The Material Change Doctrine and its Implication for Non-Competes

In the Press · August 10, 2012

Three recent Massachusetts Superior
Court decisions highlight the growing significance of the "material change
doctrine" as a basis for voiding a non-competition agreement. Under this
doctrine, a material change in the terms and conditions of employment may void
a pre-existing non-competition agreement on the theory that the material change
creates a new employment relationship requiring a new non-competition
agreement. Although this concept was first articulated by the Appeals Court in
the 1960s in F.A. Bartlett Tree Experts v. Barrington, it remained
little-used until recently. Now it seems that former employees raise it in
virtually every non-competition case – and with growing success.  

The increasing use of
the material change doctrine poses special problems for employers.

In February 2012, Superior Court
Judge Lauriat issued a decision in the case of Grace Hunt IT Solutions, LLC
v. SIS Software, LLC,
in which he held that any material change in the
employment relationship voids a pre-existing non-competition agreement. More
recently, in July 2012, Superior Court Judge Kirpilani, in the case of Protege
Software Services, Inc. v. Colameta
, again relied on the doctrine in
determining that a non-competition agreement was not enforceable against a
former employee. Finally, in Sentient Jet v. McKenzie, Judge Garsh also
considered the material change doctrine in connection with an employee’s
non-compete agreement.

In these cases, the courts have
grappled with what types of changes trigger the need for a new
non-compete.  While in both Grace Hunt and Protege, the
change at issue was a materially adverse diminution in the employee’s
compensation plan, in the Grace Hunt case Judge Lauriat stated in his
opinion that it did not matter whether the change was adverse or advantageous;
as long as it was material change, it creates a new employment relationship and
voids a pre-existing non-competition agreement.

In contrast, in the Sentient Jet
case, Judge Susan Garsh, ruling from the bench, is reported to have disagreed
with the notion that a positive change in the terms and conditions of
employment (e.g., a promotion) triggers the material change doctrine. Given
this difference in approach, employers cannot be certain which view a trial
court judge will embrace: Judge Lauriat’s strict application or Judge Garsh’s
more nuanced view. Ultimately, this issue is one that our appellate courts will
eventually clarify.

What is an employer to
do?

Employers ignore the material change
doctrine at their peril. On the other hand, there are also pitfalls for
employers who routinely ask employees to sign new non-competes. First, the very
act of asking an employee to sign a new non-compete can lead a court to
conclude that there has been a material change in the employee’s working
conditions. In Sentient Jet, Judge Garsh relied on the fact that no new
agreement had been presented to the employee as some evidence that the parties
did not consider the change material.  

Second, if an employer asks an
employee to sign a new non-compete, and the employee refuses, the employer
needs to be willing to end the relationship. These issues can be thorny ones,
so an employer needs to tread carefully and have systems in place to keep track
of job changes.

If you have any questions about the information
presented here, or would like to learn more about how Prince Lobel can address
any of your employment law concerns, please contact Daniel S. Tarlow, the
author of this Alert and Chair of Prince Lobel’s Employment Law Practice Group
at 617 456 8013 or dtarlow@princelobel.com, or click here to contact
any of the attorneys in the firm’s Employment Law Practice Group.