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Datto, Inc. v. Falk

United States District Court, D. Connecticut

March 13, 2018

DATTO, INC., Plaintiff,
WILLIAM FALK, Defendant.


          Jeffrey Alker Meyer, United States District Judge.

         A “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).

         A 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).

         That is 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.


         Datto 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.

         At the 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.

         Datto 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.

         Most 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.

         In July 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.

         For 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.

         The 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.

         The 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.

         The 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 ...

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