Posts tagged with "Trade Secrets"

Court Invalidates Non-Compete Agreement for Unreasonable Restrictions

Trans-Clean Corp. v. Terrell, 1998 Conn. Super. LEXIS 717

Trans-Clean Corp. was a company engaged in the business of restoring exteriors and interiors of commercial buildings.  The company began to employ Mr. Alton Terrell as a salesman and manager in December 1990 in connection with the company’s acquisition of Travel Washer, Inc..  The parties executed an employment agreement that created a one-year term of employment, specified the compensation schedule, and contained a non-competition covenant.  The non-compete agreement stated that Mr. Terrell was prohibited for two years following the completion of his employment contract or any renewal thereof from competing with Trans-Clean within sixty miles of the company’s main office in Stratford, CT.

The parties negotiated a pay increase in 1993 and a new compensation schedule was created.  Trans-Clean considered this a renewal of the original employment contract and held the belief that the non-compete agreement was still valid and in effect.  Mr. Terrell however did not share the same view and did not treat the pay increase and new compensation schedule as a renewal of the original contract.  While the parties had different interpretations of the pay increase, there were no direct discussions to clarify its characteristics.

The Dispute

Mr. Terrell suddenly resigned from Trans-Clean in September 1997 and proceeded to create his own commercial restoration company and solicited business from individuals/businesses on Trans-Clean’s customer list.  Trans-Clean sued Mr. Terrell and asked the court to issue an injunction to enforce the non-compete agreement and prevent any further violations.  The court had to tackle two central issues to decide the dispute: 1) whether customer lists are protected trade secrets and 2) the nature and reasonableness of the employment contract and non-compete agreement.  It held that the lists were not trade secrets that entitled Trans-Clean to an injunction and further concluded that the non-compete agreement was unreasonable and unenforceable.

The court held that the customer lists were not trade secrets or confidential information that required protection.  There was never a company policy to designate the lists as confidential information or maintain a degree of secrecy of customers or contact persons.  Furthermore, each salesperson maintained his or her own personal contact lists and did not have any direct access to other sales representatives’ lists.  Each salesperson had the responsibility of developing his or her list, maintaining business relationships, and collecting accounts.  These lists did not amount to a business interest for which Trans-Clean was entitled to protection and injunctive relief.

Reasonableness of the Covenant

Next, the court assessed the reasonableness of the covenant not to compete and found that its provisions, specifically the geographical restriction, were unreasonable and unenforceable.  The sixty-mile radius restriction covered 75% of Connecticut, including the state’s six major metropolitan areas (Bridgeport, New Haven, Hartford, Waterbury, Stamford, and Danbury), and extended into parts of New York (including four out the five boroughs) and New Jersey.  The restriction, according to the court, was overreaching and unnecessarily infringed on Mr. Terrell’s ability to purse his occupation and obtain future employment.  He had twenty years of experience in the commercial restoration industry and it was the only field in which he had ever worked.

Renewal of the Original Agreement

Lastly, the court analyzed whether the pay increase and modification of the compensation schedule amounted to a renewal of the original agreement.  The court stated there was a “question of fact” that it needed to answer in order to decide the case.  It noted that the writing drawn up by the company regarding the pay increase did not make any reference to the original employment contract and there was no apparent connection between the two writings.

In the absence of any reference or connection, the court concluded that the pay increase was not a renewal or extension of the original employment contract.  The court noted however that Mr. Terrell “should be bound by the non-compete agreement if that agreement is found to be reasonable”.  The court’s earlier analysis revealed that the covenant was in fact unreasonable, thereby overriding Mr. Terrell’s obligation to abide by its provisions.


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.

A Quick Guide to Separation Agreements and Severance Packages

Separation Agreements

Today’s report on the lagging unemployment numbers serves as a stark reminder that the state of the economy, though on the upturn, continues to move at a slow pace and that unemployment is a very real problem facing too many people.  Attorneys in our Westport office continue to see a high number of Separation Agreements and severance packages by employees who have been laid off.  What those employees should know is that experienced employment law attorneys, such as those at Maya Murphy, P.C., can review those agreements to negotiate an enhancement or increase of the benefits received.

Because there is no such thing as a standardized severance package, each and every term is crucial and should be carefully scrutinized.  As such, no employee should feel obligated to sign a Separation Agreement and return it to his or her employer without subjecting it to further review and negotiation by employment attorneys with a wide breadth of knowledge in the field.

Severance Packages 

Severance pay refers to a voluntary offer of payment from an employer to an employee who has recently been laid off.  No law requires an employer to offer a terminated employee a severance package.  However, employers offer severance packages, among other reasons, to maintain goodwill with past and future employees, to prevent employees from appropriating trade secrets, customer lists, and other proprietary information, and to ensure that employees refrain from engaging in professional associations with competing companies or businesses, or “non-competition agreements,” a separate issue on which Maya Murphy attorneys are well-versed.

It is crucial to remember that the time in which to respond to and agree to a severance agreement can be very limited, often to no more than one or two weeks, meaning it is in a terminated employee’s best interest to consult with an attorney as soon as possible after receipt of an agreement.

In sum, it is vital to have an attorney experienced in employment law take the lead on reviewing your Separation Agreement, negotiating with your company or business, and vigorously advocating on your behalf.  Should you be confronted with a Separation Agreement, contact an attorney at our Westport office at 203-221-3100.

Industry Specific Factors Can Render Unenforceable a Covenant Not to Compete

Case Background

A non-compete covenant may be unenforceable even if it is reasonable in terms of geographic designation and time limitation.  In Creative Dimensions, Inc. v. Laberge, 2012 Conn. Super. LEXIS 1464 (Conn. Super. May 31, 2012), two individuals sold their business and became “at will” employees of the purchaser.  At issue was a nationwide agreement not to compete for a period of 18 months following termination of their employment.  The court found the covenant reasonable in time and space but unenforceable nevertheless because of certain other factors, including attributes of the underlying industry.

The employer offered goods and services in the area of trade show signs, services, and exhibits.  The former employees joined a sign company that, as a result, expanded into the portable and custom exhibits market.  In deciding the case, the Court focused on two of the five factors relevant to determining the enforceability of a restrictive covenant: the extent to which it (a) protects legitimate business interests, and (b) unreasonably restricts an individual’s ability to engage in an occupation or profession.

Protections of the Non-Compete Covenant

Significantly, the defendants were the only employees of the plaintiff subject to a covenant not to compete.  The employer argued that it had invested time, energy, and money in the defendants as at will employees.  To this contention, the Court responded: “. . . an employer’s desire to stop competition from an employee in whom the employer has invested time, energy, and money is not sufficient, alone, to support the validity of a Covenant not to Compete or not to Solicit.

Equitably, the Covenant must protect against something more, and must be bargained for in exchange for more.”  Stated differently, a covenant not to compete must seek to protect against something more than mere competition, i.e., some advantage the employee acquired that would render unfair his immediate competition.

In this case, there was no evidence that the employer had trade secrets or confidential data that defendants accessed prior to their departure. By the same token, the employer’s customers were either already public knowledge or readily accessible through its own website.  The relationship between the employer and its customers was not markedly different from those of other portable display businesses.  In fact, the employer’s customers often used the services of the employer’s competitors, and the employer on occasion even outsourced business to its competitors. Significantly, the employer did not require other employees to sign a covenant not to compete even though employees had been lost to competitors in the past.

The Court’s Decision

As a result, the Court concluded that the employer did not truly believe that such covenants were necessary to protect itself within the portable display market.

The Court also found that the covenant seriously impeded defendants’ ability to pursue their chosen careers.  “The test for reasonableness is not whether the defendants would be able to make a living in other ways, or in other occupations, but whether or not the [covenant] as drafted and applied would unfairly restrain their “opportunity” to pursue their occupation.”

Finally, the Court emphasized that the portable display market “does not involve a fixed and unchanging clientele.”  The market is highly competitive, customer loyalty is fleeting, and sales staff are fairly transient.  In sum, while the defendants may have learned aspects of the trade show business while in the plaintiff’s employ, they were not provided with specialized or protected knowledge not readily available to others in the field.  Consequently, by virtue of their employ, defendants were not possessed of an unfair advantage in the market.

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.

The Enforceability of Liquidated Damages Provisions in Non-Compete Agreements

What is a Non-Compete Agreement?

A non-compete clause, or restrictive covenant, is a standard feature of many employment contracts.  Employers seek to protect their trade secrets and proprietary information by ensuring that employees who leave their employ are unable to compete with them for a reasonable time and within a reasonable geographic distance.

Connecticut uses a five-prong test to determine the enforceability of a non-compete agreement, examining (i) the reasonableness of the time restriction, (ii) the reasonableness of the geographic restriction, (iii) the degree of protection afforded to the employer, (iv) whether it unnecessarily restricts the employee’s ability to pursue his career, and (v) the degree to which it interferes with the interests of the public.

The employment attorneys at Maya Murphy, P.C. have extensive experience in employment contracts and specifically, with non-compete agreements.  Before signing away your rights, you should consult with an advocate attorney who can make sure that you won’t be prevented from earning your professional livelihood.

Liquidated Damages

Issues arise where a restrictive covenant contract provision provides for a fixed sum of damages, sometimes in the form of liquidated damages. Liquidated damages refers to a fixed sum of money agreed upon by the contracting parties during the formation of the contract.  Whether or not a liquidated damages provision will be enforced depends on whether any damage has actually been sustained.[1] Therefore, where a court finds that no damage has been sustained by a party, a liquidated damages clause will not be enforced.[2] 

Moreover, if the court determines that payment of the liquidated damages would represent a windfall provision, the clause will not be enforced.[3] In Connecticut, courts employ a three-pronged test to evaluate whether a liquidated damages provision is an unenforceable penalty, or windfall.  Such a provision will be deemed unenforceable if: (i) the damage which was to be expected as a result of a breach of the contract was uncertain in amount or difficult to prove; (ii) there was an intent on the part of the parties to liquidate damages in advance; and (iii) the amount stipulated was reasonable and not greatly disproportionate to the amount of damage caused by the loss.[4]

 

If you are faced with a liquidated damages provision in a non-compete agreement, look no further than the attorneys at Maya Murphy to guide you through the process and negotiate on your behalf.  Please contact the firm’s Westport office, at 202-221-3100.


[1] PRF, Inc. v. Gosselin, 1993 Conn. Super. LEXIS 3201 (Conn. Super. Ct. Dec. 1, 1993).

[2] Id.

[3] Id.

[4] Webster Fin. Corp. v. Levine, 2009 Conn. Super. LEXIS 841 (Conn. Super. Ct. Mar. 24, 2009).

Requisite Proof to Demonstrate Irreparable Harm in Connection to Breach of Non-Compete

VBrick Systems, Inc. v. Stephens, 2009 U.S. Dist. LEXIS 45835
Case Background

VBrick Systems, Inc. was a Delaware corporation with primary business operations based in Wallingford, Connecticut that provided networked streaming video products and services.  The company employed Mr. Robert Stephens as its Army Federal Territory Manager from July 2005 until April 1, 2008, when he tendered his resignation from the company and began to work at Optibase, Inc as its Director of Federal Sales.  Optibase is a direct competitor that also sells networked video products and services to government, military, and private sector customers. Mr. Stephens traveled to Connecticut after he was hired by VBrick to attend a training session at the company’s headquarters and signed an employment agreement that contained non-compete and non-disclosure clauses.

The Employment Agreement

In the agreement, he agreed to refrain from working at a competing company during an eighteen-month period after his termination from VBrick.  The non-disclosure covenant stipulated that Mr. Stephens be legally obligated to maintain the confidential nature of VBrick’s business operations and information that he had access to during his employment with the company.  The employment agreement stated that Connecticut law would govern any legal disputes but failed to enumerate any geographical limitations for the restrictive covenants.

VBrick alleged that Mr. Stephens breached the covenants by accepting a position with a competitor within eighteen months of his termination and by using VBrick’s proprietary information in his role as an Optibase employee.  VBrick sued in federal court and requested that the court enforce the provisions contained in the restrictive covenants.  The court ultimately found in favor of Mr. Stephens and denied VBrick’s request for injunctive relief.  The court found that VBrick did not meet the burden of proof to demonstrate that it would suffer irreparable harm if the court did not issue an injunction.

The Court’s Decision

The court held that VBrick failed to present adequate and convincing evidence that Mr. Stephens actually possessed or had access to any of its trade secrets or confidential information.  He had familiarized himself with the products he was marketing and selling by using the company’s training programs and corporate website, both of which are accessible by the public.

Additionally, VBrick did not convince the court that Mr. Stephens’ action as an Optibase employee had “affected or will significantly affect VBrick’s sales or revenues”.  This meant that VBrick was unable to show that it had been adversely affected by Mr. Stephens’ actions or that it was likely to be in the future.  VBrick’s testimony offered evidence to the contrary when it stated before the court that its sales and revenues remained strong despite Mr. Stephens’ termination and the national economic downturn.  In light of inadequate evidence to show that Mr. Stephens’ action at Optibase created an imminent danger for VBrick’s business operations, the court had no option but to deny VBrick’s request for injunctive relief.

 

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.

Court Denies Injunction Against Former IBM Executive

By:  Joseph Maya, Esq.

Early in the morning of January 19, 2011, Mr. Visentin notified IBM that he was leaving the company to work for a major competitor- Hewlett-Packard.  Just one day later, he found himself the subject of a lawsuit.  On January 20, 2011, in an effort to enforce the parties’ noncompetition agreement, IBM filed suit against Mr. Visentin, a former executive, in the United States District Court for the Southern District of New York, claiming breach of contract and misappropriation of trade secrets.

Case Background

On January 24, 2011, the Court issued a temporary restraining order, and scheduled the case for a preliminary injunction hearing.  Within five days of providing IBM with notice of his departure, Mr. Visentin was effectively without a job, precluded- at least temporarily- from engaging in his newly secured position.  This case demonstrates not only the force, speed and agility of a large corporation’s legal team, but perhaps more importantly, illustrates the effectiveness of a quickly orchestrated and well-executed legal defense.

Prior to his resignation, Mr. Visentin worked for IBM in various capacities for twenty-six years.  In 2006, he became a Global Vice President in the company’s Integrated Technology Services Group (ITS).  Then, in September, 2007, he became General Manager of the ITS business.  Responsible for providing its clients with various technology services, including services to improve data storage and recovery capabilities, protect networks from viruses, and implement data security systems, this segment generates approximately five thousand to nine thousand deals per quarter, and total revenue of $2.5 billion annually.

In December, 2008, Mr. Visentin was appointed to IBM’s Integration and Value Team, a leadership group that develops IBM’s corporate strategy.  Although there were technical aspects of Mr. Visentin’s various positions, after hearing four days of testimony, the Court found that he was a business manager, not a technical expert.

Non-Compete Agreements

As part of his employment with IBM, Mr. Visentin signed two noncompetition agreements, the first on July 16, 2008 and the second on July 29, 2009.  The July 29th agreement essentially provided that during his employment with IBM, and for 12 months thereafter, he would not directly or indirectly engage in or associate with any competitors of the company.  Mr. Visentin also agreed to a restrictive covenant precluding him from soliciting IBM clients for a period of one year, and IBM employees for a period of two years.

IBM’s first argument was that if Mr. Visentin were allowed to work for HP, IBM would be irreparably harmed because Mr. Visentin’s new position posed the risk that he would inevitably disclose confidential IBM information.  IBM argued that Mr. Visentin possessed a plethora of confidential information including strategic business and marketing plans, “strategic initiative,” new service offerings, acquisition plans, the operational finances of the ITS business, IBM’s competitive business and pricing strategies, the identity of new client targets, the identify of troubled clients, and IBM’s competitive strategies to attack HP.

Court Denies Injunction

In denying IBM’s application for an injunction, the Court first noted that a preliminary injunction is “an extraordinary and drastic remedy which should not be routinely granted.”  Med. Soc’y of State of N.Y. v. Toia, 560 F.2d 535, 538 (2nd Cir. 1977).  Indeed, to obtain a preliminary injunction, the moving party must demonstrate, first, that it will be irreparably harmed if an injunction is not granted, and, second, either a likelihood of success on the merits or sufficiently serious questions going to the merits to make them a fair ground for litigation, as well as a balance of the hardships tipping decidedly in its favor.  Lusk v. Vill. Of Cold Spring, 475 F.3d 480, 485 (2nd Cir. 2007).

To show that it will be irreparably harmed, a movant bears the burden of demonstrating that absent an injunction, it will suffer an injury that is neither remote nor speculative, but rather actual and imminent, and one that cannot be redressed through a monetary award. Payment Alliance Int’l, Inc. v. Ferreira, 530 F. Supp. 2d 477, 480 (S.D.N.Y. 2007).

Next, the Court explained that in New York, properly scoped noncompetition agreements are enforceable to protect an employer’s legitimate interests so long as they pose no undue hardship on the employee and do not militate against public policy.  BDO Seidman v. Hirshber, 712 N.E. 2d 1220, 1223 (N.Y. 1999).

The Court further explained that trade secrets and confidential information are considered legitimate interests; however, only that confidential information or those trade secrets that the employee misappropriates or will inevitably disclose are protectable.  Reed, Roberts Assocs., Inc. v. Strauman, 353 N.E. 2d 590, 593 (N.Y. 1976).

Court’s Ruling

In ruling in Mr. Visentin’s favor, the Court noted that his primary job at IBM was to be a general manager, explaining, “[a]lthough trade secrets may have lurked somewhere on the periphery, the real thrust of his position was to manage his teams to make them as efficient as possible.”  The Court relied on Mr. Visentin’s testimony that he had never taken a computer science course and considered himself a generalist.  Mr. Visentin testified, “I am not technical, I don’t know the details of offerings, I’m more of a general manager and I run a business.”

The Court also relied on the testimony of Mr. Visentin’s new manager at HP, who confirmed that Mr. Visentin’s generalist qualities were the driving factor behind his hiring.  Mr. Visentin’s future manager testified that he hired Mr. Visentin because, “he had good general IT services knowledge [and] broad experience,” and that Mr. Visentin struck him, “as a process-oriented thinker, a guy who could sort of connect the dots, if you will, of the overall responsibilities of the job.”  He also testified that Mr. Visentin’s job would not include involvement in technical services, but rather would be to “manage people.”

Court Does Not Find

Although IBM identified numerous types of information potentially in Mr. Visentin’s possession which it argued should be afforded protection, the court noted that much of the information is either applicable to all large corporations, in the public domain, or outdated, and, thus, does not constitute “trade secrets.”

The court also explained that simply showing Mr. Visentin had access to some confidential information does not sufficiently demonstrate irreparable harm.  IBM failed to provide specific examples of confidential or trade secret information that could actually be used to its detriment if Mr. Visentin were allowed to assume his new position at HP.  The Court further held that IBM failed to demonstrate Mr. Visentin’s position at HP would require him to disclose any confidential IBM information he might remember.

Contact Us

Attorney Joseph Maya is a Managing Partner of Maya Murphy, P.C. Litigation Department. He can be reached by telephone in the Firm’s Westport office at (203) 221-3100 or by e-mail at JMaya@Mayalaw.com.

Fairfield County Employment Law Attorneys

Did your employer refuse to honor a promise made to you?
Have your rights been violated in the workplace?
Your should seek immediate legal help to protect your rights before the statute of limitations expires on your potential claims.

At the Westport, Connecticut law offices of Maya Murphy, P.C. we represent executives, directors, managers, and other employees throughout Connecticut, including Fairfield and New Haven counties who are involved in disputes with their employers. We have a great deal of experience in the area of employment law and a record of success in getting employers to live up to their legal obligations.

We can help you in your employment-related dispute.

Our Trial Attorneys Can Make the Difference.

Our firm has shown the ability to take these cases to trial and to win judgments on behalf of our clients. We handle a variety of employment law concerns and litigation related to:

  • Severance package disputes
  • Executive compensation disputes
  • Non-compete agreements
  • Trade secrets and confidential information
  • Director’s, officer’s, and manager’s contracts and disputes
  • Executive employment agreements
  • Executive retirement plans

Over the last twenty years, we have represented thousands of satisfied clients in employment related cases. In fact, the quality of our work in this area of practice is so high that the majority of our work in the area of employment law comes solely from the referrals of other clients and attorneys who are familiar with what we do.

Connecticut Non-Competes and Jurisdiction Can Be Applicable To Out-Of-State Companies And Employees

United Natural Foods, Inc. v. Hagen, 2010 U.S. Dist. LEXIS 82871
Case Background

This case concerns two former employees, Mr. Barclay Hope and Mr. James Hagen, of United Natural Foods.  The two men worked for Albert’s Organics, a nationwide subsidiary of the Providence, Rhode Island based United Natural Foods.  Mr. Hope was employed in the Los Angeles area from 1997 to December 2006 at which time he began to work as an independent consultant in the organic food industry.  In May 2010 Mr. Hope accepted the position of Chief Executive Officer at Freshpack Produce, a Denver, Colorado based produce grower and shipper.

Albert’s Organics hired Mr. Hagen in March 2003 upon the recommendation of Mr. Hope to work in the company’s Denver offices.  Mr. Hagen left Albert’s in April 2010 and began a new job as the Chief Operating Officer of Freshpack Produce, the same company as Mr. Hope, and upon the recommendation of Mr. Hope.  While employed by United Natural Foods Mr. Hagen and Mr. Hope exchanged many emails wherein they transferred some of United Natural Foods’ transactions, customer information, trade secrets, and other confidential information.  Mr. Hope maintained hard and electronic copies of this confidential information and utilized it in the management of Freshpack Produce’s business operations.

The Non-Compete Agreement

Mr. Hope signed an “Employment Termination Agreement and Release” upon the termination of his employment with United Natural Foods wherein he agreed to abide by a non-compete agreement (one-year duration) and confidentiality provision (indefinite).  A special and notable feature of this agreement however was the choice of law provision that stated the agreement was “made pursuant to and shall be governed by the laws of the State of Connecticut” such that “the parties agree that the courts of the State of Connecticut, and the Federal Courts located therein, shall have exclusive jurisdiction over all matters arising from this Agreement”.

This is especially interesting given that none of the parties (individuals or the companies) in this case are based in Connecticut.  United Natural Foods is based in Rhode Island, Freshpack Produce is based in Colorado, Mr. Hagen worked in Colorado, and Mr. Hope worked in California.  Connecticut law is must more apt to enforce a non-compete agreement than many states.  Colorado for example, where Freshpack Produce and Mr. Hagen were based, historically has a policy against the enforcement of non-compete covenants.

The Court’s Decision

The courts do not see a problem in enforcing a non-compete agreement under Connecticut law for an individual living in California and working for a Colorado based company.  In the past, courts have enforced non-compete agreements in similar situations because the parties both agreed to the jurisdiction in the covenant and the swiftness and ease of air travel negates distance as an issue.  This case illustrates how employees should be mindful of the jurisdiction contained in the choice of law provision in their non-compete agreement.

The law and court governing the agreement could have a profound effect on the employee should a dispute arise between the signing parties of the agreement.  Corporations have the liberty to afford the best and brightest lawyers to handle their legal matters and they do things for specific, advantageous reasons.  It is safe to say that a corporation’s legal department will construct an agreement that utilizes a jurisdiction that will be favorable to them in the event of a legal dispute with a former employee.  Employees should pay close attention to the jurisdiction and make efforts to understand the applicable law if the choice of law is not that of the state where they live.

 

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.

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.  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.

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.