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We have previously written about Sergey Aleynikov, a former computer programmer for an investment bank who beat federal charges of trade secret theft under the Economic Espionage Act in 2012.  Although Aleynikov was initially convicted of these charges, the Second Circuit Court of Appeals overturned his conviction, finding that the trade secrets relating to the source code Aleynikov had taken were not related to a product “produced for. . . interstate or foreign commerce,” and thus, were not entitled to protection under the Act.   In response to this decision, Congress passed the Trade Secrets Clarification Act (see our prior post for additional coverage), which expands the original Economic Espionage Act to include a trade secret related to a product or service used in or intended for use in interstate or foreign commerce. The change was intended to prevent results like the Second Circuit’s decision in Aleynikov.

Although the federal case against Aleynikov has long since ended, Aleynikov is now facing a second prosecution in the New York state courts.  In January 2013, Aleynikov and his attorney argued that these charges were similar to the original federal charges, and were being brought “only because federal prosecutors couldn’t get him.”  Aleynikov’s lawyer, Kevin Marino, argued that the state prosecution amounted to double jeopardy, and violated his client’s Fifth Amendment rights.  However, in a ruling last month, Judge Ronald Zweibel rejected this argument, finding successive prosecutions in federal and state court were not prohibited. Furthermore, the successive prosecutions were not barred because the federal and state cases had been filed under separate statutes: the federal charges were filed under the National Stolen Property Act and the Economic Espionage Act, while the state cases were filed under the New York Code.  As a result, Judge Zweibel found that this was not a case of double jeopardy. 

Additionally, Judge Zweibel rejected Aleynikov’s argument that the prosecution was “inhuman,” stating, “unfortunately for the defendant, his character does not warrant a dismissal in the furtherance of justice.   Judge Zweibel also rejected Aleynikov’s claims that the state charges against him were barred by collateral estoppel.  Aleynikov’s attorney, Kevin Marino, expressed disappointment in the ruling, but “remain[ed] confident Mr. Aleynikov is not guilty and will again be exonerated.”  

We will continue to keep you apprised of future developments as the case continues.

Garrod, a salesman for more than 25 years in the field of elastomeric precision products (EPP), was terminated in mid-2012 after spending an aggregate of a dozen of those years working for manufacturers of EPP parts Fenner and a company acquired by Fenner.

He had signed both employers’ agreements containing non-compete and customer non-solicitation clauses–which appeared reasonable on their face–and Pennsylvania choice-of-law provisions. After Fenner discharged him, he was hired by Mearthane, another EPP company. When he began calling on Fenner’s customers, Fenner sued Mearthane and him in the U.S. District Court for the Western District of New York, seeking to enforce the restrictive covenants contained within the employment agreements.

Earlier this month, Fenner’s motion for a preliminary injunction was denied largely because the court found the non-compete and non-solicitation clauses to be unreasonable. According to the court, Pennsylvania law “disfavors enforcement of restrictive covenants against employees who are fired for poor performance” since the employer views those employees as “worthless.” Fenner Precision, Inc. v. Mearthane Products Corp., Case No. 12-CV-6610 CJS (W.D.N.Y., Feb. 4, 2013).

Garrod asserted that the agreements lack consideration, and that Fenner had not made a sufficient showing of irreparable harm, but the court rejected those assertions. He was more successful with his argument that the agreements are not enforceable because they are unreasonable. He pointed out that he is 58 years old, reducing the likelihood that he can obtain employment outside the EPP industry, and that Fenner gave no reason for his termination. He emphasized that he had worked in the EPP industry for more years before joining Fenner’s predecessor than he spent with that company and Fenner, and that he had significant contacts with, and knowledge about, EPP manufacturers before he became their employee.

The court concluded that Fenner’s concerns about Garrod’s ability to harm its sales “seem overstated in light of the fact that he yet to close any sales since commencing work for Mearthane.” Moreover, those concerns “are belied” by Fenner having “removed him from the company’s most profitable accounts” before firing him. In sum, “Considering all the relevant factors in the record, and weighing the parties’ competing interests,” the court found that “Garrod is likely to prevail in demonstrating that enforcement of the non-solicitation clause against him would not be reasonable.”

This case reminds us that employers can face an uphill battle in enforcing a non-compete clause against a terminated employee. However, there are courts that enforce such contracts as written regardless of the reason the employee left his or her prior employment.

By Joshua Salinas and Jessica Mendelson

The secret is out, Tic Tacs and bubblegum have the most valuable and desirable real estate in the entire grocery store.

On September 27, 2012, a district court for the Eastern District of New York granted in part and denied in part a motion to dismiss in a commercial dispute arising out of the home of these consumables–grocery checkout displays. Dorset Industries, Inc. v. Unified Groceries, Inc, 2012 WL 4470423 (E.D.N.Y. Sept. 27, 2012).

The dispute arose when the defendant, inter alia, allegedly misappropriated the plaintiff’s trade secrets and confidential information to allegedly create a competing business program that marketed checkout areas, which also allegedly “cut out” the plaintiff from their alleged exclusive business arrangement.

Plaintiff Dorset Industries develops and implements “checkout programs,” which allegedly allow grocers to maximize their sales opportunities by utilizing the front end of checkout areas. These areas are believed to be the most desirable real estate in the store as the volume of foot traffic is unmatched. To capitalize on this valuable marketing opportunity, Dorset allegedly uses its “knowhow, experience, and intellectual property” to design and manufacture display units for the grocers, and accordingly leases space in those displays to manufacturers of grocery products (e.g. candy, magazines, and health and beauty products).

Defendant Unified Groceries is allegedly one of the largest retailer-owned grocery cooperatives, and allegedly the largest wholesale grocery distributor in the Western United States. Unified allegedly signed agreements with Dorset to implement Dorset’s checkout programs. Under the alleged agreements, Unified would be responsible for finding retail grocers within its member stores to sign up for Dorset’s checkout program; Dorset would be exclusively responsible for providing the displays and leasing the spaces out to manufacturers. Both parties would share in the resulting income stream.

Unified also signed confidentiality and non-disclosure agreements that restricted the use and disclosure of any business information provided by Dorset concerning the business methods and procedures of its checkout programs.

A dispute arose when Unified allegedly attempted to circumvent the parties’ business arrangement by creating its own checkout program and dealing directly with the manufacturers to lease the checkout display space. Consequently, Unified was allegedly able to “cut out” the intermediary (i.e. Dorset) and contract with the manufacturers directly–thereby obtaining 100% of the income stream. Unified also allegedly notified Dorset that it was terminating their program agreements, although the timing and sufficiency of that notification was disputed.

Dorset sued Unified in New York state court, alleging breach of contract, breach of the confidentiality agreement, usurpation of corporate opportunity, and unfair competition. Dorset also sought a declaratory judgment that the agreement’s termination was invalid. Unified subsequently removed the case to the Eastern District of New York and filed a motion to dismiss the entire lawsuit pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

The significance of this case concerns the Court’s analysis of the third cause of action–breach of confidentiality and non-disclosure provisions. Unified contended that (1) Dorset failed to identify any confidential information allegedly used by Unified in creating its competing checkout program, (2) any such information was not confidential, and (3) Dorset failed to adequately allege that Unified misappropriated any confidential information. The Court disagreed.

The Court recognized that under New York law, a combination of characteristics and components in the public domain could be a protectable trade secret when uniquely combined into a unified process or product. The Court found that Dorset had set forth facts plausibly alleging that the information allegedly utilized by Unified constituted confidential information and/or trade secrets when Dorset identified this information as “checkout counter programs and its business model, plan-o-grams and designs, methods and procedures … including creating and designing the specific Program for Unified.”

Additionally, the Court found that Dorset adequately alleged that it took reasonable efforts to guard the secrecy of its trade secret, confidential, and proprietary information because Dorset alleged that it (i) restricted access to certain information within the company, (ii) utilized passwords to protect its computer system, (iii) limited remote access to those with authority, and (iv) limited access to certain documents containing confidential information within the company. The Court also underlined Dorset’s use of confidentiality and non-disclosure agreements, which defined such confidential and proprietary information and which also contained several express restrictive covenants, including specific covenants of non-disclosure of trade secrets and confidential and proprietary information.

The Court emphatically rejected Unified’s argument that Dorset’s complaint required a greater level of specificity at the pleading stage.

This case is also noteworthy considering the fact that Dorset allegedly admitted that it does not even know whether Unified had actually used or disclosed any confidential information, or whether it was merely speculating that it might do so at some unspecific future date. Unified contended that, at most, Dorset had alleged that Unified misappropriated a single form used for entering into agreements with vendors, and that the form did not constitute trade secret or confidential information because it was a one page five line form that contained nothing more than basic contact information.

The Court explained that it could plausibly infer that the confidentiality provisions were violated by Unified when it allegedly created its competing checkout program. Specifically, the court reasoned that (1) the form supported the inference that Unified created a checkout program that utilized the same methods and procedures as the Dorset program, (2) Unified had previously admitted to Dorset its intent to take over Dorset’s program after observing it for several years, and (3) the subsequent decline of customers that signed up for Dorset’s program compared to previous years implied that Unified began enrolling customers into its competing program. Thus, the Court found a reasonable inference from Dorset’s allegations that Unified had created a checkout display program that would replicated the allegedly confidential “methods or procedures” used in operating Dorset’s program.

Accordingly, the court denied Unified’s motion to dismiss as to Dorset’s claim for breach of confidentiality and non-disclosure provisions. The court also granted Unified’s motion to dismiss on the unfair competition and usurpation of opportunities claims, and granted in part and denied in part the claims for declaratory judgment and breach of implied covenant of good faith and fair dealing.

This case reminds us of the importance of non-disclosure and confidentiality agreements when conducting business with third parties. The existence of these agreements is often the deciding factor when analyzing whether the trade secret holder took reasonable efforts to maintain and protect the secrecy of the information. This case also reiterates that allegations for misappropriation of trade secrets and confidential information (at least in this Court) are not subject to a heightened level of specificity at the pleading stage. Indeed, as with other claims, the Court accepted as true the factual allegations set forth in the complaint and drew all reasonable inferences in the plaintiff’s favor. As illustrated in this case, a plaintiff that lacks direct evidence of misappropriation of trade secrets or confidential information should plead all corresponding facts that support a plausible inference that misappropriation occurred.

A Connecticut federal court recently issued a significant decision concerning the rights of a buyer of a business to enforce non-competition agreements against employees who previously worked for the seller under New York law.

In 2003, Milso and each of its employees signed an employment agreement expressly governed by New York law. The agreement contained confidentiality, non-solicitation and non-competition covenants enforceable for 18 months after termination of employment, but assignability was not mentioned. In 2005, the employer, a casket company, sold its assets, expressly assigning all employment agreements. At the closing of the purchase and sale transaction, the seller terminated its employees, and then the purchaser re-hired them on substantially similar terms. The purchaser asked its employees to acknowledge that they remained subject to the covenants. Three years later, two of the purchaser’s employees, who had worked for the seller but never executed the acknowledgement, resigned and began working for a competitor. The purchaser sued them in a Connecticut federal court for breach of contract, misappropriation of trade secrets, and similar causes of action. They responded by filing a declaratory judgment counterclaim asserting that, for purposes of the employment agreement covenants, they were terminated at the closing of the assets purchase and sale transaction which was more than 18 months before they began competing.

On cross motions for summary judgment, the court held that if the signatories to the employment agreements intended for the agreements to be assignable, the covenants were enforceable against employees who accepted comparable continuous employment by the purchaser. Here, the issue of the parties’ intent with regard to assignability requires a trial. Milso Indus. Co. v. Nazzaro, Case No. 3:08CV1026 (AWT) (D. Conn., Aug. 30, 2012).

The purchaser also accused the departed employees of misappropriating trade secrets, namely, a customer list and a “confidential business plan.” The court ruled that those items could qualify as trade secrets if they have “independent economic value” and reasonable efforts were undertaken to maintain their confidentiality. A trial is necessary to determine whether the list and plan here qualified as trade secrets.

The Connecticut federal court’s decision is particularly instructive with regard to the right of an assignee of an employment agreement, which contains no provision regarding assignability, to enforce covenants in the agreement. The court concluded that the dispositive question is: Did the parties to the agreement intend for it to be assignable. The assignee’s burden is to prove that the signatories to the agreement — the assignor and the assignors’ employee — understood at the time the agreement was signed that it was assignable.

Companies involved in buy-sell transactions or mergers need to take special care to ensure that there are enforceable non-compete/restrictive covenant agreements in place with employees who remain with the buyer after the transaction is complete –that may include relying upon existing non-compete agreements between the seller and the employees or new agreements between the buyer and the employees depending upon the law in the applicable jurisdiction. John Marsh’s Trade Secret Litigator blog has an excellent summary of two recent cases from Ohio and Florida concerning the assignment of non-competes agreements. Also, please consider watching our webinar on Key Considerations Concerning Trade Secrets and Non-Competes in Business Transactions for more information on this important topic.

By Robert Milligan and Jeffrey Oh

In today’s dynamic environment of interstate commerce, including internet transactions, deciding on the proper venue for a trade secret misappropriation dispute can be a complicated process involving a number of different factors particularly if the parties are domiciled and/or transact business in different states.

In the case of GLT Technovations, LLC v. Fownes Brothers & Co., 2012 WL 1380338 (N.D.Cal.), District Judge Ronald M. Whyte of the U.S. District Court for the Northern District of California granted the Defendant’s Motion to Transfer pursuant to 28 U.S.C. § 1404(a) and sent the case to the Southern District of New York where a related case was already pending. Section 28 U.S.C. § 1404(a) provides that "[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented."

According to the pleadings, the Plaintiff, GLT Technovations, LLC (“GLT”), is a California based company registered in Nevada that has developed a “capacitive leather” technology called TouchTec. This technology allows TouchTec glove-wearers to control devices with capacitive touch screens, such as the iPhone, without having to expose their hands to the elements. According to the pleadings, while GLT developed the technology independently, it has partnered with Massachusetts based Broleco Worldwide, Inc. (“Broleco”) to handle the exclusive manufacturing of TouchTec. Broleco is authorized by GLT to handle marketing of the technology to third party apparel manufacturers. In addition, GLT allows Broleco to share its trade secret information, including “capabilities, functionality, upcoming products and techniques related to the use of capacitive leather,” with potential third party partners after said parties have signed non-disclosure agreements (“NDA”). 

According to the pleadings, in September 2009, the Defendant, Fownes Brothers & Co. (“Fownes”), expressed interest in licensing TouchTec after witnessing GLT’s presentation of the technology at New York City’s “Fashion Week.” GLT and Fownes entered into an NDA, delivered to Fownes by Broleco, soon after in April 2010 while the two companies explored pursuing a business relationship. In the subsequent months, Broleco sales representatives visited Fownes’ offices in New York to sell them on the idea of using the technology. In February 2011, Fownes purchased two orders of TouchTec leather from Broleco, and also visited Broleco’s warehouse located in Johnstown, New York. Not long after, Fownes announced the development of its own technology similar to TouchTec, and has not placed any additional orders for GLT’s product since.

Reacting to what it believes is the misappropriation of its proprietary trade secret information, GLT distributed a letter to Fownes’ potential retail partners in January 2012 informing them of its claims and the potential dangers of selling Fownes’ products. In response, Fownes filed a complaint before the U.S. District Court for the Southern District of New York alleging “violations of the Lanham Act, unfair competition and tortious interference with business relations.” Just four hours later, GLT filed a complaint before the U.S. District Court for the Northern District of California “seeking a declaratory judgment that it did non violate the Lanham Act,” and alleging the misappropriation of its trade secrets, breach of the NDA and unfair competition. Fownes then filed a Motion to Transfer the suit to the U.S. District Court for the Southern District of New York, which Judge Whyte granted on April 20, 2012.

In consideration of transfer under 28 U.S.C. § 1404(a), Judge Whyte evaluated the eight factors “to determine whether transfer is appropriate” laid out in Williams v. Bowman, 157 F.Supp.2d 1103, 1106 (N.D.Cal.2001). They include: “(1) the plaintiff’s choice of forum, (2) convenience of the parties, (3) convenience of the witnesses, (4) ease of access to the evidence, (5) familiarity of each forum with the applicable law, (6) feasibility of each forum with the applicable law, (7) any local interest in the controversy, and (8) the relative court congestion and time of trial in each forum.”

For the first factor, Judge Whyte noted that “a plaintiff’s choice of forum should be afforded substantial weight[,]” but that this should be given less consideration when the activities alleged in the complaint have little to no connection to the forum. Although GLT is based out of California, all of its interactions with Fownes – including those done through Broleco – occurred in New York. Given that the “center of gravity” of the dispute is in New York, the court weighed this factor in favor of the Defendant.

The second and third factors, or so-called “convenience factors,” do not only take into account the number of witnesses who would be inconvenienced by hearing the suit in either forum, but also the potential quality and relevance of their testimony to the issues in the case. GLT’s complaint is almost entirely based on Fownes’ interactions with Broleco, which occurred in New York between companies based out of New York and Massachusetts, respectively. Since the Southern District of New York would undeniably be more convenient to the employees of these two entities, as well as to any non-party witnesses yet to be named, Judge Whyte weighed these two factors in favor of the Defendant.

For the same reasons used to weigh factors one through three in favor of the Defendant – namely the relevant interactions between Fownes and Broleco all taking place in New York – the court weighed factor four (ease of access to the evidence) in favor of the Defendant.

Arguing its case for weighing the fifth and sixth factors in its favor, GLT asserted that the case should be heard in a California court because its claims arise under California statutes and common law. In response, Judge Whyte cited multiple district court decisions where federal courts were deemed “fully capable of applying California law.” Similarly, although the NDA contained a California choice-of-law provision, the court noted that the provision, unlike a forum selection clause, was not “determinative in resolving a motion to transfer.” With Fownes’ own suit against GLT still pending in the Southern District of New York, the court stated its preference for both cases to be heard and decided by a single judge familiar with the facts and arguments of the case.

Evaluating the final two factors, Judge Whyte did not find a compelling reason to deny the Defendant’s Motion to Transfer. Although Judge Whyte agreed with GLT that California has a distinct interest in protecting the intellectual property rights of local businesses, “the bi-coastal nature of the transactions…and the parties impacted by this case” make it so that neither forum has a greater interest or right to hear the case than the other. With regards to the final factor, since neither GLT nor Fownes argued for or against transfer based on the congestion of either court, the court considered “that factor to be neutral.”

Taking all eight factors into account, Judge Whyte determined the overall weight of the facts to be overwhelmingly in favor of transfer to the U.S. District Court for the Southern District of New York. In particular, the court focused on “the convenience to the witnesses, the ease of access to evidence, and the possibility of consolidation with other litigation” in granting the Motion to Transfer.

The court’s decision underscores the importance of including mandatory forum selection clauses in non-disclosure agreements to secure a party’s desired forum and filing first in contentious trade secret disputes.

In what has been a growing trend across the country, on April 20, 2012, a New York state court has required that a plaintiff specifically plead its trade secrets in detail before proceeding with discovery. In MSCI et al. v. Jacob, Axioma, New York State Supreme Court, New York County, No. 651451/2011, the complaint alleged misappropriation of source code trade secrets by Axioma and Jacob, a former MSCI employee who now works for Axioma. Defendants argued that plaintiffs should be required to identify and describe their alleged trade secrets early in a litigation before the trade secret defendant produces its own confidential information and trade secrets.

At a conference held on November 21, 2011, the Court stated that as a plaintiff MSCI is required to identify its trade secrets; and, in response to MSCI’s proposal, as a first step, ordered that MSCI identify with specificity the information that it is not claiming to be trade secret. Despite the Court’s instruction, five months later defendant MSCI again sought judicial intervention because it claimed that Axioma was seeking to delay discovery in order to avoid having to submit its own source code for inspection.

The New York Court agreed with the defendants noting that "[m]erely providing defendants with plaintiffs’ ‘reference library’ to establish what portions of their source code are in the public domain shifts the burden to defendants to clarify plaintiffs’ claim." The Court went on to hold that: "[o]nly by distinguishing between the general knowledge in their field and their trade secrets, will the court be capable of setting the parameters of discovery and will defendants be able to prepare their defense."

By Robert Milligan and Jeffrey Oh

As Internet traffic has exploded in the last decade, Internet Service Providers (ISP) – the companies who build and profit from providing the requisite infrastructure – have had to strategically maintain their networks to satisfy demand under increasingly tightening technological constraints. One way ISPs do this is by employing a practice called “throttling,” or limiting heavy users’ access to Internet servers to free up bandwidth for others. When one subscriber to an ISP’s service makes heavy demands to the network, such as downloading large amounts of videos, other users in the area suffer from decreased speed; throttling is one way of preventing this sort of problem. ISPs typically reserve their right to throttle in their terms and of service with customers.

While ISPs argue that throttling is a necessary practice, others argue that it amounts to the arbitrary limiting of access to a vital communications tool by a corporate entity and constitutes a dangerous overreach of power. Left without regulatory recourse, net neutrality advocates – or those opposed to the practice of throttling – have turned towards the application of other laws in their battle against ISP throttling.

In Serrano v. Cablevision Systems Corp., No. 09-CV-1056 (DLI) (MDG), a class action suit filed in the United States District Court for the Eastern District of New York, Plaintiffs Alyce Serrano and Andrea Londono alleged violations of the Computer Fraud and Abuse Act (CFAA) as well as various state law claims in relation to ISP throttling. According to their complaint, ISP Cablevision “wrongfully limited Plaintiffs’ use of certain peer-to-peer (“P2P”) applications without authorization, and thereby caused damage to Plaintiffs’ computers.” Specifically, Plaintiffs cited 18 U.S.C. § 1030(a)(5)(A)-(C), a section of the CFAA related to damages caused by “the transmission of a program, information, code, or command…without authorization” or “intentionally access[ing] a protected computer without authorization.”

The first key to successfully arguing a violation of the CFAA is proving that any access or action to a protected computer system was done “without authorization.” To Cablevision’s credit, Serrano and Londono both signed “Terms of Service” and “Acceptable Use Policy” documents at the time of their service installation and after subsequent work orders. These documents included provisions for Cablevision to reserve “the right to protect the integrity of its network and resources by any means it deems appropriate. This includes but is not limited to…putting limits on bandwidth.” The agreements also allow them to do so “without prior notification.”

The Court found that Plaintiffs’ claims arising under the CFAA were "defeated by the clear language of the Terms of Service and the Acceptable Use Policy." The Court found that based on Plaintiffs’ assent to these valid and enforceable provisions, "Plaintiffs cannot now claim that Cablevision acted ‘without authorization’ when it re-stricted their bandwidth."

Although Serrano and Londono argued that these contracts were vague and ambiguous and should not be considered valid, the Honorable Judge Dora L. Irizarry ruled that they were in fact proper and could be dutifully enforced. Judge Irizarry cited New York law related to agreements made over the internet, or so-called “click-wrap” contracts, in ruling them valid “as long as the consumer is given a sufficient opportunity to read the…agreement, and assents thereto after being provided with an unambiguous method of accepting or declining the offer.” As all such requirements were met in Cablevision’s case, Judge Irizarry ruled that the contracts, and therefore Cablevision’s right to authorized access of Plaintiffs protected computer systems for the purposes of throttling, were in fact legal and granted Cablevision’s motion for summary judgment.

For all of its wide-ranging applicability to legal matters in the digital space, the CFAA does not appear to be of much use in preventing ISP throttling. Arguing that an ISP does not have authorized access to regulate its own networks may be nearly impossible to assert given their financial right to the infrastructure as well as their responsibility to protect its functionality for all users. Coupled with the robust Terms of Service and Acceptable Use Policies likely employed industry wide, ISPs are not likely to be vulnerable to this type of CFAA claim.

It will be interesting to see how the issue of ISP throttling is addressed in future cases and possible legislation.  ISPs argue that if they are not allowed to throttle heavy users, all users will eventually suffer from a decrease in Internet speed. As more Internet users trend towards heavy use, the problems may become more pronounced over time. With ISPs struggling to build out next generation networks to handle increased usage, costs could be passed on to consumers in new forms, including multi-tier pricing systems based on bandwidth usage similar to those being introduced by cellular data carriers. While the vast majority of Americans may never be subject to bandwidth throttling, the latitude ISPs are given in establishing this practice will set the stage for how ISPs are able to regulate the networks of tomorrow.

An important procedural issue that often arises in a non-compete dispute is the idea of equitable tolling. This doctrine essentially allows a court to toll, or stay, the time remaining on a non-compete agreement during the period in which the employee is in breach. Equitable tolling, however, is not always available, and the remedy is highly dependent on what state’s law governs the agreement. A New York Appellate Court recently upheld the doctrine where the agreement expressly provided for equitable tolling.

In Delta Enterprise Corp. v. Cohen, Delta Enterprise Corp. manufactures and sells furniture and other products for infants, toddlers and children. Its longtime employee, Ralph Cohen was the co-head of the Toddler Furniture Division when he left the company in early 2010. Delta alleged that Mr. Cohen misappropriated confidential information from Delta, and started a competing business while he was still employed with Delta in violation of a two year non-compete and non-solicit agreement.

Delta sued Mr. Cohen nearly a year later after he left Delta and obtained both temporary and preliminary injunctive relief from the trial court prohibiting him from, among other things, engaging "in business with any of the factories with which Delta conducted business" and "interfering with or disrupting any relations between Delta and any of its customers, licensors, employees or vendors…." for two years after the end of his employment.

Although successful in the lower court, Delta appealed the decision arguing that the tolling provision in its employment agreement should be enforced from any period in which Mr. Cohen was in violation of the employment agreement and not just from the end of his employment. The New York Appellate Division (First Department) agreed and modified the preliminary injunction to extend two years from the date of issuance of the temporary restraining order or resolution at trial, whichever is earlier.

Employers often condition the payment of post-employment or deferred compensation on a departing employee’s compliance with a noncompete agreement. New York is one of the few states that specifically allow for such an arrangement under the "employee choice" doctrine. This doctrine holds that an employee who chooses to voluntarily resign and violate his or her noncompetition obligations can be deemed to have waived any legal right to post-employment compensation, but does not require the agreement to pass the test of "reasonability" to which noncompete agreements in New York are generally subject. The employee choice doctrine is based on the premise that a resigning employee is given the choice of either preserving his or her right to compensation by refraining from engaging in competitive employment, or forfeiting that right by choosing to compete with a former employer.

A New York court has recently declined to allow the employee choice doctrine to apply to applications for equitable relief. In Richard Manno & Co., Inc. v. Manno, 2012 WL 488252 (N.Y.Sup., Suffolk Co. Feb. 6, 2012), respondent, Anthony Manno, was employed by the petitioner, a company which manufactures and sells steel fasteners and machined parts in the United States. In October of 2010, the petitioner and respondent entered into a severance agreement, which, in part, provided for future lump sum payments as well as monthly and other periodic payments for designated terms. The payments were conditioned upon certain post employment obligations by Mr. Manno, a violation of which would contractually result in the forfeiture of future payments.

The petitioner claimed that in or about January of 2011, respondent violated the severance agreement by forming a competing company and sought injunctive relief in aid of arbitration for monetary damages. The New York court denied the application assuming, without so finding that the subject severance agreement contains a non-compete restrictive covenant, it "would not be enforceable without regard to the standards of reasonableness which covenants not to compete are regularly measured." The court also noted that the "[a]pplication of the reasonableness standard is consistent with [a prior Court of Appeals decision that noted] that the ‘employee choice doctrine’ exception is applicable only in cases involving economic relief and not to those for injunctive relief."

In Renaissance Nutrition, Inc. v. Jarrett, 2012 WL 42171 (WDNY) (January 9, 2012), Renaissance, a vitamin and pre-mix company serving the dairy industry, alleged that two former top-level employees violated a five year "non-recruitment" or "anti-raiding" clause. In short, Renaissance alleged that these employees resigned in tandem with plans to develop a rival company, Cows Come First, and then actively recruited three other former Renaissance employees to join them in their new venture. The former employees moved for summary judgment arguing, in part, that the non-recruitment clause was invalid, because it did not protect a legitimate business interest. Renaissance responded by arguing that New York courts have upheld recruitment clauses like the one at issue here and that the clause was proper in scope because it only limited the defendants from purloining its employees not from engaging in business generally.

After noting that there appeared to be only one New York case discussing the applicable standard for enforcing a non-recruitment covenant (and no appellate authority), the District Court decided to apply the "overriding requirement of reasonableness" used to analyze non-compete covenants in New York. In its "reasonableness" analysis, the District Court required that Renaissance make "an enhanced showing" that its interests in protecting its client relationships outweigh the former employees’ interests in free competition, by demonstrating that: "(1) the employees diverted by defendants posed a substantial risk that if they left, their customers would follow, (2) the departed employees would engage or did engage in competitive business with Renaissance, and that (3) it provided substantial resources and assistance in cultivating the customer base such that it would be unfair to allow employees to steal those customers to compete with it." The District Court ultimately held that Renaissance had a legitimate interest in the protection of client relationships developed at its expense and denied defendants’ motion for summary judgment.