Commercial Division Blog
Posted: November 15, 2014 / Categories Commercial, Fiduciary Duties, Labor and Employment Law, Injunctions Attachments and Other Preliminary Remedies, Unfair Competition
Former Employees Preliminarily Enjoined from Carrying On New Business
On November 3, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in First Manufacturing Co., Inc. v. Young, 2014 NY Slip Op. 51562(U), enjoining former employees from carrying on a new business they set up while working for their former employer.
In First Manufacturing Co., the plaintiff wholesaler of leather sought a preliminary injunction against former employees who had established a competing business. The court granted the motion, explaining:
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. Where it is shown that trade secrets or other proprietary or confidential material belonging to the employer were used or there was other wrongful conduct by the employee, including the use of fraudulent methods or the engagement in a physical taking or copying of the employer's documents, lists or files, such conduct is actionable in tort. In such cases, it is the employee's misuse of the employer's resources to compete with the employer that is actionable as a breach of fiduciary duty.
Once the employment is terminated, the relationship between a former employee and employer is not fiduciary in nature. The former employee is free to solicit customers or to otherwise 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. However, a former employee is not entitled to solicit customers by fraudulent means, the use of trade secrets or confidential information, even in the absence of a restrictive covenant.
Wrongful misappropriations of trade secrets or other confidential or proprietary information by former employees or others having no employment relationship with the plaintiff may be actionable as common law unfair competition claims. Such claims are rooted in the bad faith misappropriation of the plaintiff's property, or its labors and expenditures or a commercial advantage belonging to the plaintiff such as its good will and generally concern the taking and use of such property right or commercial advantage to compete against the plaintiff. The bad faith misappropriation of a property or a commercial advantage belonging to the plaintiff by the infringement or dilution of a trademark or trade name or by the exploitation of proprietary information and/or trade secrets are both actionable as common law unfair competition claims.
To succeed on a claim for the misappropriation of trade secrets under New York law, a party must demonstrate: (1) that it possessed a trade secret, and (2) that the defendants used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means. Traditionally defined as relating to technical matters in the production of goods, trade secrets now encompass non-technical aspects of a business including, customer lists, price codes economic studies, costs reports, customer tracking and marketing strategies. In New York, 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. An essential requisite to legal protection against misappropriation of such a formula, process, device or compilation of information is the element of secrecy. Secrecy has been defined in accordance with the § 757 Restatement of Torts 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.
Customer lists and related information may thus constitute a trade secret provided that such list or information gives the owner an opportunity to obtain an advantage over competitors who do not know or use it. Documents, files and other assemblages of business data containing detailed, non-public information about customers, their specific or unique needs, the pricing of purchases, the credit terms of such purchases and customer class rankings may likewise constitute trade secrets and thus entitled to protection under unfair competition theories provided such assemblages are compiled through considerable effort on the part of the plaintiff and give the plaintiff a competitive advantage for the servicing of such customers and creating new business.
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 an actionable wrong. Where the information at issue is public knowledge or could be acquired easily and duplicated, it will not be considered a trade secret.
Nevertheless, confidential information not amounting to a trade secret may be protected from pirating and subsequent use under common law theories of unfair competition. To qualify for such protection, the confidential and/or proprietary material at issue must have been garnered by the defendant by way of tortious, criminal or other wrongful conduct. The remedy of an injunction against the use or divulgement of trade secrets has long been available to the plaintiff. Such remedy is also available to restrain the defendant's use of other confidential or proprietary material provided that such material was appropriated through tortious conduct or other wrongful means.
(Internal quotations and citations omitted) (emphasis added). The court went on to hold that the plaintiff had shown that it was entitled to the injunction it sought based on evidence that "included uncontroverted proof that the individual defendants engaged in the surreptitious and otherwise wrongful copying and taking of trade secrets and/or confidential proprietary material while in the employ of the plaintiff and that these defendants used and transmitted such material for purposes of competing directly and unfairly with plaintiff following the termination of their employment . . . ."