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

A high-profile no-compete case currently pending in Chicago may turn on whether merely “preparing to compete” constitutes “engaging in” contractually prohibited business activities. The case was brought by Citadel Investment Group LLC against several former employees who left to help start a rival firm. Citadel alleges, among other things, that the former employees are in breach of their no-competes with Citadel.

The former Citadel employees responded to Citadel’s lawsuit by filing a Motion to Dismiss in which they argue that they are not “engaged in” prohibited activities (and therefore not in violation of their no-competes) because their new entity has yet to actually open for business. Their argument is premised on a line of Illinois cases holding that it is not a breach of fiduciary duty for a current employee to prepare to compete with his or her employer, so long as no actual competitive activities are undertaken. The former Citadel employees argue that if it is not a breach of fiduciary duty for a current employee to prepare to compete, then they, too, ought to be able to prepare to compete without being found to have engaged in wrongful competition.

Stay tuned for Citadel’s response.
 

We previously wrote concerning a May 22, 2009 temporary restraining order (“TRO”) granted by the U.S. District Court for the Southern District of Ohio against three former employees of UBS Financial Services Inc. (“UBS”), in effect pending an arbitration hearing before the Financial Industry Regulatory Authority (“FINRA”).

Under FINRA rules, a hearing on UBS’ requested injunctive relief would need to be held within 15 days of the date of the TRO, May 22, 2009.

Prior to that arbitration hearing, on June 3, 2009, UBS moved the District Court to expand the TRO and for a preliminary injunction on the basis of additional evidence, as detailed in UBS’ motion. On May 27, 2009, the individual defendants returned to UBS ten large plastic storage bins containing original hardcopy working files they removed from UBS, two laptop computers, a USB flash drive and other documents. The plastic storage bins alone contained roughly 350 original client files for customers the defendants serviced at UBS as well as prospects. These client files contained such sensitive information as original client contact notes and reports, client investment objectives, account numbers, social security numbers, legal documents such as powers of attorney, trust instruments, and several original signed client documents.

On the basis of UBS’ motion, the District Court granted UBS an expanded TRO. Where the earlier TRO enjoined defendants Timothy Lofton and Kyle Poland from soliciting business or otherwise initiating contact with any accounts transferred to them upon the retirement of defendant Shawn Anderson, the expanded TRO extended those prohibitions to any client of UBS whom they served or whose name became known to them while in the employ of UBS, and further prohibited them from any contact or communication with any client of UBS whose records or information they used in violation of their agreements with UBS and/or applicable Ohio law. The expanded TRO also barred Lofton and Poland from disclosing, transmitting, or destroying the information contained in the records of UBS or concerning its clients.

Also, where the previous TRO had called for all customer information in electronic form in defendants’ custody to be deleted by a “computer consultant agreed to by the parties,” the expanded TRO called for such deletion by a “UBS representative.”

The expanded TRO shows that even a plaintiff who has secured temporary injunctive relief from a court need not wait for a scheduled FINRA injunctive hearing if its business interests continue to be threatened in the interim.
 

Although issues involving misappropriation of trade secrets are frequently litigated, they rarely result in criminal charges. However, according to recent stories in The Chicago Tribune, Reuters.com, and other media outlets, a former employee of Goldman Sachs was recently arrested by the FBI for allegedly stealing trade secrets (software code regarding a proprietary trading system) worth millions of dollars.

A recent decision illustrates the importance for employers of making sure non-competition agreements are correctly executed by employees.

On June 1, 2009, IBM sought a preliminary injunction in the United States District Court, Southern District of New York, enjoining its former Vice-President of Corporate Development, David L. Johnson, from continuing his employment as Senior Vice President of Strategy at Dell Inc.  On that date, doubt was raised as to whether Johnson’s alleged non-competition agreement with IBM had ever been duly executed, and the Court ordered expedited discovery on the issue and another hearing on June 22, 2009.

At the June 22 hearing, the evidence showed that at the time Johnson was first asked to sign the agreement, he was hoping to be promoted, and so in an effort to extend the time during which he could consider whether to enter into the agreement, Johnson purposefully signed the non-competition agreement not on his own signature block, but on the signature block designated for IBM.  Johnson testified that he believed that doing so would prevent the agreement from becoming valid and would allow him more time to consider whether to commit to the IBM non-compete agreement.

As the Court noted, Johnson’s “gambit appears to have worked just as he envisioned.”  Although IBM argued to the Court that the non-competition was valid, on numerous occasions IBM had sought to have Johnson properly sign the agreement, indicating that IBM did not actually consider the incorrectly signed agreement to be valid. Moreover, with respect to Johnson’s incorrectly signed document, IBM had not followed its usual protocols of sending it to an IBM representative for signature or retaining an original copy of the document in its files.

In view of the evidence, the Court found that IBM could not show a likelihood of success on the merits of its breach of contract claim.  The Court also found that the balance of equities favored Johnson, and it denied the preliminary injunctive relief sought by IBM.

A lesson for employers from this decision is that no ambiguity should be accepted as to whether the employee has assented to a restrictive covenant.  Particularly given the public policy of New York and other jurisdictions disfavoring non-competition agreements, when it is time to seek enforcement of such an agreement, the employer must be able to show that the employee unequivocally agreed to its terms.