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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: April 13, 2014

Decision Analyzes Limits of Former Employee’s Common Law Obligations to Employer

On April 2, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in Freed, Kleinberg, Nussbaum, Festa & Kronberg, MD., LLP v. Nastasi, 2014 NY Slip Op. 30879(U), discussing the duties of employees to their former employer.

In Freed, Kleinberg, the plaintiff medical practice sued “[t]he individual defendants” who “were employed by the plaintiff as staff physicians” and a “corporate defendant” that was “a competing medical practice established by” one of the individual defendants. In deciding the plaintiff’s motion for partial summary judgment, the court discussed the legal obligations of employees to their employers:

That employees owe fiduciary duties, including duties of loyalty and good faith, to their employer in the performance of their duties is well established. Actionable breaches of such duties usually result in a personal gain to the employee and losses to the employer and are generally premised upon conduct by which profits, business opportunities, the raiding of employees and other assets including confidential and proprietary information of the employer are lost or diverted. However, once the employment is terminated, the relationship between a former employee and employer does not give rise to a fiduciary relationship as a matter of law.

A cause of action based on unfair competition may be predicated upon trademark infringement or dilution in violation of General Business Law §§ 360- k and 360- 1, or upon the alleged bad faith misappropriation of a commercial advantage belonging to another by exploitation of proprietary information or trade secrets. The key to stating the non-statutory, common law claim of unfair competition is that the defendant charged actionable conduct displayed some element of bad faith in misappropriating the plaintiffs labor, skill, expenditures, proprietary information of trade secrets.

Appellate case authorities have nevertheless recognized that in the absence of a restrictive covenant not to compete, an employee is free to compete with his or her former employer where remembered information as to specific needs and business habits of particular customers is not confidential or otherwise proprietary in nature. Although an employee owes fiduciary duties of good faith and loyalty to an employer, the employee may incorporate a business prior to leaving the employer without breaching any fiduciary duty. The employee may not, however, solicit his or her employer’s customers or otherwise compete during the course of his or her employment by the use of the employer’s time, facilities or proprietary information. In such cases, it is the employee’s misuse of the employer’s resources to compete with the employer that is actionable as breach of fiduciary duty.

An employee not bound by a restrictive covenant not to compete who has left the employ of a former employer is also free to compete and he or she may solicit the former employer’s customers unless it is shown that customer lists or like material belonging to the employer constitute trade secrets or that there was other wrongful conduct including the employment of fraudulent methods or the engagement in a physical taking or copying of the employer’s customer lists or files.  Knowledge of the intricacies of a business operation does not necessarily constitute a trade secret and, absent any wrongdoing, it cannot be said that a former employee should be prohibited from utilizing his knowledge and talents in this area. Information that is garnered by the defendant’s casual memory and knowledge does not constitute actionable wrongdoing. Where the information at issue is public knowledge or could be acquired easily and duplicated, it is not a trade secret.

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

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