Automile Holdings, LLC v. McGovern

483 Mass. 797

136 N.E.3d 1207

AUTOMILE HOLDINGS, LLC, & others¹

v.Matthew MCGOVERN & others.²

SJC-12740

Supreme Judicial Court of Massachusetts, Suffolk..

Argued October 1, 2019.

Decided January 14, 2020.

Benjamin M. McGovern (Robert M. Shaw also present), Boston, for the defendants.

Liam T. O'Connell (Brian K. Lee also present), Boston, for the plaintiffs.

Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.

KAFKER, J.

At 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.

A 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 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 court's equitable powers to extend the length of the restrictive covenant beyond the terms of the contract.

We 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 liberally construed.

It is 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.

1. Facts. We summarize the facts as found by the trial judge,³ supplemented by uncontested facts from the record. See Connor v. Benedict, 481 Mass. 567, 568, 118 N.E.3d 96 (2019).

a. Background. In November 2007, David Rosenberg founded Prime Motor Group (Prime)⁴ 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, Rosenberg's father, and McGovern became minority shareholders. McGovern was initially employed as Prime's chief financial officer. He later became the vice-president of operations. Rosenberg worked as the company's chief executive officer and president.

In 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 McGovern's 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).

b. Sale of McGovern's interest in Prime. At the time of McGovern's termination, Rosenberg offered to purchase McGovern's minority interest. Because Prime was a closely held corporation, McGovern's minority interest was illiquid. Thus, Rosenberg only offered to purchase McGovern's 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 offer.

Abrams and Rosenberg subsequently took steps to pressure McGovern to sell his interest in Prime prior to an expected liquidity event. First, they amended Prime's 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 Prime's 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 McGovern's minority stake before the company's anticipated liquidity event.

At the 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.

McGovern, Abrams, and Rosenberg eventually reached an agreement to repurchase McGovern's interest in the company in October 2016 (2016 repurchase agreement). Pursuant to the agreement, Prime's other owners would buy out McGovern's minority share based on a June 2016 valuation. According to Rosenberg's testimony at trial, Rosenberg and Abrams agreed not to discount the value of McGovern's 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."⁵ This restrictive covenant was set to expire in April 2018.

c. Post-2016 repurchase agreement hiring activities and signing of 2017 agreement. After 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 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."⁶

Pursuant to the 2017 agreement, Rosenberg and Abrams agreed not to pursue legal action against McGovern for violating the 2016 repurchase agreement's 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.

Pursuant to the 2017 agreement's 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, 2018.⁷ 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."

The 2017 agreement also stated that, subject to the amendment to the 2016 repurchase agreement's restrictive covenant, "all other provisions of the [2016 repurchase agreement] shall remain in full force and effect." Despite the terms of the 2017 agreement,...