Minority Shareholder/Fiduciary Duty

U.S. District Court Judge William Young’s recent decision in Talentburst, Inc. v. Collabera, Inc. is worth study. Talentburst is the former employer of Raj Pallerla. While employed by Talentburst, Pallerla signed a noncompete agreement with Talentburst. He then resigned and went to work for Collabera, Inc. For ease of reading I’ll refer to these three parties as Former Employer, New Employer and Employee.

When the Former Employer discovered that its Employee had gone to work for New Employer, it pursued an unorthodox legal strategy: rather than sue the employee for breach of the noncompete agreement, it sued only the new employer, alleging that the New Employer had “aided and abetted” a breach of fiduciary duty by the Employee. It also claimed that by hiring the Employee the New Employer “interfered” with the noncompete contract. The case was filed in Massachusetts Superior Court, but the Former Employer was able to “remove” it to federal court (based on diversity jurisdiction).… Read the full article

Further to my post below, commenting on whether the enforceability of noncompete agreements in Massachusetts has been a major factor in Silicon Valley’s relatively greater success in attracting high tech start-ups, a review of recent Massachusetts noncompete cases shows how difficult it has become to enforce these agreements in Massachusetts. Judges appear to be leaning over backwards to deny preliminary injunction motions (which is where the real action lies in these cases). Here is a quick summary of several recent state court cases.

In Bank of America v. Verille, decided by Superior Court Judge Thomas A Connors in Norfolk County in August, the Court denied BoA a preliminary injunction to enforce a non-soliciation agreement (a close relative of noncompete agreements), on the grounds that the customers that followed the former employee to his new job signed affidavits to the effect that they were not solicited by him. To put this in context, many years ago I saw a Superior Court judge state from the bench that the line between “soliciting” a customer and the customer “following” an employee is so fine that she would presume that a customer had been solicited, even in the face of affidavits from the customer stating it had not been solicited.… Read the full article

Fiduciary Duty. As a recent case shows, the answer is: it depends.

Assume that you are the attorney for a closely-held corporation (a privately held corporation with a small number of active shareholders), and you have interacted with and provided corporate legal advice to the shareholders over the years. Even though you did not represent them personally, the shareholders placed their trust and confidence in you. A dispute then arises between one of the shareholders (who has a minority position) and the corporation. Can you represent the corporation in this dispute, or do you have a fiduciary duty to the minority shareholder that presents a conflict of interest, and precludes you from the representation?

An article by Massachusetts Bar Counsel written in 2003, Closely Held Conflicts, reviews the case law on this issue (which has developed mostly in the context of motions to disqualify counsel), and sends a clear warning that attorneys who have represented a closely held corporation most likely do owe a fiduciary duty to the shareholders.… Read the full article

Noncompete Agreements. Plaintiffs seeking to enforce noncompete agreements by means of preliminary injunctions have been up against it as of late. In Payson’s Trucking v. Yeskevicz (pdf file) Judge Peter Agnes denied the plaintiff’s motion, which was brought against a contracting party (as opposed to an employee), on the grounds (among others) that the agreement was too vague as to its geographic reach and in the identification of the plaintiff’s actual customers.

In Merchant Business Solutions v. Arst (pdf file) Judge Richard Connon denied a preliminary injunction against a former sales employee on the grounds that the geographical limits were too broad and that the plaintiff was seeking protection from ordinary competition (among other reasons). Both cases are worth reviewing, since the impression one takes away is that the pendulum has swung (yet again) in the direction away from enforcement of these agreements. A plaintiff simply needs better facts than the parties had here in order to obtain a preliminary injunction to enforce a noncompete agreement.… Read the full article