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.

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

Decision Analyzes Limits of Former Employee’s Common Law Obligations to Employer

On April 2, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in Freed, Kleinberg, Nussbaum, Festa & Kronberg, MD., LLP v. Nastasi, 2014 NY Slip Op. 30879(U), discussing the duties of employees to their former employer.

In Freed, Kleinberg, the plaintiff medical practice sued “[t]he individual defendants” who “were employed by the plaintiff as staff physicians” and a “corporate defendant” that was “a competing medical practice established by” one of the individual defendants. In deciding the plaintiff’s motion for partial summary judgment, the court discussed the legal obligations of employees to their employers:

That employees owe fiduciary duties, including duties of loyalty and good faith, to their employer in the performance of their duties is well established. Actionable breaches of such duties usually result in a personal gain to the employee and losses to the employer and are generally premised upon conduct by which profits, business opportunities, the raiding of employees and other assets including confidential and proprietary information of the employer are lost or diverted. However, once the employment is terminated, the relationship between a former employee and employer does not give rise to a fiduciary relationship as a matter of law.

A cause of action based on unfair competition may be predicated upon trademark infringement or dilution in violation of General Business Law §§ 360- k and 360- 1, or upon the alleged bad faith misappropriation of a commercial advantage belonging to another by exploitation of proprietary information or trade secrets. The key to stating the non-statutory, common law claim of unfair competition is that the defendant charged actionable conduct displayed some element of bad faith in misappropriating the plaintiffs labor, skill, expenditures, proprietary information of trade secrets.

Appellate case authorities have nevertheless recognized that in the absence of a restrictive covenant not to compete, an employee is free to 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. 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. In such cases, it is the employee’s misuse of the employer’s resources to compete with the employer that is actionable as breach of fiduciary duty.

An employee not bound by a restrictive covenant not to compete who has left the employ of a former employer is also free to compete and he or she may solicit the former employer’s customers unless it is shown that customer lists or like material belonging to the employer constitute trade secrets or that there was other wrongful conduct including the employment of fraudulent methods or the engagement in a physical taking or copying of the employer’s customer lists or files.  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 actionable wrongdoing. Where the information at issue is public knowledge or could be acquired easily and duplicated, it is not a trade secret.

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

Court Addresses Remedies for Violation of Non-Compete, Non-Disclosure and Non-Solicitation Agreements

On March 28, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Admarketplace Inc. v. Salzman, 2014 NY Slip Op. 30813(U), regarding the enforcement of non-compete, non-disclosure and non-solicitation agreements.

In Admarketplace, “plaintiff adMarketplace Inc. (AMP) commenced [an] action to enjoin Salzman, a former employee, from working for VSW, a competitor. Salzman was accused of violating a contractual non-competition agreement, as well as misappropriating trade secrets and other confidential information that he allegedly was using to help VSW poach employees and clients from AMP.” The plaintiff sought an order “(1) compelling VSW to terminate AMP’s former employees; (2) enjoining defendants from using AMP’s confidential information; (3) enjoining defendants from soliciting AMP’s clients and employees; and (4) compensating it for the business AMP lost due to defendants’ unfair competition.” Among the points the court made in deciding the plaintiff’s motion were:

It is well settled that in order to be enforceable, an anticompetitive covenant ancillary to an employment agreement must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmtul to the public, and not unreasonably burdensome to the employee. The Court of Appeals has limited the cognizable employer interests under the reasonableness prong to the protection against misappropriation of the employer’s trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary. A restriction on a former employee’s ability to work for a competitor is invalid unless the employee’s services were unique or extraordinary or if the job is considered a learned profession (such as law or accounting).

First, it is clear that the NDA’s prohibition of Salzman and Carney working for a competitor is unenforceable. They work in the pay-per-click online marketing industry, which is not a learned profession, and their services are not unique. The law is well settled that agreements barring such employees from working for competitors are unenforceable.

. . .

As for the prohibition on soliciting former employees, this court recently observed that there is scant case law on the enforceability of non-recruitment clauses. This court, persuaded by the analysis in Renaissance Nutrition and Lazer, upheld a two year non-recruitment clause because such a restriction is inherently more reasonable and less restrictive than non-compete clauses since it does not impact the employee’s ability to procure employment. Here, the duration of the NDA’s non-recruitment clauses is shorter than in OTG. Additionally, AMP has a legitimate interest in the protection of client relationships developed at the employer’s expense. The gravamen of AMP’s allegations is that VSW has been poaching employees from AMP, inducing them to switch companies for greater compensation hoping that bring proprietary information with them. A non-recruitment prohibition directly guts this channel of wrongful competition. This is reasonable and, therefore, enforceable. . . . .

[T]he existence of actual monetary damages here is questionable. Though AMP has been in court to argue three motions in this case, it has yet to identify any actual lost business. Though such proof is not required at this juncture, absent lost business, there is little relief to be had by AMP. As explained to the parties on multiple occasions, no one’s employment will be terminated as a result of this case. For AMP to recover from defendants, it must prove a nexus between the alleged violations of the subject restrictive covenants and revenue generated by defendants using confidential information.

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

This decision provides a useful summary of what the courts will (and will not) do in enforcing employment agreements. Significantly, as this decision shows, employment agreements–unlike most other contracts–are not necessarily enforced as written and instead are interpreted and enforced by the courts based on the overlay of law discussed above.

Statute of Frauds and At-Will Employment Doctrine Bar Claim for Unpaid Commissions

On March 7, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Niyazov v. Park Fragrance, LLC, 2014 NY Slip Op. 30610(U), holding that a combination of the statute of frauds and the at-will employee doctrine resulted in an employee having no claim based on a unilateral change to his right to earn commissions.

In Niyazov, the plaintiff sued his former employer and its owners for unpaid pay and commissions. In deciding the defendants’ motion to dismiss, the trial court examined the plaintiff’s rights in light of both the at-will employee doctrine and the statute of frauds. Because the decision is fact-dependant, we have repeated below both an excerpt of the relevant facts and the court’s reasoning. Continue reading

Fourth Department Declares Florida Law Regarding the Enforcement of Non-Compete Agreements Unenforceable on Public Policy Grounds

On February 7, 2014, the Fourth Department issued a decision in Brown & Brown, Inc. v. Johnson, 2014 NY Slip Op. 00822, declaring unenforceable on public policy grounds a Florida statute providing that in determining the enforceability of a non-compete agreement, a court “shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.”

In Brown & Brown, the plaintiff sued a former employee for breach of restrictive covenants in an employment agreement that prohibited her from soliciting customers or employees for a two-year period following the termination of her employment.  As the Fourth Department noted, under New York law, non-compete agreements are “almost uniformly disfavored and are sustained only to the extent that they are reasonably necessary to protect the legitimate interests of the employer and not unduly harsh or burdensome to the one restrained.”  The courts apply a three-part test to assess the reasonableness of a restrictive covenant under which the party moving to enforce the agreement must show that the restraint “(1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.”  The employment agreement at issue, however, was governed by Florida law, which “expressly forbids courts from considering the hardship imposed upon an employee in evaluating the reasonableness of a restrictive covenant.”  The Fourth Department found that Florida law conflicts with New York public policy and is therefore unenforceable:

[W]e conclude that Florida law prohibiting courts from considering the hardship imposed on the person against whom enforcement is sought is “truly obnoxious” to New York Public Policy, inasmuch as under New York law, a restrictive covenant that imposes an undue hardship on the employee is invalid and unenforceable for that reason. Furthermore, while New York judicially disfavors such restrictive covenants, and New York courts will carefully scrutinize such agreements and enforce them only to the extent that they are reasonably necessary to protect the legitimate interest of the employer and not unduly harsh or burdensome to the one restrained, Florida law requires courts to construe such restrictive covenants in favor of the party seeking to protect its legitimate business interests.

This decision demonstrates the strong New York public policy disfavoring non-compete agreements and the unwillingness of the New York courts to enforce foreign laws that contravene that policy.