Mass Law Blog

Try Not to Use “Defalcation” in Your Employment Agreements

Few things anger employers more than learning that an employee who has been terminated has, before leaving, copied confidential documents. Courts often view this as an equitable justification for enforcing a covenant not to compete that might otherwise be “on the line” legally – maybe enforceable, maybe not.

But what if an employee copies confidential documents and does nothing with them? In other words, doesn’t give them to a competitor or use them in a way harmful to the employer?  If the employer discovers this after the employee has left, does it justify declaring that the employee is being terminated “for cause” (retroactively) and denying him the one year of severance his employment agreement had promised him when he was terminated “without cause”?

This was the issue in Eventmonitor v. Leness, which (rather oddly) went all the way to the Massachusetts Supreme Judicial Court. The precise issue was whether the employee had engaged in a “defalcation of company assets.” According to the employment agreement, “defalcation” was a basis for terminating the employee for cause and denying him severance payments. (The court chose not to grapple with the question of whether this could be done retroactively, as Eventmonitor tried to do, since a ruling on that issue was not necessary to decide the case).

However, “defalcation” was not defined in the employment agreement. The court decided that “in ordinary usage defalcation requires at least a temporary misuse or deprivation of the use or value of an asset.”  Mr. Leland had not deprived Eventmonitor of its electronic files (he didn’t delete them, he copied them), and therefore he was not guilty of “defalcation.” Leland won.

One troubling postscript to this case is how long it took to resolve. It took five years for the case to go to trial, and eight years to be resolved completely through the appeals process. One can only hope the Massachusetts courts are able to do better than that. Eight years is a long time to wait to decide a case where only one word needs to be interpreted.

Eventmonitor v. Leness (Feb. 4, 2016 Mass.).


Nudge, Nudge, Wink, Wink – Are You “Soliciting” in Violation of an Employee Non-Solicitation Agreement?

Two note-worthy decisions have emerged from AMD v. Feldstein, a trade secret case pending in federal district court in Massachusetts. At the heart of the case is the conduct of several AMD employees who left to work for Nvidia Corporation. Inexplicably, they copied and took with them huge amounts of AMD data, actions which earned them a preliminary injunction in the first of two opinions, dated May 15, 2013.

However, in the May 15th decision Massachusetts federal district court judge Timothy Hillman also addressed the thorny issue of  what constitutes a “solicitation” in violation of a non-solicitation agreement, and specifically solicitation of employees (as opposed to customers) of the former employer.

The employee non-solicitation provisions in this case were fairly standard. For example, Feldstein’s provided that:

during [Feldstein’s] employment with [AMD] and for a period of one year following the termination of [Feldstein’s] employment, whether voluntary or involuntary, [Feldstein would] not hire or attempt to hire an employee of [AMD], or directly or indirectly solicit, induce or encourage an employee of [AMD] to leave his or her employ to work for another employer, without first getting the written consent of an Officer of [AMD].

However, just what kinds of behavior violate such a provision, and which do not?

Clearly, expressly asking or encouraging an AMD employee to leave AMD would do so (“you should leave AMD and come to work for Nvidia with me – you can make much more money there, and they have chair massages every day!”). But what if Feldstein, on his last day of work at AMD, tells another employee “I’m moving to Nvidia” and winks? What if, after he’s at Nvidia, he has  lunch with a former co-worker at AMD and raves about how much he likes his new job, nothing more? What if, once Feldstein is at Nvidia a former co-worker at AMD approaches him and asks him questions about salary and working conditions at Nvidia, and whether there are any more job openings, and he does nothing more than answer these questions? What if Feldstein encourages an AMD employee to move to Nvidia, but the employee was unhappy at AMD, and was planning to leave in any event? The permutations are almost endless.

These examples pose perplexing problems for employers and employees alike, who must try to navigate a thin line between legal and illegal behavior.*

*As the Massachusetts Appeals Court stated in a case involving the alleged solicitation of customers, “as a practical matter, the difference between accepting and receiving business, on the one hand, and indirectly soliciting on the other, may be more metaphysical than real.” (Alexander & Alexander, Inc. v. Danahy, 1986).

There is not a lot of law to help sort out these issues. As Judge Hillman points out, “much of the case law on solicitation in Massachusetts deals with former employees soliciting customers from their former employers,” not soliciting other employees.  However, he noted that “colleagues can generally be expected to have even closer personal relationships than do employees and customers; and wherever closer working relationships are, courts must bear in the mind the fact that solicitation can be quite subtle.”

Needless to say, the parties in the case took opposing views. AMD argued for something close to a “wink test”– if Feldstein says he is leaving AMD to work at Nvidia and winks at another employee he has solicited. The former employees in the case argued that AMD should be required to prove that they took “active steps to persuade” an employee to leave, and even then they were not soliciting if the person were planning to leave anyway.

Rejecting these extreme positions Judge Hillman formulated the following tests:

I will define solicitation as follows. Direct solicitation is what might be seen as traditional solicitation, encompassing any active verbal or written  encouragement to leave AMD, even if not intended to harm AMD. Due to the personal relationships that develop between colleagues, liability for indirect solicitation requires a more context-sensitive inquiry. …subtle hints and encouragements … can constitute indirect solicitation. However, to preserve the public’s interest in free personal communications, such solicitation should only be found where the finder-of-fact is satisfied that the solicitor actually intended to induce the solicitee to leave AMD.

Given the paucity of precedent on indirect solicitation in Massachusetts, this decision may be the best guide to the law of employee solicitation in Massachusetts at present.* However, the definition of “indirect solicitation” is problematic: given that a former  employee accused of indirect solicitation is unlikely to admit illegal intent, it may be very difficult for the former employer to prove the requisite level of intent in court.  Absent overt encouragement in the form of testimony or “smoking gun” emails,  what chance does the employer have of proving the “actual intent” required by this test? Under this definition “nudge, nudge, wink, wink” may be safe for the former employee.

*A caveat: this decision was issued by a federal court, not a state court. The decision may carry relatively little weight with a state court judge, who is not bound by federal court decisions on Massachusetts law. The state courts are the final arbiters of state law.

An obvious conclusion to be drawn from this case is that non-solicitation clauses (at least as applied to employees), are weak tea. A potentially more effective way of preventing an ex-employee from luring employees away to a competitor (in most states, but not all) is indirectly, through a non-compete agreement. Although non-competes have their own set of enforcement problems (see, for example, this recent post), they have fewer problems than non-solicitations.

I’ll be writing about the second important issue to emerge out of this case in a separate post.

AMD v. Feldstein (D. Mass. May 15, 2013)

You Want to Blog for Huffpost? Well, I Have to Warn You – We’re Pretty Darn Selective!

You Want to Blog for Huffpost? Well, I Have to Warn You – We’re Pretty Darn Selective!

A lot of people blogged for The Huffington Post for free between 2005 and 2011. But after Huffpost was sold to AOL for $315 million in 2011, they had second thoughts about their generosity. They filed a class action seeking compensation for their work based on claims of unjust enrichment and deceptive business practices, seeking one-third of that money for the bloggers. The trial court, and now the Second Circuit, rejected their claims. As the Second Circuit stated early this week in Tasini v. AOL (2d Cir. Dec. 12, 2012):

Plaintiffs’ basic contention is that they were duped into providing free content for The Huffington Post based upon the representation that their work would be used to provide a public service and would not be supplied or sold to “Big Media.” Had they known that The Huffington Post would use their efforts not solely in support of liberal causes, but, in fact, to make itself desirable as a merger target for a large media corporation, plaintiffs claim they would never have supplied material for The Huffington Post.

The problem with plaintiffs’ argument is that it has no basis in their Amended Complaint. Nowhere in the Amended Complaint do plaintiffs allege that The Huffington Post represented that their work was purely for public service or that The Huffington Post would not subsequently be sold to another company. To the contrary, plaintiffs were perfectly aware that The Huffington Post was a for-profit enterprise, which derived revenues from their ubmissions through advertising. Perhaps most importantly, at all times prior to the merger when they submitted their work to The Huffington Post, plaintiffs understood that they would receive compensation only in the form of exposure and promotion. Indeed, these arrangements have never changed.

The case puts me in mind of the observations of a great American writer:

Tom said to himself that it was not such a hollow world, after all. He had discovered a great law of human action, without knowing it – namely, that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain. If he had been a great and wise philosopher, like the writer of this book, he would now have comprehended that Work consists of whatever a body is obliged to do, and that Play consists of whatever a body is not obliged to do. And this would help him to understand why constructing artificial flowers or performing on a tread-mill is work, while rolling ten-pins or climbing Mont Blanc is only amusement. There are wealthy gentlemen in England who drive four-horse passenger-coaches twenty or thirty miles on a daily line, in the summer, because the privilege costs them considerable money; but if they were offered wages for the service, that would turn it into work and then they would resign.

In an earlier time, I think Ms. Huffington would rarely have been required to lift a paintbrush.

Apple, Google, Have You No Shame?  Really!

Apple, Google, Have You No Shame? Really!

While the debate over whether Massachusetts should adopt a law restricting the enforceability of non-compete agreements rages on (well, at least among a group of maybe 100 economists, lawyers and business people), California proudly observes that noncompete agreements are unenforceable in that state (except under very limited circumstances).   And, economists argue, that is one reason why the high-tech industry in Silicon Valley is more successful than its counterpart Massachusetts.

Now, come to learn, things were not quite what they seemed.  I’m sure that 99% of California companies are in fact impacted by the California law — that is, they cannot impose covenants not to compete on their employees.  But a few companies — Google, Apple, Pixar, Adobe, Intuit and Intel — figured out an end-run around this law.  Apparently, the Federal Trade Commission tumbled to the fact that each of these companies agreed, with one or more of the others, not to solicit that company’s employees. For example, according to the FTC Apple and Google put each others employees on “Do Not Call” lists.


First Circuit Declines to Reconsider Its Holding That Truth May Not Be a Defense Under 1902 Massachusetts Law

First Circuit Declines to Reconsider Its Holding That Truth May Not Be a Defense Under 1902 Massachusetts Law

The First Circuit has denied Staples’ request that it hear the Noonan v. Staples case en banc, or that it ask the SJC to advise it on how to apply the 100 year old Massachusetts statute which provides that “actual malice” may create an exception to the principle that defamation must be false to be actionable.

I posted on this case a few weeks ago (link here), and commented on the agita it had created in the First Amendment milieu. In fact, a vast number of publishers and First Amendment advocates filed an amicus en banc brief urging the First Circuit to reconsider this decision

Today, the Court denied this request and let its February 13, 2009 decision stand. In an order several pages long, the Court found that Staples had waived any First Amendment challenge to the state law by failing to raise it earlier, and that Staples could not, moreover, cite a case supporting the proposition that the law was unconstitutional. Here are some selective quotes from the Order:

Since its initial brief, Staples has argued under the premise that the term “actual malice” in § 92 means “malevolent intent.” Yet, Staples did not then challenge the constitutionality of such a construction. Thus, the . . . opinion found that it need not consider the issue. . . .

The issue is waived, and the fact that the issue raises constitutional concerns does not save the waiver. . . .

Further, Staples has not shown that the constitutional issue is so clear that the panel should have acted sua sponte to strike down a state statute, without the required notice to the state attorney general. Staples still does not cite a case for the proposition that the First Amendment does not permit liability for true statements concerning matters of private concern.

Nor it is appropriate to now certify the question to the SJC. We have answered the question of state law regarding the proper interpretation of the statute, and Staples has not challenged that matter on rehearing. The question of the constitutionality of that state law under the First Amendment is a federal question, which we could answer without certification.

Staples’ petition for rehearing is here.

It is worth pointing out, as a complement to the Staples case, a recent decision by Massachusetts Superior Court Justice James Lemire, issued on January 14, 2009 in Oropallo v. Brenner. The issue in that case was not defamation, but rather the right to privacy under Massachusetts law.  Without going into the facts of the case (which are confidential in nature), the court acknowledged an employee’s “expectation that [certain] details [of her life would] be kept private.”  The court stated that there exists a genuine issue of material fact as to whether [the Town] had a legitimate interest in publishing  [a document that disclosed this information] to Town employees and volunteers that outweighed [the employee’s] interest in keeping aspects of her personal life from public view.”

Accordingly, the Court held, the case should proceed to trial.

In light of these two recent cases it probably goes with out saying, but of course I’ll say it anyways: employers should proceed with extreme caution with respect to statements they make about employees, lest they risk claims of defamation and/or invasion of privacy. Praemonitus, praemunitus.