United States: Consider Making A New Year's Resolution To Protect Your Company's Confidential Information

Each year at this time, employees throughout the United States receive performance reviews, raises, holiday bonuses, promotions with new responsibilities and, very often, new employment agreements. These events are often exciting for all parties: excitement on the part of the professional who receives increased compensation and often new responsibilities and exciting for the employer who has the opportunity to retain and promote its top talent. Unfortunately, without proper planning, these happy events can render old noncompetes, nonsolicits and confidentiality agreements unenforceable and leave a gap in a company’s trade secret protections.

A recent decision from the District of Massachusetts, Meschino v. Frazier Indus. Co., 2015 U.S. Dist. LEXIS 155997 (D. Mass. Nov. 18, 2015), serves as a reminder of why employers should consider treating changes in the employment relationship, including employment contract updates, with prudence. In Meschino, the employee signed a 2005 employment agreement that required the employee to also sign a confidentiality and noncompete agreement. The employee, in fact, signed the separate confidentiality and noncompete agreements. Then, in 2012, the employee signed a new employment agreement, but the new employment agreement “made no reference to any confidentiality or non-compete covenants.” The employee quit the company and started working for a competitor. The employee sued his predecessor employer to recover commissions that he alleged were wrongfully withheld. The employer attempted to counterclaim for breach of the 2005 confidentiality and noncompete agreements.

United States District Judge Richard Stearns held that the 2012 employment agreement, without any mention of confidentiality restrictions, nullified the 2005 confidentiality and noncompete agreements. The District Court held that because the 2012 agreement made no reference to confidentiality or noncompete promises, and because there was no evidence of an intention to preserve the 2005 confidentiality and noncompete agreements, the old agreements were not in effect. This barred the employer from pursuing claims against its former employee for breach of the 2005 confidentiality and noncompete agreements.

In short, the employer in Meschino lost the benefit of a bargained-for agreement. Although the Meschino result is striking, it is hardly new. It follows similar cases in Massachusetts dating back to 1968 (including a prior opinion authored by Judge Stearns). Those cases caution employers not to assume that old employment agreements are still valid. Changes in an ongoing employment relationship may unintentionally render previously signed agreements unenforceable. For example, Massachusetts courts have voided restrictive covenants where a subsequent contract was entered into and where there was a material change in an employee’s job.

What should employers consider in the wake of the Meschino decision and the growing body of cases in Massachusetts on theories of rescission, novation and the material change doctrine?

First, Massachusetts employers wishing to impose noncompete, nonsolicitation or confidentiality restrictions may want to include such restrictions in their initial employment agreements. Second, when promoting employees, boosting wages or otherwise favorably changing an employee’s position, employers should consider refreshing existing agreements. Third, in connection with any acquisition, merger or similar transaction, employers should assess whether these requirements have been met by the predecessor employer in order to determine whether to secure new agreements restricting solicitation or competition. Finally, prudence indicates that employers may also want to conduct periodic reviews of employees’ existing agreements to ensure continuing validity and potentially avert the fate of the employer in Meschino.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.