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

Part I posted July 3, 2013

Part II posted September 4, 2013

 Tribeca Technology Solutions, Inc. v. Goldberg, 2013 NY Slip Op 31313(U) [Sup. Ct. New York County, June 17, 2013, Singh, J.]

Tribeca arose over “a dispute over the right to manufacture, market and profit from sales of a product named the ‘Intelliseat’, an electronic toilet seat.”  The complaint asserted causes of action “for misappropriation, aiding and abetting breach of fiduciary duty, and conspiracy.”

According to the complaint:

Plaintiff Tribeca Technology Solutions, Inc. (“Tribeca”) is in the business of wholesale distribution of computing and consumer electronics.  In addition, it was involved in the “commercialization” of other consumer products, including the Intelliseat.  Plaintiff contends that it is entitled to all of defendants’ profits from sales of the Intelliseat, as defendants have no legal right to be involved in any way in the design, manufacture, marketing or sale of the device.

Defendant David Goldberg is a former employee of plaintiff…Defendant Scott Simon has held himself out as plaintiff’s former Chief Operating Officer…Defendant Edward Shapiro financed the other defendants’ business activities…

The complaint alleges that, as a former employee of plaintiff[…]Goldberg was subject to the terms of a written non-disclosure and non-solicitation agreement dated February 20, 2008.  According to plaintiff, defendants Goldberg and Simon violated the agreement by secretly forming AMDM LLC and selling Intelliseats.

As part of the effort to “commercialize” the device, plaintiff entered into a memorandum of understanding dated March 4, 2010, with a Korean-based company to manufacture the Intelliseat for sale in the United States, Canada and Korea.  Defendant Goldberg signed the memorandum of understanding as plaintiff’s “Managing Director.”

Goldberg’s and Simon’s relationship with plaintiff was terminated around June 2010.  Subsequently, plaintiff discovered that Goldberg had been contacting plaintiff’s customers and vendors in direct violation of his written agreement.

Defendants moved to dismiss, and Court addressed, the claim for misappropriation of confidential information:

Defendants’ second contention is that plaintiff’s complaint fails to state a cause of action to pierce the corporate veil and hold defendant Shapiro liable for misappropriation of confidential information.  Defendant Shapiro states in a sworn affidavit that he is the President of American Manufacturing Distribution Management, Inc.  According to Shapiro, AMDM, Inc., is a d/b/a of his employer.

Misappropriation is a form of tort (Sporn v. MCA Records, Inc., 88 A.D.2d 857 [1st Dept., 1982]).  “[A] corporation is liable for the torts and wrongful acts or omissions of its officers, agents, or employees acting within the scope of their authority or the course of their employment, and a person injured may generally hold both the corporation and the corporate employee liable as joint tortfeasors” (14A N.Y. Jur.2d Business Relationships section 510).  Accordingly, the Court finds that the complaint asserts a valid cause of action for misappropriation.

Defendants also moved to dismiss, and Supreme Court addressed, the claim for aiding and abetting a breach of fiduciary duty:

Defendants’ next contention is that the cause of action for aiding and abetting breach of fiduciary duty should be dismissed.

The complaint alleges that defendant Shapiro knew that defendants Goldberg and Simon had fiduciary obligations to plaintiff; that Shapiro had actual knowledge of the breaches of fiduciary obligations by defendant Goldberg and Simon; and that Shapiro “knowingly induced and participated in the breach of fiduciary obligations by funding the defendants’ theft and illegal commercialization of the Intelliseat”[.]

It is not entirely clear at this early stage of the litigation what fiduciary duty Simon owed. Nevertheless, it is clear that Goldberg owed a fiduciary duty to plaintiff as his former employer.  Accordingly, the Court finds that the complaint sufficiently states a cause of action for aiding and abetting breach of fiduciary duty.

And defendants finally moved to dismiss, and Justice Singh addressed, the conspiracy claim:

Defendants’ final contention is that the complaint fails to sufficiently plead a cause of action for conspiracy.

On its face, the complaint alleges that the defendants have committed the primary torts of misappropriation, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty.  It alleges further that the defendants made an agreement to commercialize the Intelliseat to the exclusion of plaintiff; that they made overt acts in furtherance of their agreement by marketing and selling the product to Costco and individual consumers on the Internet; and that the defendants each intentionally participated in furtherance of their plan to commercialize the Intelliseat to the exclusion of the plaintiff…

“In order to properly plead a cause of action to recover damages for civil conspiracy, the plaintiff must allege a cognizable tort, coupled with an agreement between the conspirators regarding the tort, and an overt action in furtherance of the agreement” (Perez v. Lopez, 97 A.D.3d 558, 560 [2d Dept., 2012]).

In short, the Court finds that the Complaint sufficiently alleges these elements.

Alken Industries, Inc. v. Toxey Leonard & Associates, Inc., 2013 NY Slip 31864(U) [Sup. Ct. Suffolk County, August 2, 2013, Emerson, J.]

Supreme Court set for the facts:

The plaintiff, Alken Industries, Inc. (“Alken”) is engaged in the business of manufacturing machine parts for the aerospace industry.  The defendant, Toxey Leonard & Associates, Inc. (“Leonard”) is a sales representative who represents manufacturers and procures contracts on their behalf.  On September 1, 1994, Alken and Leonard entered into an agreement in which Leonard agreed to represent Alken and to procure manufacturing contracts for it as an independent contractor, and Alken agreed to pay Leonard a 5% commission.  The initial term of the agreement was for a period of one year.  The agreement provided that it would be automatically renewed for successive one-year terms unless cancelled by either party upon 30 days’ written notice.  The agreement also provided, in pertinent part, as follows:

If any dispute arises concerning any portion of commissions or other sums owing to [Leonard], [Alken] agrees to pay promptly to [Leonard] all sums not in dispute.  Acceptance of any portion of such sums owed to [Leonard] shall not constitute a waiver or release of the claims of [Leonard] to other sums claimed due from [Alken] to [Leonard] (emphasis added).

*     *     *

No modification or waiver of any of the terms of this Agreement shall be valid unless in writing and executed with the same formality as this Agreement.

In 2003, Alken advised Leonard that it could not afford to continue to pay a 5% commission and that, if Leonard did not accept a reduced commission, Alken would terminate the agreement.  The parties dispute whether Leonard agreed to accept a reduced commission, and the parties never executed a written modification of the agreement reflecting a commission of less than 5%.  However, it is undisputed that Leonard continued to represent Alken and that Alken paid Leonard less than 5% until 2009, when Alken terminated the agreement.  In 2011, Leonard demanded payment of all outstanding commissions at the 5% rate, which Alken refused.  Alken subsequently commenced this action.

And summarized the pleadings:

Alken’s first cause of action alleges that Leonard beached its duty of loyalty to Alken by representing another manufacturer, i.e. Fort Walton Machining.  Alken’s second cause of action is for a judgment declaring that the agreement was orally modified and that the commissions paid to Leonard were consistent with the modification.  Leonard asserts four counterclaims against Alken.  The first three allege violations of the Labor Law, breach of contract, and conversion for failing to pay Leonard the full 5% commission.  The fourth alleges that Alken tortiously interfered with Leonard’s contract with Fort Walton Machining.  Alken moves for partial summary judgment dismissing Leonard’s counterclaims.  Leonard cross moves for partial summary judgment on the issue of liability on the first, second and third counterclaims.

The Court addressed, and denied the cross-motions relating to, the first counterclaim:

The first counterclaim alleges that Alken violated the Labor Law by failing to pay Leonard the full 5% commission within five business days after the agreement was terminated.

Labor Law § 191-b provides that, when a principal contracts with a sales representative to solicit wholesale orders within the state, the contract shall be in writing and shall set forth the method by which the commission is to be computed and paid.  Labor Law § 191-a defines a “principal” as a person or company engaged in the business of manufacturing who (1) manufacturers, produces, imports, or distributes a product for wholesale, (2) contracts with a sales representative to solicit orders for the product, and (3) compensates the sales representative in whole or in part by commissions (Labor Law § 191-a[c]).  Labor Law § 191-a defines a “sales representative” as a person or entity who solicits orders in New York State and is an independent contractor, but not someone who places orders for his own account for resale (Labor Law § 191-a[d]).  Labor Law § 191-c provides that, when a contract between a principal and a sales representative is terminated, all earned commissions shall be paid within five business days after such termination or within five business days after they become due.

The defendant contends that Alken was a “principal” and that Leonard was a “sales representative” within the meaning of Labor Law §§ 191-a(c) and (d), respectively.  Therefore, any modification of the method by which Leonard’s commission was computed and paid had to be in writing.  The defendant contends that, in the absence of a writing reducing Leonard’s commission, Leonard is entitled to recover the full 5%, plus double damages and attorney’s fees under the Labor Law.  The plaintiff contends that Leonard was not a “sales representative” within the meaning of Labor Law § 191-a(d) because Leonard, who was located in Georgia, was not engaged to solicit customers in New York and none of his accounts were located in New York.  The defendant contends that Leonard frequently traveled to New York and worked out of Alken’s Ronkonkoma facility.  The plaintiff acknowledges that Leonard traveled to Alken’s Ronkonkoma facility, but denies that he solicited business there.

In interpreting the definition of “sales representative” found in Labor Law § 191-a(d), emphasis is placed on whether the purported sales representative solicited orders from New York and not the location of the customers (Kay v. Artmatic Corp., 214 AD2d 473, 474).  The court finds that there is a question of fact regarding whether Leonard solicited orders from New York.  Accordingly, the motion and cross motion are denied as to the first counterclaim.

Supreme Court addressed, and denied the cross-motions relating to, the second counterclaim:

The second counterclaim alleges that Alken breached the parties’ agreement by failing to pay Leonard the full 5% commission.  The plaintiff contends that the parties’ agreement was modified orally to reduce the commission to less than 5% and that Leonard is equitably estopped from denying the oral modification because he consented to it and induced Alken’s reliance thereon.  The defendant contends that the statute of frauds bars enforcement of the alleged oral modification and that equitable estoppel does not apply because the parties’ agreement contains a no-oral modification clause.  The plaintiff contends that the statute of frauds is inapplicable when, as here, the modification has been fully performed.

Parties to a written agreement who include a proscription against oral modification are protected by General Obligations Law § 15-301(1), which provides that any contract containing such a clause cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement is sought (Rose v. Spa Realty Assoc., 42 NY2d 338, 343).  Put otherwise, if the only proof of an alleged agreement to deviate from a written contract is the oral exchanges between the parties, the writing controls.  Thus, the authenticity of any amendment is ensured (id.).  On the other hand, when the oral agreement to modify has been acted upon to completion, the same need to protect the integrity of the written agreement from false claims of modification does not arise (id).  In such a case, not only may past oral discussions be relied upon to test the alleged modification, but the actions taken may demonstrate objectively the nature and extent of the modification (id.).  Moreover, a contractual prohibition against oral modification may itself be waived (id.).  Thus, § 15-301 nullifies only executory oral modifications.  Once executed, the oral modification may be proved. (id.)

Here, the alleged oral modification has been acted upon to completion and is no longer executory.  It is undisputed that Alken paid Leonard a commission of less than 5% until 2009, when Alken terminated their agreement.  Thus, General Obligations Law § 15-301 does not bar enforcement of the alleged oral modification.

Having determined that General Obligations Law § 15-301 does not apply, it is not necessary to reach the plaintiff’s estoppel argument since equitable estoppel is an exception to § 15-301 (id. at 344).

The defendant also relies on General Obligations Law §5-701(a)(1), which provides than an agreement, promise, or undertaking is void unless embodied in a writing or writings and signed by the party to be charged if, by its terms, it is not to be performed within one year from the making thereof.  The defendant’s arguments in support of General Obligations Law § 5-701(a)(1) ignore the fact that the parties had a written agreement.  The written agreement continued to govern the parties’ relationship even after the purported modification.  In fact, when Alken terminated the agreement in 2009, it gave Leonard 30 days’ written notice in accordance with the written agreement.  Accordingly, General Obligations Law § 5-701(a)(1) does not apply.

Likewise, the defendant’s reliance on General Obligations Law § 5-701(a)(10) is misplaced.  General Obligations Law § 5-701(a)(10) provides that an agreement is void unless evidenced by a writing signed by the party to be charged if the agreement is one to pay compensation for services rendered in negotiating a business opportunity.  Negotiating includes procuring an introduction to a party to the transaction or assisting in the negotiation or consummation of the transaction (Ostrove v. Michaels, 280 AD2d 211, 212, citing General Obligations Law § 5-701[a][10].  The defendant again ignores the fact that the parties had a written agreement, thereby satisfying General Obligations Law § 5-701(a)(10).  The question presented is whether the agreement was modified.  The court finds that there are issues of fact as to whether Leonard waived the contractual prohibition against oral modification and agreed to accept the reduced commission proffered by Alken and whether the modification was supported by mutual consideration.  Accordingly, the motion and cross motion are denied as to the second counterclaim.

Justice Emerson summarily dismissed the third counterclaim:

The third counterclaim for conversion is duplicative of the second counterclaim for breach of contract.  A cause of action alleging conversion cannot be maintained when, as here, damages are being sought merely for breach of contract and no wrong independent of the contract claim has been demonstrated (Hassett-Belfer Senior Housing, LLC v. Town of North Hempstead, 270 AD2d 306; Wolf v. National Council of Young Israel, 264 AD2d 416).  Accordingly, the plaintiff’s motion is granted to the extent of dismissing the third counterclaim.

And the court addressed, and denied, plaintiff’s motion to dismiss the fourth counterclaim:

The fourth counterclaim alleges that Alken tortiously interfered with Leonard’s contract with Fort Walton Machining.  The plaintiff contends that, because Leonard alleges that the contract with Fort Walton Machining was terminated rather than breached, the fourth counterclaim fails to state a cause of action or tortious interference with contract.

In Guard-Life Corp. v. S. Parker Hardward Mfg. (50 NY2d 183, 189), the Court of Appeals adopted the definition found in § 766 of the Restatement [Second] of Torts for tortious interference with contract, which is:

One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.

Many of the cases that came after Guard-Life Corp. state that the elements of a cause of action for tortious interference with contract are the existence of a valid contract between the plaintiff and a third party, the defendant’s knowledge of that contract, the defendant’s intentional procurement of the third-party’s breach of contract without justification, actual breach of the contract, and damages resulting therefrom (see, e.g., Lama Holding Co. v. Smith Barney, Inc., 88 NY2d 413, 424 [emphasis added]).  However, New York continues to adhere to the definition of tortious interference with contract found in Guard-Life Corp.  In Kronos, Inc. v. AVX Corp. (81 NY2d 90), the Court of Appeals, citing § 766 of the Restatement [Second] of Torts, states that tortious interference with contract consists of the following four elements:  (1) the existence of a contract between the plaintiff and a third party, (2) the defendant’s knowledge of the contract, (3) the defendant’s intentional inducement of the third party to breach or otherwise render performance impossible, and (4) damages to the plaintiff (Id. at 94).  Thus, the fact that Fort Walton Machining terminated, rather than breached, its contract with Leonard is not fatal to the plaintiff’s claim.

As a general rule, a party does not carry its burden in moving for summary judgment by pointing to gaps in its opponent’s proof, but must affirmatively demonstrate the merits of its claim or defense (see, Corrigan v. Spring Lake Building Corp., 23 AD3d 604, 605).  The court finds that the plaintiff’s reliance on the deficiencies in the defendant’s proof and the conclusory denials of Alken’s President, Kimberly Senior, are insufficient to establish the plaintiff’s entitlement to judgment as a matter of law on the fourth counterclaim.  Failure to make a prima facie showing requires denial of the motion regardless of the sufficiency of the opposing papers (see, Winegrad v. New York Univ. Med. Ctr., 64 NY2d 851, 853).  Accordingly, the plaintiff’s motion is denied as to the fourth counterclaim.

Blue Fountain Media, Inc. v. Metasense, Inc., 2013 NY Slip Op 31405(U) [Sup. Ct., New York County, June 21, 2013, Madden, J.]

The Court set forth the “background”:

Blue Fountain is a corporation engaged in website design and marketing.  Metasense is a competitor of Blue Fountain in the field of website design and marketing.  Defendant Alysia Antonelli (“Antonelli”) held the position of Associate Business Consultant at Blue Fountain from April 1, 2011 to February 10, 2012.  During the course of her employment at Blue Fountain, Antonelli allegedly had access to Blue Fountain’s client database, and Client Relationship Manager (“CRM”), which contains information regarding Blue Fountain’s current and potential customers.

Blue Fountain alleges that it intended to keep the CRM list secret and took significant measures to guard the secrecy of the CRM list by maintaining password protection. It further alleges that the information, procedures and methods constituting the CRM list are not ascertainable outside Blue Fountain’s organization, have always been treated as proprietary and confidential, and constitute proprietary information and trade secrets.

The claims asserted in this action:

This action seeks, inter alia, damages and a permanent injunctive based on allegations that Metasense obtained its proprietary and confidential information after Metasense hired Antonelli as its employee.  Specifically, Blue Fountain alleges that Antonelli became an employee of Metasense after her termination from Blue Fountain.  She was allegedly hired as “President of Business Development”.  Blue Fountain alleges that during her time of employment at Metasense, Antonelli violated her employment contract with Blue Fountain by contacting many of Blue Fountain’s clients and potential clients, via emails and/or phone calls.

In addition to a claim for a permanent injunction, Blue Fountain alleges the following causes of action against defendants: (1) misappropriation of trade secrets against all defendants; (2) breach of contract against defendant Antonelli; (3) tortious interference with contract against defendant Metasense; (4) unfair competition against all defendants; (5) defamation against all defendants; (6) tortious interference with economic relations against all defendants; (7) unjust enrichment against all defendants; and (8) trespass to chattels against all defendants.

And the application before the Court:

Plaintiff Blue Fountain Media, Inc. moves for an order granting a preliminary injunction enjoining defendants’ use of Blue Fountain’s records and trade secrets, including client lists, potential client lists, client databases, and any other confidential or proprietary information.  Defendant Metasense, Inc. (“Metasense”) opposes the motion and cross moves to dismiss the complaint for lack of personal jurisdiction, for failure to state a cause of action, and based on documentary evidence.  For the reasons set forth below, Blue Fountain’s motion is denied, and Metasense’s cross motion is granted in part and denied in part.

In support of the injunction motion:

Blue Fountain moves for a preliminary injunction, enjoining defendants from using its records and trade secrets, including client lists, potential client lists and CRM list information and/or other confidential or proprietary information of Blue Fountain.  In support of its motion, Blue Fountain submits the affirmation of its counsel Rebecca Adhoot, who alleges that Antonelli called Blue Fountain’s clients and/or potential clients using the pseudonym “Lisa Janowitz” and stated that she works “for a subsidiary of Blue Fountain Media”, but that “Blue Fountain Media overcharges its customers” and that the clients “would be better suited to work with” Antonelli’s current employer.

Blue Fountain also submits an employment agreement entered into between it and Antonelli at the start of Antonelli’s employment on April 1, 2011, under which, inter alia, Antonelli agreed to keep certain information, including information regarding customers confidential and not to solicit Blue Fountain’s customers while she was employed and for three years thereafter.

Blue Fountain also relies on an email from Antonelli to a business contact dated April 11, 2012, showing Antonelli’s contact information at Metasense and on an email dated March 22, 2012, from a prospective client describing a telephone call she received from “Lisa Janowitz”, on March 19, 2012.  The prospective client states, “I don’t know how she [i.e. Antonelli] got my contact information and I find it very strange that she knew all of the information that I placed in your contact form.  She must have access to either your leads or the email account that the contact us form is being sent to.”

In opposition to the motion:

Metasense opposes the motion, arguing, inter alia, that the names and identities of Blue Fountain’s potential customers are in the public domain.  Metasense also denied that it was given any information obtained by Antonelli, who, it asserts, was not an employee of Metasense, but an independent sales representative with no position of authority or direct oversight or control by the company.  Metasense also states that it terminated Antonelli’s independent contractor agreement after 35 days, as a result of Antonelli’s conduct.  In support of its position, Metasense submits a copy of an April 5, 2012 agreement identifying Antonelli as “an independent sales representative”, and stating that she is ”an independent contractor and not an employee”.  Metasense also asserts that the email from the client complaining about “Lisa Janowitz’s” conduct was dated March 22, 2012, which is before it entered into an agreement with Antonelli.

Supreme Court denied Metasense’s motion to dismiss Blue Fountain Media’s causes of action for a permanent injunction:

Next, contrary to Metasense’s position, the complaint adequately states causes of action for a permanent injunction based on allegations that Metasense misappropriated Blue Fountain’s proprietary and confidential information, and that such use will result in irreparable damage.  See generally, U.S. Reins Corp. v. Humphreys, 205 AD2d 187 (1st Dept 1984).  Likewise, the complaint adequately states a claim for misappropriation of trade secrets based on allegations of Metasense’s use of Blue Fountain’s customer lists, CRM lists and other proprietary and confidential information.  In this connection, while Metasense denies that the information is entitled to trade secret protection, at this early stage of the proceeding, this determination cannot be made as a matter of law.  Ashland Mgt. v. Janian, 82 NY2d 395, 407 (1993) (whether information constitutes a trade secret is generally a question of fact).

Tortious interference with contract:

The cause of action for tortious interference with contract is also adequately stated as it alleges the existence of a valid contract between Antonelli and Blue Fountain, Metasense’s knowledge of the contract, its intentional procurement of its breach without justification and damages.  Foster v. Churchill, 87 NY2d 744, 749-750 (1996).  While Metasense asserts that it is speculation as to whether it knew of the contract and asserts that Antonelli committed her wrongful acts before Metasense’s hired her, such assertions do not provide a basis for dismissal prior to discovery.

Tortious interference with prospective business relations:

As for the claim for tortious interference with prospective business relations, Metasense argues that it must be dismissed as Antonelli’s wrongful conduct occurred before Metasense was involved in the matter.  However, as with the tortious interference claim, it is premature to dismiss the tortious interference with prospective business relations claim prior to discovery as the complaint adequately alleges that Metasense intentionally used wrongful means to interfere with prospective business relationships with clients.  See WFB Telecom, Inc. v. NYNEX Corp., 188 AD2d 257 (1st Dept 1992) Iv denied, 81 NY2d 709 (1993).

And unfair competition:

The unfair competition claim likewise cannot be dismissed at this juncture as the complaint adequately pleads such a claim based on various allegations, including that Antonelli emailed Metasense Blue Fountain’s client list.  See ITC Ltd. v. Punchgini, Inc., 9 NY3d 467, 476 (2007) (A claim of unfair competition sounding in misappropriation usually concerns the taking and use of [a party’s] property to compete against the [party’s] own use of the same property…).  Moreover, while Metasense denies it knew of Antonelli’s wrongful conduct, Blue Fountain is entitled to discovery with respect to this issue as to whether Metasense was involved in, or benefitted from, Antonelli’s alleged conduct.

B.O. Technology, L.L.C. v. Dray, 2013 NY Slip OP 51178(U) [Sup. Ct. Suffolk County, June 27, 2013, Emerson, J.]

The Court described the pending application:

In December 2011, the plaintiff, B.O. Technology, L.L.C., a New York limited liability company that provides information technology services, (the “plaintiff”) brought an order to show cause seeking to enjoin preliminarily its former employee, Julien Dray (the “defendant”) from rendering services to the plaintiff’s former customer Maesa Group (“Maesa”).  The plaintiff based its request for relief on the provisions of a non-competition and non-solicitation agreement dated May 26, 2009 (the “Agreement”), between the plaintiff and the defendant.  The plaintiff alleges that the Agreement prohibited the defendant from engaging in a variety of competitive activities for a period of one and one-half years following termination of his employment within the territorial boundaries of the United States or such broader area as covered by the plaintiff’s business (defined in the Agreement as the “Geographic Boundary”).  The plaintiff alleges that the defendant violated certain portions of the Agreement when he accepted a position with Maesa in or about August 2011.  In particular, the plaintiff cites Section (b) subsections (i), (iii) and (iv) of the Agreement which provide, in relevant part, that the defendant shall not engage in the following activities for a period of one and one-half years following termination of the defendant’s employment in the Geographic Boundary:

(i) directly or indirectly engage, own, manage, operate, control, be employed by or consult for, participate in, render services for, or be connected in any manner with the ownership, management, operation, or control of any business in competition with the business of the [plaintiff]…; and

(iii)  directly attempt in any manner to solicit or accept from any customer (emphasis added) of the [plaintiff], with whom the [defendant] had significant contact during the term of the [defendant’s] employment, business competitive with the business done by the plaintiff with such customer; and

(iv) interfere with any relationship, contractual or otherwise, between the [plaintiff] and any other party, including, without limitation, any supplier, co-venturer, or joint venture of the company, or solicit such party to discontinue or reduce its business with the [plaintiff].

And the countervailing contentions:

The plaintiff claimed that the defendant violated these provisions by accepting a position with Maesa in August 2011.  Accordingly, the plaintiff claimed that it suffered irreparable harm and was entitled to injunctive relief.

The defendant opposed the order to show cause arguing, among other things, that the provisions relied upon by the plaintiff were unenforceable under New York law.  The defendant also argued that the plain language of the Agreement did not prohibit the defendant from accepting his position with Maesa.  Finally, the defendant pointed out that the restrictive covenants have expired in accordance with their terms.  For these reasons, the defendant argued that the plaintiff could not demonstrate that it was entitled to the injunctive relief requested.

After a settlement effort by the Court came to naught and discovery proceedings ensued, the Court held an evidentiary hearing that was followed by the submission of post-hearing memoranda.  Supreme Court summarized the testimony:

As previously noted, the plaintiff is a company that provides information technology support to a variety of customers.  The plaintiff’s typical customers are French companies operating in the United States, particularly those whose businesses relate to beauty and/or fashion.  Also, the plaintiff’s customers are typically small companies that do not have information technology expertise in-house.  The defendant began work as a Network Engineer for the plaintiff in or about January 2009.  The defendant’s duties consisted principally of working directly with the plaintiff’s customers on a number of information technology issues as directed by the customer.  The defendant acknowledged that, during his employment with the plaintiff, he had been assigned to work to Maesa.  However, he claimed that, at the time of his email to Mr. Major…he was no longer Maesa’s primary contact at the plaintiff and only worked for Maesa occasionally.  Both parties agree that, during his employment, the defendant performed his job duties well and that the defendant’s assignments became more sophisticated as time progressed.  As a French citizen, the defendant required a work visa, which the plaintiff helped him to obtain.  Sometime in May 2009, after commencing his employment with the plaintiff, the defendant alleges that he was required to sign the Agreement.  The defendant claims that he believed he was required to sign the Agreement as a condition of his continued employment.  The defendant claimed that it was of paramount importance that he maintain continuous employment because, if he became unemployed, his visa status would require him to return to France immediately.

Although he continued his employment with the plaintiff through the summer of 2011, the defendant claimed that he was very unhappy working for the plaintiff.  The defendant testified that in the spring of 2011 he began to look for another job within the information technology industry.  As part of that process, he sent an email to Gregory Major, Co-Chairman and founder of Maesa, asking if Mr. Major knew of any positions that were available and, if so, whether Mr. Major would be willing to forward the defendant’s resume.  The defendant claimed that he was not attempting to solicit a position with Maesa.

The record reveals that, at or about the time of the defendant’s email to Gregory Major, Maesa was re-evaluating their information technology needs.  Evelin Gullon, Maesa’s HR Director testified that Maesa’s business had grown dramatically in the previous year and that such growth had led Maesa to conclude it would be advisable to handle its information technology needs internally.  She testified that Maesa believed creating such a position would promote “economic efficiency”.  She noted that, in June of 2011, the rates charged by the plaintiff for its services had significantly increased and that Maesa and the plaintiff had not been able to reach an agreement as to the rates to be charged by plaintiff for its services.  She testified that Maesa believed its continuing growth would mean that its “help desk” and “server issues” would be best handled internally.  She testified that, once Maesa had decided to create a position internally, it stopped using the plaintiff for its information technology needs.  Ms. Gullon testified that, in accordance with usual practice at Mesa, she created a job description for the position that was eventually offered to the defendant.  Ms. Gullon testified that the position was not created for anyone in particular, nor was it created with the expectation that it would be filled by the defendant.  Ms. Gullon testified that the new position would have been filled whether or not the defendant was available to accept it.  Ms. Gullon recalled that a meeting was held at Maesa at which the new position was discussed.  At this meeting, she recalled that someone suggested the defendant as a potential candidate.  She also recalled that the CFO of Maesa suggested that she contact the defendant about the position.  Ms. Gullon testified that she approached the defendant about the position and conducted a telephone interview.  She stated that she believed the defendant was approached because of his character and customer skills, as well as his general IT skills.  Upon completion of the interview process, Maesa offered the position to the defendant.

The defendant testified that he was initially offered a part-time position at Maesa in August of 2011 and that he became a full-time employee in January 2012.  He described his responsibilities at Maesa as broader than his responsibilities for the plaintiff.  In his position as Director of Information Technology, he is responsible for all aspects of Maesa’s IT work in each of its offices in New York, Los Angeles, Paris and China.

In its order to show cause, the plaintiff sought injunctive relief restraining and enjoining the defendant from rendering services to Maesa for a period of one and one-half years from the date of the defendant’s resignation.  The record reveals that the defendant resigned from his employment on or about August 26, 2011.  Thus, the restricted period set forth in the Agreement expired in February 2013.  However, the court did not receive the parties’ submissions until March 8, 2013.  Although the court agrees with the defendant that, as the restricted period has expired, the plaintiff is no longer entitled to injunctive relief, the court finds that, in any event, the plaintiff cannot prevail on the merits.

Justice Emerson summarized the applicable law:

The party seeking a preliminary injunction must establish (1) a likelihood of success on the merits, (2) irreparable harm in the absence of an injunction, and (3) a balancing of the equities in favor of granting the injunction, (see, Taub v. Kaplan, 15 Misc 3d 1145[A] at *2 [and cases cited therein]).  The party seeking the preliminary injunction has the burden of establishing a prima facie entitlement to such relief (Id.).  The court finds that the plaintiff has failed to meet its burden.

New York courts have long held that, since there are powerful considerations of public policy which militate against sanctioning the loss of a person’s livelihood, restrictive covenants which tend to prevent an employee from pursuing a similar vocation after termination of employment are disfavored by the law (Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 NY2d 496, 499 [1977]).  Restrictive covenants that restrict an employee’s ability to compete must meet the test of reasonableness (BDO Seidman v. Hershberg, 93 NY2d 382, 388-389 [1999]).  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 (Id at 389).  A violation of any prong of this three-prong test renders the covenant invalid (Id).  In addition to the test of reasonableness, a covenant will only be subject to specific enforcement if it is reasonable in time and area (Id.).  In articulating this standard, the Court of Appeals made it abundantly clear that the test of reasonableness focuses on the particular facts and circumstances of the case at bar and that the agreement in question will be evaluated in light of such facts and circumstances.  The goal of this test very clearly is to prevent unfair competition(emphasis added) while still leaving room for fair and unrestricted competition (BDO Seidman v. Heishberg, supra at 391; see Columbia Ribbon and Carbon Manufacturing v. A-1-A Corp., supra at 499).

Continuing customer relationships are often the focus of restrictive-covenant litigation.  The Court of Appeals has recognized that an employer may have a legitimate interest in preventing an employee from making competitive use for a time of information or relationships which pertain particularly to the employer and which the employee acquired in the course of the employment.  (BDO Seidman v. Heishberg, supra at 391, quoting Blake, Employee Agreements Not To Compete, 73 Harv L Rev 625, 647).  Thus, New York law has recognized that the employer has a legitimate interest in preventing former employees from exploiting or appropriating the goodwill of a client or customer that has been created and maintained at the employer’s expense to the employer’s competitive detriment (BDO Seidman v. Heishberg, supra at 392 [emphasis added]).  New York law recognizes that not all employee competition is prohibited and that the competition an employer seeks to restrain must contain elements that render the competition unfair.  When evaluating a customer relationship acquired during employment, the focus is whether such relationship is being used by an employee to the employer’s competitive detriment.  A restriction that does not pertain to competitive activity would constitute a restraint greater than is needed to protect the legitimate interest of the employer (Id.).

And applied the facts to the law:

In the present case, the defendant is not competing with the plaintiff.  The defendant did not start a competing business, nor did he leave his employment with the plaintiff to work for one of the plaintiff’s many competitors.  The alleged violation of the Agreement is his accepting the position created by Maesa.  Although the defendant was introduced to Maesa through his work for plaintiff, the court finds that he did not violate the terms of the Agreement, exploit customer relationships, or appropriate his employer’s good will.  It is clear from the record that, by creating an in-house position, Maesa’s intent was to end its use of the services provided by the plaintiff.  The court finds that Maesa’s decision was not brought about by any action by the defendant.  Maesa concluded that it would create the in-house position of IT Director due to expanding needs and rising costs, as described by Ms. Gullon.  While the defendant freely admitted that he sent an email to Maesa during the period of time when Maesa was creating the position, the defendant’s actions did not cause or influence Maesa’s decision, and Maesa did not create the position for the defendant.  Maesa’s goal was to terminate its use of outside IT services such as those offered by the plaintiff.  The record demonstrates that the creation of the position had nothing to do with the defendant or any of his activities.  That the defendant was familiar to Maesa, that he was seeking new employment, and that Maesa knew the defendant’s work and temperament do not constitute the type of exploitation or appropriation of customer good will or employer capital that would support a restriction under New York law.  The defendant played no role in bringing about the events in question.  The record is clear that the plaintiff would lose Maesa’s business whether or not the defendant took the job.  Even Thierry Duclay, the President of the plaintiff, recognized that their market niche is small companies in the beauty and fashion industries.  He conceded that, although the plaintiff offers efficient low-cost services, its customers sometimes grow big enough to need their own IT staff, which normally causes the plaintiff to lose income.  Such circumstances cannot be controlled by the plaintiff’s covenant not to compete.  Enforcing the covenant would provide no benefit to the plaintiff.  It would merely prevent the defendant from accepting the position at Maesa.  Therefore, the court finds that the restriction is far broader than the plaintiff’s legitimate interest.  Accordingly, the motion is denied.

Willis Group Holdings plc v. Hanrahan, Sup. Ct. New York County, Index No. 651932/2012, June 21, 2013 (Schweitzer, J.)

After working at Willis Group, an insurance company for the aviation industry, for four years, allegedly as “the highest ranking employee in the western hemisphere and [as] second in command to the entire practice group”, Hanrahan resigned to accept employment as leader of a competitive practice  with Marsh Aviation.

According to Willis’ attorney:

Mr. Hanrahan indicated that his last day of employment would be June 7.  He advised Mr. Smaje that he was going to be joining Marsh the world’s largest insurance broker and a major competitor of Willis.

On May 28, 2013, Mr. Hanrahan was notified he was being placed on garden leave effective the date of his written resignation and that it was going to end on November 24, 2013.  He was advised pursuant to Restrictive Covenant Agreement…that he had signed on or about January 16, 2010, that [during] the garden leave period he would be paid his salary and COBRA.

The issue before the Court was whether Willis could enforce a so-called “garden leave” provision in Hanrahan’s employment agreement that Willis asserted prohibited Hanrahan “from working for March [for six months] during which time he would be paid his full salary and during which time his family [would] be covered entirely under the COBRA obligations.”

Willis moved for a preliminary injunction and Hanrahan cross moved for a declaratory judgment.

The Court summarized the facts:

Plaintiff Willis Group Holdings plc WGL or plaintiff seeks a preliminary injunction restraining defendant Joseph G. Hanrahan from violating the terms of the restrictive covenant that he allegedly entered into with the plaintiff.

Defendant Mr. Hanrahan makes a cross motion for declaratory judgment seeking to narrow certain non-solicitation provisions contained in his separate employment agreement between him and Willis New York, not a party to this case and not formally before the Court in this current proceeding.

Background.  Mr. Hanrahan was employed by an indirect subsidiary of the plaintiff.  That is Willis of New York as President of Willis Aerospace and Chief Executive Officer of Aerospace America and was the highest ranking for Willis Aerospace in North America and Latin America.  This job entailed overall profit and loss responsibility for a group of 65 employees scattered throughout ten offices in the United States, Canada and the United Kingdom.

In this role, he was entrusted with among other things confidential proprietary and competitively sensitive client and prospective client information in addition to Willis Aerospace’s own business information and trade secrets.

The applicable law as to trade secrets:

Under New York law “a trade secret may consist, in part, of any compilation of information which is used in one’s business and which gives the owner the opportunity to obtain an advantage over competitors who do not know or use it.”  That cite is Estee Lauder Companies Inc. v. Batra, 430 F Supp 2 158 (SDNY 2006) and that’s quoted from the Restatement of Torts Section 757.

Applied the law to the facts.

In addition to the information Mr. Hanrahan possesses that constitutes trade secrets pertaining to each of Willis Aerospace’s existing clients’ current and historical revenues, insurance premiums, fee structures, contact information for client representatives and satisfaction or dissatisfaction with Willis Aerospace’s services, Mr. Hanrahan also possesses information pertaining to Willis Aerospace’s marketing and development strategies and business information from prospective client list which he obtained while he was given the opportunity to develop and maintain special and unique relationships with Willis Aerospace’s prospective clients like Northrop Grumman Corporation and Honeywell International, Inc.

On several occasions commensurate with his management position with the plaintiff, he was offered the opportunity to own shares in WGH by being granted stock options.

One set of options and awards that he received in the late fall of 2009 is at the heart of the current dispute and plaintiff’s request for a preliminary injunction.  This is because there exist[s] an Agreement of Restrictive Covenants and Other Obligations, the RCA executed by Mr. Hanrahan in January 2010 in which he ostensibly agreed inter alia that for six months immediately following his resignation of employment from Willis Aerospace he would not directly or indirectly work for [a] Willis Aerospace Competitor.

The RCA specifically provides that during the six-month period Mr. Hanrahan will continue to be paid his base salary of $425,000 and the costs of his COBRA continuation coverage for his family even as he is not required to perform any of his duties or responsibilities.

It is this so-called garden provision which defendant challenges here as he seeks to start work with a direct competitor of Willis in the business of aerospace insurance, Marsh USA.

At the outset it would be beneficial to restate the standard for issuance for preliminary injunction.  To obtain one, a movant must demonstrate a prima facie case of the likelihood of success on the merits, irreparable injury absent the preliminary injunction and a balancing of the equities in the movant’s favor.  I have two sites for that.  Yedlin v. Lieberman, 102 AD 3d 769 Second Department 2013 and Gilliland v. Acquafredda Enterprises LLC 92 AD 3d 19 First Department 2011.

And granted the preliminary injunctive relief sought by Willis Group against Hanrahan:

Cutting to the heart of the matter in the Court’s view, this case comes down to only one question, has the movant here demonstrated by clear and convincing evidence that it has a probability of success on the merits.

With respect to the other two requirements for preliminary injunction, the Court is amply persuaded that the plaintiff would suffer irreparable injury absent the injunction and that the balance of the equities does favor the plaintiff.

Briefly then, dealing with these two other requirements, the Court agrees with plaintiff’s counsel that Mr. Hanrahan has been far more than what he portrays himself to have been with Willis, that being these are the words of the plaintiff’s counsel, a glorified salesman.

On the contrary, the Court is of the view that Mr. Hanrahan has been a key player on the Willis team at the top and with access to sensitive pricing and competitive information that makes him an extremely valuable commodity in a niche aerospace industry where insurance needs and rates are ever changing.

This is especially so at this particular time when as the Court understands it the annual insurance renewal season will take place in the fall.  This makes it an especially competitive time in the industry and a time when a respected knowledgeable player like Mr. Hanrahan can add real value to a company’s team in strategizing to take business from competitors, being the visible presence as the team leader and simply accessing the many relationships he has built up throughout the industry in his years at Willis and at Aon before that.

After all, as Marsh admitted in its affidavit, Mr. Hanrahan has been on Marsh’s “radar screen” for some time now and what better time to bring him on board than just before the season where there is a tectonic shift of business relationships in the industry and clients move from one company to another to form new alliances based on a while host of factors that someone like Mr. Hanrahan is privy to.

So, there is indeed irreparable harm to be suffered here by the plaintiff and it is not harm that necessarily can be quantified in damages at this or any other time because one or more clients switches or retentions for that matter can last for much longer than a year thus making it especially difficult to reduce to a damage award.

In short, irreparable harm is present.

Next, we look at the balance of the equities.  Even as the Court takes into account the public interest that we all have in wanting to foster people working in their chosen occupations in order to live the happiest most productive lives, there are times when circumstances do come together to tip the balance the other way.

This is one of them.

Mr. Hanrahan’s garden agreement if you will, if it’s binding and enforceable and we’ll get to that in a minute will take him out of the work force for the next six months to be sure but he will be receiving full compensation during that time period in addition to health benefits without being required to do anything for his former employer and allowing him to work in an unrelated field should he so desire.

Moreover, just a few months before announcing his decision to leave Willis, Mr. Hanrahan decided to cash in some of that stock which was the subject of the award he received in 2009.  1250 shares on November 9, 2012, shortly before announcing his departure.

This together with the remaining shares he continues to hold from other awards and this award adds to Mr. Hanrahan’s side of the ledger when considering the equity balance.  When weighted against the position his now former employer is in as it must scramble to put together a new far less experienced team to lead it at a time of year when business is most fluid in the aviation insurance industry thus leaving that company on an uncertain footing, clearly tips the balancing of the equities even further in the plaintiff’s favor.

Clearly, there are no “one size fits all” solutions for applying BDO Seidman to every action in which an employer alleges that a former employer either breached a restrictive covenant, on the one hand, and/or engaged in an unfair trade practice, on the other.  In each case the Court is required to apply the tri-partite BDO Seidman test, in general, to the specific agreements, facts and circumstances of the proceeding, in particular.

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