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

A July 27, 2010 decision by the United States Court of Appeals for the Third Circuit, in Bimbo Bakeries USA, Inc. v. Botticella, No. 10-1510, upheld an injunction preventing a senior executive from commencing employment at Hostess Brands, Inc., a bakery rival to the plaintiff Bimbo. The decision is notable in that the Court enjoined Mr. Botticella’s employment, in the absence of any non-competition agreement, on the basis that there was a “substantial likelihood,” but not an “inevitability,” that Mr. Botticella would disclose or use Bimbo’s trade secrets in the course of his planned employment at Hostess.

Mr. Botticella was employed at Bimbo from 2001 through January 13, 2010 as its Vice President of Operations for California, and he signed a “Confidentiality, Non-Solicitation and Invention Assignment Agreement” with Bimbo on March 13, 2009. As one of Bimbo’s senior executives, Mr. Botticella had access to a broad range of confidential information about Bimbo’s products and business strategy. Notably, Mr. Botticella was one of only seven people to possess all of the knowledge necessary to replicate independently Bimbo’s popular line of Thomas’ English Muffins.

The Third Circuit affirmed the District Court’s holding that Bimbo was likely to prevail on the merits of its claim of misappropriation of trade secrets under Pennsylvania’s Uniform Trade Secrets Act (“PUTSA”). The Circuit Court made it clear that it was basing its opinion not upon a theory of “inevitable disclosure,” but rather upon the PUTSA’s proscription of threatened misappropriation. The Circuit Court rejected Mr. Botticella’s argument that an injunction should only issue if Bimbo could show that it would be “virtually impossible” for him to perform his new job at Hostess without disclosing Bimbo trade secrets.

The Court found that the District Court’s injunction was amply supported by evidence adduced at the preliminary injunction hearing; in short, Mr. Botticella was not a “good leaver” when resigning from Bimbo. Mr. Botticella accepted the Hostess position on October 15, 2009, but agreed to begin work in January 2010. During the intervening time, he remained fully engaged in his work (with its attendant exposure to confidential information) at Bimbo, and did not inform Bimbo of his intention to resign until January 4, 2010. The District Court found that Mr. Botticella had accessed highly sensitive Bimbo information via his computer in his last days at Bimbo and had likely copied such information onto external storage devices, and that his explanation at his deposition of such conduct was “confusing at best” and “not credible.”

The Third Circuit also noted that the District Court was entitled to make an adverse inference against Botticella because he did not testify at the preliminary injunction hearing.
 

Applying Missouri law, the United States Court of Appeals for the Eighth Circuit recently affirmed an award of $1,369,921 in liquidated damages stemming from the alleged violation of non-solicitation agreements by four former employees of accounting firm Mayer Hoffman McCann. Mayer Hoffman McCann, P.C. v. Thomas L. Barton et al., Case No. 09-2061 (8th Cir. August 11, 2010). In pertinent part, these agreements provided that for two years following the termination of employment, the employees could not solicit clients and employees of their former employer. The agreements also contained a liquidated damages provision.

The Court held that the two year duration was reasonable and further held that the absence of a geographic restriction was not a problem, because “a customer restriction may substitute for an explicit geographical restriction.”

Regarding the liquidated damages provision, the Court explained that

the issue here is whether the parties intended the provision to be a form of recoverable compensation – liquidated damages – or an unenforceable penalty provision meant to compel performance. In order to distinguish between the two, we ask whether: ‘(1) the amount fixed as damages [is] a reasonable forecast for the harm caused by the breach; and (2) the harm [is] of a kind difficult to accurately estimate.’

Because the Court found that both requirements were met in this case, it affirmed the trial court’s award of $1,369,921 in liquidated damages, calculated based upon gross billings to 124 former clients who moved their business after being improperly solicited.
 

Co-authored by Ted A. Gehring.

On July 30, 2010, in Silguero v. Creteguard, Inc., the California Court of Appeal (2nd District) held that an employee could state a claim for wrongful termination against her subsequent employer when that employer terminated her after having been informed by her former employer that the employee was subject to a non-compete clause.  The decision will have important consequences for companies with California employees in industries where non-competition and non-solicitation agreements are common.

The plaintiff, Rosemary Silguero,  began employment with Floor Seal Technology Inc. (“FST”)  in 2003 as a sales representative.  In 2007, FST threatened to terminate her employment unless she signed a confidentiality agreement which contained a non-competition clause that prohibited her from all sales activities for 18 months following either her departure or termination from FST.  Silgureo's employment was subsequently terminated by FST.  She was then hired by Creteguard Inc.  FST contacted Creteguard requesting its cooperation in enforcing the confidentially agreement.  Creteguard then terminated Silguero’s employment, citing the non-competition clause.  Notably, in terminating her, Creteguard acknowledged the invalidity of the non-competition agreement, but noted it was terminating Silguero "to keep the same respect and understanding" with Creteguard's "colleagues" in the same industry.

Silguero filed suit against Creteguard, alleging wrongful termination.  She also sued FST in a separate lawsuit, alleging that FST had intentionally interfered with her contract with Creteguard.

Silguero contended that the non-competition agreement with FST was void under California Business and Professions Code Section 16600 and that her termination by Creteguard pursuant to that agreement was against public policy.   Creteguard demurred, arguing that that there was no clearly delineated public policy prohibiting an employer from honoring a non-competition agreement by an employee and a former employer.  Creteguard argued that if there was any violation of public policy, the violation was by FST.  The trial court granted Creteguard’s demurrer, finding it was not against public policy for a subsequent employer to honor a previous agreement entered into by an employee and former employer. Silguero appealed.

On appeal, the Court of Appeal reversed, holding that Silguero's allegations supported a claim for wrongful termination pursuant to Tameny v. Atlantic Richfield.  In reversing the ruling of the trial court, the Court held that Section 16600 was a clear legislative declaration of a fundamental public policy that forbid discharge based on a non-competition agreement.  The Court of Appeal did not address Silguero's claims against FST.

Creteguard argued that, notwithstanding the legislative policy against non-competition agreements, nothing in Section 16600 evidenced any legislative intent to impose third-party liability.  Imposing liability on Creteguard for a violation of Section 16600, Creteguard argued, went beyond the legislative intent evidenced by Section 16600.  The Court of Appeal disagreed, noting that California courts had previously rejected as unenforceable "no-hire" agreements between employees.  The Court of Appeal found that Creteguard's desire to keep an "understanding" with its competitors in the industry operated as a no-hire agreement.

In a recent decision issued by the Supreme Court of the State of New York, New York County, a lawsuit brought by Marsh USA Inc. against two former employees and a competitor was sustained in the face of the defendants’ challenge to the complaint on grounds of forum non conveniens and failure to state a cause of action.  The decision is notable for its application of New York non-competition law to California residents, and Marsh’s inclusion of forum selection clauses and choice of law provisions in its agreements with the individual defendants appears to have enabled it to avoid the draconian effect of California law upon those individual’s non-compete agreements.

The decision denying defendants’ motion to dismiss, by Justice Bernard J. Fried, was entered on July 23, 2010 in the matter of Marsh USA Inc. v. Hamby, Index No. 600636/10.

The individual defendants, John A. Hamby and Lida Davidians, both reside in California and worked over five years in Marsh’s Entertainment Practice, in which they were senior employees.  The complaint alleges that Hamby and Davidians each breached several non-compete agreements, misappropriated confidential information, and unfairly competed when they went to work for DeWitt Stern Group, Inc. in late January 2010.  After their resignations, in short order, numerous clients terminated their relationship with Marsh and appointed DeWitt as their new insurance broker, and 8 of 20 employees of Marsh’s Los Angeles Entertainment Practice abruptly defected to DeWitt.

The defendants moved to dismiss the complaint first on the ground that the New York court is an inconvenient form.  The Court refused to dismiss on this ground, because both Hamby and Davidians had signed multiple agreements containing forum selection clauses and choice of law provisions that obligated the parties to litigate in New York, applying New York law.  Defendants’ arguments that connections to California outweighed connections to New York, and that California’s public policy would render the non-compete agreements void under California law, did not convince the New York court to dismiss.  The New York court noted, among other things, that a lawsuit commenced by defendants against Marsh in the Superior Court of the State of California, No. BC 430457, seeking a determination that the agreements were unenforceable under California Business and Professions Code Section 16600, was stayed upon Marsh’s motion, allowing the dispute to be heard in the New York court.

Defendants’ second motion to dismiss, for failure to state a cause of action, focused on Marsh’s allegations of misappropriation of trade secrets, which defendants argued were conclusory and did not identify what trade secrets had been stolen.  The New York court found that the defection of numerous Marsh employees and clients quickly following Hamby and Davidians’ resignations raised a strong enough inference of misappropriation of trade secrets, that the complaint would therefore survive the motion to dismiss.