Plaintiff IDG USA, LLC (“IDG”), a Georgia company with its principal place of business in North Carolina, commenced an action against a former employee, Kevin J. Schupp (“Schupp”), a New York resident, alleging breaches of a Non-Compete Agreement, breach of a Confidentiality Agreement, unfair competition, and theft of trade secrets.

In a 12 page decision, IDG USA, LLC v. Schupp, Slip Copy, 2010 WL 3260046 (W.D.N.Y. Aug.18, 2010), the District Court granted IDG’s Motion for a temporary restraining order and preliminary injunction, enjoining Schupp from: (1) working for any competitor of IDG within 50 miles of IDG’s Amherst, New York office, (2) soliciting orders from IDG’s identified “major” customers with whom Schupp had had contact , and (3) disclosing or using confidential information and/or trade secrets of IDG. The court also denied Schupp’s Rule 12(c) cross-motion to dismiss the Complaint, expressly finding that IDG’s allegations that Schupp used his knowledge of IDG’s major, revenue-generating customers and its pricing policies for the benefit of his new employer, and disclosed information regarding IDG’s Amherst Office’s control over pricing issues to one of those customers were sufficient to render the causes of action plausible for purposes of a Rule 12(c) analysis.

The Complaint alleged that IDG is a national distributor and supplier of industrial materials, has a Northeast Division, with a principal office in York, Pennsylvania, an a regional office in Amherst, New York, which  is responsible for the company’s customer base in upstate New York and western Pennsylvania.  It was further alleged that in 1998, IDG acquired Schupp’s previous employer, AFL, and retained most of AFL’s employees including Schupp, whom immediately began working out of IDG’s Amherst, New York office as a Sales Associate.  IDG claimed that Schupp serviced many of IDG’s major revenue generating clients, most, if not all of whom were assigned to Schupp by IDG, which had preexisting relationships with the clients.

The operative agreements before the District Court were a Non-Compete Agreement (the “NCA”) and a Confidentiality Agreement, entered into between IDG and Schupp.  The Court found that Schupp received “additional compensation in the amount of Three Thousand Dollars ($3,000) in consideration for his execution, delivery, and performance of th[e] [NCA] .”   Notably, the Court found that the NCA restrained Schupp, for the period of one year from the date of the termination of his employment with IDG, from accepting employment with any competitor of IDG, for work similar to that he performed at IDG, within a fifty (50) mile radius of any office to which he was assigned during the twelve months prior to the termination.

The Complaint went on to allege that on January 14, 2010, Schupp voluntarily terminated his employment without advance notice, and that within days after his resignation he commenced employment as a sales representative with Abrasive-Tool Corp. (“Abrasive”), a company that sells many of the same products as IDG and offers customers similar services.  It was shown that Schupp worked out of Abrasive’s Buffalo office, which is within ten miles of IDG’s Buffalo office.  The Court found that Schupp had solicited orders on behalf of Abrasive from long-standing, major revenue producing clients he was assigned to service and entertain during his employment with IDG, and further disclosed to an IDG customer confidential information regarding its Amherst Office’s control over pricing issues.

Of primary interest, the District Court found that IDG had demonstrated the threat of irreparable harm by Schupp’s conduct by reason of: (a) Schupp’s contacting three “Major Customers” of the  company” (identified by the Court as customers whose purchases from IDG exceeded $25,000 in the previous twelve months) and quoting prices for Abrasive’s goods and services to one of these Major Customers; (b) three Major Customers requesting pricing information and quotes from IDG, something they had not required in the previous ten years; (c) another Major Customer informing IDG that it would no longer do business with IDG; and (d) the fact that the month following Schupp’s resignation from IDG, IDG experienced a reduction in its sales to ten of the thirteen Major Customers which had been serviced by Schupp.

Specifically, the Court held:

Here, IDG has sufficiently demonstrated that Schupp violated paragraph 7(a) of the NCA when he commenced work at Abrasive, as a sales associate in its Buffalo office, immediately after resigning from IDG. Likewise, IDG has sufficiently demonstrated that Schupp immediately began soliciting orders on Abrasive’s behalf from IDG’s Major Customers in violation of the NCA’s paragraph 7(b). Schupp does not dispute IDG’s attestations in this regard. In addition, the NCA expressly provides that “if Schupp is permitted, after cessation of his employment with [IDG], to trade upon th[e] training and th[e] confidential information which he had received by virtue of his position of trust and confidence with [IDG] … irreparable damages will result to [IDG],” and that “any breach of the [NCA’s] covenants … would not be readily or appropriately compensable in damages”  Courts have found that such language in an employment agreement “ ‘might arguably be viewed as an admission by [the former employee] that plaintiff will suffer irreparable harm were he to breach the contract’s non-compete agreement.’ ” On the evidence presented at this juncture, including the NCA’s provisions, Schupp’s conclusory assertion that any damage to IDG can be rectified by a monetary award is rejected.

Finally, the Court rejected Schupp’s argument that IDG had “materially breached” the NCA by reducing his annual salary from that stated in the NCA, prior to his resignation. IDG argued that because the salary reduction was not a “material breach,” Schupp was not excused from performance of his obligations and, in any event, Schupp waived any breach when he continued to work for IDG after his salary was modified.  The District Court found IDG’s contentions that it did not materially breach the agreement and that Schupp acquiesced to a modification of the NCA consistent with New York decisional authority involving employment agreements similar to the NCA, citing: In re Footstar, Inc., 04-22350, 2007 Bankr.LEXIS 2302, at *12-13 (S.D.N.Y. July 6, 2007); Hanlon v. MacFadden Publications, 302 N.Y. 502, 505, 99 N.E.2d 546 (1951)); Bottini v. Lewis & Judge Co., 211 A.D.2d 1006, 1007-1008, 621 N.Y.S.2d 753 (3d Dep’t 1995); Dwyer v. Burlington Broadcasters Inc., 295 A.D.2d 745, 745-746, 744 N.Y.S.2d 55 (3d Dep’t 2002); Gebhardt v. Time Warner Entm’t-Advance/Newhouse, 284 A.D.2d 978, 978-9, 726 N.Y.S.2d 534 (4th Dep’t 2001); Bottini, 211 A.D.2d at 1007-1008, 621 N.Y.S.2d 753; and Mosely v. Island Computer Prods., 2006 U.S. Dist. LEXIS 6437, 2006 WL 318815, at *2-4 (E.D.N.Y. Feb.9, 2006).

The Georgia Court of Appeals issued two decisions in July addressing restrictive covenants in Georgia. In both instances, the Court of Appeals upheld trial court findings that the covenants were unenforceable under existing Georgia law.

In Peachtree Fayette Women’s Specialists, LLC, v. Turner, the Court of Appeals agreed with Superior Court Judge Tommy Hankinson of the Griffin Judicial Circuit that a non-compete provision is unenforceable if it covers any territory in which the employee did not work. The non-compete provision in question restricted Dr. Heather Turner from practicing at a number of hospitals, including Piedmont Hospital in Atlanta. The record reflected that Dr. Turner never worked at Piedmont Hospital and that the physicians at Peachtree Fayette Women’s Specialists had resigned their staff privileges there. PFWS argued that because its principal, Dr. William Cook, had worked previously at Piedmont and established it as a referral source, it had a legitimate interest in preventing competition there. The Court of Appeals rejected this argument, noting that Dr. Turner did not work at Piedmont and therefore that PFWS did not have an interest in preventing her from working there. Because current Georgia law does not permit modification of restrictive covenants in employment agreements, the entire non-compete was invalidated, including the provisions that did protect PFWS’s legitimate interests.

In Fine v. Communication Trends Inc., the Court of Appeals agreed with Fulton County Superior Court Judge Melvin Westmoreland that a customer non-solicitation provision was unenforceable because it prevented contact with customers with an eye to providing competitive services. The case was contested between Communications Trends, a business engaged in media planning, purchasing, and cable network programming, on the one hand and its former employee Lynette Fine, on the other. Fine’s new employer, Allscope Media, was also a party. The non-solicitation covenant at issue stated as follows:

4. Nonsolicitation of Clients. The Employee hereby also agrees and covenants with [CTI] that throughout the period of his employment and for a period of two (2) years immediately following cessation of Employee’s employment with [CTI], the Employee shall not solicit advertising media placement business similar to [CTI] on behalf of any persons or entity other than [CTI], either directly or indirectly, whether as a shareholder, partner, joint venturer, consultant, employee, officer, agent or otherwise, from any person or entity (or otherwise contact, call upon, communicate with or attempt to communicate with any such person or entity with a view to providing advertising media placement services competitive or potentially competitive with [CTI][.] )

(Emphasis added.) The trial court found and the Court of Appeals agreed that the highlighted portion rendered the entire provision unenforceable because it would prevent Fine from communicating with customers that seek her out. Georgia law permits employers from preventing competitive solicitation by former employees, but it forbids covenants that purport to prohibit acceptance of business. The Court of Appeals found that CTI’s covenant ran afoul of this rule.

(As an aside, the trial court’s finding that the covenant was unenforceable prevented the resolution of a very interesting factual question. The record reflected that Fine attended a large cable industry dinner after joining Allscope and provided her new Allscope business cards to executives affiliated with CTI’s clients.  Fine testified that she informed CTI’s clients that she was not allowed to solicit them and that they would have to provide a statement in writing that she had not done so in order to continue doing business with her at Allscope. Fine further testified that if CTI’s clients contacted her and sent emails stating that they had not been solicited, she accepted their business. Fine’s activity falls in the gray area of solicitation and would have presented a difficult question for a fact-finder.)

The Court of Appeals also found that Fine did not violate the non-disclosure of confidential information provision of her agreement with CTI when she provided revenue projections to Allscope. The fact that the revenue information was not client-specific proved to be decisive.

The Court of Appeals did, however, reverse the trial court’s decision to grant Fine’s motion for summary judgment on a duty of loyalty claim brought by CTI. CTI alleged that Fine breached her duty of loyalty by: (1) making detailed disclosures to Allscope regarding the revenues generated by various CTI clients; (2) failing to provide adequate notice prior to her resignation; and (3) deleting client contact information and destroying CTI’s files that had been in her possession. The Court of Appeals found that the former two allegations were insufficient to state a claim for breach of the duty of loyalty, but the final allegation was sufficient. 

             On July 27, the United States Court of Appeals for the Third Circuit affirmed a district court’s order enjoining a senior executive from Bimbo Bakeries USA, Inc., from working for one of Bimbo’s competitors, Hostess, until after the district court resolved the merits of Bimbo’s misappropriation of trade secrets claim against the executive. Among other trade secrets at issue in the lawsuit is the recipe for Thomas’ English Muffins, which were estimated to account for approximately $500 million in Bimbo’s annual sales income. Defendant Chris Botticella is alleged to be one of only seven people who possess all of the knowledge necessary to replicate independently the muffins.

            The Circuit Court affirmed the district court’s finding that Bimbo was likely to prevail on the merits of its misappropriation of trade secrets claim under Pennsylvania’s Uniform Trade Secrets Act (“PUTSA”). Specifically, the Circuit Court left undisturbed the district court’s determination that Bimbo likely would be able to prove at trial that Botticella would misappropriate Bimbo’s trade secrets if allowed to work at Hostess.

            The Circuit Court focused on PUTSA section 5303 and related case law, which allows courts to enjoin actual or threatened misappropriation of trade secrets. The district court’s finding that there was “[a] substantial likelihood, if not an inevitability, that [Botticella] will disclose or use Bimbo’s trade secrets in the course of his employment with Hostess,” was proper, held the Circuit Court. In so holding, the Circuit Court rejected Botticella’s argument that the district court could only issue an injunction where it is shown that it would be “virtually impossible” for Botticella to perform his new job at Hostess without disclosing trade secrets.

            In reaching this holding, however, the Circuit Court took exception with the district court’s analysis of Pennsylvania’s law concerning the “inevitable disclosure” doctrine. Specifically, the Circuit Court noted that “[w]hile we agree…that Pennsylvania law empowers a court to enjoin the threatened disclosure of trade secrets without requiring a plaintiff to show that disclosure is inevitable, we do not consider that an injunction granted absent such a showing was issued pursuant to the ‘inevitable disclosure doctrine’.” Rather, said the Court, an injunction enjoining one from assuming particular employment may issue where the facts of the case demonstrate a substantial threat of trade secret misappropriation.

            Citing the district court’s findings of fact, the Circuit Court held that the district court had, and properly exercised, discretion to enjoin Botticella from working at Hostess to the extent his proposed employment there threatened to lead to the misappropriation of Bimbo’s trade secrets. The Circuit Court noted that, among other things, the district court found that (1) Botticella had accessed via his laptop computer in his final days at Bimbo highly sensitive information belonging to Bimbo which information would have been damaging to Bimbo if obtained by a competitor; (2) Botticella’s explanation at deposition regarding his suspicious use of the laptop was “confusing at best” and “not credible”; and (3) Botticella’s conduct following his acceptance of the Hostess job offer demonstrated his intention to use Bimbo’s trade secrets during his employment with Hostess. As to this latter point, the district court found that Botticella (a) did not disclose to Bimbo his acceptance of a job offer from a direct competitor and remained in his position to receive Bimbo’s confidential information, (b) received Bimbo’s confidential information after his acceptance of the Hostess job offer, and (c) copied trade secret information from his work laptop onto external storage devices.

The Third Circuit’s decision provides guidance to employers as to the showing required to enjoin former employees from assuming new employment where the facts show that there is a substantial threat of trade secret misappropriation.

On July 28, 2010, Seyfarth Shaw will continue its webinar series on trade secrets, with a focus franchise and dealer relations.

The fourth webinar of the 2010 series will focus on how to protect trade secrets, trade dress/marks, and goodwill while maintaining and enhancing successful franchises and dealerships. These are often the core assets of a franchise or dealership, and this webinar will present an overview of what assets are protectable, how those assets can be protected, what state and federal laws can be used to protect these assets, and what can be done if these assets are threatened.

Among the topics discussed will be

  • Common protectable interests such as trade secrets, trade marks, trade dress and goodwill 
  • Best practices for the protection of these assets during the franchise, dealership or distributor relationship, including the use of confidentiality and/or non-competition agreements at the beginning of a business relationship and registering trade dress/marks
  • State and federal law that can be used to protect trade secrets and brands such as the Uniform Trade Secret Act, the Lanham Act, unfair competition statutes and common law
  • What a company must show to prevail in litigation and what he company may recover if successful

Our panel consists of attorneys with significant experience advising franchise, dealer, and distributor clients on protecting their brands, trade secrets, and other intellectual property, including litigating trade secret cases, drafting protection agreements and conducting trade secret audits. on trade secret issues, including  litigating trade secret cases, drafting protection agreements and conducting trade secret audits. CLE credit will be available for participants.

Register here.

In New York, injunctive relief will not be awarded unless the plaintiff sets forth specific non-monetary harm to Plaintiff in a trade secret case.

In Systems Management Planning, Inc., v. Gordon, 23 Misc.3d 1104(A), 2009 WL 901514 (N.Y.Sup.) (Sup. Ct., Monroe Co, April 3, 2009), the court, in determining a preliminary injunction, assumed that the trade secret status of the information and the fact of its misappropriation has indeed occurred and therefore focused on the issue of irreparable harm and the “related” doctrine of inevitable disclosure. 

Plaintiff asserted that, in all cases, irreparable harm is presumed when trade secrets have been misappropriated. The Gordon court first noted that “no appellate case in New York has laid down such a hard and fast rule” and the subsequently declined to adopt such a rule citing the recent Second Circuit decision in Faiveley Transport Malmo AB v. Wabtec Corp., — F.3d at —, 2009 WL 636020 (2d Cir. Mar. 9, 2009) (such a presumption “might be warranted in cases where there is a danger that, unless enjoined, a misappropriator of trade secrets will disseminate those secrets to a wider audience or otherwise irreparably impair the value of those secrets.”)

The Gordon court, applying the principles of Faiveley Transport, concluded that plaintiff in that case had not adduced clear evidence of irreparable harm. Instead, the court found the plaintiff’s moving affidavit wholly lacking, because it merely stated in conclusory fashion that the defendants had used the confidential and proprietary information that they stole to unfairly divert business and solicit certain specified customers. The court held that these “conclusory assertions wholly fail to show how this worldwide $20 million business cannot readily ascertain its damages if successful in proving that the claimed diversion of six customers resulted from defendant’s misuse of wrongfully appropriated trade secret information, instead of what defendants insist was legitimate competition occurring in the absence of a confidentiality agreement or restrictive covenant.”

In a case brought by a seller of camouflage clothing against a competitor, the U.S. District Court for the District of Montana held recently that just because “something is confidential does not mean it is a trade secret,” and the court granted the defendants’ summary judgment motion. Montana Camo, Inc. v. Cabela’s, Inc., Civ. Ac. No. CV-08-71-BLG-RFC, 2010 U.S. Dist. LEXIS 57895 (D. Mont., June 11, 2010). 

Montana Camo sued Cabela’s, alleging that Cabela’s violated Montana’s Uniform Trade Secrets Act by misappropriating Montana Camo’s confidential sources of supply, marketing information, patterns, and technical information used in making its products. With respect to the names of Montana Camo’s suppliers, however, the court held that most of the relevant information was readily ascertainable, that Cabela’s had not even used certain of the suppliers, and that Cabela’s began purchasing from one of the suppliers before Montana Camo was formed. Since the customer and dealer identification was available on Montana Camo’s website, it was not secret. The technical information to which Montana Camo claimed proprietary rights was determined to be generally known or otherwise not misappropriated. Finally, the court said that even if the supposedly confidential cost, pricing and marketing information referred to by Montana Camo could ever constitute something other than “nebulous concepts” insufficient to be considered a trade secret, Montana Camo had not detailed it adequately to defeat the summary judgment motion.

 A recent decision by the Commercial Division in New York County requires specific pleading security measures to establish trade secret protection under New York law.  Clean Earth Holding, Inc. v. Kopenhaver, et al., Ind. No. 604077/2007, Sup. Ct., NY Co., Commercial Part (Ramos) (April 26, 2010) (Unpublished)

Clean Earth is in the business of treating, recycling, reusing, transporting, and disposing of contaminated soil, dredge sediments, and other non-hazardous and hazardous materials. Clean Earth’s success was alleged to have been due to its unique position in the marketplace, pricing strategies, exclusive arrangements with third-party disposal facilities, and its client base that it had developed over the years.

Clean Earth alleged that defendant Richard Rivkin had breached his fiduciary duty by soliciting certain Clean Earth clients after his employment with Clean Earth was terminated. Clean Earth predicated this cause of action on the theory that its "Client List" was a trade secret and that Rivkin breached his fiduciary duties by providing the Client List to a competitor.

Justice Ramos noted the six factors that are considered in trade secret claims are:

 (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.’"

 

 Justice Ramos then indicated that trade secret protection does not apply to names, addresses, and telephone numbers of clients or potential clients, if the information is readily available from public sources, such as a local telephone directory.

In dismissing the fiduciary duty claim on summary judgment, Justice Ramos first ruled that certain representations in a client certification that the Client List "is protected within our company in a number of ways, and access to the information is restricted internally" failed to demonstrate with sufficient detail the measures that were taken to guard the information’s secrecy. Justice Ramos then held that "Clean Earth fails to raise a triable issue that the Client List was not readily ascertainable to those in the industry or that it was compiled through great effort and expense. Therefore, it fails to demonstrate that the Client List qualifies as a trade secret."

A recent decision by the United States Court of Appeals for the Second Circuit is a not so subtle reminder that a company must adequately protect its confidential client information at all levels of the company in order to receive trade secret protection under the law. In Nationwide Mutual Insurance Company v. Mortensen, Nationwide insurance agents left Nationwide to work for a competitor.  In doing so, the agents took with them confidential information about Nationwide policyholders. The confidential information included personal client information and data about the client’s needs and purchasing history. The agents received this information while working for Nationwide and the information was kept in two places, Nationwide’s protected computer system and the agent’s personal policyholder file.

The agents shared the confidential client information with Nationwide competitors while looking for alternative employment. Not surprisingly, the agents also used the confidential client information to compete with Nationwide once they joined a competitor. Nationwide filed suit against the agents alleging, among other things, that the agents violated the Connecticut Uniform Trade Secrets Act (CUTSA) when they improperly retained the confidential client information and shared the information with Nationwide competitors. 

Unfortunately for Nationwide, the trial court found, and the Appellate Court affirmed, that Nationwide could not seek protection under the CUTSA. The basis for the Courts’ decision was the lack of adequate protective safeguards that would prevent the disclosure of the confidential client information found in the agent’s personal policyholder files. The fact that the confidential client information was properly protected in a secure computer system was irrelevant because confidential information has to be “adequately protected” at all company levels in order to be protected by the CUTSA. Since Nationwide did not adequately protect the confidential information contained in the agent’s policyholder files, Nationwide could not use the measures found in the CUTSA (injunctive relief, punitive damages, attorneys fees, etc.) to thwart the agent’s removal and subsequent use of Nationwide’s confidential client information.

A trade secrets audit may have enabled Nationwide to receive trade secret protection under the CUTSA. A trade secrets audit identifies the location(s) of confidential information, individuals who possess or need to possess the confidential information, and steps a company can take in order to keep the information confidential and, if necessary, seek protection under the Uniform Trade Secrets Act.

On May 19, 2010, Seyfarth Shaw will continue its webinar series on trade secrets and restrictive covenant issues with a focus on California.  

The third webinar of the 2010 series will focus on how California trade secret law is similar and diverse from other jurisdictions, including a discussion of the California Uniform Trade Secrets Act, trade secret identification requirements, remedies, and the interplay between trade secret law and Business and Professions Code Section 16600, which codifies California’s general prohibition of employee non-compete agreements. The webinar will also cover effective California trade secret protection policies and practices.  Among the topics discussed will be

  • Defining and understanding trade secrets in California 
  • Comparison between California trade secret law and other jurisdictions
  • Protecting trade secret assets in California and remedies for trade secret misappropriation
  • Appropriate policies and practices to effectively protect trade secrets, including hiring and termination protocols, a discussion  regarding the use of restrictive covenants, and effective computer and physical security practices

Our panel consists of attorneys with significant experience advising clients on trade secret issues, including  litigating trade secret cases, drafting protection agreements and conducting trade secret audits. CLE credit will be available for participants.*

Register here.

 

The Los Angeles County Bar Association’s Corporate Law Departments Section is hosting a luncheon program entitled "Employees Run Amok: A Roundtable Program on Recent Developments in California Trade Secrets Law And Covenants Not To Compete" for in-house counsel on Thursday, April 22, 2010 at Seyfarth Shaw LLP’s Century City, California office.

The meal/reception will start at 11:30 a.m. followed by the program which will run from 12:15 p.m. through 1:15 p.m. 1 hour of CLE credit will be provided. Seyfarth’s office is located at 2029 Century Park East, Suite 3500, Los Angeles, California 90067.

This will be an informative program for in-house counsel on the latest developments in California trade secret law and best practices for protecting trade secret and confidential information.

To register for the program, please click here [http://onlinestore.lacba.org/calendar/index.cfm?fuseaction=ViewCalendarEvent&CalendarEventID=3196] or contact LACBA’s Member Services Department at 213-896-6560. You do not need to be a LACBA Member to attend.