In this time of COVID-19, layoffs and furloughs have become necessary for many employers. A recent opinion of the United States First Circuit Court of Appeals, Russomano v. Novo Norodisk, Inc. , affirming the denial of enforcement of a non-competition agreement highlights an unexpected side effect of such actions.

Thomas Russomano began employment with Novo as a hemophilia community specialist and signed an agreement containing non-compete provisions. He was laid off in 2016, but returned in a different position in a different region three weeks later. Novo had him re-sign an identical non-compete agreement. Both agreements restrained him from competing for one year after the termination of his employment.

In June of 2018, Novo once again notified him that his position would be eliminated and his employment would be terminated as part of a business realignment. He was informed that the termination would be effective as of Friday, August 3, 2018. He was also encouraged to apply for other positions within the company. Severance benefits would be paid to him, provided he did not accept an alternate position with the company prior to that effective date.

Consistent with the company’s encouragement, Mr. Russomano applied and was offered a new position by Novo. That position was a new role within the organization with different responsibilities, a different location and decreased incentive compensation. Mr. Russomano began in the new position on Monday, August 6, 2018, the very next business day after the effective date of the termination from his prior position. In contemporaneous correspondence, Novo formally confirmed Mr. Russomano’s “transfer.” Novo did not ask Mr. Russomano to sign a new non-compete.

In early 2020, Mr. Russomano resigned from Novo and took a position with a competitor. Suit followed and Novo sought a preliminary injunction to enforce the non-compete in the 2016 agreement. 

Mr. Russomano defended on the basis that the non-compete restriction period began on August 3, 2018, the date on which his termination became effective. Because the one year period had expired before he accepted the position with the competitor, he argued that he should not be restrained. 

In response, Novo argued that Mr. Russomano was not terminated citing its letter in which it used the word “transfer.” Novo also argued that its own letter notifying Mr. Russomano of the elimination of his position was ambiguous and should be interpreted to mean that his termination was conditional on his not securing another position within the company. Because he did find another position, the termination never occurred. The thrust of these arguments was that if there was no termination, then the non-compete had not been triggered and Mr. Russomano was restricted for one year after his 2020 resignation.  

Neither the District Court nor the Court of Appeals found Novo’s arguments persuasive. The request for injunctive relief was denied; a denial that was affirmed on appeal. Both courts agreed with Mr. Russomano that the one year non-compete restriction had begun on August 3, 2018 and the restricted period had run its entire course by the time he joined the competitor. To Novo’s arguments that there was no termination, the Court’s response was terse and to the point – “Not so.”

While this case predates the massive disruption caused by the coronavirus crisis, it exposes a potential conundrum for an unwitting employer. Many employers furloughed employees as an alternative to an outright layoff partly in the hope that those furloughed employees would return to work when the economy re-started. 

If those furloughed employees had previously signed non-competes (or other restrictive covenants such as customer or employee non-solicitations), the employer cannot assume that a recall to work will revive those agreements as if nothing happened. Like Novo, the employer may be lulled into thinking that no termination occurred, those agreements remain in place and the clock on the restriction period has not started ticking. 

For an employer who wants to enforce its restrictive covenants, it may find itself between the proverbial rock and a hard place. Does it rely on convincing a court that a furlough is not a termination? In light of the Russomano case, that may be a very hard argument to win.

Instead, should it take a cautious approach and have the recalled employees re-sign the agreements upon their return? If the agreement contains a non-compete, however, then such an approach will implicate the 2018 Massachusetts Non-Competition Agreements Act. The employer will then have to consider the additional requirements and restrictions found in that Act – complicating factors that often weigh heavily against the use of non-competes. This Act has been extensively addressed in several of our earlier blog posts .

To this conundrum, there is no easy, one size fits all answer. The informed employer, however, will at least be in a position to recognize the trap and address the options with counsel before it inadvertently falls into it.