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

On February 4, 2010, the United States District Court for the District of Maryland granted summary judgment to Plaintiff TEKsystems, Inc. (“TEK” or the “Company”), a leading technical staffing and services company, and enjoined its former Director of Strategic Accounts, Jonathan Bolton (“Bolton”), from violating certain restrictive covenants contained in his Employment Agreement.

Pursuant to the Employment Agreement, Bolton was prohibited from competing with the Company within a fifty (50) mile radius of the office in which he worked at the time his employment was terminated, for a period of eighteen (18) months following the termination of his employment. Although Bolton worked in New York City, the Employment Agreement at issue was executed in Maryland and the contract specifically provided that Maryland law would govern all disputes.

Less than two weeks after resigning from TEK, Bolton began working for another IT-staffing company as their Managing Director of New York City. Bolton worked out of his home in Wayne, New Jersey, which is located less than 50 miles from his prior office at TEK. Approximately one month later, TEK issued Bolton a cease and desist letter requesting that he provide written assurances that he would abide by the terms of his Employment Agreement. However, Bolton never provided any response to the Company. Consequently, TEK filed a lawsuit to enforce the restrictive covenant and sought an award of injunctive relief and damages.

In analyzing the restrictive covenant pursuant to Maryland law, the court concluded that it was reasonable in terms of both geographic scope and duration. The court noted that covenants imposing a far broader limitation than 50-miles had previously been upheld by courts in Maryland, especially where, as here, the Company operates on a nationwide and international level. Likewise, the 18-month duration of the restrictive covenant was clearly compliant with the norms governing the temporal scope of restrictive covenants.

The court also found that the covenant not to compete served to protect TEK’s legitimate business interest, as the Company’s success in the IT-staffing industry overwhelmingly depends upon the ability of its employees to make and maintain personal connections with clients, and Bolton was privy to TEK’s client contacts and confidential information. And, while the covenant could create some inconveniences for Bolton by prohibiting him from working in the New York City area for the next 18 months, the Court did not find that such inconveniences rose to the level of undue hardship. Finally, the court considered the public interest at stake and noted that “the public benefits from the enforcement of reasonable restrictive covenants” which serves to “facilitate and protect business growth, especially in technology-related and information based fields.”

Based on these conclusions, the court awarded a permanent injunction barring Bolton from operating in the New York City area for 18 months from the date of the court’s order. Because the court found that there was insufficient evidence showing that any of TEK’s customers had paid any fees to Bolton for his work with his new employer, the court declined to rule on damages, choosing instead to allow the parties to further brief that specific issue.

This case demonstrates that Maryland is a favorable forum for enforcing non-compete agreements, even where there is no proof that an employer has suffered a loss of profits. Thus, Maryland employers who wish to protect their legitimate business interests should not hesitate to utilize and maintain appropriate restrictive covenants, so long as such covenants are reasonable in terms of scope, geographic area and duration, do not unduly restrict an employee from earning a living, and do not limit fair competition.
 

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Florida law, specifically section 542.335, Florida statutes, generally authorizes courts to enforce non-compete and other post-employment restrictive covenants, provided the agreements are in writing and signed by the employees against whom enforcement is sought, are reasonable in time, area, and line of business, and are supported by one or more legitimate business interests supporting the restrictive covenants.

Section 542.335 is fairly detailed. The statute defines what a reasonable time period is (it depends on the nature of the restrictive covenant), it lists several legitimate business interests, and it even addresses potential defenses. For example, it states that the court "[s]hall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought."

Still, section 542.335 leaves several issues unaddressed, leaving the courts to sort them out. Several of those issues are addressed in a 48 page opinion issued recently by the Eleventh Circuit Court of Appeals in Proudfoot Consulting Co. v. Gordon (11th Cir., July 30, 2009). The Eleventh Circuit affirmed the district court's injunction, but reversed the $1.66 million damages award to the former employer.

Here are some key points to take away from the court's decision:

• Where a non-compete covenant does not contain a geographic limitation, the court can supply a reasonable geographic scope. And where, as here, the employee had been assigned to a territory that included all of North American and Europe, this geographic area is reasonable.

• The court expressed doubt that a broad non-compete agreement that prohibits the former employee from working for a competitor, irrespective of which clients he is serving, would be reasonably necessary to protect an employer's interest in the relationships that the former employee developed with its clients.

• The court also expressed doubt that such a broad non-compete agreement would be reasonably necessary to protect client-specific confidential information, if restrictions that prevent the employee from contacting, or working for, those clients would be sufficient to protect that information.

• On the other hand, the court stated that where an employee has access to confidential business information crucial to the success of the employer's business, the employer has a strong interest in enforcing a covenant not to compete, irrespective of whether the employee improperly retains and uses that information in his new employment. But the court noted that it is unclear under Florida case law precisely when confidential information will justify a broad non-compete covenant. Is it sufficient that the employee be in a position at his new employer to use the former employer's confidential information? Or must the former employer meet the higher burden of proving that disclosure of the confidential information by the employee would be inevitable in the employee's new position? The court declined to answer this question, finding that under the facts of this case, where the employee had actually retained some of his former employer's confidential business information, the potential disclosure of that information to his new employer justified the enforcement of the non-compete covenant.

• It is not necessary that the former employer prove that the employee intentionally breached the restrictive covenants at issue in order to receive injunctive relief. The employee's good faith, reasonable belief that he is not in breach of a restrictive covenant is no defense.

• With respect to damages, the fact that the new employer profits from a breach of its employee's non-compete agreement with his former employer is irrelevant absent a finding that the employee directly caused his former employer to lose profits. "Damages for breach of a non-compete are intended to make the prior employer whole, not to punish employees." Furthermore, "disgorgement of profits earned is not a remedy for breach of contract," especially where the new employer is not even a party to the litigation.
 

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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.
 

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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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Under Florida law, where an employment contract expires by its terms and the parties continue to perform as before, an implication arises that they have mutually assented to a new contract containing the same provisions as the old.

But this principle does not apply to non-competes and other restrictive covenants contained in employment contracts, as illustrated by a recent decision by the Third District Court of Appeal, Zupnik v. All Florida Paper, Inc., Case No. 3D08-1371 (Fla. 3d DCA, Dec. 31, 2008).

Zupnik had signed a two-year employment contract with All-Florida. The contract provided that "during the Employment Term and within twelve (12) months from the termination of said term, he or she will not directly or indirectly … compete against ALL FLORIDA, within a fifty (50) mile radius of where ALL FLORIDA then engages in business[.]" The contract further provided that "[a]t the expiration of this two (2) year contract, the employee can exercise an option to remain in ALL FLORIDA’S employ as an at-will employee." But the contract did not contain language specifying that the restrictive covenants would continue beyond the two-year term if Zupnik remained an at-will employee after the two-year term expired.

After the expiration of the initial two-year term, Zupnik remained an All Florida employee for an additional two years, but the relationship was not formalized in a written document. Zupnik then formed his own company intending to serve his long-standing customers. All-Florida sued Zupnik and the trial court entered an injunction enforcing the non-competition covenant. The Third DCA reversed. Citing its decision in Sanz v. R.T. Aerospace Corp., 650 So. 2d 1057 (Fla. 3d DCA 1995), the court held that "post-termination restrictions expire upon the termination of an agreement for a specific term, even if an employee remains an at-will employee after the term of the written agreement expires."

For employers, the Zupnik case highlights the importance of drafting non-competes and other restrictive covenants carefully. Where an employment contract is for a specified term (e.g., two years), employers should include language in the contract which provides that the restrictive covenants contained in the contract continue beyond the specified term if the employee remains an at-will employee after the term has expired.
 

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A Florida trial court should not have entered a temporary injunction enforcing a non-compete agreement against a former employee on an ex parte basis, i.e., without notice to the employee, according to Florida’s Fourth District Court of Appeals in a recent decision, Bookall v. Sunbelt Rentals, Case No. 08-26291 (Fla. 4th DCA, December 3, 2008).
 
The employer, a company that rents construction equipment, employed the former employee until February 7, 2008, under a written agreement containing a non-compete and non-solicitation provision. Shortly after the employee resigned, he began to work at a competing company. Upon discovering this, the employer sent the former employee a letter advising him of the breach of the agreement. The former employee’s counsel responded that the employee understood and would comply with his obligations under the agreement.

Upon learning that the former employee continued to work for the competitor, the employer filed a verified complaint with supporting affidavits and an ex parte emergency motion for temporary injunction. The motion sought a temporary injunction against the former employee and the competitor based on the noncompete and non-solicitation provisions of the employment agreement. The duty judge assigned to the case entered the temporary injunction.

In its opinion, the Fourth DCA noted that under the Florida Rules of Civil Procedure, a temporary injunction "may be granted without written or oral notice to the adverse party only if: (A) it appears from the specific facts shown by affidavit or verified pleading that immediate and irreparable injury, loss, or damage will result to the movant before the adverse party can be heard in opposition; and (B) the movant's attorney certifies in writing any efforts that have been made to give notice and the reasons why notice should not be required." Furthermore, "[e]very temporary injunction granted without notice . . . shall define the injury, state findings by the court why the injury may be irreparable, and give the reasons why the order was granted without notice if notice was not given." See Fla. R. Civ. P. 1.610(a).

According to the Fourth DCA, the injunction suffered from a "fatal defect": it failed to give the reasons why the order was granted without notice. The court noted that "[t]his deficiency could have been cured if the employer articulated in its complaint or motion reasons why notice should be dispensed with....Unfortunately for the employer, neither the complaint nor the motion cured the deficiency in this case."

One lesson from the Bookall decision is clear: follow the civil procedure rules carefully. The rules are just that - rules - not guidelines or suggestions. The employer's and the court's failure to articulate why the order was granted without notice required a reversal of the injunction order under a plain reading of Rule 1.610(a).

One might surmise that there was no good reason why notice was not given to the former employee. After all, the opinion notes that the former employee was represented by counsel. How hard is it to fax, email and/or call opposing counsel before a hearing, even on an emergency motion?

But perhaps the former employee's counsel was on vacation or otherwise unavailable to receive notice of the hearing. In that case, an ex parte injunction may have been appropriate, and the employer's and the court's failure to state why the order was granted without notice a mere oversight.

However, even where an ex parte injunction is appropriate, employers and their counsel should be aware that it may be short-lived. Under Fla. R. Civ. P. 1.610(d), "[a] party against whom a temporary injunction has been granted may move to dissolve or modify it at any time. If a party moves to dissolve or modify, the motion shall be heard within 5 days after the movant applies for a hearing on the motion." Thus, if a court enters a temporary injunction on an ex parte basis, the employer's counsel should clear his calendar for the next week. The employee is entitled to a file a motion to dissolve and obtain an expedited hearing, and he may stand a good chance of getting the injunction modified or dissolved entirely once he tells his side of the story.
 

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