Former Employee Breached Confidentiality/Non-Compete/Solicit Provisions:

This was originally posted on the SGR Blog.

Would Court Enforce Post-Employment Restrictive Covenants?

Mission Capital LLC d/b/a SBG Funding is a financial services firm that provides personalized financing solutions to small businesses.  Jason Javich began working for SBG in February 2020 as an account executive and was employed as a manager at the time of his resignation about 18 months later. In addition to managing his own customers, Javich was also responsible for managing a team of seven account executives that worked under him. Javich oversaw the sales process for all of his team members. And SBG entrusted Javich with access to its proprietary client list database and other sensitive information.

Javich asserted that he joined SBG’s employ as an entry level funding broker and his work did not require any specialized abilities, training, education, or experience, and that, before he began working for SBG, his only full-time job had been as an administrative assistant in a radiologist’s office.

In connection with his employment, Javich signed an employment agreement. The agreement bears a DocuSign signature stamp of Javich, but Javich denied having signed the agreement. The alleged employment agreement included a covenant not to compete for one year after termination from SBG’s employment in any business that competed with SBG within 1,500 miles of Javich’s workplace.

The employment agreement also prohibited Javich from disclosing the names, addresses or any information about SBG’s customers or clients; and from soliciting SBG’s customers or employees for one year after termination from his employment.

Javich resigned from SBG’s employ on October 1, 2021. At that time he informed SBG of his intention to immediately begin working for Streamline Funding, LLC d/b/a Fundable. Fundable is SBG’s competitor having been established in 2020 by Dov Kauderer and Chen Cohen, both former employees of SBG.

SBG sent a cease-and-desist letter to Fundable, Kauderer and Cohen on October 7, 2021. And, after a standstill period, the parties entered into a Settlement Agreement on January 14, 2022. Sections 9, 10, and 11 of the Settlement Agreement provided for a series of audits to determine whether Fundable, Kauderer and Cohen were using any of SBG’s confidential information. And section 2 of the Settlement Agreement provided that Javich could commence employment with Fundable starting on April 1, 2022.

SBG asserted that the results of the first audit revealed that, contrary to their certifications, Fundable, Kauderer and Cohen had misappropriated SBG’s confidential information and solicited SBG’s customers.  Kauderer admitted that Javich showed Kauderer a list of customers whose funding Javich had closed while working with SBG, but denied that such information was confidential or proprietary. And asserted that Fundable had not funded any deals respecting any of the customer’s on Javich’s contact list.  Kauderer further asserted that Fundable deleted the information Javich shared, but that the reason the audit uncovered remnants was because the deleted data had not yet been overwritten and was therefore recoverable. For this explanation, Fundable offered the affidavit of James Rocker, a technology professional.

After the audit, negotiations between the parties broke down because, in part, Fundable believed that SBG’s audit impermissibly went beyond the scope of Javich’s customer list. A lawsuit then ensued. On February 24, 2022, the Court granted SBG’s request for temporary enjoinment respecting access and dissemination of SBG’s information and Javich’s employment with Fundable. After oral argument on February 25, 2022, the Court held the enjoinment in place pending further order.

SBG argued that the injunctive relief sought was appropriate given the nature of the information involved and reinforcement of the confidentiality and non-solicitation terms in the Settlement Agreement. Fundable opposed the motion, arguing that SBG had not met its evidentiary burden or demonstrated the enforceability of the restrictive covenants.

A preliminary injunction substantially limits a defendant’s rights and was thus an extraordinary provisional remedy requiring a special showing. Accordingly, a preliminary injunction will only be granted when the party seeking such relief demonstrates a likelihood of ultimate success on the merits, irreparable injury if the preliminary injunction is withheld, and a balance of equities tipping in favor of the moving party. At the same time, the existence of triable issues of fact does not require the denial of a preliminary injunction when the movant meets its burden of establishing that the three prerequisites for injunctive relief have been met.

Javich claimed that he did not sign the employment agreement. But his denial was controverted in the Settlement Agreement, which he signed and thereby acknowledged that “as part of Javich’s Employment Agreement, he entered into several post-employment restrictive covenants” and that “Javich agrees that [subject to allowing Javich to begin employ with Fundable on April 1, 2022], the Restrictive Covenants in the Employment Agreement remain in full force and effect”.

Furthermore, Javich did not deny having signed an offer letter. The offer letter provided that, upon his acceptance of the offer, the parties would “formalize the terms of your employment in a separate employment agreement, which you will be required to sign prior to employment”. Accordingly, for the purposes of the motion, the Court deemed the employment agreement to be valid and in effect.

Fundable next argued that the motion must be denied because SBG did not submit an affidavit from a witness with personal knowledge of the facts. On a motion for a preliminary injunction the plaintiff must show, by affidavit and such other evidence as may be submitted, that there is a cause of action. Here, SBG’s counsel submitted an affidavit introducing evidence of emails among the parties’ counsels. As such SBG’s counsel did have personal knowledge of such materials. Further, the complaint, verified by SBG’s CEO, swore as true the facts of the complaint, including respecting the terms of the employment agreement.

Noncompete clauses in employment contracts are not favored and will only be enforced to the extent reasonable and necessary to protect valid business interests. Thus, enforcement of restrictive covenants has been limited to circumstances where they are found to 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.

As to the assessment of the reasonableness of the restrictive covenants here, SBG argued that courts routinely enforce contractual confidentiality terms and one-year customer non-solicitation restrictions, especially when they are reinforced in a settlement agreement. While restrictive covenants with regard to the one-year time period were reasonable, the same could not be said about the prohibition  on competition within 1,500 miles of the workplace.  And SBG failed to articulate the reasonableness of such a large geographic scope for Javich’s work with SBG, which involved funding small businesses.

Even if, for argument’s sake, the non-compete had a reasonable geographic scope, SBG failed to demonstrate the necessity of enjoining Javich from working at Fundable to support its legitimate interest. New York courts have held that an employer has a legitimate interest in preventing: (i) misappropriation of the employer’s trade secrets or of confidential customer lists; (ii) competition by a former employee whose services are unique or extraordinary; and (iii) exploitation by former employees of the goodwill of a client or customer which has been created and maintained at the company’s expense, to the employer’s competitive detriment. In reviewing Javich’s services under the second category of the standard, it could not be said that that Javich’s services were unique or extraordinary nor was the job considered a learned profession. The fact that a former employee was a knowledgeable and experienced sales representative did not establish that his skills were unique or that he was irreplaceable.

Fundable admitted that Javich shared his contact list with Kauderer but asserted that the information on the list was not confidential. And claimed to have already deleted the list. To the extent Fundable still had access to Javich’s contact list, because of how computers stored deleted information or otherwise, the Court found that SBG’s legitimate interest in protecting its confidential information could be protected with tailored enforcement of the non-disclosure and non-solicitation portions of the employment agreement, without overly burdening Javich, by enjoining what he could do at Fundable, without enjoining him for working there.

SBG also sought to enjoin Fundable, Kauderer and Chen from accessing, disclosing, using or exploiting SBG’s confidential information and contacting, soliciting, or servicing any customer of SBG identified in allegedly misappropriated information.

Javich breached his employment agreement by sharing his contact list with Kauderer and allegedly soliciting former clients. So SBG established a prima facie case for its legitimate interest in preventing misappropriation of its confidential customer lists.

Fundable argued that the contact list was not a trade secret. But a customer list can be treated as a trade secret provided it is not otherwise readily ascertainable. The assertion that the contact list was comprised of publicly available information missed the mark. And even if general contact information of small businesses could be purchased, Fundable, Kauderer and Chen did not assert that they could purchase contact information of clients specifically identified as having been SBG’s clients or Javich’s clients or that such information could otherwise be readily ascertained.

SBG was required to demonstrate that it would suffer irreparable harm as a result of the asserted possession of its confidential information or solicitation of its customers. To establish irreparable harm, a party seeking a preliminary injunction must demonstrate that it could not be compensated by money damages. The Court found that SBG had adequately shown that it was likely to suffer irreparable harm in the event that Javich’s contact list or other confidential information were used to support Fundable’s solicitation of SBG’s customers. In the context of restrictive covenants, irreparable harm is established when it is shown that in the absence of a restraint a plaintiff would likely sustain a loss of business impossible, or very difficult, to quantify. And it is very difficult to calculate monetary damages that would successfully redress the loss of a relationship with a client that would produce an indeterminate amount of business in years to come.

The Court was required to evaluate the balance of the equities and weigh the harm to SBG by denial of the injunction against the harm to Fundable in granting that relief. On the one hand, the balance of equities did not favor enjoining Javich from working for Fundable, which would be unduly burdensome. On the other hand, the Court found as appropriate a remedy that would protect SBG without causing a disproportionate harm to Javich and the public interest in protecting an individual’s livelihood and competition. The Court granted a more limited injunction which enjoined, until October 1, 2022, Javich from disclosing or otherwise using his contact list or SBG’s other confidential information or soliciting those customers with which Javich worked while in SBG’s employ.

SBG requested injunctive relief enjoining Javich, Fundable, Kauderer and Cohen from soliciting SBG’s customers identified on the contact list.  But Kauderer certified to his deletion of that information. And SBG did not explain how it expected Fundable to know which customers were on that list in order to affirmatively refrain from doing business with those customers.  So Court enjoined only Javich, without prejudice to other rights, if any, that SBG may have with respect to the employment or settlement agreements.  And in recognition of the certifications, Fundable, Kauderer and Cohen were enjoined from using SBG’s confidential information they may have obtained from Javich or by virtue of information deleted but not overwritten or stored in the email or other customer management systems.

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