After a financial services salesperson resigned and took a chunk of his employer’s database with him, HNRK successfully argued to an arbitrator acting under the American Arbitration Association’s Optional Rules for Emergency Measures of Protection, that he should award injunctive relief against the use and disclosure of our client’s trade secrets even though the underlying employment agreement only provided for monetary relief.
The agreement required mandatory arbitration of all disputes. It contained a six-month non-competition and non-solicitation clause and further stated that injunctive relief may be warranted to preclude harm arising from the misappropriation and disclosure of trade secrets. But, dueto poor drafting (no, not by us) the agreement only allowed the arbitrator to issue an award of monetary damages. To give effect to the entire agreement, HNRK argued and convinced the arbitrator that any limitation on his power pertained to the issuance of a final award and did not preclude him from issuing a preliminary injunction pending the full arbitration and his ultimate decision on the merits.
The arbitrator issued this interim award
after an efficient four hour telephonic hearing, in which there was both direct and cross examination of the defendant and other witnesses. The emergency measures procedure turned out to be a successful, cost-effective and timely mechanism to obtain relief for the client, albeit one that is rarely utilized.
In a recent non-compete case filed in the New York Supreme Court in Suffolk County, Long Island, the court was none too protective of two employees accused of violating their employment agreements, denying their motion to dismiss their former employer’s complaint.
In Frontiers Unlimited LLC v. Claudette Greenstein, Kathy Silanovich, et. al., 2013 N.Y. Slip Op. 51488(U) ( Sup. Ct., Suffolk, September 9, 2013), Defendants were employed by a real estate advertising firm in the Hamptons. Both signed
confidentiality agreements in 2004 with Frontier in which, among other things, they agreed not to sell any services related to real estate advertising in the Hamptons for competition or to solicit Frontier customers for a period of two years after their employment terminated. In 2012, both resigned from Frontier to join M3 Media Group which published competing real estate advertising magazines. Frontier (and its subsequent purchaser Homes & Land LLC), sued its former employees and their new employer, M3 Media, to enforce the restrictive covenants claiming, among other things, breach of contract, misappropriation of trade secrets, and tortious interference with contracts.
Defendants moved to dismiss the action for lack of standing. They, argued that because Homes & Land was a Delaware corporation not registered to do business in New York, Section 1312 of the Business Corporation Law barred it from bringing suit. The court carefully analyzed Homes & Land’s business activities in the state and found that they were not at a level that, in fact, required Homes & Land to register. The court explained that a foreign corporation must conduct continuous activities in New York that are essential to its corporate business before it will be required to register to do business, a standard that requires a greater amount of local activity than the more familiar “doing business” test under New York’s long-arm statute. Using this framework, the court found that Homes & Land was not required to register to do business in New York, noting among other things that it had a separate New York company—Frontiers—that handled its New York activities
This case demonstrates the New York will go to significant lengths to provide employers an opportunity to achieve the benefit of their restrictive covenant bargain.
A recent New Jersey Appellate Court, considered this question and the issue of when is a confidentiality agreement so broad as to be, in effect, a non-compete provision that precludes an ex-employee from working in their chosen profession. In UCB Manfacturing, Inc. v. Tris Pharma, Inc. and Yu Hsing Tu 2013 WL 4516012 (Sup. Ct N.J., App Div. Aug. 27, 2013, Defendant Tu, an industrial pharmacologist, worked for plaintiff UCB as the lead “formulator” for the cough syrup Tussionex. Tu signed a detailed and lengthy, but boiler-plate, confidentiality agreement pledging not to disclose secret information regarding product design, formulas, processes, techniques, know-how etc. His agreement did not contain a non-compete.
In 2001, Tu began working for defendant Tris Pharma. This did not appear to trouble UCB as its patent for Tussionex did not expire until 2005, and the product was so complicated to manufacture that no competitor even tried. Things changed in 2010 when Tris brought a generic Tussionex – which it had been developing since 2007 – to market and quickly captured seventy-five percent of it. The litigation hit the fan soon thereafter. UCB sued Tu and Tris claiming breach of contract and unfair competition. It claimed that Tres’ generic Tussionex could be manufactured onlybecause Tu had access to UCB confidential formula and manufacturing process information while a UCB employee.
In his defense, Tu claimed that his general knowledge and experience, the information contained in Tussionex’s label and its expired patent filings, and his ability to “reverse engineer” all allowed him to manufacture generic Tussionex. In addition, much of the information UCB, sought to protect was now in the public domain and not subject to protection as trade secrets. The court agreed and, in a decision that will no doubt send a chill down industry’s neck, refused to enjoin Tu and Tris and denied UCB’s motion for a preliminary injunction. While a trade secret may be a formula ora manufacturing process, it must be separated from “general techniques” an employee learns during the course of their employment. The UCB court stressed that “[t]heemployer’s interest in the trade secret must be crystal clear to justify the restraint of the employee, for whom it may have become part of his general knowledge and experience.” (quoting Advance Biofactures Corp. v. Greenberg 478 N.Y.S. 2d 344 (N.Y. App. Div. 1984). Here, UCB faced an uphill battle given the expiration of its patent.
The most startling aspect of the UCB case is the court’s application of a non-compete analysis to the enforcement of a confidentiality provision. Here the court applied the test set forth in the seminal New York non-compete, non-solicitation case, Reed Roberts Associates, Inc., v. Strauman, 40 N.Y. 2d 303 (1978), which is that a non-compete, non-solicitation provision will only be subject to specific enforcement if it is (1) reasonable in time and area; (2) necessary to protect the employer’s legitimate interests (3) not harmful to the general public; and (4) not unreasonably burdensome to the employee.” Even then, the provision will only be enforced to the extent necessary to prevent the disclosure or used of trade secrets or confidential customer information. The Tu confidentiality provision failed this test, stated the court because it was “not limited in time, space or scope” and “so vague as to encompass every phase of Tu’s work experience.” Thus, its “strict enforcement” would make Tu a “virtual hostage” of UCB. Although the court acknowledged that Tu’s employment agreement did not contain a non-compete, it viewed the confidentiality agreement in the same light because “if enforced, it would preclude him from working in the area that has become his specialty.”
The UCB case is cause for concern. The court’s reasoning that the confidentiality agreement is vague, and thus enforceable, presents numerous challenges for an employer for it is very difficult to define, on the date of hire, the possible trade secrets employees will be exposed to during the course of their career—not to mention the differences between job titles, duties, and work locations among possibly hundreds if not thousands of employees. Accordingly, employers draft broad, one-size-fits-all, confidentiality provisions knowing that if the day comes to enforce them, they will need to satisfy the a Reed Roberts type test. For employers to narrowly tailor a confidentiality provision or to keep updating a confidentiality provision so that it stays current with an employee’s job duties and trade secret exposure is hugely burdensome. This is a fundamental shift in the law that requires close monitoring.
In addition, the court did something no New York court has done, which is to apply the Reed Roberts non-compete test to a confidentiality agreement. By definition a confidentiality provision is a laundry list of protected information and a promise to maintain its secrecy. Its intent is to prevent dissemination and misuse of trade secrets, not to keep an employee out of the marketplace. Indeed Tu had been a pharmacologist at Tris for ten years without bother from UCB, sufficient evidence that such provision was equal to an anti-competitive set of handcuffs. For the court to morph a confidentiality agreement into a non-compete agreement and apply a more stringent test to its enforcement is a change that the market, at least in New Jersey, will have to respond to.