Posts tagged with "business interests"

Policy of Enforcing Connecticut Non-Compete Agreements to Protect Employer’s Interests

Torrington Creamery, Inc. v. Davenport, 126 Conn. 515 pertains to a dispute regarding a non-compete agreement between an employer and employee in the dairy products industry in 1940.  While this case is by no means recent, it is a seminal case that lays the groundwork for the policy of enforcing non-compete agreements in Connecticut on the grounds of protecting the employer’s interest.  Specifically, this is one of the first Connecticut cases to address the enforceability of a company’s non-compete agreements when another company acquires it.

Case Background

The High Brook Corporation employed Mr. Preston Davenport as a farm manager and superintendent beginning in 1932 at its Torrington, Connecticut location.  The company produced and distributed dairy products in the towns of Torrington, Litchfield, Winsted, Thomaston, New Milford, New Preston, and Greenwich, all towns in western or southwestern Connecticut.  High Brook changed its name to The Sunny Valley Corporation in March 1938 and on April 15, 1938, had Mr. Davenport sign an employment contract.

The contract specified that Mr. Davenport would receive a fixed compensation with no set duration and that he would be subject to several restrictive covenants.  A non-solicitation clause prohibited Mr. Davenport from soliciting, either directly or indirectly, Sunny Valley or its successor’s customers for a period of two years.  Meanwhile, a non-compete clause prohibited Mr. Davenport from engaging in the dairy production and distribution industry in the towns where Sunny Valley operated.

Another clause in the employment agreement stipulated that a court’s invalidation of a portion of the agreement would not affect the legally binding nature of the other provisions.  Sunny Valley sold its operations and assets to Torrington Creamery, Inc. in October 1938 and the company discharged Mr. Davenport from employment on October 18, 1938.  He proceeded to start his own dairy production and distribution business in February 1939 in the towns of Torrington and Litchfield.

The Court’s Decision 

Torrington Creamery sued Mr. Davenport to enforce the duration and geographical limitations of the restrictive covenant he had signed with Sunny Valley Corporation.  The Superior Court in Litchfield County found in favor of Torrington Creamery, Mr. Davenport appealed the decision, and the case went on to the Connecticut Supreme Court where it affirmed the lower court’s decision.

The Supreme Court found the terms of the non-compete agreement to be reasonable and necessary for the protection of Torrington Creamery’s business interests.  The notion of “protecting an employer’s business interests” is a driving force and major policy concern when deciding whether to enforce a non-compete agreement under Connecticut law.  Restrictive covenants become valuable assets of the employer and courts generally hold that the employer is entitled to the right to safeguard these assets.

Equally as important, the court held that the employer benefits contained in a restrictive covenant can be assigned to a purchaser in the event of the sale of the business and its assets.  Thus, when a company acquires another company, it gains the legal authority to enforce the acquired company’s valid non-compete agreements.  Courts view restrictive covenants as valuable business assets that provide for the necessary protection of the employer and any successor company.

The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Court Enforces Non-Compete Agreement to Protect Employer’s Business Interests

Webster Bank v. Ludwin, 2011 Conn. Super. LEXIS 127

Webster Bank is regional commercial bank with headquarters in Waterbury, Connecticut that provides financial services to customers in Connecticut, New York Rhode Island, and Massachusetts.  The company employed Mr. Michael Ludwin as a dual employee with UVEST Financial Services from January 2007 until the company terminated his employment in June 2010.  Mr. Ludwin signed a new employment agreement with Webster when he became a dual employee wherein the agreement contained a non-compete covenant.

The agreement, executed on February 7, 2009, prohibited Mr. Ludwin, for a period of one year following termination, from engaging in competing business activities within twenty-five miles of Webster Bank’s “base of operation”.  Additionally, he was obligated to refrain from soliciting Webster’s customers and to “treat as confidential the names and addresses of customers” (non-disclosure clause).

Non-Compete Breach

Webster terminated Mr. Ludwin in June 2010 and on July 9, 2010 he began to work for Harvest Capital, LLC, a Wethersfield, CT based financial consulting firm.  Webster’s counsel sent Mr. Ludwin a letter reminding him of his obligations under the non-compete agreement contained in his employment contract and demanded that he observe the enumerated restrictions.  The bank sued Mr. Ludwin in Connecticut state court for violation of the covenant not to compete when Mr. Ludwin failed to curtail his activities and requested that the court issue an injunction preventing any further breaches of the agreement.

The court granted Webster’s request and ordered that Mr. Ludwin “cease and desist from competing with the plaintiffs within a twenty-five mile radius of Hamden and Milford, Connecticut for a period to end on June 30, 2011” and further ordered him to return any and all customer lists that he removed from Webster’s premises.

The Court’s Decision

The court held that injunctive relief was necessary if it was to maintain the status quo between the parties.  Webster presented sufficient evidence to demonstrate that it would experience irreparable harm from Mr. Ludwin’s actions in the absence of an injunction.  Its customer lists and relationships are valuable business interests that are integral to the success of the company and as such the court identified that Webster had a legitimate business interest that was afforded protection under Connecticut law.  Furthermore, the court concluded that the agreement had reasonable provisions that did not excessively favor one party over the other or unnecessarily stifle their future business activities.


The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Differences in the Enforcement of Non-Disclosure and Non-Compete Covenants

Newinno, Inc. v. Peregrim Development, Inc., 2004 Conn. Super. LEXIS 1160

Mr. Russell Koch worked for Newinno, Inc., a consulting firm, where his employment was contingent upon several restrictive covenants contained in his employment contract.  The main agreement between the parties was a non-disclosure covenant designed to protect Newinno’s confidential information and business interests upon Mr. Koch’s termination.  The agreement had four main provisions such that Mr. Koch was: 1) prohibited from disclosing information about the company that “is not generally known in the industry which the company is or may become engaged”, 2) prohibited disclosing any information relating to actual or potential clients’ products, business plans, designs, or trade secrets, 3) prohibited disclosing information from the company’s “BrainBank”, and lastly 4) prohibited disclosing information relating to the company’s “lead/prospect and customer lists”.

The agreement did not articulate any time or geographical restrictions, which became the main issue in the case and how Mr. Koch asserted that the covenant was not binding or enforceable.  These provisions went into effect when Mr. Koch voluntarily terminated his employment at Newinno and began to work for one of its competitors, Peregrim Development, Inc..

The Court’s Decision

Newinno sought to enforce the provisions and requested an injunction from the court to prevent Mr. Koch’s further employment at its direct competitor in order to prevent any breaches of the covenant by him disclosing confidential information.  The court held in favor of Newinno and stated that the company had met the burden of proof to demonstrate that the facts of the case warranted injunctive relief.  In its decision, the court explained that the issue at the heart of the case was not “whether a reasonableness standard should govern the enforceability of the parties’ confidentiality agreements, but rather concerns [regarding] the exact manner in which the test should be defined or applied”.

Enforcing Confidentiality Agreements

Connecticut courts are divided on whether to apply the same criteria and test used to assess non-compete agreements’ enforceability or resort to a more relaxed version of the reasonableness test.  Non-disclosure/confidentiality agreements have traditionally enjoyed treatment that is more favorable under Connecticut laws in the courts than non-compete agreements.  There are not any Connecticut cases, state or federal, that have held that the enforceability of confidentiality agreements hinges on the same standards and test that governs the enforceability of non-compete agreements.

Overall, the courts have concluded that time and geographical restrictions are not necessary in order to enforce a non-disclosure agreement.  This is very divergent from how the courts address the enforceability of non-compete agreements where they generally insist that those provisions are in the text of the agreement.  This trend has led Connecticut courts to apply a modified version of the non-compete enforceability test where the legal analysis takes into account the “purpose of the confidentiality covenants and the specific information sought to be protected.

It is beneficial for an employee to know the difference in the enforcement trends and policies with regard to non-disclosure and non-compete agreements under Connecticut law.  This is especially true when an employment contract contains both covenants and ensuing legal disputes question the validity of each.  A party may succeed on the merits of the case with regard to the enforcement of one covenant and then fail on the merits for the other.

The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Enforcing a Non-Compete Agreement to Protect Software Company’s Confidential Information

Weseley Software Development Corporation v. Burdette, 977 F. Supp. 137

Mr. Wesley Burdette worked for Weseley Development Corporation first as a Logistics Analyst and then as a Senior Logistics Analyst from May 1993 to September 16, 1996.  Weseley was a software development company based in Shelton, Connecticut whose focus product was a transportation and logistics management program referred to as TRACS (Tactical Routing and Consolidation System).  Mr. Burdette played a significant role in the development and testing of TRACS versions 3.0 and 3.1.  He worked with “customers and potential customers to evaluate, develop, tailor, and implement Weseley’s products” during his approximately three years of employment.

He gave Weseley his two weeks notice on August 29, 1996 and planned to switch companies to work for Manugistics for the marketing and sales of its product titled MTP.  Management reminded Mr. Burdette of the non-compete clause in his employment agreement that he had signed.

The most important covenants that he signed in conjunction with his employment contract were those not to compete or disclose confidential information.  The agreement was signed on January 14, 1995 after Mr. Burdette was allowed time to consult with an attorney regarding any and all of the agreement’s provisions.  The non-compete clause stipulated that he could not work for a competitor for a period of six months following his termination with Weseley or disclose confidential information for an indefinite period of time.

The company sued Mr. Burdette to enforce the non-compete and asked the court to enjoin him from further employment with Manugistics.  Mr. Burdette countered that the agreement was unenforceable because its provisions were unreasonable and that Weseley had only signed the agreement once litigation began.

The Court’s Decision

The court found in favor of Weseley and enforced the non-compete covenant, enjoining Mr. Burdette from working for Manugistics for a period of six months as stated in the language of the agreement.  It validated the agreement because there was adequate consideration in the form of “continued employment, an articulated paid vacation entitlement, a new entitlement to severance benefits, and stock options”.  Furthermore, it found the limitations to be reasonable such that they fairly balanced Weseley’s desire to protect its business and Mr. Burdette’s desire to still be able to pursue his career.

It was paramount that the court protected the company’s interests since Mr. Burdette had a great deal of access to proprietary research & development information that could have severely disadvantaged Weseley should Mr. Burdette have shared the information with Manugistics.  Although the court stated that there was no evidence that he had already disclosed confidential information, it held that he would inadvertently draw upon his knowledge gained while employed at Weseley and eventually disclose some amount, however small it may be in, in the course of his new employment with Manugistics.


The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County. If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Excessive Geographical Restriction Invalidates Connecticut Non-Compete Between Dance Studio and Instructor

RKR Dance Studios, Inc. v. Makowski, 2008 Conn. Super. LEXIS 2295
Case Background

This case involved the legal analysis used to determine if a non-compete agreement between a dance studio and one of its instructors is enforceable in the State of Connecticut.  Jessica Makowski worked as an at-will instructor for RKR Dance Studios from November 29, 2001, to September 28, 2007, at one of its franchised dance studios.  Maximize Your Impact, LLC became the franchisor for RKR in January 2004 and thus became the employer of Ms. Makowski.

She signed a non-compete agreement with Maximize on May 5, 2006, that contained provisions specifying a two-year duration and geographical limitation of a fifteen-mile radius from Maximize’s dance studio and a ten mile radius from any Fred Astaire Dance Studio, whether they be corporate-owned, franchised, or otherwise established.  Ms. Makowski voluntarily left Maximize on September 28, 2007 and shortly thereafter began employment with Steps in Time, a dance studio located within ten miles of another Fred Astaire Dance Studio.  Maximize sued Ms. Makowski to enforce the provisions of the non-compete agreement.

Ms. Makowski contended that she did not violate the agreement because there was inadequate consideration and unreasonable limitations, characteristics that would make the non-compete agreement unenforceable.  The court, while finding that there was adequate consideration, ultimately found in favor of Ms. Makowski, held the non-compete covenant to be unreasonable, and denied Maximize’s request for the court to enforce the agreement.

Considering Continued Employment 

The major issue with regard to consideration in this case revolved around the question “is continued employment adequate consideration for a non-compete agreement?”.  The court cited previous cases, both state (Roessler v. Burwell (119 Conn. 289)) and federal (MacDermid, Inc. v. Selle (535 F. Supp.2d 308)), where the courts concluded that continued employment was adequate consideration for at-will employees for restrictive covenants with their employers.

The court highlights the exchange between the parties, such that the employee receives wages and the employer receives his or her services and the protection created by the non-compete agreement.  The payment and receipt of wages was adequate consideration to legitimize a non-compete agreement and render vague terms sufficient for enforcement.  The court did discuss several dissenting cases but noted that the facts of those cases were critically different from the legal dispute between Ms. Makowski and Maximize.

The court emphasized that the pivotal fact with regard to continued employment as adequate consideration is whether it involves at-will employment.  If there is at-will employment, as was the case with Ms. Makowski, then continued employment is sufficient consideration to render the non-compete agreement enforceable.

Unreasonable Restrictions

The agreement was ultimately found to be unenforceable however due to containing unreasonable restrictions.  The court highlighted the public policy of non-compete agreement enforcement and the balance that must be struck between: 1) the employer’s need to protect legitimate business interests, 2) the employee’s need to earn a living, and 3) the public’s need to secure the employee’s presence in the labor pool.  Fair protection must be afforded to employer and employee alike, a principle that is absent in the agreement between Ms. Makowski and Maximize.

The court specifically stated that the geographical limitation was extremely unreasonable and placed a great hardship on Ms. Makowski’s efforts to earn a living and pursue her career.  Evidence pertaining to job prospects in Massachusetts, Rhode Island, Connecticut, and New York revealed that the closest permissible studio to employ Ms. Makowski was located in Natick, MA, a staggering one and a half hour drive from her house.  The court felt that a three hour daily, roundtrip commute was an excessive burden for Ms. Makowski to bear and concluded that this provision was indeed unreasonable and invalidated the agreement as a whole.

If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Balancing Policy Concerns When Determining Enforceability of Non-Compete Agreement

Booth Waltz Enterprises, Inc. v. Pierson, 2009 Conn. Super. LEXIS 1912
Case Background

Speedway Distributors, Inc. employed Mr. David Pierson as a sales representative beginning in 1998 and had him sign a non-compete agreement as a condition precedent to his employment.  The agreement, executed on January 26, 1998, prohibited Mr. Pierson from soliciting Speedway customers or divulging their contact information to other parties for a period of one year following his termination.  Speedway’s primary business operation was distributing aftermarket chemical products in Connecticut, Rhode Island, and western Massachusetts.

On October 20, 1998 Booth Waltz Enterprises, Inc. acquired certain Speedway assets, most notably its customer lists/information and its sales representatives’ non-compete agreements.  Booth Waltz offered Mr. Pierson a job under the new corporate management scheme and asked him to sign a new non-solicitation agreement but he voluntarily terminated his employment.

Following his termination, Mr. Pierson started his own business, Hometown Distributors, which engaged in the same business operations and geographical area as his former employer.  Booth Waltz alleged that Mr. Pierson was soliciting its customers in violation of the non-compete it acquired from Speedway and sued for the enforcement of the restrictive covenant.

The Court’s Decision

The court found in favor of Booth Waltz, holding that the “defendant [Mr. Pierson] has engaged in conduct which is in breach of the restrictive covenant.  This conduct would dictate that the plaintiff [Booth Waltz] is entitled to enforce the agreement”.  Mr. Pierson contended that the provisions of the non-compete agreement were unreasonable, rending the agreement unenforceable, but the court rejected these assertions.  In handing down its decision, the court had to balance the necessity to protect the employer’s business interests and the employee’s right to earn a living.

The duration of one year was reasonable and was supported by the public policy principle that Booth Waltz had a right to protect the long-term relationships that Speedway maintained with its customers.  Additionally, the court concluded that the geographical limitation (Connecticut, Rhode Island, and western Massachusetts) was reasonable because it only restricted specific customers appearing on Speedway’s customer list, and not the region as a whole.

The court also addressed and stated that its holding did not interfere with public interest since it did not unreasonably deprive the public of a good/service for the sake of protecting a business’s recognized interest.  This case is a good example of how a court must balance multiple interests and policy concerns when deciding a case disputing a non-compete agreement between an employer and one of its former employees.

 

If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Connecticut & Missouri Laws Apply the Same Tests to Determine the Enforceability of Non-Compete Agreements

H & R Block Eastern Tax Services, Inc. v. Brooks, 2000 U.S. Dist. LEXIS 19369
The Employment Agreement

Mr. Donald Brooks worked for H & R Block Eastern Tax Services, Inc. as an Accounting Service Manager from December 30, 1996, when he sold his business assets to H & R Block until the company terminated his employment on May 31, 2000.  The closing of the Asset Purchase Agreement was contingent on the execution of an employment agreement.

Under the agreement, H & R Block employed Mr. Brooks on a year-to-year basis but had the authority to terminate him at any time without notice.  The employment agreement contained a covenant not to compete that prohibited Mr. Brooks for two years after termination from soliciting H & R Block’s clients and offering competing business services within a twenty-five mile radius of the company’s offices in the sales district where he worked.  The non-compete agreement also stated that Missouri law would govern the contract and any legal disputes.

Mr. Brook’s termination became effective on May 31, 2000 and he began providing accounting/tax services to former H & R Block clients.  The company sued him for breach of the covenant not to compete and requested that the court enforce the provisions of the agreement.  He claimed that the covenant was unenforceable and therefore his actions did not constitute a breach that entitled the company to any type of relief.  The federal district court found in favor of H & R Block and granted the company’s request for injunctive relief by enforcing the non-compete agreement executed by the parties at the beginning of Mr. Brooks’s employment.

The Court’s Analysis

In its legal analysis, the court evaluated whether to apply the choice of law provision and examined the reasonableness of the agreement.  The covenant designated Missouri law as the choice of law because that was the location of the company’s corporate headquarters.  The agreement stipulated that Missouri law would apply to disputes except when Missouri had no connection to the contract or when its law contradicted public policy of a state with a materially greater interest in the issue.  The court concluded that Missouri had similar laws and public policy with regard to contract, employment, and non-compete principles.

Both states (Connecticut and Missouri) enforce covenants that “impose reasonable restrictions” in order to safeguard the “protectable interests” of a former employer.  Furthermore, both states stress that enforcement of a restrictive covenant must balance the need to protect the employer from unfair competition without unnecessarily restricting the employee’s ability to secure future employment.  The court approved the use of Missouri law due to its similarities with Connecticut state law and the application of very similar tests to ascertain an agreement’s enforceability.

The Agreement’s Restrictions

Next, the court analyzed whether the provisions in the agreement were reasonable limitations and did not excessively restrict Mr. Brooks’s ability to pursue his occupation following his termination from H & R Block.  The court found that the restrictions were temporary and spatially limited.  The agreement specifically prohibited “soliciting, diverting, or taking” business away from H & R Block and the restrictions inserted into the employment contract reflect this objective.

The language and provisions of the covenant restricted competing activities in the Greater Hartford Area but left Mr. Brooks free to practice in the majority of the state of Connecticut and the rest of the country.  These restrictions thus protected H & R Block’s legitimate business interests and did not create excessive hardships for Mr. Brooks.  The court found that the covenant not to compete was enforceable under the laws of both Missouri and Connecticut.

 

The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Two-Prong Test for Temporary Injunction for Breach of Non-Solicitation Agreement

Integrated Corporate Relations, Inc. v. Bidz, Inc., 2009 Conn. Super. LEXIS 2212
Case Background

Integrated Corporate Relations, Inc. was a Westport-based parties relations and public consulting firm that contracted with Bidz, Inc., a California corporation, to perform various investor relations services.  The agreement between the companies contained a non-solicitation clause that prohibited Bidz from soliciting, hiring, or otherwise engaging any of Integrated’s personnel during the agreement and for one year following its termination.  Integrated stated that this was their standard practice with clients in order to protect its legitimate business interests and the resources it had spent to develop its business model.  It also claimed that it incurs a hardship when an employee leaves because it must find a suitable replacement.

Integrated hired Mr. Andrew Greenebaum in 2003 as an at-will employee at the company’s Los Angeles office to work as a Senior Managing Director where he was the primary manager of Bidz’s account.  Mr. Greenebaum worked in this capacity until his resignation on February 27, 2009 at which point he founded his own company, Addo Communications, Inc. with another former Integrated employee.  Bidz terminated its business relationship with Integrated on March 30, 2009 and shortly thereafter contracted with Mr. Greenebaum and Addo for investor relations services.

Granting Temporary Injunction

Integrated sued Bidz when it learned of this new business relationship and claimed that Bidz had violated the non-solicitation agreement in their contract.  The company requested equitable relief and called for the enforcement of the restrictive covenant.  Integrated requested a temporary injunction while the case was being decided in order to prevent further violations of the agreement.  The court’s holding in this case pertains to the issue of whether to grant a temporary injunction.

The court outlined that the primary purpose of a temporary injunction is to “preserve the status quo until the rights of the parties can be finally determined after a hearing on the merits”.  Connecticut courts will generally grant temporary injunctions when the moving party: 1) demonstrates “it is likely to succeed on the merits of its case” and 2) that it will “suffer immediate and irreparable harm if the injunction is not granted”.  The court concluded that Integrated failed to meet either of these requirements and denied the company’s request for a temporary injunction.

The Court’s Decision

The court concluded that Integrated lacked a meritorious claim regarding a breach of the employment contract by Bidz contracting with one of its former employees.  The non-solicitation agreement in question is one between a consulting company and a client, not between a company and its employee(s).  Integrated failed to present any case from any jurisdiction in the United States where a court recognized this business arrangement as an interest that warranted legal protection.

This, according to this court, meant that Integrated lacked a legitimate business interest that a temporary injunction would be necessary to protect.  Additionally, Integrated failed to present evidence that Bidz had actually “solicited” Mr. Greenebaum and purposefully induced him to terminate his employment with Integrated.  The court used these two factors to hold that that Integrated would most likely not succeed on the merits of its case.

Conclusions

The facts of the case also led the court to conclude that Integrated would not experience imminent and irreparable harm if it failed to issue an injunction.  The court held that this was requisite for granting a temporary injunction and commented “Connecticut law supports a distinctly moderated level of proof required to establish the elements of irreparable harm”.  Even though Connecticut courts require only a “moderated level of proof”, the moving party must demonstrate some degree of imminent, irreparable harm.  The only loss that Integrated could demonstrate was that two employees terminated their employment and started their own company.  They were both at-will employees however and could have done so at any point in time, regardless of Bidz’s action.

In conclusion, the court held that Integrated failed to meet the requirements that would warrant a temporary injunction against Bidz to prevent it from transacting with Mr. Greenebaum and his company Addo.

The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

“Inevitable Disclosure Doctrine” Fails to Demonstrate Breach of Non-Disclosure and Non-Compete Agreements

EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299
EarthWeb, Inc. v. Schlack, 2000 U.S. App. LEXIS 11446

Mr. Mark Schlack worked for EarthWeb, Inc. from October 19, 1998 to September 22, 1999 as the company’s Vice President of Worldwide Content where he had overall editorial responsibilities for the company’s website.  EarthWeb was started in 2004 and had 230 employees nationwide that provided online products and services to business professionals in the information technology (IT) industry.  The company and Mr. Schlack signed an employment agreement on October 13, 1998 that contained non disclosure and non compete clauses.

The restrictions prohibited Mr. Schlack from being an employee of a business entity that directly competed with EarthWeb for a period of twelve months after his termination.  The agreement provided consideration in the form of Mr. Schlack’s salary, performance-based bonus, and stock options.  Mr. Schlack tendered his resignation in September 1999 and informed his superiors at EarthWeb that he had accepted a position with ITworld.com, a subsidiary of IDG, another business connected to the IT industry.

EarthWeb Takes Action

EarthWeb sued Mr. Schlack in federal court and asked it to grant a preliminary injunction to prevent him from working for ITworld.com.  EarthWeb sued in order to protect its confidential information and trade secrets related to several components of its business operations: 1) strategic content planning, 2) licensing agreements and acquisitions, 3) advertising, and 4) technical knowledge.

The company argued that an injunction and the enforcement of the non-compete agreement were necessary to prevent disclosure of its trade secrets and confidential business information.  The federal court denied EarthWeb’s request and the company appealed to the Second Circuit Court of Appeals (jurisdiction over Connecticut, New York, and Vermont).  At the appellate level, the court affirmed the district court’s decision and held that the denial of the injunction and enforcement was proper given the facts of the case.

How to Prove Irreparable Harm

The Second Circuit had previously held that a demonstration of irreparable harm is the “single most important prerequisite for the issuance of a preliminary injunction”.  Mamiya Co. v. Masel Supply Co., 719 F.2d 42, (1983).  Disclosure of trade secrets and confidential information has traditionally been sufficient to show irreparable harm so long as the harm is imminent.  The mere possibility of harm is insufficient and motions should be denied when the harm described in the complaint is remote and speculative.  This case did not involve actual theft or misappropriation of confidential information, only the possibility of future disclosure.

Mr. Schlack defended himself by asserting that the position awaiting him at ITworld.com was very different from his job at EarthWeb and that he would not have an occasion to divulge any of EarthWeb’s confidential information.  Additionally, he claimed that EarthWeb’s complaint overstated his responsibilities and he was nowhere close to being a senior executive with access to vast amounts of confidential information.

Shortcomings of EarthWeb’s Argument

EarthWeb had the burden to show that Mr. Schlack’s breach of the non-compete agreement would create irreparable harm.  The appellate court held that the company had failed to establish that an injunction was reasonably necessary to protect its business interests.  The company failed to produce any evidence that there was an imminent risk that Mr. Schlack would disclose EarthWeb’s confidential information while being employed at ITworld.com.

The court stated that EarthWeb had relied on the “Inevitable Disclosure Doctrine”; a theory the court rejected and commented should only be applied in the rarest of circumstances.  The doctrine heavily relies on speculation and “what ifs” to advance a request for injunctive relief for breach of a non-compete agreement.  This doctrine employed insufficient concrete evidence that there would be a disclosure of confidential information and both the district and appellate courts denied EarthWeb’s request for injunctive relief in the form of enforcing the restrictive covenant.

The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.