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

A recent New York case, Edelman v. Starwood Capital Group, LLC, 2009 NY Slip Op. 09309 (1st Dep’t December 15, 2009), relates to the issue of maintaining the confidentiality of proprietary materials. The case involved an unsuccessful attempt by an investor, Asher B. Edelman, to acquire a French company Société du Louvre (SDL) in 1999. Edelman claimed that pursuant to his attempt to acquire SDL in 1999, he conducted and compiled significant research to identify SDL as a valuable acquisition. Among other things, Edelman claimed that he researched and analyzed the finances, ownership structure and business operations of SDL. In conjunction with his desire to acquire SDL, Edelman retained a French company to arrange for the financing and to help him obtain a business partner which could help run the hotel operations of SDL that Edelman wanted to continue. This company solicited Starwood Capital Group, LLC ("Starwood") as a potential business partner. Starwood was provided with Edelman's business plans and information, which were all marked confidential, pursuant to the oral agreement between Edelman and the third party company to maintain confidentiality. Starwood declined the deal.

In 2005, pursuant to an auction, Starwood acquired SDL. Its post-acquisition plan allegedly matched the business plans which Edelman had put together and had shown to Starwood years earlier. Edelman claimed that Starwood improperly took and profited from the information he compiled. Edelman alleged claims of unfair competition, improper use of proprietary information and unjust enrichment.

The First Department found that Edelman's claim for the misappropriation of proprietary information failed because the allegations did not sufficiently allege that he took "sufficient precautionary measures to insure that the information remained secret..." Among other things, the Court pointed out that Edelman had failed to obtain a confidentiality agreement with Starwood, as the Court noted would have normally been expected. The Court also stated that the fact that the documents had a "confidential" stamp was, on its own, inadequate to protect them, especially for six years.

The case is another reminder that companies should take appropriate precautionary steps when dealing with confidential information.
 

*Co-authored with Jake Schmidt.

As we noted in a blog post in October 2009, in Sunbelt Rentals, Inc. v. Ehlers, 333 Ill.Dec. 791, 915 N.E.2d 862 (Ill. App. Ct. 2009), an Illinois appellate court reexamined and rejected over thirty years of well-established precedent regarding the enforceability of restrictive covenants. Specifically, it rejected the “legitimate business interest” test long applied as a threshold issue by Illinois courts when deciding the enforceability of a restrictive covenant. At the time, we noted that the court either isolated itself from every other Illinois appellate court or took the first step in decreasing the traditional hostility with which Illinois courts treat restrictive covenants.

Although we expect that the reasoning of Sunbelt will be at issue in virtually every lawsuit seeking to enforce or invalidate an Illinois restrictive covenant, to date only one published decision, Aspen Marketing Services, Inc. v. Russell, No. 09 C 2864, 2009 WL 4674061 (N.D. Ill. Dec. 3, 2009), has cited Sunbelt. In that case, federal district court judge Robert Gettleman noted his awareness of Sunbelt and its rejection of the legitimate business interest test, but he applied the test anyway, noting that “[t]he Illinois Supreme Court, the United States Court of Appeals for the Seventh Circuit, and this court, however, have not rejected the applications of the legitimate business interest test.” Judge Gettleman did not otherwise elaborate on his decision to apply the legitimate business interest test.

We will continue to monitor this issue, as it has significant ramifications on the enforceability of restrictive covenants in Illinois.
 

An article recently published in the New Jersey Law Journal reviews potential sources of information to be searched and procedures that can be followed by employers faced with a departing employee who may have misappropriated the the employer's information, client lists and know-how.