Producer’s Non-Compete Void Under New 2018 Law
Since October 1, 2018, Massachusetts law has regulated employee covenants not to compete. Under parts of the new law, employers must give employees ten days to consider signing a covenant not to compete and must advise the employees about seeking legal counsel.
A recent Business Litigation Session decision denied an insurance agency’s attempt to enforce a covenant not to compete that violated the new rules. In 2020, the agency had a producer sign a covenant not to compete without allowing a ten-day review or advising about obtaining a lawyer’s opinion.
In this case, the agency had included the covenant not to compete as part of a contract that changed the producer’s commissions and supposedly purchased the producer’s so-called ownership interests in the accounts he had produced for the agency. The producer signed the new contract the day he received it. Subsequently, the producer explained he signed the contract to keep his job as the agency had fired seven of its fifteen employees a few days before giving him the contract to sign.
A year after supposedly buying the producer’s book of business, the agency fired the producer. While the producer was still within the term of the covenant not to compete that he had signed, an agency account generating over $100 thousand in annual commissions decided to follow the fired producer to his new agency. The producer’s former agency claimed it had purchased the account and that the producer had breached the purchase agreement’s covenant not to compete and sued the producer and their new agency for an injunction and damages.
The Business Litigation Session in Suffolk Superior Court summarily denied any preliminary injunctions to the agency. The Court found that the producer had established that the covenant not to compete did not arise out of a sale of the producer’s ownership interest as the agency claimed. Instead, the Court ruled the agency’s covenant not to compete with the producer violated the 2018 law and was unenforceable under Massachusetts law.
The Court also denied any relief based on the agency’s claim that the producer and his new agency had solicited a broker of record letter. The evidence showed that the insured independently decided to follow the producer.
After the Court issued its decision, the former agency gave up and filed a voluntary dismissal of its suit with prejudice.
An insurance account producing ten (10%) percent of the agency’s commission income
Ralph O. Lambert, commonly known as Jack Lambert, worked as an insurance producer for the Lighthouse Insurance Agency, Ltd. (“Lighthouse”), located in Dorchester, MA, from 2013 until 2021. He now works for Integrated Insurance Solutions, LLC, a Framingham, MA agency.
Lighthouse is, according to its owner and president, Brian Boucher, “a multi-service insurance agency, focusing on the taxi and transit industry as well as personal lines. Lighthouse currently has 5 employees. In 2021 Lighthouse had total gross revenues of $1.3 million.”
While at Lighthouse, Lambert’s compensation consisted solely of commission income based on the insurance accounts he produced. Lighthouse paid him fifty (50%) percent of the commission on all new accounts and forty (40%) percent of all his account’s renewal commissions.
Lambert was an employee of Lighthouse. He did not own the rights to the accounts he produced, and he had no ownership interest in Lighthouse.
One of Lighthouse’s largest clients was a cannabis conglomerate, INSA. According to Mr. Boucher, INSA provided $105,000, ten (10%) percent of Lighthouse’s commission income.
Insuring cannabis risks is a complex process that many insurance agencies would have difficulty in handling. In 2015, Lambert connected with INSA at a cannabis trade show and brought the account to Lighthouse in 2016. He serviced this account while at Lighthouse and established a relationship with the company’s officers and owners.
The October account sale agreement with Lambert’s non-competition agreement
In early October 2020, Mr. Boucher fired seven Lighthouse employees on the same day. A day or two after these firings, Mr. Boucher delivered a written employment contract to Lambert and asked him to sign it.
The proposed contract took Lambert off of his commission-only compensation. It gave him a fixed salary of $80,000 per year plus forty (40%) percent of the commission received by Lighthouse on any new accounts produced by Lambert.
Although Lambert did not own any rights in the accounts that he had produced for Lighthouse, the new contract proposed to purchase Lambert’s book of business for the accounts that he had produced by paying Lambert twenty (20%) percent of the total commissions earned by Lighthouse on Lambert’s accounts for the previous twelve months. The twenty was to be paid in two installments: fifteen (15%) percent upon the signing of the agreement and the remaining five (%) percent twelve months after the signing of the agreement.
The new agreement, however, included a covenant not to compete and an anti-piracy or non-solicitation agreement that would continue for one year after his employment with Lighthouse that stated:
During the term of the Agreement, and for a period of one (1) year after the termination of this Agreement, Lambert shall not, without Lighthouse’s express prior written consent, directly or indirectly solicit or write insurance business to or for any other person or firm for compensation or engage in any activity competitive with or adverse to Lighthouse’s business or practice
Similarly, the anti-piracy agreement in the new contract provided that:
[Lambert will not] directly or indirectly either for himself or for any other commercial enterprise, solicit, divert, or take away or attempt to solicit, divert, or take away, accept as customers any of Lighthouse’s and/or Related Companies’ customers, businesses, or prospective customers in existence at the time of termination of such employment on behalf of any organization competitive to Lighthouse.
The final covenant of the new contract provided that Lambert would never disclose or use any confidential information that belonged to Lighthouse, except on behalf of Lighthouse.
Lambert signs the new contract to keep his job
Lambert signed the contract on October 8, 2020, the same day Mr. Boucher presented it to him. There was no negotiation. According to Lambert, “Given that Mr. Boucher had just fired 7 of my coworkers, I signed the 2020 Agreement because I didn’t think I had much choice if I wanted to keep my job.”
He was not told that he could have any time to review the new contract before signing or that he would be able to have an attorney review the agreement before signing.
In accordance with the terms of the 2020 Agreement, Lighthouse paid me $18,000 upon signing. Under the terms of the 2020 Agreement, Lighthouse was obligated to pay me the remaining percentage of commissions in October 2021.
Lighthouse paid Lambert $18,000 in October 2020 following the signing of the contract and another $11,000 a year later in accord with the agreement.
Lighthouse fires Lambert, and INSA gives Lambert a broker of record letter
Lighthouse fired Lambert on July 15, 2021. Mr. Boucher claimed that the firing was for cause. Lambert, in an affidavit, stated that Mr. Boucher unilaterally reduced his salary from $85,000 to $65,000 and that they agreed for him to be laid off.
In March 2022, accepted a position with Integrated as an insurance producer.
Consistent with his non-solicitation agreement with Lighthouse, he did not solicit INSA after his employment with Lighthouse terminated. However, in early April, INSA’s CEO Peter Gallagher phoned Lambert and told him that he wanted to move his business from Lighthouse.
Lambert had had a relationship with INSA over the years as a Lighthouse employee and had helped INSA build its insurance and risk management programs. Mr. Gallagher said that INSA wanted to continue working with him.
On April 8, 2022, ISNA gave Integrated a broker of record letter.
On May 3, 2022, Lighthouse learned that INSA had given Integrated a broker of record letter and that Lighthouse’s business relationship with INSA was finished.
Lighthouse’s demand letter to Integrated about Lambert’s covenant not to compete
On May 12, 2022, Lighthouse’s counsel sent Integrated a cease and desist letter claiming that Lambert was bound by a covenant not to compete and a non-solicitation agreement. The attorney for Lighthouse provided Integrated with all relevant documents and agreements and claimed that Integrated accepting INSA as a new account was a direct violation of Lambert’s agreements with Lighthouse.
Integrated’s response that Lighthouse’s demands were “patently absurd”
Integrated’s attorney’s response five days later, on May 17, 2022, was direct: “[F]or the reasons set forth below, your client’s demands are patently absurd, and neither [Integrated] nor Mr. Lambert will agree to them!”
The response claimed [with justification] that Lighthouse’s covenant not to compete was legally void, stating:
First, the Agreement does not include the statutorily mandated notice of Mr. Lambert’s right to counsel prior to signing.Second, Lighthouse did not provide Mr. Lambert with the required legal notice, which required an existing employee to receive ten (10) business days to consider a non-compete.Third, under the 2018 law change, non-competes are not enforceable against employees who are laid off or terminated without cause, as Mr. Lambert claimed he was.
Lighthouse files for an injunction and damages against Lambert and Intergrated
Lighthouse responded rapidly to Integrated’s attorney’s disparagement of its claims against Lambert and his current employer, Integrated Insurance Solutions, LLC. (“Integrated”).
On May 26, 2022, Lighthouse filed a civil action in the Business Litigation Session sitting in Boston against Lambert and Integrated, claiming (1) breach of contract against Lambert, (2) breach of the implied covenant of good faith and fair dealing against Lambert, (3) tortious interference with advantageous business relations against Integrated, and (4) violations of M.G.L. c. 93A against Integrated, seeking to recover damages in excess of $145,000 before doubling or trebling.
The complaint also sought a preliminary and permanent injunction:
Enjoining the Defendants from accepting, servicing, soliciting, directly or indirectly, of any Lighthouse clients, including, but not limited to INSA, Inc., INSA, LLC, D&D Accounting, and GPMII, LLC (collectively “INSA”) and any other clients within Lambert’s book of business which was sold to Lighthouse pursuant to the 2020 Agreement.Enjoining Lambert from writing insurance business to or for any other person or firm, including, but not limited to Integrated, for compensation or engage in any activity competitive with or adverse to Lighthouse’s business or practice, whether alone, as a partner, or as an officer, director, employee, or shareholder of any other corporation, including, but not limited to Integrated, or as a trustee, a fiduciary, or other representatives of any other entity, including, but not limited to Integrated
Court decides Lighthouse’s claims by denying any injunctive relief
Courts hear preliminary injunction requests expeditiously. In Lighthouse’s suit, the Business Litigation Session judge heard the preliminary injunction application on June 6, 2022, less than two weeks after Lighthouse filed its complaint.
The court decided the matter based on the factual affidavits of Mr. Boucher and Mr. Lambert. Both sides filed legal memoranda, and counsel for each argued for and against the issuance of preliminary injunctions.
Four days later, the Court entered its Memorandum and Order denying Lighthouse’s request for injunctive relief on all counts.
The decision made findings of fact and rulings of law that ended Lighthouse’s lawsuit as a practical matter.
Covenant not to compete related to employment and not the sale of a business
In the first instance, the Court found that since October 1, 2018, G.L. c. 149, § 24L has applied to covenants not to compete given to employees to sign.
This statute states that employees must receive the agreement at least ten business days before the agreement is to be effective, and the agreement must expressly state that the employee has the right to consult with counsel before signing it.
The Court further found that the no-competition agreement that Lambert and Lighthouse entered into in October 2020 was invalid and unenforceable because, “by its express terms, it took effect immediately without Lambert receiving at least ten days advance notice, and because the new employment agreement does not expressly state that Lambert had the right to confer with an attorney before entering into the no-competition agreement.”
The Court rejected Lighthouse’s claim that the October 2020 agreement was a bona fide sale of a business entity or of the majority of the assets of a business entity which would not be subject to the statute.
The Court concluded that the covenant not to compete and the non-solicitation at issue arose in an employment context, not in the context of the sale of a business. The contract offered by Lighthouse and accepted by Lambert was labeled as an “Employment Agreement.” The non-solicitation and no-competition covenants were conditions of Lambert’s continued employment by Lighthouse and not covenants resulting from the sale of a business.
The non-solicitation agreement cannot prohibit unsolicited offers based on personal goodwill
The Court accepted Lambert’s undisputed affidavit that he did nothing to solicit INSA after his employment with Lighthouse ended and that INSA approached him and said they wanted him to keep servicing their insurance account.
Based on that finding, it appeared to the Court that the goodwill in this client relationship belonged to Lambert, not to Lighthouse. The Court noted that Lighthouse, in an employment context, may not enforce its restrictive covenant to deprive Lambert of goodwill that belongs to him.
Finally, the Court pointed out that Lighthouse had not presented any evidence that Lambert has violated the non-solicitation covenant in any way other than accepting INSA’s choice to transfer its insurance business to Integrated.
On that basis, the lack of evidence that Lambert used or disclosed any of Lighthouse’s confidential information made the Court conclude that Lighthouse was not entitled to a preliminary injunction to enforce the non-solicitation covenant.
The claims against Integrated fail because there is no claim against Lambert
Based on the denial of injunctive relief against Lambert because Lighthouse had no likelihood to prove that Lambert violated his non-competition and non-solicitation covenants, the Court ruled that Lighthouse was unlikely to succeed on its claims against Integrated, and therefore Lighthouse was not entitled to injunctive relief against Lighthouse.
The final conclusion of the Court and dismissal by Lighthouse of its suit
The final order of the Court that “Plaintiff’s motion for a preliminary injunction is denied” (Emphasis in original) would ordinarily not end litigation like this. However, in this case, it did.
On June 24, 2022, new counsel for Lighthouse filed their appearance, and Lighthouse’s prior attorneys withdrew their appearances.
The same day, the new attorney filed a voluntary dismissal of Lighthouse’s lawsuit with prejudice ending the lawsuit.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
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