October 1, 2019.
N.E.3d 1210] CIVIL ACTION commenced in the Superior Court
Department on November 21, 2017. The case was heard by
Mitchell H. Kaplan, J.
Supreme Judicial Court on its own initiative transferred the
case from the Appeals Court.
M. McGovern (Robert M. Shaw also present), Boston, for the
OConnell (Brian K. Lee also present), Boston, for the
Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.
issue in the instant case is an "anti-raiding"
restrictive covenant entered into between an automotive
dealership group and a former executive and minority owner.
The provision at issue prohibited defendant Matthew McGovern
from soliciting or hiring employees from his former company
for a defined period of time. The restriction was designed to
prevent McGovern from "raiding" the company by
targeting and soliciting key employees to work for him. In
spite of this provision, McGovern went on to hire numerous
employees from his former company in breach of the
restrictive covenant. This suit quickly followed.
judge in the Superior Court concluded that the restrictive
covenant at issue was enforceable. He determined that, in the
case at bar, the anti-raiding purpose of the provision
constituted a legitimate business interest. The judge further
concluded that McGovern had committed a breach of the
covenant by hiring at least three employees from his former
company. Further, the judge found that McGovern had
misrepresented the nature of a transaction to the court in
order to obfuscate his violation of the restrictive covenant.
The judge declined to enjoin the three employees McGovern had
hired from continuing to work [136 N.E.3d 1211] for him.
Instead, the judge issued injunctive relief extending the
length of the restrictive covenant for one additional year
beyond the end date provided for in the contract. On appeal,
the parties contest whether such a provision is necessary to
protect a legitimate business interest. They also disagree as
to whether the judge may use the courts equitable powers to
extend the length of the restrictive covenant beyond the
terms of the contract.
conclude that, in the factual circumstances of this case, the
restrictive covenant was necessary to protect a legitimate
business interest. In reaching that conclusion, we observe
that the restrictive covenant at issue is more properly
considered as arising from the sale of a business rather than
from an employment agreement, and thus is to be more
clear from the record below, and at this point appears
undisputed, that the defendant committed a breach of the
anti-raiding provision. However, the equitable remedy
fashioned by the trial judge, which expanded the restrictive
covenant beyond its plain terms, constituted an abuse of
discretion where, as here, the plaintiffs had not yet
attempted to calculate monetary damages. As a matter of
public policy, we strongly disfavor restrictive covenants,
and the use of an equitable remedy to extend such a
restriction beyond the plain terms of the contract, even in
the context of a sale of a business, was not warranted
without a finding that damages would be inadequate.
summarize the facts as found by the trial
judge, supplemented by uncontested facts from
the record. See Connor v. Benedict, 481 Mass. 567,
568, 118 N.E.3d 96 (2019).
November 2007, David Rosenberg founded Prime Motor Group
(Prime) with McGovern and David Abrams. The
company was a closely held corporation created to manage a
number of retail automobile dealerships in New England.
Abrams was a friend of Rosenberg, and his company, Abrams
Capital, became the majority shareholder in Prime. Rosenberg,
Rosenbergs father, and McGovern became minority
shareholders. McGovern was initially employed as Primes
chief financial officer. He later became the vice-president
of operations. Rosenberg worked as the companys chief
executive officer and president.
2015, disagreements arose among Rosenberg, Abrams, and
McGovern in relation to a decision to sell the company. In
February 2016, these disagreements led Abrams and Rosenberg
to terminate McGoverns employment. At the time of his
termination, McGovern was not subject to a noncompete
agreement. McGovern also did not have a right to redeem his
minority interest in Prime upon termination. As this was a
closely held corporation, however, he was owed fiduciary
duties. See Wilkes v. Springside Nursing Home, Inc.,
370 Mass. 842, 850, 353 N.E.2d 657 (1976).
Sale of McGoverns interest in Prime.
time of McGoverns termination, Rosenberg offered to purchase
McGoverns minority interest. Because Prime was a closely
McGoverns minority interest was illiquid. Thus, Rosenberg
only offered to purchase McGoverns [136 N.E.3d 1212]
interest subject to a thirty percent discount on its fair
market value. Rosenberg also wanted McGovern to agree to a
five-year nonsolicitation provision. McGovern rejected the
and Rosenberg subsequently took steps to pressure McGovern to
sell his interest in Prime prior to an expected liquidity
event. First, they amended Primes operating agreement to
remove a provision that allowed for the distribution of
profits sufficient to cover the owners tax liabilities. Such
provisions are commonplace, and without it, McGovern faced a
tax liability of between $500,000 and $600,000 for the 2015
tax year. Additionally, Abrams and Rosenberg denied McGovern
access to Primes financial information, leaving McGovern
unable to calculate his expected tax obligation for the 2016
tax year. Abrams and Rosenberg also demanded that McGovern
and his wife return the company vehicles they had been using
and threatened to report McGovern to the authorities as being
in possession of stolen automobiles. As the trial judge
remarked, these tactics amounted to Rosenberg and Abrams
applying "as much pressure as they could manage to put
on [McGovern] to take the best deal they could get" in
purchasing McGoverns minority stake before the companys
anticipated liquidity event.
same time that Abrams and Rosenberg were pressuring McGovern
to sell his interest in Prime, McGovern was in the process of
starting his own competing automotive group, McGovern Motors.
McGovern was thus short on cash both to cover his tax
liability and to fund his new business. Due to this financial
pressure, McGovern entered into negotiations with Abrams and
Rosenberg to sell his interest in Prime. McGovern was
represented by counsel in these negotiations, as was Prime.
Abrams, and Rosenberg eventually reached an agreement to
repurchase McGoverns interest in the company in October 2016
(2016 repurchase agreement). Pursuant to the agreement,
Primes other owners would buy out McGoverns minority share
based on a June 2016 valuation. According to Rosenbergs
testimony at trial, Rosenberg and Abrams agreed not to
discount the value of McGoverns ownership interest, despite
the fact that Prime was a closely held corporation. McGovern
was instead given the full value of his minority interest, as
calculated by the June 2016 valuation. In exchange for
receiving the full value of
his interest, McGovern agreed to an eighteen-month
restrictive covenant. Specifically, McGovern agreed not to
directly or indirectly "hire or solicit any employee or
consultant of [Prime] or encourage any such employee or
consultant to leave such employment or hire any such employee
or consultant who has left such employment, except pursuant
to a general solicitation which is not directed specifically
to any such employees." This restrictive covenant
was set to expire in April 2018.
Post-2016 repurchase agreement hiring activities and
signing of 2017 agreement.
leaving Prime, McGovern worked to develop McGovern Motors,
which came to comprise six dealerships. Despite agreeing to
the restrictive covenant contained within the 2016 repurchase
agreement, McGovern went on to hire at [136 N.E.3d 1213]
least fifteen former Prime employees to work at McGovern
Motors. Upon learning that McGovern had hired former Prime
employees, Rosenberg threatened to sue. McGovern denied
engaging in any specific solicitation of Prime employees,
insisting that his hiring practices fell within the general
solicitation exception to the 2016 restrictive covenant. The
parties eventually agreed to enter into a new agreement in
February 2017 (2017 agreement), which, according to its
terms, was entered into "[i]n order to avoid the cost of
litigation relating to this dispute."
Pursuant to the 2017 agreement, Rosenberg and Abrams agreed
not to pursue legal action against McGovern for violating the
2016 repurchase agreements restrictive covenant, provided
that he abide by the terms of the 2017 agreement. In
exchange, McGovern agreed to enter into a more robust
restrictive covenant that would be extended in duration for
four additional months, ending in August 2018.
to the 2017 agreements restrictive covenant, McGovern
agreed, inter alia, not to "directly or indirectly ...
solicit for hire or hire" Prime employees, "or
encourage [Prime employees]
to leave the employment" of Prime through August 8,
2018. Notably, it did not include an
exception for general solicitation, as the 2016 repurchase
agreement had. With regard to available remedies, the 2017
agreement provided that
"in the event McGovern or McGovern Motors breaches [the
2017 agreement], Prime shall be entitled to all damages and
remedies available under applicable law, and further,
McGovern and McGovern Motors consent to the entry of
preliminary or permanent injunctive relief as a remedy for a
violation of this Agreement, without the need to prove
irreparable harm or to post a bond."
2017 agreement also stated that, subject to the amendment to
the 2016 repurchase agreements restrictive covenant,
"all other provisions of the [2016 repurchase agreement]
shall remain in full force and effect." Despite the
terms of the 2017 agreement, ...