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Simplivity Corp. v. Hofdahl

Superior Court of Massachusetts, Suffolk, Business Litigation Session

June 23, 2016

Simplivity Corporation
v.
John Hofdahl No. 134252

          Filed June 24, 2016

          MEMORANDUM OF DECISION AND ORDER ON PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION

          Mitchell H. Kaplan, Justice

         Plaintiff Simplivity Corporation filed this action against its former employee, defendant John Hofdahl, on May 16, 2016 to enforce a covenant not to compete contained in his employment agreement. The case was first before the court on June 1, 2016, on Simplivity's motion for a preliminary injunction. After reviewing the parties' affidavits, supporting materials, and memoranda of law, the court determined that it would convene an evidentiary hearing on the motion. That hearing took place on June 21, 2016. Three witnesses testified and sixteen exhibits were admitted in evidence.

         FACTS

         In consideration of the affidavits, exhibits and testimony, and the reasonable inferences drawn therefrom, the court finds the following facts.

         Simplivity is a corporation organized under the laws of Delaware with its principal place of business at 8 Technology Drive, in Westborough, Massachusetts. It was founded in 2009. It develops and sells so-called " hyperconverged infrastructure solutions" which converge a number of functionalities or applications into " all-in-one" products. Simplivity's software is sold together with servers to integrate a collection of technologies that span across the functional areas of storage, computing, networking, hypervisor-based virtualization, containers, and infrastructure management. There are a number of companies providing these types of solutions in this emerging market. See " IDC MarketScape: Worldwide Hyperconverged Systems 2014 Vendor Assessment, " December 2014.

         In March 2014, Simplivity hired Edward Bannigan as its area sales manager for the Western Region of the United States. At or about the same time, Bannigan recruited Hofdahl to be a regional sales manager. Bannigan and Hofdahl had worked together at EMC for many years and briefly at another software company called Violin Memory. Hofdahl was one of five regional sales managers who reported to Bannigan. The two went through an initial training session together in Westborough in March 2014, where, among other things, they reviewed a manual entitled Sales Handbook, which explained in detail Simplivity's " go to market strategy." Hofdahl was not permitted to take the Sales Manual with him and never reviewed it again.

         When he was hired, Hofdahl signed a Proprietary Information and Inventions Agreement (the Employment Agreement). Of relevance to this case, the Employment Agreement provided that Hofdahl could not disclose any Simplivity Proprietary Information, which included all business, technical and financial information that Hofdahl obtained during his employment. Also, Hofdahl agreed that " [f]or the period of one year immediately following termination of [his] employment with the Company (for any reason, whether voluntary or involuntary), [Hofdahl] will not directly or indirectly: (i) Cause any person to leave their employment with the Company; (ii) Cause any person who was employed by the Company at any time during the past six months to become an employee of [h]is or a third party, (iii) Solicit any business partner; or (iv) Act in any capacity in or with respect to any Competing Business located within the Commonwealth of Massachusetts, the rest of the region known as New England, the rest of the United States, or anywhere else in the world." " Acting in any capacity" was defined to include being an employee; being a " business partner" was defined to include any past, present or prospective customer, vendor supplier, or distributor of Simplivity; and " Competing Business" was defined to include any firm which competes or is reasonably likely to compete with any business that Simplivity " conducts or demonstrably anticipates conducting." The Employment Agreement stated that it was to be governed by the laws of Massachusetts without regard to its conflict of laws provisions. It also included the standard recitation that any breach or threatened breach of this competition clause would cause " irreparable harm to the Company for which damages would not be an adequate remedy, and, therefore, the Company will be entitled to injunctive relief with respect thereto (without the necessity of posting any bond)."

         While working for Simplivity, Hofdahl lived in Phoenix, Arizona, where he had lived for many years while working in sales for other technology companies. Hofdahl's territory originally consisted of Arizona, New Mexico, Colorado, Utah, and Wyoming. He had a base salary of $128, 000 plus commissions. His commission rate increased if he reached his quota, with further increases if he exceeded it. In 2014, Hofdahl sold approximately $1.9 million of Simplivity products which exceeded his quota by roughly 100%, and his total salary and commissions for the nine months that he worked for Simplivity was $315, 000. Of those sales nearly $1.5 million came from Colorado and Utah.

         In the fall of 2014, Bannigan informed his sales force that he would be adding sales representatives. This meant that the existing regional sales managers would have their regions reduced in geographic size. The existing managers would be able to complete sales with any prospective customers then in the pipeline, but could initiate no new sales calls in areas reassigned to other representatives. Hofdahl's territory was reduced to Arizona and New Mexico, at the same time his annual quota increased to $2.4 million. Hofdahl earned $276, 000 in 2015.

         Each quarter, Bannigan convened a quarterly business review meeting for all of the sales representatives working in the western region of the United States. At these meetings, Simplivity's chief executive officer and the chief sales officer for sales in the Western Hemisphere made a presentation concerning Simplivity that could include a discussion of planned product enhancements and the company's financial position. Each sales representative reviewed activity in his region, including marketing successes and instances in which a sale was lost to a competitor, and the new business pipeline. There was also a discussion of the strengths and weaknesses of Simplivity's and competitors' products and sales approaches that had been successful and those that had not worked. The last quarterly review that Hofdahl attended was February 18 and 19, 2016.

         In 2015, Hofdahl's sales were generally in line with his quota requirements through the third quarter (he recorded 102% of quota in Q3), but he did very poorly in the fourth quarter, closing less than $100, 000 of sales. Hofdahl attributed this fall-off to the loss of Utah and Colorado and his view, based on twenty years of technology sales in the southwest, that Arizona-based companies were slow to adopt new technologies. He also attributed his poor performance to personal issues related to a post-divorce child custody dispute with his former wife that began in October.

         In late November 2015, he had a meeting with Martin Sanders, Simplivity's vice president for sales in the Americas. Sanders had also known Hofdahl for many years and worked with him at EMC. Indeed, Sanders had called on Hofdahl for his impressions regarding Simplivity and a reference, before Sanders accepted his position with Simplivity in July 2014. At the meeting, Sanders expressed concern regarding Hofdahl's productivity decline and also about the fact that sales that Hofdahl had reported as completed, apparently in the third quarter, had to be " debooked, " a very serious matter to Sanders. Sanders was discouraging about the likelihood that Hofdahl could be promoted to a management position in the near future, but encouraged Hofdahl to work hard and make better inroads in the Arizona market. At the meeting, Hofdahl explained that his work had been impacted by the custody dispute, but did not complain about the reduction of the size of his territory.

         The court finds that it was not unusual for a growing company like Simplivity that was selling a product that was an emerging, " disruptive, " technology to increase its sales force as it matured which, of necessity, would decrease the geographic area assigned to existing sales representatives. A regional sales representative, like Hofdahl, could hope that as the sales force increased in his region, he could move into a position in which he would begin to manage other representatives. However, Hofdahl was neither promised a promotion nor that his geographic region would not be reduced as the company's sales grew.

         In late 2015, Andrew Perry, who had also worked with Hofdahl in the past, called to recruit Hofdahl to join Maxta, Inc. Maxta was a small software company, fifty or so employees, that was also trying to sell products in the hyperconverged market space. (The difference between the " solution" being sold by Maxta and Simplivity's products is discussed below.) Perry was the global sales director for Maxta, and offered the position of director of United States sales to Hofdahl. In addition to sales, Hofdahl's job would include building and training a U.S. sales force.

         Hofdahl told Bannigan about Perry's offer and in mid-March 2016 explained that he was leaning toward accepting it. Hofdahl was then about to leave for vacation, and Bannigan suggested that Hofdahl think through the matter while on vacation before making a decision. When Hofdahl returned, he told Bannigan that he thought it was best for him to start fresh at Maxta. It would be an ...


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