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

[continued from Part I posted July 3, 2013]

Godoy v. FDR Services Corp, 2013 NY Slip Op 30985[U] [Sup Ct, New York County 2013]

At the outset the Court noted that: “In this action, Plaintiff Richard Godoy, seeks, among other relief, a declaratory judgment declaring the parties’ Employment Agreement and the Restrictive Covenant contained therein unenforceable.”

Supreme Court set forth the operative facts:

As alleged in the Complaint, pursuant to an Employment Agreement dated August 25, 2011 (the “Employment Agreement”), defendant FDR Services Corp., (“FDR”), a healthcare linen and laundry specialist company, hired Plaintiff as its Northeast Vice President of Operations.  On November 8,2012, Plaintiff was terminated without cause.

In the Complaint, Plaintiff alleges that FDR breached the parties’ Employment Agreement by failing to provide Plaintiff with two weeks notice of his termination and two weeks of severance pay.  Plaintiff asserts that after his termination from FDR, he received an employment offer from JVK Operations Ltd (“JVK”).  The Complaint alleges that despite FDR’s breach of the parties’ Employment Agreement, FDR sought to prevent plaintiff from working with JVK, pursuant to the Agreement’s restrictive covenant, which prevents Plaintiff from undertaking any services “directly or indirectly competitive with any business operated by FDR” for 18 months after Plaintiff’s termination.  Plaintiff asserts that as a result of FDR’s cease and desist notice to sent to JYK, JYK rescinded its employment offer to plaintiff.

Plaintiff brings this motion for an Order pursuant to CPLR §6312 enjoining and restraining FDR during the pendency of this action from taking any action by litigation or otherwise based upon the Employment Agreement and restrictive  covenant and enjoining and restraining FDR during the pendency of this action from hindering or preventing Plaintiff from seeking and performing employment.

The relevant Restrictive Covenant provision in the parties’ Employment Agreement is set forth in paragraph 10, section c, and provides:

Employee will not, during the Employment Term (including any extensions, thereof) and for an 18 month period thereafter, directly or indirectly, under any circumstance other than at the direction and for the benefit of the Company or its subsidiaries or affiliates, engage in or participate in any business activity, including but not limited to, acting as a director, officer, employee, agent, independent contractor, partner, consultant, licensor or licensee, franchisor or franchisee, proprietor, syndicate member, shareholder or creditor or with a person having any other relationship with any other business, company, firm, occupation or business activity, that is directly or indirectly, competitive with any business carried on by the Company or its subsidiaries and affiliates during the term of the Employment.

And the governing law:

To establish entitlement to a preliminary injunction, a movant must establish (1) a likelihood or probability of success on the merits, (2) irreparable harm in the absence of an injunction, and (3) a balance of the equities in favor of granting the injunction.  (See, CPLR §6301; Doe v. Axelrod, 73 NY2d 748, 532 NE2d 1272, 536 NYS2d 44 [1998]).

[A] restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer’s legitimate interest, not harmful to the general public and not unreasonably burdensome to the employee.”  BDO v. Seidman v. Hirschberg, 93 N.Y.2d 382, 388-89 [1999] (citations omitted).  Determination of whether a restrictive covenant should be enforced is reasonable is fact sensitive.  See id. at 390 (“the application of the test of reasonableness of employee restrictive covenants focuses on the particular facts and circumstances giving context to the agreement.”)  “A covenant will be rejected as overly broad, however, if it seeks to bar the employee from soliciting or providing services to clients with whom the employee never acquired a relationship through his or her employment or if the covenant extends to personal clients recruited through the employee’s independent efforts. (Id).

In support of the motion:

Plaintiff submit his own affidavit and the attorney affirmation of Anthony Balsamo.  Plaintiff argue[d] that the restrictive covenant is not enforceable as any confidential or proprietary information obtained by Plaintiff is not required for the full performance of his duties with his prospective employer and the information will not be used to compete against Defendant.  As set forth in Plaintiff’s affidavit, Plaintiff has been employed in the health care industry for forty years and has worked in various capacities for a number of different businesses.  In 2011, while employed at Superior, Plaintiff was offered the position of Northeast Vice President of Operations at FDR.  Plaintiff’s duties “were operational, and were primarily concerned with matters such as production and distribution, engineering, monitoring deliveries, quality control; monitoring the plan to adhere to all federal, state, and local regulations; and to oversee the performance of management and staff.”  As Northeast Vice President of Operations, his duties were “essentially the same as [his] duties with Superior, except on a larger scale.”  Plaintiff asserts that the position that he was offered at JVK was similar to that he had at Superior and was neither “unique nor extraordinary.

In opposition to the relief sought:

[FDR submitted] the affidavit of James McCormack, vice president of FDR.  FDR contends that Plaintiff was privy to confidential or proprietary information, and that if this information is divulged to JVK, Plaintiff could target specific FDR employees and customers based on his knowledge of FDR’s pricing, compensation, and operations.  Defendant asserts that contrary to Plaintiff’s assertion that FDR and JVK’s business models are different, JVK and FDR offer many of the same services including, but not limited to, linen management and uniform services.

And the Court concluded that:

Here, Plaintiff has demonstrated a likelihood of success in establishing that the restrictive covenant which prohibits him from “directly or indirectly, under any circumstance other than at the direction and for the benefit of the Company or its subsidiaries or affiliates, engage in or participate in any business activity, including but not limited to, acting as a director, officer, employee, agent” is greater than necessary to protect any legitimate interest of Defendant, and as such, is unenforceable.  The provision, which contains no geographic limitation, seeks to bar Plaintiff from working in an entire industry and therefore soliciting or providing services to any clients with whom Plaintiff may never have acquired a relationship through his employment.  Furthermore, in opposition to Plaintiff’s motion, Defendant does not claim that the services of Plaintiff are unique or extraordinary nor does Defendant provide any evidentiary support to substantiate its allegations that this restrictive covenant is necessary to protect its legitimate interests.  The Court notes that the parties’ Employment Agreement also contains separate provisions that prohibit Plaintiff from using or disclosing to any third party any trade secrets or confidential information of Defendant (Paragraph 10(b) and soliciting or inducing any “creditor, customer, client supplier, officer, employee or agent of [Defendant] or its past or present subsidiaries or affiliates…” (Paragraph 10(d), which would protect Defendant’s confidential or proprietary information that Plaintiff may have been privy to in connection with his employment at Defendant.

In addition, Plaintiff has demonstrated irreparable harm in the absence of an injunction, and further that a balance of the equities weighs in favor of granting the injunction in light of the fact that Plaintiff cannot resume employment if the injunction is not granted and Defendant’s business will nevertheless continue notwithstanding said injunction.

Mitzvah Inc. v. Power, 2013 NY Slip Op 03421 [1st Dept 2013]

The Appellate Division summarily affirmed Supreme Court’s order finding that:

The motion court properly determined that plaintiff had standing to assert its claims for unfair competition (third cause of action), misappropriation of trade secrets (fourth cause of action) and tortious interference with prospective business relationships and economic advantage (sixth cause of action).  Defendant Power allegedly misappropriated substantial client information from her former employer (Pisa Brothers) prior to resigning and going to work for the corporate defendant (Altour), a competitor travel agency.  Power, with Altour’s authorization, allegedly utilized Pisa Brother’s customer lists to, inter alia, promptly notify prior customers she serviced at her former employment of her new association with Altour.  She also allegedly used Pisa Brothers’ client information to cause a transfer of existing vacation bookings, from Pisa Brothers to Altour, which had the effect of transferring earned commissions.

The First Department found that:

Plaintiff’s allegations, which are supported by evidence in the record, assert a cognizable stake to its claim for damages, as well as continuing damages, arising from defendants’ conduct (see generally Community Bd. 7 of Borough of Manhattan v. Schaffer, 84 NY2d 148, 154-155 [1994]).  The evidence raises factual issues as to whether Power deceptively removed client lists and copies of client folders, and transferred client bookings at Pisa Brothers to Altour, resulting in damage to plaintiff, which purchased Pisa Brothers’ business only months after the purchase-sale negotiations commenced.  The evidence demonstrates that plaintiff potentially lost value to the business assets purchased, in the form of lost commissions, lost “over-ride” bonus money, and an apparent loss of good will of Pisa Brothers’ clients.

The argument that Power was not under plaintiff’s employ at any time, and was not subject to noncompetition agreements, or other written policies governing the use of client information at Pisa Brothers’ does not undermine plaintiff’s evidence that it purchased Pisa Brothers’ clients information, good will and trade name, and that the client information at Pisa Brothers was not readily available, and was deceptively removed by Power to the advantage of Altour and to plaintiff’s likely financial injury.

And the First Department found the existence of certain triable issues of fact:

The motion court correctly found that a triable issue existed as to whether Pisa Brothers’ compilation of client lists over an 80-year period, along with folders containing clients’ personal information, after years of advertising and assisting clients, constituted trade secrets, which plaintiff paid good value to purchase (see Ashland Mgt. v. Janien, 82 NY2d 395, 407 [1993]).  The misappropriated Pisa Brothers client information was not readily known, or available in the cruise trade industry, and as defendants’ own conduct substantiates, such information was discoverable only through their deceptive efforts (see Stanley Tulchin Assoc. v. Vignola, 186 AD2d 183, 185 [2d Dept 1992]).

The evidence also raises factual issues to support the cause of action alleging that defendants engaged in unfair competition by misappropriating client information plaintiff had negotiated to purchase from Pisa Brothers, and using it to defendants’ commercial advantage (see Electrolux Corp. v. Val-Worth, Inc., 6 NY2d 556, 567-568 [1959]; ITC Ltd. V. Punchgini, Inc., 9 NY3d 467, 476-478 [2007]).

Triable issues of fact exist in connection with plaintiff’s sixth cause of action alleging that defendants had utilized Pisa Brothers’ misappropriated client information to tortiously interfere with plaintiff’s prospective business relationships with the former clients of Pisa Brothers, as well as with the economic advantage plaintiff had sought to gain by paying good value to purchase Pisa Brothers’ client information and good will.  While the cause of action entails a higher standard for culpable conduct than would a claim for tortious interference with contract, inasmuch as a plaintiff must set forth that he claimed interference constituted a crime or an independent tort (see Carvel Corp. v. Noonan, 3 NY3d 182 [2004], here, there was evidence of intentional, wrongful acts by defendants, including evidence suggesting that Pisa’s computers were hacked and that client signatures were forged by Power on booking-transfer documents.

Greystone Staffing, Inc. v. Warner, 2013 NY Slip Op. 03636 [2d Dept 2013]

A recent Decision by the Appellate Division held that:  “The Supreme Court did not improvidently exercise its discretion in denying the plaintiff’s motion, in effect, to preliminarily enjoin the defendant from, inter alia, soliciting any current or former customers of the plaintiff.”

After summarizing the standard for obtaining a preliminary injunction, the Second Department wrote:

Initially, we note that the particular covenant not to compete under review in this case belongs to that category of agreements that is subject to a stricter standard of reasonableness and provokes “undoubted judicial disfavor” (Reed, Roberts Assoc. v. Strauman, 40 NY2d 303, 307; see Purchasing Assoc. v. Weitz, 13 NY2d 267, 272).  Enforcement of the subject covenant would have effectively required the defendant (1) to endure a one-year period of total unemployment, (2) to accept employment in an entirely different occupation or profession, (3) to relocate to a place far outside of the area in which she had grown accustomed to living, or (4) to continue to work for the plaintiff.  The plaintiff had filed for bankruptcy protection, its checks had been dishonored for insufficient funds, its 401(k) retirement plan payments had been “unilaterally suspended,” and its president had been arrested.  Thus, not only did the plaintiff fail to show a likelihood of success on the merits, but it is clear that the “equities” do not weigh in favor of the plaintiff (see Eastman Kodak Co. v. Carmosino, 77 AD3d 1434, 1436).

Greystone Staffing, Inc. v. Warner, Sup Ct, Nassau County, May 25, 2012, Driscoll, J., Index No. 04355-12

In Supreme Court:

Plaintiff move[d] for an Order, pursuant to CPLR § 6301, enjoining and restraining Defendant Wendy Warner (“Warner” or “Defendant”) from 1) soliciting and/or doing business with any current or former customers of Plaintiff; 2) using, or disclosing to any person and/or entity, for any purpose, any Confidential Information of Plaintiff; 3) contacting, directly or indirectly, any person, firm, corporation, employer, client or applicant, who was at any time prior a customer or client or prospective customer or client of Plaintiff; 4) interfering, directly or indirectly, with any such business of Plaintiff; 5) directly or indirectly soliciting or accepting business or employment, whether as an employee or independent contractor, from any person or entity who was at any time within one (1) year prior to the termination of employment with Plaintiff, a customer of Plaintiff, to provide services similar to or the same as any of the services provided by Plaintiff; 6) offering or attempting to offer employment to any employee, consultant, or independent contractor of Plaintiff, or otherwise inducing or attempting to induce any employee of Plaintiff to leave the employ thereof; 7) transferring, selling or otherwise disposing of any Confidential Information belonging to the Plaintiff; and 8) continuing her employment with Green Key Resources (“Green Key”).

According to the complaint:

Greystone is engaged in the “highly competitive” business of recruiting and providing personnel on a temporary and/or permanent basis to its customers and/or clients…On or about March 19, 2001, Greystone entered into an employment contract with Defendant (“Agreement”)…The Agreement contains provisions regarding, inter alia, 1) the employee’s obligation to notify Greystone of any contact with, or inquiries by, a competitor of Greystone, and 2) materials deemed Trade Secrets and Confidential Information, and the employee’s agreement never to disclose or use Trade Secrets and Confidential Information,

Plaintiff alleges that it provided Defendant with access to its Trade Secrets and Confidential Information, including customer lists, characteristics of customers, internet and computer data and Plaintiff’s financial information.  Plaintiff further alleges that its Confidential Information was not ascertainable by any means other than through Plaintiff.

Supreme Court described the restrictive covenant:

The Agreement contained a restrictive covenant (“Restrictive Covenant”) which reflected Defendant’s agreement that, for a period of one (1) year after termination of her employment with Plaintiff, Defendant would not, directly or indirectly, engage in the same business as Plaintiff anywhere within a radius of fifty (50) miles from any offices of Plaintiff.  Defendant also agreed that she could not 1) contact any person or company who was at any prior time a customer of Plaintiff; 2) interfere with Plaintiff’s business; 3) solicit or accept business or employment from any person or entity who was, at any time within one (1) year prior to the termination of Defendant’s employment, a customer of Plaintiff, to provide services that were similar to those provided by Plaintiff; or 4) offer, or attempt to offer, employment to any employee, consultant or independent contractor of Plaintiff, or otherwise induce any employee of Plaintiff to leave his employment.  The Agreement also required Defendant, upon termination of her employment, to deliver to Plaintiff all materials, including correspondence and computer data, in her possession or control.  Defendant resigned from her employment with Plaintiff in November of 2011.

The Court described the two causes of action in the complaint:

…In the first cause of action, Plaintiff alleges that Defendant breached the agreement by, inter alia, 1) improperly retaining and using Confidential Information to obtain an unfair competitive advantage over Plaintiff; 2) failing to notify Plaintiff of, and provide Plaintiff with information regarding, her contact with Green Key, a competitor of Plaintiff; and 3) soliciting or accepting business or employment with Green Key, offering or attempting to offer employment to employees of Plaintiff, and/or inducing employees of Plaintiff to leave the employ of Plaintiff.

In the second cause of action, Plaintiff seeks injunctive relief similar to that requested in the instant Order to Show Cause.  In support of that request, Plaintiff alleges, inter alia, that 1) Plaintiff invested significant time and developmental costs in developing and maintaining the Confidential Information; 2) the Confidential Information was not ascertainable by any means other than through Plaintiff; and 3) in the Agreement, Defendant agreed that disclosure of the Confidential Information in violation of the Agreement would cause serious and irreparable harm to Plaintiff.

Plaintiff’s contentions:

In his Affidavit in Support of Plaintiff’s application, Phil Missirlian (“Missirlian”), the President of Plaintiff, affirms the truth of the allegations in the Complaint regarding Defendant’s execution of the Agreement, the terms of the Agreement, the nature and importance of the Trade secrets and Confidential Information, Defendant’s breach of the agreement and the basis for Plaintiff’s request for injunctive relief.  Missirlian also affirms that Defendant, in her capacity as regional manager, managed the sales force of Plaintiff, contributed to marketing strategies and had personal knowledge of pricing and margins used by Plaintiff.  In addition, Defendant had “unencumbered access”… to the computer databases of Plaintiff, and acquired “intimate knowledge”… of Plaintiff’s clients, employees and methods of operation.

And Warner’s response:

In opposition, Defendant affirms that when she began her employment with Greystone in 2001, Greystone presented her with the Agreement and required her immediate signature.  She affirms that Greystone clearly communicated to her that she should not make any changes to the Agreement, and that she would not be hired if she did not sign the Agreement.

Defendant affirms that her primary responsibilities while employed by Greystone were client development, contact and sales.  She sought to ensure that candidates were placed with the most appropriate job assignment.  She had access to client lists, so that she could confirm placements and client satisfaction, but did not retain that information in hard copy after her resignation (“Resignation”) from Greystone.

Defendant avers that problems developed at Greystone in 2009 when Greystone unexpectedly filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code.  Greystone filed for additional bankruptcy protection in 2010.  Greystone’s court filings in the 2010 bankruptcy matter included a schedule of aged receivables which made public the telephone numbers of Greystone’s clients.

In March 2011, Greystone encountered payroll problems when numerous checks were dishonored for insufficient funds.  Greystone’s controller said that Greystone was only able to pay half of its payroll obligations.  In April of 2011, Greystone did not process direct deposits for its candidates, and the temporary staff was not compensated.  Defendant affirms that she was not paid according to her payment schedule, and Greystone suspended internal staff Holiday Club deposits and 401(k) payments.  Defendant borrowed funds from family members to cover her expenses, and was concerned that Greystone was going out of business.

Defendant affirms, further, that in May of 2011, she learned that Missirlain had been arrested for fraud based on his failure to pay withholding taxes in excess of $400,000.  In July of 2011, Greystone’s subscriptions to Monster.com, Careerbuilder.com, Newsday and Pennysaver were suspended for non-payment, and the staff learned that Greystone’s headquarters building was scheduled for public auction.  In addition, Greystone’s human resources manager resigned.

Defendant avers that she is the primary provider for her family, and needed employment on which she could depend.  Accordingly, she resigned from Greystone on November 15, 2011 and began working for Green Key one week later.  Defendant affirms that she took no information of any kind from Greystone when she resigned.  Green Key directed Defendant not to bring any customer lists or other documentation that would violate the Agreement, and Defendant complied with that directive.  Defendant affirms that she is, and will remain, in compliance with her obligations under the Agreement, except that she maintains that the fifty (50) mile radius restriction in the Agreement is overbroad and unenforceable.

Supreme Court described the arguments for and against the injunction:

Plaintiff submits that it has demonstrated its right to the requested injunctive relief by establishing a likelihood of success on the merits by demonstrating that Defendant breached the Agreement.  Plaintiff argues that the Restrictive Covenant is enforceable in light of 1) the special and unique nature of Plaintiff’s services, 2) the limited temporal and geographical limitations in the Restrictive Covenant, and 3) Defendant’s acknowledgment of the reasonableness of those restrictions when she signed the Agreement.

Plaintiff also argues that it has established irreparable injury without the requested injunctive relief in that it will sustain a loss of business that is difficult to quantify.  Finally, Plaintiff submits that a balancing of the equities favors Plaintiff because there is no evidence that Defendant will be harmed by the requested injunctive relief, while Plaintiff faces a substantial loss of business without the requested restrictions.

Defendant oppose Plaintiff’s application, submitted inter alia that 1) there are no protectable trade secrets or confidential information in the temporary staffing industry as it is the type of business that relies more on “common sense, cold calling, advertising and being a good salesperson”… 2) Greystone cannot demonstrate irreparable harm in light of the fact that Greystone voluntarily published its customer lists in connection with its bankruptcy filings; 3) Plaintiff has not demonstrated that Defendant shared any of Plaintiff’s information with Green Key, or used Plaintiff’s information to Green Key’s advantage; 3) the Agreement is unenforceable because its restrictions are “anti-competitive and coercively overreaching”… 4) the information that Plaintiff characterizes as trade secrets does not warrant trade secret protection because it is readily ascertainable from publicly available sources; 5) the Restrictive Covenant is unreasonable in time and geographical scope; 6) the requested injunctive relief would impose an undue hardship on Warner by preventing her from soliciting business from a wide range of businesses, with whom Greystone does not have an exclusive agreement; and 7) the public would be harmed by the enforcement of the restrictions in the Agreement which would prevent Green Key from competing in the temporary staffing industry and deprive the public of the benefits of that competition.

Supreme Court set forth the preliminary injunction standard:

A preliminary injunction is a drastic remedy and will only be granted if the movant establishes a clear right to it under the law and upon the relevant facts set forth in the moving papers.  William M. Blake Agency, Inc. v. Leon, 283 A.D.2d 423, 424 (2d Dept. 2001); Peterson v. Corbin, 275 A.D.2d 35, 36 (2d Dept. 2000).  Injunctive relief will lie where a movant demonstrates a likelihood of success on the merits, a danger of irreparable harm unless the injunction is granted and a balance of the equities in his or her favor.  Aetna Ins. Co. v. Capasso, 75 N.Y.2d 860 (1990); W.T. Grant Co. v. Srogi, 52 N.Y.2d 496, 517 (1981); Merscorp, Inc. v. Romaine, 295 A.D.2d 431 (2d Dept. 2002); Neos v. Lacey, 291 A.D.2d 434 (2d Dept. 2002).  The decision whether to grant a preliminary injunction rests in the sound discretion of the Supreme Court.  Doe v. Axelrod, 73 N.Y.2d 748, 750 (1988); Automated Waste Disposal, Inc. v. Mid-Hudson Waste, Inc., 50 A.D.3d 1073 (2d Dept. 2008);City of Long Beach v. Sterling American Capital, LLC, 40 A.D.3d 902, 903 (2d Dept. 2007); Ruiz v. Meloney, 26 A.D.3d 485 (2d Dept. 2006).

The law with respect to restrictive covenants:

Powerful considerations of public policy militate against sanctioning the loss of a person’s livelihood.  Post v. Merrill Lynch, 48 N.Y.2d 84, 86 (1979), citing Purchasing Assoc. v. Weitz, 13 N.Y.2d 267, 272 (1963).  This policy is so potent that covenants tending to restrain anyone from engaging in any lawful vocation are almost uniformly disfavored, and are sustained only to the extent that they are reasonably necessary to protect the legitimate interests of the employer, and are not unduly harsh or burdensome to the one restrained.  Id. at 87, citing inter alia, Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 N.Y.2d 496, 499 (1977).  Restrictive covenants contained in employment contracts are disfavored by the courts and are to be enforced only if reasonably limited temporally and geographically, and to the extent necessary to protect the employer’s use of trade secrets or confidential customer information.  Gilman & Ciocia, Inc. v. Randello, 55 A.D.3d 871, 872 (2d Dept. 2008).

And the law as to trade secrets:

Where the employer’s past or prospective customers’ names are readily ascertainable from sources outside its business, trade secret protection will not attach and their solicitation by the employee will not be enjoined.  H & R Recruiters, Inc. v. Kirkpatrick, 243 A.D.2d 680, 681 (2d Dept. 1977).  A trade secret is any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to gain an advantage over competitors who do not know or use it.  Ashland Mgt. v. Janian, 82 N.Y.2d 395, 407 (1993), citing Restatement of Torts Section 757, comment b.  In deciding a trade secret claim, the court should consider the following factors:  1) the extent to which the information is known outside of the business, 2) the extent to which it is known by employees and others involved in the business, 3) the extent of measures taken by the business to guard the secrecy of the information, 4) the value of the information to the business and its competitors, 5) the amount of effort or money expended by the business in developing the information, 6) the ease or difficulty with which the information could be properly acquired or duplicated by others.  Id.

And Supreme Court then applied the law to the facts:

The Court denies Plaintiff’s Order to Show Cause in its entirety.  The Court concludes that Plaintiff has not demonstrated a likelihood of success on the merits in light of 1) the issues regarding the enforceability of the restrictive covenant given its breadth, particularly the 50 mile radius restriction on Defendant’s future employment, and the public policy disfavoring such covenants, 2) the factual disputes regarding whether Defendant has improperly used Plaintiff’s information in her new employment, which Defendant denies, and 3) the issues regarding whether Plaintiff’s customer lists and other information are deserving of trade secret information, given the accessibility of employment information on the internet and in newspapers, and in light of Defendant’s assertion that some of that information was filed publicly by Greystone during its bankruptcy proceeding.

With respect to the showing of irreparable harm, the Court concludes that it is not bound by the language in the Agreement which states that disclosure of the Confidential Information in violation of the Agreement would cause serious and irreparable harm to Plaintiff, and must make an independent determination of that issue.  The Court concludes that Plaintiff has not demonstrated irreparable harm without the requested injunctive relief in light of the issues regarding whether Plaintiff’s customer lists and other information are deserving of trade secret protection, and in consideration of Defendant’s affirmation that she did not retain any of Plaintiff’s information when she resigned from Greystone.

Finally, Plaintiff has not shown that the equities balance in favor of Plaintiff, given Warner’s affirmation regarding the financial difficulties encountered by Plaintiff which affected the stability of her employment with Plaintiff, and her need for the compensation she receives from Green Key to maintain her financial stability.

In light of the foregoing, the Court denies Plaintiff’s Order to Show Cause in its entirety.

Dewitt Stern Group, Inc v. Eisenberg, NYLJ 1202603559850 [SDNY 2013]

The Court described the pending application:

Plaintiff DeWitt Stern Group Inc. (“DeWitt” or “Plaintiff”) has moved by order to show cause for a preliminary injunction to prohibit its former employee, Richard Eisenberg (“Mr. Eisenberg” or “Defendant”), from violating Defendant’s Employment Agreement, in particular with respect to the confidentiality and non-solicitation provisions.  For the reasons set forth below, Plaintiff’s motion for a preliminary injunction is granted to the extent it prohibits Defendant from future violations of the Employment Agreement.

The parties:

DeWitt is a privately held insurance brokerage and risk management firm, specializing (in part) in insurance for the entertainment industry, with its primary place of business operations and senior management located in New York….

Mr. Eisenberg is an established insurance broker…From 2007 until May 6, 2013, Mr. Eisenberg was employed by DeWitt as a Senior Vice President and producer, with his primary responsibility to sell film insurance products and oversee the handling of client accounts…Mr. Eisenberg is currently employed by Arthur J. Gallagher & Co. (“Gallagher”)….

The historical facts:

Prior to Mr.Eisenberg’s employment at DeWitt, he worked at Aon/AGRIS from 2001 until 2007…When Mr. Eisenberg joined Aon/AGRIS, he was compensated for the sale of his business, client accounts and goodwill in the amount of $400,000…His employment with Aon/AGRIS therefore contained restrictive covenants preventing him from soliciting these clients for another firm, or competing with them if he were to terminate his agreement…

In 2007, Mr. Eisenberg left Aon/AGRIS and joined DeWitt, and shortly thereafter Aon/AGRIS filed a Cross-Complaint against DeWitt and Mr. Eisenberg alleging, among other things, that Mr. Eisenberg had breached the restrictive covenant provisions in his agreement, and that DeWitt had raided and tortuously interfered with its business by convincing customers to abandon their relationships with Aon/AGRIS and move instead to Dewitt.

…DeWitt alleges that in order to free Mr. Eisenberg from the restraints imposed by his contract with Aon/AGRIS, and to permit Mr. Eisenberg to lawfully solicit his former clients for DeWitt, DeWitt entered into a settlement with Aon/AGRIS in which DeWitt paid Aon/AGRIS $425,000…According to DeWitt, as a result of this settlement, which Mr. Eisenberg signed, Mr. Eisenberg was permitted to solicit the business he had sold to Aon/AGRIS for DeWitt and continue cultivating these relationships on behalf of DeWitt…

After Mr. Eisenberg joined DeWitt, Plaintiff alleges that Mr. Eisenberg, in his capacity as Senior Vice President and producer, had access to DeWitt’s confidential information and trade secrets, including names and lists of accounts and clients, names of key account contacts, account characteristics, pricing information, and application information.  Further, DeWitt asserts that in the course of his work for DeWitt, Mr. Eisenberg was provided substantial support in his efforts to make former Aon/AGRIS clients DeWitt clients, thereby building his book of business, including:  (1) substantial compensation on commissions earned on the business; (2) two full-time employees to assist him in servicing any business he could bring in; (3) offices he could work out of on both coasts; and (4) an apartment in California, half of which was paid for by DeWitt so he could develop clients on the west coast…

Mr. Eisenberg also signed a series of employment agreements with DeWitt, including his final agreement executed on or about October 9, 2012 (the “Employment Agreement”)…The Employment Agreement in Paragraph 5(a) states that “by signing this Agreement, Employee acknowledges and agrees that the restrictive covenants contained in this Agreement are reasonably necessary to protect Company’s business interests and that during and after the term of this Agreement Employee will not use or disclose, directly or indirectly, and will keep strictly secret and confidential all Confidential Information and Trade Secrets except as required in the course of Employee’s employment by Company.”… Further, Paragraph 5(c) of the Employee Agreement states that,

In consideration of Employee’s continued employment with the company, Employee agrees that during the term of employment, and for the two (2) year period immediately following termination of employment for any reason, Employee will not use Company’s Confidential Information or Trade Secrets to solicit, accept, divert, or take away, in whole or in part, directly or indirectly, any clients or “Prospect” (as hereinafter defined) of Company who were solicited or serviced by Employee or by anyone directly or indirectly under Employee’s supervision, or with whom Employee had any business relationship, within the two (2) year period immediately prior to Employee’s termination of employment.  For purposes of this Agreement “Prospect” shall be defined as a potential customer known and contacted by Employee of Company prior to the date of termination of employment.  Mr. Eisenberg voluntarily agreed to these provisions, which included an acknowledgement in Paragraph 6 of the Employment Agreement that, “[i]n the event of Employee breaches any of its obligations under Paragraph 5 above the Company will suffer irreparable injury, not readily susceptible of valuation in monetary damages.”…Accordingly, Mr. Eisenberg agreed that DeWitt would be “entitled to injunctive relief against any breach or prospective breach” by him of the “obligations under Paragraph 5 above.

And the recent developments from which litigation ensued:

On April 30, 2013, Mr. Eisenberg contacted DeWitt and requested a meeting on May 1, 2013 at DeWitt’s corporate headquarters in New York….Mr. Eisenberg canceled the meeting on May 1, and instead met with the Company’s President and Chief Operating Officer (Charles Johnson) on May 6, 2013, where he announced his resignation…During this meeting, Mr. Eisenberg has acknowledged that he told DeWitt’s President Charles Johnson that he would not abide by the Employment Agreement’s non-solicitation provision because he did not believe any non-compete was enforceable against him…Mr. Eisenberg has since stated that he left DeWitt because he felt undercompensated due to deductions reducing his income….

Within a day of the announcement of Mr. Eisenberg’s departure, DeWitt received a Broker of Record (“BOR”) Letter from one of the clients Mr. Eisenberg serviced at DeWitt notifying DeWitt of its move to Gallagher….DeWitt has since received three more such BOR letters, including one from a client who had only come to DeWitt in March of this year.…The record also shows that Mr. Eisenberg, beginning no later than March 18, 2013, began violating his Employment Agreement by sending confidential information from his Company e-mail to his personal e-mail and to Brian Kingman, Managing Director at Gallagher, a direct competitor of DeWitt…More specifically, Mr. Eisenberg, beginning on April 30, 2013 through May 4, 2013, forwarded e-mails containing confidential information and/or trade secrets to his personal e-mail account, including:  (1) an e-mail describing coverage issues for a current DeWitt client; (2) interactive policy renewal applications for a different current DeWitt client; (3) a current DeWitt client’s movie script, budget, and other confidential information necessary to solicit preliminary insurance quotes and (4) a current movie client’s cast log and medical forms containing confidential coverage and other information…Additionally, DeWitt establishes that Mr. Eisenberg on April 17, 2013 and his e-mail correspondence from Brian Kingman shared confidential information and/or trade secrets pertaining to a business opportunity to place insurance on behalf of a client with respect to a forthcoming film…

Immediately upon resigning, Mr. Eisenberg joined Gallagher on May 6, 2013 as Area Executive Vice President, where he is responsible for producing business from his clients and servicing that business…Mr. Eisenberg’s Employment Agreement does not prohibit him from competing with DeWitt in this new role so long as he is not using confidential information obtained during his employment at DeWitt, or attempting to divert clients he serviced while at DeWitt.

The Court set forth the requisites for injunctive relief:

In order to obtain a preliminary injunction, a party must demonstrate (1) that he or she will suffer irreparable harm absent injunctive relief, and (2) either (a) that he or she is likely to succeed on the merits, or (b) that there are sufficiently serious questions going to the merits to make them a fair ground for litigation, and that the balance of hardships tips decidedly in favor of the moving party.  Moore v. Consol. Edison Co. of N.Y., Inc., 409 F.3d 506, 510 (2d Cir. 2005) (internal quotation marks and citation omitted).

Pursuant to Fed.R. Civ. P. 52(a), in granting or refusing a preliminary injunction, the court shall set forth “the findings of fact and conclusions of law” which constitute the grounds of its action.  The Second Circuit has stated that “[t]hese findings are not conclusive, and may be altered after a trial on the merits.”  Visual Sciences, Inc. v. Integrated Communications Inc., 660 F.2d 56, 58 (citing Hamilton Watch Co. v. Benrus Watch Co., 206 F.2d 738, 740 (2d Cir. 1953).

Judge Sweet found that Dewitt Stern had demonstrated irreparable harm:

Irreparable injury exists where a monetary award does not provide adequate compensation.  See Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979).  Irreparable harm to an employer results through both the loss of client relationships and customer goodwill from a breach of a non-compete clause, and where “an employee has misappropriated trade secrets or confidential customer information, including pricing methods, customer lists and customer preferences.”  Johnson Controls, Inc. v. A.P.T. Critical Sys., 323 F. Supp.2d 525, 532-33 (S.D.N.Y. 2004); see also Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 69 (2d Cir. 19999) (recognizing that “it would be 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.”)  For instance, in Arthur J. Gallagher Serv. Co. v. Egan, 2013 U.S. App. LEXIS 5875 (11th Cir. Fla. March 25, 2013), the court found that “the factors of irreparable harm and balance of harms weighed in favor of issuing a preliminary injunction [where if Defendant] continued to solicit his former clients, the companies stood to lose accounts in which they had invested significant resources, revenues from the renewal of those accounts, and goodwill cultivated with those clients.”… The court therefore determined that “the loss of longstanding clients and goodwill [was] an irreparable injury.”  Here, DeWitt has already received notice of three clients, previously under Mr. Eisenberg at DeWitt, that are leaving DeWitt…Additionally, Mr. Eisenberg has sent confidential Company property, as defined in the Employment Agreement, from his DeWitt e-mail address both to a Gallagher employee and his personal e-mail account.  Mr. Eisenberg does not deny that these clients have moved to Gallagher or that he has sent such e-mails from work address.  Given the potential future loss of clients and confidential information, DeWitt has shown that they will suffer irreparable harm if the Employment Agreement is not enforced.

And a likelihood of success:

The likelihood of success on the merits is great where, as here, the Employment Agreement at issue is enforceable with respect to both the non-compete and confidentiality provisions.

First, a covenant not to compete will be enforced “to the extent that it is reasonable in time and area, necessary to protect an employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.”  BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 289 (N.Y. 1999).  “New York courts addressing…twenty-four month restrictions on solicitation of former clients in the insurance industry have fo[u]nd them to be reasonable.”  USI Ins. Servs. LLC v. Miner, 801 F.Supp.2d 175, 188 (S.D.N.Y. 2011).  Such agreements are not found overbroad even if they “would prohibit [the employee] from accepting business from former clients who voluntarily and without any solicitation chose to do business with [employee]…

Here, the Employment Agreement narrowly tailors the two year non-compete provisions to prohibit Mr. Eisenberg only from “using the Company’s Confidential Information and/or Trade Secrets…to solicit, accept, divert, or take away, in whole or in part, directly or indirectly,” any clients or prospect of DeWitt “who were solicited or serviced by Employee or by anyone directly or indirectly under [Mr. Eisenberg’s] supervision, or with whom Employee had any business relationship.”…This does not prevent Mr. Eisenberg from soliciting clients retained through “pre-existing” relationships or through his “own independent efforts, unassisted by the firm.”  Barbagallo v. Marcum LLP, __ F.Supp.2d __, 2013 WL 132711, at 18 (E.D.N.Y. Jan. 10, 2013).

Second, New York courts have expressly recognized trade secrets and other confidential information of the nature DeWitt specified in the Employment Agreement.  See, e.g., John Hancock Mut. Life Ins. Co. v. Austin, 916 F.Supp. 158, 165 (S.D.N.Y. 1996) (noting that “papers and records in question were not mere customer lists.  In addition to customer names, these papers contained information involving customer coverage, premium amounts, cash values and loans against existing policies,” and that such information “rises to the level of ‘confidential customer information.’”); USI Ins. Servs. LLC v. Miner, 801 F.Supp.2d 175, 189 (S.D.N.Y. 2011) (finding that where employee sent e-mail from former employer’s business e-mail account to personal e-mail containing names of companies and their financial information, the document might contain trade secrets or confidential information).  Here, Mr. Eisenberg agreed not to “use or disclose, directly or indirectly, and keep strictly secret and confidential all Confidential Information and Trade Secrets or retain copies of Company Property during or for two years after his employment.  Such covenants are reasonable and enforceable under New York law, and such Mr. Eisenberg should be restricted by the provisions he signed.

In any event, the balance of hardships tips in favor of DeWitt.  DeWitt has established irreparable harm if Mr. Eisenberg were to breach, or continue to breach, the Employment Agreement.  In contrast, Mr. Eisenberg can continue earning his livelihood at Gallagher or elsewhere; he is merely restricted from using DeWitt’s protected information as outlined in the Employment Agreement to solicit clients.  Indeed, the Employment Agreement at issue neither prohibits Mr. Eisenberg from competing with DeWitt nor preclude him from soliciting clients in the entertainment insurance industry.  Imposing the restrictions Mr. Eisenberg voluntarily agreed to cannot reasonably be said to disrupt his likelihood or cause him undue harm.  See Arthur J. Gallagher Serv. Co., 2013 U.S. App. LEXIS 5875, at *11 (finding that factors weighed in favor of preliminarily enjoining employee from violating his restrictive covenant where employee retained the right to compete for new accounts, but employee’s lost ability to solicit clients for two years with whom the companies had an ongoing relationship).

OTG Management, LLC v. Konstantinidis, 2013 NY Slip Op 23187 [U] [Sup Ct, New York County 2013]

OTG moved by order to show cause for a preliminary injunction against Aris Konstantinidis and SSP America, Inc.  Supreme Court described the background:

OTG is a company that provides food and beverage services at airports, including JFK and LaGuardia airports in New York.  In July 2011, Konstantinidis was hired by OTG to be an Operations Manager at LaGuardia.  On July 8, 2011, Konstantinidis signed an Agreement Regarding Post-Employment Competition (the Agreement) because, as paragraph E of the Recitals states, he was “required to sign this Agreement as a condition being employed.”  The Agreement prohibits Konstantinidis from, inter alia, (1) being employed by a competitor at any airport in the United States for one year after the end of his employment; (2) soliciting any OTG employee or customer for two years after the end of his employment; and (3) disclosing OTG’s proprietary information.  The Agreement requires all disputes to be mediated, except for applications for injunctive relief, such as the instant motion.

In December 2012, OTG transferred Konstantinidis to JFK, where he became the Terminal Director of JFK Terminal 5.  On April 18, 2013, Konstantinidis resigned from OTG.  The following week, Konstantinidis began working for SSP, a competitor of OTG that operates at JFK Terminal.

and the resulting complaint:

On April 30, 2013, OTG commenced this action and asserted two causes of action in the Compliant: (1) breach of contract against Konstantinidis for violating the non-compete, non-solicitation, and non-disclosure clauses in the Agreement; and (2) tortious interference with contractual relations against SSP for inducing Konstantinidis to breach the Agreement.  That same day, OTG filed the instant motion and appeared in court seeking a temporary restraining order (TRO) prohibiting Konstantinidis from working at SSP and from recruiting current and former OTG employees to work for SSP.  The court only issued a TRO as to the latter relief and allowed Konstantinidis to continue working at SSP pending a decision on the instant motion… “A preliminary injunction substantially limits a defendant’s rights and is 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.”  1234 Broadway LLC v. West Side SRO Law Project, 86 AD3d 18, 23 (1st Dept 2011) (citation omitted), citing Doe v. Axelrod, 73 NY2d 748 (1988).  As a threshold matter, the court must assess whether the non-compete and non-recruitment clauses in the Agreement are enforceable restrictive covenants.

Justice Kornreich set forth the applicable law as to covenants not to compete:

In order to be enforceable, an anticompetitive covenant ancillary to an employment agreement must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the public, and not unreasonably burdensome to the employee.  Crown It Services, Inc. v. Koval-Olsen, 11 AD3d 263, 264 (1st Dept 2004), citing BDO Seidman v. Hirshberg, 93 NY2d 382 (1999).  The Court of Appeals “has limited the cognizable employer interests under the [reasonableness prong] 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.”  BDO Seidman, 93 NY2d at 389.  A restriction on a former employee’s ability to work for a competitor is invalid unless the employee’s services were “unique or extraordinary” or if the job is considered a “learned profession” (such as law or accounting).  Id. at 389-90.

And, as follow, found the covenant to be unenforceable:

The non-compete clause is unenforceable against Konstantinidis.  His services were not unique nor is a Terminal Director considered a learned profession.  Nonetheless, OTG argues that Konstantinidis can be barred from working for SSP because he is in possession of OTG’s trade secrets, which he will inevitably disclose to SSP.  See Estee Lauder Companies Inc. v. Batra, 430 FSupp2d 158, 176 (SDNY 2006), quoting Monovis, Inc. v. Aquino, 905 FSupp 1205, 1234 (WDNY 1994) (“it is doubtful whether the defendant could completely divorce his knowledge of the trade secrets from any…work he might engage in.”).  In this case, however, Konstantinidis’ employment managing the food service appears to have little to nothing to do with utilizing the trade secrets at issue, which are complex financial models utilized by OTG that supposedly are what makes its unique “concessionaire product” profitable.  Though Konstantinidis had access to these trade secrets while employed with OTG (and possibly shortly thereafter), the disclosure of such secrets to SSP, a director competitor, is both a separate violation of the Agreement and otherwise illegal under New York law.  However, this court cannot adjudicate the merits of any alleged illegal disclosure of OTG’s trade secrets because such a dispute is subject to the mandatory arbitration clause in the Agreement.  The court’s inquiry is limited to whether OTG has demonstrated a likelihood of success on the merits that would warrant the drastic measure of prohibiting his employment with SSP.  OTG has not.

OTG’s concern about Konstantinidis working for SSP is not predicated on whether Konstantinidis will actually use the financial models in the scope of his new employment.  Rather, OTG understandably worries about its trade secrets falling into the hands of a competitor.  This danger, however, cannot be remedied by granting the requested preliminary injunction because Konstantinidis’ continued employment with SSP has no bearing on whether he has already or is going to illegally give them the trade secrets.  Based on the record, he is fully capable o[f] performing his job without relying on OTG’s financial model which cannot be aided by information about OTG’s model.  Indeed, SSP contends that it uses a completely different type of financial model which cannot be aided by information about OTG’s model.

….Whether this is true is a question of fact, but OTG has not produced evidence demonstrating a likelihood of success on the merits with respect to this issue.

Additionally, the myriad bad acts alleged through OTG’s papers (such as the circumstances of Konstantinidis allegedly forwarding another employee’s login information to his personal email address so he could access a company database after his resignation) do not militate in favor of enjoining his employment with SSP.  Rather, they speak to the merits of OTG’s claims against Konstantinidis for breach of the Agreement and unfair competition, which also must be arbitrated.

Supreme Court set forth the applicable law as to covenants not to recruit:

As for the non-recruitment clause, a federal district court recently observed that “[t]here appears to be no New York Court of Appeals case discussing the applicable standard for non-recruitment covenants.”  See Renaissance Nutrition, Inc. v. Jarrett, 2012 WL 42171, at *2 (WDNY 2012) (also noting that only one state court case has discussed the standard), citing Lazer Inc. v. Kesselring, 13 Misc3d 427 (Sup Ct, Monroe County 2005).  While both Renaissance Nutrition and Lazer recognized that non-recruitment clauses are subject to reasonableness scrutiny because they are anti-competitive in nature, non-recruitment clauses are “inherently more reasonable and less restrictive” that non-compete clauses.  Renaissance Nutrition, 2012 WL 42171, at *5 (“a non-recruitment clause, as opposed a non-compete clause, does not infringe on an [employee’s] ability to engage in an occupation, but merely infringes on his ability to recruit former co-workers to engage in competitive businesses”); Lazer, 13 Misc3d at 431 (“such a covenant does not affect in the same way the powerful considerations of public policy which militage against sanctioning the loss of a man’s livelihood”), quoting Purchasing Assocs., Inc. v. Weitz, 13 NY2d 267, 272 (1963).

And found the covenant to be enforceable:

Here, the court finds that the non-recruitment clause is enforceable because it is reasonable in scope and imposes no meaningful burden on Konstantinidis.  There is no reason to believe that Konstantinidis’ employment with SSP will be impacted by his inability to recruit his former co-workers.  The court originally issued the TRO for these reasons and likewise issues a preliminary injunction.  However, the injunction will automatically expire on April 18, 2015, because the Agreement limits the non-solicitation clause to two years after Konstantinidis’ resignation.  Finally, given that the determination of whether Konstantinidis breached the Agreement will be decided by an arbitrator, the court stays this action against SSP until the arbitration concludes.  The stay is necessary because the only claim against SSP is for tortious interference with contract, the elements of which are “the existence of a valid contract, the tortfeasor’s knowledge of the contract and intentional interference with it, the resulting breach and damages.”  Hoag v. Chancellor, Inc., 246 AD2d 224, 228 (1st Dept. 1998).  To prevail on this claim, OTG must prove that Konstantinidis breached the Agreement.  OTG cannot simultaneously litigate that issue before the arbitrator and this court.  This would waste judicial resources and create the risk of inconsistent rulings.  Consequently, OTG may only proceed with its claim against SSP if and when the arbitrator rules that Konstantinidis breached the Agreement.

Rosetta Marketing Group, LLC v. Michaelson, 2013 NY Slip Op 04558[U] [1st Dept. 2013]

The First Department summarily affirmed the Order of Supreme Court, New York County (Schweitzer, J.) that denied Rosetta’s motion for a preliminary injunction:

While the parties dispute the factual assertions surrounding the negotiation and execution of the separation agreements, which contain a one-year noncompete term, as well as whether those agreements concern and supersede the parties’ earlier executed purchase agreement, which contains the disputed five-year term, the motion court correctly found that, overall, the comparative harm to the employee defendants in allowing enforcement of a five-year noncompete term is significantly greater the harm to the employer plaintiffs.  Further, plaintiffs failed to establish, a likelihood of success on the merits (see Gilliland v. Acquafredda Enters., LLC, 92 AD3d 19, 24-25 [1st Dept. 2011]).  Nor have plaintiffs shown that they would be irreparably harmed absent a preliminary injunction, as any harm could be compensated by money damages (see GFI Sec., LLC v. Tradition Asiel Sec., Inc., 61 AD3d 586, 586 [1st Dept. 2009]).

Supreme Court outlined the submissions on the record:

The court has read the submissions of both sides and listened to the arguments and concludes that the draftsmanship of the various transaction documents leaves much to be desired to arrive at a decision as to what was intended here.  In all candor, attempting to arrive at a definitive interpretations of the various documents is almost pointless because a strong and a weak case can be advanced for each side.  For example, the argument for a five-year non-compete period gains support from some of the language in Section 10.06 of the Purchase Agreement which states that in the event of any inconsistency between the statements in the body of the Purchase Agreement and those in the other transaction documents, the exhibits and the disclosure schedules, the statements in the body of the Purchase Agreement will control.  Using that as a starting point, and turning to the definition of transaction documents in the Purchase Agreement, we see an express reference to the Employment Agreements “and the other agreements, instruments and documents required to be delivered at the closing.”  There is no specific reference in the definition to what is called an Appendix A, which is a “form of separation agreement and general release,” a document which accompanies the Employment Agreement, but which leaves terms open to be further negotiated and which is not to be signed at the closing because, obviously, the sellers were signing their Employment Agreements at that point.  And, of course, it is the one-year proscription on competition in the Employment Agreement which is ostensibly trumped by the five-year proscription in the Purchase Agreement.  There simply was no Separation Agreement to be trumped at the time of closing.  However, as we also know, once the Michaelsons left the employ of Rosetta, they were in a position where they did negotiate and execute Separation Agreements.  The fact that this occurred after the closing serves to underscore that this document was not a “prior and contemporaneous understanding and agreement” of the Purchase Agreement to be superseded at all when the Purchase Agreement was actually signed.  Until it went through numerous drafts, seven and four respectively, the Appendix did not even become an agreement specific enough to warrant express reference in the Purchase Agreement.  As such, it was not until the Separation Agreements were signed that Paragraph 16(d) of those agreements which reminded each of the Michaelsons that they remained subject to and bound by the one-year non-competition agreement of the employment contract is a strong argument for the one-year proscription in the Separation Agreement trumping the five-year provision of the earlier Purchase Agreement.  Just to add a little law to this conundrum, we have the general proposition which governs the interpretation of contracts and statutes that the specific always trumps the general when it comes to language interpretation, as does a later agreement over an earlier one.

Turning again to the definition of transaction documents in the Purchase Agreement, there is no specific reference to the Separation Agreement.  And as we saw in Section 10.06 of the Purchase Agreement, it is only that agreement and the transaction documents that are to be compared in the event of any inconsistency between provisions in one or the other.  The unfinished Appendix to a signed document was not an exhibit or disclosure schedule.

And denied the injunctive relief sought:

There probably is much more the court could say on the interpretation of the language of the agreements themselves, Paragraph 9, for example, of the Separation Agreement which says the agreement supersedes all prior agreements between the parties “pertaining to the subject matter set forth herein” and then goes on to refer to rights the parties may have under the Purchase Agreement in the context of not being released by the Separation Agreement is one which makes the Purchase Agreement part of the subject matter being superseded.  Even if the court leans to one interpretation over the other, the case is so close that the court finds it difficult to declare that one side or the other has satisfied the test of demonstrating a likelihood of success on the merits.  The inquiry does not stop there, however, for as we know, there is more to the test of whether a preliminary injunction should issue, and one of the other two prongs of the test offers a much clearer path to a result, that being a balance of the equities.  On this score, the court at this stage believes that the balance rests with the Michaelsons.  One needs to read the affidavits of Judy Capano-Michaelson and Michaelson’s lawyer Marla Meg Gordon to conclude that something disturbing took place during the negotiations of the Separation Agreements and has resulted in the Michaelsons then taking dramatic action pursuant to which they now face the loss of their new business, the loss of substantial operating capital, incurring two years of office lease debt, and debts to executive and non-executive employees alike.  In addition, the Michaelsons are in a position to suffer loss of additional funds as a result of contractual obligations they incurred on behalf of two clients.  In sum, unless this is sorted out, they will be out of business right now.

Winning a balance of hardships alone, however, is not sufficient when balancing the equities.  Here, though, what the court finds especially troubling is that according to the Michaelson’s attorney who negotiated both the sale of their company to Rosetta and the Separation Agreements for each of the Michaelsons after they were forced out of the company, it appears that at no point in the negotiations of the separation was the five-year proscription brought upon by the plaintiff or its lawyers.  Indeed, through all of the drafts and exchange of communications, everything appears to have focused on the one-year proscription of competition which originated in the Employment Agreements which were executed at the closing of the sale of the business.  Why, for example, then, if there were multi-years remaining on the five-year proscription, would there now be a discussion of the one-year prohibition at all?  We were told in chambers that the one-year provision had originally been put in the agreement in the event the Michaelsons worked a full five years and there would still be a need for an extended non-compete.  Well, they didn’t work for five years.  So why the emphasis on the one-year provision if not that it was the only one intended to survive their early departure.

We learned from Ms. Gordon’s affidavit that, “the addition of the term ‘restrictive covenants’ to Paragraph 16(d) of the Separation Agreements made it absolutely unambiguous that the one-year restrictive covenants of the 2009 Employment Agreements were to control.”  Quoting again from Ms. Gordon, “At no time during the negotiation of Paragraph 16(d) did counsel for Rosetta ask to preserve the five-year non-complete period” – skipping but continuing – “or to otherwise substitute a five-year period for the one-year period contained in the Employment Agreement referred to in Paragraph 16(d) of the Separation Agreement.”  And so the Michaelsons waited a year before they embarked on their new venture, presumably on advice of counsel, who had never been given a clue that five years was still on Rosetta’s mind.

Again, although one can quibble with some of the language in Paragraph 9 of the Separation Agreement which states that the agreement sets forth the entire agreement between the parties and fully supersedes and any and all prior agreements and understandings between the parties “pertaining to the subject matter set forth herein,” the deafening silence from the Rosetta side of the negotiations that otherwise could have reminded the Michaelsons that Rosetta continued to have a five-year proscription on their returning to their industry simply doesn’t add up as Rosetta now seeks to rely on a five-year proscription.  Again, turning to the law, the doctrine of equitable estoppel best comes to mind as an aid to the court in these circumstances as they affect the parties.  In order to prevail in asserting the defense of estoppel, a defendant must demonstrate that it reasonably relied upon the words or conduct of the plaintiff and that it changed its position to its detriment based on this reliance.  The court here is of the view that given the close call on which side ultimately would be able to prevail on the merits when interpreting the language of the documents themselves, the doctrine of equitable estoppel and the facts of this case as set forth in the affidavits lead the court to conclude that a preliminary injunction here is not only unwarranted, but would do much greater harm to one side, that is the Michaelsons, when compared with plaintiff Rosetta in these circumstances because they did rely on plaintiff’s silence and then they did take significant actions which could end up being to their serious detriment.  Accordingly, the court denies plaintiff’s motion for a preliminary injunction.

[to be continued]

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