December 19, 2012

Enforceable Forum Selection Clause? Think Again.

Parker | Scheer has previously emphasized the various benefits of including "forum selection clauses" in business contracts, noting that, generally speaking, courts will uphold and enforce such clauses if a dispute arises between the contracting parties and there is a question as to the appropriate forum in which such a dispute should be litigated. [See Being a Homebody: The Benefits of Forum Selection Clauses]. However, a recent decision from the United States District Court for the District of Massachusetts serves as a reminder of the circumstances in which a court will refuse to enforce the parties' previously agreed-upon choice of forum.

In Full Spectrum Software, Inc. v. Forte Automation System, Inc. ("Full Spectrum"), the plaintiff sued the defendant for the defendant's alleged breach of the parties' consulting services agreement ("CSA"). Although the plaintiff filed the lawsuit in the Massachusetts federal district court, the CSA's forum selection clause provided for adjudication of disputes arising under the CSA in the United States District Court for the Northern District of Ohio.

While acknowledging the parties' right to contractually select the appropriate forum for a future dispute, the judge emphasized that a court must balance certain public and private interests when considering the convenience, fairness, and ultimate appropriateness of the selected forum. The court also set forth the four circumstances in which forum selection clauses will be set aside: if it was the product of fraud or overreaching; if enforcement of the clause would be unreasonable or unjust; if the proceedings in the forum selected by the parties would be so difficult and inconvenient that the party challenging the clause will essentially be deprived of his day in court; or if enforcement would contravene some strong public policy of the forum in which the lawsuit is brought. The court also suggested that enforcement of a forum selection clause would depend upon the enforceability of the contract as a whole.

In Full Spectrum, the judge refused to enforce the CSA's forum selection clause on three bases. First, the judge determined that the parties' selection of Ohio as the forum jurisdiction was entirely arbitrary. Second, neither of the parties resided in Ohio, nor did any of the transactions or occurrences underlying the lawsuit take place there. Finally, the court found that, at the early juncture of the case, it was not yet clear whether the CSA was the final "meeting of the minds" between the parties, and therefore it was not clear whether the CSA as a whole was enforceable. For these reasons, the court determined that it would be unreasonable and unjust to dismiss the action by enforcing the forum selection clause of the CSA, and refused to do so.

The cautionary lesson of Full Spectrum resounds: When seeking to take advantage of the many benefits of forum selection clauses in business contracts, be reasonably certain that the selected forum is sufficiently connected to the parties or to the transaction, and that the agreement as a whole will be enforceable. Otherwise, the jurisdictional benefits believed to have been secured in contract may very well be lost.

December 14, 2012

Facebook Posting Advertising Former Employee's New Position Not A Violation of Nonsolicitation Agreement- Boston Business Laywers Parker Scheer LLP

A Massachusetts Superior Court recently held that a Facebook posting regarding a former employee's new employment did not violate the nonsolicitation covenant she signed with her former employer, although there was evidence that the former employee violated her non-competition agreement with the former employer.

In Invidia LLC v. DiFonzo, DiFonzo, a stylist at the Invidia hair salon, was required to sign a non-competition agreement and non-solicitation covenant with Invidia at the time she was hired. This agreement restricted her from working with any competitor of Invidia within ten miles of the salon and within two years after DiFonzo was no longer employed at Invidia. After two years of working at Invidia, DiFonzo left the hair salon. The next day, DiFonzo took a similar stylist position with one of Invidia's competitors, which was located less than two miles from Invidia. The competing salon posted an announcement on Facebook advertising that DiFonzo had joined the salon.

Following DiFonzo's departure from Invidia, the salon experienced a significant number of no-shows, cancellations and nonresponses from clients, which the salon attributed to DiFonzo. Invidia threatened to sue both DiFonzo and the competing hair salon for the loss of business and DiFonzo's violation of her non-compete agreement and nonsolicitation covenant. DiFonzo's new employer then terminated her employment, and Invidia sought a preliminary injunction against DiFonzo to enforce the non-compete agreement restrictions, and to prevent DiFonzo from soliciting Invidia clients or using confidential information she may have obtained from Invidia.

In its analysis of her non-compete agreement case, the superior court noted that, while Invidia had presented sufficient evidence to calculate any monetary damages caused by the loss of each client DiFonzo may have solicited from Invidia, it was not entitled to monetary damages if DiFonzo did not breach the nonsolicitation covenant. Invidia claimed that DiFonzo's Facebook activities violated the nonsolicitation agreement. However, the court found no such violation. First, the competing hair salon - not DiFonzo herself - posted the Facebook announcement regarding DiFonzo joining its salon, and the posting appeared on DiFonzo's personal Facebook page only as a result of her name being "tagged" in the announcement. Second, the mere fact that DiFonzo was "friends" on Facebook with some Invidia clients was not sufficient to amount to solicitation in violation of the agreement. Accordingly, the court held that DiFonzo did not breach the nonsolicitation covenant with Invidia.

Although the court denied Invidia's request for a preliminary injunction, it did note that it found sufficient evidence to support Invidia's contention that DiFonzo had violated the noncompetition covenant.

If you believe you may have a non-compete agreement case and are in need of a business lawyer, please contact Parker | Scheer LLP for a free consultation with one of our experienced Business Law and Business Litigation Lawyers.

December 7, 2012


U.S. District Court Judge Dennis Saylor recently granted a motion to dismiss a former employer's 93A consumer protection claim against a company that had hired its former employees--employees who were bound by a non-competition agreement which they had entered into with the former employer. Interestingly, the former employer did not assert the 93A claim against the former employees, but instead against the company that employed those employees, on the theory that the company knew or should have known that the former employees would be breaching their respective non-competition agreements with the former employer by accepting employment with the new company. Although the court let the former employer's claims for intentional interference with contractual relations against the new company proceed, it determined that, because the proposed 93A claim arose out of an employer-employee relationship, the "trade or commerce" nexus required under the 93A statute was not satisfied in a claim involving two employers. The judge focused on the fact that the former employer's claims against the new company would not have arisen but for the employer-employee relationship between the former employer and its former employees.

Whether other courts construing the 93A statute will follow this federal judge's very expansive view remains to be seen. It is, at the very least, arguable that companies may be engaging in trade or commerce under circumstances similar to those in this case. Time will tell whether the same result would be reached if, for example, an employment agency lured employees away from one company to work for a competitor.

If you believe you have a claim related to non-compete agreements, please contact Parker | Scheer LLP for a free consultation with one of our experienced Business Lawyers.

June 5, 2012

New Non-Competition Considerations for Family Businesses

Following a recent Massachusetts Appeals Court decision, keeping it all in the family business has become a reality for divorcing spouses.

Last month, the Massachusetts Appeals Court held that the Probate and Family Court had the authority, as part of divorce proceedings, to enjoin a wife from operating a business that is in competition with the husband's family business, effectively binding the wife to a non-competition agreement to which she never agreed. Because the good will of a business is a divisible asset in divorce proceedings, the right of the spouse who does not receive that asset to open a competing business diminishes the value of the business, undermining the attempt at an equitable division of assets between the spouses.

Although this decision is not likely to have broad application outside of divorce matters, it is yet another dimension to consider in family business planning, taking into account the potential pitfalls that may occur when spouses are involved in the same family business, and where that family business may be distributable to one spouse in future divorce proceedings.

May 21, 2012

Misrepresentation Claims - When is "Reliance" "Reasonable"?

We are all called upon to place our trust and reliance in the representations of others in all kinds of business contexts. Occasionally the representations turn out to be untrue. While most business people are aware that they have certain rights against parties who have misrepresented material facts, a Massachusetts Superior Court case decided this week on a Motion for Summary Judgment, suggests an odd standard of reasonableness.

In Bank of America, N.A. v. BDO Seidman, LLP, Bank of America contended that it relied on audited financial statements prepared by BDO in providing over twenty- million dollars to a borrower that defaulted on repayment. The Court however found that Bank of America's reliance on the BDO financial statements was unreasonable under the circumstances where Bank of America had access at all times to all of the borrower's financial books and records and could have even determined, from a close analysis of the financial statement that the company's financial health was misstated. Accordingly, the Court found that Bank of America's reliance was unreasonable.

Continue reading "Misrepresentation Claims - When is "Reliance" "Reasonable"?" »

May 14, 2012

Settling Litigation- The Business Side of the Equation

Intel Corp., the semiconductor giant, settled an antitrust lawsuit brought by the New York Attorney General in February, 2012. The suit, filed in Delaware, was compromised by procedural missteps committed by the AG's office. That said, the suit was otherwise viable. Intel paid 6.5 million dollars to settle the dispute although it absolutely maintained that it committed no violations. Given the dollars paid, it is highly likely that Intel viewed the settlement as merely a "cost" of doing business. On the contrary, in conducting a "risk-benefit" analysis, the 6.5 million dollar settlement - with no admission of wrongdoing - was, no doubt a relatively easy decision for a company that recently reported a 14.3 billion dollar revenue quarter. The settlement will not materially affect the company's share price, and the cost of antitrust litigation would almost certainly have exceeded the payment. The other component of the risk analysis was the outcome of the litigation. Here, the outcome was not only reduced to both quantifiable and positive, but is now certain as well. This was simply smart business.

Obviously, not every business decision involving settlement of a case is this easy. Nevertheless, whenever settlement is a possibility in a business litigation case, it is crucial that both counsel and client undertake a painstaking analysis of all relevant factors other than simply the amount sought by the opposing side. How much are we paying? (or accepting as the case may be)--how much will I pay in litigation fees and costs going forward? What is the likelihood of success? What are the consequences and risks if I do not settle?

Continue reading "Settling Litigation- The Business Side of the Equation" »

May 7, 2012

Massachusetts Business Contracts: Making sure that third-party beneficiaries do not climb out of the wood work.

The typical business contract is between two or more parties providing money, services, goods or something of value to the other. All of the parties are identified as the parties to the contract and with good draftsmanship; their respective roles are clearly set out. The law however does recognize another potential beneficiary of a contract, that being the so-called intended third-party beneficiary.

A third-party beneficiary would be one who the parties knew and intended to benefit from a contract and whose standing emanates from its prominent position and there is a clear intent gleaned from the contractual language that the third-party beneficiary benefit from the contract.

Here, in Massachusetts, the Rule is pretty clear: "Under Massachusetts law, a contract does not confer third-party beneficiary status unless 'language and circumstances of the contract' show that the parties to the contract clearly and definitely intended the beneficiary to benefit from the promised performance." That language was from a 2011 Massachusetts Appeals Court case called Doherty v. Admiral's Flagship Condominium Trust, 80 Mass. App. Ct. 104 (2011), quoting from another case entitled Cumis Insurance Society, Inc. v. BJs Wholesale Club Inc., 455 Mass. 458 (2009). In the first case, credit unions claimed they were third-party beneficiaries where the claim was that BJs stored data improperly and allowed thieves to access the data. The court made a point that just because someone receives the benefit from the contract between other parties, it does not necessarily make them a third-party beneficiary.

Continue reading "Massachusetts Business Contracts: Making sure that third-party beneficiaries do not climb out of the wood work." »

May 3, 2012

Viability of Employee's Claim for Severance Pay Under Massachusetts Wage Act Uncertain

Generally, when an employee is entitled to severance payments under an employment contract, and the employer fails or refuses to make those payments following the employee's termination, the employee would have a claim against the employer for breach of the employment agreement.

Some Massachusetts employees have endeavored to take the employers' liability one step further - by coupling a claim for breach of the employment contract with a claim for violation of the Massachusetts Wage Act. Employers, on the other hand, have a significant interest in thwarting such endeavors. Who wins?

Under the Wage Act, any employee who is discharged from employment must be paid his or her earned wages (including holiday or vacation payments due) in full on the date of discharge. A violation of this provision subjects the employer to liability for treble damages, attorneys' fees, and litigation costs. A claim under the Wage Act, then, is attractive to employees who would otherwise be limited to only single damages in a successful breach of contract claim.

One Massachusetts superior court has held that an employer's failure to make severance payments may constitute a violation of the Wage Act, and allowed the claim. Recently, however, a different Massachusetts superior court disagreed, ruling that the Wage Act provides no protection for an employee's right to severance pay under an employment agreement, and dismissed that plaintiff-employee's Wage Act claim.

These contrasting results stem from the contested issue as to whether severance pay owed to an employee pursuant to an employment contract is part of the "earned wages" due to the employee on the date of discharge under the Wage Act.

Without a definitive decision from a higher court on this issue, confusion grows, leaving employers and employees only to guess at the future viability of a claim under the Wage Act for severance payments.

April 3, 2012

Reminder: A Material Change in Compensation Arrangement can Void a Non-compete

A Massachusetts Superior Court recently reminded employers that a previously valid non-compete agreement may become unenforceable against an employee if the employer implements a new salary structure.

In that case, employees had signed non-competition agreements with their original employer. After the assets of the original employer company were purchased by a new company, the new employer requested that the employees sign new offer letters and new non-competition agreements. The new employer proposed to decrease employees' base salaries by approximately 20%, but allow the employees to make up the difference by way of potential bonuses earned based upon billable hours. The employees signed the new offer letters, but refused to sign the new non-competition agreements. The employees later resigned from the new employer company and began working for a competing business, taking some clients with them. The new employer sought to enforce the original non-competition agreement against the employees.

However, under settled Massachusetts law, non-compete agreements may be voided by any "material change" in the employment relationship between the employee and the employer. Here, the court held that the new salary structure was a "material change" because under it, the employees would have received significantly less compensation. This change in the employment relationship was enough to render the original non-compete agreement ineffective against the employees who resigned.

The lesson for employers: be mindful that any change to your business structure that materially affects the employer-employee relationship may allow employees to escape the chains that bind them under a prior non-competition agreement.

March 8, 2012

The Battle Between Fiduciary Duties and Shareholder Contracts

In Massachusetts, majority shareholders in a close corporation owe certain fiduciary duties to minority shareholders, including a duty of utmost good faith and loyalty. However, since the decision in Blank v. Chelmsford OB/GYN, P.C. (1995), Massachusetts also allows majority shareholders to circumvent these fiduciary duties if the parties agree to terms that conflict with these duties in an employment contract or stock buy-back agreement.

In Blank, the majority shareholders terminated the plaintiff's employment on the basis that, under the plaintiff's employment agreement and stock repurchase agreement, he could be terminated without cause upon six months' notice and the repurchase of his shares at book value. Although such termination would typically be a violation of the majority shareholders' fiduciary duties to the plaintiff as a minority shareholder, the Court found the termination to be proper because it was done in compliance with the terms of the contracts to which the plaintiff had agreed at the outset of the parties' relationship. The terms of the agreements superseded the majority's fiduciary duties to the plaintiff, and there was no breach of fiduciary duty.

Since the Blank decision, Massachusetts law has specified important limitations upon the application of Blank. A recent Massachusetts Lawyers Weekly article highlighted such limitations on these "contractually-sanctioned freeze-outs."

For the majority shareholders to be free of liability when exercising contractual "freeze-out" rights, the action by the majority must fall entirely within the scope of the cited agreement. In other words, it must be clear that the challenged action is permissible under the terms of the contract. In addition, the shareholders participating in the complained-of conduct must have complied with the covenant of good faith and fair dealing at the time the agreement permitting the conduct was executed. This represents a lower standard than the duty of utmost good faith and loyalty to fellow shareholders, but still requires that shareholders "act fairly."

The majority must also still comply with the duty of utmost good faith and loyalty in their actions leading up to the exercise of their "freeze-out" rights under the contract. Otherwise, even if the ultimate action is permissible under the agreement, the conduct preceding that ultimate action may still constitute a breach of fiduciary duty. Similarly, the majority must not put their contractual "freeze-out" rights to use in a manipulative manner.

Finally, the majority may be required to employ actions that are "less harmful alternatives" to termination of a minority shareholder-employee. For example, where a minority shareholder is alleged to have engaged in conduct that his employment agreement considered grounds for termination, the majority shareholders may not terminate him under the agreement unless they first attempt to resolve the allegations by less drastic measures.

Should any of the above-referenced circumstances not exist, the majority may be found liable for breach of fiduciary duty to the minority shareholder, despite a good faith belief that they were exercising their rights under a valid agreement.

January 17, 2011

Proposed Noncompete Legislation Continues to Loom

Employers dodged a bullet with the recent tabling of legislation that would have significantly restricted an employer's ability to enforce noncompetition agreements in Massachusetts. Nevertheless, employers are not yet completely out of the water.

As have most states, Massachusetts has traditionally taken a dim view of noncompetition agreements. Under current Massachusetts law, noncompetition agreements are considered valid and enforceable, provided that they are reasonable in duration, geographic scope, and restricted activities. Thus, Massachusetts employers have been able to use noncompetes to minimize the potentially harmful effects of an employee leaving the business to work for a competitor, taking with him valuable information and trade secrets that are the essence of the employer's business.

Continue reading "Proposed Noncompete Legislation Continues to Loom" »