by Lee Gesmer | Jun 17, 2013 | Noncompete Agreements
My late May post on Rent-A-PC, Inc. v. Robert March, et al. discussed a Massachusetts federal district court case in which Judge O’Toole refused to issue a preliminary injunction enforcing noncompete provisions against two former employees of Rent-A-PC because their job responsibilities had substantially changed since their non-compete agreements had been signed.
In a decision issued by a Massachusetts Superior Court Judge in May, the court refused to issue a preliminary injunction on the same grounds. In Intepros v. Athy one defendant, Paul Athy, had advanced from branch manager to regional vice president. Relying on the hoary case of F.A. Bartlett Tree Expert Co. v. Barrington (1968), as well as several more recent cases, the court held that this change in job title responsibilities, as well as changes in pay, constituted a material change rendering the noncompete agreement void and unenforceable.
A second defendant, Anne Marie Canty, had been hired and fired twice, and had signed a noncompete agreement on the first two hires. However, she was not asked to sign a noncompete agreement at the time of her third hire, a fact that left the employer without an enforceable noncompete agreement against her.
Ms. Canty’s case was open and shut: if you fire an employee don’t expect a noncompete provision from that employment to be enforceable if you rehire the employee and don’t get a new agreement.
Mr. Athy’s case is more difficult. Must an employer require an employee to sign a new noncompete agreement (or ratify an existing agreement) on the occasion of every promotion or change in salary? Not only is this an awkward condition to impose on the employer-employee relationship, but lets face it: many employers will forget. To make matters murkier, no court has provided a bright line as to how much an employment relationship must change before a new agreement becomes mandatory. In fact, one Massachusetts judge has ruled that the material change doctrine applies only when the change adversely affects the employee, such as in the case of a demotion or decrease in pay. (Sentient Jet LLC v. Mackenzie, Garsh, J. 2012).
Employers may attempt to use noncompete agreements that specifically anticipate job changes during the course of employment and provide that the non-compete clause will continue regardless of such changes, but no Massachusetts court has ruled on whether such a provision is enforceable.
Unfortunately, for now the material change doctrine seems to be an unavoidable stumbling block for Massachusetts employers.
by Lee Gesmer | Jun 14, 2013 | General
“The FBI is an unindicted coconspirator in the massive racketeering case against Whitey.” – Kevin Cullen, Boston Globe, June 14, 2013
_______________
I wonder if Martin Cruz Smith had Bulger in mind when he wrote this in 1981:
The FBI doesn’t conduct investigations, they pay informers. … Their informers are mental cases and hit men. Where the bureau touches the real world, suddenly you get all these freaks who know how to kill people with piano wire. Say a freak gets caught … he tells the bureau what it wants to hear and makes up what he doesn’t know. See, that’s the basic difference. A cop goes out on the street and digs up information for himself. He’s willing to get dirty because his ambition in life is to be a detective. But a bureau agent is really a lawyer or an accountant; he wants to work in an office and dress nice, maybe go into politics. That son of a bitch will buy a freak a day. … When their freaks are finished testifying, they move them and give them new names. If the freak kills someone else, they move him again. There are psychopaths that have been moved four, five times — totally immune; they’ve got better pardons than Nixon. That’s what happens when you don’t do the job yourself, when you use freaks.
Gorky Park, p. 387-388.
by Lee Gesmer | Jun 13, 2013 | Contracts, Corporate Law, Litigation
Earlier this year, on the eve of trial in Baker v. Goldman Sachs in federal district court in Boston, I published a blog post describing the facts behind this unusual case, which involved the acquisition of Dragon Systems by Lernout & Hauspie in a $600 million all-stock deal. Soon after the acquisition closed the market discovered that Lernout had fabricated its Asian sales figures. This was quickly followed by Lernout’s bankruptcy, which left Dragon (owned by the Bakers, husband and wife founders) holding worthless Lernout stock. (Baker v. Goldman Sachs – The Business Deal From Hell).
The acquisition was negotiated and concluded in the first half of 2000, just as the technology bubble was beginning to deflate. 
After a lengthy trial the jury ruled in favor of Goldman Sachs on all issues except the claim that Goldman violated M.G.L. c. 93A, the Massachusetts statute that makes illegal “unfair or deceptive acts or practices.” Under Massachusetts law, that claim must be decided by the judge.
Now, Massachusetts federal district court judge Patti Saris has issued her decision on the Baker’s 93A claims, holding that Goldman Sachs did not violate 93A. This ruling is not a surprise; judges rarely find a violation of 93A when a jury rules against a plaintiff on the underlying claims, which in this case were negligence, breach of fiduciary duty and fraud.
However, her opinion is a fascinating look into how a transaction of this magnitude can go wrong. In addition, I read her opinion to imply that, in her view, the jury should have found Goldman Sachs negligent. Of course, there is no explanation for why the jury ruled against the Bakers – perhaps the Bakers were unsympathetic witnesses, or they drew a hostile jury. Perhaps the jury failed to understand the case, or the Baker’s case was poorly tried. These are the risks of the jury system–you may be convinced you have a great case and the jury can still rule against you. And, to rub salt in your wounds, you will never know why.
But, the case shows what goes on behind the scenes in a transaction of this sort, especially when your investment banker is Goldman Sachs, which was paid $5 million for its services to Dragon Systems. Here are a few points from Judge Saris’ opinion that caught my attention:
The Goldman Sachs Investment Banking Team Was Very Young. The team was comprised of three people. The leader of the team was only 31 years old. The second team member was 25 years old and was job hunting at the time. The third investment banker was a 21 year old recent college graduate. No senior Goldman Sachs investment banker did any work on the transaction.
=> The fact that Dragon allowed a 31 year old Goldman employee to be the leader on a $600 million deal of this importance to Dragon’s owners is a mystery. This brings to mind the saying, “young doctors, old lawyers.” For this case, I would change that to read, “young doctors, old lawyers and old investment bankers.” A degree from a prestigious business school does not equal experience.
Dragon Made a Critical Decision Without the Involvement of Its Investment Bankers. The sale of Dragon to Lernout initially had a large cash component – 50% cash/50% Lernout stock. But, this changed at a meeting at which Goldman Sachs was not present. Judge Saris wrote that “Janet Baker chose to pursue an all-stock transaction with [Lernout] for $580 million. By the end of the meeting, Janet Baker and [Lernout] signed a handwritten agreement setting forth a fixed exchange ratio for an all-stock acquisition of Dragon. … Janet Baker made this napkin agreement without consulting Goldman.”
=> The fact that the Bakers modified the deal without consulting Goldman Sachs suggests a lack of business sophistication on the part of the Bakers. A “napkin agreement” to sell your company for 100% stock, without including your investment banker in the decision? This was a huge decision, and by the time it was made it was too late for Goldman Sachs to advise against it. If you’re going to pay your New York investment bankers $5 million, keep them in the loop.
Goldman Sachs C.E.O. Lloyd Blankfein and C.O.O. Gary Cohn, in the boardroom of Goldman’s headquarters, in New York City
The Investment Bankers Are Not Your Friend, So Get Their Opinions and Assurances in Writing. Judge Saris wrote that “Goldman was dissatisfied with respect to Lernout’s answers on many due diligence questions up until the last moment. The transaction would likely not have gone forward if Goldman had voiced its ongoing concerns about financial due diligence. In his deposition, Wayner said he did not disclose any concerns he had about due diligence at the March 27 meeting because ‘the client did not ask.’”
=> Wow. Wayner was the senior Goldman team member. His testimony that he was concerned about due diligence but didn’t voice his concerns because “the client did not ask” shows how careful a client must be in dealing with its investment banker. When you are about to sell your company for $600 million in stock you should be waking up in the middle of the night worrying. And, before you fall back to sleep you should be emailing your investment banker and asking, “is there anything about this deal you’re concerned about that we should know before we jump?” The fact that an investment banker as prestigious, expensive and (supposedly) competent as Goldman Sachs took a “don’t ask, don’t tell” position toward its client says a lot about where investment banker interests lie. Could their $5 million fee on the sale of the company been in the back of Wayner’s mind when he weighed whether to tell the Bakers about his concerns?
Don’t Assume the Investment Banker is Creating a File You Can Use to Sue The If Things Go Wrong. Judge Saris wrote that Goldman Sachs has a “written policy encouraging its mergers and acquisitions department not to safeguard their written notes. The policy tells investment bankers to keep ‘[n]otes supporting due diligence,’ to throw out ‘[n]otes to self-citing unresolved problems,’ and ‘[w]hen in doubt, throw them out,’ unless litigation has commenced.”
=> In case you had any doubts, that’s what’s going on behind the scenes at Goldman Sachs, and probably other New York investment bankers. If you make a note to yourself regarding an unresolved problem in an M&A transaction, throw it out. Why? So it can’t be used in litigation against Goldman Sachs if there is a legal problem later.
Near the end of her lengthy opinion Judge Saris observes that “The reasons why small startup companies like Dragon go to a place like Goldman to assist with hatching their golden eggs is because they don’t have their own expertise to analyze revenue projections by asking tough questions to potential merger partners.” Reading between the lines of her opinion, one could conclude that Judge Saris felts that Goldman Sachs did not provide that expertise to Dragon. However, this decision was the province of the jury, and the jury ruled for Goldman Sachs on all of Dragon’s legal claims. Judge Saris’ ruling on Dragon’s Chapter 93A claims was Dragon’s last chance, and she concluded that Goldman Sachs did not engage in conduct that met the test of “unfair and deceptive practices,” as that law has been interpreted by the courts. Absent an appeal, her decision marks the end of a long road, strewn with missteps by Dragon and its advisors. Perhaps it will serve as a lesson for the future.
by Lee Gesmer | May 30, 2013 | Noncompete Agreements
In this May 28th, 2013 decision by Massachusetts Federal District Court Judge George O’Toole, Rent-A-PC unsuccessfully sought to obtain a preliminary injunction against two former employees, and to enforce a confidentiality agreement against a third.
As to two of the employees, Rent-A-PC attempted to enforce a one year covenant not to compete. Judge O’Toole denied that motion, finding that the employees underwent several material changes to their employment, making it likely that their agreements had been abrogated. In analyzing this issue Judge O’Toole relied heavily on F.A. Bartlett Tree Expert Co. v. Barrington, a hallowed chestnut in Massachusetts noncompete case law dating back to 1968, but one that had been largely ignored until it was revived by a series of Superior Court cases in 2004.* Judge O’Toole’s reliance on F.A. Bartlett reinforces the impression that this doctrine has come full circle.
*These cases held that when the employment itself was the consideration for a noncompetition provision but the employee’s job had substantially changed, the provision was no longer enforceable.
The third employee had only a confidentiality/non-disclosure agreement, and the court found there was insufficient evidence to show he had violated it.
Rent-A-PC, Inc. v. Robert March, et al. (D. Mass., May 28, 2013)
by Lee Gesmer | May 29, 2013 | Copyright
Click here for Part 1 in this series of posts, here for Part 2.
In Parts 1 and 2 of this series of posts I discussed how Aereo designed its broadcast-TV-to-Internet system to fit within the ruling established by the Second Circuit in the Cablevision case anticipating that it would be sued for copyright infringement by a group of broadcasters.
INNOCENCE ABROAD
(IN SEARCH OF A COPYRIGHT)
Thomas Nast’s illustration in Harper’s Weekly
January 21, 1882, p. 37.
The broadcasters did file suit against Aereo, and in the Second Circuit, the very circuit in which Cablevision is controlling law and the circuit in which Aereo, not coincidentally, first offered its service. Home territory, in a manner of speaking. As expected, Aereo wrapped itself in Cablevision, and the district court ruled that Aereo’s “one antenna-one viewer” system did not violate the broadcasters’ public performance right under the Copyright Act. On this basis the district court denied the broadcasters’ request for a preliminary injunction that would have forced Aereo to stop operations in the Second Circuit, at the very least.
The broadcasters appealed this ruling to the Second Circuit, which upheld the district court. The Second Circuit held that its holding in Cablevision controlled the outcome in Aereo, and set out four conditions that needed to be considered in evaluating a challenge to a rebroadcast system such as Aereo’s based on the copyright public performance right:
First and most important, the Transmit Clause [of the statutory definition of public performance] directs courts to consider the potential audience of the individual transmission. If that transmission is “capable of being received by the public” the transmission is a public performance; if the potential audience of the transmission is only one subscriber, the transmission is not a public performance, except as discussed below. Second and following from the first, private transmissions – that is those not capable of being received by the public – should not be aggregated. It is therefore irrelevant to the Transmit Clause analysis whether the public is capable of receiving the same underlying work or original performance of the work by means of many transmissions. Third, there is an exception to this no-aggregation rule when private transmissions are generated from the same copy of the work. In such cases, these private transmissions should be aggregated, and if these aggregated transmissions from a single copy enable the public to view that copy, the transmissions are public performances. Fourth and finally, “any factor that limits the potential audience of a transmission is relevant” to the Transmit Clause analysis.
Aereo satisfied this four-factor test. Its system relies on individual transmissions that can be received by only one subscriber. These individual or “private” transmissions are not generated from the same copy of the work, but rather from the “unique copies” that are created for each subscriber. The transmission of these separate copies should not be aggregated for purposes of determining whether Aereo was violating the broadcasters’ public performance rights. Thus, the fact that Aereo might be transmitting 50,000 individual copies of the Super Bowl at the same time does not turn its rebroadcast system into a public performance.
The broadcasters fought valiantly, but without success, to distinguish Aereo from Cablevision:
- The court rejected Aereo’s argument that Cablevision should be distinguished because Cablevision had a license to retransmit programs and Aereo had no license. The presence or absence of a license was irrelevant to the rationale of the Second Circuit in Cablevision.
- It refused to accept the broadcasters’ argument that Aereo should be distinguished because Aereo’s system was analogous to a cable system, whereas the Cablevision system was more like a VCR. The Cablevision decision was not influenced by the fact that the system was comparable to a stand-alone VCR.
- The broadcasters’ argument that Cablevision engaged in time-shifting that broke the chain of transmission, while Aereo facilitated near-real time retransmission, likewise failed to provide a basis for distinguishing the Aereo system from Cablevision’s network-DVR.
As the Second Circuit noted, the broadcasters’ arguments boiled down to an attempt to persuade the court to overrule Cablevision, something the Aero court lacked the authority to do.* The broadcasters have filed a request for en banc review of the case which, as of the time of this post, has not been acted on. Cablevision remains the law of the Second Circuit, and it controlled the outcome of the broadcasters’ suit against Aereo, at least at this stage of the case.
*The circumstances under which a federal appeals court panel may overrule a decision of an earlier panel are sharply limited.
Fox Television Stations v. BarryDriller
While the Aereo case has come to at least a temporary conclusion in the Second Circuit (pending a ruling on en banc review), a similar case is pending in the Ninth Circuit. In Fox Television Stations v. BarryDriller (C.D. Cal. Dec. 27, 2012),* the California district court rejected the rationale of Cablevision and Aereo, and enjoined a “technologically analogous” broadcast system on the very grounds rejected by the New York federal courts. Like Aereo, the system at issue used mini-antennas, a transient buffer copy and unique copies of programs.
*For an explanation of why the defendant company named itself “BarryDriller” see this article on paidcontent.com.
However, after reviewing Cablevision, the district court found that Cablevision “is not the only possible reading of the statute.” The court found that the copyright statute does not, by its terms, require that a public performance be received from the same transmission, the central holding in Cablevision: “the concern is with the performance of the copyrighted work, irrespective of which copy of the work the transmission is made from. … Cablevision’s focus on the uniqueness of the individual copy from which a transmission is made is misplaced.”
Will the Supreme Court Take This Case?
BarryDriller case is on appeal to the Ninth Circuit Court of Appeals. If that court upholds the district court and the Second Circuit either declines to review Aereo en banc or upholds the Second Circuit panel decision, there will be a split of authority between the two circuits, making these cases strong candidates for Supreme Court review. While the Supreme Court accepts only about 1% of cases appealed to it, and infrequently reviews copyright matters, the importance of this issue,* and a clear circuit split, would give the cases a good chance for Supreme Court review.
*As the broadcasters said in the first sentence of their en banc petition, “A recent … decision of this Court raises a question of exceptional importance; it effectively overturns a congressional mandate that is the foundation for much of the current system for delivery of television programming.”
And, there a prospect of additional circuit splits over the Cablevision issue as Aereo introduces its service in 
additional markets throughout the United States and is sued in one or more of those circuits, which would only increase the likelihood of Supreme Court review. The imminent release of Aereo in Boston would give the broadcasters a chance to present their arguments to the Massachusetts federal courts.
In the next, and last, post in this series, I’ll discuss the widespread criticism of Cablevision and Aereo, which will be presented to additional circuits should Aereo be sued in other circuits. And ultimately, perhaps, before the Supreme Court.
Click here to go to Part 4 in this series of posts.
