JOHN J. CHENEY vs. AUTOMATIC SPRINKLER CORPORATION OF AMERICA.

WILKINS, J. The plaintiff, a former salesman, district manager, and regional vice president of the defendant corporation, brought this action to recover direct incentive payments and bonuses to which he claims entitlement under the defendant's compensation agreements

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with him. The defendant filed a motion to dismiss under Mass. R. Civ. P. 12(b)(6), 365 Mass. 754 (1974), and, alternatively, presented a motion for a more definite statement under Mass. R. Civ. P. 12(e), 365 Mass. 754 (1974). A judge of the Superior Court allowed the motion for a more definite statement and took no action on the motion to dismiss. After the plaintiff filed a more definite statement, another judge allowed the defendant's motion to dismiss. We transferred the plaintiff's appeal to this court. We conclude that the plaintiff should have the opportunity to amend his complaint in light of the principles of law considered in this opinion.

The allegations of the complaint and of the more definite statement are as follows. The plaintiff worked for the defendant from November, 1956, until June, 1972. He started as a salesman, became a district manager in 1966, and later became the eastern regional vice president, responsible for the northeastern United States. Each year he signed a contract of employment in Massachusetts. A copy of the form of agreement executed by the plaintiff for the year 1966, when he was promoted to district manager, is annexed to the complaint. We infer that the language of the annexed agreement was in effect during each subsequent year of the plaintiff's employment, although the annexed agreement is limited to one year and apparently applies only to district managers.

The defendant's compensation plan for district managers supervising other salesmen provides three types of compensation: a base salary, a direct incentive payment based on a certain percentage of the annual operating profit of the employee's district, and a discretionary bonus. The agreement noted that direct incentive payments and discretionary bonuses presented "by far, the greatest opportunity for enhanced earnings." Any direct incentive payment for one year would be paid to the employee during the first quarter of the next year up to an amount equal to 50% of the employee's base salary. Any remaining unpaid direct incentive payment would be

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paid in equal amounts during the first quarter of each of the next four years. The amount of any bonus was to be determined by a compensation committee and paid from a bonus fund established annually by the defendant's board of directors. One-fourth of any year's bonus was to be paid to the employee during the first quarter of each of the succeeding four years.

The agreement provided that the award of any direct incentive payment or of any bonus was wholly discretionary with the defendant. [Note 1] Any employee who dies, retires, or leaves the defendant "with the approval of the [directors is to] receive all direct incentive and bonus installments as described above." However, "[o]ne who is discharged for cause, terminates his employment, joins a competitor, or engages in activities which are harmful to the Corporation, will forfeit all installments which remain unpaid on the date of the occurrence of any of such events. However, final authority over the payment or forfeiture of direct incentive and bonus installments will be vested in the Compensation Committee." The defendant reserved the right to change or terminate the plan and to make final and binding decisions concerning the

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interpretation and administration of the plan. [Note 2]

The defendant discontinued all direct incentive and installment payments when the plaintiff left its employment. The plaintiff claims that he is entitled to (a) $34,-800 in unpaid direct incentive installments attributable to the years 1968 through 1971, and (b) $14,000 in unpaid bonus installments for the years 1968 through 1971. [Note 3] In his brief, but nowhere in his pleadings, the plaintiff represents that he resigned to form a competing corporation, and that the defendant was aware of this when it accepted the plaintiff's resignation. It makes no sense for us to consider the plaintiff's pleadings apart from his representation that he had formed a competing corporation, and, therefore, we will treat the pleadings as if they alleged that fact.

From a literal reading of the plaintiff's compensation agreement, it is clear that he had no explicit right to unpaid incentive and bonus installments when he left the defendant's employ and went to work for a competitor. If the agreement presented an ambiguity, we would construe it in favor of the plaintiff because it tends indirectly to restrain employment. See Union Cent. Life Ins. Co. v. Coolidge, 357 Mass. 457, 459 (1970). However, we see no basis for interpreting the agreement as giving the plaintiff any rights in the circumstances. The agreement was not without consideration, nor was it illusory. If, for example,

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an employee had died while still employed by the defendant, we would construe the agreement as assuring the payment of all installments then unpaid. The question is whether there is any theory under which, in the circumstances, the discretionary provisions of the agreement should not be enforced.

Our previous decisions have upheld agreements which have provided for the loss of unpaid compensation if a former employee went to work for a competitor. See Flynn v. Murphy, 350 Mass. 352 (1966) (interest in profit sharing fund lost where former employee went to work for a competitor although not engaged in competing work); Chase v. New York Life Ins. Co., 188 Mass. 271, 273 (1905) (renewal premiums lost by former employee who went to work for a competitor). See also Union Cent. Life Ins. Co v. Coolidge, 357 Mass. 457, 459 (1970), where the principle was recognized as valid, but inapplicable under the agreement as construed.

Our opinions have not assessed the right of a former employee to unpaid compensation in terms of the reasonableness of the indirect restraint on the employee's seeking other employment. Apart from statutory limitations, the majority view in this country seems to be that a forfeiture for competition clause in an employment agreement is enforceable without regard to the reasonableness of the restraint on the former employee. See, e.g., Woodward v. Cadillac Overall Supply Co., 396 Mich. 379, 383-384 (1976) (three to two plurality) (noncontributory pension plan); [Note 4] Rochester Corp. v. Rochester, 450 F.2d 118, 122-123 (4th Cir. 1971) (Virginia law) (noncontributory pension plan), and cases cited. [Note 5] See generally Annot., 18 A. L. R. 3d 1246

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(1968); Annot., 81 A. L. R. 2d 1066 (1962). Some courts, however, have treated unreasonably broad forfeiture clauses as invalid and not subject to judicial modification to reasonable limits. See, e.g., Almers v. South Carolina Nat'l Bank, 265 S.C. 48, 56 (1975) (forfeiture clause in noncontributory pension plan invalid unless it contains reasonable time and geographic limitations); Union Cent. Life Ins. Co. v. Balistrieri, 19 Wis. 2d 265, 270-271 (1963) (terms of the agreement unenforceable unless they are reasonable in time and place). Cf. Muggill v. Reuben H. Donnelley Corp., 62 Cal. 2d 239, 242-243 (1965) (construing a statutory prohibition against contracts restraining people from engaging in a lawful profession, trade, or business).

Other courts have taken an intermediate ground and have assessed the facts of a particular forfeiture to determine whether it is reasonable. See, e.g., Food Fair Stores, Inc. v. Greeley, 264 Md. 105, 116-119 (1972) (forfeiture of rights under pension plan an invalid restraint where former employee's work for an indirect competitor created little, if any, hardship to his former employer); Lavey v. Edwards, 264 Or. 331, 337-340 (1973) (test of reasonableness as to forfeiture provision in profit-sharing retirement plan); Sheppard v. Blackstock Lumber Co., 85 Wash. 2d 929, 933 (1975) (burden of proving reasonableness of forfeiture on the employer); Neuffer v. Bakery & Confectionery Workers Int'l Union, 307 F. 2d 671, 673 (D.C. Cir. 1962) (forfeiture of pension rights by retired employee who sponsored a rival union, a reasonable condition and not against public policy). Cf. Briggs v. R. R. Donnelley &

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Sons Co., 589 F.2d 39, 41 (1st Cir. 1978) (Illinois law) (forfeiture clause in deferred compensation, plan voluntarily joined by employee, now working for competitor, is a reasonable restraint in the circumstances). [Note 6]

We reject the suggestion that an employee in a case such as this has made an agreement to which he must be held in all instances. Agreements of the character involved here often are not arrived at by bargaining between equals. The employer normally presents the terms on a "take it or leave it" basis. This is particularly true where, as here, an annual agreement is presented to an employee whose options are to sign or to terminate his employment. We have not automatically held a former employee to the terms of his covenant not to compete. A test of reasonableness, based on the circumstances of the parties and the public interest, has been traditional in our cases involving covenants not to compete. We have enforced the covenants only to the extent that the restraint is reasonable in time and place and necessary to protect the former employer's trade secrets, confidential information, or good will. See New England Canteen Serv., Inc. v. Ashley, 372 Mass. 671, 674 (1977), and cases cited. We see no reason not to enforce a forfeiture clause to the extent that it serves an appropriate interest of the former employer and is otherwise reasonable. Just as we have cut back on overbroad terms of a covenant not to compete (see All Stainless, Inc. v. Colby, 364 Mass. 773, 777 [1974]), we would enforce a forfeiture of deferred compensation only to the extent the restraint is reasonable. [Note 7]

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A number of considerations are appropriate in determining the reasonableness of a provision forfeiting posttermination financial benefits. The amount and nature of the forfeiture and the nature of the employee's duties and responsibilities in his former and current employment are important. If the former employee is not working in circumstances in which a covenant not to compete would be enforceable, the burden of justification of the forfeiture becomes particularly onerous on the former employer. In such a case, the former employee's loss may assume the character of a forfeiture in the classical sense. We do not discount, however, the possibility that a financial inducement to an employee, especially a key employee, to continue to work for his employer might be reasonable in particular instances. [Note 8] Even if the former employee is working in circumstances in which a covenant not to compete would be enforceable, the reasonableness of the employee's loss must still be weighed, and, in an appropriate case, it might be modified to a reasonable level.

The notion is not new that an employer may not be entitled to rely on the express terms of its agreement with an employee so as to avoid the payment of compensation attributable to past services. For example, we have recently

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held that an employer may not in bad faith discharge an employee, employed at will, so as to prevent the employee from earning commissions which would have been payable in the normal course. Fortune v. National Cash Register Co., 373 Mass. 96, 105 (1977). There is no suggestion of bad faith by the defendant in this case.

We consider the plaintiff's allegations in light of these principles and in conjunction with his concession that he has formed a competing corporation. Count 1 claims a right to recover under the provisions of the contract. However, the plaintiff has no absolute right to incentive and bonus payments under the terms of the contract when he has gone to work for a competitor. Even reading the complaint sympathetically (see Charbonnier v. Amico, 367 Mass. 146, 152-154 [1975]), we find no allegation, or even a hint, of facts that would justify relief; that is, facts that suggest that the enforcement of the terms of the agreement would be unreasonable in the circumstances. The plaintiff does say in his more definite statement that the restrictions violate Massachusetts law because they do "not specify the scope of the restrictions as to time and place and specificity," and the fifth count alleges that the forfeiture provisions are unenforceable as an unreasonable restriction against competition. Our cases, however, have not automatically invalidated covenants not to compete where they did not express appropriate limitations, and, as we have said, the same principle applies to forfeiture for competition provisions.

The other counts of the complaint considered with the more definite statement fare no better. The second count alleges that the compensation plan is an illusory contract; the third count alleges that the plan is an adhesion contract and the forfeiture unconscionable and therefore unenforceable; and the fourth count alleges that the forfeiture is an unenforceable penalty clause. None of these conclusory allegations is supported by a reference to facts which would warrant the legal consequences asserted. The plaintiff has not cited supporting authority, concerning

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the purported denial of deferred compensation, in which any of these theories have been accepted as automatically justifying the overriding of the terms of such an agreement.

In the absence of allegations of fact indicating (a) that the defendant acted in bad faith in denying further payments to the plaintiff or (b) that the provision denying benefits if the plaintiff went to work for a competitor was an unreasonable restraint on the plaintiff, the complaint and the more definite statement fail to allege a claim on which relief can be granted. In the circumstances, however, particularly because of our indication for the first time of the relevant considerations concerning the enforcement of a forfeiture for competition clause, we believe that the plaintiff should be given an opportunity to amend his complaint. [Note 9]

The judgment dismissing the complaint shall be reversed, and the plaintiff will have leave to file an amended complaint within forty days of the date of the rescript.

So ordered.