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Posted: October 28, 2017

Court Refuses to Issue Injunction Enforcing Restrictive Covenants

On September 28, 2017, Justice Emerson of the Suffolk County Commercial Division issued a decision in Devos, Ltd. v. United Returns, Inc., 2017 NY Slip Op. 51379(U), refusing to issue an injunction enforcing restrictive covenants in employment contracts, explaining:

New York courts have long held that, since there are powerful considerations of public policy which militate against sanctioning the loss of a person’s livelihood, restrictive covenants which tend to prevent an employee from pursuing a similar vocation after termination of employment are disfavored by the law. Covenants that restrict an employee’s ability to compete must meet the test of reasonableness. A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. A violation of any prong of this three-prong test renders the covenant invalid. Moreover, with respect to the first prong, a covenant will only be subject to specific enforcement if it is reasonable in time and area and then only to the extent necessary to protect the employer from unfair competition which stems from the employee’s use or disclosure of trade secrets or confidential customer lists or from competition by a former employee whose services are unique or extraordinary.

The restrictive covenants at issue in this case are facially overbroad. While the first paragraph is limited temporally to three years, it contains no geographical limitation. It prohibits the individual defendants from engaging in any competitive business within the continental United States and in any countries in which they performed any duties for Devos or had any contact with a Devos customer, including telephone and facsimile transmission. The second paragraph, which prohibits the individual defendants from soliciting any Devos customers with whom they did business and from inducing any Devos representatives or employees from terminating their employment, has no temporal limitation. The court finds that these restrictions are far greater than required to protect any legitimate interest of Devos and that they impose an undue hardship on the individual defendants, all of whom are in their late 40’s or early 50’s and have been employed by Devos or in the pharmaceutical-return industry for 20 years or more. To enforce these covenants would require the individual defendants to endure a three-year period of total unemployment, to accept employment in an entirely different occupation or profession, or to relocate outside of the continental United States to a foreign country where they have never performed any duties for Devos or had any contact with any of Devos’ customers. The defendant Robert Dooley (former Director of Government Affairs Outside the Continental United States), in particular, would potentially be prohibited from relocating anywhere in the world.

The plaintiff contends that the covenants are necessary to protect Devos’ confidential customer information and trade secrets. A trade secret is a formula, pattern, device, or compilation of information that is used in one’s business and that gives the owner an opportunity to obtain an advantage over competitors who do not know or use. An essential requisite to legal protection is the element of secrecy. Secrecy has been defined as (1) substantial exclusivity of knowledge of the formula, process, device, or compilation of information and (2) the employment of precautionary measures to preserve such exclusive knowledge by limiting legitimate access by others.

The plaintiff has made no showing of the precautionary measures taken by Devos to guard the secrecy of the customer lists and other information that it seeks to protect as trade secrets. With respect to customer information, it is well established that, when an employer’s past or prospective customers’ names are readily ascertainable from sources outside its business, trade secret protection will not attach and solicitation by the employee will not be enjoined. The defendants have produced evidence in admissible form that, contrary to the plaintiff’s contentions, the names of Devos’ customers are publicly available and well known within the pharmaceutical-return industry. Moreover, pricing data and market strategies do not constitute trade secrets, and an employee’ recollection of information pertaining to the specific needs and business habits of particular customers is not confidential. The plaintiff’s contention that the defendants used Devos’ confidential and proprietary information to copy the way Devos operates and services its clients is contradicted by the affidavit of the defendant Robert Dooley, who avers that Devos’ systems and processes are used throughout the pharmaceutical-return industry. Mere knowledge of the intricacies of a business is not enough to constitute a trade secret.

In view of the foregoing, the court finds that the plaintiff has failed to establish that the restrictive covenants are necessary to protect Devos from unfair competition which stems from the individual defendants’ use or disclosure of trade secrets or confidential customer lists. Moreover, in addition to being sharply disputed, many of the plaintiff’s allegations are based on hearsay or information and belief. Accordingly, the plaintiff has failed to establish by clear and convincing evidence that it is likely to succeed on the merits and that the balancing of the equities is in its favor.The plaintiff has also failed to establish by clear and convincing evidence that it will be irreparably harmed in the absence of an injunction. It cannot be determined on the record presently before the court whether any loss of good will and/or business by Devos was due to the competing business set up by the defendants or due to its indictment and subsequent criminal conviction. In any event, Devos contends that its business is thriving, that it acquired more than 1,000 new customer accounts in 2015 and 2016, and that the sales representatives who replaced the defendants David Silvis and Christopher Louis have generated more than $800,000 in fees and services for the years 2015 and 2016, respectively.

Finally, the plaintiff contends that, if the court finds the restrictive covenants to be overbroad in time or scope, they should be partially enforced to the extent that the court determines them to be reasonable. Such partial enforcement is unavailable when, as here, the employer fails to demonstrate that the noncompete agreement serves to protect a legitimate employer interest. Moreover, there is evidence in the record that the restrictive covenants were imposed on the individual defendants as a condition of their continued employment for which they received no additional compensation. Accordingly, partial enforcement is not warranted.

(Internal quotations and citations omitted) (emphasis added).

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