Former Employees Preliminarily Enjoined from Carrying On New Business

On November 3, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in First Manufacturing Co., Inc. v. Young, 2014 NY Slip Op. 51562(U), enjoining former employees from carrying on a new business they set up while working for their former employer.

In First Manufacturing Co., the plaintiff wholesaler of leather sought a preliminary injunction against former employees who had established a competing business. The court granted the motion, explaining:

Although an employee owes fiduciary duties of good faith and loyalty to an employer, the employee may incorporate a business prior to leaving the employer without breaching any fiduciary duty. The employee may not, however, solicit his or her employer’s customers or otherwise compete during the course of his or her employment by the use of the employer’s time, facilities or proprietary information. Where it is shown that trade secrets or other proprietary or confidential material belonging to the employer were used or there was other wrongful conduct by the employee, including the use of fraudulent methods or the engagement in a physical taking or copying of the employer’s documents, lists or files, such conduct is actionable in tort. In such cases, it is the employee’s misuse of the employer’s resources to compete with the employer that is actionable as a breach of fiduciary duty.

Once the employment is terminated, the relationship between a former employee and employer is not fiduciary in nature. The former employee is free to solicit customers or to otherwise compete with his or her former employer where remembered information as to specific needs and business habits of particular customers is not confidential or otherwise proprietary in nature. However, a former employee is not entitled to solicit customers by fraudulent means, the use of trade secrets or confidential information, even in the absence of a restrictive covenant.

Wrongful misappropriations of trade secrets or other confidential or proprietary information by former employees or others having no employment relationship with the plaintiff may be actionable as common law unfair competition claims. Such claims are rooted in the bad faith misappropriation of the plaintiff’s property, or its labors and expenditures or a commercial advantage belonging to the plaintiff such as its good will and generally concern the taking and use of such property right or commercial advantage to compete against the plaintiff. The bad faith misappropriation of a property or a commercial advantage belonging to the plaintiff by the infringement or dilution of a trademark or trade name or by the exploitation of proprietary information and/or trade secrets are both actionable as common law unfair competition claims.

To succeed on a claim for the misappropriation of trade secrets under New York law, a party must demonstrate: (1) that it possessed a trade secret, and (2) that the defendants used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means. Traditionally defined as relating to technical matters in the production of goods, trade secrets now encompass non-technical aspects of a business including, customer lists, price codes economic studies, costs reports, customer tracking and marketing strategies. In New York, a trade secret is defined as any formula, pattern, device or compilation of information which is used in one’s business and which gives the owner an opportunity to obtain an advantage over competitors who do not know or use it. An essential requisite to legal protection against misappropriation of such a formula, process, device or compilation of information is the element of secrecy. Secrecy has been defined in accordance with the § 757 Restatement of Torts as: (1) substantial exclusivity of knowledge of the formula, process, device or compilation of information; and (2) the employment of precautionary measures to preserve such exclusive knowledge by limiting legitimate access by others.

Customer lists and related information may thus constitute a trade secret provided that such list or information gives the owner an opportunity to obtain an advantage over competitors who do not know or use it. Documents, files and other assemblages of business data containing detailed, non-public information about customers, their specific or unique needs, the pricing of purchases, the credit terms of such purchases and customer class rankings may likewise constitute trade secrets and thus entitled to protection under unfair competition theories provided such assemblages are compiled through considerable effort on the part of the plaintiff and give the plaintiff a competitive advantage for the servicing of such customers and creating new business.

Knowledge of the intricacies of a business operation does not necessarily constitute a trade secret and, absent any wrongdoing, it cannot be said that a former employee should be prohibited from utilizing his knowledge and talents in this area. Information that is garnered by the defendant’s casual memory and knowledge does not constitute an actionable wrong. Where the information at issue is public knowledge or could be acquired easily and duplicated, it will not be considered a trade secret.

Nevertheless, confidential information not amounting to a trade secret may be protected from pirating and subsequent use under common law theories of unfair competition. To qualify for such protection, the confidential and/or proprietary material at issue must have been garnered by the defendant by way of tortious, criminal or other wrongful conduct. The remedy of an injunction against the use or divulgement of trade secrets has long been available to the plaintiff. Such remedy is also available to restrain the defendant’s use of other confidential or proprietary material provided that such material was appropriated through tortious conduct or other wrongful means.

(Internal quotations and citations omitted) (emphasis added).  The court went on to hold that the plaintiff had shown that it was entitled to the injunction it sought based on evidence that “included uncontroverted proof that the individual defendants engaged in the surreptitious and otherwise wrongful copying and taking of trade secrets and/or confidential proprietary material while in the employ of the plaintiff and that these defendants used and transmitted such material for purposes of competing directly and unfairly with plaintiff following the termination of their employment . . . .”

Commercial Non-Compete Agreement Enforced as Written, Including the Injunctive Relief and No-Bond Provisions

On October 2, 2014, Justice Platkin of the Albany County Commercial Division issued a decision in Eric Woods, LLC v. Schrade, 2014 NY Slip Op. 51473(U), granting a preliminary injunction to enforce a commercial non-compete agreement.

In Eric Woods, LLC, the plaintiff purchased an Allstate insurance agency from the defendant, including customer files and goodwill. The agreement contained a non-compete agreement in which the defendant agreed (i) not to sell insurance within 25 miles of the former business (except within Saratoga County) for a period of five years, (ii) not to solicit or accept business from former customers for a period of five years, and (iii) that violation of the non-compete provisions would constitute irreparable injury, and consented to entry of injunctive relief without requiring a bond.

Once the plaintiff learned that the defendant had purchased a GEICO insurance agency in Albany County and that his Saratoga County insurance agency was accepting business from former customers, he filed the instant action and moved for a preliminary injunction.

In considering the application, the court first noted that the judicial disfavor of post-employment non-compete agreements does not apply to non-compete agreements incident to the sale of a business:

The sole limitation on the enforceability of such a restrictive covenant is that the restraint imposed be “reasonable,” that is, not more extensive, in terms of time and space, than is reasonably necessary to the buyer for the protection of his legitimate interest in the enjoyment of the asset he bought . . . . Accordingly, the Court must apply the more relaxed standard of reasonableness applicable to post-sale covenants, rather than the stricter post-employment standard emphasized by defendants. For this reason, plaintiff need not demonstrate a “legitimate interest” in enforcing the covenant beyond its protection of the confidential customer/policyholder information and goodwill that in purchased from [the defendant] for value.

(Internal citations omitted.)

The court then considered the traditional preliminary injunction factors, irreparable injury, likelihood of success on the merits, and the balance of the equities.

The court found that the non-compete provisions were likely reasonable, in that the 25-mile radius and the five-year term were both “well within prevailing notions of reasonableness.” (Indeed, the court noted that in similar cases, courts have enforced covenants of unlimited duration.) The court also found that the plaintiff had amply documented the defendant’s breaches of the agreement.

As to irreparable injury, the court found that, in general, “irreparable injury is presumed where the covenant not to compete was part of the consideration for the sale of an existing business with its goodwill,” and also that the defendant conceded irreparable injury in the agreement.

As to the balance of the equities, the defendant made the very common argument that injunctive relief “would cause him severe financial hardship.” The court was unimpressed, finding that because “these hardships largely are self-created,” and the violation was “flagrant”; “the burden imposed upon defendants by the injunction, while substantial, cannot be said to be inequitable.” The court also found that the defendant had not shown that any burden on third parties was severe enough to tip the balance against the plaintiff.

The court also enforced the no-bond provision of the agreement, granting the preliminary injunction without a bond.

This case is a good example of courts enforcing commercial non-compete agreements as written, including a no-bond provision. It may serve as useful precedent for attorneys seeking to enforce such agreements on the issue of balance of the equities: parties opposing preliminary injunctions enforcing non-compete agreements routinely argue some version of “granting the preliminary injunction will ruin my business, but he’s doing just fine under the status quo.” In this case, Justice Platkin rejected that argument in no uncertain terms.

Customer Lists Readily Ascertainable from Sources Outside Employer’s Business not Trade Secrets

On August 21, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Chaos Commerce, Inc. v. Khaimov, 2014 NY Slip Op. 32377(U), refusing preliminary to enforce a non-compete clause.

In Chaos Commerce, the plaintiff sued the defendants for theft of trade secrets and breach of an employment agreement. The court denied the plaintiff’s motion for a preliminary injunction “to enforce non-competition, non-disclosure and non-solicitation covenants,” explaining:

Under New York law negative covenants restricting competition are enforceable only to the extent that they satisfy the overriding requirement of reasonableness. In order to be enforceable, a covenant’s terms must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.

In Reed, Roberts Associates, Inc. (40 NY2d 303), the Court of Appeals interpreted the reasonableness standard, and determined that a restrictive covenant will only be enforceable if it serves a legitimate interest of the employer: (1) to the extent necessary to prevent the disclosure or use of trade secrets or confidential information, or (2) where an employee’s services are unique or extraordinary.

In Reed, Roberts Associates, Inc. (Id.), the Court denied injunctive relief to an employer complaining of the theft of a customer list because it failed to demonstrate that the restrictive covenant at issue served a legitimate interest of the employer. The Court reasoned that the contact information of current and potential customers that is easily ascertainable from public sources is not a protectable trade secret.

. . .

Defendants argue that the supplier list does not contain confidential information, and that [the plaintiff] has not demonstrated that Khaimov has or will use or disclose any information to his new employer []. Khaimov represents that the supplier list contains contact information that is readily available in public sources such as the internet.

According to Khaimov, the same information is obtainable by Googling various items to purchase, searching for potential sources for those respective items, and then contacting the various companies found in the search to inquire about the products offered that he can then sell on the website. Khaimov also states that the supplier list at issue only contains the name of the supplier without any contact information.

Customer lists that are readily ascertainable from sources outside an employer’s business do not qualify for trade secret protection, and thus, Khaimov’s forwarding of the list to his home email address likely does not constitute misappropriation of trade secrets. Under the first prong of the Reed standard, [the plaintiff] fails to persuade that the restrictive covenant serves any legitimate interest.

(Internal quotations and citations omitted) (emphasis added).

Supreme Court Decides Special Proceeding to Enjoin Trademark Violation Despite Co-Pending Federal Trademark Action

On August 4, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Matter of Explorers Club Inc. v. Diageo PLC, 2014 NY Slip Op. 24218, granting judgment and a permanent injunction to the plaintiff in a summary proceeding brought under GBL § 135.

Section 135 of the General Business Law permits a summary proceeding to obtain permanent injunctive relief:

No person, society or corporation shall . . . adopt or use the name of a benevolent, humane or charitable organization incorporated under the laws of this state, or a name so resembling it as to be calculated to deceive the public . . . . an application may be made to a court or justice having jurisdiction to issue an injunction, upon notice to the defendant of not less than five days, for an injunction to enjoin and restrain said actual or threatened violation . . . without requiring proof that any person has in fact been misled or deceived thereby.

The Explorers Club brought a GBL § 135 proceeding against Diageo—a large London-based alcohol distributor—alleging that Diageo had used its name in marketing its “Johnny Walker Explorer’s Club” brand.

Diageo moved to dismiss the petition on a number of grounds, one of which was that the petition should be stayed in light of a co-pending trademark infringement action in the Southern District of New York.

The court refused to stay the summary proceeding on the grounds that the relief available under GBL § 135 is “separate and not to be confused” with the relief sought in the federal action. “Special proceedings in the sense used in the CPLR are unknown in federal court [and are] designed to facilitate a summary disposition of the issues and [have] been described as a fast and cheap way to implement a right . . . . For these reasons federal courts often decline to exercise supplemental jurisdiction over summary proceedings.”

The court also found that, although the parties were the same and the facts undoubtedly overlapped, “the questions of law are separate and distinct.” Under the Lanham Act, the plaintiff is required to show that its mark has “acquired distinctiveness or a secondary meaning.” No such requirement exists in a GBL § 135 special proceeding.

Accordingly, the court refused to stay or dismiss the New York action in light of the federal action, and after a consideration of the merits awarded a permanent injunction to the Explorers Club against Diageo.

This ruling is interesting because a GBL § 135 special proceeding is a specific, seldom-utilized action which must be unfamiliar to many practitioners. It is also interesting on a more general level, in that it shows that a party litigating in federal court can also bring a New York law special proceeding. Given that the special proceeding will probably be decided first, it could have a decisive effect, perhaps mooting large portions of the federal action.

SECOND UPDATE: Guest Post: New York County Commercial Division Grants TRO Enforcing Restrictive Covenants Pending FINRA Arbitration with Departing Employees

On June 3, 2014, we posted about dueling requests for “emergency” interim relief in a dispute concerning a Deutsche Bank investment advisory team joining the investment advisory and private wealth management firm HPM Partners. Here is an update:

There has been little rest for the lawyers engaged in the battle over non-compete clauses and other restrictive covenants allegedly covering Deutsche Bank’s departing discretionary portfolio management team. Last Friday, Justice Marcy Friedman entered a TRO enforcing post-employment restrictive covenants against six departing Deutsche Bank employees, including Benjamin Pace, formerly Deutsche Bank’s chief investment officer for wealth management in the Americas. On Tuesday morning, Pace sought interim vacatur of that TRO (insofar as it applied to him personally) by application to the First Department. Pace’s brief to the First Department (available here) relies principally on the absence of any restrictive covenants from his written employment agreement with Deutsche Bank predecessor, Bankers’ Trust. Pace evidently never signed any agreement directly with Deutsche Bank, and insists that the restrictive covenants contained in Deutsche Bank’s employee handbook are unenforceable because the handbook, by its own terms, does not create a binding contract of employment.

Justice Leland DeGrasse granted Pace’s request for emergency interim relief from the TRO. The order is merely an endorsement on Pace’s application for interim relief and does not set forth any reasoning (or effect any defendant other than Pace himself). The order is here. Justice DeGrasse’s vacatur of the TRO as to Pace seems to accept at least implicitly that covenants in written employment agreements are to be distinguished from those contained in employee handbooks — at least where, as here, the handbook contains disclaimer language to the effect that it does not create a written contract of employment.

This guest post was written by Isaac B. Zaur of Clarick Gueron Reisbaum LLP.

UPDATE Guest Post: New York County Commercial Division Grants TRO Enforcing Restrictive Covenants Pending FINRA Arbitration with Departing Employees

On June 3, 2014, we posted about dueling requests for “emergency” interim relief in a dispute concerning a Deutsche Bank investment advisory team joining the investment advisory and private wealth management firm HPM Partners. Here is an update:

On June 3, 2014, the two most senior departing Deutsche Bank employees, Benjamin Pace and Lawrence Weissman, filed notices of appeal in both actions. The pre-argument statements are available here and here. The principal asserted grounds for reversal are: (1) the absence of any agreement between Deutsche Bank and Pace; and (2) the theory that both were constructively discharged without cause – rendering any restrictive covenants unenforceable.

Also on June 3, HPM moved by order to show cause for expedited document and deposition discovery in anticipation of the scheduled June 24 hearing on the parties’ respective requests for preliminary injunctions. The discovery sought focuses on the relevant employees’ personnel files (and hence the existence or non-existence of applicable covenants in written employment agreements) and Deutsche Bank’s conduct with respect to the investment instruments that Pace and Weissman claim they were being pressured to sell their clients. HPM’s brief in support of its motion for discovery is here.

This guest post was written by Isaac B. Zaur of Clarick Gueron Reisbaum LLP.

Guest Post: New York County Commercial Division Grants TRO Enforcing Restrictive Covenants Pending FINRA Arbitration with Departing Employees

This guest post was written by Isaac B. Zaur of Clarick Gueron Reisbaum LLP.

Last week saw rapid-fire briefing and argument before Justice Marcy Friedman of New York County’s Commercial Division over dueling requests for “emergency” interim relief in a dispute concerning the departure of a Deutsche Bank investment advisory team. Three days after the first action was commenced, the Court entered partial interim relief in favor of Deutsche Bank. The dispute sits at the intersection of the substantive law concerning the enforceability of restrictive covenants in employment agreements and the phenomenon of injunctive relief “in aid of arbitration.”

On Friday, May 16, 2014, ten New York-based members of Deutsche Bank’s “discretionary portfolio management” division, including that division’s two most senior members, handed in letters of resignation. Over the next several days, another eight Deutsche Bank employees resigned. The resigning personnel have indicated an intention to join an investment advisory and private wealth management firm named HPM Partners, but apparently are continuing to appear for work each day at Deutsche Bank. Continue reading

Standard for Pre-Award Attachment Under CPLR 7502(c) is that Award Must Otherwise Be “Rendered Ineffectual”

On March 6, 2014, the First Department issued a decision in Matter of Kadish v. First Midwest Securities, Inc., 2014 NY Slip Op. 01517, addressing the standard in deciding motions for CPLR 7502(c) attachments.

In Matter of Kadish, the First Department addressed whether, in addition to the grounds stated in CPLR 7502(c)–that without the attachment, the award will be rendered ineffectual–a petitioner seeking a pre-award attachment also must also demonstrate the traditional factors for injunctive relief under CPLR article 63.

Without making a clear statement, the court implied that the “rendered ineffectual” standard is the only one governing Article 75 attachments, writing:

CPLR 7502(c) provides, in pertinent part, that the court may

entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitration . . . but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief. The provisions of articles 62 [attachment] and 63 [injunction] of this chapter shall apply to the application, including those relating to undertakings and to the time for commencement of an action (arbitration shall be deemed an action for this purpose), except that the sole ground for the granting of the remedy shall be as stated above”

(emphasis added).

Respondent FMSI disputes this standard, citing to multiple cases which involve injunctions under CPLR 7502(c), and clarify that, in addition to the usual three-prong test for preliminary injunctions under article 63 of the CPLR, a petitioner must demonstrate that a potential arbitral award could be rendered ineffectual (see Interoil LNG Holdings, Inc. v Merrill Lynch PNG LNG Corp., 60 AD3d 403, 404 [1st Dept 2009]; Founders Ins. Co. Ltd. v Everest Natl. Ins. Co., 41 AD3d 350, 351 [1st Dept 2007]; Erber v Catalyst Trading, 303 AD2d 165 [1st Dept 2003]; Matter of Cullman Ventures [Conk], 252 AD2d 222, 230 [1st Dept 1998]; Koob v IDS Fin. Servs., 213 AD2d 26 [1st Dept 1995]; see also SG Cowen Sec. Corp. v Messih, 224 F3d 79, 81-84 [2d Cir 2000] [detailed analysis of interplay between CPLR 7502 and CPLR article 63]).

Recent cases of this Court, however, continue to apply the “rendered ineffectual” standard with regard to a CPLR 7502(c) attachment in aid of arbitration (Matter of Sojitz Corp. v Prithvi Info. Solutions Ltd., 82 AD3d 89, 96 [1st Dept 2011] [citing Matter of H.I.G. Capital Mgt. v Ligator, 233 AD2d 270, 271 [1st Dept 1996]; Sullivan & Worcester LLP v Takieddine, 73 AD3d 442, 442 [1st Dept 2010]), and we agree with this interpretation.

The First Department went on to find that “under either standard, petitioner’s evidentiary showing was insufficient” to support the imposition of a pre-award attachment.

The implication of this decision is that the First Department will require only that an award be “rendered ineffectual” in order to grant a CPLR 7502(c) attachment. Hopefully, at some point the court will provide clearer guidance. Until then, litigators seeking an Article 75 attachment still must be prepared to address an argument that they must meet the traditional Article 63 standards for preliminary injunctive relief as well.