iWe have written recently about legislative action in various states concerning their restrictive covenant laws, including Washington state’s prohibitions on nondisclosure and nondisparagement provisions in employment agreements, a proposal in Connecticut to codify limitations on noncompetes, and a law passed in Colorado that would limit the use and enforcement of noncompetes and non-solicitation provisions. Another state that is considering new non-compete legislation is New Hampshire.
The proposed bill in New Hampshire would codify the so-called “material change doctrine,” a principle that a restrictive covenant is unenforceable if there are material changes to an employee’s employment relationship after the agreement is signed. Until now, only Massachusetts has recognized the doctrine. A brief history of the doctrine is illuminating.
The material change doctrine originally appeared in the Massachusetts Supreme Judicial Court’s 1968 seminal decision in F.A. Bartlett Tree Expert Co. v. Barrington, 353 Mass. 585 (1968). In that decision, the SJC held that changes to the employee’s compensation and sales territory “strongly suggest that the parties had abandoned their old arrangement and entered into a new relationship,” and, therefore, the non-compete agreement “was inoperative when the defendant terminated his employment with the plaintiff.” Id., at 587-88.
Subsequent decisions have applied and refined the material change doctrine, albeit not with any real consistency. In Lycos, Inc. v. Jackson, 18 Mass. L. Rptr. 256 (Mass. Super. 2004), the Massachusetts Superior Court held that “[e]ach time an employee’s employment relationship with the employer changes materially such that they have entered into a new employment relationship a new restrictive covenant must be signed.” Id. Several other Superior Court decisions have reached the same result. See, e.g., Cypress Group, Inc. v. Stride & Assocs., Inc., 17 Mass. L. Rptr. 436, 2004 WL 616302 (Mass. Super. Ct. Feb. 11, 2004); Intertek Testing Servs. N.A., Inc. v. Curtis Strauss, LLC, 2000 WL 1473126 at *6 (Mass. Super. Ct. Aug. 8, 2000). And federal courts in Massachusetts and New York (applying Massachusetts law) have come to the same conclusion. See, e.g., ABC Cable Sys., Inc. v. Clisham, 62 F. Supp. 2d 167, 173 (D. Mass. 1999) (applying Massachusetts law); Iron Mountain Information Mgmnt., Inc. v. Taddeo, 455 F. Supp. 2d 124, 132 (E.D.N.Y. 2006) (applying Massachusetts law). In 2012, the Massachusetts Superior Court ruled in Grace Hunt IT Solutions, LLC v. SIS Software LLC, 2012 WL 1088825 at *4 (Mass. Super. Feb. 14, 2012), that a change in management that resulted in an employee’s base salary being reduced voided a restrictive covenant.
But not every court has ruled the same way. In Sentient Jet LLC v. Mackenzie (Unreported, March 2012), for example, the Superior Court rejected the material change defense, ruling that the situation before it was not one “where a covenant not to compete is sought to be enforced after dropping someone’s . . . base salary by 20 percent and making it unlikely they’d ever be able to make it up, as was the case in [Grace Hunt IT Solutions, LLC v. SIS Software LLC].” Thus, the Court drew a distinction between reducing an employee’s salary and making some other material change to an employee’s employment relationship.
But then, a year later, the Superior Court ruled in the opposite direction in Intepros, Inc. v. Athy, 2013 WL 2181650 (Mass. Super. May 5, 2013). In that case, rather than decreasing the defendant’s salary, he was promoted, and his salary was increased several times after he signed his non-compete agreement 15 or so years earlier. Id., at *5. The Court nevertheless ruled that was a sufficient change to void his non-compete agreement because just as in Bartlett Tree and its progeny, “Mr. Athy’s employment relationship with Intepros materially changed over his many promotions. As a result, the non-competition agreement executed in 1997 between Mr. Athy and Intepros must be declared void and unenforceable.” Id. A few weeks later, in Rent-A-PC, Inc. v. March, et al., (May 18, 2013), the U.S. District Court in Massachusetts ruled that Bartlett Tree “is a significant problem for the plaintiff. [Defendant] underwent several material changes to his employment, but he did not sign any additional restrictive covenant agreements.”
All was relatively quiet in that regard until 2020, when the Massachusetts Superior Court ruled that a temporary reassignment during a business slowdown that required additional duties was not a material change sufficient to invalidate a noncompete agreement. Specifically, the Court ruled that because there was no change to his job title or rate of pay, he was neither promoted nor demoted, and his specialized consulting services remained the focus of his job, his employment relationship was not materially changed because the change must be of such magnitude that it “‘show[ed] a clear new employment contract—and that the [original employment] contract was abandoned and rescinded by mutual consent.’”
And just last month, the United States District Court for the District of Massachusetts ruled that there was no material change where an employee’s salary was increased because “the possibility of a salary increase was set out in the Employment Agreement.” Marion Family Chiropractic, Inc. v. Seaside Family Chiropractic, LLC, 2022 WL 1003963, at *6 (D. Mass. Apr. 4, 2022).
To our knowledge, no other state has adopted the material change doctrine. That may soon change. A bill pending in New Hampshire that ostensibly is intended to limit the enforceability of noncompetes against employees who are terminated for refusing to get vaccinated, is actually much broader, and would invalidate any noncompete where “an employer makes any material change to the terms of employment for any employee”:
If an employer makes any material change to the terms of employment for any employee, any existing noncompete agreement shall be unenforceable against such employee. Termination of employment resulting from the material change in terms of employment or the failure to agree to a new employment contract or noncompete contract shall be considered a termination at the will of the employer. New requirements for medical testing, vaccination, or other medical intervention, established by the employer as a condition of employment, shall be considered a material change in the terms of employment. Any other employment agreement, including confidentiality, nondisclosure, trade secret, intellectual property assignment, or other agreement between the employer and such employee shall remain in full force and effect.
Business owners and organizations in New Hampshire are pushing back, claiming that the bill is vague—“How do you know what is a material change and what is not . . . and when it is invalidated and what to do about that?”— and warning that “[i]t will lead to litigation between employers and employees” A representative of the HR State Council of New Hampshire further warned that if the bill passes, “this is not going to be a business-friendly state.”
We will continue to track the progress of this bill and report back with any major developments.
