“One Size Does Not Fit All”: Recent Decisions Highlight Claims and Defenses By and Against Departing Employees (Part I)

“One Size Does Not Fit All”:  Recent Decisions Highlight Claims and Defenses By and Against Departing Employees (Part I)

                   Two decisions by Justices of the Supreme Court of the State of New York, both sitting in Suffolk County, released on the same day (April 11th) and appearing back-to-back on the Office of Court Administration website (on April 30th), and several other recent trial and appellate court opinions, separately and together present a CLE course on typical fact situations relating to departing employees and restrictive covenants, on the one hand, and the legally cognizable causes of action and the scope of relief and defenses available under such circumstances, on the other.

Lupton & Luce, Inc. v. Scherer, 2013 NY Slip Op 30888[U] [Sup Ct, Suffolk County 2013]

Plaintiff, an insurance agency, commenced an action on May 15, 2012, seeking to enjoin defendants, both former employees of plaintiff, from using plaintiff’s confidential and proprietary information.

Supreme Court set forth the facts:

Plaintiff alleges that defendant LAURA SCHERER (“Scherer”) is bound by an Employment Agreement, dated January 28, 2010, that prohibits, among other things, her disclosure and direct or indirect use of plaintiff’s confidential and proprietary information (“Employment Agreement”).  Such confidential and proprietary information, according to plaintiff, includes plaintiff’s customers and their contact information.  Further, Scherer is prohibited from soliciting, either directly or indirectly, plaintiff’s customers for a period of two years following the termination of her employment pursuant to the Employment Agreement.  Plaintiff claims that Scherer’s employment terminated on June 21, 2011, whereupon she gained employment with the Cotgreave Insurance Agency, a competitor of plaintiff, along with co-defendant THOMAS K. REGNIER (“Regnier”).  Thereafter, defendants allegedly solicited plaintiff’s customers and utilized plaintiff’s confidential information.  As such, plaintiff now seeks a preliminary injunction[.]  In support thereof, plaintiff has submitted, among other things, an undated solicitation letter from Regnier to a potential customer, “Debbie Davis” of “Island Hardscapes”, wherein Regnier offers to review Ms. Davis’ insurance coverage in order to “either improve the cost or strengthen the coverage.”  The letter is signed at the bottom by Regnier of “Cotgreave Insurance Agency Inc.”, but is on letterhead stating “Tom Regnier Medicare Supplement & Dental Plans”, and “Property & Casualty Auto, Homeowners and Commercial”, with Regnier’s home address in East Moriches.

In opposition hereto, Scherer acknowledges that she was a former employee of plaintiff, that she entered into the Employment Agreement, and that she thereafter began employment with Cotgreave Insurance Agency, but otherwise denies each and every allegation of plaintiff.  Scherer alleges that she has not breached the Employment Agreement, and that the Employment Agreement itself is unreasonable and unenforceable as it prohibits Scherer from working in her capacity as a customer service representative in the insurance industry.  Moreover, Scherer indicates that she did not sign the letter addressed to Ms. Davis, did not direct Regnier to send the letter, and has not solicited any of plaintiff’s customers.  Notably, Scherer informs the Court that she merely earns a fixed salary as a customer service representative, and would not earn commission or other compensation if she were to bring in new customers to her current firm.  Thus, Scherer argues that plaintiff has not sustained its burden for the issuance of a preliminary injunction.  In support thereof, Scherer has submitted, among other things, her own affidavit.

Regnier has filed a motion to dismiss the complaint against him, alleging that he was also a former employee of plaintiff who was “suddenly” terminated on July 20, 2009.  Regnier indicates that he signed an Employment Agreement with plaintiff in or about January of 2009, but that the period of non-solicitation therein ended on July 21, 2011.  Regnier contends that he never breached any of the terms of his Employment Agreement.  Regnier informs the Court that he began working as an independent insurance broker from his home, and entered into a Broker Agreement with Cotgreave Insurance Agency on or about July 12, 2011, so he could place his customer’s insurance needs through Cotgreave.  Based upon the foregoing, Regnier argues that he was not prohibited whatsoever from sending the letter to Ms. Davis, which he indicates was sent on or about April 26, 2012, and was unaware whether Ms. Davis was a customer of plaintiff.  Moreover, Regnier denies that Scherer ever provided him with plaintiff’s proprietary information; that Scherer had no idea he sent that letter; and that he was never an employee of Cotgreave.

At the outset of the litigation, the Court issued a temporary restraining order that enjoined the defendants from soliciting their former employer’s customers.  Defendants cross-moved to dismiss the complaint.  Supreme Court denied the motion to dismiss:

Regarding that branch of Regnier’s motion to dismiss pursuant to CPLR 3211(a)(1), where a defendant moves to dismiss an action asserting the existence of a defense founded upon documentary evidence, the documentary evidence “must be such that it resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff’s claim” (Trade Source, Inc. v. Westchester Wood Works, Inc., 290 AD2d 437 [2002]; see Del Pozo v. Impressive Homes, Inc., 29 AD 3d 621 [2006]; Montes Corp. v. Charles Freihofer Baking Co., 17 AD3d 330 [2005]; Berger v. Temple Beth-El of Great Neck, 303 AD2d 346 [2003]).  Here, it cannot be said that the documentary evidence submitted, to wit:

Regnier’s Employment Agreement executed in or about January 1, 2009, resolves all factual issues as a matter of law and conclusively disposes of the plaintiff’s claim.  Despite Regnier’s contentions, plaintiff is not attempting to enforce said Agreement against Regnier; instead, plaintiff has named Regnier as a defendant herein alleging that Regnier has received plaintiff’s confidential information from Scherer, and has improperly used such information to solicit plaintiff’s customers.

On a motion to dismiss for failure to state a cause of action pursuant to CPLR 3211(a)(7), the complaint must be construed in the light most favorable to the plaintiff and all factual allegations must be accepted as true in determining whether the complaint states any legally cognizable cause of action (see Grand Realty Co. v. City of White Plains, 125 AD2d 639 [1986]; Barrows v. Rozansky, 111 AD2d 105 [1985]; Holly v. Pennysaver Corp., 98 AD2d 570 [1984]).  Here, plaintiff’s claim against Regnier, although not explicitly stated, is for unfair competition based upon the alleged bad faith misappropriation of a commercial advantage belong to another “by exploitation of proprietary information or trade secrets” (Beverage Mktg. USA v. S. Beach Bev. Co., 20 AD3d 439 [2005]; Eagle Comtronics v. Pico Prods., 256 AD2d 1202 [1998]).  Under this theory, the allegations that Regnier exploited proprietary information and trade secrets acquired by Scherer during her employment with plaintiff, are sufficient to state a cause of action for unfair competition (see Beverage Mktg. USA v. S. Beach Bev. Co., 20 AD3d 439, supra; Bender Ins. Agency v. Treiber Ins. Agency, 283 AD2d 448 [2001]; CBS Corp. v. Dumsday, 268 AD2d 350 [2000]).

And Justice Farneti continued the temporary restraining order:

With respect to plaintiff’s motion, since a preliminary injunction prevents litigants from taking actions that they would otherwise be legally entitled to take in advance of an adjudication on the merits, it is considered a drastic remedy which should be issued cautiously (see Uniformed Firefighters Assn. of Greater N.Y. v. City of New York, 79 NY2d 236 [1992]; Gagnon Bus Co., Inc. v. Vallo Transp., Ltd., 13 AD3d 334 [2004]; Bonnieview Holdings v. Allinger, 263 AD2d 933 [1999]).  Thus, in order to obtain a preliminary injunction, a moving party must demonstrate:  (1) a likelihood of success on the merits; (2) an irreparable injury absent the injunction; and (3) a balancing of the equities in its favor (see CPLR 6301; Aetna Ins. Co. v. Capasso, 75 NY2d 860 [1990]; Iron Mtn. Info. Mgt., Inc. v. Pullman, 41 AD3d 656 [2007]; Gerstner v. Katz, 38 AD3d 835 [2007]).  To sustain its burden of demonstrating a likelihood of success on the merits, the movant must demonstrate a clear right to relief which is plain from the undisputed facts (see Gagnon Bus Co., Inc. v. Vallo Transp., Ltd., 13 AD3d 334, supraDental Health Assoc. v. Zangeneh, 267 AD2d 421 [1999]; Blueberries Gourmet v. Aris Realty Corp., 255 AD2d 348 [1998].

The Court has weighed the elements necessary for the granting of a preliminary injunction, and finds that plaintiff has sustained its burden.  Although the parties’ submissions demonstrate that the underlying facts are disputed herein, it is undisputed that the Employment Agreement provides for injunctive relief “upon any actual, impending, threatened or inevitable violation of [the] Agreement”.  Scherer is subject to the Employment Agreement until June 21, 2013.  Further, although defendants contend that they have not acquired or disseminated any of plaintiff’s proprietary or secret information, the letter to Ms. Davis references former employees of plaintiff who apparently handled Ms. Davis’ account with plaintiff, including Scherer.  In addition the emails submitted by Regnier indicate that defendants corresponded with each other about Ms. Davis’ insurance position, and reference a “Mark”, who plaintiff alleges was also involved with Ms. Davis’ account at plaintiff.  As such, plaintiff argues that Regnier would not otherwise have such information unless Scherer provided it to him.

Aalco Transportation & Storage, Inc. v. DeGuara, 2013 NY Slip Op 30889[U] [Sup Ct, Suffolk County 2013]

Plaintiff filed suit to recover damages allegedly sustained when defendant Joseph DeGuara, a former employee of the plaintiff, misappropriated the plaintiff’s proprietary and confidential information which he wrongfully used to solicit and divert a business opportunity from the plaintiff.

Supreme Court set forth the facts:

The plaintiff is in the business of providing labor, equipment, engineering strategies, and transportation and storage services in the crane and rigging industry.  Jeffrey S. Krevat is the plaintiff’s owner and president.

In 2003, the plaintiff hired DeGuara as an employee.  According to the defendants, at and prior to the time DeGuara was hired, Krevat told DeGuara that he wanted DeGuara to “learn the business” in anticipation that DeGuara would eventually purchase the plaintiff from Krevat.  Thus, while DeGuara’s prior area of responsibility was sales, he also managed operations for the plaintiff.  By using his prior experience in the electrical contracting and electrical equipment industry, DeGuara claims to have significantly grown the plaintiff’s business throughout the course of his employment.

According to the defendants, sometime in late 2007, Krevat indicated that DeGuara “was ready to purchase the business” and instructed DeGuara to develop a purchase plan.  In response to the offer, DeGuara hired an attorney and an accountant to assist with the development of a proposal.  Several rounds of negotiations followed.  The defendants claim, however, that in or about March 2008, Krevat abruptly broke off negotiations.  The plaintiff claims that no sale took place because Krevat and DeGuara never came to mutually agreeable terms, including a valuation of the business.

On May 5, 2008, DeGuara entered into an agreement with the plaintiff whereby the plaintiff agreed to pay DeGuara a bonus equal to “twenty-five (25%) percent of the net earning of AALCO for the year 2008”, and DeGuara agreed to a restrictive covenant providing that, for the calendar year ending December 31, 2009, “he will not become an employee, a partner, shareholder or an agent for any company that is in competition with AALCO, or will be in competition with AALCO”.  The agreement further provided that, in the event DeGuara breached the restrictive covenant, the plaintiff would be entitled to a return of the bonus together with all damages which it incurred by reason of the breach.  The plaintiff subsequently paid DeGuara a bonus in two installments totaling $203,300, a figure which the defendants claim was more than 50% lower than anticipated based on the parties’ previous discussions regarding the plaintiff’s 2007 net earnings; the plaintiff, for its part, claims that the bonus amount was computed on the basis of the net income reported in its 2008 tax return.  At DeGuara’s discretion, the plaintiff made the bonus payments to defendant Bel-Air Consulting & Design, LLC (“Bel-Air”), a company formed by DeGuara specifically for the purpose of receiving those payments.

In May 2009, according to the defendants, Krevat offered DeGuara another opportunity to craft a proposal to purchase the plaintiff, and DeGuara again retained an attorney and an accountant to assist with the development of a purchase proposal.  The defendants claim that when “significant questions” arose in the course of the accountant’s review of the plaintiff’s financial data regarding its revenues and expenses and whether those amounts were accurately reported in its tax returns for the previous three years, DeGuara asked Krevat for supporting documentation but Krevat’s accountant refused the request.  Shortly thereafter, and despite nearly six months of negotiations, Krevat again “abruptly” withdrew his offer.

Sometime in 2009, DeGuara, on behalf of the plaintiff, entered into negotiations with R.B. Samuels, Inc., an electrical contractor, concerning a project involving a hoisting of four electrical transformers into a building under construction at 111 Eighth Avenue, New York, New York (the “Taconic job”).  In or about September 2009, DeGuara prepared and submitted a price quote for the job and, as the project was taking shape throughout the fall of 2009, he continued to discuss the job with Tony Kolb, an employee of R.B. Samuels, and to refine the plaintiff’s proposal.  As of December 31, 2009, the project had not been finalized and the rigging job which DeGuara and Kolb were discussing had not yet been awarded.

On January 5, 2010, DeGuara resigned from his employment with the plaintiff.  The plaintiff claims that, upon his departure, DeGuara took the plaintiff’s written and electronic records with him, including information regarding ongoing jobs and bids and a log he kept detailing every job he worked on for the plaintiff.  Shortly thereafter, he prepared and submitted a price quote for the Taconic job, either on his own personal behalf or on behalf of Bel-Air, which was ultimately accepted by R.B. Samuels. According to the plaintiff, that bid was submitted no more than 14 hours after DeGuara resigned and left the plaintiff’s premises, and included certain information pertaining to the operations of Brothers & Company, Inc., a competing rigging company, which had no independent knowledge of the Taconic job and was not a participating bidder but had nevertheless “teamed up” with the defendants to submit the bid.  The plaintiff also claims that by January 15, 2010, when the final bid was awarded, DeGuara was “already holding himself out as a vice-president of Brothers”.  This action followed.

Justice Rebolini described the causes of action asserted in the complaint:

The plaintiff alleges four causes of action in its complaint.  The first and second seek damages for breach of contract on the theory that the defendants’ misappropriation of the plaintiff’s proprietary and confidential information for use in soliciting and procuring the rigging job with R.B. Samuels constitutes a violation of the restrictive covenant contained in the May 5, 2008 agreement.  By its first cause of action, the plaintiff seeks the return of the $203,300 bonus paid to the defendants; by its second cause of action, the plaintiff seeks compensatory and consequential damages incurred by reason of the alleged breach, including loss of profits, legal fees, and the costs of collecting the bonus.  The third cause of action is for breach of the duty of good faith and loyalty.  The fourth is for conversion of proprietary information.

And described the counterclaims set forth the answer:

The defendants, in their answer, plead 11 counterclaims against the plaintiff and against Krevat as an additional party.  The first is for breach of contract, alleging that the plaintiff and Krevat failed to pay DeGuara the compensation and benefits owned under the parties’ May 5, 2008 agreement.  The second is also for breach of contract, stemming from Krevat’s failure to negotiate in good faith regarding the proposed purchase of the business.  The third is for breach of the duty of good faith and fair dealing with respect to both the May 5, 2008 agreement and the proposed purchase of the business.  The fourth, which appears to be based on a quasi-contractual theory, is to recover for the services performed and efforts made by DeGuara on the plaintiff’s behalf.  The fifth alleges a violation of Labor Law § 191 based on the failure to pay the full amount of the bonus due under the May 5, 2008 agreement.  The sixth is for liquidated damages under Labor Law § 198.  The seventh and eighth appear to be based in fraud, on the theory that Krevat falsely represented his intention to offer an opportunity to purchase the plaintiff’s business in order to induce DeGuara to learn and develop the business.  The ninth, in addition to repeating the material allegations set forth in the seventh and eighth counterclaims, pleads that Krevat falsely represented the plaintiff’s 2008 earnings to DeGuara and engaged in a scheme of tax evasion in order to avoid paying the full amount of bonus due under the May 5, 2008 agreement, and seeks both compensatory and punitive damages.  The tenth pleads that the plaintiff and Krevat converted the unpaid amount of the bonus for their own use.  The eleventh is for an accounting.

The parties cross-moved for partial summary judgment.  Justice Rebolini systematically addressed the claims, counterclaims and affirmative defenses:

[Third Cause of Action]

Based on the sharply conflicting affidavits, deposition testimony, and other evidence presented, the court finds the record rife with factual questions – including whether, during the period that the restrictive covenant was in force, DeGuara acted as an agent for a company which was to be in competition with the plaintiff, whether DeGuara used confidential or proprietary information obtained during the course of his employment to usurp a business opportunity properly belonging to the plaintiff, whether DeGuara removed written and electronic records from the plaintiff’s office to the exclusion of the plaintiff’s rights, and whether the bonus paid to DeGuara represented 25% of the plaintiff’s actual net earnings for the year 2008 – all of which preclude generally the granting of summary judgment as to any of various theories of liability underlying the complaint and the defendants’ first counterclaim.  However, since Bel-Air is not an employee of the plaintiff and did not owe the plaintiff a duty of loyalty (see Qosina Corp. v. C & N Packaging, 96 AD3d 1032, 948 NYS2d 308 [2012]), summary judgment is granted to the limited extent of dismissing the third cause of action against Bel-Air.

[Second and Third Counterclaims]

Summary judgment is also granted dismissing the second counterclaim, as it is premised on the existence of a “contract” – i.e., the proposed purchase of the business – which is nothing more than an agreement to agree and, consequently, unenforceable as a matter of law (see Joseph Martin Jr., Delicatessen v. Schumacher, 52 NY2d 105, 436 NYS2e 247 [1981]; Miranco Contr. V. Perel, 29 AD3d 873, 816 NYS2d 516 [2006]).  To the extent that the third counterclaim is predicated on a claimed breach of the duty of good faith and fair dealing with respect to that “contract”, it is dismissed as well, as is the remaining portion of that counterclaim, which essentially pleads that the plaintiff and Krevat did not act in good faith in performing their obligations under the May 5, 2008 agreement and is, therefore, duplicative of the first counterclaim (see New York Univ. v. Continental Ins. Co., 87 NY2d 308, 639 NYS2d 283 [1995]).

[Fourth Counterclaim]

Summary judgment is likewise granted dismissing the fourth counterclaim, seeking recovery, in quantum meruit, since the existence of a written agreement governing the subject matter of the parties’ dispute is undisputed (see Clark-Fitzpatrick, Inc. v. Long Is. R.R. Co., 70 NY2d 382, 521 NYS2d 653 [1987]).

[Fifth and Sixth Counterclaims]

As to the fifth and sixth counterclaims, the court finds that the payment of DeGuara’s bonus does not fall within the statutory protection of Labor Law article 6; rather, it is evident upon review of the terms of the May 5, 2008 agreement that the bonus is not a “wage” within the meaning of Labor Law § 190(1) because it was not predicated on DeGuara’s own personal productivity but on the plaintiff’s financial success (see Truelove v. Northeast Capital & Advisory, 95 NY2d 220, 715 NYS2d 366 [2000];Duffy v. RMSCO, Inc., 34 AD3d 1285, 825 NYS2d 861 [2006]).  Accordingly, summary judgment dismissing the fifth and sixth counterclaims is granted, and the defendants’ motion for summary judgment in their favor with respect to those counterclaims is correspondingly denied.

[Seventh and Eighth Counterclaims]

As to the seventh counterclaim, the court finds it adequately pleaded and, further, that there remain issues of fact, sufficient to defeat summary judgment, whether Krevat falsely represented his intention to sell the business to DeGuara and, if so, whether and to what extent the defendants were damaged thereby.  Both the eight counterclaim and that portion of the ninth counterclaim which pleads the same conduct and measure of damages are dismissed as redundant.

[Ninth Counterclaim]

Summary judgment is denied with respect to the remaining portion of the ninth counterclaim, alleging that Krevat falsely represented the plaintiff’s 2008 earnings to DeGuara and engaged in a scheme of tax evasion in order to avoid paying the full amount of bonus due under the   May 5, 2008 agreement.  The court finds that such conduct states a valid cause of action for breach of the duty of good faith and fair dealing, which is breached when a party to a contract “acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement” (Jaffe v. Paramount Communications, 222 AD2d 17, 22-23, 644 NYS2d 43, 47 [1996]).  The court further finds that the evidentiary submissions fail to negate a triable issue of facts as to whether Krevat participated in such conduct.

[Tenth Counterclaim]

The tenth counterclaim fails as a matter of law; a claim to recover damages for conversion cannot be predicated on a mere breach of contract, and no independent facts are alleged giving rise to tort liability (see Wolf v. National Council of Young Israel, 264 AD2d 416, 694 NYS2d 424 [1999]).

[Eleventh Counterclaim]

Summary judgment is granted dismissing the eleventh counterclaim as well, and the defendants’ request for summary judgment in their favor with respect to that counterclaim is, again, correspondingly denied.  “The right to an accounting is premised upon the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest” (Palazzo v. Palazzo, 121 AD2d 261, 265, 503 NYS2d 381, 384 [1986]).  Since the May 5, 2008 agreement provided that DeGuara would share only in the plaintiff’s net earnings and not in any losses, no fiduciary relationship was created that would entitle the defendants to an accounting (see Vitale v. Steinberg, 307 AD2d 107, 764 NYS2d 236 [2003]).  “An employer-employee relationship providing for the division of profits will not give rise to a fiduciary obligation on the part of the employer absent an agreement to also share losses” (id. at 108, 764 NYS2d at 237).

J.K. Dental Lab Services, Inc. v. Manno, 2013 NY Slip Op 50303[U] [Sup Ct, New York County 2013]

Plaintiff dental lab (doing business in Great Neck)  sued several former employees who opened a competing facility (in the nearby office of a former client) for, among other things,  breach of contract and breach of fiduciary duty; and, in connection therewith, sought a preliminary injunction prohibiting Peter Kouvaris from competing with J.K. Dental in violation of a restrictive covenant.

The Court outlined the undisputed facts:

In 1991, plaintiff Jason Kim founded JK, a dental lab located in Great Neck that produced prosthetic dental products such as crowns and bridges.  JK’s clients were primarily dentists.  In 1996, former defendant Jack Manno was hired by JK to be its Chief Administrative Officer.  Manno was responsible for the operations of JK, such as human resources and marketing, but did not engage in the actual business of producing prosthetic dental products – that was Kim’s job.  In 1998, Kim founded plaintiff Oral Design New York, Ltd. (Oral Design), a separate company that engaged in substantially the same business as JK.  As Kim could not manage the labs of both companies, he sought to hire someone to take over his responsibilities at JK so he could focus on running Oral Design.  To that effect, Kim and Manno hired Kouvaris.

On August 1, 2000, JK and Kouvaris entered into an Employment Agreement whereby Kouvaris would be paid an annual base salary of $180,000 to run JK’s lab for an initial term of four years.  Pursuant to Section 1, the Employment Agreement would automatically renew for an additional year unless the parties issued a notice of termination at least 30 days prior to its expiration.  Section 4.B provided that Kouvaris would also receive “incentive compensation equal to one percent (1%) of gross annual Group Cosmetic sales with respect to non-metal restorations.”  Section 4.C granted Kouvaris the option to purchase up to 1,000 shares of JK for $400 per share.  Kouvaris never exercised that option.

Section 9 indicated that Kouvaris “acknowledges that information regarding the business and affairs of the Company is confidential and/or proprietary.”  Section 9(c), titled “Non-Competition” (the Restrictive Covenant), provided that Kouvaris could not do the following while employed with JK and for six months thereafter:  (1) induce or solicit JK employees to leave the company; (2) induce or solicit JK’s customers to do business with a competitor of JK; and (3) be employed in a competing business in New York and Nassau Counties.  Section 10 entitled Kouvaris to a termination payment calculated based on his annual base salary and incentive compensation, but only if Kouvaris was not terminated for cause.

On July 1, 2003, JK’s board executed a resolution granting 900 shares to Kouvaris in recognition of his “substantial contribution made to the Company.”  As of September 1, 2004, Kim owned 5,100 shares, Manno owned 3,000 shares, and Kouvaris owned 1,900 shares.

In 2005, JK moved its offices from Great Neck to Port Washington.  To finance the move, JK borrowed over $1 million from Bank of America (BOA).  BOA was granted a security interest in all of JK’s assets and the loan was personally guaranteed by Kim, Manno, and Kouvaris.

After the original four year term of the Employment Agreement elapsed, Kouvaris was occasionally given base salary raises.  However, no written amendment to the Employment Agreement was ever executed.  Kouvaris’ base salary increased to $200,000 in 2004, $250,000 in 2005, and $300,000 in 2006.  To date, Kouvaris has not received any incentive compensation.

In 2008, as the economy entered a recession, JK’s business began to suffer, and the company faced serious cash flow problems.  Kim, Manno and Kouvaris decided that given the company’s struggles and their personal guarantee of the BOA loan, they would try to sell JK and use the proceeds to pay off the loan.  Their initial efforts to sell JK were unfruitful, and JK defaulted on the loan in April 2009.  JK was able to buy itself some more time by negotiating an agreement with BOA to retain a financial consultant.

In June 2009, Kim, Manno, and Kouvaris entered into discussions with a company called Frontier Dental Laboratories (Frontier) regarding the sale of JK.  As part of those discussions, the parties contemplated deferring some of their salary payments to allow JK to make its loan payments to BOA.  However, only Kim and Manno signed an agreement to defer a portion their salaries, which they executed on August 14, 2009.  Nevertheless, as of August 28, 2009, JK began withholding a portion of Kouvaris’ salary as well.  In September 2009, JK and Frontier terminated their negotiations because Frontier was unwilling to assume JK’s debt on the BOA loan.  On September 10, 2009, Kim, Manno, and Kouvaris executed a Forbearance Agreement with BOA whereby BOA agreed not to enforce its rights under the loan until November 30, 2009.  On November 18, 2009, JK and Frontier resumed negotiations and the companies reached a tentative agreement to sell JK for $1 million in early December 2009.  On December 22, 2009, a letter of intent (the LOI) was drafted to reflect the parties’ understanding of the terms of sale.  Manno refused to sign the LOI because it contained a five-year non-compete/non-solicitation clause.  On December 31, 2009, Manno resigned from JK.  That same day, BOA commenced an action to enforce its rights under the Forbearance Agreement.

Kouvaris did not have an initial objection to the non-compete/non-solicitation clause because an essential condition of the sale was that Kouvaris would continue to operate JK’s lab for Frontier.  Kouvaris’ only condition was that Frontier give him an employment contract with a salary that he found to be satisfactory.  Accordingly, Kouvaris and Frontier entered into negotiations over the terms of Kouvaris’ prospective employment.  However, by January 15, 2010, the negotiations broke down since Frontier was unwilling to sign Kouvaris to a long term deal and yet still insisted that he sign a non-compete.  On January 17, 2010, a Sunday, Kouvaris went to JK’s offices and took home laptops, a camera, and various lab equipment.  On January 19, 2010, after an employee noticed that the equipment was missing, JK’s IT Manager reviewed JK’s security tapes and saw that Kouvaris had taken the equipment.  Kim was informed of Kouvaris’ actions on January 21, 2010.  The next day, January 22, Kim confronted Kouvaris and Kouvaris admitted taking the equipment and explained that he did so out of concern that BOA would seize it as part of its lawsuit against JK.  Kim told Kouvaris to return the equipment, and Kouvaris agreed to do so.

Later that week, Kouvaris and Frontier resumed negotiations.  At some point during the prior year, and again on or about January 22, 2010, Kouvaris emailed certain company documents from his JK computer to his personal email accounts.  None of these documents included a list of JK’s clients.  By January 25, 2010, it appeared that Kouvaris and Frontier were close to executing an employment agreement and both Kim and Kouvaris were close to signing the LOI.  However, the negotiations broke down for the final time on January 26, 2010.  On January 27, 2010, after Kouvaris and Frontier failed to reach an employment agreement, Kouvaris refused to sign the LOI.  Later that day, Kouvaris was sent a letter terminating his employment with JK. The letter specifically set forth that the termination was due to Kouvaris’ removal of the equipment from JK’s lab.

The development that triggered the suit:

On February 4, 2010, Kouvaris opened up his own dental lab in the offices of Dr. Dean Vafiadis, a former JK client.  The lab was incorporated as PKDS on April 6, 2010.  Kouvaris hired Gail Broderick, JK’s former lab director.  Kouvaris also hired other former JK employees, including Sang Lee, Michele Kim, and Luis Navarro.  PKDS’s clients included former JK clients that Kouvaris had worked with, such as Drs. Ian Buckle, John Heimke, Terry Shapiro, Lori Thornhill, Jackie Rodgers, Vincent Romano, and Brian Kantor.  Plaintiffs contend that Kouvaris had under-billed these doctors for work done with JK as part of a purported scheme to retain them as clients when he opened up his own lab.

The claims asserted by J.K:

Plaintiffs commenced this action on March 4, 2010.  On March 5, 2010, plaintiffs moved by order to show cause for a preliminary injunction prohibiting, inter alia, Kouvaris from indefinitely competing with JK.  The motion was denied in an Order dated March 26, 2010.  After discovery began, JK settled with former defendants Jack Manno, Vivian Manno, Craftsman Dental Lab, Inc., Prizm Associates, Inc., and All Access Dental.  On October 12, 2010, plaintiffs filed an Amended Complaint, asserting seven causes of action against the Kouvaris Defendants:  (1) breach of contract (the Employment Agreement) against Kouvaris; (2) breach of fiduciary duty against Kouvaris; (3) misappropriation of trade secrets against Kouvaris and PKDS; (4) tortious interference with contract against Kouvaris and PKDS; (5) unfair competition against Kouvaris and PKDS; (6) breach of contract against Kouvaris (for failure to pay for his JK shares); and (7) permanent injunctive relief against Kouvaris and PKDS.

And the counterclaims asserted by the defendants:

On October 14, 2010, the Kouvaris defendants filed an Answer which contains six counterclaims against JK: (1) violations of §§ 193 & 198(1-a) of the New York Labor Law (for failure to pay portions of Kouvaris’ base salary); (2) breach of contract (for failure to pay portions of Kouvaris’ base salary); (3) unjust enrichment; (4) breach of contract (for failure to pay incentive compensation and the termination payment); (5) violations of §§ 193 & 198(1-a) of the New York Labor Law (for failure to pay incentive compensation); and (6) violations of §§ 193 & 198(1-a) of the New York Labor Law (for failure to pay the termination payment).

Defendants moved for summary judgment dismissing J.K.’s claims and for the relief sought in their counterclaims.  J.K. cross-moved for summary judgment dismissing the counterclaims and for relief on the claim that defendants breached the restrictive covenant.

As to the restrictive covenant, the Court held that:

Plaintiffs allege that Kouvaris breached the Restrictive Covenant by soliciting and conducting business with JK’s customers, inducing JK’s employees to leave JK and work for PKDS, and engaging in a similar business as JK in New York County.  There is no question that Kouvaris opened up a competing lab in New York County and immediately began doing business with JK’s customers.  However, Kouvaris argues that the Restrictive Covenant is unenforceable because: (i) it does not involve trade secrets; (ii) JK breached the Employment Agreement; (iii) JK terminated the Employment Agreement by firing Kouvaris without “good cause”; and (iv) judicial estoppel bars its enforcement.

Restrictive covenants that are “temporally and geographically reasonable and necessary to protect plaintiff’s legitimate business interests” are enforceable.  See Delta Enter.  Corp. v. Cohen, 93 AD3d 411, 412 (1st Dept 2012).  “The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test.  A restraint is reasonable only if it:  (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.  A violation of any prong renders the covenant invalid.”  BDO Seidman v. Hirshberg, 93 NY2d 382, 388-89 (1999) (emphasis in original; internal citations omitted).

The Restrictive Covenant satisfies these requirements.  It is reasonable in that it is limited to a six month period, applies only to JK customers in New York and Nassau Counties, and pertains only to work that is substantially the same as that of JK.  The covenant protects a legitimate business interest – the goodwill that JK developed over the years with its customers.  An “employer has a legitimate interest in preventing former employees from exploiting or appropriating the goodwill of a client or customer, which had been created and maintained at the employer’s expense, to the employer’s competitive detriment.”  Crown IT Servs., Inc. v. Koval-Olsen, 11 AD3d 263, 265 (1st Dept 2004) (quoting BDO Seidman, 93 NY2d at 392).

Moreover, whether JK’s customer list is a confidential trade secret is a separate inquiry and has no bearing on the enforceability of the Restrictive Covenant.  The “covenant is, on its face, reasonably limited, both temporally and geographically, and not unduly burdensome, and therefore prima facie enforceable,” and it protects JK’s goodwill even in the absence of trade secrets.  DS Courier Servs., Inc. v. Seebarran, 40 AD 3d 271, 271 (1st Dept 2007) (internal quotation marks and citation omitted). Furthermore, when JK moved for a preliminary injunction, the court was not made aware of the Employment Agreement.  This circumstances is the basis for the judicial estoppel defense.  The Kouvaris defendants contend that in March 2010, when JK sought a preliminary injunction, it failed to mention the Employment Agreement, which would otherwise require it to acknowledge that the injunction that it sought could last for only a six month period, and not indefinitely.  Kim explains that he did not possess a copy of the Employment Agreement because he did not sign it; rather, Manno signed it on JK’s behalf.

Remarkably, JK itself is seeking to assert judicial estoppel against the Kourvaris Defendants based on the very same circumstances of failure to acknowledge the existence of the Employment Agreement.  JK argues that Kouvaris falsely informed the court that he never entered into an employment agreement with JK that contained a restrictive covenant.  Kouvaris explains that, at the time that he started his business, he had forgotten that he had ever had an employment agreement containing a restrictive covenant, which was entered into 10 years earlier.  It was only when he was shown a copy of it during the pendency of this action (through documents that JK produced in discovery) that he recalled it.  Neither explanation by Kim or Kouvaris is entirely satisfactory, but both are sufficient to nullify each side’s attempt to rely on judicial estoppel to achieve their ends in this action.  The court is not persuaded that adequate evidence has been propounded showing a knowing misrepresentation by either party.  See Frank Crystal & Co., Inc. v. Dillmann, 84 AD3d 704 (1st Dept 2011).

Nevertheless, though the Restrictive Covenant is valid on its face, the inquiry does not end here.  There are questions of fact as to whether JK breached the Employment Agreement.  Such alleged breaches, if established at trial, would preclude JK form enforcing the Restrictive Covenant.  See DeCapua v. Dine-A-Mate, Inc., 292 AD2d 489, 491 (2d Dept 2002) (“[W]hen a party benefitting from a restrictive covenant in a contract breaches that contract, the covenant is not valid and enforceable against the other party, because the benefitting party was responsible for the breach.”).

The record establishes that Kouvaris was JK’s most valuable employee.  He was so essential to JK’s business that Frontier viewed his continued employment as essential to acquiring JK.  While Kouvaris admitted to taking certain equipment from JK’s lab on January 17, 2010,he did so in the presence of the security camera that he installed and made no attempt to deny his actions when confronted.  Moreover, he provided an explanation for his reasons for removing the equipment.  Yet, despite his importance to JK and notwithstanding Kouvaris’ explanation, Kim fired him – purportedly for stealing, not for refusing to sign the LOI – though Kouvaris was only fired after the negotiations with Frontier failed approximately a week after Kouvaris took the equipment.  Nevertheless, on this motion for summary judgment, the court cannot assess the parties’ credibility as to whether Kouvaris was fired for stealing or whether such grounds were pretextual.  However, even if Kouvaris was actually fired for cause, summary judgment still cannot be granted on the enforceability of the restrictive covenant because…there are questions of fact as to whether JK breached the Employment Agreement by improperly withholding base salary payments and failing to pay Kouvaris his incentive compensation and termination payment.  Finally, there are questions of fact as to whether Kouvaris wrongly solicited JK’s employees to work for PKDS.

And as to breach of fiduciary duty the Court concluded:

A fiduciary duty is a relationship of higher trust that arises out of an obligation to act for or give advice to another upon matters within the scope of the relation.  EBCI, Inc. v. Goldman Sachs, 5 NY3d 11, 31 (2005).  The “relationship between shareholders in a close corporation, vis-à-vis each other, is akin to that between partners and imposes a high degree of fidelity and good faith.”  Brunetti v. Musallam, 11 AD3d 280, 281 (1st Dept 2004) (internal quotation marks and citation omitted).

Plaintiffs allege that, as a shareholder, director, officer and employee of JK, Kouvaris owed JK a duty of loyalty, honesty, good faith and fair dealing, which he breached by: (i) stealing JK’s confidential information; (ii) stealing JK’s property; (iii) using the stolen confidential information and property to solicit JK’s customers and unfairly compete against JK; (iv) inducing employees of JK to leave JK’s employment; and (v) under billing JK’s customers with whom he subsequently did business.

First, the confidential information that Kouvaris is alleged to have stolen was contained in attachments to emails that Kouvaris forwarded to his personal email accounts on or before January 22, 2010.  Kouvaris had the authority to possess these documents by virtue of being an employee and officer of JK.  The mere act of forwarding the documents to his personal email accounts before he was terminated by JK is not a breach of fiduciary duty.

Second, as JK correctly contends, stealing company property is a violation of the Employment Agreement and grounds for termination.  Thus, JK cannot maintain a breach of fiduciary duty claim for such theft because it is improperly duplicative of its breach of contract claim.

Third, the manner in which Kouvaris could compete with JK after his termination is governed by the Restrictive Covenant and a violation of that covenant is a breach of contract, not a breach of fiduciary duty.  That being said, JK cannot otherwise maintain a breach of fiduciary duty claim for unfair competition because Kouvaris did not misappropriate any of JK’s trade secrets.

Fourth, Kouvaris’ ability to induce JK’s employees to leave and work for PKDS is also governed by the Employment Agreement, rendering a claim for breach of fiduciary duty duplicative.

Fifth, there are questions of fact that preclude summary judgment on Kouvaris’ alleged under-billing of JK’s clients, which was purportedly done to induce them to become clients of PKDS.  Kouvaris contests this allegation.  This is the sole issue on which plaintiffs’ breach of fiduciary claim may proceed.

Synergy Advanced Pharmaceuticals, Inc. v. Capebio, LLC,  2013 NY Slip Op 31042[U] [Sup Ct, New York County 2013]

At the outset the Court summarized the suit as “an action by plaintiff, Synergy Advanced Pharmaceuticals, Inc. (“Synergy”), a small, publicly traded drug development company, against its former employee, defendant Per Lindell (“Lindell”), and two entities Lindell formed, defendants CapeBio, LLC (“CapeBio”) and CombiMab, Inc. (“CombiMab”) (collectively, “defendants”), inter alia, for breach of confidentiality, non-compete and assignment of inventions provisions of a services agreement between Synergy and CapeBio, which was executed by Lindell as President of CapeBio.”

And described the parties:

Synergy is a company incorporated under the laws of the State of Delaware with its principal place of business in New York.  Its primary business is the development of urgoguanylin or ST-peptide derivatives, including a compound called SP-304 or Guanilib, which are used to treat gastrointestinal (“GI”) disorders and diseases…CapeBio is a consultancy company that provides services for companies developing various pharmaceuticals.  Lindell is its President and only shareholder.  CombiMab is a company formed by Lindell, who is also its President and only shareholder for development for drugs for the treatment of lower GI disorders such as diarrhea and constipation (Lindell Aff. In Support of Motion…).

The relevant agreements:

On September 25, 2007, Lindell, as President of CapeBio, and Bernard Denoyer, as President of Synergy, executed a services agreement (the “Agreement”), pursuant to which CapeBio agreed to perform consulting services related to the research and development of GI pharmaceutical products in exchange for monetary compensation…The Agreement commenced on October 1, 2007 and was to expire on August 31, 2008, unless terminated earlier…On July 1, 2008, Synergy terminated the Agreement pursuant to paragraph 6 (a) thereof allegedly due to a series of bad acts in which Lindell engaged while in Synergy’s employ…The Agreement expressly provides in paragraph 6 (e) that paragraphs 8 through 19, which include a confidentiality provision, a covenant not to compete and a provision regarding the assignment of inventions, “shall remain in effect notwithstanding the termination of this Agreement for any reason”…

And the relevant and governing provisions:

1.       Non-Disclosure Provisions

 a.       Good Will

Paragraph 10(a) of the Agreement contains an acknowledgment that CapeBio, as a result of providing consulting services to Synergy, would have the opportunity to obtain confidential information as to Synergy and its affiliates and would also have the opportunity to develop relationships with Synergy’s existing employees, customers and business associates, which relationships constitute Synergy’s “good will”, and further that Synergy would suffer significant damage if CapeBio were to use Synergy’s confidential information or to take actions that would damage or misappropriate Synergy’s good will.

b.       Confidentiality Provision

Paragraph 10(b) of the agreement prohibits CapeBio from disclosing to third parties any confidential information it obtained during the performance of its consulting services or using such confidential information for its own benefit.  Confidential information is defined to include:

(i) any information which is proprietary or unique to [Synergy] or its affiliates (or their businesses), whether or not identified as being matters of a technical nature such as processes, systems, research techniques, computer programs, know-how, improvements, discoveries, designs, inventions, devices, techniques, data and formulas, research subjects and results; (ii) information of a strategic nature, including, but not limited to, any information with respect to marketing methods, plans and strategies, investigation research studies, forecasts, products, operations, revenues, unpublished financial statements, expenses, budgets, projections, profits, sales, key personnel, customers (including customer lists and customer contacts), suppliers, costs and pricing policies; (iii) information as to employees and consultants, including, but not limited to, capabilities, competence, status with [Synergy] and compensation levels; and (iv) any information, whether communicated to [CapeBio] in written, electronic or oral form, where [Synergy] or an affiliate has indicated the confidential nature of such information to [CapeBio].

Excluded from the definition of confidential information is any information:

(x)  that is otherwise public knowledge or known within the applicable industry, (y) that has become available to [CapeBio] on a non-confidential basis from a source which is not prohibited from disclosing such information to [CapeBio] by a legal, contractual or fiduciary obligation to [Synergy], or (z) compelled to be disclosed pursuant to the order of the court or other governmental or legal body having jurisdiction over such matter.

c.       Covenant Not to Compete

Paragraph 10(e) of the Agreement prohibits CapeBio from performing any services related to the treatment of GI diseases for two competing companies, Forest Laboratories, Inc. and Microbia, Inc.  Specifically, this provision states:

neither [CapeBio] nor any direct or indirect principal or employee of [CapeBio] will directly or indirectly work for or with, own, invest in, render any service or advice to or act as officer, director, employee, or independent contractor, for Microbia, Inc. or any division, subsidiary, or joint venture of Forest Laboratories, Inc. that is exclusively engaged in the research, development, marketing or sale of drugs for the treatment of or mitigation of symptoms related to gastro-intestinal diseases.

The covenant not to compete, which is stated to be applicable anywhere in the United States, remained in effect during the term of the Agreement and for one (1) year following the termination of the Agreement.

2.       Assignment of Inventions

Paragraph 11 (a) of the Agreement provides that “all ideas, methods, inventions, discoveries, improvements, work products or developments, whether patentable or unpatenable, that relate to [CapeBio’s] work with [Synergy], made or conceived by [CapeBio], solely or jointly with others, while providing consulting services to [Synergy] (collectively, ‘Inventions’), shall belong exclusively to [Synergy] (or its designee), whether or not patent applications are filed thereon.”  Accordingly, CapeBio was required by the Agreement to assign to Synergy “such Inventions and all patents that may issue thereon in any and all countries” (¶ 11 [b]).  These provisions apply to all inventions as so defined produced within one (1) year of termination or expiration of the Agreement (¶ 10 [a]).

Justice Sherwood summarized the complaint:

Synergy alleged that Lindell, through CapeBio and CombiMab, breached the agreement by, inter alia, filing a patent or patents in competition with Synergy, attempting to assemble a team of consultants and listing as consultants on a business plan several scientists that have contracts with Synergy, making presentations to various venture capital firms regarding the development of uroguanylin analogs and analogs of ST Peptides, and misappropriating Synergy’s confidential information for his own benefit.  Synergy also asserts that Lindell committed perjury by submitting the affidavit that caused Synergy to discontinue the prior action…The amended complaint asserts four causes of action, namely, for a declaratory judgment (first cause of action), preliminary and permanent injunction (second cause of action), breach of fiduciary duty (third cause of action) and breach of contract (fourth cause of action).

Defendants moved for summary judgment.  As to the claim of breach of the restrictive covenant, Supreme Court held that:

In BDO Seidman v. Hirschberg (93 NY2d 382 [1999]), the Court of Appeals recognized that an employer has a legitimate and protectable interest in preventing former employees from exploiting its client relationships and goodwill which was created and maintained at the employer’s expense and effort…The Seidman court also provided for the severability and partial enforcement of non-compete covenants to the extent that they protect an employer’s “legitimate interests”, rather than refusing to enforce overly broad restrictive covenants in their entirety…The court adopted a three-part analysis for determining the validity of employee agreements not to compete, stating that: “A restraint is reasonably only if it: (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”… (emphasis in original).  A violation of any prong renders the covenant invalid.  In addition, a restrictive covenant will be subject to specific performance only if it is reasonable in duration and geographic scope (id.).”

With respect to covenants aimed at protecting against misappropriation of trade secrets or confidential customer lists, such covenants will be enforceable to the extent necessary to prevent the disclosure or use of proprietary information (see Reed, Roberts Assoc. v. Strauman, 40 NY2d 303, 308 [1976].  Whether an employer’s proprietary information constitutes a trade secret or is readily ascertainable from public sources is ordinarily a triable issue of fact (see Ashland Mgmt. Inc. v. Altair Investment NA, LLC, 59 AD3d 97, 102 [1st Dept 2008], modified 14 NY3d 774 [2010]).

In seeking dismissal of the breach of contract cause of action predicated on defendants’ breach of the confidentiality and non-compete provisions of the Agreement, defendants contend that all of the information or business activities alleged by Synergy to be confidential were part of Synergy’s day-to-day business, information that was separately publicly available, or were “skillful variations of general processes known in the trade”.  Specifically, defendants claim that the scientific tests known as “assays” to analyze the efficacy of various compounds on humans were generally available in a wide variety of public documents including Synergy’s own patent applications, scholarly works and public website.  Defendants further claim that Dr. Leonard Forte, a scientist employed by Synergy, and Dr. Kunwar Shailubhai, Synergy’s Chief Scientific Officer, used such assays in their own research and published articles concerning the use of such assays in question here.  Thus, such information is readily available by a simple Google search.

Defendants further aver that the terms of the restrictive covenant in the Agreement are unreasonable as they seek to prevent Lindell from entering into the gastrointestinal (“GI”) field in any way in perpetuity, a field in which he claims he has worked for over two decades.  In any event, defendants maintain that Synergy cannot show that defendants engaged in any competitive action during the one-year period of duration of the restrictions following termination of Lindell’s employment.

In opposition, Synergy maintains that although Lindell had worked in the pharmaceutical industry for over 20 years prior to his employment with Synergy, he had no experience in the GI field.  During his employment with Synergy, Lindell was advised of Synergy’s mandate to develop SP-304 (a/k/a guanilib) and a class of GCCR agonists to treat GI disorders and diseases and learned in detail the attributes of Synergy’s GCCR compounds, particularly SP-304, and learned what Synergy’s scientists were doing to maximize the compounds’ benefits and address their limitations.  Lindell was also privy to Synergy’s development and marketing strategies in seeking to develop a patent estate to maximize Synergy’s potential market share of GI pharmaceutical drugs.

In an affidavit, Synergy’s CEO, Gary Jacobs, states that in late June 2008 while still employed at Synergy, Lindell solicited Dr. Shailubhai to leave Synergy with him to form a new company for the purpose of developing a competing compound with him for GI products.  The statement is confirmed by Dr. Shailubhai.  Mr. Jacobs also states that Synergy learned that in July 2009 that Lindell contacted Dr. Forte, one of Synergy’s consultants, requesting that he analyze certain molecules using the same cell-based assays that Dr. Forte was using to test Synergy’s molecules.  In addition, Lindell had contacted an associate of Synergy’s IP counsel asking her to represent him with regard to a patent application on a ST-peptide GCCR agonist similar to ones Synergy was developing, telling her that he had determined where Synergy had gone wrong.  Synergy also notes that only six days after the August 25, 2009 lawsuit was discontinued based on an affidavit Lindell provided, stating that neither he nor CapeBio had used any of Synergy’s confidential information to develop ST-peptide derivatives and/or uroguanylin derivatives or derived any patenable idea, method etc. relating to his work at Synergy, Lindell filed a provisional patent application for a product directly competing with Synergy based on ST-peptides or their derivatives.

The patent application was allegedly for Dr. Henry Wolfe, who had assigned it to defendant CombiMab and Lindell.  Lindell contends that Dr. Wolfe developed the ST-peptide CMB 101 molecule, based on his 10 years of research in the field of ST peptide structure, without any input from him.  Lindell claims that he met with Dr. Wolfe for the first time on August 26, 2009 to discuss his joining CombiMab as Chief Scientific Officer, with his first task being to design ST peptide analogues.  Dr. Wolfe testified at deposition that he did not begin working for Lindell until September 3, 2009.  Both Dr. Shailubhai and Jacobs assert that it is virtually impossible for a team, much less an individual, to create a molecule from scratch in less than sixty days. Dr. Wolfe acknowledged at his deposition that he considered Dr. Shailubhai an expert in the GI field, based his doctoral thesis which involved the use of ST-peptides, upon Dr. Shulabhai’s work, and that from 2006, when he completed his dissertation, to 2009, when he was hired by Lindell, he had conducted no research and had nothing to do with GI drugs…On or about August 28, 2009, Lindell was already seeking to raise money by claiming he had a lead compound free of competing IP, and a molecule and formulation had been created.

Synergy claims that Lindell copied Synergy’s business plan and created a Powerpoint presentation based thereon to show to potential investors.  Synergy claims further that knowing Synergy had spent over $400,000 to have its compound supplier, Peptisntha, develop its molecule, Lindell sought to have Peptisyntha sell him plaintiff’s molecule so that he did not have to spend $400,000.

Synergy has a legitimate interest in (1) preventing CapeBio and its principal, Lindell, from exploiting Synergy’s goodwill; and (2) protecting itself from the disadvantageous use of its confidential information by CapeBio, its principal, Lindell, and CombiMab, the company Lindell allegedly created to disguise his activities in competition with Synergy.

The covenants in the Agreement are not over broad.  They do not prevent Lindell from working in the GI field.  Rather, they prevent him from misappropriating and using Synergy’s confidential information and from taking any action to damage or misappropriate Synergy’s good will, essentially by doing business with Synergy’s employees, customers or business associates with whom he worked or became familiar with during his tenure at Synergy.

Whether or not the proprietary information Synergy seeks to protect is in the public domain involves disputed issues of fact which cannot be resolved on a motion or summary judgment.  Similarly, whether defendants engaged in competitive action in breach of the restrictive covenants involves issues of credibility, which issues the court may not resolve on a motion for summary judgment (see Powell v. HIS Contractors, Inc., 75 AD3d 463 [1st Dept 2010]; F. Garofalo Elec. Co. v. New York Univ., 300 AD 186 [1st Dept 2002]).  With regard to the misuse of confidential information and despite Lindell’s protestations that he took no action during the one-year period subsequent to the termination of his employment by Synergy to compete with Synergy in the GI field, questions remain as to Lindell’s post-termination conduct including the circumstances surrounding the 2009 patent application and fund-raising on behalf of CombiMab.  Defendants have not shown that the information they are charged with having misappropriated is readily ascertainable through the public domain and is not confidential.

As to the claim of breach of fiduciary duty, Justice Sherwood wrote:

It is well settled that am employee is “prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties” (CBS Corp. v. Dumsday, 268 AD2d 350, 353 [1st Dept 2000]).  When an employee uses an employer’s time, facilities or proprietary or confidential information when establishing a competing business, the employee breaches his or her fiduciary duty to the employer (id.).

Here, plaintiff has presented evidence sufficient to create a triable issue of fact as to whether Lindell and CapeBio violated a fiduciary duty to Synergy.  Lindell appears to have been in a position of trust and in the course of his work for Synergy was exposed to highly confidential information.  As is reflected in the Agreement, Lindell acknowledged that disclosure of such confidential information could harm Synergy.  Further, Synergy has shown facts sufficient to require denial of the motion that Lindell, while still employed by Synergy, solicited Dr. Shailubhai to join him in forming a new company to produce a competing compound for GI products competing and contacted Dr. Forte requesting that he analyze certain molecules using the same cell-based assays Dr. Forte was using to test Synergy’s products.  Defendants’ motion for summary judgment to dismiss the cause of action for breach of fiduciary duty must be denied.

And, as to the claim of unfair competition, Supreme Court found that:

New York courts have held that the misappropriation and improper use of another’s trade secrets is sufficient to constitute a claim for unfair competition (Louis Capital Markets, L.P. v. REFCO Group Ltd., LLC, 9 Misc3d 283, 289 [Sup. Ct. N.Y. Co. 2005], citing CBS Corp., 268 AD2d at 353).  Such a claim can be brought by an employer against a former employee in the absence of a restrictive covenant (see e.g., Pearlgreen Corp. v. Yau Chi Chu, 8 AD3d 460 [2d Dept 2004]).

Here, plaintiff has sufficiently demonstrated that triable issues of fact exist concerning defendants’ misappropriation of Synergy’s good will.  Specifically, Synergy has produced evidence of efforts to use Synergy’s employees, suppliers and consultants and misappropriation of Synergy’s confidential and proprietary information to develop products in competition with Synergy.  Defendants’ motion for summary judgment dismissing the unfair competition claim must also be denied.

TBG Global, LLC v. Proscenium Events, LLC, 2013 NY Slip Op 30938[U] [Sup Ct, New York County 2013]

According to Supreme Court:

In this employment contract dispute defendants Mark Shearon, Chuck Santoro and James Cavanaugh (collectively, Defendants) move for partial summary judgment.  Plaintiff TBA Global, LLC (TBA) alleges various causes of action that can be broken down into two categories:  (1) Defendants improperly set up a competing company (defendant Proscenium Events, LLC (Proscenium)) while employed at TBA before resigning from TBA and joining Proscenium, and (2) Defendants have violated and continue to violate restrictive covenants in their employment contracts with TBA.  Defendants do not move with respect to the first category but move with respect to the restrictive covenant allegations, contending that they are unenforceable as a matter of law.

Summarizing the facts, Justice Schweitzer wrote:

TBA is a live events marketing company that plans and produces live event programs and marketing presentations for companies and branded products.  Defendants are three former senior employees who signed non-solicitation agreements with TBA when they joined the company as a condition of their employment.  They collectively resigned from TBA on June 6, [2]011 and immediately began to compete with TBA as employees of Proscenium doing the same business as TBA.  The parties vigorously dispute whether Defendants improperly set up Proscenium while they were still employed at TBA.  However, the court does not address that issue in this decision as it is clearly a fact-intensive issue with respect to which the parties are conducting contentious discovery.  The court limits its decision solely to the issue of whether the restrictive covenants are enforceable as a matter of law.  Each of the three Defendants’ respective covenants is worded differently.   Mr. Shearon’s Agreement provides that:

“for the duration of [his] employment relationship with [TBA], and for a period of two (2) years after the termination of [his] employment relationship with [TBA] for any reason… [Shearon] will not, directly or indirectly, communicate with clients or customers of [TBA] or pursue business relationships developed while employed by [TBA], except for the exclusions listed at the end of this section. Communication with clients or customers and pursuing business relationships developed while employed by [TBA] means communication in a manner which is used to procure business by Employee or communication which would alter the business relationships of such customers or clients with [TBA] in a negative way. This prohibition includes assisting or supervising any other person to solicit or secure a business relationship with a client or customer of [TBA].”

…There are no exclusions listed in Mr. Shearon’s agreement

Mr. Cavanaugh’s customer non-solicitation covenant with TBA provides:

for the duration of Employee’s employment relationship with [TBA], and for a period of one (1) year after the termination of [his] employment relationship with I [TBA] for any reason, Employee will not, directly or indirectly, communicate with clients or prospective clients of [TBA] that [he] had personal contact with while employed by [TBA].  The restrictions in this paragraph do not apply to the individuals, clients and customers listed on Exhibit A to this Agreement.

 …There are no exclusions listed in Mr. Cavanaugh’s Agreement.

Mr. Santoro’s customer non-solicitation covenant provides:

Employee further agrees that for the duration of [his] employment relationship with [TBA], and for a period of one (1) year after the termination of [his] employment relationship with [TBA] for any reason, Employee will not, directly or indirectly, communicate with clients or prospective clients of [TBA] that [he] had personal contact with while employed by [TBA]…The restrictions in this paragraph do not apply to clients you bring with you to TBA in the event your employment terminates within the first year of employment. Beyond one year of employment, all restrictions contained herein will be fully enforced.

…The TBA Agreements also include a covenant against soliciting or hiring TBA employees for a competing company during their employment with TBA and for one year (Messrs. Cavanaugh and Santoro) or two years (Mr. Shearon) after termination…

After a choice of law analysis and a determination that “the court will apply New York law in its analysis of the enforceability of the restrictive covenants”, Justice Schweitzer held that:

The starting point for analyzing the covenants here is BDO Seidman v Hirshberg, 93 NY2d 382 (1999), where the New York Court of Appeals adopted the “modern, prevailing standard of reasonableness for employee agreements not to compete [which] applies a three-part test” to determine whether or not the covenant is enforceable.  Under this test, “[a] restraint is only reasonable if it: (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.” 93 NY2d at 388-89 (citations omitted). Moreover, the Court of Appeals emphasized that “[a] violation of any prong renders the covenant invalid.” Id

The BDO court also reiterated its prior holding in Reed, Roberts, 40 NY2d 303, that a restrictive covenant will only survive the first prong of the test in cases where the employee’s services are “unique or extraordinary,” or where the departing employee uses confidential customer lists or trade secret to compete:

In [Reed Roberts] we limited the cognizable employer interests under the first prong of the common-law rule 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. . . .

 Id. at 389; Columbia Robbon & Carbon Mfg. Co., Inc. v. A-1-A Corp., 42 NY2d496 (1977); see also Buhler v Maloney Consulting, Inc,, 299 AD2d 190 (1st Dept 2002) (non-compete clause held unenforceable where executive recruiter’s services not extraordinary or unique and there was no unfair competition through utilizing employer’s confidential information); TMP Worldwide Inc, v Franzio, 269 AD2d 332 (1st Dept 2000) (no irreparable injury in absence of evidence that former employee had misappropriated confidential customer lists or trade secrets or that his services were or a unique or extraordinary nature).

Here, TBA does not meet the first prong of the test because the Defendants’ services were not unique or extraordinary as the court finds that their services are not sufficiently unique or extraordinary to render Defendants irreplaceable (see Pure Power Boot Camp v Warrior Fitness Boot damp, 813 F Supp 2d 489 510 [SDNY 2011]), and TBA does not point to evidence (as opposed to broad and unsupported contentions) that Defendants misappropriated or used TBA’s customer lists or trade secrets. The customers Defendants are accused of soliciting, T-Mobile, IBM, Daiichi Sankyo and Walmart, are large well-known companies readily ascertainable as potential business opportunities. See Reed, Roberts, 40 NY2d at 308.

Finally, the court notes that Mr. Santoro had a relationship with the only two clients for which Defendants have done work since leaving TBA, T-Mobile and Daiichi Sankyo, prior to joining TBA. In New York “a non-solicitation provision will be rejected as overly broad if it seeks to bar the employee from soliciting clients of the employer with whom the employee did not acquire a relationship through his or her employment, or if the provision extends to clients recruited through the employee’s own independent efforts.” Pure Power Boot Camp, 813 F Supp 2d at 511; FTI Consulting, Inc. v. Graves, 2007 WL 2192200, *8 (SDNY 2007) (“FTI cannot extend the covenants to FTI clients with whom [its former employee] did not develop a relationship during the course of his employment with FTI”); Arenson Office Furnishings, Inc. v. Archondo, 2006 WL 5229728 (Sup Ct NY Co 2006) (“Arenson has no legitimate interest in preventing Archondo from competing for the business of customers with whom he never developed a relationship while at Arenson or customers with whom he had a relationship with prior to his employment at Arenson”)).

And the Court concluded that:

The court finds Willis of N.Y., Inc. v. DeFelice, 299 AD2d 240 (1st Dept 2002), to be instructive.  In that case an insurance brokerage firm sought to restrain its former employees from soliciting its clients.  The trial court granted the employer a preliminary injunction with respect to certain of its employees.  On appeal the First Department upheld the restraints against certain employees who were soliciting plaintiff’s clients with which they developed relationships while employed at plaintiff, but the court modified the injunction to exclude clients the employees had brought with them to their former employer:

[S]ince the record discloses that many of DeFelice’s clients are loyal to him personally, and not to the firm at which he works, he should not be enjoined from soliciting the clients he originally brought with him to plaintiffs, or related account.

299 AD2d at 242.  Under these circumstances the court concludes the restrictive covenants TBA seeks to apply here against defendants are unenforceable.  Accordingly, the court grants Defendants’ motion for partial summary judgment.


[to be continued]

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