by Bethany Stevens
Massachusetts law has long provided two tools to suspend a person’s lawful access to firearms: a firearms licensing authority could suspend a person’s license to carry or possess a firearm if it found the person was unsuitable, or a court could — indeed, is required to — suspend a firearms license and order the surrender of the person’s firearms after finding a substantial likelihood of an immediate danger of abuse of a household or family member pursuant to G.L. c. 209A. Massachusetts has now added a third tool, modeled after “red flag” laws in other states, to allow seizure of the firearms of persons who present a risk to themselves or others. As of August 17, 2018, the District Court and Boston Municipal Court may now issue an “extreme risk protection order” to compel a person to immediately surrender firearms and ammunition on the petition of a household member, family member or licensing authority without the need for a finding of abuse. See G.L. c. 140, §§ 131R-131Z.
What is an Extreme Risk Protection Order?
An extreme risk protection order (sometimes referred to as an “ERPO”) immediately suspends a person’s license to carry or possess a firearm and directs the person to immediately surrender their firearms licenses, guns (including stun guns), and ammunition to the licensing authority in the municipality where the person resides. An ERPO may issue only upon a finding that the person “poses a risk of bodily injury to self or others by being in possession of a [firearms license] or having in his control, ownership or possession [guns or ammunition].” G.L. c. 140, § 131T(a). While the order is in effect, the respondent is disqualified from obtaining a firearms license and is prohibited from possessing a firearms license, gun or ammunition. A violation of the order is a misdemeanor criminal offense.
Who Can Seek an Order?
The new law allows a household or family member, defined as those phrases are used in G.L. c. 209A, to file a petition with the court upon “belie[f] that a person holding a license to carry firearms or a firearm identification card may pose a risk of causing bodily injury to self or others.” G.L. c. 140, § 131R. A petition may also be filed by the licensing authority where the respondent resides (defined as “the chief of police or the board or officer having control of the police in a city or town, or persons authorized by them,” G.L. c. 140, § 121). In some instances, the licensing authority where the respondent resides will not be the authority that actually issued the respondent’s firearms license(s) because a person could be licensed by the police department of the municipality in which the person works or because a person might move to a different municipality after licensing. G.L. c. 140, §§ 129B(1), 129B(11), and 131(d).
Individuals who are not family or household members may not petition a court for an ERPO, even though in appropriate instances they may seek a harassment protection order under G.L. c. 258E. Chapter 258E does not authorize a harassment prevention order to include an order to surrender firearms. J.C. v. J.H., 92 Mass. App. Ct. 224, 230 (2017). As a result, if an individual who is not a member of a license-holder’s family or household believes that a license-holder poses a risk to themselves or others, the individual should seek appropriate relief by reporting the information to an eligible ERPO petitioner.
Procedure to Issue an Order
The new law bears many procedural similarities to G.L. c. 209A. A petitioner who seeks an ERPO must file a petition signed under the pains and penalties of perjury. If on review the judge “finds reasonable cause to conclude that the respondent poses a risk of bodily injury to self or others” by possessing a firearms license, guns or ammunition, the judge may issue an emergency or temporary extreme risk protection order without first giving notice to the respondent. G.L. c. 140, § 131T(a). An emergency order issued during court hours is valid for only 10 days. Like an emergency order under c. 209A, an emergency ERPO issued after court hours by an on-call judge is valid only until the end of the next court day. If a petitioner seeks to have such an “after hours” emergency order extended beyond the next court day, the petitioner must appear during court hours for a hearing at the appropriate court with jurisdiction over the city or town where the respondent lives.
Because an ERPO suspends a person’s lawful access to guns and ammunition, an ERPO will not issue when the person has no license to suspend. Rather than issuing an ERPO, the court will provide the information to police to take whatever action is warranted when they learn information related to the illegal possession of firearms. If in these circumstances the petitioner is a household or family member concerned about their own safety, they should consider seeking a c. 209A order.
For an ERPO to be extended up to one year, the court must hold a hearing within ten days of the filing of the petition with notice to the respondent at least seven days prior to the hearing. The respondent can waive this notice period. If the respondent files an affidavit stating that guns are required in the performance of the respondent’s employment, the hearing must be held within two days of the petition being filed. At the hearing, the petitioner must establish by a preponderance of the evidence that the respondent poses a risk of bodily injury to self or others by possessing guns or ammunition. If the judge so finds, the judge must issue an order for up to one year. Either party may move to modify, suspend or terminate an active order. Appeals of ERPO proceedings may be taken to the Appeals Court just as c. 209A orders may be appealed.
Effect of an Order
Whenever a court issues an ERPO, the licensing authority and the criminal justice information service database (CJIS) must be notified. This triggers suspension of any Massachusetts firearms license and disqualifies the respondent from obtaining a new firearms license in Massachusetts. This is the same process that occurs when a c. 209A order issues: CJIS and licensing authorities are notified of c. 209A orders as such orders generally require immediate suspension of a firearms license and surrender of guns and ammunition. G.L. c. 209A, §§ 3B and 3C.
The new statute allowing courts to issue extreme risk protection orders does not replace a licensing authority’s ability to suspend a firearms license. Therefore, under G.L. c. 140, § 129B (firearm identification cards) or § 131 (licenses to carry), the chief of police who issued the license or their designee may still suspend a person’s license and require surrender of guns and ammunition upon finding the licensee “unsuitable.” This determination by the licensing authority results in immediate suspension of the firearms license without the need for a court ruling.
Restoration of Firearms License
While issuing an extreme risk protection order is a process separate from the licensing authority’s determination of suitability, the two processes converge upon an ERPO’s expiration or termination. After an ERPO is issued, a firearms license, guns, and ammunition may be returned to the respondent only after the licensing authority where the respondent resides determines that the respondent is suitable. A determination of unsuitability must be based either on reliable information that the person “has exhibited or engaged in behavior to suggest the [person] could potentially create a risk to public safety” or on “existing factors that suggest that the [person] could potentially create a risk to public safety.” G.L. c. 140, § 129B(1½)(d) . If denied reinstatement, a respondent presumably could seek judicial review under existing license appeal procedures, although the new statute does not explicitly provide for such judicial review.
Reports on the New Law’s Use
By December 31, 2018, we will learn more about the utility of this new law. The court must provide an annual statistical report on its use, including the number of petitions filed, petitions granted, and petitions that led to surrender of guns, as well as demographic information about respondents and petitioners. In the meantime, information about extreme risk protection orders and the forms a petitioner is required to file can be found on the court’s website.
Bethany Stevens is the Director of Legal Policy and Deputy General Counsel to the Administrative Office of the District Court, and is a member of the BBA’s Criminal Law Section Steering Committee. Previously, she served as the Deputy Chief of the Middlesex District Attorney’s Appeals Bureau where she litigated closed courtroom claims at the trial level as well as at the Appeals Court and Supreme Judicial Court.
Massachusetts High Court Rules Judges Can Require Sobriety as Part of Probation in Commonwealth v. EldredPosted: November 6, 2018
by Martha Coakley and Rachel Hutchinson
On July 16, 2018, the Massachusetts Supreme Judicial Court unanimously ruled in Commonwealth v. Eldred, 480 Mass. 90 (2018) that judges can require individuals with substance use disorders to remain drug-free as a condition of probation. Although the Court stressed that judges should consider the challenges of addiction, the Court nevertheless found that judges must also “have the authority to detain a defendant” who has violated probation by using drugs. Id. at 99. It appears that the SJC is the first state supreme court to reach and decide this issue.
I. The Addiction Debate
Remaining drug-free is an almost universal requirement of probation. Many courts, including specialty courts such as drug courts that take a public health approach to substance abuse, require offenders to stay clean, and respond to relapses with sanctions ranging from warnings to jail time. But as the opioid crisis has swept the nation, many have begun to question the central role that courts play in battles with substance abuse.
Eldred cut to the heart of this growing debate. The defendant, Julie Eldred, argued that requiring her to remain drug-free as a condition of probation violated her constitutional rights. According to Eldred, addiction is a chronic brain disease that interferes with one’s ability to abstain from drugs. Eldred argued that punishing addicts like herself for a relapse punishes them for something over which they have no control and negates willfulness. The prosecution disagreed, arguing that addiction is a condition that ranges in intensity and is responsive to penalties and rewards. According to the prosecution, sanctions like jail time are an important tool that judges can use to encourage recovery and promote public safety.
Many of the Eldred amici weighed in on the science of addiction, focusing on the degree of control addicted individuals have over their drug use. For instance, the Massachusetts Medical Society argued that relapse was a symptom of a disease that must be treated, not punished. Other amici, however, pointed out that the scientific community has not yet reached consensus about whether addiction leaves someone powerless over their drug use. The National Association of Drug Court Professionals noted that supervision and drug testing combined with graduated sanctions helps keep individuals in recovery, and cautioned the SJC against allowing “any particular theory of addiction to influence its decision.”
II. The Eldred Decision
Eldred arose out of the 10-day incarceration of Julie Eldred after she failed a court-ordered drug test. Eldred, who had suffered from substance use disorder since age 15, had originally been convicted of larceny for stealing jewelry to support her addiction. Eldred’s probation required her to enroll in outpatient treatment, submit to random drug screenings, and remain drug-free. Although Eldred originally complied with her probation, enrolling in a program and starting on a course of Suboxone, she relapsed shortly thereafter and tested positive for fentanyl, a powerful opioid. Because no inpatient drug treatment facilities had open spots, the judge overseeing Eldred’s detention hearing ordered her held in custody until one became available 10 days later. Eldred, 480 Mass. at 93.
At the full hearing on her probation violation, Eldred argued that this 10-day detention was unlawful because her substance use disorder “rendered her incapable of remaining drug free.” Id. at 92. The judge disagreed, finding that Eldred had violated her probation, but nevertheless granted Eldred’s motion to report the question regarding the lawfulness of the drug-free condition to the SJC. The SJC found that the question was improperly reported, but agreed to consider it nonetheless because it presented “issues of significant magnitude.” Id. at 94.
Although the parties and amici focused their arguments on the addiction debate, the SJC declined to weigh in on the science. Instead, the Eldred decision focused on a judge’s role in setting probation conditions. Based on longstanding precedent, the SJC decided that judges may continue to require individuals to remain drug-free while on probation, and may detain individuals who violate that condition until their probation hearing.
The SJC framed the reported question in three parts. First, when someone who is addicted to drugs commits a crime, may a judge require her to remain drug-free as a condition of probation? Second, if an individual violates the drug-free condition, can she be subject to probation revocation proceedings? Third, may she be held in custody while awaiting admission to an inpatient treatment facility? Id. at 94.
The SJC answered all three questions in the affirmative. While the Court noted that judges who deal with those who suffer from substance use disorder should act with “flexibility, sensitivity, and compassion,” the Court ruled that judges “must have the authority to detain a defendant facing a probation violation based on illicit drug use.” Id. at 95, 99. The Court disagreed with Eldred that the judge’s decision to detain her constituted a punishment for her relapse. Rather, the Court likened it to a bail decision, since no final determination on whether Eldred had violated her probation had been made. The Court noted that the judge simply sought to detain Eldred until an inpatient facility became available. It also held that “although the appellate record before the court was inadequate to determine whether SUD affects the brain in such a way that certain individuals cannot control their drug use,” the trial court did not abuse its discretion in concluding that there was a wilful violation of the defendant’s probation. Id. at 104.
Finally, although the SJC agreed with Eldred that substance use disorder itself cannot be criminalized, it pointed out that “relapse is dangerous,” both for addicted individuals and the community in which they live. Id. at 99. The Court noted that judges, who are on the front lines of the opioid epidemic, “face unresolved and constantly changing societal issues with little notice and, in many situations, without the benefit of precedential guidance.” Id. The Court characterized these decisions as “especially unpalatable” when an offender is addicted to drugs. Id. While the Court, pointing to its own Standards on Substance Abuse, acknowledged that relapse is an accepted part of recovery, the Court stressed that relapse was dangerous nonetheless, and ruled that judges must continue to have the authority to detain defendants after a relapse that violates their probationary terms.
III. Eldred’s Implications
Although Eldred maintained the status quo for judges dealing with addicted offenders, it is unlikely to be the final word on the subject. As the opioid epidemic grows, the way we view addition is changing. Even the Attorney General’s Office acknowledged in its briefing that “exclusively punitive responses to addiction … do not make us safer.” While the criminal justice system may be on the front lines of the crisis for now, that role may change as other jurisdictions, legislatures, agencies, and disciplines grapple with the same questions faced in Eldred.
Martha Coakley, the first female Attorney General of Massachusetts, served from 2007-2015. Her prior experience includes District Attorney of Middlesex County; Special Attorney, Boston Organized Crime Strike Force; and Resident Fellow, Harvard Institute of Politics, John F. Kennedy School of Government. Martha has been a national leader in consumer protection, and civil rights, among other areas. As an active member and then President of the Women’s Bar Association, Martha supported and participated in the §12S petition panel for young women needing counsel in Court. NAAG recognized her outstanding accomplishments in 2014 when she received the Kelley-Wyman Award, given annual to the AG who has done the most to achieve NAAG objectives, Martha graduated from Williams College and the Boston University School of Law. She is a Partner in Foley Hoag’s Administrative Department where she focuses on government and internal investigations, litigation, data privacy and security, and healthcare.
Rachel Hutchinson is an associate in the firm’s Administrative Law and Litigation departments, where she represents individual and corporate clients in a wide range of regulatory matters and civil disputes. Her practice focuses on regulatory compliance, government investigations, and white collar crime. Rachel also maintains a pro bono practice focused on civil rights and LGBT issues.
by Joseph N. Schneiderman
On August 23, 2016, the Supreme Judicial Court held that a student who was unlawfully suspended under the felony suspension statute, G.L. c.71, §37H1/2, did not need to seek review of her suspension to pursue the statutory tort of unlawful exclusion from public school, G.L. c.76, §16. Goodwin v. Lee Public Schools, 475 Mass. 280 (2016). This victory for students’ rights offers an opportunity for the Legislature to take action to further stem the flow of children in the school to prison pipeline.
The Case and Holding
Katelynn Goodwin was a senior at Lee Middle and High School in the Berkshires. In late December 2011, the principal suspended Ms. Goodwin under the felony suspension statute because the Lee Police suspected her involvement in a weapons theft. There was one obvious problem, however: a felony complaint never issued against Ms. Goodwin. Indeed, the superintendent admitted that Ms. Goodwin “perhaps not been charged yet.” A misdemeanor complaint ultimately issued against her in April 2012 for receiving stolen property. The school offered to lift the suspension but refused to allow Ms. Goodwin to graduate with her class. Ms. Goodwin graduated alone through an online program in 2013.
In December 2014, Ms. Goodwin sued for damages. A judge of the Superior Court dismissed Ms. Goodwin’s complaint on the grounds that she failed to appeal her suspension within five days pursuant to the felony suspension statute’s administrative process. Ms. Goodwin timely appealed and the SJC allowed her application for direct appellate review.
A unanimous Court reinstated Ms. Goodwin’s complaint and agreed that her right to tort recovery for unlawful exclusion constitutes a separate and distinct remedy from seeking reinstatement to school. The Court recalled that the statutory tort of unlawful exclusion has existed since 1845, although there have been relatively few recent cases analyzing the claims. The felony suspension statute, enacted in 1994, authorizes a principal to suspend when: (1) a student is charged with or convicted of a felony; and (2) the student’s continued presence would have a substantial detrimental effect on the general welfare of the school. A student could appeal the suspension to the superintendent-but the school committee does not review suspensions under the felony suspension statute. 475 Mass. at 284-286, compare G.L. c. 76, §17.
The Court reasoned that the felony suspension statute was only “triggered ‘[u]pon the issuance of a criminal complaint charging a student with a felony.’” Goodwin, 475 Mass. at 287 (quoting §37H1/2). Because the principal suspended Ms. Goodwin without any felony complaint issuing against her, the suspension violated Section 37H1/2 and Ms. Goodwin did not need to pursue any administrative review before seeking damages. The Court also rejected the notion that the felony suspension statute precluded any recovery in tort. Instead, the statute simply provides an “additional, immediate, review of a decision to exclude them from school, with the goal of readmission.” Id. at 288. Ms. Goodwin thus deserved her day in court.
Goodwin marks an overdue moment of accountability for schools in the crisis of juvenile delinquency based school suspensions. Some felony charges decidedly warrant suspension to preserve school safety. See Doe v. Superintendent of Schools of Stoughton, 437 Mass. 1 (2002) (principal properly suspended a high school freshman charged with the rape of a primary school student on the same campus). There are many “felony” crimes, however, that should never warrant a suspension, absent aggravating circumstances.
Specifically, a felony constitutes “any offense punishable by imprisonment in the State Prison,” G.L. c. 274, §1. Therefore, a student who has a fake driver’s license faces suspension if the principal believes that having a fake license poses substantial detrimental effect to the general welfare of the school. G.L. c. 90, §24B (punishable by five years in state prison.) The sheer breadth of offenses that may trigger suspension has grave potential to thwart a child’s education and the command that allegedly delinquent children “shall be treated not as criminals but as children needing aid, encouragement of guidance.” G.L. c. 119, §53.
Between 1997 and 2011, principals suspended an average of more than 100 students per year under the felony suspension statute. Melanie Riccobene Jarboe, “Expelled to Nowhere”: School Exclusion Laws in Massachusetts, 31 B.C. Third World L.J. 343, 376 (2011). Courts tended not to review suspensions critically, despite “ample indication that principals [suspended] indiscriminately and [did not] carefully consider each case”, as the Commissioner of Education urged. Id. at 352, 360. Those suspensions inevitably flushed students into the school to prison pipeline. Id. at 349–51, 357, 365–69.
The review process is messy at best. A student or parent must request review in writing within five days.. Goodwin, 475 Mass. at 282, n.4. There is also no guidepost to judicial review, and certiorari becomes the only (default) option, which does not account for the best rehabilitative interests of a child. Doe, 437 Mass. at 5. An unlawful suspension may deprive a student of their future. See Commonwealth v. Mogelinski, 466 Mass. 627, 647-648 (2013), S.C., 473 Mass. 164 (2015). (“futurelessness” may overcome a child who endures a prolonged delinquency case.)
Finally, there is no freestanding right to counsel in suspension proceedings. And, unfortunately, “many parents often do not have the mindset, time, or means to pursue redress against the educational system…and the parents who do have the resources are often ostracized, frustrated, and unsuccessful.” Expelled to Nowhere, 31 B.C. Third World L.J. at 352.
Where Do We Go After Goodwin?
The Legislature has three concrete ways to build on Goodwin to spur continued accountability. First, the Legislature should limit suspensions only to when a student stands indicted as a youthful offender for a felony offense that involves infliction or risk of serious bodily harm. G.L. c.119, §54.
Second, as the Court implicitly suggested, the Legislature should create flexibility in the administrative review process and expressly establish procedures for judicial review to the Juvenile Court–which has a statutory mandate to further the best rehabilitative interests of children. G.L. c.119, §§1, 53.
Finally, the Legislature should create an independent right to appointed counsel in suspension hearings-with the right to commence the process for tort recovery for unlawful exclusion pursuant to the Massachusetts Tort Claims Act. These changes would ensure due process for students and further the goal of ending unlawful exclusions from education.
Joe Schneiderman has an appellate practice in Massachusetts and Connecticut with a particular affinity for and focus on juvenile delinquency and municipal law. Joe gratefully dedicates this article to: his mother Ro (who passed away three weeks after he filed Ms. Goodwin’s brief), as well as his dear friend, mentor, and teacher, Robert Kyff.
Distinguishing Employees’ “General Skill or Knowledge” From Protectable Trade Secrets Under Massachusetts LawPosted: August 15, 2018
by Gregory S. Bombard and Adam M. Santeusanio
Trade secret claims often arise when a highly skilled employee leaves to work for a competitor. Under Massachusetts trade secret law, this fact pattern creates a tension between the employer’s interest in protecting its trade secrets and the employee’s competing interest in using his or her own general experience and abilities to foster a successful career. Though Massachusetts courts have long recognized this tension, the line between what constitutes a protectable trade secret as compared to an employee’s “general skill or knowledge” is not explicitly defined in Massachusetts case law. The inquiry is highly fact-based and does not easily lend itself to bright lines. This article examines the leading cases addressing the distinction between trade secrets and general skill or knowledge, and identifies the four factors courts most commonly use to draw the line.
I. The Legal Framework
Massachusetts law protects trade secret information, which is defined by statute as “a formula, pattern, compilation, program, device, method, technique, process, business strategy, customer list, invention, or scientific, technical, financial or customer data that (i) at the time of the alleged misappropriation, provided economic advantage, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, others who might obtain economic advantage from its acquisition, disclosure or use; and (ii) at the time of the alleged misappropriation was the subject of efforts that were reasonable under the circumstances . . . to protect against it being acquired, disclosed or used.”[i]
Although a company must safeguard the secrecy of purported trade secrets in order to seek legal protection for them, the company must, of course, disclose such secrets to at least some of its employees for use in the company’s business. That disclosure creates a legally-implied duty by the employee to maintain the confidentiality of the trade secrets. In addition, employees are often subject to contractual nondisclosure covenants, which survive the termination of employment.
However, Massachusetts courts recognize an important limitation on trade secret protection: a departing employee may continue to use his “general skill or knowledge acquired during the course of the employment” following his departure.[iii] This doctrine, which has been the law in Massachusetts since at least 1912,[iv] provides that an employer may not claim trade secret protection over an employee’s general skill or knowledge regardless of whether the employee developed it prior to or during his employment. By limiting the types of information that an employer can protect as trade secrets, the general skill or knowledge rule “effectuates the public interest in labor mobility, promotes the employee’s freedom to practice a profession, and [promotes] freedom of competition.”[v] The rule applies both when a former employer sues a former employee for misappropriation of the former employer’s trade secrets,[vi] and when an employer seeks to enforce post-employment restrictive covenants, like noncompetition agreements.[vii]
The facts of Intertek Testing Servs. NA, Inc. v. Curtis-Strauss LLC provides an example of how the doctrine plays out in practice. Intertek was a product inspection, testing and certification company that sued several of its former salespeople for having misappropriated “secret” information about “the quality of the relationship that certain customers had with Intertek,” including whether those relationships were “good,” “bad,” or “in-between.” Judge Gants, then sitting in the Business Litigation Session, granted summary judgment in favor of the salespeople, ruling that the strength of an employer’s relationship with a particular customer “certainly falls into the category of general knowledge acquired during the course of employment.” Speaking to the rule’s policy goal of promoting labor mobility, Judge Gants observed that “if this general information were deemed secret or confidential, then no salesman could ever work for a competitor, because every salesman inevitably knows this information and could not help but use it in some fashion.”[viii]
II. Distinguishing Trade Secrets from General Skill or Knowledge
Although the general skill or knowledge doctrine is widely cited in Massachusetts case law, no court has articulated a test for distinguishing between protectable trade secrets and nonprotectable general skill or knowledge. In the cases applying the doctrine, however, the courts most commonly consider the following four factors: (1) whether an employee had significant experience or expertise prior to starting their employment; (2) whether an employee assisted in the development of the alleged trade secret; (3) whether the alleged trade secrets were actually put to use or were merely inchoate “concepts” or “goals”; and (4) whether the alleged misappropriation involved the removal of documents or merely the contents of the employee’s memory. None of the four factors standing alone is dispositive.
A. The Employee’s Prior Experience or Expertise
Massachusetts courts are more likely to find that an alleged secret falls within an employee’s general skill and knowledge if the employee had significant experience, expertise, or education in the field before starting his employment. This factor is based on the policy that “the loss to the individual and the economic loss to society are both greatest when a highly trained and specialized person is prevented from employing his special abilities.”[ix]
For example, in Dynamics Research Corp v. Analytic Sciences Corp., an employer claimed its former employee misappropriated a system for managing data and providing feedback during the development of weapons systems for government contracts. Prior to his employment, the employee had been decorated by the Air Force for his management ability and had worked as a manager of an MIT laboratory. In fact, the employer hired him “in part because he [already] understood its management system concept.” The Appeals Court ruled that the alleged secret fell within the employee’s general skill and knowledge, observing he had come to the job “with knowledge and skill in the plaintiff’s area of operation” and “much of the [alleged trade secret] was known to the defendant prior to his employment.”[x] Conversely, in Junker v. Plummer, the employer’s claimed secret was a novel machine for “combining shoe cloth,” and the former employees “had never seen a combining machine” before their employment.[xi] There, the SJC ruled that the machine’s functionality was not part of the employees’ general skill or knowledge and was instead a protectable trade secret of their former employer.
B. The Employee’s Personal Participation in Developing the Secret
Massachusetts courts are more likely to find that an alleged secret falls within an employee’s general skill and knowledge if the employee directly participated in developing the alleged secret. The rationale behind this factor is that if the employee personally contributed towards the alleged secret’s creation or development, then the alleged secret may consist, at least in part, of the skill, knowledge, and experience that the employee brought to bear on the project.
Thus, in Chomerics, Inc. v. Ehrreich, the employee had been “personally actively involved in all of the inventions and discoveries made” by the employer in developing the alleged secret.[xii] Indeed, the employer’s “effort in this field was pioneered largely through [the defendant employee’s] inventions and research,” and the research into conductive plastics was “peculiarly his . . . almost private domain.” The Appeals Court ruled that the information fell within the employee’s general skill or knowledge as a scientist, despite the fact that the employer took reasonable measures to safeguard the information as a trade secret, including requiring the defendant to keep his laboratory notebooks locked up. Similarly, in New Method Die & Cut-Out Co. v. Milton Bradley Co., the employee “took part to a substantial extent in developing the [allegedly secret] process” for manufacturing cardboard toys, bringing to bear “his faculties, skill and experience.”[xiii] The SJC held that the process for manufacturing cardboard toys did not constitute a protectable trade secret, but rather was “the product of [the employee’s] knowledge,” which he developed in the course of his work for his former employer.
C. The Employer’s Unfinished Concepts and Goals
Massachusetts courts are more likely to find that information is within an employee’s general skill or knowledge where the alleged secret is merely an unfinished “concept” or “goal,” as opposed to information that has been reduced to practice in the form of a functioning devise, machine, or system. For example, in Chomerics, Inc. v. Ehrreich, the employer sought to develop electrically conductive plastics using “metal particles embedded in a plastic matrix.”[xiv] During his employment, the employee worked on a project to develop an electrically conductive gasket that contained less than 10 percent silver particles. The employee eventually quit and began working for a competitor, which soon thereafter patented an electrically conductive gasket that used less than 10 percent silver. The Appeals Court ruled that the use of a certain amount of silver represented only a “concept,” and that “when [the defendant] left [the plaintiff’s employ] he took with him nothing but possibilities and goals which had hitherto proved impossible to bring to fruition.” The Appeals Court ruled those “possibilities and goals” were part of the employee’s general skill or knowledge, not a protectable trade secret of the former employer.
By comparison, in Junker, the machine for combining shoe cloth was fully operational, in use in the employer’s manufacturing facility in “actual and substantial production.”[xv] Several of the plaintiff’s employees quit, started working for a competitor, and duplicated the machine, up to which point “there was none other faintly resembling it in use anywhere.” The SJC ruled that the machine was a protectable trade secret belonging to the employer.
D. Employees’ Memory and Nondocumentary Information
Massachusetts courts are more likely to find that an alleged trade secret falls within an employee’s general skill and knowledge if the employee allegedly used information from his memory, without taking away documents or electronically stored information. The SJC has, in several cases, “considered it significant that the former employee did or did not take actual lists or papers belonging to his former employer.”[xvi] For example, in American Window Cleaning Co. of Springfield v. Cohen, the plaintiff alleged that its former employees had misappropriated secret information regarding its customers. The SJC ruled the former employees had not breached their duty of confidentiality to their former employer because “[r]emembered information” regarding certain of the employer’s customers was “not confidential” and “a discharged employee, without the use of a list belonging to his former employer, may solicit the latter’s customers.”[xvii]
Similarly, in New Method Die & Cut-Out Co., the SJC ruled that an allegedly secret method for manufacturing cardboard toys was within the defendant employee’s general skill or knowledge, noting that “the defendant . . . when he left the employment of the plaintiff . . . took no documentary manufacturing data, cost figures, or customers’ lists and no drawing which were a part of the plaintiff’s files or were final drawings which had been used by the [plaintiff] for the manufacture of toys.”[xviii]
By contrast, in Pacific Packaging Products v. Barenboim, the plaintiff employer alleged that five of its former employees removed, among other things, sales history reports, cost books, invoices, and spreadsheets containing the employer’s information about particular customer accounts, all in order to form a competing company using the plaintiff’s customer base. In granting the plaintiff’s request for a preliminary injunction against the defendants’ use of the information, Judge Billings ruled “[m]y focus herein is almost exclusively on documentary information” alleged to have been misappropriated because “while it is theoretically possible to make the showing that a former employee used his memory to compete unfairly with the former employer, it is not―particularly where business, not technical, information is concerned―an easy task.”[xix]
Distinguishing trade secrets from general skill and knowledge is not a precise science and requires a fact-specific analysis. While Massachusetts courts have not articulated a specific set of rules to apply in making the distinction, the four factors discussed above provide an outline of the key considerations Massachusetts courts have used to decide whether certain information was within a departing employee’s general skill or knowledge.
[i] Massachusetts adopted a version of the Uniform Trade Secrets Act (“UTSA”), effective October 1, 2018. See Mass. Gen. Laws ch. 93, §§ 42-42G. Other UTSA jurisdictions distinguish trade secrets from general skill or knowledge. See, e.g., American Red Cross v. Palm Beach Blood Bank, Inc., 143 F.3d 1407, 1410 (11th Cir. 1998) (applying Florida law).
[ii] Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840 (1972) (citing Restatement of Torts § 757, cmt. b.).
[v] CVD, Inc. v. Raytheon Co., 769 F.2d 842, 852 (1st Cir. 1985) (applying Mass. law).
[vii] See, e.g., EMC Corp. v. Loafman, No. 2012-3115-F, 2012 WL 3620374 (Mass. Super. Ct. 2012) (Wilkins, J.) (“Nor does general knowledge acquired on the job justify a non-compete.”) (citing Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 267 (1980)).
[viii] Intertek Testing Servs. NA, Inc. v. Curtis-Strauss LLC, No. 98903F, 2000 WL 1473126, at *8 (Mass. Super. Ct. Aug. 8, 2000) (Gants, J.).
[ix] Dynamics Research Corp., 9 Mass. App. Ct. at 268 (quoting Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, 684-85 (1960)); see also Harvard Apparatus, Inc. v. Cowen, 130 F. Supp. 2d 161, 175 n.31 (D. Mass. 2001) (applying Mass. law) (“The issue of whether the information lies within the employee’s general skill or knowledge depends, in part, upon the amount of knowledge and skill the employee had in the relevant area at the start of his employment.”).
[x] Dynamics Research Corp., 9 Mass. App. Ct. at 268; see also New Method Die & Cut-Out Co. v. Milton Bradley Co., 289 Mass. 277, 281-82 (1935) (finding no protectable secret where “much of the [allegedly secret] process was familiar to [the employee] from his [prior] experience”).
[xiii] New Method Die & Cut-Out Co., 289 Mass. at 282.
[xvi] Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840 (1972) (citing cases). Like the other factors, however, this factor is not dispositive. The SJC ruled in Jet Spray Cooler that “the fact that no list or paper was taken does not prevent the former employee from being enjoined if the information which he gained through his employment and retained in his memory is confidential in nature.” Id.
[xviii] New Method Die & Cut-Out Co., 289 Mass. at 280.
[xix] Pac. Packaging Prod., Inc. v. Barenboim, No. MICV2009-04320, 2010 WL 11068538, at *1 (Mass. Super. Ct. Apr. 20, 2010) (Billings, J.). To avoid an injunction on that basis, the defendants represented to the court they had completely divested themselves of the paper and electronic versions of the plaintiff’s information. The court later found that representation to be a fraud on the court because the defendants had not in fact turned over the information; the court entered a default on the defendants’ counterclaims and awarded fees and costs in excess of $1 million to the plaintiff.
Gregory S. Bombard, a trial lawyer at Duane Morris, focuses his practice on trade secret litigation, business torts, and other complex commercial disputes. He represents pharmaceutical, manufacturing and technology companies in state and federal courts and arbitration proceedings throughout the United States.
Adam M. Santeusanio is a trial lawyer at Duane Morris. His practice focuses on intellectual property and commercial litigation.
by Tara J. Myslinski and Stephanie R. Parker
Filing a new complaint? If your client is part of a for-profit corporate entity and the dispute concerns that entity, there is a good chance that you are wondering whether some or all of your client’s potential claims are derivative or direct claims. There are plenty of ways to get tripped up in this context; it is wise to think early about all of the possible pitfalls in such a case and understand the road ahead.
In this article we discuss the steps an attorney facing this issue must take, including understanding the nature of your client’s entity at the outset of a case, determining whether your client has direct or derivative claims, and following the unique procedural and substantive rules applicable to derivative claims.
Understand the Nature of Your Client’s Entity and its Place of Formation.
The law of the state of the entity’s incorporation or registration will dictate substantive issues of law for claims concerning that entity. Procedural rules for the forum will govern procedural issues.
Issues of substantive law include whether claims are derivative or direct and whether a plaintiff has standing to pursue derivative claims against the entity. See Cannonball Fund, Ltd. v. Dutchess Capital Mgmt., LLC, 84 Mass. App. Ct. 75, 93 (2013) (quoting Harrison v. NetCentric Corp., 433 Mass. 465, 471 (2001)). The differences among the states on derivative suits can be substantial; for example, whereas under Massachusetts law a shareholder is required to make demand on directors in every case alleging derivative claims on behalf of a corporation, see G.L. c. 156D, § 7.42, a suit on behalf of a Delaware corporation may still allege futility of such demand. See Johnston v. Box, 453 Mass. 569, 578 & n. 15 (2009); Del. Ct. Ch. R. 23.1; see also 6 Del. C. §§ 18-1001 & 18-1002 (allowing any LLC member to bring derivative action).
In addition to ascertaining the state of your entity’s formation, study the entity’s governing documents for specific provisions that may apply to derivative suits. See, e.g., G.L. c. 156C, § 56.
Determine Whether Your Client has Direct or Derivative Claims, or Both.
In your complaint, you must specify whether each claim is brought directly by your client as an individual or derivatively by your client on behalf of the entity. This distinction is important because, as discussed below, you must comply with special procedural requirements for any derivative claims you assert.
In general, a derivative claim asserts a wrong done to the corporation, as opposed to any particular shareholder. As such, a derivative claim belongs to the corporation and any damages recovered on a derivative claim will go to the corporation. Examples of derivative claims include:
Wasting, mismanaging or misappropriating corporate assets, resulting in a general diminution of the value of corporate stock, assets, or cash on hand; see, e.g., Rubin v. Murray, 79 Mass. App. Ct. 64, 80 (2011);
- Engaging in acts of self-dealing and/or diverting corporate opportunities; see, e.g., Williams v. Charles, 84 Mass. App. Ct. 328, 338 (2013);
- Breach of a contractual obligation owed to the company, including breach of a non-competition provision; see, e.g., Pagounis v. Pendleton, 52 Mass. App. Ct. 270, 275 (2001); and
- Breach of a fiduciary or other duty owed by the defendant to the corporation. See, e.g., International Brotherhood of Electrical Workers Local No. 129 Benefit Fund v. Tucci, 476 Mass. 553, 558 (2017).
A direct claim, in contrast, alleges breach of a duty owed to the plaintiff as a shareholder, investor, or creditor of a corporation and seeks to remedy some harm that is distinct from that suffered by shareholders generally. IBEW, 476 Mass. at 558. As such, damages recovered on a direct claim will go directly to the plaintiff. Examples of direct claims include:
- Misrepresentation or fraud perpetrated on an individual investor in connection with his or her investment; see, e.g., Amorim Holding Financeria, S.G.P.S., S.A. v. C.P. Baker & Co., 53 F. Supp. 3d 279, 306-07 (D. Mass. 2014);
- Failure to make payments owed directly to plaintiff, such as profit distributions; see, e.g., Reeve v. Folly Hill Limited Partnership, 36 Mass. App. Ct. 90, 97 (1994);
- Dilution of one shareholder’s share value or equity while increasing the equity held by other shareholders; see, e.g., Donahue v. Rodd Electrotype Co., 367 Mass. 578, 600 n.25 (1975); and
- Breach of a fiduciary duty owed to a shareholder/member or freeze out of a shareholder/member. See id. at 579 n. 4.
In certain contexts, particularly cases involving a close corporation, the line separating direct and derivative claims can be blurred. In those contexts, good pleading practice may require alleging certain claims both individually and derivatively.
Follow the Procedural Prerequisites and Substantive Rules that Apply Uniquely to Derivative Suits.
1. As a Threshold Matter, Ensure Your Plaintiff has Standing.
Massachusetts law on a plaintiff’s standing to bring a derivative claim varies somewhat depending on the type of entity at issue. See G.L c. 156C, §§ 56-57 (LLCs); G.L c. 156D, §§ 7.40-7.47 (corporations); G.L. c. 109, §§ 56-59 (limited partnerships).
With respect to any entity in Massachusetts, however, to have standing to bring a derivative claim, a plaintiff must have been a shareholder (or member or partner) at the time of the alleged misconduct and must continue to be a shareholder throughout the entirety of the derivative litigation. G.L. c. 156D, § 7.41; see Billings v. GTFM, LLC, 449 Mass. 281, 289-96 (2007) (involuntary loss of ownership interest during pendency of litigation deprived plaintiff of standing to press derivative claims); see also Kolancian v. Snowden, 532 F. Supp. 2d 260, 262-263 (D. Mass. 2008) (“a narrow exception to this rule arises where the [event causing the loss of the plaintiff’s ownership interest] itself is the subject of a claim of fraud. . . [t]o establish that a merger was fraudulent, a plaintiff must plead with particularity that it was undertaken ‘merely to eliminate derivative claims’”) (quotation omitted). If your client is concerned that, during the pendency of the case, the defendant may eliminate your client’s interest, preliminary injunctive relief to halt that transaction may be necessary. See IBEW, 476 Mass. at 564 n.15.
If your client controls the entity by owning a majority of its shares or serving as its manager or president, your client may be able to bring a direct suit against a wrongdoer. But if the company is owned 50/50 and your client is one of the 50% owners seeking to sue the other 50% owner in the company’s name, the analysis is different. Although Massachusetts has yet to issue a clear decision on this issue, other jurisdictions uniformly hold that a 50% owner may not bring suit against another 50% owner in the company’s name without following derivative procedures. See, e.g., Swart v. Pawar, No. 1:14-cv-10, ECF #162 (N.D.W.Va. Nov. 19, 2015); Barry v. Curtin, 993 F. Supp. 2d 347, 352-53 (E.D.N.Y. 2014); Crouse v. Mineo, 189 N.C. App. 232, 238-39 (2008).
If the entity is a limited liability company, G.L. c. 156C, § 56 imposes additional constraints on a plaintiff’s standing. It requires that a plaintiff alleging a derivative claim be either: (1) a member authorized to sue by the vote of members owning more than 50% of the unreturned contributions to the LLC; or (2) a manager of the LLC authorized to sue by a vote of a majority of the managers. In either case, the vote of any member or manager who has an interest in the outcome of the suit that is adverse to the LLC’s interest must be excluded. Given this statutory rigor, unless the LLC’s operating documents state otherwise, a minority member, or single manager in a multi-manager LLC, would have to secure a favorable vote to obtain a non-interested majority in order to have standing to sue on behalf of the LLC. Compare G.L. c. 156D, § 7.41 (any shareholder holding stock at the time of wrongdoing may commence a derivative proceeding so long as they “fairly and adequately” represent the interests of the corporation).
2. Comply with Procedural Rules for Derivative Claims in Massachusetts State or Federal Court.
State and federal rules of civil procedure impose special pleading requirements on derivative claims. Specifically, in addition to any substantive law governed by the entity’s state of formation, Massachusetts Rule of Civil Procedure 23.1 requires that the derivative complaint:
- Be verified;
- Allege that the plaintiff was a shareholder or member at the time of the transaction at issue, or that the plaintiff’s share or membership thereafter devolved on him by operation of law from someone who was a shareholder or member at the time; and
- Allege with particularity the efforts made by the plaintiff to obtain the action he or she desires from the directors or comparable authority and the reasons for his failure to obtain the action.
The requirements of Federal Rule of Civil Procedure 23.1 are similar, but add that the plaintiff must plead that “the action is not a collusive one to confer jurisdiction that the court would otherwise lack.” The requirements of the Massachusetts Rule can be waived if a defendant proceeds to trial without addressing these issues, see Diamond v. Pappathanasi, 78 Mass. App. Ct. 77, 89 (2010) (involving a general partnership), but there is no analogous case law concerning the Federal Rule.
You also must name the company as a nominal defendant in any derivative action when filing suit in Massachusetts state or federal court, regardless of the state of formation of the entity. See Fusco v. Rocky Mountain I Investments Ltd. P’ship, 42 Mass. App. Ct. 441, 447 (1997); Gabriel v. Preble, 396 F.3d 10, 14-15 (1st Cir. 2005).
3. Properly Apply Substantive Law on Demand Requirements Prior to Filing a Derivative Suit.
The most frequently litigated issue of substantive law in derivative cases is demand/demand futility. Massachusetts substantive law imposes hurdles additional to the procedural requirement of Mass. R. Civ. P. 23.1.
A plaintiff intending to bring a derivative claim on behalf of a Massachusetts corporation must first demand that the corporation pursue the claim. G.L. c. 156D, § 7.42. “The rationale behind the demand requirement is that, as a basic principle of corporate governance, the board of directors or majority of shareholders should set the corporation’s business policy, including the decision whether to pursue a lawsuit.” Harhen v. Brown, 431 Mass. 838, 844 (2010). The procedure for making demand is detailed and is set forth in G.L. c. 156D, §§ 7.40, et seq. Massachusetts is a universal demand state, which means that demand must be made even if the plaintiff believes it would be futile due to a board’s interest or lack of independence. See Johnston, 453 Mass. at 578 n.15.
A plaintiff may only initiate a derivative action once the corporation has either (i) refused a demand to bring suit; or (ii) ignored the demand for at least 90 days (or 120 days if the decision regarding whether to pursue the claims is submitted to the shareholders for a vote). A derivative plaintiff may file suit before expiration of the waiting period if the plaintiff can show that irreparable injury would result by waiting for the period to expire. G.L. c. 156D, § 7.42.
If your client’s demand is refused and she disagrees with the corporation’s decision, you should carefully study G.L. c. 156D, § 7.44 and be prepared to challenge the refusal in your complaint and in your opposition to the inevitable motion to dismiss. In this context, the “business judgment rule” precludes the suit if the corporation can show that it determined in good faith and after reasonable inquiry that the suit would not be in the best interests of the corporation. G.L. c. 156D, § 7.44(a). Although challenging a director vote to refuse a demand is difficult because of the protections of the business judgment rule, Judge Kaplan of the Superior Court’s Business Litigation Session recently denied a motion to dismiss derivative claims in just that context. See Brining v. Donovan, No. 1684-CV-3422-BLS1 (Mass. Super. Ct. Sept. 14, 2017). The court questioned the directors’ independence given their close ties with the alleged wrongdoer and also found reasonable doubt as to whether the board conducted its investigation in good faith because its conclusion in the face of glaring financial improprieties was “so different from what an independent Board would be expected to do.” Id.
Limited Liability Companies
In contrast to corporation derivative suits, the futility exception is still alive in the context of LLC derivative suits, but must be well-pleaded to satisfy Mass. R. Civ. P. 23.1. See Billings, 449 Mass. at 289-90 n.19; see also Harhen, 431 Mass. at 844 (futility exception is pled by alleging that “a majority of [members] are alleged to have participated in wrongdoing, or are otherwise interested” and adopting definition of “interested” director as stated in ALI’s Principles of Corporate Governance, §§ 1.15 & 1.23); Diamond, 78 Mass. App. Ct. at 89 (“to satisfy rule 23.1, a complaint in a derivative action must plead with particularity either the presuit demand the plaintiff has made or the reasons why making such demand would have been futile”).
Limited partners alleging damage to the partnership must make demand upon the general partner or allege the reasons that doing so would be futile. G.L. c. 109, § 58.
4. Follow Procedural and Substantive Rules at the Conclusion of a Derivative Case.
A derivative proceeding filed in Massachusetts may not be discontinued or settled without court approval. Mass. R. Civ. P. 23.1; G.L. c. 156D, § 7.45.
As discussed above, damages recovered on a derivative claim will go to the entity. The Massachusetts Appeals Court recently noted that there may be some irony, particularly in the context of a close corporation, if this rule results in the wrongdoer benefiting from a share in the recovery. See Beninati v. Borghi, 90 Mass. App. Ct. 566, 567, n.11 (2016). This irony can be mitigated by the trial judge, who is “free to take the equities into account in fashioning any remedy under c. 93A.” Id. In an effort to remedy that type of unfair result, on remand to the Business Litigation Session in Beninati, Judge Sanders recently reduced a G.L. c. 93A damages award by a wrongdoer’s percentage of ownership interest in the company and directed that the company “shall not permit” any distribution of the damages to the wrongdoer. Beninati v. Borghi, Nos. 1284-cv-1985-BLS2, 1384-cv-1772-BLS2 (Mass. Super. Ct. June 30, 2017). An appeal of that decision is currently pending.
Massachusetts law authorizes the court to award attorneys’ fees and costs to the plaintiff upon conclusion of a case if the court finds that the proceeding has resulted in a “substantial benefit to the corporation.” G.L. c. 156D, § 7.46; see also Beninati , 90 Mass. App. Ct. at 568 (affirming denial of fee application in part because time records failed to make that distinction). The court may award the defendant its fees and costs if the court finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose. G.L. c. 156C, § 57 contains parallel fee-shifting provisions for derivative claims in the Massachusetts LLC context. Because Massachusetts law is not clear on the issue of whether an award of attorneys’ fees in derivative litigation is procedural or substantive, be sure to also understand the law of the entity’s formation state on this issue at the outset of your case.
Tara J. Myslinski is a partner in the business litigation boutique O’Connor Carnathan & Mack LLC based in Burlington. She focuses her practice in complex commercial and corporate litigation, frequently involving small-business shareholder disputes, complex contractual disputes, trade secret and non-compete litigation, and internal pre-litigation investigations.
Stephanie R. Parker is an associate in the business litigation boutique O’Connor, Carnathan & Mack LLC, based in Burlington, MA. Ms. Parker graduated from Northeastern University School of Law in May 2013. Prior to joining OCM, Ms. Parker worked as a judicial intern for The Honorable Patti B. Saris at the U.S. District Court for the District of Massachusetts.
Director Liability Under the Massachusetts Wage Act: The Supreme Judicial Court Clarifies the Law but Traps May Remain for the UnwaryPosted: May 14, 2018
by Mark D. Finsterwald
In Segal v. Genitrix, 478 Mass. 551 (2017), the Supreme Judicial Court (“SJC”) addressed whether members of a company’s board of directors may be personally liable under the Massachusetts Wage Act, G.L. c. 149, §§ 148, 150, for the company’s failure to pay wages to employees. In Segal, the SJC interpreted, for the first time, language in the Wage Act defining “employer” in the context of directors. The SJC held that the Wage Act does not impose liability on directors acting only in their capacity as directors. Even so, the Court did not fully insulate directors from Wage Act liability. There remains a possibility that directors could, perhaps unwittingly, become subject to personal liability in the event a company fails to pay wages.
The Wage Act
The Wage Act enables employees to sue employers who do not pay earned wages, with mandatory awards of treble damages and attorney’s fees for successful claims. Liability is not limited to the business entity, as the Wage Act defines “employer” to include “the president and treasurer of a corporation and any officers or agents having the management of such corporation.” This definition does not mention directors. Nor does it explain how to assess whether a person is an “agent having the management of such corporation.” G.L. c. 149, § 148.
Facts and Procedural History
Plaintiff Andrew Segal was the president of Genitrix, LLC, a biotechnology startup that he cofounded with defendant H. Fisk Johnson, III. Johnson was also an investor in Genitrix, and he appointed his representative, defendant Stephen Rose, to the company’s board of directors. Johnson funded Genitrix through a company called Fisk, which Johnson and Rose co-owned. Segal, as president, managed all of Genitrix’s day-to-day operations, including payroll.
In 2006, Genitrix began to have difficulty making payroll. Starting in 2007, Segal stopped taking salary to enable the company to meet its other financial commitments. Rose later declined to direct Fisk to invest enough money in Genitrix to pay Segal. In early 2009, Segal initiated Wage Act litigation against Johnson and Rose.
At trial, the judge instructed the jury that “a person qualifies as an ‘agent having the management of such corporation’ if he … controls, directs, and participates to a substantial degree in formulating and determining policy of the corporation or LLC.” The judge did not instruct the jury that the defendants needed to have been appointed as agents. Nor did the judge instruct the jury that defendants needed to have assumed responsibilities functionally equivalent to those of a president or treasurer. The jury found both defendants liable for Segal’s unpaid salary. Johnson and Rose moved for judgment notwithstanding the verdict, the trial court denied the motion, and Johnson and Rose appealed.
The SJC’s Analysis
At the outset, the Court stated that it viewed as significant the Legislature’s omission of directors from the Wage Act’s definition of “employer.” Segal, 478 Mass. at 558. Parsing the statutory language, the SJC dismissed the possibility that either defendant could be liable as president, treasurer, or any other officer, because neither of them held an office at Genitrix. Johnson and Rose could be liable only if they were “agents having the management” of the company. The Court explained that this language establishes “two important requirements: the defendant must both be an agent and have the management of the company.” Id. at 559. The Court differentiated between having some management responsibility and “having the management” of the company. “Having the management” means assuming responsibility similar to that performed by a corporation’s president or treasurer, the Court reasoned, “particularly in regard to the control of finances or payment of wages.”
As to agency, common law agency principles—set forth in the Restatement (Second) of Agency—counsel that directors are not typically considered agents. Restatement (Second) of Agency § 14C (1958). The SJC observed that “[a] board generally acts collectively, not individually.” Segal, 478 Mass. at 561. Such collective action does not confer individual agency authority on directors. Nevertheless, the Court explained that individual directors still could be “considered agents of the corporation if they are empowered to act as such, but any agency relationship stems from their appointment as an agent, not from their position as a director….” Id. at 563. An agency appointment could result from a board resolution, but also could “arise from either express or implied consent.” The Court gave as an example a scenario in which “a particular board member had been empowered to act individually as the functional equivalent of the president or treasurer of the corporation.” Genitrix, however, made no such appointment with respect to either defendant, instead delegating executive management authority (including dominion over wages) to Segal. Segal signed the checks, oversaw the payroll, and suspended the payment of his salary. Defendants had no such authority.
Moreover, just as a board’s collective authority over a corporation does not confer agency authority on an individual director, a board’s collective “oversight and control over management, finances, and policy is not oversight and control by individual board members.” Id. at 565. The Court noted that, since corporate statutes vest all management responsibility in a corporation’s board, if board members were to be considered agents and normal board oversight were considered “management,” then all directors would be personally liable under the Wage Act. That result would be inconsistent with the plain wording of the statute.
The Segal defendants’ participation in difficult board decisions that affected the company’s finances were not the acts of individual agents, did not involve the type of ordinary decisions left to individual managers, and did not confer Wage Act liability. Accordingly, the SJC determined that the trial court should have allowed defendants’ motion for judgment notwithstanding the verdict.
In addition to adjudicating the claim against Johnson and Rose, the SJC also provided guidance for instructing future juries. The Court explained that judges should instruct juries that there are two requirements for a defendant to qualify as an employer under the Wage Act: (1) the defendant must be an officer or agent; and (2) the defendant must have the management of the company. The Court cautioned that juries should be instructed that directors are not agents simply by being directors, and the collective powers of the board are distinct from the powers of individual directors. As to “having the management,” courts should instruct juries that the Wage Act imposes liability on the president, the treasurer, and other officers or agents who perform management responsibilities similar to a president or treasurer, “particularly in regard to the control of finances or the payment of wages.” Id. at 570.
Lessons for Directors and Corporate Advisors
After Segal, it is difficult, but not impossible, to establish Wage Act liability on the part of individual directors. Directors should be aware that they still may face personal liability (with attendant mandatory treble damages and fee shifting) if they are found to be agents of the corporation who performed responsibilities similar to that of a president or treasurer. Consequently, boards and their advisors should take precautionary measures to reduce the risk to directors.
Corporate counsel would be wise to include in companies’ governing documents language stating that individual directors are not authorized to speak or act on behalf of the company. Counsel should then advise boards to abide by such language in practice. While it is common for boards to delegate tasks and authority to particular directors or committees, counsel should screen such delegations carefully to ensure that they cannot reasonably be construed as conferring management or agency authority. Counsel also would be wise to monitor initiatives that might not expressly delegate agency authority but could be deemed to do so by implication.
To the extent a board bestows management or agency authority on individual directors or committees of directors, that authority should be limited to discrete issues. More importantly, that authority should not encroach on officer control over finances and wages. For example, individual directors should not have check-writing authority, control over payroll, or authority to approve or deny wage payments.
Overall, counsel should be vigilant in ensuring that boards and board committees, including compensation committees, exercise their oversight function collectively, with such collective action formally recorded. These steps would help directors perform their fiduciary responsibilities with less risk of personal liability under the Wage Act.
Mark D. Finsterwald is an associate at Foley Hoag LLP and a member of the firm’s litigation department. He focuses his practice in the area of complex business litigation.