Violations of a Restrictive Covenant

There are various circumstances under which an individual can be found in violation of a restrictive covenant. The two most common types of activity that result in litigation are (a) the solicitation of prohibited parties in violation of the time and/or geographical restrictions and (b) the unauthorized dissemination of confidential and proprietary information belonging to the plaintiff employer.

A. Solicitation

Solicitation activities can generally be divided into two categories: direct solicitation and indirect solicitation.

Direct Solicitation

Under a theory of direct solicitation, the employer alleges that the former employee personally solicited business in violation of the covenant not to compete. The employer bears the burden of proof and must submit sufficient evidence to the court showing that the former employee knowingly took action to solicit business from prohibited parties.

Indirect Solicitation

On the other hand, cases involving the theory of indirect solicitation have a plaintiff employer that “support[s] its position that one who is not a party to a non-compete contract can be enjoined from activity prohibited by the contract where the person or entity is operating indirectly for the party to the contract.” Under this scenario, the employer alleges that a former employee induced a third party to engage in activities the employee personally was contractually prohibited from doing, using knowledge or information that the employee acquired during his or her employment with the plaintiff employer.

In order to be successful in an “indirect solicitation” claim, the employer must demonstrate that the actions the nonaffiliated parties evince “conscious disregard” of the non-compete agreement by the former employee. A court may find breach even though the employee did not personally violate its terms but instead used information to induce a third party to perform activities that would otherwise be considered a contractual breach.

Allegations of impermissible solicitation are only valid and successful if the target of the solicitation is actually a prohibited party within the purview of the terms of the non-compete agreement. There are many categories of clients or customers that may or may not be protected, a characteristic that is determined by the nature of the client or customer.

Current and Past Clients

The business sources that an employer seeks to protect with a restrictive covenant are its current and past clients. A restriction limited to the plaintiff’s current and past customers is not overly broad, unreasonable, or unenforceable under the laws of Connecticut. Current clients are easily and readily identifiable, giving courts relatively few issues with determining who falls into this class of clients. On the other hand, past customers can be a bit trickier in the sense that certain companies have very long histories, a sizable client base, extensive geographical presence, and diversified subsidiaries.

Many employers place limitations in their non-compete agreements with regard to who is protected as a “past client.” Common restrictions for defining “past clients” include establishing a period of time the client has been affiliated with the company, as well as specifying that the employee is only prohibited from soliciting those clients that he or she had a professional relationship with and on whose account the employee worked. Such restrictions make the provisions themselves more reasonable, and courts look favorably on limitations that reduce the scope of the restraint on trade and appropriately define the client class.

Potential Clients

A more difficult classification of clients to identify is “potential clients.” This class is much more amorphous and, in theory, every participant in the economy could be a potential client. A restrictive covenant encompassing potential clients creates a virtually limitless prohibition on solicitation for the employee upon termination. Enforceability under this scenario greatly depends on the agreement’s definition of “potential clients.”

Restrictions on potential clients are reasonable and enforceable so long as the clients classified as such are “readily identifiable and narrowly defined.” Therefore, a clause that prohibits the solicitation of potential clients is permissible and enforceable so long as the agreement narrowly and specifically construes this class of clients.

Personal or Private Clients

Companies that engage in service-based industries – professions including but not limited to lawyers, doctors, accountants, financial advisors, hair stylists, and personal trainers – potentially have an additional class of clients to consider when drafting a restrictive covenant and suing for its enforcement. Many professionals in a service-based industry have “personal or private clients” that are not affiliated with their employer but to whom the professional provides services on the side and off the company’s clock.

Even upon executing a non-compete agreement, employees are generally not enjoined from continuing to provide services to personal or private clients. Because these clients did not have an official relationship with the employer, courts have held it would be unfair to include them on lists of prohibited clients. These personal clients are not receiving services from the employee as a result of a business connection to the employer, and as such they fall outside the protections and restrictions enumerated in any restrictive covenants.

B. Use of Confidential/Proprietary Information

The second common activity alleged to constitute breach of a non-compete agreement is the employee’s dissemination of confidential or proprietary information that gives his new employer an economic advantage, thus creating unlawful competition. Former employees cannot “use trade secrets, or other confidential information he [or she] has acquired in the course of his employment [with the plaintiff employer], for his [or her] own benefit or that of a competitor to the detriment of his [or her] former employer.”

To qualify as confidential information or a trade secret in Connecticut, the information must reflect a substantial degree of secrecy. Employers typically seek injunctive relief when the alleged breach of a restrictive covenant takes the form of the misappropriation of confidential information. Legal remedies are inadequate in most, if not all, of these cases because the “loss of trade secrets [and/or confidential information] cannot be measured in money damages…[because a] trade secret, once lost is, of course, lost forever.”

Trade Secrets

Connecticut has developed several statutes pertaining to “trade secrets” and their unlawful misappropriation that clearly contravenes non-compete agreements. A category of confidential information, trade secrets are “the property of the employer and cannot be used by the employee for his own benefit [or the benefit of another].”

Connecticut courts use the term “trade secret” to mean any “formula, pattern, device, or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” The content of a trade secret must be undisclosed, and courts will not enforce a non-compete agreement to protect knowledge that is generally and widely known in the respective industry or that is publicly disclosed.

What information qualifies as a trade secret?

When determining whether certain information qualifies as a trade secret and entitles the owner to protection under a non-compete agreement, the court examines the following factors:

a) the extent to which the information is known outside the business,
b) the extent to which the information is known by employees and others involved in the business,
c) the extent of measures taken by the company to guard the secrecy of the information,
d) the value of the information to the company and its competitors,
e) the amount of effort and money expended by the company in developing the information, and
f) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Misappropriating Trade Secrets and Confidential Knowledge

The elements of breach of a restrictive covenant by misappropriating trade secrets and confidential knowledge hinge on the defendant acquiring, disclosing, or using the knowledge via “improper means.” Under Connecticut law, “improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means, including but not limited to searching through trash.

Furthermore, Connecticut has a statute of limitations with regard to actions against a party for the misappropriation of trade secrets and confidential knowledge in contravention of a covenant not to compete. Parties are barred from commencing an action beyond three years “from the date the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.” The statute further states that a continuing misappropriation constitutes a single claim for the purposes of the statute of limitations.

Implied Duty of Non-Disclosure

Connecticut law espouses the principle of an implied duty to not disclose confidential information to other parties, even in the absence of a non-compete agreement. Courts routinely uphold this implied duty related to employment law and the Supreme Court of Connecticut has stated that “even after employment has ceased, a former ‘employee’ remains subject to a duty not to use trade secrets, or other confidential information, which he has acquired in the course of his employment for his own benefit or that of a competitor, to the detriment of his former employer.”

As with most rules, however, there are some limited exceptions. Business-client relationships and corresponding information that predate employment with the employer are not protected by the implied duty not to disclose. “[I]n the absence of a covenant not to compete, an employee who possessed the relevant customer information prior to the former employment is free to use the information in competition with the employer after termination of the employment relationship.”

Retaining Confidential Information

In some cases, the act of merely retaining confidential information can constitute a breach of a non-compete agreement, and the employee need not actually exploit the knowledge for the court to grant injunctive relief. In one such case, TyMetrix, Inc. v. Szymonik, an employee retained physical possession of confidential information, claiming he kept it in order to assist in the litigation with his former employer.

This act, regardless of the employee’s reasons, nonetheless violated the non-compete agreement between the employer and employee . The court specifically held that “whether Szymonik [the former employee of plaintiff employer] has used the information on the DVDs is not, at this point in the proceedings, the relevant consideration. His possession and retention of the DVDs [that contained confidential information] is in violation of the terms of the employment agreement.”

Non-compete agreements often contain a clause regarding non-disclosure of confidential information acquired or to which the employee is exposed during the employment relationship. However, some employee-employer contracts separate these restrictions into two separate agreements.

Historically, Connecticut courts have favored the enforcement of non-disclosure/confidentiality agreements compared to covenants not to compete, since the protection of a company’s proprietary and confidential information is far more clear-cut than granting an injunction that results in the restraint of trade or potential employment. Time and geographical restrictions are not necessary for the enforcement of a non-disclosure agreement, and courts have the discretion to apply the “reasonableness” test or a relaxed version of the test.

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