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

States vary widely in their willingness to enforce noncompetition agreements. Some states, such as California, are openly hostile and will not enforce them, while others will do so so, subject to varying degrees of judicial scrutiny.

My home state of Illinois, for example, will enforce a noncompetition agreement, but only after fairly rigorous judicial scrutiny. Notwithstanding such scrutiny, Illinois employers can draft enforceable noncompetition agreements. The attached article that I published in the April 2009 Illinois Bar Journal offers practical guidance on how to do so.
 

The New York State Supreme Court recently shot down a request to enjoin two former salesmen and their new employer from tortiously interfering with a real estate investment firm’s business, from interfering or contacting its customers or using or exploiting its trade secrets. See Koenigsberg v. Silber Investment Properties Ltd., Index No. 20127/08 (Nassau County March 17, 2009). The two former salesmen claimed that they were not actual employees of the real estate investment firm, but independent contractors, that they did not sign non-compete contracts and that the alleged client lists were their personal property. The plaintiff sought to enjoin the former sales representatives' solicitation of clients based on its contention they misappropriated trade secrets (i.e., the client lists). In disagreeing with the plaintiff, the Court referred to plaintiff's prior course of conduct with other former sales representatives. Specifically, the Court pointed out that there was no indication that the plaintiff had prohibited other sales representatives from soliciting clients after they left, had required other sales representatives to sign non-solicitation agreements, or had prevented other sales representatives from keeping their own lists of customers. The Court stated "[i]f AIP did not require that its salespeople guard the secrecy of the customer list during their service with AIP or attempt to prevent the AIP salesmen from using the information in the list once they left AIP's service, this is an indication that the customer list was not a 'trade secret.'" The Court further reasoned that the plaintiff failed to set forth "what 'considerable efforts' were expended in developing the purported secrets." Nor did the plaintiff establish how the client list was created.

The case serves as a reminder to employers to take appropriate and reasonable steps to protect their confidential information and trade secrets. Such steps may include limiting access to the confidential information, requiring persons with access to such information to execute written confidentiality and/or non-solicitation agreements, and requiring departing employees to return company property and documents.

Many New York attorneys, when seeking a preliminary injunction against a party that has misappropriated their clients’ trade secrets, will argue that a presumption of irreparable harm to their clients automatically arises upon the determination that a trade secret has been misappropriated, citing Ivy Mar Co. v. C.R. Seasons, Ltd., 907 F. Supp. 2d 547, 567 (E.D.N.Y. 1995). A recent decision of the U.S. Court of Appeals for the Second Circuit, however, holds that misappropriation of trade secrets does not automatically lead to irreparable harm. The aggrieved party only faces irreparable harm if the misappropriator will disseminate the secrets to a wider audience or otherwise irreparably impair the value of the secrets.

In Faiveley Transport Malmo AB v. Wabtec Corporation, __ F.3d __, 2009 WL 636020 (2d Cir. March 9, 2009), Wabtec had manufactured subway brakes under a contract with Faiveley and its predecessor from 1993 through 2005. Faiveley alleges that after expiration of the contract, Wabtec impermissibly continued to use Faiveley’s proprietary information (including various technical specifications, designs, plans, and patents) to produce subway brakes for the New York City Transit Authority. The District Court granted an preliminary injunction enjoining Wabtec from disclosing Faiveley’s proprietary information to the Transit Authority.

On appeal, the Second Circuit vacated the injunction because Faiveley had not demonstrated that it faced irreparable injury. Although the Second Circuit agreed that Wabtec had misappropriated trade secrets, it held that misappropriation alone does not give rise to a presumption of irreparable harm, noting:

Where a misappropriator seeks only to use those secrets - without further dissemination or irreparable impairment of value - in pursuit of profit, no such presumption is warranted because an award of damages will often provide a complete remedy for such an injury. Indeed, once a trade secret is misappropriated, the misappropriator will often have the same incentive as the originator to maintain the confidentiality of the secret in order to profit from the proprietary knowledge.

The Court went on to note in dicta that even where irreparable injury has been shown, only a narrowly drawn preliminary injunction that protects the trade secret from further disclosure or use may be appropriate, and admonished courts in all cases to strive to avoid unnecessary burdens on lawful commercial activity.
 

Employers across all sectors of industry rely on narrowly tailored employment agreements to prevent employees from unfairly competing and stealing clients and customers post-employment. Last week, the adult nightclub chain, Penthouse Club, filed a suit seeking a temporary restraining order and other injunctive relief against a former director for violating a noncompete and nondisclosure agreement.

Penthouse claims that after the former director was fired for cause, he became employed at a rival nightclub not far from the Penthouse Club. Such mere employment allegedly directly violated the terms of his noncompete agreement. Penthouse also alleges that he is now using his contacts and intimate knowledge of Penthouse’s customers and employees to bring business to his new employer. As a result of his high-level position, which included access to the club’s VIP room where members pay a $2,500 fee to join and then a $1,000 fee each year, the former director obtained extensive knowledge concerning the real names of members and exotic dancers who worked there. Penthouse is relying on the “inevitable disclosure” theory to assert that it would be inevitable that the former director would use his knowledge of clients and employees to his and his new employer’s competitive advantage.

The agreement that the former director signed in 2004 contained restrictive covenants including a noncompete, nondisclosure, and nonsolicitation provisions. Penthouse is relying on the unique nature of its business, and, in particular, the fact that its exotic dancers and entertainers specifically attract particular customers, in order to establish its legitimate business interests and the competitive disadvantage that the former director’s solicitations could cause to Penthouse.

Penthouse attempted to resolve the dispute informally through a cease and desist letter but ultimately filed suit in federal court in Illinois seeking an injunction and monetary damages in excess of $75,000.
 

I recently reported on a decision of Florida’s Fourth District Court of Appeal in which the appellate court reversed the issuance of an ex parte temporary injunction because the order failed to specify why it was granted without notice to the other party.

In a recent case, Florida’s Third District Court of Appeal ("DCA") reversed the issuance of a temporary injunction for a similar reason: it failed to specify with reasonable particularity the conduct being enjoined. The case is Angelino v. Santa Barbara Enterprises, LLC, Case No. 3D08-1066 (Fla. 3d DCA, February 18, 2009).

The case involved a business dispute between the appellant, Sabrina Angelino, and Santa Barbara Enterprises, LLC, each of whom owned a fifty percent interest in Starbridge Networks, LLC, which sells telecommunications products and related technical services. Santa Barbara alleged that Angelino and her husband set up two competing companies, SILA Networks, LLC and SILA Networks, C.A., through which they usurped business opportunities that belonged to Starbridge Networks. Santa Barbara also alleged that Angelino interfered with Starbridge Networks' relationships with its customers and suppliers.

In its order, the trial court found that Angelino, through SILA Networks, competed and interfered with Starbridge Networks' business relationships in Venezuela. The trial court therefore enjoined Angelino, both individually and as an employee of SILA Networks LLC, her agents, servants, employees and attorneys from: (a) competing against Starbridge Networks; (b) usurping Starbridge Networks' business opportunities, customers and suppliers; (c) using Starbridge Networks' proprietary information and technology; and (d) interfering with Starbridge Network's relationships with its customers and suppliers, including through the use of derogatory comments about Starbridge Networks, its officers, managers or employees.

The trial court also imposed a constructive trust. The trust encompassed any purchase orders, contracts or other business that Angelino, her agents, servants, employees and attorneys, may have obtained from Starbridge Networks' customers.

The Third DCA reversed both the injunction and the imposition of a constructive trust. Citing the Fifth DCA's decision in Clark v. Allied Assocs., Inc., 477 So. 2d 656, 657 (Fla. 5th DCA 1985), the court noted:

The trial court enjoined Angelino from competing against Starbridge Networks. But there is no mention of any acts that may be considered competitive in nature. The trial court enjoined Angelino from usurping Starbridge Networks' business opportunities, customers, and suppliers. There is no mention, however, of any customers and suppliers with whom Angelino may not compete. The trial court also enjoined Angelino from the use of Starbridge Networks' proprietary information and technology. There is no mention of any specifics upon which Angelino can rely to determine what information and technology he cannot use. This type of vague language is precisely the type that the district court contemplated in Clark, and we cannot uphold to support the entry of a temporary injunction.

The portion of the temporary injunction in which the trial court imposed a constructive trust is likewise overly broad. The trial court failed to mention with sufficient particularity “what purchase orders, contracts, or other business” Angelino is obligated to hold in a constructive trust. Angelino is left in doubt as to what he is required to do to comply with the trial court's directives. This portion of the injunction is thus defective.

The takeaway from this court is clear. When drafting a proposed temporary injunction order, attorneys should use precise language that makes it abundantly clear what the other side can and cannot do. Trial judges in the state court system are extremely busy, and they may not be inclined to tailor language to the specific facts of the case. But that is what is required to avoid the reversal of the injunction on appeal. The Fifth DCA's advice in Clark is worth reciting here:

An injunctive order should never be broader than is necessary to secure the injured party, without injustice to the adversary, relief warranted by the circumstances of the particular case. The order should be adequately particularized, especially where some activities may be permissible and proper. Such an order should be confined within reasonable limitations and phrased in such language that its requirements can be met, without resert to portions of the record or facts outside the ‘four corners' of the injunction itself. One against whom an injunction is directed should not be left in doubt as to what he is required to do.

Clark, 477 So.2d at 477-78.
 

As the enforcement of non-competition agreements becomes more crucial than ever, some employers are including provisions that require or promise payments to the former employees during the post-employment period of non-competition. If properly crafted, such a payment may act as the additional consideration needed for the promise not to compete and may dissipate the former employee's argument of undue hardship during the non-competition period. Employers promising to make such payments must be prepared to follow through with their promises, as the Eighth Circuit recently held.

On February 25, 2009, the Eighth Circuit upheld a district court's decision to award Roger Bannister, a former Director of Technical and Product Development for Bemis Company, Inc. ("Bemis"), nine months worth of his salary, based on a promise in his non-competition agreement. See Bannister v. Bemis Company, Inc., No. 08-1634 (8th Cir. Feb. 25, 2009).

The Agreement

Bannister had worked at Bemis since 1990 and signed a Confidentiality and Non-Competitive Agreement in 2000 which prevented him from, among things, working for a competitor for 18 months following the termination of his employment. The agreement further provided that in the event that his employment with Bemis terminated, and Bannister "was unable to obtain employment consistent with [his] abilities and education solely because of the [non-competition provisions]" such provisions continued to bind him only as Bemis, in its sole discretion, made payments to him equal to his monthly base salary at the time of his termination. In order to receive such payments, the agreement provided that Bannister needed to provide Bemis with a detailed written account of his "good faith and aggressive effort[s]" to obtain employment and a sworn statement that, although he had made a good faith effort, the non-compete was the sole reason for his unemployment.

Bannister Wished to Work for a Competitor

In early 2004, Bannister informed, Bemis, his then current employer that he wished to be released from his non-compete obligations to accept employment with a competitor, Mondi Packaging ("Mondi"). Bemis refused to provide him with permission to do so. Thereafter, Mondi and Bemis were involved in a litigation arising out of Mondi's hiring of Bemis employees. The case was settled. Pursuant to the settlement, Mondi agreed to a 18 month no-poach of employees subject to noncompetition agreements. In December, Bemis offered Bannister a severance package of $40,000 and a release from the non-compete provisions other than for Mondi. Bannister declined the offer and was terminated in January 2005.

In February, Bannister sought payment pursuant to the agreement because of his unemployment. He told Bemis that he had been told by Mondi that it wished to hire him but could not do so because of his noncompetition agreement. He also sent a job contacts log to Bemis as support for his payment request. Thereafter, Bannister was informed that he was released from his non-competition obligation as to all companies, other than Mondi. Bemis took the position that the former employee could not work for Mondi because of the no-poach agreement between the two companies. Bannister remained unemployed for nine months and sought pay for that period of unemployment

The Court's Decision

The Eight Circuit found that the non-competition agreement was unambiguous and clearly provided the company with discretion as to whether to enforce the noncompetition provisions by paying the monthly salary during the unemployment period. As the company refused to provide a full release from the non-compete (and tried to prevent him from working for Mondi), the company was required to pay when Bannister provided proper documentation. The Court found that the clearly written contract did not provide for a partial release -- only a full one. Thus, the company did not have the option to only offer a partial release from the non-competition agreement and try to enforce the remainder of it. The fact that Mondi and Bemis had separately negotiated a no-poach agreement was on no consequence because it only applied to individuals subject to non-competition agreements and it was in Bemis' discretion whether to enforce the former employee's agreement. Consequently, Bemis was ordered to pay over $80,000 to the former employee.

The Bottom Line

For all employers - whether or not they are within the Eighth Circuit - this case stands as a reminder to only promise what you are prepared to do and make efforts to comply with the terms of the contract. While this case involved a clear agreement, in instances of ambiguity, such questions are decided against the drafter. Thus, employers considering whether to include a provision to pay during a non-compete must keep in mind that if they do so, they will need to follow through on their promises of payment.
 

When a former employee is in violation of a non-compete agreement, the former employer often files suit not just against the former employee for breach of contract, but also against the new employer for tortious interference. Under Florida law, the elements of a tortious interference claim are as follows:

(1) the existence of a business relationship; (2) knowledge of the relationship on the part of the defendant; (3) an intentional and unjustified interference with the relationship by the
defendant; and (4) damages to the plaintiff as a result of the breach of the relationship.

The Second District Court of Appeals' recent decision in Fiberglass Coatings v. Interstate Chemical, Inc., Case No. 2D-08-1847 (Fla. 2d DCA, February 27, 2009), illustrates an interesting defense to a tortious interference claim.

Fiberglass Coatings, Inc. (FCI) had a non-compete agreement with its salesman Robert Hutchens. Hutchens left FCI to work for a competitor, Polymeric. Hutchens left Polymeric after a short time to work for another competitor of FCI's, Interstate Chemical, Inc. While at Interstate, Hutchens allegedly solicited FCI's customers. FCI filed suit against Interstate for tortious interference. On a motion for summary judgment, Interstate argued that FCI could not meet the causation element of its tortious interference claim because Hutchens was predisposed to breaching his non-compete agreement, as evidenced by Hutchens' employment with Polymeric. The trial court agreed with Interstate, concluding that Interstate did not cause or induce Hutchens to breach his non-compete agreement.

The Second DCA affirmed, citing Florida case law and the Restatement (Second) of Torts:

Causation requires a plaintiff to "prove that the defendant manifested a specific intent to interfere with the business relationship." [Chicago Title Ins. Co. v. Alday-Donalson Title Co. of Fla., Inc. 832 So. 2d 810, 814 (Fla. 2d DCA 2002) (citing Tamiami Trail Tours, Inc. v. Cotton, 463 So. 2d 1126, 1127 (Fla. 1985))]. No liability will attach unless it is established "that the defendant intended to procure a breach of the contract." Id. " 'One does not induce another to commit a breach of contract with a third person under the rule stated in this Section when he merely enters into an agreement with the other with knowledge that the other cannot perform both it and his contract with the third person.' " Martin Petroleum Corp. v. Amerada Hess Corp., 769 So. 2d 1105, 1107 (Fla. 4th DCA 2000) (quoting Restatement (Second) of Torts § 766 cmt. n (1977)). As noted by the Fourth District, Florida follows this section of the Restatement in these circumstances. Id.

Under this prevailing case law, we conclude that the circuit court did not err in granting summary judgment under the "employment" theory of liability set forth in paragraph 29 of the amended complaint. As explained by comment n of the Restatement (Second) of Torts, section 766, Interstate merely entered into an employment agreement with Hutchens knowing that he could not honor his covenant not to compete with FCI and at the same time work for Interstate.

The takeway from this case is that, absent evidence that the new employer induced the former employee to violate his non-compete agreement, merely hiring an employee whom the employer knows to be in violation of a non-compete agreement may not be sufficient to sustain a tortious interference claim under Florida law.

Having said that, it should be noted that the Second DCA did not let Interstate completely off the hook. Because Hutchens had allegedly solicited FCI's customers, the court held that Interstate could be held liable for tortious interference under a "solicitation of customers" theory. In other words, although Interstate may not have crossed the line in hiring Hutchens despite his non-compete agreement, it may have crossed the line by inducing him to solicit FCI's customers in violation of that agreement. The court therefore affirmed in part, and reversed in part, the trial court's summary judgment order.