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

We previously wrote about the June 26, 2009 Memorandum Decision and Order in which the U.S. District Court for the Southern District of New York denied a preliminary injunction sought by IBM to prevent its former employee David L. Johnson from continuing his employment as Senior Vice President of Strategy at Dell Inc.

When presented with a non-compete agreement by IBM, Johnson, who was then hoping to be promoted at IBM, purposefully signed the agreement on IBM’s signature block rather than his own in order to allow himself more time to consider whether to commit to signing the agreement. The District Court held that IBM could not show a likelihood of success on the merits and denied IBM’s preliminary injunction motion, because IBM’s actions after receiving the agreement incorrectly signed by Johnson indicated that it did not really consider the agreement to be valid. IBM immediately appealed to the Second Circuit Court of Appeals.

While the Second Circuit appeal was pending, IBM sought leave from the District Court to bring a second motion for a preliminary injunction against Johnson.  In a July 30, 2009 Memorandum Decision and Order, the District Court denied such leave to IBM, on the grounds that the proposed motion (a) sought “essentially the same relief that IBM requested in its first motion,” (b) was “based on information that has been in IBM’s possession since well before” the hearing on the first motion, and (c) “might well encroach upon the Second Circuit’s review of IBM’s appeal.” IBM sought a writ of mandamus from the Second Circuit to vacate this July 30 order, and also appealed the order.

All three of IBM’s pending applications were rejected by a Second Circuit Panel in a Summary Order, dated October 22, 2009.  In affirming the June 26, 2009 Order, the Second Circuit found the District Court’s conclusions “well-supported by the court’s finding that Johnson was extremely credible, and that IBM’s designated witness was much less credible chiefly because IBM’s witness lacked familiarity with documents bearing on the controversy.” With respect to the mandamus petition, the Second Circuit agreed with the District Court’s July 30, 2009 Order that the pending appeal “temporarily divested the district court of jurisdiction to consider a second motion arising from the same facts even if IBM asserted a nominally different cause of action.” Finally, with respect to the appeal of the July 30, 2009 Order, the Second Circuit noted that any “conceivable challenge to the appealed-from order would essentially duplicate the arguments we have already rejected with respect to the mandamus petition.”

In this heavily litigated matter, it now appears that IBM may be out of options in its attempt to prevent Johnson from continuing to work for Dell Inc., for which he has been employed since June. However, IBM’s underlying District Court action against Johnson, seeking damages, may continue.
 

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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.
 

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A recent decision of the United States District Court, Southern District of New York, entitled International Business Machines Corporation v. Papermaster, No. 08-CV-9078 (KMK), 2008 WL 4974508, 2008 U.S. Dist. LEXIS 95516 (S.D.N.Y. Nov. 21, 2008), appears to have breathed new life into the “inevitable disclosure” doctrine, apparently easing the burden of proof that an employer must satisfy in order to show the irreparable harm necessary for a court to grant an injunction preventing the former employee from working for a competitor.

Under the inevitable disclosure doctrine, certain employees cannot “wipe clean” their knowledge of their former employers’ trade secrets. Despite such employee’s best efforts to avoid disclosing any trade secrets to the new employer, the employee will inevitably disclose trade secrets to the new employer simply by virtue of the employment, and therefore should be enjoined from working for the new employer for some period of time, even in the absence of any non-compete agreement. The inevitable disclosure doctrine may provide a source of relief against improper competition by former employees even where the employer cannot show actual misuse, or intent to misuse, confidential or trade secret information. PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

The recent IBM v. Papermaster decision not only grants injunctive relief to IBM preventing Papermaster’s employment with competitor Apple, Inc. without IBM presenting evidence of actual misappropriation, but bases its finding of irreparable harm largely upon the probability of “inadvertent” disclosure by Papermaster and Papermaster’s acknowledgement in his employment agreement with IBM that IBM would suffer irreparable harm were he to breach the agreement’s non-competition provision. This seems a surprisingly low threshold for applying the inevitable disclosure doctrine to find irreparable harm in the absence of any evidence of misuse or even misappropriation of confidential information and/or trade secrets.

Mark D. Papermaster worked at IBM for 26 years in various product design and development roles, and in 2006 joined an elite group of about 300 top executives that develops IBM’s corporate strategy. Papermaster’s last day of employment with IBM was October 24, 2008, and he began working at Apple on November 3, 2008. IBM sought a preliminary injunction and in its November 21, 2008 decision, the District Court enjoined Papermaster from working for or with Apple until further order of the Court.

The Court held that IBM faced irreparable harm, even though there was no reason to ascribe ill-will to Papermaster or to doubt that he would abide by Apple’s Intellectual Property Agreement, in which he agreed not to use or disclose to Apple any confidential, proprietary or secret information of his previous employers, or otherwise to think that he would misuse or disclose IBM’s trade secrets. The Court’s holding that such disclosure was nonetheless inevitable rested in large part on its conclusion that inadvertent disclosure would probably occur, on the boilerplate provision in Papermaster’s IBM Noncompetition Agreement stating that he agreed that IBM would suffer “irreparable harm” if he worked for a competitor, and on what the Court termed “common sense.”

Having relied on these factors, which may not previously have been sufficient, to find irreparable harm, the Papermaster decision could have the effect of further expanding the application of the inevitable disclosure doctrine. The Papermaster matter was set to go to trial in late February 2009, but the parties reached a settlement by consent order on January 27, 2009 which will allow Papermaster to begin working for Apple on April 24, 2009. Time will tell if other courts follow the lead of the Papermaster decision in applying the inevitable disclosure doctrine.
 
For a recent New York Law Journal column discussing further the inevitable disclosure doctrine and the IBM v. Papermaster decision, click here.

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