New York Court Holds That Familiarity with Software Program, Without Evidence of Knowledge of Program's Source Codes or Imminent Commercial Piracy, Does Not Support Injunction Seeking Enforcement of Restrictive Covenants and Protection of Trade Secrets

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.