United States District Court, D. Connecticut
RULING ON CROSS MOTIONS FOR SUMMARY JUDGMENT
Jeffrey Alker Meyer, United States District Judge.
“non-compete” agreement is an agreement between
an employer and an employee that an employee will not work
for a competing business if she stops working for her
employer. Non-compete agreements have proved controversial
for hundreds of years since their origin in mercantile
England. See Harlan M. Blake, Employee
Agreements Not to Compete, 73 Harv. L. Rev. 625, 629-46
(1960). They continue nonetheless to thrive in the American
workplace today and remain a frequent subject for litigation
in U.S. courts. See generally J. Gregory
Grisham, Beyond the Red-Blue Divide: An Overview of
Current Trends in State Non-Compete Law, 18 Federalist
Soc'y Rev. 82 (2017); Norman D. Bishara, Fifty Ways
to Leave Your Employer: Relative Enforcement of Covenants Not
to Compete, Trends, and Implications for Employee Mobility
Policy, 13 U. Pa. J. Bus. L. 751 (2011).
non-compete agreement outright bars an employee from going to
work for the competition. Sometimes employers use a less
restrictive alternative: to allow an employee to jump ship to
the competition but discourage this by docking them with a
loss of certain company benefits. “Federal cases draw a
distinction between provisions that prevent an employee from
working for a competitor and those that call for a forfeiture
of certain benefits should he do so.” Tatom v.
Ameritech Corp., 305 F.3d 737, 744 (7th Cir. 2002). This
latter form of agreement is commonly known as a
forfeiture-for-competition agreement. See, e.g.,
Lucente v. Int'l Bus. Machines Corp., 75
F.Supp.2d 169, 172-73 (S.D.N.Y. 1999).
the type of agreement at issue in this case. Plaintiff Datto,
Inc. seeks to forfeit the stock option rights of defendant
William Falk as a consequence of his leaving Datto to work
for one of Datto's competitors. Now the parties have
cross-moved for summary judgment, and I conclude that Falk
agreed to forfeit his stock options and that his agreement to
do so is enforceable as a matter of law.
is a privately-held company based in Connecticut that
furnishes data protection and back-up services for
businesses. Falk began working for Datto as its Chief Revenue
Officer in February 2014. Datto and Falk entered into a
series of agreements over the course of his employment that
are all necessary to an understanding of this case.
start of his employment, Falk signed a document titled
“Confidentiality, Assignment of Inventions, and
Non-Compete Agreement” that the parties refer to as the
“Restrictive Covenant Agreement.” Doc. #45-1.
This agreement was designed in part to impede Falk from
harming Datto if he left his job there. It barred Falk from
working for a competitor for one year after the termination
of his employment, from soliciting any Datto employees for
two years after the termination of his employment, and from
thereafter disclosing or using Datto's confidential
information. Id. at 2-4.
offered Falk stock options as part of his employment package.
Doc. #75 at 3. These options were governed by a separate
agreement titled “Datto, Inc. 2013 Stock Incentive
Plan, ” which the parties refer to simply as “the
Plan.” Id. at 16-40. The declared purpose of
the Plan was to aid Datto in recruiting and retaining
employees as well as to benefit the company from the added
interest that employees will have in the welfare of the
company as a result of having a proprietary interest in the
company. Id. at 16.
importantly for purposes of this litigation, the Plan stated
that any stock award “shall immediately
terminate” and any stock options “shall no longer
be exercisable” if a participant engages in a
“Detrimental Activity.” Id. at 33. The
Plan defined “Detrimental Activity” in relevant
part to include a participant's working for a business
competitor. Id. at 18.
of 2014, Falk executed a “Notice of Stock Option
Grant” agreement providing Falk with the stock options
as promised in Datto's employment offer. Id. at
11-14. The Grant set the price and vesting schedule for the
exercise of stock options. It made clear that it was
“subject to the terms and conditions of the Plan, this
Notice of Grant, and the attached Stock Option
Agreement.” Id. at 11. The Grant also stated
that the “Option shall terminate and shall no longer be
exercisable on the date on which the Participant engages in a
Detrimental Activity.” Id. at 13.
reasons not clear on this record Falk's employment with
Datto did not work out as the parties had hoped. And so they
negotiated a “Separation Agreement” for Falk to
leave. Id. at 50-66. Under the terms of this
agreement, Falk was in a limbo status of “transition
leave” from January 2015 to September 30, 2015, during
which time he continued to receive his salary but with few
job duties for him to do. Id. at 51-52.
Separation Agreement relieved Falk from the Restrictive
Covenant Agreement to the extent that it had barred him from
working for a competitor after he left the company's
employ at the end of September 2015. Id. at 53.
Indeed, the agreement “encouraged” Falk to pursue
employment “with any other potential employer”
during the transition as long as the employment began no
earlier than October 1, 2015. Id. at 51.
Separation Agreement also addressed the issue of Falk's
stock options. It provided that subject to board approval,
the parties would execute an amended agreement that
significantly reduced the number of shares for which he would
have options. Id. at 52, 64-65.
Separation Agreement otherwise provided that Falk's prior
agreements with Datto would remain in effect to the extent
not modified by the Separation Agreement: “this
Agreement does not supersede the Restrictive Covenant
Agreement (as conditionally amended herein), Notice of Stock
Option Grant, and the Plan, all of which are referenced
herein and shall continue to be in full force ...