to violate a non-solicitation agreement, depending on how the agreement is worded.  If you need assistance drafting an effective post-employment agreement or have questions about the validity of existing agreements, be sure to seek the guidance of experienced employment counsel.

Article By: John Gannon, Esq.
Reprinted from the November 2013 issue of the  Massachusetts Employment Law Letter.

John Gannon is a Partner at the firm Skoler, Abbott & Presser, P.C. John can be reached at (413) 737-4753 or  jgannon@skoler-abbott.com.