Opinion
CIVIL ACTION NO. 07-10584-GAO.
December 7, 2007
OPINION AND ORDER
In this case, involving a dispute over the enforceability of non-compete and forfeiture provisions of an employment agreement, the relevant facts are undisputed. On February 16, 2005, the defendant, Anthony Floreano, accepted a job with the plaintiff, GES Exposition Services, Incorporated ("GES"), a wholly owned subsidiary of Viad Corporation, as General Manager of GES's Northeast Division. His offer letter mentioned his eligibility to participate in GES's "Line of Business Incentive Plan" ("Incentive Plan"), but the letter itself did not spell out the specifics of the Incentive Plan. The Incentive Plan included a forfeiture clause requiring participating employees to repay any amounts paid to them as bonuses within the past year if they were to violate the terms of a non-compete clause also included in the Incentive Plan. When he was negotiating his offer of employment with GES, Floreano discussed the Incentive Plan generally with GES's Regional Vice President, but neither the forfeiture clause nor the non-compete clause within the Incentive Plan were specifically discussed. (Joint Notice of Stipulated Facts ¶ 5.) Prior to his commencement of employment, Floreano did not request a copy of the full terms and conditions of the Incentive Plan. (Id. ¶ 6.)
In May 2005, Floreano received the Incentive Plan package which disclosed the full terms and conditions of the bonus plan. He voiced his objections to the forfeiture provision to GES's National Director of Human Resources and Labor Relations, who told Floreano that he would be ineligible to receive a bonus unless he accepted the forfeiture provision. Unwilling to forego eligibility for a bonus, Floreano signed a form acknowledging his willingness to be bound by the terms of the Incentive Plan. A year later, he refused to sign a similar acknowledgment. Floreano received two bonus payments — one on March 7, 2006 in the amount of $14,600 and a second on March 7, 2007 in the amount of $85,100.
On March 20, 2007, two weeks after receiving his second bonus, Floreano terminated his employment with GES. Shortly thereafter, he began employment with a competitor of GES, The Freeman Companies ("Freeman"), as General Manager for the Boston/New England market. (Id. ¶ 26.) As a result, GES claims that Floreano breached the non-compete clause in the Incentive Plan and pursuant to the forfeiture clause is required to repay to GES the $85,100 bonus he received in 2007. The parties have filed cross-motions for summary judgment.
As a preliminary issue, there is a question as to what State's law applies to the controversy. The 2005 Acknowledgment signed by Floreano states that "these incentive payments are governed under the applicable state laws of Nevada." However, the Acknowledgment also states that in the event of "any inconsistency" between the Incentive Plan and the Acknowledgment, the terms and provisions of the Incentive Plan shall govern. Because the Incentive Plan itself contains no choice of law provision, the Acknowledgment's reference to Nevada state law may be regarded as an "inconsistency" with the Plan so that the "no choice" silence of the Plan overrides that Acknowledgment's explicit choice.
The parties both refer to Massachusetts law. That is consistent with the general understanding that a federal court exercising jurisdiction based on diversity of citizenship ordinarily looks to the law of the forum State for rules of decision, including choice of law rules. See Okmyansky v. Herbalife Int'l of Am., Inc., 415 F.3d 154, 158 (1st Cir. 2005) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). In the absence of a controlling choice of law provision, Massachusetts courts apply the substantive law of the State that has the most significant relationship to the transaction. Bushkin Assocs., Inc. v. Raytheon Co., 473 N.E.2d 662, 668 (Mass. 1985).
Here, Floreano is a Massachusetts resident who conducted business on behalf of GES throughout the Northeast, including in Massachusetts. Furthermore, Floreano's current employment with Freeman is centered in Massachusetts. Besides Massachusetts, New Jersey would also have an interest because Floreano conducted business for GES out of Teterboro, New Jersey. However, based on the relative weight of the various considerations, I conclude, as the parties have apparently implicitly done, that Massachusetts has the most significant relationship to this case, and therefore that Massachusetts law should govern the resolution of the parties' dispute.
Floreano presents three arguments against GES's claim for the return of the 2007 bonus. First, he argues that forfeiture clause is not enforceable because it protects no legitimate business interest of GES and thus serves only a punitive purpose. Second, Floreano argues that the entire Incentive Plan cannot be enforced for want of consideration. Third, Floreano argues that the non-compete clause is unreasonable because it is too broad in scope.
1. Enforceability of the Forfeiture Clause
The relevant portion of the forfeiture clause in the Incentive Plan states:
If, at any time within two (2) years following the date of a participant's termination of employment with Viad or any of its Affiliates, such participant engages in any conduct agreed to be avoided in accordance with paragraph V A, then all bonuses paid under this Plan to such participant during the last 12 months of employment shall be returned or otherwise repaid by such participant to Viad.
Viad Corp Management Incentive Plan, Pursuant to the 1997 Viad Corp Omnibus Incentive Plan, § V(A)(3) (as amended March 29, 2005). Under Massachusetts law, a forfeiture for competition clause is enforceable "to the extent that it serves an appropriate interest of the former employer and is otherwise reasonable. . . .[and] only to the extent that the restraint is reasonable." Cheney v. Automatic Sprinkler Corp. of Am., 385 N.E.2d 961, 965 (Mass. 1979); Wilson v. Clarke, 470 F.2d 1218, 1223 (1st Cir. 1972) ("[T]he employer, in appropriate circumstances, might require the employee to reimburse it for a sum, or under a formula, reasonably related to what it cost the employer to train him, or to retrain a replacement, or the like.").
Floreano argues that GES has demonstrated no protectable business interest. In response, GES points out that some of Floreano's tasks and duties while employed with GES included negotiating contracts on behalf of GES and developing new trade show contacts with industry suppliers and union personnel. It is undisputed that Floreano's responsibilities at Freedman are similar to his responsibilities at GES. For example, at least one GES customer whose contract Floreano negotiated is also a customer of his new employer, Freedman. (Joint Notice of Stipulated Facts ¶ 42.) Furthermore, Floreano admits that "he might utilize routine contacts he met at GES in his employment with Freedman . . .but [that] he does not believe that his use of such contacts will cause any harm to GES." (Id. ¶ 44.) Massachusetts courts have recognized that good will in the context of customer relationships may be a legitimate business interest of the employer. New England Canteen Serv. Inc. v. Ashley, 363 N.E.2d 526, 528 (Mass. 1977). Although Floreano seeks to minimize the extent of his personal contacts with customers, potential customers, or other external persons, the undisputed record shows that Floreano did in fact develop customer relationships which would be in the legitimate interest of GES to protect under the Massachusetts cases.
Apart from protecting customer relationships, Cheney recognized that retention of key employees could be another protectable business interest. 385 N.E.2d at 965 ("We do not discount, however, the possibility that a financial inducement to an employee, especially a key employee, to continue to work for his employer might be reasonable in particular instances."). Here, Floreano can safely be characterized as a "key employee" at GES as only "key executives" are eligible for the Incentive Plan. See Incentive Plan § III(D) (limiting participant eligibility to "Executive Officers" as used in § 16(b) of the Securities Exchange Act and "other personnel . . . limited only to those executives who occupy a position in which they can significantly affect operating results. . . ."). Furthermore, the Incentive Plan promotes GES's interest in retaining well-performing key executives by providing the yearly bonus as "an incentive [for key executives] to achieve goals as set forth under this Plan for each calendar year (Plan Year) for their respective companies and to provide effective management and leadership to that end." Id. § I.
Beyond protecting a legitimate business interest of GES, the forfeiture clause is also reasonable in its effect. Cheney says that "the amount and nature of the forfeiture and the nature of the employee's duties and responsibilities in his former and current employment are important" considerations when determining the reasonableness of a forfeiture provision. 385 N.E.2d at 965. Here, the clause only seeks repayment of the employee's past year's bonus — not his salary. Furthermore, the forfeiture clause is not triggered in the case of every termination but only those situations where the covenant not to compete would also be applicable and violated. See id. ("If the former employee is not working in circumstances in which a covenant not to compete would be enforceable, the burden of justification of the forfeiture becomes particularly onerous on the former employee."). On the other side of the equation, many of the typical concerns regarding the effect on the employee of enforcement of the forfeiture clause are not at play in this case. This is not a situation where the powerless employee was forced to accept unfavorable terms in order to secure employment. See id. Floreano was not required to agree to the non-compete and forfeiture clauses as part of his base salary package or offer of employment. Rather these terms were incorporated as part of the optional bonus plan, which Floreano could have rejected with no other consequence. And, of course, this is not a case where the employer fired an employee and then sought in addition to recover past payments to the employee. Floreano left GES voluntarily within weeks of receiving his bonus to accept employment with Freeman. The undisputed facts show that he was fully aware of the ramifications of his leaving under the non-compete clause and the forfeiture provision of the Incentive Plan. Cf. Kroeger v. Stop Shop Companies, 432 N.E.2d 566, 572 (Mass.App.Ct. 1982).
In these circumstances, the balance of equities leads me to conclude that the forfeiture clause is reasonable and enforceable.
2. Enforceability of the Incentive Plan as a Whole
Floreano claims that GES offered no new consideration for his promise not to compete, given by acknowledging his acceptance of the Incentive Plan, because the promise of a bonus had been already included in his initial offer of employment. This argument mischaracterizes the offer of employment extended by GES. The initial offer of employment did not include a promise for a bonus, but rather a promise of eligibility for a participation in a bonus program. His offer letter simply said, "[Floreano] will be eligible for participation in the company's Line of Business Incentive Plan" and "[a]s with any Viad Corp subsidiary incentive plan, such bonus plans are discretionary." Letter from Anne Hanson, Executive Vice President of Human Resources and Labor Relations, GES Exposition Services to Anthony Floreano (Feb. 11, 2005) (Joint Notice of Stipulated Facts, Ex. 2). A promise to consider one for eligibility into an incentive program is distinct from a promise to pay a bonus. The Incentive Plan is supported by adequate consideration. In exchange for Floreano's promise to comply with the terms of the Incentive Plan, including the non-compete and forfeiture clauses, GES promised to pay Floreano a bonus according to the terms set forth within the Incentive Plan.
Moreover, Floreano accepted the terms of the Incentive Plan when he signed the Acknowledgment Form in 2005. Even if he did not affirmatively sign a second acknowledgment of his acceptance of the Incentive Plan for 2006, he accepted the bonus payment for that year. His acceptance of the benefit of the Plan binds him to its burden.
3. Enforceability of the Non-Compete Clause
Finally, Floreano argues that the non-compete clause (which triggers the forfeiture clause) is unenforceable because it is too broad in geographic scope. The non-compete clause prohibits Floreano from working for a competitor of GES anywhere in the United States for a period of two years. Floreano is correct that Massachusetts courts will not enforce unreasonably broad non-compete clauses. See, e.g., Marine Contractors Co. v. Hurley, 310 N.E.2d 915, 920 (Mass. 1974) ("While it is true that agreements not to compete will be enforced only in so far as they are reasonable, what is reasonable depends on the facts of each case.") (citations omitted). However, Massachusetts courts have also been clear that if faced with a covenant not to compete that is unreasonable, courts can enforce it to the extent it would be reasonable. See, e.g., All Stainless, Inc. v. Colby, 308 N.E.2d 481, 486-87 (Mass. 1974) (finding that the geographical limitation as written by the employer was "far too broad," but then narrowing and enforcing the non-compete clause to bar employee from working for a competition in his former sales territory). Thus, although the non-compete clause as originally written is likely too broad in geographic scope, it is not so when narrowed to prohibit Floreano from working for a GES competitor within only those geographic areas that Floreano covered while in the employ of GES. That narrowing encompasses his employment at Freeman.
The evidence shows that Floreano willingly agreed to be bound by the terms of the Incentive Plan. For the foregoing reasons, I conclude that the overall Incentive Plan, including both the non-compete and forfeiture clauses, is valid and enforceable. Furthermore, I conclude that the defendant is in breach of the Incentive Plan.
Therefore, I GRANT the plaintiff's motion for summary judgment (dkt. no. 11) and DENY the defendant's cross-motion for summary judgment (dkt. no. 12). Judgment shall enter in favor of the plaintiff in the amount of the 2007 bonus of $85,100.
It is SO ORDERED.