Posts tagged with "clauses"

Connecticut Federal Court Applies Louisiana Law to Enforce Non-Compete to Protect Confidential Information

In United Rentals, Inc. v. Myers, 2003 U.S. Dist. LEXIS 25287, United Rental, Inc. was a Delaware corporation with principal business operations in Connecticut that employed Ms. Charlotte Myers in its Shreveport, Louisiana office from May 20, 2002, to March 7, 2003.  She signed an employment agreement with United Rentals on her first day of work that contained non-compete and confidentiality clauses that prohibited employment for a period of twelve months at any competing company located within one hundred miles of a United Rentals location where she worked.

The restrictive covenants further stated that the state and federal courts in Fairfield County, Connecticut would have jurisdiction in the event that legal proceedings ensued.  Upon her voluntary termination from United Rentals, Ms. Myers began to work at Head & Enquist Equipment, Inc., a competitor, at an office located approximately ten miles away from the United Rentals’ Shreveport office.  United Rentals contacted her to remind her of the restrictive covenants and her obligations under them but she continued her employment with Head & Enquist.

The Lawsuit

United Rentals sued Ms. Myers in Connecticut federal court for breach of the non-compete and confidentiality agreements and sought a court injunction to enforce their provisions.  The court found in favor of United Rentals and granted its request to enforce the non-compete agreement.

Ms. Myers presented various arguments to the court to persuade it to deny enforcement of the agreement, but the court ultimately found in favor of United Rentals.  She argued that Louisiana law should be controlling in the legal dispute, and further asserted that Louisiana law does not permit “choice of law” clauses in employment agreements.

The court investigated Ms. Myers’ contention and explained that the proper procedure to determine if a “choice of law” clause is permissible is to consult the law of the state being selected, in this case, that of Connecticut.  Connecticut law however cannot be the “choice of law” state when there is another state with a “materially greater interest…in the determination of the particular issue”.  The court held that Louisiana did in fact have a greater interest in the dispute and thus Louisiana law was applicable and controlling for the case.

The Court’s Decision

Although Louisiana law is less than favorable to United Rentals with regard to “choice of law” clauses, it still recognizes that parties are entitled to a remedy in connection with a violation of a confidentiality agreement “if the material sought to be protected is in fact confidential”.  Courts generally view the disclosure of confidential information as sufficient evidence for a company to establish that it would suffer irreparable harm if an injunction were not granted.

During her employment with the company, Ms. Myers was exposed to and had access to United Rentals’ trade secrets, contract details, customer data, financial information, and marketing plans/strategies.  The court held that this was clearly sensitive and confidential information, the content of which entitled United Rentals to protection in the form of a court-ordered injunction.

The court held for United Rentals despite applying Louisiana law in response to Ms. Myers’ justified assertion that this specific “choice of law” provision was not valid.  Although Louisiana law shuns “choice of law” provisions in non-compete agreements, it does support injunctions when it is necessary and proper for a company to protect its confidential business information.

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.

Sufficient Consideration for At-Will Employees

Home Funding Group, LLC v. Kochmann, 2007 U.S. Dist. LEXIS 41376

Home Funding Group, LLC was a New York corporation with primary business operations in Connecticut that engaged in the residential mortgage brokerage business.  The company employed Mr. Nicholas Kochmann and Mr. Patrick Dougherty in its New Jersey office.  They worked at-will for the company from January 2004 to May 1, 2006, and July 18, 2006, respectively.  The company had both employees sign an Employment Agreement that contained non-compete and non-solicitation clauses to protect Home Funding’s business interests.

The employees later signed an “Invention Assignment Agreement” stating that Home Funding was the sole owner of any invention connected to their employment and that it would maintain full intellectual property rights.  The agreement stated that Connecticut law would govern any legal disputes and litigation in state and/or federal court.  Both employees signed a new restrictive covenant in March 2006 that amended and superseded the 2004 Employment Agreement.

Misters Kochmann and Dougherty both voluntarily terminated their employment with Home Funding and Hamilton Financial, a direct competitor in the mortgage broker industry, hired them shortly thereafter.  Home Funding sued its two former employees for breach of the non-compete agreements and requested they be enjoined from further employment with Hamilton Financial.

The Court’s Decision

Misters Kochmann and Dougherty asserted that the agreements were not legally binding on them because they lacked valid consideration, claiming that continued employment is inadequate consideration for a covenant executed after the start of employment.  The federal court sitting in Bridgeport, Connecticut rejected this argument and held that the agreements were properly executed, contained adequate consideration, and were binding upon the parties.

The former employees argued that Connecticut law requires an employer to promise to something different from what it is already obligated to do when it wants to modify/amend a restrictive covenant with one or more of its employees.  The court however applied Home Funding’s legal assertion that at-will employees may be terminated at any time at the employer’s discretion and thus continued employment amounted to adequate consideration to support a valid non-compete agreement.

The court noted that in this case, Home Funding had the burden of proof at trial to demonstrate that the agreement was correctly executed and enforceable.  Home Funding was able to provide such proof and the federal court held in its favor.  Had Misters Kochmann and Dougherty not been at-will employees however, the court would have likely held that the agreement did not have the requisite consideration and could have invalidated the agreement in its entirety.

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.

Role of Consideration in a Connecticut Non-Compete Agreement

J. M. Layton & Co. v. Millar, 2004 Conn. Super LEXIS 2226
Case Background

Mr. Reid Millar worked at J. M. Layton & Co., a Connecticut commercial insurance brokerage firm, for close to twenty years until he voluntarily terminated his employment on December 3, 2003.  During his career at Layton, Mr. Millar developed and maintained client relationships and the company even sent him to seminars in Florida on how to engender customer loyalty.  In January 1994, the company’s ownership transferred to an ‘Employee Stock Option Plan” scheme wherein Mr. Millar and the other employees became the new owners of the brokerage firm.  Mr. Millar signed an employment agreement later that year in August.

Mr. Millar signed this agreement in response to a memo from the company’s president stating, “The value of the stock in the company would increase when all employees/shareholders signed employment agreements”. The employment agreement contained non-compete and non-solicitation clauses prohibiting Mr. Millar from performing any service provided by Layton for a period of two years to any entity or person that was a client of Layton in the two years prior to termination.

Four years later, in 1998, the employee-owners sold the firm to SIG Acquisition Co. for $5.59 million.  Mr. Millar terminated his employment on December 3, 2003 and began to work for a competitor, Shoff Darby, soon after this decision.  Several clients made the switch with Mr. Millar and he provided them with services they previously received from Layton.  Layton sued Mr. Millar to enforce the terms of the restrictive covenant to which Mr. Millar presented a defense that there was not adequate consideration for the agreement to be enforceable.

The Court’s Decision

The court found in favor of Mr. Millar and held that the agreement between Layton and himself lacked the adequate consideration required to make the covenant legally binding on the signatory parties.  The court rejected Layton’s contentions that continued employment and increased value of stock in the firm were adequate forms of consideration for the agreement.

Consideration is a crucial contract law principle wherein each party must receive a benefit and/or a detriment from the agreement to make it legally valid and enforceable.  In the absence of consideration, an executory promise is generally unenforceable.  Courts have determined that continued employment alone is not adequate consideration for a restrictive covenant.  Past decisions have permitted it to qualify as adequate consideration when it accompanied by another defined benefit such as a change in compensation.

Likewise, the court held that the “increase in stock value” argument was without merit and did not constitute adequate consideration.  There was a timeline disconnect with the issuance of the stock, the employment agreement, and any increase in value that prevented adequate consideration in this form.  Mr. Millar received the stock seven months prior to signing the employment agreement and the increase in its value (if any) occurred four years after the agreement’s execution.

These components lacked a coherent connection that would unite them in a manner as to represent the adequate consideration needed to make the agreement enforceable.  The court concluded that the possible increase in stock value was far too “imprecise, indefinite, and self-serving, to be adequate consideration” and it denied Layton’s request for enforcement of the non-compete agreement.

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.

Contract Principles in Connecticut Non-Compete Agreements: Consideration and the Parol Evidence Rule

United Rentals, Inc. v. Bastanzi, 2005 U.S. Dist. LEXIS 45268
Case Background

This federal case involved an employee, one Mr. Jeffrey Bastanzi that started his own company in direct competition with his employer while still in its employment, allegedly in violation of a non-compete agreement signed by both parties.  Mr. Bastanzi worked for United Rentals, Inc. from July 2003 to March 30, 2005, as a salesperson in the company’s Gainesville, Florida office.  United Rentals is a Delaware corporation with principle business operations in Connecticut that rents and sells equipment and contractor supplies (including but not limited to safety equipment, hand tools, anchoring systems, hard hats, and silk fencing).

Mr. Bastanzi was provided with United Rentals’ “Business Ethics Policy” and “Conflict of Interest Policy” on the first day of employment wherein the latter contained a clause stating “no employee shall own or have an interest, directly or indirectly, in any competing enterprise or activity, which conflicts or might conflict with United Rentals’ interests, except with the written approval of the Chief Operating Officer”.

Ten months into the job, on May 10, 2004, United Rentals had Mr. Bastanzi sign a “Confidentiality and Non-Competition Agreement” containing non-compete, non-disclosure, and non-solicitation clauses.  The covenant established a duration of twelve months, a geographical limitation of seventy-five miles in any direction of United Rentals’ Gainesville office, and stipulated that the company be entitled to injunctive relief in the event Mr. Bastanzi violated the agreement.

Breach of the Employment Agreement

United Rentals alleged that Mr. Bastanzi breached the agreement by operating his own competing business, B&S Industrial and Contractor Supplies, LLC, while still employed by the company and within the twelve months following his termination.  Mr. Bastanzi started B&S with his wife in 2004 and began contacting United Rentals’ vendors to inquire about becoming a distributor for their products.  B&S continued to grow at a steady pace and eventually Mr. Bastanzi’s co-workers informed management that he was operating a competing business on the side.

United Rentals terminated Mr. Bastanzi after it conducted an investigation into the matter and found the allegations to be true.  At this point Ms. Bastanzi began to work full time at his new company B&S, at that time making approximately $30,000.00 in monthly sales.  United Rentals proceeded to sue Mr. Bastanzi for breach of the non-compete agreement to which he offered three defenses to the court: 1) the agreement lacked consideration, 2) he signed the restrictive covenant under duress, and 3) the agreement was incomplete.

Adequate Consideration

The court found in favor of United Rentals, ordered the enforcement of the non-compete agreement, and invalidated all of Mr. Bastanzi’s defenses.  It concluded that there was indeed adequate consideration in the non-compete agreement that would make it binding upon the parties.  Mr. Bastanzi received continued employment at United Rentals at a mutually agreed upon salary plus the added benefit of a conditional severance package, while United Rentals in return received Mr. Bastanzi’s services and the benefit(s) of the restrictive covenant.  Citing a previous federal case, Sartor v. Town of Manchester (312 F. Supp.2d 238 (D. Conn. 2004)), the court stated that, “Connecticut recognizes that continued employment is adequate consideration to support non-compete covenants with at-will employees”.

Burden of Proof

Next, the court concluded that Mr. Bastanzi did not meet the burden of proof with respect to his claim that he signed the agreement under duress.  Mr. Bastanzi failed to impress upon the court that United Rentals committed any “wrongful act or threat” in conjunction with him signing the non-compete agreement.  Courts have the authority to invalidate a contract/agreement if there is sufficient evidence that one or more of the parties engaged in fraud or wrongful acts, but in the face of insufficient evidence, the court would not invalidate the agreement between United Rentals and Mr. Bastanzi.

Parol Evidence Rule

Thirdly, the court rejected Mr. Bastanzi’s claim that the non-compete agreement was an incomplete document and therefore not binding upon the parties.  To come to this conclusion, the court applied a very important contract principle, that of the Parol Evidence Rule.  The rule prohibits the use of evidence outside the content contained within the four corners of the contract/agreement concerning matters discussed and governed by the finalized document.

Mr. Bastanzi told the court that he received oral representations from management before he was hired stating he would not have to sign a non-compete agreement with United Rentals.  The finalized document signed by Mr. Bastanzi and United Rentals however did not reflect any of these oral representations and there was not sufficient evidence that the terms of the non-compete agreement were designed to render the alleged representations binding upon the parties.  Considering this and applying the parol evidence rule, the court ultimately concluded that the agreement was complete and Mr. Bastanzi’s claim lacked merit.

 

If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment contract, 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.