PROTECTING GOODWILL AND THE NON-SOLICITATION OF CUSTOMERS WITH A NON-COMPETITION AGREEMENT

By Timothy K. Cutler

 

Non-competition agreements are not favored under Massachusetts Law. The threshold requirement of an enforceable non-competition agreement is that it is intended to protect the legitimate business interest of the employer. Legitimate business purpose has been defined as protecting trade secrets; confidential information; or goodwill of the employer. 

In addressing goodwill, the courts have found that there is goodwill that belongs to the employer and there is goodwill that belongs to the employee. Goodwill of the employer belongs to the employer and is a legitimate a basis for a non-competition agreement. Conversely, the goodwill of the employee belongs to the employee and non-competition agreements cannot be used to preclude an employee from benefiting from that goodwill in his or her new employment. Obviously, the trick is in separating the two and determining who owns the goodwill. 

Some recent decisions coming out of the Massachusetts Superior Court, Complex Business Division, have provided some guidance on this issue. When an employee (most particularly in sales) brings in a new customer, the question is whether the customer became a customer of the company because of the employee or because of the reputation of the company. In answering this question, it is usually found that there is some combination of both. If the bulk of the goodwill was that of the employer, then the non-solicitation provision will be upheld. 

If, however, the bulk of the goodwill belongs to the employee, then the courts will permit the customers to go with the employee if the customer chooses to do so, without being solicited. Then, after a reasonable time, the employee owning the goodwill may actively solicit all of his former clients who had not chosen, on their own volition, to follow the employee to the new employer.