In a prior blog post, we used the Star Wars Universe as the backdrop for a discussion about obtaining a preliminary injunction in the context of a noncompete agreement. But we left a discussion of the inevitable disclosure doctrine for another day. Today is that day.
By way of background, the inevitable disclosure doctrine typically plays out as follows. A key employee of a company who possesses all manner of company secrets leaves for a competitor without a trail, digital or otherwise, of actually taking records with him or her to the competitor. Nonetheless, even in the absence of physical copying, the company’s secrets are still in the employee’s head. In the words of the Seventh Circuit Court of Appeals in the case of PepsiCo, Inc. v. Redmond, this leaves the company in the predicament of a "coach, one of whose players has left, playbook in hand, to join the opposing team before the big game."
Common experience tells us that, even assuming good faith, the former employee simply cannot help using confidential information to lure away his/her former employer’s customers or otherwise help the new employer gain a competitive advantage. For example, if the employee knows the confidential pricing for a specific customer, how would he/she not use that information in a sales pitch for the new employer? Indeed, that would likely be a primary reason for the competitor’s recruitment of the employee in the first instance.
As is often the case, however, gut feel of misuse or misappropriation of a trade secret is not necessarily accompanied by direct proof of it. Even when there is proof, using it may not be so easy. For example, when a loyal customer reports an improper solicitation by the former employee, do we really want to drag that customer in to testify in a hearing on a preliminary injunction?
This all begs the question: How can the company convince a judge to issue a temporary restraining order and preliminary injunction barring the employee’s use of confidential information without proof of the employee’s misconduct? Enter the inevitable disclosure doctrine.
The inevitable disclosure doctrine, at its core, is a rule of pragmatics. It recognizes the practical reality that once employees have knowledge of a company’s confidential business information, it is impossible to compartmentalize that knowledge and avoid using it when they go to work for their new employer in the same industry.
The doctrine in New York has roots going back to 1919, in the case of Eastman Kodak Co. v. Powers Film Products, Inc. In the 1990s, the doctrine hit its peak in two contexts. First, in Lumex, Inc. v. Highsmith, the U.S. District Court for the Eastern District of New York held that when the departing employee had signed a noncompete agreement, the doctrine supplied the missing element of actual proof of use of trade secrets on a motion for a preliminary injunction even when the departing employee acted with the utmost good faith. Second, in DoubleClick Inc. v. Henderson, the New York State Supreme Court in New York County held that, even in the absence of a noncompete agreement, when the departing employee left with physical or electronic files, the inevitability of use of the trade secrets in such a circumstance springs from the already proven misconduct of the employee.
The decisions in Lumex and DoubleClick seemed to usher in a more welcoming attitude towards the doctrine. But that was somewhat short-lived. The doctrine receded from its high water mark when employers attempted to broadly use it as a substitute for a noncompete agreement. In Earthweb v. Schlack, decided by the U.S. District Court for the Southern District of New York, the employer sought to enjoin its former employee from working for a competitor even though the parties’ agreement contained no such prohibition. The Court held that in absence of evidence of actual misappropriation of confidential information, it would not essentially draft a noncompete for the parties under the guise of inevitable disclosure. The Appellate Division, Third Department, reached a similar result in Marietta Corp. v. Fairhurst, where the Court refused to use the inevitable disclosure doctrine in a manner that would convert a nondisclosure agreement into a noncompete agreement.
Most recently, on December 30, 2016, the U.S. District Court for the Southern District of New York, in Free Country Ltd. v. Drennen, declined to use the inevitable disclosure doctrine to enjoin the solicitation of customers in the absence of a noncompete agreement.
The issue now is whether the inevitable disclosure doctrine has lost its teeth and, if it hasn’t, how can an employer actually use it to stop its trade secrets from being used when it can’t prove misappropriation. The short answer is that the inevitable disclosure is not dead. It still has its power when used in its proper context.
If a company truly wants to protect itself from competition from former employees who possess its confidential information, there is simply no substitute for a narrowly crafted noncompete agreement. The inevitable disclosure doctrine can be used quite effectively to enforce such a noncompete agreement on an application for a preliminary injunction.
The narrower the scope of the restriction, the more receptive a court will be to enforcing it. Before drafting a noncompete, there ought to be a careful discussion of what the employer is really worried about in terms of an employee leaving. More often than not, the concern is about the employee working for a limited group of competitors and/or soliciting a limited group of major customers. In such circumstances, to increase the likelihood of success of enjoining a former employee, a noncompete agreement should actually list the specific group of competitors where the employee would be prohibited from working in the same or similar capacity and/or a specific list of customers whose solicitation would be prohibited. The noncompete itself may also have a clause stating that if the employee were to work for one of the listed competitors or attempt to solicit a listed customer it would be inevitable that the employee would use confidential information. A high level executive, particularly one with access to legal counsel to review and negotiate the agreement, would be hard pressed to later dispute that which he/she expressly acknowledged.
Finally, for those high level executives for whom it is absolutely critical that a noncompete be enforceable, the agreement should provide for the payment of compensation during the period of noncompetition. This was done effectively in Lumex.
Employers are well served to use narrowly crafted noncompete agreements for a limited class of employees whose departure could damage the company’s legitimate business interests. The inevitable disclosure doctrine, for all of its long and winding permutations, can still be a powerful tool -- not a substitute -- for enforcing a noncompete agreement.
The following article was first published in Employment Law 360 on February 24, 2016.
Being both an employment law geek and a "Star Wars" geek, I can’t help but watch the "Star Wars" movies through the troublesome lenses of my employment lawyer glasses, nor can I practice employment law without various “Yodaisms” running through my mind (e.g., “Do or do not. There is no try.”). Having watched all of the "Star Wars" movies, it occurred to me while watching "Star Wars: The Force Awakens," that the most fundamental source of disturbances in the Force are key characters — employees, if you will, for the purposes of this article — joining competitor masters (employers) with catastrophic results. Darth Vader, Count Dooku and Kylo Ren all started their careers with the Jedi before leaving to a competitor.
But what if they couldn’t? How would a New York court view a noncompete agreement in the context of the Jedi Order? Below is my best estimate as to how it would play out, at least in the lower court.
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
LUKE SKYWALKER’S JEDI ACADEMY,
-against- Index No. 2016/R2D2
KYLO REN, THE FIRST ORDER AND SNOKE,
This case comes before the Court on Plaintiff’s motion for a preliminary injunction: (1) enjoining defendant Kylo Ren from working for Defendants Snoke and the First Order; and (2) enjoining the Defendants from using Plaintiff’s trade secrets and usurping its customer relationships. For the reasons stated below, subject to Plaintiff’s posting of a sufficient undertaking, the Court grants the motion for a preliminary injunction.
The Court assumes the parties’ familiarity with the facts and will state them only briefly here. Plaintiff at all times relevant to this proceeding operates a Jedi Training Academy for the purpose of teaching its pupils (Padawans) how to use the “light-side” of the Force. Defendant Kylo Ren is a former employee of the academy who was terminated for various alleged acts of misconduct (discussed, infra). During the course of his employment, Ren signed a noncompete agreement in which he agreed not to compete against the academy for a period of one year following his separation.
Notwithstanding the noncompete agreement, immediately upon his termination, Ren commenced employment with Snoke and the First Order. The parties stipulate that Snoke and the First Order are direct competitors of the academy and the constituency it serves. The present litigation ensued. The parties agreed to venue this matter in New York County, as it is apparently the only venue in which individuals from the “bar scenes” from "Star Wars IV" and "Star Wars VII" can blend in without feeling self-conscious. New York law controls this matter despite the choice of law provision regarding “Intergalactic Law” because that law is too employer-friendly. See Brown & Brown Inc. v. Johnson, 25 N.Y.3d 364 (2015).
Standard for Issuing an Injunction
The standard for obtaining a preliminary injunction is well-known. The moving party must show the following: (1) the likelihood of ultimate success on the merits; (2) threat of irreparable injury absent the granting of the preliminary injunction; and (3) that the equities are balanced in its favor. See McLaughlin, Pivin, Vogel Inc. v. W.J. Nolan & Company Inc., 114 A.D.2d 165, 172 (2d Dep’t 1986).
Enforceability of the Noncompete
The Court of Appeals has espoused a three-pronged test for determining whether a restrictive employment covenant will be enforced. An agreement will be enforced 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. BDO Seidman v. Hirshberg, 92 N.Y.2d 382, 388-89 (1999). Legitimate employer interests include protection of trade secrets and customer relationships.
Ren argues that, as a threshold matter, because he was terminated without cause, the noncompete cannot be enforced against him. Post v. Merrill Lynch, Pierce, Fenner & Smith Inc., 48 N.Y.2d 84, 88 (1979). There is currently a split in the appellate divisions on this issue. The Second Department follows the rule against enforcement where an employee was terminated without cause. Grassi & Co., CPAs PC v. Janover Rubinroit LLC, 82 A.D.3d 700, 702 (2d Dep’t 2011); Borne Chemical Co. Inc. v. Dictrow, 85 A.D.2d 646 (2d Dep’t 1981). Conversely, the First Department is more wary in its application of the rule. Bell & Co. PC v. Rosen, 2012 N.Y. Misc. LEXIS 6230 (N.Y. Cnty. Sup. Ct. Nov. 8, 2012), aff’d, 979 N.Y.S.2d 564 (1st Dep’t 2014).
The Fourth Department has also held on numerous occasions that involuntary termination without cause will not necessarily preclude enforcement of a noncompete. Eastman Kodak Co. v. Carmosino, 77 A.D.3d 1434, 1436 (4th Dep’t 2010); Wise v. Transco Inc., 425 N.Y.S.2d 434 (4th Dep’t 1980).
This Court need not resolve this conflict because the Court finds that Ren has stolen trade secrets. Consequently, the Court can and will issue a preliminary injunction on this issue irrespective of the existence of a valid noncompete. See, e.g., Churchill Communications Corp. v. Demyanovich, 668 F. Supp. 207, 211 (S.D.N.Y. 1987) ("Of course, an employee’s use of an employer’s trade secrets or confidential customer information can be enjoined even in the absence of a restrictive covenant when such conduct violates a fiduciary duty owed by the former employee to his former employer.").
A trade secret is defined as "any formula, pattern, device or compilation of information which is used in one's business, and which gives [the owner] an opportunity to obtain an advantage over competitors who do not know or use it." North Atlantic Instruments Inc. v. Haber, 188 F.3d 38, 49 (2d Cir. 1999); see also Ashland Management Inc. v. Janien, 82 N.Y.2d 395, 407 (1993) (discussing six-factor test). Plaintiff argues that as an employee of the academy, Ren was entrusted with access to all manner of trade secrets, including how to use various mind tricks, construct a lightsaber and turn into a “force ghost.” Further, Ren was provided with lists of individuals sympathetic to the cause of the rebellion (customer lists).
Ren argues that despite the mystique of the Jedi, nothing they do rises to the level of a trade secret. According to Ren, a cursory Google search will reveal how to do mind tricks and any elementary school student with a computer and a basement can construct their own lightsaber (albeit poorly shaped). We disagree with this analysis.
While Ren is correct that an employer has the burden of demonstrating that "it took substantial measures to protect the secret nature of its information," (see Geritrex Corp. v. Dermarite Industries LLC, 910 F. Supp. 955, 961 (S.D.N.Y. 1996)), Plaintiff has met its burden. Only a select few are provided with its secrets, its secrets are only revealed in secure locations, and any computerized lists are password-protected, encrypted and stored in the vaults of droids. Further, the trade secrets cannot, as Ren contends, be so easily learned or reverse engineered. Ren’s own incomplete lightsaber reveals that guarded secrets are still needed to complete it.
In any event, the record is clear that Ren took physical copies of the academy’s confidential information, namely sympathizer lists, a partially working lightsaber, and force ghost manuals.
It is well-settled that "an employee’s illegal physical taking or copying of an employer’s files or confidential information constitutes actionable unfair competition." Advance Magnification Instruments Ltd. v. Minuteman Optical Corp., 135 A.D.2d 889 (3d Dep’t 1987).
Further, "if there has been a physical taking or studied copying of confidential information, the court may in the proper case grant injunctive relief, not necessarily as a violation of a trade secret, but as an egregious breach of trust and confidence while in plaintiff’s service." Garbor GuyButler Corporation v. Cowen & Co., 155 Misc.2d 39 (N.Y. Cnty. Sup. Ct. 1992); see also Ecolab Inc. v. Paolo, 753 F. Supp. 1100, 1112 (E.D.N.Y. 1991) ("Moreover, even if this information did not independently rise to the level of a trade secret, [the former employees’] wrongful retention of the customer information would justify treating it as a trade secret."); Marcone APW LLC v. Servall Co., 85 A.D.3d 1693, 1696 (4th Dep’t 2011) (“In any event, even assuming, arguendo, that the misappropriated information is not entitled to trade secret protection, we conclude that the court properly determined that injunctive relief is warranted on the alternative ground of breach of trust by the individual defendants in misappropriating plaintiff’s proprietary information.”)
"It is clear that irreparable harm is presumed where a trade secret has been misappropriated." Lumex v. Highsmith, 919 F. Supp. 624, 628 (E.D.N.Y. 1996). This is because a trade secret, once lost, is lost forever; its loss cannot be measured in money damages. North Atlantic Instruments Inc. v. Haber, 188 F.3d 38, 49 (2d Cir. 1999) (quoting FMC Corp. v. Taiwan Tainan Giant Industrial Co., 730 F.2d 61, 63 (2d Cir. 1984).
Scope of the Injunction
Ren is directed to return all hard copies of any trade secrets he has taken from the academy and destroy any electronic version of any trade secret in his possession. For a period of one year, Ren may work for Snoke and the First Order, but not in any capacity that requires the use of the Force. Plaintiff argues that under the Inevitable Disclosure Doctrine, Ren should be barred from working for the First Order in any capacity. The Court will address this argument after further briefing in the context of summary judgment on Plaintiff’s request for a permanent injunction. Ren may discuss joining the First Order with individuals and entities who are his own relatives, personal friends and/or “who, without solicitation, approach [him],” (Eastern Business Systems Inc. v. Specialty Business Solutions LLC, 292 A.D.2d 336, 338 (2d Dep’t 2002); see also Frank Crystal & Co. v. Dillmann, 84 A.D.3d 704 (1st Dep’t 2011); Weiser LLP v. Coopersmith, 74 A.D.3d 465 (1st Dep’t 2010)), or who wanted to leave the academy on their own accord. Data Systems Computer Centre Inc. v. Tempesta, 171 A.D.2d 724 (2d Dep't 1991).
The foregoing shall constitute the Order of this Court.
It is not uncommon for employers to present restrictive covenants, such as non-competition, non-solicitation, or confidentiality agreements, to new employees in a stack of orientation paperwork. A recent case from New York’s highest court reminds employers not only that it is important to narrowly tailor restrictive covenants, but also that it is worthwhile to take the time to explain the meaning of those agreements to new employees, and even provide new employees with some time to review them.
In 2014, we posted a blog article on a New York Appellate Division (Fourth Department) case regarding the partial enforcement of an overbroad non-solicitation provision in an employment agreement. In Brown & Brown, Inc. v. Johnson, the appellate court deemed the non-solicitation provision overbroad and unenforceable because it prohibited the former employee from soliciting any client of the firm, not just those with whom she developed a relationship while employed by the firm. The firm sought to have the non-solicitation agreement partially enforced. In other words, the firm asked the court to modify or “blue pencil” the covenant to make it enforceable.
Significantly, the appellate court refused to blue pencil the overbroad agreement, citing the unequal balance of power between the employee and employer at the time the agreement was signed. Thus, the entire non-solicitation provision was deemed unenforceable, allowing the former employee to solicit any former clients. Given this decision, we cautioned employers to be wary of overreaching in a restrictive covenant, as it could result in a court refusing to enforce even a pared down version of the agreement.
In June 2015, the Court of Appeals reversed the Appellate Division on the partial enforcement issue and sent the case back to the trial court to review the circumstances of the case. According to the Court, the lower court should have taken a closer look at the facts and circumstances surrounding the signing of the non-solicitation agreement before deciding whether to simply strike the overbroad agreement. The Court noted that the fact that the agreement was not presented to the employee, Johnson, until after she left her prior employment “could have caused her to feel pressure to sign the agreement, rather than risk being unemployed.” Nevertheless, the mere fact that the agreement was a requirement of the job, and that the employee was not presented with the agreement until the first day of work was not enough alone to deny partial enforcement. The Court cited other factors that would be considered to determine the partial enforcement issue: whether the employee understood the agreement, whether it was discussed or explained to her, and whether she was coerced into signing it on the first day or could have sought advice from counsel or negotiated the terms.
The latest lesson on restrictive covenants from New York’s highest court is clear: they must be presented to employees in a non-coercive fashion. If your restriction on an employee could be construed as overbroad, courts will consider the circumstances under which the agreement was provided to the employee when determining whether to modify or “blue pencil” it to make it enforceable. To convince a court to do so, there must be facts showing that the employer took steps to minimize the inherent inequality in bargaining power between the employer and the employee. While employers may be reluctant to negotiate the terms of these agreements, employers should consider sitting down to explain the meaning of a non-compete or non-solicitation agreement, leaving some time for the new employee to think over and review the agreement, and allowing the employee to seek counsel before signing it.
In prior blog articles, we’ve visited the battle field with Sun Tzu to learn the art of defending employment litigation, Santa’s Workshop for a holiday reminder that we can be sued for just about anything, and the major league baseball diamond with A-Rod for a lesson in swinging for the fences with the faithless servant doctrine. Our next stop on the Employment Law Express is to confer with one of the foremost Zen-masters on a more peaceful approach to our day-to-day employment matters. That master is none other than the venerable Winnie the Pooh.
Often thought of only as a cuddly focal point in children’s fiction, Pooh Corner offers a host of spiritual wisdom that has broad applications as to how we can best manage our day-to-day strife in the world of human resources. So let’s take a careful look at some of the more astute Pooh-isms and what they tell us about how best to minimize the agita in our work.
"It's more fun to talk with someone who doesn't use long difficult words but rather short easy words like, 'What about lunch?'"
Indeed, though apparently Winnie the Pooh has never had lunch with a lawyer. Not using (I thought about using the word “Eschewing”) long difficult words is not only wise but an absolute necessity in the world of employment law. Take, for example, company handbooks and policies. Their whole purpose is to provide clear notice to employees of the rules governing their employment. The use of “long difficult words” defeats this purpose. Ambiguity and uncertainty breed escape hatches for employees which, in turn, disrupt the tranquility of human resources operations.
The use of “long difficult words” also becomes a serious problem when trying to enforce a non-compete agreement. Some courts will hold that ambiguous non-compete clauses are either not enforceable at all or require a full-blown trial to enforce them. Consequently, it is “more fun” to enforce a non-compete clause that is worded using short easy words that make the employee’s obligations crystal clear. This holds true with any type of employment, separation or severance agreement -- they should contain short, easy language that even a bear who forgets to wear pants can understand.
"People say nothing is impossible, but I do nothing every day!"
While most of our employees are dedicated and hard-working, there are always a few exceptions who put a great deal of effort into doing nothing. Think George Costanza. The problems with these type of employees are many and include lost productivity and loss of morale among other employees who do not have the luxury of doing nothing all day. So we need to make doing nothing all day impossible. The caveat here is that nothing-doers tend to sue for discrimination when their reign of nothingness is put to an end. To avoid such claims, or make them easily dismissible, ironically requires hard work on our part. This means well-written (short easy words) counseling and disciplinary memos documenting the lack of performance and failure to follow specific directives.
This played out in the interesting case of Sanzo v. Uniondale Union Free School District. The plaintiff school custodian sued his former employer claiming that he was unlawfully terminated on the basis of his disability, narcolepsy, which caused him to occasionally fall asleep on the job. The well-documented personnel file, however, demonstrated that discrimination was not at all at play. The plaintiff was not fired because he fell asleep, but rather he was fired because he declined to do his job when he was awake.
In the end, what Pooh is telling us is that some people will find it possible to do nothing at least until such time as someone with supervisory authority affirmatively makes it impossible.
"You can't stay in your corner of the forest, waiting for others to come to you; you have to go to them sometimes."
There are certainly days when sanity dictates that we stay in our own corner of the proverbial forest. Staying too long, however, is like saying “open sesame” to the door of liability. This often comes up in the context of workplace harassment and bullying investigations. We’ve all gotten much better at the initial response to complaints and we conduct our investigations promptly and fairly. The problem arises, however, when the harassment, if established, is not sufficiently severe to warrant terminating the alleged harasser so some other resolution is formulated (e.g., the harasser is separated from the complainant). With such a remedial measure, our job is done, right? Actually, the seeming completion of a workplace investigation is precisely not the time to retreat to our corner of the forest. Rather, that is the time to periodically go out to see the complainant to make sure that no further harassment is taking place. Our anti-harassment policies become viable defenses when they are not just initially followed but continually followed to stop any ongoing harassment. Getting out of our corner of the forest means being proactive and being proactive defeats lawsuits.
Although we all continue to get older and more experienced, the answers to many of our day-to-day problems nonetheless can still often be found in the pages of books long left unopened on our children’s bookshelves (or Kindles, I-Pads, etc.).
Note: All of the Pooh-isms in this blog article can be found in A.A. Milne's Winnie the Pooh and Pooh's Little Instruction Book.
On February 7, 2014, the Appellate Division, Fourth Department, issued a significant decision regarding restrictive covenants. In Brown & Brown, Inc. v. Johnson, the plaintiffs terminated the defendant-employee and then sued her for violating non-competition and non-solicitation provisions in her employment agreement, which contained a provision stating that Florida law would govern. The Fourth Department considered several issues, including: (1) whether to enforce the Florida choice-of-law provision for the restrictive covenants; (2) whether employers can enforce restrictive covenants against employees who were involuntary terminated; and (3) whether the court must partially enforce an overbroad restrictive covenant where the agreement expressly provides for such partial enforcement.
First, the Fourth Department considered the issue of whether the Florida choice-of-law provision in the agreement was enforceable. The court noted that choice-of-law provisions are generally enforceable in New York as long as the chosen law: (1) bears a reasonable relationship to the parties or the transaction; and (2) is not “obnoxious” to New York public policy. The Fourth Department concluded that while Florida law met the first prong of this test, it failed the second prong. The court explained that under New York law, restrictive covenants are enforceable if they are no greater than necessary to protect a legitimate interest of the employer, are not unduly harsh or burdensome to the employee, and do not injure or harm the public. In contrast, Florida law does not permit courts to consider the hardship to the employee in determining whether to enforce a restrictive covenant. Based on this difference, the Fourth Department ruled that the choice-of-law provision in the employment agreement was unenforceable, and proceeded to apply New York law to the dispute. Significantly, the Fourth Department’s ruling did not depend on the specific facts of this case, so it is unlikely that the Fourth Department would enforce a Florida choice-of-law provision in any employer-employee restrictive covenants.
Second, the Fourth Department considered defendants’ argument that plaintiffs could not enforce the restrictive covenants because they terminated the defendant-employee. Defendants relied on a Court of Appeals decision which involved an agreement that employees would forfeit their benefits under pension and profit-sharing plans if they competed with their employer after the end of their employment. The Court of Appeals held that the employer could not enforce the forfeiture-for-competition clause because the employees were involuntarily terminated without cause. In Brown & Brown, the Fourth Department refused to apply the Court of Appeals decision to create a per se rule that an involuntary termination without cause always renders a restrictive covenant unenforceable.
Third, the Fourth Department ruled that the non-solicitation covenant was overbroad and unenforceable because it prohibited solicitation of any clients of plaintiffs’ New York offices, regardless of whether the employee developed a relationship with those clients during her employment. Plaintiffs argued that the court should partially enforce the covenant because plaintiffs only sought to prevent the defendant-employee from soliciting clients with whom she developed a relationship during her employment. The Fourth Department disagreed and explained that partial enforcement is not justified where the covenant is imposed in connection with hiring or continued enforcement or where the employer knew the covenant was overbroad. The court ruled that several factors weighed against partial enforcement in this case. Specifically, the employee received the covenant upon hire and did not receive any benefit for signing the agreement other than continued employment. In addition, the Fourth Department held that the employer was on notice that the covenant was overbroad based on existing case law. Plaintiffs argued that partial enforcement was required because the employment agreement expressly provided for partial enforcement in the event that a court found the restrictive covenant unenforceable. The Fourth Department disagreed and found that plaintiffs’ position would permit employers to use their superior bargaining position to impose unreasonable restrictive covenants without any real risk that courts would deem them unenforceable in their entirety.
In light of this decision, New York employers should review any choice-of-law provisions governing their restrictive covenants. If these provisions select Florida law or any other state laws that vary substantially from New York law, they may not be enforceable in the Fourth Department or other New York courts. Employers should also review the scope of their restrictive covenants to determine whether they are overbroad under New York law. Based on the reasoning set forth in the Brown & Brown decision, New York courts may sever any overbroad restrictive covenants in their entirety from agreements, even if there is a provision for partial enforcement.
A recent decision by New York’s highest court highlights the value to employers of initially setting forth the terms of employment in a written offer letter. In Ryan v. Kellogg Partners Institutional Services, the New York Court of Appeals upheld an award of $380,000 for an unpaid wage claim and attorneys’ fees, principally because the jury believed the plaintiff’s testimony that he was promised a $175,000 bonus by the defendant’s managing partner, and notwithstanding the managing partner’s testimony that he made no such promise.
Neither the employer’s employment-at-will policy and disclaimers, nor the Statute of Frauds provided a defense to the claim, but a properly drafted employment offer letter, which was missing here, would have made all the difference in the result.
The plaintiff testified that he was recruited to work for the defendant, which at the time was a fledgling securities brokerage firm. He testified that he sought an annual salary of $350,000 to change jobs, and, to meet his demand, the managing partner offered him compensation consisting of a salary of $175,000 and a guaranteed bonus of $175,000 payable within the first year of his employment. After accepting the position, but before starting, plaintiff completed an employment application with an employment-at-will acknowledgment. He also signed off on the employer’s handbook that confirmed his “at will” status, and specifically provided that:
[no] representative of the company . . . has the authority to enter into any agreement for employment for any specified period of time or to make any agreement contrary to [the employee’s at-will status]. [N]othing contained in the handbook may be construed as creating a promise of future benefits or a binding contract with [the employer] for benefits or any other purpose.
The new business started slowly and, according to the plaintiff, within the first year, the managing partner asked him to postpone the bonus for a year. Plaintiff claimed to reluctantly agree. There was, apparently, no documentation of this discussion or agreement. The plaintiff also testified that he discussed the bonus “many times” with the managing partner who, according to the plaintiff, “put him off.” Ultimately, plaintiff was offered a $20,000 bonus, which he refused to accept, and subsequently was terminated.
At trial, the managing partner contradicted the plaintiff’s testimony in “every conceivable way” on the topic of bonuses. He told the jury that the subject of a $175,000 bonus was never discussed before or after plaintiff was hired, and that bonuses were entirely discretionary.
The jury credited the plaintiff’s testimony and awarded the $175,000 bonus. The court found the failure to pay the bonus to be a violation of the wage payment provisions of the New York Labor Law and awarded attorneys’ fees of $205,000.
The Court of Appeals affirmed in all respects. In particular, the Court reasoned that the employment-at-will policy and acknowledgments did not provide a defense to this claim because, while the employment-at-will policy established that the plaintiff was not guaranteed employment for any period of time, and that his employment, compensation, and benefits were subject to termination, that policy did not establish that bonuses were discretionary, or that the plaintiff was not entitled to payment of compensation that he claimed was promised at the outset of his employment. According to the Court, the at-will disclaimers did not preclude an employee from recovering remuneration earned before his employment ended. It was for the jury to decide what agreement the parties had reached on the plaintiff’s bonus compensation.
The Statute of Frauds (New York General Obligations Law §§ 5-701 et seq.), which limits the enforceability of oral contracts by requiring a writing in certain enumerated circumstances, was not a defense here because there was adequate consideration for the alleged promise, and the bonus was scheduled to be paid within one year.
The Court of Appeals also approved the award of attorneys’ fees to the plaintiff on the theory that the failure to pay the bonus constituted a failure to pay wages under New York Labor Law. The Court noted that, subsequent to trial, the relevant Labor Law provision, Section 198(1-a), had been amended to increase the potential recovery to include liquidated damages of 100% of the wages found due (i.e., double damages plus attorneys’ fees).
The facts in Ryan v. Kellogg Partners illustrate the significant risk that employers take in not confirming the terms of employment through a written offer letter. Such an offer letter can incorporate at-will employment principles before the employee accepts a position. In addition, important terms of employment, including salary, benefits, bonus and incentive opportunities, can be clearly identified and not left to the vagaries of jury deliberations. The warning of Ryan v. Kellogg Partners is that substantial jury verdicts can rest on the testimony of a former employee. Employers who heed that warning will have thorough employment documentation -- beginning with a well-crafted offer of employment.
Last week, the Second Circuit Court of Appeals affirmed a Southern District of New York decision denying IBM Corporation's application for a preliminary injunction to enforce a broad non-competition agreement and to prevent a former high-level executive from working for Hewlett-Packard. The case illustrates the high standard under New York law to obtain preliminary injunctions to enforce non-competition agreements.
The case involved Giovanni Visentin, who worked for IBM in numerous roles during his 26 years of employment. His most recent position was General Manager of IBM's Integrated Technology Services ("ITS") business. In that position, he was responsible for the development and sale of ITS products and services throughout North America. In January of 2011, Mr. Visentin submitted his resignation from IBM to accept a position with Hewlett-Packard in the position of Senior Vice President, General Manager, Americas for Hewlett-Packard Enterprise Services.
Mr. Visentin had signed a non-competition agreement during his employment with IBM, which, on its face, seemed to preclude Mr. Visentin from working in his new position at Hewlett-Packard. The non-competition agreement provided that Mr. Visentin would not, during his employment and for a period of 12 months following the termination of his employment, become employed by any competitor of IBM in any geographic area in the world for which Mr. Visentin had job responsibilities during his last 12 months of employment with IBM. Clearly, Hewlett-Packard is one of IBM's principal competitors. However, the Southern District of New York held that the non-competition agreement was overly broad and refused to grant the preliminary injunction requested by IBM.
The Court reiterated the standard under New York law that "properly scoped non-competition agreements are enforceable to protect an employer's legitimate interests so long as they pose no undue hardship on the employee and do not militate against public policy." The Court also recognized that the protection of confidential information and trade secrets are legitimate interests of an employer in enforcing a non-competition agreement. The Court found, however, that the evidence did not support IBM's contention that any of its confidential information or trade secrets would be in jeopardy as a result of Mr. Visentin's employment with Hewlett-Packard.
The evidence indicated that Hewlett-Packard took steps to fence Mr. Visentin off from his former IBM clients and to avoid any overlap in responsibilities between his position with IBM and his new position with Hewlett-Packard. The new position was structured so that it was different from his IBM position in terms of subject area, geographic scope, and level of responsibility. For example, Hewlett-Packard narrowed Mr. Visentin's responsibilities during his first 12 months of employment (i.e., the length of the non-competition agreement) to include primarily segments of Hewlett-Packard's business for which he did not have responsibility during his employment at IBM. In the few segments for which Mr. Visentin did have responsibility during his employment at IBM, Hewlett-Packard made sure that Mr. Visentin worked only with existing Hewlett-Packard clients. In the geographic regions where Mr. Visentin had no responsibility during the last year of his employment with IBM, Mr. Visentin was responsible for Hewlett-Packard's full range of products and services for all existing and potential clients.
Based on all of these factors, the Court concluded that IBM had not satisfied its burden of demonstrating that any of its confidential information or trade secrets would be disclosed or relied upon by Mr. Visentin as a result of his new position at Hewlett-Packard, and refused to grant the application for a preliminary injunction.
For an employer seeking to hire a new employee who may have signed a non-competition agreement with a former employer, this case can serve as a blueprint of the steps that the employer can take to minimize the risk that the non-competition agreement will be enforced.
Over the past couple of decades, there has been much debate over whether arbitration agreements can be used to prevent employees from asserting discrimination and other employment-related claims in court. Lost in this debate, however, is a simpler and perhaps more reliable means of managing an employer’s risk: a jury waiver. A jury waiver is nothing more than a contractual provision in which an employee waives his or her right to a trial by jury in a legal proceeding brought against his or her employer. Such a provision is most commonly found in an employment agreement that is entered into when an employee is hired, but the agreement can be entered into at other times, such as when the employee obtains a raise or promotion.
Many employers assume that a jury waiver cannot be enforceable. We are, after all, trained from an early age to believe that we have a constitutional right to a trial by jury. In large part, that belief is accurate. The right to a jury trial is embodied in both the United States and New York Constitutions. And yet, the case law is generally clear that a jury waiver, if properly written and entered into, can have the effect of surrendering an employee’s right to a jury trial.
The more pressing question, then, is not whether a jury waiver is valid, but whether employers should take advantage of this opportunity. Similarly, is a jury waiver preferable to arbitration? Both jury waivers and arbitration agreements help avoid the danger and unpredictability of a jury trial, but there are some distinct advantages to jury waivers. Maybe the most obvious advantage is that, by keeping the process in the judicial system, a jury waiver allows the employer to exercise all of its formal, procedural rights, including the right to conduct discovery; the right to file a motion asking for the dismissal of the case; and the right to pursue a meaningful appeal. Anyone who has been through litigation knows that these tools can be powerful weapons for a defendant.
Detractors of jury waivers may respond by arguing that arbitration is cheaper and less time-consuming. In many instances, they are correct. However, most lawyers would agree that arbitration has become more protracted and expensive in recent years. Although it may still be a cheaper alternative to judicial litigation, that advantage is not as clear-cut as it was in the past. This is in no small part due to the fact that arbitration agreements are often challenged in court. In fact, the litigation over the enforceability of an arbitration agreement can be so costly and time-consuming that it often defeats the purpose of arbitration altogether.
Regardless, those employers who are considering the use of jury waivers must be aware of the best manner in which to frame such a waiver in order to enhance its chances of being held enforceable. The courts have made it clear that a jury waiver must be “knowing and voluntary” in order to be enforceable. As such, a waiver is more likely to withstand challenge if it contains specific references to the statutes for which a jury demand is being waived (e.g., Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, etc.). On the other hand, if the waiver is buried in a lengthy, complex contract or is being forced upon an unsophisticated employee who is unlikely to appreciate the waiver’s implications, a court will be less inclined to find that the waiver is truly “knowing and voluntary.” An employer should therefore ensure that the agreement is carefully drafted to make clear the nature and scope of the jury waiver.
Ultimately, although often ignored as a possibility, jury waivers are a viable option for many employers. The state and federal courts have upheld their validity. Accordingly, despite all of the attention given to arbitration agreements, many employers would be well-advised to carefully consider the advantages of a jury waiver instead.
Often the simplest and most straightforward cases serve as helpful reminders of best practices. This is certainly true of a recent federal court decision applying New York contract law and the New York Labor Law (“NYLL”) to a claim for bonus compensation. In that case, including the right language in an offer letter made it easy for the court to dismiss the claims.
There are a number of best practices applicable to offer letters. At a minimum, of course, the offer letter should include an employment at-will statement, unless the employment is not intended to be at-will. But simply including that statement does not mean the offer letter cannot be contractual in nature for purposes unrelated to the right to discharge. Representations made in the offer letter can be enforceable, particularly representations about bonus compensation. If the offer letter refers to potential bonus compensation, it should also incorporate by reference the terms of the bonus plan, and explicitly describe any eligibility requirements, including, if applicable, the requirement of active employment on the payout date. Most important, if the bonus plan is a discretionary plan – meaning that whether there will be a payout and how much the payout will be is entirely discretionary with the employer -- that fact should be stated. Language like that can provide a complete defense to a claim by a discharged employee that he was entitled to bonus compensation as unpaid wages under the NYLL. Bonus compensation can be “wages” under the NYLL, but only if it has already been “earned” at the time of termination. It is not “earned,” if, at the time of discharge, the payment is conditioned on some future event or left to the discretion of the employer.
On the less intuitive side, consider including what lawyers refer to as a “merger clause.” A merger clause states that the offer letter supersedes prior discussions and agreements, if any, between the parties. When such a clause is included in an offer letter, it can be used to defeat a breach of contract claim based on an alleged oral promise of something different than what was stated in the offer letter.
Some employers do not like to complicate an offer letter or make it too lengthy. In many cases that is not necessary, but in others inserting some complication in the letter is just prudent risk management, which can pay significant future dividends.