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Supreme Judicial Court Sets Rules for Departing Employees

April 1993

Assume an employee is not bound by an non-competition agreement, and is planning to resign to start or join a competing business. What legal obligations does the employee owe to his current employer prior to resignation? This question is critical in technology industries, where there is a high degree of employee mobility and employees often have the technical expertise or business opportunity to pose a competitive threat to their former employers.

The Massachusetts Supreme Judicial Court recently answered this question in an important decision which will establish guidelines for employers and entrepreneurs for years to come.

The facts of the case, simplified slightly, were as follows. Scherer sold his micro-circuit packaging company to Augat, Inc., in 1975. He also entered into a non-competition agreement with Augat, and continued to work for the company. Nine years later, immediately after his non-competition agreement expired, he resigned from Augat and formed Aegis, Inc. He then contacted Greenspan, an Augat vice president and general manager who had played a significant role in Augat’s success, but who was dissatisfied with his job at Augat. Scherer asked Greenspan whether he was willing to join Scherer’s new company, and Greenspan indicated he would be willing to do so. Scherer and Greenspan (before Greenspan resigned) then together approached four other Augat employees who held senior management positions with Augat and invited them to join the new company. Three of these managers committed to work for Aegis if the company could obtain funding, and ultimately all four of these Augat employees joined Aegis.

After obtaining the firm commitment of Greenspan to join Aegis, and the commitment of the other three Augat employees to leave Aegis contingent on successful financing, Scherer marketed this management team to various venture capital firms, and quickly obtained $4.3 million in funding. Greenspan and three of the managers then left Augat and joined Aegis. Within a few months, the fourth Augat employee also joined Aegis. Augat brought suit, claiming breach of the duty of loyalty.

The court held that Greenspan, by soliciting several important Augat employees for his new venture while he was still the general manager of the company, had breached his duty of loyalty to his employer. Moreover, because Scherer and his new company, Aegis, participated with Greenspan in this illegal conduct, they were liable as well.

In finding Scherer, Greenspan and Aegis liable on these grounds, the court cautioned that the basis for its decision was extremely limited. The court stated that an at-will employee may properly plan to compete with his employer and may take active steps to do so while still employed. Such an employee has no duty to disclose his plans to his employer.

However, the court made it clear that while still employed, an employee may not solicit his employer’s customers, use the employer’s funds or employees for personal gain, or undertake any course of conduct designed to hurt the employer. Greenspan had violated this duty when he secretly solicited employees of the company while still employed there himself.

The court rejected several additional claims made by Augat. When he tendered his resignation to Augat, Scherer had represented to the company that he would be entering a non-competitive business. Greenspan, before his departure, had indicated that he had no other employment plans. Augat argued that in each case the employee had made actionable misrepresentations. The court held that an employee has no obligation to tell his employer what his plans are, or to not mislead his employer as to his future competitive actions.

The court also rejected Augat’s claim that Scherer had lured away Augat’s key employees in an effort to “cripple” Augat in order to ease Scherer’s new company’s entry into the market. The court stated that Scherer had an “absolute right” to compete with his former employer, and that “the possibility of crippling, or even destroying, a competitor is inherent in a competitive market.”

TLB Comment : The message of the Augat case could not be clearer on several points. A managerial or executive employee may not solicit employees or customers from his current employer while still employed. However, assuming no contractual restrictions, any former employee is free to solicit customers and employees from his former employer, regardless of motives and regardless of the impact that his actions might have on the old employer.

In light of this ruling, we suggest that companies fearing raids on their key employees utilize a clause in their standard employment agreements prohibiting solicitation of employees. While many employees may be reluctant to agree to a non-competition clause, employees usually are willing to agree to a non-solicitation clause of reasonable duration.

For better or worse, the class of employees that the Augat rule applies to was left somewhat ambiguous in the decision. In one place, the Court states that the rule is limited to prohibiting a “general manager,” still employed, from secretly soliciting key managerial employees to leave their employment to join the general manager in a competitive position. However, in other places the opinion may be read to hold that this limitation applies to lower level employees as well. We believe that at the very least, the Massachusetts courts will apply this rule in the future to any officer, director or managerial employee of a company who, while still employed, solicits co-workers to join a contemplated or existing competitive enterprise.