U.S. District Court in Massachusetts Weighs in on the ‘Material Change’ Doctrine and Nurse Noncompetition Exemption

A recent ruling by the U.S. District Court for the District of Massachusetts in a restrictive covenant case, Ascend Learning, LLC v. Bryan and SPIN-Learning, LLC, No. 22-cv-11978 (August 16, 2023), has implications for the “material change” doctrine under Massachusetts law, the state’s prohibition against noncompetition covenants for registered nurses, and personal jurisdiction over corporate entities.

Quick Hits

• Ruling on a motion to dismiss, U.S. District Judge Allison D. Burroughs found that where a restrictive covenant contained a provision indicating that subsequent changes in employment would not affect its validity, the court could not find that the agreement was void, despite uncontested allegations of a material change in employment.
• Allegations concerning job titles and duties, even if they strongly suggested the employee was not “practic[ing] as a nurse,” were insufficient to establish that the statutory prohibition against noncompetition covenants for registered nurses did not apply.
• It was not appropriate to pierce the corporate veil under an alter ego theory for purposes of establishing personal jurisdiction over a corporate entity simply because an individual was the owner and only full-time employee of the corporate entity, held many roles within that entity, and operated the entity out of her home.

Background

The individual defendant in the case, Bridgette Bryan, was a longtime employee of Ascend Learning, LLC, a company that develops and owns online educational resources for nursing schools and for nursing students studying for the National Council Licensure Examination (NCLEX), a national nursing exam. Bryan began working for Ascend in July 2010 as a part-time contractor nurse educator. She accepted a full-time position in January 2011 and was promoted to a management position in 2018. She resigned from the company on May 19, 2022.

On December 19, 2010, Bryan executed an “Intellectual Property, Confidentiality and Non-Compete Agreement,” and on December 2, 2011, she signed an updated “Confidentiality, Inventions and Non-Solicitation Agreement.” The 2011 agreement included a noncompetition clause that applied during her employment. It also contained nonsolicitation provisions concerning customers, potential customers, and employees, which were in effect for one year following the termination of her employment. The 2011 agreement also restricted Bryan’s use of Ascend confidential information both during and after her employment.

The complaint alleged that while Bryan was still employed by Ascend, she filed a certificate of formation for SPIN-Learning, LLC (a company offering various educational services for nursing students studying for the NCLEX), developed, created, and operated SPIN, engaged Ascend employees to work on SPIN material, and used Ascend’s confidential information to create SPIN materials. At least one of the videos created by SPIN appeared to have used information Bryan presented at a conference on behalf of Ascend. Ascend alleged it discovered that Bryan solicited or attempted to induce several Ascend employees to work for SPIN after she resigned.

SPIN is a Mississippi LLC with its principal place of business in Biloxi. It is not registered to do business in Massachusetts and has no employees, property, bank accounts, phone numbers, or mailboxes in Massachusetts.

The Motion to Dismiss

Bryan and SPIN moved to dismiss the complaint based on a lack of personal jurisdiction and failure to state a claim. The court dismissed the claims against SPIN (without prejudice) for a lack of jurisdiction but denied the motion to dismiss in all other respects.

On the motion to dismiss for failure to state a claim, the defendants argued that any claims arising out of the 2011 agreement must fail because there had been material changes to Bryan’s employment after she signed the agreement. Under Massachusetts law, a noncompete or nonsolicitation agreement may be unenforceable under certain circumstances if there are material changes in the employment relationship since the employee entered into the agreement at issue. Here, while Bryan was promoted after she signed the 2011 agreement—which can be evidence of a material change—the 2011 agreement provided that it would apply regardless of any changes to Bryan’s employment. The court therefore found that whether Bryan’s promotion or any other changes in Bryan’s employment amounted to a material change sufficient to void the 2011 agreement was not evident from the pleadings. The court denied the defendants’ motion to dismiss so that the facts concerning the applicability of the material change doctrine could be further developed in discovery.

The defendants also argued the 2011 agreement was void under Mass. Gen. Laws ch. 112, § 74D because noncompetition agreements cannot apply to employees who are “practic[ing] as a nurse.” The complaint contained uncontested allegations concerning the titles and positions held by Bryan and another employee she solicited from Ascend, Diane Harris, including, “ATI Live Review Educator and NCLEX Specialist,” “Director of NCLEX Services,” “ATI Nurse Educator NCLEX Team Lead,” and “Director of Academic Success.” The complaint also contained descriptions of Bryan’s and Harris’s duties and responsibilities at both companies, which included overseeing educational programs, developing products and services related to the NCLEX certification exam, recruiting employees, and soliciting clients. While the court noted that these allegations suggested that Bryan and Harris were not practicing as nurses, which would render Section 74D inapplicable, the allegations concerning employee titles and duties were insufficient for the court to make such a factual finding in ruling on a motion to dismiss.

The court found that it had personal jurisdiction over Bryan because the 2011 agreement included a clause titled, “Massachusetts Choice of Law and Forum.” The court did, however, dismiss the claims against SPIN without prejudice for a lack of personal jurisdiction. The court held that SPIN did not have sufficient minimum contacts with Massachusetts, and Ascend had not met the “demanding standard for piercing the corporate veil” to establish that SPIN was Bryan’s alter ego.

The court found that while Ascend was able to show that Bryan was the owner and only full-time employee of SPIN, and that Bryan held many roles at SPIN and operated SPIN from her home, Ascend had not yet demonstrated that Bryan had “‘siphoned away corporate funds’” for personal use, used SPIN “‘as a shell for [her] own personal benefit,’” or “‘disregarded [other] corporate formalities,’” which would have provided a basis to show that SPIN was the alter ego of Bryan so as to justify piercing the corporate veil.

Ogletree Deakins’ Boston office will continue to monitor developments and will provide updates on the Healthcare, Massachusetts, and Unfair Competition and Trade Secrets blogs as additional information becomes available.

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