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 . . . .”

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).

Court Examines Elements of Claim for Misappropriation of Skills and Expenditures in Pinterest Lawsuit

On July 8, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Schroeder v. Pinterest Inc., 2014 NY Slip Op. 31809(U), illustrating the elements of a claim for misappropriation of skills and expenditures.

In Schroeder, the plaintiffs claimed that the defendants used their ideas and work in creating the website Pinterest. The defendants moved to dismiss. This post looks at the court’s denial of the defendants’ motion with respect to the plaintiffs’ claim for misappropriation of skills and expenditures. The court explained:

To make a claim of misappropriation of skills and expenditures, plaintiffs must allege (1) investment of labor, skill or expenditure, (2) that the information was misappropriated in bad faith, (3) and used for defendant’s own benefit. Such claims are traditionally called unfair competition. Unfair competition claims can stand even when a misappropriation of trade secret claim fails. Finally, bad faith requires the existence of a confidential or fiduciary relationship and can consist of theft, deception, bribery, or coercion.

(Internal quotations and citations omitted). The court found all three elements adequately pleaded with respect to the individual defendant, Cohen, but not Pinterest, explaining:

Plaintiffs allege that the investment in skill, labor, and expenditures was misappropriated by Mr. Cohen when he took plaintiffs’ ideas to the Pinterest founders. Plaintiffs allege that Mr. Cohen acted in bad faith by stealing ideas when he promised he would not. Plaintiffs allege that Mr. Cohen, as chairman and CEO of both RDV and Skoopwire, while acting as an agent of NY A, knew that the proprietary information he acquired from plaintiffs should be kept confidential. Plaintiffs further allege that Mr. Cohen knew such information was to be kept confidential because Mr. Cohen signed the operating agreement, refused to sign a liquidation agreement, and wrote an email promising that he would not profit from plaintiffs’ ideas. . . .

Plaintiffs sufficiently allege that Mr. Cohen’s misappropriation of Mr. Schroeder’s labor, skill, and expenditures was for Mr. Cohen and NY A’s own benefit and gave defendants an unfair advantage. NY A is allegedly also responsible because Mr. Cohen was at all times acting in furtherance of NY A business and within the scope of his authority as an NYA officer. NYA exists “to provide capital to entrepreneur’s starting new businesses.” Mr. Cohen was affiliated with NY A and plaintiffs met with Mr. Cohen to look for capital. NY A’s success occurs through the investments made by its members. For example, NY A touted the success of Pinterest with a tombstone on its website. NY A is not just a clearinghouse (independent consortium of angel investors) and it does not matter that it is a not-for-profit entity.

This decision illustrates that even where a claim for theft of trade secrets might not exist, a plaintiff might still have a claim for the misappropriation of the fruits of her labor.