Alert November 01, 2013

In Harnett, First Circuit Rejects Bright Line "First Contact" Rule for Non-Solicitation Agreement

In a decision involving the “first contact” rule with respect to non-solicitation agreements, the First Circuit, in Corporate Technologies v. Harnett, rejected a bright line application and upheld a ruling of tortious interference against an employee and his new employer for doing business with former clients. A rare example of a federal appellate decision discussing the law of non-solicitation agreements in Massachusetts, it should prompt employers to be thoughtful when hiring employees with non-solicitation agreements – particularly with respect to contacting their former clients and providing indemnification. The ruling also provides greater clarity as to the rights of employers with departing employees subject to non-solicitation agreements.

In September, the U.S. Court of Appeals for the First Circuit in Corporate Technologies, Inc. v. Harnett, upheld a preliminary injunction in favor of the plaintiff, Corporate Technologies Inc. (“CTI”), that restrained one of its former employees, Brian Harnett, from doing business with certain customers to whom he had sold products and services while he worked for CTI.  Significantly, the court upheld the injunction even though  Harnett did not reach out to the customers at issue, but rather waited for those customers to make the “initial contact” with him at his new employer, OnX USA LLC (“OnX”), before he engaged in any business dealings with them.  The Harnett case is a rare example of an appellate decision, and in particular a federal appellate decision, discussing the law of non-solicitation agreements in Massachusetts, and provides valuable insight into how these agreements will be analyzed going forward.

Facts, Issues and Holdings in Harnett

CTI and OnX compete to provide information technology solutions to corporations and universities, integrating software, hardware, consulting, maintenance and support.   Harnett worked as a salesman for CTI for almost 10 years before he left to work as a salesman for OnX in October 2012.  CTI required  Harnett to sign a non-disclosure and non-solicitation agreement at the outset of his employment, which included a non-solicitation provision stating that  Harnett would not “solicit, divert or entice away” existing customers or business of CTI for one year following the end of his employment with CTI. 

On  Harnett’s first day at OnX, OnX sent an announcement to several potential clients—including  Harnett’s eight most active CTI clients in 2012—notifying them of  Harnett’s new position at OnX.  Four of  Harnett’s former clients reached out to  Harnett in response to the announcement.   Harnett then proceeded to repeatedly meet and communicate with them to discuss and encourage their business on behalf of OnX.    Harnett closed a deal with one those clients within his first six months at OnX.  In addition, in his first two months at OnX,  he submitted at least 10 requests to various vendors for “registered opportunities” for exclusive pricing discount arrangements in an attempt to acquire business from some of his previous CTI clients.

CTI sued both  Harnett and OnX in December 2012 for breach of contract, tortious interference, unjust enrichment and for unfair business practices under Massachusetts law.  Three months later, CTI moved for a preliminary injunction, which OnX and  Harnett opposed on the principal basis that CTI’s customers sought out  Harnett in the hope of doing business with him, not the other way around.  OnX and  Harnett argued that the initial client announcement was permissible and the lack of any other initial contact on their part was a “crucial” and “dispositive” issue under the law. 

In ordering the preliminary injunction, Judge Woodlock of U.S. District Court for the District of Massachusetts disagreed.  Judge Woodlock concluded that in interpreting non-solicitation agreements, Massachusetts courts do not draw a bright-line distinction between those actions following first contact by the client or customer and those following first contact by the employee.  Judge Woodlock also found that the evidence in the record supported CTI’s claim of tortious interference because OnX induced  Harnett to leave CTI and join OnX by promising to indemnify him for any liability on the basis of the non-disclosure and non-solicitation agreement, and OnX encouraged  Harnett to do business with his former clients.

The First Circuit affirmed.  It expressed concern about the ability of courts to identify the “initial contact” in each situation.  The court stated that the weight afforded to an initial contact would likely vary depending on the setting of each particular case.  For example, in industries where sales processes and products involve fungible off-the-shelf goods, an initial contact might weigh much more heavily than in industries where the sales processes and products are more complex.

The court reviewed the Oxford English Dictionary definition of “solicit”—“To entreat or petition (a person) for, or to do, something; to urge, importune; to ask earnestly or persistently”—and concluded that given the “hazy” line between solicitation and acceptance of business, the district court properly drew the line where the initial contacts were necessarily preliminary, the sales process was complex, and the products were custom-tailored.  The court stated, “One could more readily believe in the Tooth Fairy than believe that [Harnett’s] course of conduct was insufficient to ground a finding of probable solicitation.”

Implications of Harnett for Employers

There are several important takeaways from the Harnett decision.  First, employers hiring employees with non-solicitation obligations should be thoughtful in doing so.  In particular, employers should not encourage such employees to do business with their former clients, and should be cautious about agreeing to indemnify new employees.  Such agreements must be carefully drafted so that they cannot be seen as implicitly encouraging violations of valid contractual obligations to the employee’s former employer. 

Additionally, while “wedding-style” announcements may be acceptable in some circumstances, employers should be cautious in determining their wording and to whom they are distributed.  The First Circuit viewed negatively the announcement in Harnett as a “blast email” to pique the curiosity of an inappropriately “targeted list of prospects” (given that approximately 40% of them had been CTI customers), such that the announcement was “part and parcel” of the improper pattern of solicitation in the case. 

For guidance on what is permissible, a Massachusetts Superior Court case, Getman v. USI Holdings Corp., Inc., is instructional.  In Getman, the court explained that when leaving one company and going to another, it is not improper for an employee to notify his clients as a “common courtesy” that he is leaving one company and joining another and to provide them with his new contact information.  Additionally, the court explained that it is also not improper for an employee to explain in “summary terms” why he left his former employer and joined his current employer and to describe “in general terms” the type of work he will be doing in his new job and the nature of the work performed by his new company, so long as the former client is the one who initiates this conversation.  Employees cross the line, however, if they depreciate their former employer, praise their new employer or otherwise encourage former clients to bring their business to their new employer. 

Second, employers with departing employees subject to non-solicitation agreements now have the benefit of a clearer and more expansive description of their rights under such agreements and should not be hesitant to enforce them.  Importantly, departing employees and new employers will not be able to use a bright line “first contact” rule as a shield for unfair solicitation.  By the same token, in cases when a customer reaches out to a salesperson who has changed employers without the customer having been prompted to do so, the First Circuit’s decision leaves room for the initial contact to be a relevant consideration in determining whether to bar the salesperson from doing business with the customer.