Jonathan M. Shirley

Agreements that limit competition in business generally arise in two settings:  employment relationships and sales of businesses.  Although restraints on competition are generally disfavored in the law, reasonable noncompetition agreements are enforceable in most states, and those entered in connection with the sale of a business are scrutinized less critically by courts than those governing employees. 

One reason for the difference in scrutiny is bargaining power.  Parties negotiating arms-length for the purchase and sale of a business typically have equal bargaining power to strike fair terms, whereas employers often have the upper hand in bargaining with employees.  There is also the stark difference in economic realities.  As compared to business sellers flush with cash, employees are less likely to have the economic resources to sustain an extended period of unemployment  in their chosen field imposed by a noncompetition agreement.  Not surprisingly, the level of scrutiny courts apply to noncompetition agreements can often dictate their enforceability.   

So it was in a recent decision from Massachusetts’ highest court that examined the enforceability of an “anti-raiding” clause against the former owner of automobile dealerships.   Anti-raiding clauses, which are common in noncompetition agreements, obligate employees and sellers not to solicit or hire employees of the business after they leave for a specified period of time. 

The decision in Automile Holdings, LLC v. McGovern, 483 Mass. 797 (2020), is notable because, despite the common use of anti-raiding clauses, few courts have had occasion to analyze whether and to what extent they are enforceable.  Automile Holdings arose after McGovern, an executive and minority owner of an automobile dealership group, sold his ownership stake to the majority owners.  McGovern promised as a condition of the sale not solicit or hire any of the dealerships’ employees for eighteen months after the sale.  After the buy-out was completed, McGovern launched a competing venture and promptly hired three employees from the dealerships he once managed.   

A core question before the Massachusetts Supreme Judicial Court was whether the anti-raiding clause was enforceable against McGovern.  The Court ultimately held it was, and the analysis it used in reaching the result hints at broader implications.  The Court first decided that McGovern’s anti-raiding obligation arose in the context of the sale of a business and not from an employer-employee relationship.  This was a close call because McGovern had been an employee of the dealership group, not just an owner, and the ownership sale coincided with McGovern’s exit from the dealership as an executive.  Nevertheless, finding the clause arose in connection with a business sale relaxed the Court’s scrutiny in examining the justification for its enforcement.     

The Court then determined that the majority owners had a legitimate interest in preventing McGovern from poaching the dealerships’ employees.  For one thing, the anti-raiding clause was tailored to McGovern’s particular situation, with no indication the majority owners imposed the clause solely to limit competition.  Moreover, the dealerships’ other employees were not themselves subject to noncompetition restrictions, and McGovern’s anti-raiding obligation did not materially impede their employment options because plenty of other dealerships operated in the region.  As such, McGovern’s restrictions did not spill over to impact competition more broadly.  McGovern was also paid a premium for the ownership stake he sold to the majority owners.  Because of this, the Court viewed the majority owners as rightly justified in demanding McGovern not take actions – like using his inside knowledge to raid the dealership of its best employees – that would derogate the value of a business from which McGovern had just profited by selling. 

Given the rarity with which courts have dealt with anti-raiding clauses, Automile Holdings offers useful guideposts for analyzing their enforceability.  The decision also foreshadows how anti-raiding clauses might be construed in other contexts.  For one thing, there appears to be an inverse relationship between the enforceability of anti-raiding clauses and the amount of competition in a business sector.  For sectors with fewer competitors, enforcing an anti-raiding clause may be more difficult because of its possible adverse influence on overall competition.   A court may be persuaded to deny enforcement of the clause if it risks substantially narrowing employees’ choices for employers. 

The decision also suggests anti-raiding clauses will be difficult to enforce when they arise in the employer-employee setting.  The Court did not disturb the trial court’s determination that no legitimate business interest supported enforcement of McGovern’s anti-raiding clause in the employment context.  The trial court found the clause did not relate directly to the protection of the dealerships’ goodwill, trade secrets, or confidential information.  It is a step too far to say Automile Holdings has doomed anti-raiding clauses as a tool for employers across the board.  But the decision certainly hints the bar an employer must clear to justify enforcement could be dauntingly high.