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Recent Case Highlights How Narrowly Courts Will Construe Noncompete Agreements

A Massachusetts Superior Court denied Plaintiffs’ motion for a preliminary injunction to enforce a non-compete provision as Plaintiffs did not show that they were likely to succeed on the merits of their claims. As discussed below, this case presents an illuminating example of the deep level of factual detail and analysis that Courts will engage in when considering whether to enforce a noncompete agreement.

Dr. Singh and Dr. Dhawan formed Fuse Therapeutics, LLC to develop drugs using “covalent warhead” technologies. Such drugs target proteins that cause diseases. Dr. Singh’s company Ankaa Therapeutics, Inc., gave Fuse a license to use any of Ankaa’s intellectual property regarding covalent warheads.

In 2019, Singh and Dhawan decided to go their separate ways and they, Fuse, and Ankaa entered into a Purchase and Sale Agreement. The agreement included the following: (1) Singh sold his ownership interest in Fuse; (2) the parties terminated the prior License Agreement; (3) Fuse assigned to Ankaa any “Covalent Warheads Joint Intellectual Property” that was “conceived, made or reduced to practice” by the two companies under the License Agreement; and (4) Fuse entered into a non-compete agreement. The scope of the non-compete agreement is in dispute.

Dhawan subsequently joined Totus Medicines, Inc., which he helped to form and which is also trying to develop covalent drug treatments. Plaintiffs Singh and Ankaa brought this lawsuit against Dhawan, Fuse, and Totus, claiming that Dhawan and Fuse were violating the non-compete agreement and misappropriated Ankaa’s confidential information. Plaintiffs also claimed that Totus unlawfully interfered with the non-compete agreement, engaged in unfair or deceptive conduct, and helped Dhawan engage in unlawful acts. Plaintiffs filed a motion seeking a preliminary injunction to prevent Dhawan and Fuse from doing any work on covalent warheads and to prevent Totus from employing Dhawan.

In denying the Plaintiffs’ motion for a preliminary injunction, the Court emphasized that such a motion is granted at the judge’s discretion and should not be granted “unless the plaintiffs have made a clear showing of entitlement thereto.”

The Court then focused on the language of the non-compete provision itself, which read as follows:  “Fuse agrees that for five (5) years from and after the Effective Date [April 2, 2019], Fuse will not engage in research, development, marketing, distribution, or sales of Covalent Warheads (including Intellectual Property in Covalent Warheads) licensed pursuant to the License Agreement.”

As stated by the Court, “this provision does not bar Dr. Dhawan from competing with Dr. Singh and Ankaa in the entire field of covalent warheads, as Plaintiffs contend. Its effect is much narrower than that. The Court concludes that this provision is unambiguous, and thus its meaning is a question of law for the Court to answer.”

The Court further stated, “the non-compete only bars Fuse from doing work on covalent warheads that were licensed to it by Ankaa. This provision states expressly it only bars work by Fuse on covalent warheads that were ‘licensed pursuant to the License Agreement.’ Singh and Ankaa’s interpretation would read this limited clause out of the contract, which would be improper.”

In other words, the provision does not bar Dhawan or Totus from working on covalent warheads that Ankaa did not license to Fuse or from competing generally in the field of covalent drugs.

The Court reiterated from previous decisions that a covenant not to compete may not be enforced merely “to protect a party from ordinary competition,” as that is not a protectable “legitimate business interest.” Here, the only legitimate business interest identified by Singh and Ankaa that the non-competition agreement would protect is Ankaa’s confidential and proprietary information. The Court held that “by reading the non-compete provision to bar all work on covalent warheads, even if it does not involve any proprietary information belonging to Singh or Ankaa, the Plaintiffs are attempting to stifle normal competition – which they cannot do.”

In reaching the above conclusion, the Court credits the undisputed, sworn statement by Dhawan that “Totus does not research, develop, or use any warheads licensed pursuant to the License Agreement between Ankaa and Fuse.” While the Plaintiffs allege the opposite “on information and belief,” the Court stated that “assertions in an affidavit or verified complaint made on ‘information and belief’ that are not supported by any other evidence do ‘not supply an adequate factual basis’ for granting preliminary injunctive relief.”

Lastly, the Court remarked that “the mere fact that Dhawan is continuing to work in the same generic scientific field does not at all suggest or support a reasonable inference that he is using Ankaa’s intellectual property.”

Image Credit: Stock Photo ID: 1985777465; Shutterstock Standard Lic.
 
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