Two days, Nike Inc., filed a breach of a restrictive covenant suit against Matthew Millward, its senior apparel designer. The action was commenced after Millward jumped ship to work and design for an arch competitor of Nike’s, Ralph Lauren’s Club Monaco brand. The suit caught our attention not only because of the notable parties, it is also the type of case that we routinely handle for our own clients.
As a condition of his employment in 2012, Millward was required by Nike to sign a one year non-compete and non-disclosure agreement by which he was not to compete with Nike for one year following the termination of his employment by working for, managing or owning a business in among others, the athletic footwear, athletic apparel, sports electronics, sports equipment, or sports accessories business (the “Agreement”). In addition, the Agreement requires Millward to maintain the confidentiality of Nike’s trade secrets. Unlike many non-competes, Nike is to pay Millward fifty percent of his regular salary during the non-compete period.
Millward resigned from Nike on October 6, 2015, and Nike’s Complaint states that it did not learn that Millward was in violation of the Agreement until November 19, 2015. Although it took Nike three weeks to file its Complaint on December 7, 2015, it can be assumed that cease and desist and response letters were flying back and forth in the interim.
Nike’s Complaint states that “Millward was responsible for “managing the look and feel of new NSW products…design vision” and business plan execution. Nike claims that Millward had access to numerous trade secrets pertaining to design, R&D, and long term strategy both for his group and for others within the company. It alleges that Nike will be “irreparably harmed by Millward’s ongoing employment with Ralph Lauren” and that through Millward “Ralph Lauren will have access to all of Nike’s current planning for its Sportswear line through approximately 2018.”
The case is interesting for a number of reasons: the parties, the industry and the legal questions it presents. First, the parties are high visibility and Nike has a global market. Second, Millward’s designs produced clothing referred to in the industry as “sportstyle innovation” or “athleisure,” the designs and fabrics of one manufacturer often resembles that of its competitors and are often quickly “knock-ed off”. Third, the legal arguments: Is the restrictive covenant too broad given its world-wide geographic scope and the breadth of businesses Millward is precluding from working in? Is it enough to pay Millward only 50% of his salary to keep him out of several distinct job categories world-wide? Millward may further claim that the designs in the industry are not true trade secrets for they are similar in look, fabric and technology and quickly copied.
Indeed, it is ironic that to activate the prohibitions of the Agreement, Nike alleges that Club Monaco manufactures products that are similar to its own and to make its point Nike included in its Complaint a series of side by side photos of Nike and Club Monaco products, that to the untrained eye are virtually identical. Might Millward simply argue that keeping him out the market for a year will not protect Nike’s trade secrets for none are at play, but punitively just prevent him from earning a living? While Oregon has enacted a non-competition statute, Or. Rev. Stat. § 653.295, it does not afford Nike protection to prevent Millward from working and using his “general knowledge that he acquired through training and experience,” something Millward will argue he is entitled to do.
We will keep our readers posted as this case progresses.
A lawyer crafts a demand letter to make a special point: she represents a client who’s been wronged and she is prepared to take aggressive steps to make that wrong right. She is bound by the rules of professional conduct, of course, and a bad faith letter may expose her to professional discipline. But can a demand letter that goes too far—for example, by threatening litigation that has no basis in fact—also put her at risk of a civil defamation suit? New York’s highest court answered that question this week with a “maybe.” When it comes to an actual and ongoing litigation, an absolute privilege shields lawyers from defamation suits. In Front v. Khalil, the Court of Appeals said that a lawyer’s statements made in connection with future litigation are entitled only to a qualified privilege—a privilege that can be lost if the lawyer acts unethically.
A Lawyer’s Letter
The background facts in Front are similar to many of the cases we have written about on this blog. An employer suspected its employee of stealing proprietary information when the employee quit to work for the employer’s competitor. The opinion gives a little color about the employee’s alleged malfeasance; according to the employer, the employee was caught copying the firm’s computer files, including client contacts and other proprietary information, onto an external hard drive shortly after the employee gave his resignation notice. Presumably outraged, the employer hired a lawyer and the lawyer sent the employee (and later forwarded to the competitor) a cease-and-desist letter. Among other things, the letter accused the employee of misappropriating trade secrets and illegally diverting business opportunities, and it demanded that the employee return the proprietary information and refrain from contacting the employer’s clients.
The employee and the competitor ignored the employer’s demands, so the employer sued them both. Then the case took an unusual turn: the employee filed a third-party defamation suit against the employer’s lawyer based on the accusations in the letter that the lawyer had forwarded to the competitor. The Supreme Court dismissed the defamation claim, holding that because the lawyer’s statements were made in the context of prospective litigation, they were absolutely privileged—i.e., that they could not form the basis of a defamation claim regardless of the lawyer’s motivation in sending the letter. The First Department affirmed.
The Court of Appeals Affirms the Result but Clarifies the Privilege
The New York Court of Appeals affirmed the dismissal but held that a lawyer’s statements regarding prospective litigation are protected by a qualified, not absolute, privilege. The qualified privilege is a lesser form of protection; it is lost where a would-be defamation plaintiff proves that the statements were “not pertinent to a good-faith anticipated litigation.”
If the outcome in Front was the same under either standard, what’s the significance of this case? On one level, it shows the court’s reluctance to extend the absolute privilege farther than necessary. Traditionally, a lawyer’s statements during an actual, ongoing litigation have been afforded an absolute privilege for public policy reasons: the risk of a defamation suit could chill a lawyer’s advocacy and hamper a court’s search for the truth. By declining to extend the absolute privilege to statements made in connection with prospective litigation, the court in Front recognized the importance of protecting a lawyer’s freedom to advocate for her client but reasoned that the qualified privilege provides adequate protection.
On another level, the decision shows that unethical demand letters (or other types of pre-litigation statements) may expose a lawyer to defamation liability. The court explained that the qualified privilege does not protect “attorneys who are seeking to bully, harass, or intimidate their client’s adversaries by threatening baseless litigation or by asserting wholly unmeritorious claims, unsupported in law and fact, in violation of counsel’s ethical obligations.” And, the court cautioned that attorneys should take extra care in corresponding with “unrepresented potential parties who may be particularly susceptible to harassment….”
The practical impact of this ruling remains to be seen, but in the meantime it serves as a reminder that lawyers who cross ethical lines can face serious consequences.
Well-written employment agreements will often have both forum selection (which court is to have jurisdiction) and choice-of-law (which state’s law will be applied to interpreting and enforcing a contract) provisions, and earlier this month the Second Circuit clarified how federal courts should analyze forum selection clauses in agreements that also have choice-of-law language. This is a huge issue, particularly in the area of restrictive covenants as the enforceability of those covenants can vary greatly from state to state and even from court to court within those states. Federal law governs the enforceability of the forum selection clause, the court held, but the body of law identified in the choice-of-law clause governs how courts interpret the forum selection provision. Courts have not always articulated this distinction clearly, and the Second Circuit’s guidance should be helpful to lawyers analyzing their clients’ employment contracts.
In Martinez v Bloomberg, 2014 WL 114252 (2d Cir. Jan 14, 2014) , the plaintiff was a London-based employee of Bloomberg, L.P., the financial software and media company. After he was fired in 2011, the plaintiff filed a discrimination suit in the Southern District of New York, alleging among other things that he was discharged because of a perceived disability in violation of the Americans with Disabilities Act. The district court dismissed the case as barred by the plaintiff’s employment agreement, which had a combined forum selection and choice-of-law clause: the contract “shall be interpreted and construed in accordance with English law and any dispute arising hereunder shall be subject to the exclusive jurisdiction of the English courts.” Id. at *1.
The Second Circuit affirmed in an opinion that clarifies the respective roles that federal and state (or in this case, foreign) law play in interpreting a forum selection clause. Here, the court distinguished between the interpretation and enforceability of such a clause, explainingthat federal law must govern the ultimate enforcement of forum selection clauses to preserve federal courts’ ability to decline to enforce the clauses in appropriate cases—for example, where the clause was the result of fraud or overreaching or where enforcement of the clause would be unreasonable or unjust.
Under federal law, the test for enforceability has four prongs. Courts ask: “(1) ‘whether the clause was reasonably communicated to the party resisting enforcement’; (2) whether the clause is ‘mandatory or permissive, i.e., … whether the parties are required to bring any dispute to the designated forum or simply permitted to do so’; and (3) ‘whether the claims and parties involved in the suit are subject to the forum selection clause.’” Id. at *4 (quoting Phillips v. Audio Active Ltd., 494 F.3d 378, 383 (2d Cir. 2007)) (emphasis in Phillips). The clause is presumptively enforceable if it “was communicated to the resisting party, has mandatory force and covers the claims and parties involved in the dispute.” Id. “A party can overcome this presumption only by (4) ‘making a sufficiently strong showing that enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.’” Id. (quoting Phillips, 494
F.3d at 383-84).
In Martinez, the court explained that although federal law governs the enforceability of forum selection clauses, prongs two and three of the federal enforceability test raise interpretive questions that must be resolved using the body of law specified in the choice-of-law clause. Id. at *4. This approach ensures that federal courts will interpret contract language in accordance with the parties’ legitimate expectations at the time that they drafted the agreement. Id. at *4-6. And, the court noted, applying state law to contract interpretation questions is in accord with the federal courts’ traditional distinction between procedural rules (the rules of the court) and substantive rules (the applicable law). Id. at *7. Courts interpreting contract language may confront a wide range of substantive contract questions (e.g., the effect of ambiguous language and the scope of the parol evidence rule) that are firmly the purview of state law. See id.
Applying this framework, the Martinez court found that the forum selection clause required the plaintiff to bring suit in England. First, it applied English law to answer the interpretive question of whether the plaintiff’s claims were within the scope of the forum selection clause. It concluded yes, the plaintiff’s discrimination claims were disputes “arising under” his employment agreement. Id. at *10. Then, the court applied federal law to determine the whether the clause was enforceable; here, it focused on the fourth prong of the enforceability inquiry—whether enforcement “would be unreasonable or unjust.” Id. at *14. The Court rejected the plaintiff’s attempts to resist the clause, including his argument that forcing him to litigate in England would effectively deprive him of any remedy because his English claims were likely time-barred. Id. at *14-16.
Martinez’s holding is not limited to the employment context, but the opinion is a useful guide for understanding a distinction that courts and practitioners have blurred in the past. See id. at *9. The case makes clear that federal courts must use the parties’ chosen body of law to interpret forum selection clauses but that the ultimate question of enforceability remains a matter of federal law.
The issue of whether a departing employee has misappropriated the trade secrets of his or her employer often arises in the context of restrictive covenant enforcement. Indeed, some judges in New York City, will not issue a TRO in a restrictive covenant matter unless the court is presented with compelling evidence of theft of trade secrets. Given that such trade secrets are often downloaded from an employer’s computer database it may involve a breach of the federal Computer Fraud and Abuse Act (CFAA) and thus provide a plaintiff a pathway into federal court.
The CFAA makes it a federal crime to access a protected computer without proper authorization. It additionally provides a private right of action for, among others, an employer who has suffered loss or damage from violations of the CFAA by an employee to bring a civil action for relief. Originally an anti-hacking statute which targeted third-party individuals who accessed private computer systems without any authority, the CFAA’s language is ambiguous leaving the courts to determine whether it also applies to an employee who has authorized access to a computer, but then exceeds the scope of the authorized access uses a company computer to facilitate the misappropriation of confidential information.
District courts within the Second Circuit are split in their interpretation of the CFAA. Some have adopted a “broad approach,” and have allowed CFAA claims for alleged violations of an employer’s computer policies such as accessing a company computer to steal documents or for example, trading algorithms and surreptitiously mailing them to their home email address or to a third party. Other courts within the Circuit have embraced the “narrow approach” and prohibited CFAA claims against former employees.
The recent United States District Court for the Southern District of New York case, JBCHoldings NY LLC v. Pakter, addressed the issue of employee misuse of his employer’s computer. 931 F.Supp.2d 514 (S.D.N.Y. 2013). In JBCHoldings, defendants Janou Pakter and Jerry Tavin owned an executive search firm, which was purchased by plaintiff JBCHoldings NY (“JBCHoldings”). Under the purchase agreement, Pakter was required to “continue to participate in the business” and help plaintiffs build their executive search business. Both Pakter and Tavin agreed not to compete with plaintiffs and to help attract new clients to work with plaintiffs. However, plaintiffs allege that while under contract, Pakter and other co-defendants were operating a competing business and using their association with JBCHoldings to misappropriate proprietary information in order to advance this competing business. Plaintiffs theorized that “Janou (or a co-defendant) obtained this information either by (1) copying it to her personal laptop and sharing it with her co-defendants; (2) lifting it from JBC’s computers using a flash drive; and/or (3) obtaining it remotely via spyware.” Id. at 518-519.
The court highlighted how district courts within the Second Circuit have split in their views of how the CFAA should be interpreted in the employment context. Id. at 522. For example, in United States v. Aleynikov, where the defendant accessed, copied, and transferred his employer’s confidential information to an outside server, the court took a narrow approach and stated that “[t]he phrases ‘accesses a computer without authorization’ and ‘exceeds authorized access’ cannot be read to encompass an individual’s misuse or misappropriation of information to which the individual was permitted access. What use an individual makes of the accessed information is utterly distinct from whether the access was authorized in the first place.” 737 F.Supp.2d 173, 190-194 (S.D.N.Y. 2010). In contrast, in Calyon v.
Mizuho Securities USA, Inc., the defendants with broad access to their employer’s computer system copied proprietary information to use at a competitor bank. No. 07 Civ. 2241, 2007 WL 2618658 (S.D.N.Y. Sept. 5, 2007). There, the court took a broad approach stating that the “plain language of the statute seems to contemplate that, whatever else, ‘without access’ and ‘exceeds authorized access’ would include an employee who is accessing documents on a computer system which that employee had to know was in contravention of the wishes and interests of his employer.” Id. at *1.
The Second Circuit has yet to provide guidance on the interpretation of “unauthorized access” under the CFAA in situations where an employee, who is permitted access to his employer’s computers, misuses or misappropriates the employer’s confidential information. Assuming your assigned trial judge has not adopted the “narrow” approach, the CFAA remains a viable cause of action and avenue for access to Federal court. However, a plaintiff would be wise to have a plan “B” ready to proceed in the corresponding state court…just in case.
HNRK’s expertise in restrictive covenant enforcement was illustrated this past month after a large French bank’s firewall security system detected a research analyst’s transmissions of confidential documents that contained trading strategies and market analysis algorithms to his wife’s personal and business email addresses.
The analyst, who worked in the bank’s Park Avenue, New York, office had signed an employment agreement containing comprehensive confidentiality, no-raiding and garden leave/non-compete provisions (the “Employment Agreement”). Within minutes after our retention to enforce those covenants, we assembled a team to quickly work with the client to gather the relevant facts and efficiently draft the complaint and motion papers necessary to obtain fast emergency injunctive relief to prevent the dissemination and destruction of the misappropriated trade secret materials.
Based on the strength of our papers (admittedly, we had good facts), a New York Supreme Court justice, after the briefest of arguments, granted the bank a temporary restraining order and a preliminary injunction ordering, among other things, the preservation of the stolen documents and their return, plus third-party forensic examinations of all of the defendants’ home computers, laptops,
iPads and iPhones—an effort coordinated by HNRK.
Last, because the Employment Agreement provided for the reimbursement of the bank’s legal fees, we were successful in negotiating for enhanced protections against further breach of the Employment Agreement as well as the reimbursement of a significant portion of the cost of the bank’s enforcement action.
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.
A recent case in Supreme Court, New York County, addressed the issue of whether the services provided by the employee to be enjoined were unique such that an injunction was warranted. In OTG Management, LLC v. Konstantinidis, 967 N.Y.S.2d 823 (N.Y. Sup. Ct. 2013), a provider of food and beverage services at airports tried to prevent a former “terminal director,” Konstantinidis, from working for a competitor. 967 N.Y.S. 2d at 824. When OTG hired Konstantinidis, the company required him to promise that if he left OTG he would not work for “a competitor at any airport in the United States” for a full year after leaving. Id. Shortly after being promoted from an “Operations Manager” at LaGuardia to a “Terminal Director” at JFK, Konstantinidis left OTG and began working for a direct competitor, SSP, at a neighboring JFK terminal. Id.
OTG sued Konstantinidis and SSP to try to enforce the non-compete agreement and prevent Konstantinidis from working for SSP. The judge conducted the standard reasonableness test for non-compete agreements and focused on whether Konstantinidis’ services were “unique or extraordinary.” Konstantinidis, 967 N.Y.S.2d at 825. In determining that the non-compete clause was unenforceable, the judge explained that Konstantinidis’ services “were not unique nor is a Terminal Director considered a learned profession.” Konstantinidis, 967 N.Y.S.2d at 825. Furthermore, though OTG was concerned that in working for SSP Konstantinidis would divulge their trade secrets, the court explained that it would be unlikely that his status as a food service manager would require him to disclose or utilize the trade secrets at issue. Konstantinidis, 967 N.Y.S.2d at 825-26.
Konstantinidis reminds us that as much as businesses wish to restrict competition by departing employees, courts disfavor agreements that are unreasonable restraints on the free flow of labor. When employees do not perform a unique service or rely on specialized knowledge, and whose career success was not the product of a significant time or money investment by the original employer, a court will be very reluctant to allow the employer to prevent that employee from changing jobs.