2014.Aug.29 Forfeiture-for-Disloyalty Sustained by Texas Supreme Court (applying NY Choice of Law)
There is a crucial difference between non-competition provisions and forfeitures-for competition, and the Supreme Court of Texas highlighted that in ruling against a Texas-based employee who resigned from Exxon Mobil to join a competitor. That employee forfeited about $5.7 million of restricted stock awards due to "detrimental conduct" within the meaning of to the underlying plan and award agreements. The decision highlights the importance of well-grounding the forfeiture in suitable state law. Writing that "Forfeiture provisions conditioned on loyalty . . . do not restrict or prohibit the employee's future employment opportunities," the Supreme Court of Texas declined to apply state non-compete principles and instead applied New York's employee choice doctrine. The court enforced the parties' designation of New York law as controlling partly because the employee had worked in New York for 3 of his 31 years, but seemingly more so because --
Applying New York's employee choice doctrine, the Texas Supreme Court enforced the restricted stock forfeiture because "the employee who leaves his employer voluntarily or is terminated with cause makes an informed choice between retaining the benefit by avoiding competitive employment or forfeiting his benefit by taking competitive employment" (page 19 of Exxon Mobil Corp. v. Drennen).
- "the subject matter of the transaction - XOM shares - are traded on the New York Stock Exchange";
- "consistency is required to administer the Incentive Programs" for "large numbers of employees in many states and countries, many of whom move throughout their careers";
- New York has a well-developed and clearly defined body of law regarding employee stock and incentive plans"; and
- "Exxon Mobil's outside counsel is a New York law firm."
2013.Nov.06 Non-compete Claims Dismissed where Termination for Cause
The NY Supreme Court for NY County has dismissed claims brought by a former employer, on the basis of an email terminating his employment without cause. The court cited NY law against enforcing non-competition provisions under such circumstances. Here, the dismissal occurred because the employee would not sign a new employment agreement upon expiration of the current one. See Greystone Funding v. Kutner, 11/6/2013.
2012.Oct.25 NY Injunction Standard for Preemptive Action by Former Employee: 2nd Circuit Breaks Ground
In Hyde v. KLS Prof. Advisors, the 2nd Circuit decision begins by explaining: "Our Court has not directly addressed when enforcement of a covenant restricting competition may irreparably injure a former employee." The former employee had alleged irreparable injury from having his three-year restrictive covenant inhibit his ability to find a new job and continue his client relationships. Reversing a district court's grant of injunctive relief, the 2nd Circuit found that monetary damages would suffice to protect employee on the facts presented. Further, the court noted that "these clients did not belong to Hyde. During his employment by KLS, he signed multiple agreements in which he acknowledged that KLS's client base was proprietary and belonged to the firm." The 2nd Circuit's decision expressed reservations about the district court's conclusion "that restrictive covenants are per se unenforceable in New York against an employee who has been terminated without cause."
2012.Sept.09 Asset Purchase and Restrictive Covenants (Assignability). In Milso Industries v. Nazzaro, a Connecticut District Court applied New York to a dispute involving (1) an asset purchase that involved the seller's assignment of employment agreements that did not expressly allow for that, (2) the buyer's hiring of seller's key employees pursuant to offer letters that they did not sign, and (3) trade secret and non-compete issues arising when the key employees broke away to form a competing company. The absence of an assignability clause in the seller's employment agreement created an issue of fact as to whether the seller and its key employees intended to permit assignment when the agreements were originally executed. As a result, the court denied summary judgement.
2012.Mar.6 Aon Enforces Non-Competition and Non-solicitation Covenants via Multi-Layer Approach
In NY County's Sup. Court, Aon succeeded in enforcing post-employment restrictive covenants against a former SVP and his new employer, as a result of what the court described as "their orchestration and participation in a massive raid on the clients and employees" of an Aon division. Aon prevailed both despite an expired employment agreement (with the court enforcing its "survival of covenants" provision), and because its restrictive covenants were also set forth in three different benefit executive incentive plans in which the executive participated. See Aon Risk Services v. Cusack, NY Sup. Ct. (NY Co.), 2/28/2012.
2011.Feb.16 General Non-Compete Rules. The following quotations appear in IBM
(2011 U.S. Dist. LEXIS 15342, SDNY, 2/16/2011), in which IBM was denied a preliminary injunction to enforce noncompetition agreement with a
former executive who joined Hewlett-Packard:
- In New York, noncompetition 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. See BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999).
- To determine whether a noncompetition agreenent is specifically enforceable, New York courts have adopted the prevailing common law reasonableness standard BDO Seidman v. Hirshberg,
712 N.E.2d 1220, 1223 (N.Y. 1999); see also Ticor Tile Ins. Co. v. Cohn, 173 F.3d 63, 70 (2d Cir. 1999) The New York Court of Appeals expounded the reasonableness standard as follows:
The modern, prevailing common-law standard of reasonableness agreements for employee agreements applies a three-pronged test. 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. (Page 51 of PDF.)
- Trade secrets and confidential information count among employer interests courts recognize as "legitimate." Reed Roberts Assocs., Inc. v. Strauman, 353 N.E.2d 590, 593 (N.Y. 1976).
- Only that confidential information or those trade secrets that the employee misappropriates or will tably disclose is protectable. See id. (recognizing that enforcement of noncompetition agreements allows employer to "protect himself against deliberate surreptitious commercial piracy)..."
- New York courts define a "trade secret" 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. N. Atl. Instruments, 188 F.3d at 44 (internal quotation marks omitted); in accord Ashland Inc. v. Janien, 624 N.E.2d 1007.
Why? The following quotations from the District Court's decision in IBM
v. Visentin indicate why IBM's injunction was denied:
- Additionally, the clawback provision appears to be punitive, its only real purpose is to make it prohibitively expensive for an employee to leave his current employment with IBM. (Tr. 589: 22 591: 23). It has no discernable relation to the legitimate interest of protecting trade secrets.
- the evidence shows that the noncompetition agreements at IBM were never altered based upon the specific functions performed
by an employee. (Page 56 of PDF)
- Neither party asserts that Mr. Visentin's skiIls as a manager are "unique or extraordinary," and IBM produced no persuasive evidence that Mr. Visentin's managerial skills are somehow "unique or extraordinary." (Page 53 of PDF.)
- Here, it is undisputed that Mr. Visentin did not leave IBM with any documents in any form and that Mr. Visentin has not begun to work for HP. ... Thus, there is no showing that Mr. Visentin has actually misappropriated any trade secrets. (Page 41 of PDF.)
- Also, unlike Estee Lauder, there is no evidence of any prior wrongdoing
or that Mr. Visentin has already discIosed confidential information to
HP. See 430 F. Supp. 2d at 176.
- Mr. Visentin has agreed to circumscribe the nature of his responsibilities at HP.
- Recognizing there was a potential risk with regard to Mr. Visentin's prior clients at IBM, Mr. Visentin and HP to limit the scope of Mr. Visentin's responsibilities for the first twelve months of his employment with HP as noted above. (Page 41 of PDF.)
- If the primary purpose of the noncompetition agreements were to protect trade secrets or confidential information, IBM could
have drafted specifically tailored noncompetition agreements recognizing the unique information (or even business areas) it sought to protect. It did not do so. (Page 56-57 of PDF.)
Conclusion in IBM
- Finally, in an effort to blunt the force of these facts, Mr. MacDonald testified that in each case IBM applies a process" where it discusses the specifics of a departing employee's future job and attempts to construct a means for the employee to work there without violating the agreement. There is no evidence that IBM undertook that "process" here, and the lack of such process suggests IBM's primary concern was not protecting any specific trade secrets. The combined force of all of these facts persuades the Court that IBM's purpose was not to protect its legitimate interests but to prevent its employees from taking employment elsewhere. (Page 57 of PDF.)
- Moreover, the testimony of the architect of IBM's noncompetition program, Mr. MacDonald, indicates that IBM's Noncompetition Agreement is designed not to protect a legitimate business interest but, rather, to keep the leadership talent of IBM from leaving. (Tr. 574:23-575:3 ("Q. The noncompetition agreement that you helped to draft and adopted was driven to protect the talent of IBM from leaving; isn't that right? A: Yes, sir. Q: It was a device to keep them employed by IBM? A. Yes, sir.").) Indeed, Mr. MacDonald testified IBM views its noncompetition s as "retention devices. (Page 56 of PDF.)
- For the reasons set above, Mr. Visentin has demonstrated that this agreement is overbroad and, thus, that it fails the first prong of the BDO Seidman test. Even if that is not so, IBM has not satisfied first prong of the BDO Seidman test because it failed to demonstrate that its prohibitions are needed to protect a "legitimate" interest. (Page 58 of the PDF.)
COMPARE: NON-SOLICITATION RULES
- 2011.July.7 USI Insurance Services LLC v. Miner, 801 F.Supp.2d 175, 2011 WL 2848139 (S.D.N.Y.). "New York law recognizes the
enforceability of nonsolicitation covenants in employment agreements, so long
as they are necessary to prevent disclosure of trade secrets or confidential
information or where an employee's services are unique *191 or extraordinary. See Reed, Roberts Assocs., 386 N.Y.S.2d at 680, 353 N.E.2d 590."
- Note that within days after leaving employment, the employee sent emails to his former employer's clients, and that the court refused to find that the applicable 24-month non-solicitation provision was overly broad, with the court citing numerous decisions to that effect for the insurance industry.
- 2011.Apr.28 M&A-related Standard set forth by NY Court of Appeals ("What degree of participation in a new employer's solicitation of a
former employer's client by a voluntary seller of that client's good
will constitutes improper solicitation?"). Bessemer Trust v Branin (
16 N.Y.3d 549,
949 N.E.2d 462).