First Circuit: Massachusetts Employee Must Abide by a Restrictive Covenant Governed by a Delaware Choice of Law Clause – the More Things Change, the More They Stay the Same, Part II
When Massachusetts enacted the Massachusetts Noncompetition Agreement Act (“MNCA”) in mid-2018, some commentators suggested that the statute reflected an anti-employer tilt in public policy. But, we advised that sophisticated employers advised by knowledgeable counsel could navigate the restrictions set forth in the MNCA. As reported here, the May 2019 decision from the District of Massachusetts in Nuvasive Inc. v. Day and Richard, 19-cv-10800 (D. Mass. May 29, 2019) (Nuvasive I) supported our initial reading of the MNCA. The First Circuit’s April 8, 2020 decision in Nuvasive, Inc. v. Day, No. 19-1611 (1st Cir. April 8, 2020) (Nuvasive II),which upheld the District Court’s decision, provides further evidence that Massachusetts courts will still enforce contractual choice of law provisions when considering requests to enforce certain restrictive covenants in employment contracts. Indeed, in Nuvasive II, the First Circuit concluded that the MNCA, by its terms, does not apply to non-solicitation agreements, and that the Massachusetts employee, Day, had not demonstrated a legal basis for the District Court to ignore the Delaware choice of law clause in his employment agreement.
Nuvasive II, like Nuvasive I, presented the question of whether an employer incorporated in Delaware could enforce a non-solicitation agreement, which was governed by Delaware law, against a former employee, who was a Massachusetts resident. Massachusetts law, like the law of most states, generally requires courts to enforce a contractual choice of law provisions. Nonetheless, in Nuvasive II, the former employee argued that the District Court erred in enforcing a Delaware choice of law clause because: (1) Delaware had no “substantial relationship” to the parties or the transaction; and (2) Delaware law was contrary to the fundamental policy of Massachusetts. The First Circuit, like the District Court, rejected both arguments.
The First Circuit summarily rejected the employee’s argument that the choice of law clause was unenforceable because Delaware lacked the requisite relationship to the contract and the parties. The Court noted that the employer was incorporated in Delaware and held that this was a sufficient basis on which to apply Delaware law to the restrictive covenant. Indeed, the First Circuit emphasized that the Restatement of Contracts generally recognizes the validity of choice of law clauses that require application of the law of the state where one of the parties resides or maintains its principal place of business. Thus, Nuvasive II recognizes the employer’s right to include a choice of law clause that requires application of the law of the state where it is incorporated or maintains its principal place of business.
Similarly, the First Circuit did not linger too long over the employee’s argument that the application of Delaware law would be contrary to the fundamental public policy of Massachusetts. Citing the Massachusetts Supreme Court’s 2020 opinion in Automile Holdings, LLC v. McGovern, 136 N.E. 1207, 1271 n. 15, (Mass. 2020), the Court quickly concluded the MNCA was not applicable to the dispute at all, because it does not apply to agreements executed before October 1, 2018 and because it “does not apply to non-solicitation agreements.” Further, the Court concluded that Massachusetts’ material change doctrine, which requires new restrictive covenants to be executed with each material change in an employment relationship, did not bar the application of Delaware law to the parties’ dispute. In reaching this conclusion, the First Circuit defined the types of events that qualified as “material changes” as employer-initiated changes to the employment relationship, such as pay cuts, demotions, and material breaches of an employment contract by the employer. Notably, the First Circuit rejected the contention that “an employee’s own choice to terminate” his employment by accepting a different position with his employer could be “a ‘qualifying’ change under Massachusetts’ ‘material change’ doctrine.” Thus, as we initially predicted, the enactment of the MNCA does not bar out of state employers from enforcing reasonable restrictive covenants against Massachusetts employees.
The First Circuit expressly declined to consider whether either the MNCA or the material change doctrine embodied a “fundamental policy” of Massachusetts, because it found that the application of Delaware law did not violate either the MNCA or the material change doctrine. Thus, out-of-state employers can expect Massachusetts employees seeking to avoid restrictive covenants governed by the laws of other states to continue to argue that the MNCA or the material change doctrine reflect fundamental policies of Massachusetts, which invalidate choice of law clauses. Accordingly, out-of-state employers with Massachusetts employees should review the guidance in Nuvasive I and Nuvasive II and consult counsel when drafting restrictive covenants in employment contracts with Massachusetts employees.