Restrictive Covenants

           This time of the year employees may consider a change of job.  When analyzing the costs and benefits of changing jobs, employees should seriously consider the effect of any restrictive covenants on their ability to be employed by their current employer’s competitors.  This point was well illustrated in the September 24, 2008 Massachusetts federal court preliminary injunction decision of Bio-Imaging Technologies, Inc. v. Thomas Marchant.  The Court granted Marchant’s former employer, Bio-Imaging, a preliminary injunction to prevent Marchant from violating the terms of restrictive covenants by being employed with M2S, Inc. as its Director of Business Development. 

          Bio-Imaging provides medical imaging core laboratory services for clinical trials in order for companies to collect data on safety and efficacy of their drugs and devices for purposes of obtaining regulatory approval.  Bio-Imaging takes a number of precautions to protect its confidential information including requiring all employees to sign confidentiality agreements and requiring many employees to sign non-competition and non-solicitation agreements.  Also, before submitting proposals to customers, Bio-Imaging requires that they sign non-disclosure agreements and customer proposals include a confidentiality legend.

          In 1997 Marchant was hired by Bio-Imaging as Manager for Clinical Trial Services in the Northeast Region.  In that position Marchant’s duties included developing clients.  Marchant at the time of being hired signed a confidentiality agreement and a non-competition/non-solicitation agreement.  The two agreements together prohibited Marchant from using or disclosing confidential information which was defined in the agreement; prevented him for a period of one year after termination of his employment from working in a business competitive with Bio-Imaging in the United States or any country in which Bio-Imaging did business; and further prohibited Marchant from soliciting or contacting any customer or potential customer of Bio-Imaging for a period of one year after his employment.  All of these restrictive covenants were made in consideration of Marchant’s continued employment of Bio-Imaging.

          In 2000, Marchant assumed a new position at Bio-Imaging as the Director of Business Development.  The new job included identifying new business opportunities, developing business and maintaining client relations.  Marchant knew of Bio-Imaging’s pricing, sales strategies, customer relations, presentations and proposals, and its assessment of strengths, weaknesses, opportunities and threats facing Bio-Imaging’s business.  On July 18, 2008, Marchant gave his resignation notice and informed Bio-Imaging that he had accepted employment with M2S which the Court found was a competitor.  Marchant was hired by M2S to become its Director of Business Development, which included securing new business and maintaining relationships with M2S’s clinical trial customers. 

          The Court in granting the preliminary injunction found that a substantial part of Marchant’s job at Bio-Imaging related to customer relations and provided him access to confidential information which would be used to Bio-Imaging’s disadvantage if he worked in a competitive position at M2S.  Marchant in one of his arguments stated that Bio-Imaging’s failure to pay a certain bonus as set forth in the offer letter of 1997 resulted in its breach of the agreement, thereby voiding the restrictive covenant. The Court made short work of that argument noting that not only was their evidence that Bio-Imaging met the requirements of the actual bonus agreed to, but if they had not after eleven years of employment such an argument was waived.  The Court noted that the non-competition provisions would be narrowly construed to protect only the legitimate business interests of the employer and found that granting the injunction would legitimately protect the interests of the employer particularly given Marchant’s relationship with customer’s and confidential information. 

          A lesson to be learned from this case is that an employee who has signed a restrictive covenant agreement should carefully analyze with his attorney the risks involved in resigning from a position without ensuring that he could use his skills to provide value to another employer.  In this case, Bio-Imaging had paid Marchant approximately $135,000 in 2007 and approximately $170,000 in both 2005 and 2006.  Now he has resigned from Bio-Imaging to work for M2S and is enjoined from working for M2S.  A lesson for employers of this case is that if you have a reasonable restrictive covenant, you take reasonable measures to protect your confidential information, you have treated the employee fairly, and the employee thereafter competes in violation of that restrictive covenant, many judges are willing to prohibit an employee from competing in a narrowly defined field with reasonable geographic and time parameters in addition to preventing the employees from soliciting customers or potential customers of the employer so that both the non-competition and non-solicitation restrictive covenants may be enforceable.

J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf.  Attorney Marr is licensed and practices in both New Hampshire and Massachusetts.  Attorney Marr can be reached at dmarr@nashualaw.com.

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