Beware Of Applicable State Law In Enforcing Restrictive Covenants

On October 22, 2009, in a case entitled Astro-Med, Inc. v. Nihon Kohden America, Inc. and Kevin Plant, on appeal from the U.S. District Court for the District of Rhode Island, the First Circuit Court of Appeals affirmed a jury verdict granting Astro-Med, Inc. ("Astro-Med") damages of more than $1 million against Nihon Kohden America, Inc. ("Nihon") and employee Kevin Plant ("Plant") for violating non-compete and non-disclosure clauses which Plant signed when he was first employed by Astro-Med in 2002.

Astro-Med and Nihon were competitors in the life sciences equipment market. In 2002, Astro-Med hired Plant as a Product Specialist at its Rhode Island facility. Upon his hire, he signed an Employment Agreement which contained a non-competition clause and a trade secrets clause. The Agreement was governed by the laws of Rhode Island.

After significant training from Astro-Med, Plant transferred to a Sales Representative position at Astro-Med's Florida facility. In 2006, Nihon, a California corporation, hired Plant as a Sales Representative in Florida. Shortly thereafter, Astro-Med sued Plant in federal court in Rhode Island for breach of contract, misappropriation of trade secrets and unfair competition. Astro-Med later added Nihon as a defendant, alleging claims including misappropriation of trade secrets. After losing before the jury, both Nihon and Plant appealed to the First Circuit Court of Appeals.

On appeal, Nihon and Plant alleged nine separate claims of legal error, each of which was rejected by the First Circuit. The Non-Competition clause and the Trade Secrets clause stated that Rhode Island law applied. On appeal, Nihon argued that as a California business, it should not be subjected to the jurisdiction of Rhode Island concerning its hiring of a Florida resident to sell its product in Florida. The Appeals Court disagreed, finding that Rhode Island had jurisdiction. It also found that Astro-Med and Plant entered into the agreement in Rhode Island and that Nihon hired away Plant with full knowledge of the agreement. Because Astro-Med was headquartered in Rhode Island, that was one of the places where the harm occurred.

Specifically with respect to the Non-Competition and the Trades Secrets provisions, defendants raised numerous arguments. The two most interesting are discussed below:

First, Nihon argued that the Non-Competition clause that Plant signed when he was first hired at Astro-Med was unenforceable because after Plant signed it, his duties materially changed. It is true that Plant's job changed at Astro-Med when he transferred to the salesperson job in Florida. Nihon relied on a Massachusetts case (AFC Cable Sys. Inc. v Clisham, 62 F. Supp. 2d 167 (D. Mass. 1999), for the proposition that a change in an employee's job can void a non-competition clause. Massachusetts case law provides that "each time an employee's employment relationship with the employer changes materially such that they have entered into a new employment relationship a restrictive covenant must be signed." Lycos, Inc. v. Jackson, No. 2004-3009, 2004 Mass. Super. LEXIS 348 (Mass. Super. Ct. Aug. 24, 2004). After a substantial discussion of the genesis and intent of the Massachusetts decision which turns on the parties' intent to abandon the non-competition agreement upon the change in duties, the First Circuit held that even if Rhode Island adopted the Massachusetts approach, the facts in the instant case did not support a finding that the parties intended mutual abandonment and rescission of the non-competition provision.

Second, with respect to the Trade Secret Misappropriation claim, relying on Massachusetts common law, Nihon argued that since no evidence was established at trial that either Plant or Nihon ever used any of Astro-Med's confidential information, there can be no violation. However, the First Circuit, which also hears appeals from Massachusetts, said Nihon's reliance on Massachusetts law was misplaced. Rhode Island law applied and the Rhode Island Uniform Trade Secrets Act, R.I. Gen. Laws Sect. 6-4-1, et seq. defines "misappropriation" as including disclosure of a trade secret by one who acquired it while under a duty to maintain its secrecy and the acquisition of a trade secret by one who knew it was obtained from someone who had a duty to keep it secret. Under Rhode Island law, it is not necessary to show that either Plant or Nihon used Astro-Med's trade secrets. The First Circuit noted that disclosure or acquisition is sufficient to prove a misappropriation, subjecting defendants to liability for actual loss and unjust enrichment caused by the misappropriation.

This case illustrates that it is important to check the applicable state law to determine if an individual has violated a restrictive covenant like the Non-Competition or Trades Secrets clauses discussed in this summary. Appellants Nihon and Plant relied on principles from Massachusetts which were different than the applicable law of Rhode Island. The growing Massachusetts case law regarding material changes in employment and the Massachusetts doctrine that misappropriated trade secrets must be used before they can be the subject of an actionable claim, have not been adopted by other states and did not help Nihon and Plant.