Superior Court of Massachusetts, Suffolk, Business Litigation Session
Denise M. Annunciata, individually and on behalf of VPS Services, LLC
VPS Services, LLC et al Opinion No. 132501
MEMORANDUM OF DECISION AND ORDER ON CROSS MOTIONS FOR A PRELIMINARY INJUNCTION
Janet L. Sanders, Justice
This is an action brought by a member and former employee of a limited liability company asserting claims for breach of fiduciary duty, diversion of corporate opportunities, and wrongful termination. The plaintiff Denise Annunciata also seeks declaratory relief regarding restrictive covenants that, if enforceable, would prevent her from engaging in business in competition with the defendants. She is now before the Court asking that I enjoin the defendants from seeking to enforce those covenants. The defendants have responded by seeking an injunction of their own, given Annunciata's declared intent to open a competing business. This Court concludes the plaintiff's Motion for Injunctive Relief must be Denied and that the Defendants' Motion must be Allowed.
The following is taken from the Verified Complaint as well the various affidavits presented by the parties, with those facts in dispute specifically noted as such.
Annunciata is a trained paralegal who in 2006 formed her own business to provide outsourced paralegal services to corporate clients and law firms. In 2013, Annunciata decided to sell her business to the defendant Agile Legal Services Holdings, LLC (ALS Holdings). In addition to receiving a cash payment, Annunciata was granted an equity interest in the new company which arose from that sale, VPS Holdings, LLC (VPS, LLC); she also secured a position in the new company as Executive Vice President for five years at a salary of $100, 000 annually.
In connection with that sale, Annunciata entered into six agreements, two of which are relevant here. The first is an Asset Purchase Agreement; paragraph 11 of that Agreement prohibited Annunciata from engaging in activity in competition with VPS, LLC for a period of five years from the September 2013 closing date. The second agreement is a Service Agreement pursuant to which Annunciata was hired to work for VPS, LLC. That Agreement permitted VPS, LLC to terminate her before the five-year period of employment with or without cause, with " cause" being defined to include " conduct that constitutes gross insubordination or that directly results in a credible threat of litigation" against the company. See ¶ 2E of Services Agreement. The Services Agreement also contained a more expansive covenant not to compete and not to solicit than that contained in the Asset Purchase Agreement. It expressly stated that the restrictions applied if Annunciata was " terminated for any reason whatsoever, with or without Cause (even if by wrongful discharge) . . ." See ¶ 5B of Services Agreement. If she were terminated without cause, however, the length of the noncompete period would be reduced from a five-year period to a one-year period, to run from the date of her termination or the date on which she no longer owns an interest in VPS, LLC, whichever is later. She would also receive severance benefits. At all times during the negotiations and execution of these agreements, Annunciata was represented by counsel.
Pursuant to these various agreements, Annunciata held a twenty percent interest in the new company; the remaining eighty percent was owned by defendant Agile Legal Services Holdings, LLC (ALSH). The defendants Stephen Craig, Dennis Tarzian and Reyner Meikle were all managers of ALSH. Meikle was also VPS, LLC's president and CEO.
Although Meikle and Annunciata worked out of different locations, they almost immediately had disagreements about the direction of the new company. As described in her affidavit, Annunciata believed that Meikle was " making decisions that seemed not well thought out" and did not treat employees with respect. On his part, Meikle believed that Annunciata was getting in the way of his efforts to grow the business and increase revenue. Things came to a head in the summer of 2015, when Annunciata asked to meet with Tarzian and Craig without Meikle present. That meeting took place on September 14, 2015. Annunciata opened the meeting by informing them that she had engaged litigation counsel; she then proceeded to go through a PowerPoint presentation detailing her grievances. The footer of each slide stated " For Settlement Purposes Only." When asked what she was looking for, Annunciata replied that she was seeking a buyout of her interests or the " return" of her company.
The allegations made in the PowerPoint presentation constitute the underpinnings of Annunciata's claims in the instant case. She alleges among other things that Meikle used VPS, LLC money to fund activities that were for the benefits of other companies in which he had an interest and diverted business opportunities to these other entities. Defendants (including Tarzian and Craig, who have no particular motive to lie) strongly deny the allegations, and have submitted detailed affidavits explaining why. They describe her allegations as " curious, " nonsensical and outright wrong, based on statements that they say are clearly false. In addition, they allege that Annunciata discussed her allegations with outside contractors and customers, actually providing two of them with her PowerPoint presentation. Concerned that she was damaging the company, they decided to terminate her on September 23, 2014. This lawsuit followed.
Plaintiff argues that the noncompetition and nonsolicitation provisions of the agreements described above are not enforceable because defendants have materially breached their obligations under those agreements. Defendants respond that, to the extent that she is claiming wrongful termination, the covenant in the Service Agreement expressly stated that it applies even in the event of a wrongful discharge; moreover, none of plaintiff's allegations, even if accepted as true, show that there has been a breach of the Asset Purchase Agreement, which carries a similar (albeit narrower) covenant not to compete. Accordingly, defendants contend that not only is there no basis to relieve Annunciata of her obligations but that, in light of her stated intent to violate the restrictive covenants (an intention which was not disavowed at the hearing on these motions), they are entitled to an injunction of their own. Applying the familiar standard of Packaging Industries Group, Inc. v. Cheney, 380 Mass. 609, 617, 405 N.E.2d 106 (1980), this Court concludes that defendants are correct and that an injunction should issue in their favor.
I reach this conclusion because the defendants have shown a reasonable likelihood of success as to the enforceability of these covenants. Particularly where such covenants are negotiated as part of the sale of a business, a court is inclined to honor them, provided they are reasonable in time and geographical scope. See Boulanger v. Dunkin' Donuts, Inc., 442 Mass. 635, 639-40, 815 N.E.2d 572 (2004). The defendants also stand to be irreparably harmed, since plaintiff's decision to go into competition with VPS, LLC would essentially deprive them of precisely what they had purchased from Annunciata--namely, the good will of her existing customers. Annunciata on the other hand still retains her twenty percent ownership in VPS, LLC, and although enjoined from forming a business in competition with VPS, LLC, she may still pursue her claims for breach of fiduciary duty and diversion of corporate opportunities by virtue of that membership status. Moreover, the covenants do not deprive her of earning a livelihood, since they specifically contain an exception which would permit her to work in the profession for which she was trained. See ¶ 5B(2) of Services Agreement (" [T]he Executive shall be permitted to be employed by a law firm or corporate law department as a paralegal" during the restrictive period). Finally if Annunciata does ultimately prevail in showing that her termination was wrongful, she will be eligible for severance pay and the length of the noncompetition period will be greatly reduced. Balancing these harms and the strength of the parties' respective positions on the merits, this Court concludes that an injunction should issue as requested by defendants.
In support of her position, plaintiff relies on Ward v. Am. Mutual Liability Ins. Co., 15 Mass.App.Ct. 98, 443 N.E.2d 1342 (1983). In that case, the Appeals Court upheld a judgment entered after a trial in favor of former employees for commissions due at the time they were terminated. The employees, all of whom had agreed to restrictive covenants when hired, had been fired after many years of employment performed " fully, faithfully and competently" when they would not agree to sign even more restrictive noncompete provisions. As part of that judgment, the lower court concluded that the defendant, their former employer, could not enforce the restrictive covenants against them because the " wrongful discharges of the plaintiffs constituted breaches of the employment agreement so material as to discharge the plaintiffs from any further obligations . . ." Id. at 101. The Ward case differs from the instant one in a number of important respects, however.
First, the plaintiffs in Ward had not agreed to restrictive covenants as part of a sale of their business, as Annunciata did here. Second, the covenants at issue in Ward did not expressly state that they survived even in the event of wrongful discharge. Third, Annunciata's claims of breach are simply not as strong as the plaintiffs' claim in Ward, at least on this preliminary record. Indeed, the defendants' position that she was terminated for cause (as defined under the Services Agreement) appears to have some merit. Finally and perhaps most ...