Trade Secrets and Noncompete Blog : Non-Compete Lawyer & Attorney : Epstein Becker Green Law Firm : Trade Secrets & Confidentiality Agreements

A study released by Ponemon Institute LLC on February 23, 2009 confirms a human resources truism: departing employees frequently steal company data while heading out the door. According to the study (a copy of which can be obtained at http://www.vontu.com/downloads/ponemon_09.asp), 59% of departing employees admit that they stole company data; 92% of departing employees admit that they took CDs/DVDs; and 73% admit taking USB memory sticks.

The study contains a wealth of other interesting statistics about employee data thefts.

While none of the study’s findings should be a surprise to those who regularly address these issues, it is interesting to see a study which quantifies the scope of the problem.
 

In a decision, dated January 26, 2009, in the matter Epiq Systems, Inc. v. Hartie, Index No. 111950/08, the Supreme Court of the State of New York, New York County, by Judicial Hearing Officer (and retired Justice) Ira Gammerman, denied a preliminary injunction in aid of arbitration sought by plaintiffs Epiq Systems, Inc. and related companies (collectively, “Epiq”). Epiq claimed that it faced inevitable disclosure of its trade secrets by three individual defendants formerly employed at Epiq and their new employer Kurtzman Carson Consultants LLC (“KCC”) with respect to three computer programs, including one web-based system, developed and used by Epiq to solicit ballots and tabulate ballot results in Chapter 11 bankruptcy proceedings, and in analogous foreign proceedings, involving widely-held public securities.

Epiq sought to enforce restrictive covenants in its employment agreements, which barred the individual defendants from disclosing Epiq’s confidential, proprietary or trade secret information, competing against Epiq or soliciting Epiq’s customers for one year after termination, and soliciting Epiq’s employees during employment and for one year after termination. After a two-day hearing in September 2008, the Court entered a temporary restraining order specifically limiting, although not prohibiting, the individuals’ employment with KCC.

Although the Court held that any arbitration award to which Epiq might ultimately be entitled apparently would be rendered ineffectual absent preliminary relief, it declined to issue a preliminary injunction against defendants, finding that Epiq had not satisfied any of the elements of the traditional tripartite test for injunctive relief: likelihood of success on the merits, showing of irreparable harm, and balance of equities favoring the movant.

Key findings for the Court were that the individual defendants did not know any part of the source code or the underlying algorithms of Epiq’s programs, even though they had worked at length with Epiq’s programmers, and so they could not disclose such information to KCC. In addition, KCC already had its own software program that allowed KCC to perform bankruptcy-related solicitation and tabulating projects in-house. Moreover, the Court held that even if the defendants would seek to improve KCC’s software, their knowledge brought to bear on such a project would not constitute a trade secret under the definition of trade secret under section 757, comment b, of the Restatement of Torts, which applies under New York law. In finding a lack of irreparable harm, the Court also noted that it had been presented with no real evidence that defendants had committed or were about to commit commercial piracy.

Epiq filed a notice of appeal on February 11, 2009.
 

A recent decision of the United States District Court, Southern District of New York, entitled International Business Machines Corporation v. Papermaster, No. 08-CV-9078 (KMK), 2008 WL 4974508, 2008 U.S. Dist. LEXIS 95516 (S.D.N.Y. Nov. 21, 2008), appears to have breathed new life into the “inevitable disclosure” doctrine, apparently easing the burden of proof that an employer must satisfy in order to show the irreparable harm necessary for a court to grant an injunction preventing the former employee from working for a competitor.

Under the inevitable disclosure doctrine, certain employees cannot “wipe clean” their knowledge of their former employers’ trade secrets. Despite such employee’s best efforts to avoid disclosing any trade secrets to the new employer, the employee will inevitably disclose trade secrets to the new employer simply by virtue of the employment, and therefore should be enjoined from working for the new employer for some period of time, even in the absence of any non-compete agreement. The inevitable disclosure doctrine may provide a source of relief against improper competition by former employees even where the employer cannot show actual misuse, or intent to misuse, confidential or trade secret information. PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

The recent IBM v. Papermaster decision not only grants injunctive relief to IBM preventing Papermaster’s employment with competitor Apple, Inc. without IBM presenting evidence of actual misappropriation, but bases its finding of irreparable harm largely upon the probability of “inadvertent” disclosure by Papermaster and Papermaster’s acknowledgement in his employment agreement with IBM that IBM would suffer irreparable harm were he to breach the agreement’s non-competition provision. This seems a surprisingly low threshold for applying the inevitable disclosure doctrine to find irreparable harm in the absence of any evidence of misuse or even misappropriation of confidential information and/or trade secrets.

Mark D. Papermaster worked at IBM for 26 years in various product design and development roles, and in 2006 joined an elite group of about 300 top executives that develops IBM’s corporate strategy. Papermaster’s last day of employment with IBM was October 24, 2008, and he began working at Apple on November 3, 2008. IBM sought a preliminary injunction and in its November 21, 2008 decision, the District Court enjoined Papermaster from working for or with Apple until further order of the Court.

The Court held that IBM faced irreparable harm, even though there was no reason to ascribe ill-will to Papermaster or to doubt that he would abide by Apple’s Intellectual Property Agreement, in which he agreed not to use or disclose to Apple any confidential, proprietary or secret information of his previous employers, or otherwise to think that he would misuse or disclose IBM’s trade secrets. The Court’s holding that such disclosure was nonetheless inevitable rested in large part on its conclusion that inadvertent disclosure would probably occur, on the boilerplate provision in Papermaster’s IBM Noncompetition Agreement stating that he agreed that IBM would suffer “irreparable harm” if he worked for a competitor, and on what the Court termed “common sense.”

Having relied on these factors, which may not previously have been sufficient, to find irreparable harm, the Papermaster decision could have the effect of further expanding the application of the inevitable disclosure doctrine. The Papermaster matter was set to go to trial in late February 2009, but the parties reached a settlement by consent order on January 27, 2009 which will allow Papermaster to begin working for Apple on April 24, 2009. Time will tell if other courts follow the lead of the Papermaster decision in applying the inevitable disclosure doctrine.
 
For a recent New York Law Journal column discussing further the inevitable disclosure doctrine and the IBM v. Papermaster decision, click here.

One little noticed provision in the proposed federal "Paycheck Fairness Act" would affect standard language in many confidentiality agreements and policies. Specifically, the Paycheck Fairness Act, which is intended to fight discriminatory pay practices, contains a provision that bars an employer from taking adverse action against an employee who “has inquired about, discussed or disclosed the wages of the employee or another employee . . ."

Although there is an exception for employees who have “access to the wage information of other employees as a part of such employee's essential job functions" (e.g., managers who set compensation or HR employees), this provision would effectively bar employers from restricting most employees’ ability to discuss or disclose their own compensation or that of their co-workers.

Many employers have confidentiality agreements and/or confidentiality policies that expressly bar employees from discussing or revealing wage information. Although such provisions would not be rendered unlawful by the Paycheck Fairness Act, in most instances, they would be unenforceable.

Accordingly, if, as expected, the Paycheck Fairness Act becomes law (it was passed by the U.S. House in January 2009 and is currently pending in the Senate), employers may want to review provisions in confidentiality agreements and policies that expressly bar the disclosure of wage information.
 

Under Florida law, where an employment contract expires by its terms and the parties continue to perform as before, an implication arises that they have mutually assented to a new contract containing the same provisions as the old.

But this principle does not apply to non-competes and other restrictive covenants contained in employment contracts, as illustrated by a recent decision by the Third District Court of Appeal, Zupnik v. All Florida Paper, Inc., Case No. 3D08-1371 (Fla. 3d DCA, Dec. 31, 2008).

Zupnik had signed a two-year employment contract with All-Florida. The contract provided that "during the Employment Term and within twelve (12) months from the termination of said term, he or she will not directly or indirectly … compete against ALL FLORIDA, within a fifty (50) mile radius of where ALL FLORIDA then engages in business[.]" The contract further provided that "[a]t the expiration of this two (2) year contract, the employee can exercise an option to remain in ALL FLORIDA’S employ as an at-will employee." But the contract did not contain language specifying that the restrictive covenants would continue beyond the two-year term if Zupnik remained an at-will employee after the two-year term expired.

After the expiration of the initial two-year term, Zupnik remained an All Florida employee for an additional two years, but the relationship was not formalized in a written document. Zupnik then formed his own company intending to serve his long-standing customers. All-Florida sued Zupnik and the trial court entered an injunction enforcing the non-competition covenant. The Third DCA reversed. Citing its decision in Sanz v. R.T. Aerospace Corp., 650 So. 2d 1057 (Fla. 3d DCA 1995), the court held that "post-termination restrictions expire upon the termination of an agreement for a specific term, even if an employee remains an at-will employee after the term of the written agreement expires."

For employers, the Zupnik case highlights the importance of drafting non-competes and other restrictive covenants carefully. Where an employment contract is for a specified term (e.g., two years), employers should include language in the contract which provides that the restrictive covenants contained in the contract continue beyond the specified term if the employee remains an at-will employee after the term has expired.
 

A Florida trial court should not have entered a temporary injunction enforcing a non-compete agreement against a former employee on an ex parte basis, i.e., without notice to the employee, according to Florida’s Fourth District Court of Appeals in a recent decision, Bookall v. Sunbelt Rentals, Case No. 08-26291 (Fla. 4th DCA, December 3, 2008).
 
The employer, a company that rents construction equipment, employed the former employee until February 7, 2008, under a written agreement containing a non-compete and non-solicitation provision. Shortly after the employee resigned, he began to work at a competing company. Upon discovering this, the employer sent the former employee a letter advising him of the breach of the agreement. The former employee’s counsel responded that the employee understood and would comply with his obligations under the agreement.

Upon learning that the former employee continued to work for the competitor, the employer filed a verified complaint with supporting affidavits and an ex parte emergency motion for temporary injunction. The motion sought a temporary injunction against the former employee and the competitor based on the noncompete and non-solicitation provisions of the employment agreement. The duty judge assigned to the case entered the temporary injunction.

In its opinion, the Fourth DCA noted that under the Florida Rules of Civil Procedure, a temporary injunction "may be granted without written or oral notice to the adverse party only if: (A) it appears from the specific facts shown by affidavit or verified pleading that immediate and irreparable injury, loss, or damage will result to the movant before the adverse party can be heard in opposition; and (B) the movant's attorney certifies in writing any efforts that have been made to give notice and the reasons why notice should not be required." Furthermore, "[e]very temporary injunction granted without notice . . . shall define the injury, state findings by the court why the injury may be irreparable, and give the reasons why the order was granted without notice if notice was not given." See Fla. R. Civ. P. 1.610(a).

According to the Fourth DCA, the injunction suffered from a "fatal defect": it failed to give the reasons why the order was granted without notice. The court noted that "[t]his deficiency could have been cured if the employer articulated in its complaint or motion reasons why notice should be dispensed with....Unfortunately for the employer, neither the complaint nor the motion cured the deficiency in this case."

One lesson from the Bookall decision is clear: follow the civil procedure rules carefully. The rules are just that - rules - not guidelines or suggestions. The employer's and the court's failure to articulate why the order was granted without notice required a reversal of the injunction order under a plain reading of Rule 1.610(a).

One might surmise that there was no good reason why notice was not given to the former employee. After all, the opinion notes that the former employee was represented by counsel. How hard is it to fax, email and/or call opposing counsel before a hearing, even on an emergency motion?

But perhaps the former employee's counsel was on vacation or otherwise unavailable to receive notice of the hearing. In that case, an ex parte injunction may have been appropriate, and the employer's and the court's failure to state why the order was granted without notice a mere oversight.

However, even where an ex parte injunction is appropriate, employers and their counsel should be aware that it may be short-lived. Under Fla. R. Civ. P. 1.610(d), "[a] party against whom a temporary injunction has been granted may move to dissolve or modify it at any time. If a party moves to dissolve or modify, the motion shall be heard within 5 days after the movant applies for a hearing on the motion." Thus, if a court enters a temporary injunction on an ex parte basis, the employer's counsel should clear his calendar for the next week. The employee is entitled to a file a motion to dissolve and obtain an expedited hearing, and he may stand a good chance of getting the injunction modified or dissolved entirely once he tells his side of the story.