Third Party Corporation Can Enforce Non-Compete After Stock Purchase

ThyssenKrupp Elevator Corporation v. Hubbard, 2013 WL 3242380 (M.D. Fla 2013) considers whether a company that buys the assets of another can enforce the purchased company’s non-compete agreements. 

The defendant was an elevator salesman for a company that was bought by the plaintiff. an elevator company.  The defendant previously signed a non-disclosure (involving intellectual property), non-solicitation and non-compete provision. 

Soon after plaintiff acquired his employer, defendant resigned and joined one of plaintiff’s competitors. Plaintiff sued, claiming a breach of the restrictive covenants. 

Defendant moved to dismiss on the ground that plaintiff wasn’t a party to the employment contract that contained the restrictive covenants.

The Court denied the motion to dismiss.  Citing a 2008 Florida Federal case (Johnson Controls, Inc. v. Rumore, 2008 WL 203575) and Florida’s Business Corporation Act, the court held that where there was a 100% merger or stock transfer, the surviving company (here, plaintiff) assumed all rights and obligations of the predecessor,  including rights under  the challenged non-compete agreement.  *2, Fla. Stat. § 607.1106 (surviving corporation of a merger shall have all the rights, privileges, immunities and powers, and shall be subject to all the duties and liabilities of the merged corporation). 

Here, in light of plaintiff’s stock purchase of defendant’s former employer, plaintiff was a “surviving corporation” and could sue to enforce defendant’s non-compete  

Take-aways:

A third party can enforce employee restrictive covenants where there is an asset purchase by the third party;

Employees should press for terms in their employment contracts that clarify only their direct employer (and not an acquiring company) can hold them to restrictive covenants.  

Court Can Shorten Overly Broad Non-Compete In Recruiting Business Dispute – IL Court (Applying Md. Law)

blue pencilIn TEKsystems, Inc. v. Lajiness, 2013 WL 3389062 (N.D.Ill. 2013), the Northern District of Illinois, applying Maryland law (due to a contractual choice of law provision), upheld a 50 mile/18 month restrictive covenant in a recruiter’s employment contract. 

The plaintiff employer sued one of its former recruiters for violating a non-compete provision contained in a written employment contract when the recruiter went to work for a competitor.  The employment contract provided that Maryland law would govern (Maryland was where plaintiff was headquartered), and precluded the defendant from competing with plaintiff in the job placement business for a period of 18 months and within a 50-mile radius post-employment. 

The contract contained some drafting precision: it only prevented the recruiter defendant from working for a competitor who engages in any aspect of plaintiff’s business for which defendant specifically performed services or about which defendant obtained confidential information.  2013 WL 3389062, *4.   In other words, the restriction didn’t entirely ban the defendant from working in any capacity for a competitor. If the recruiter’s job duties while at the plaintiff employer differed qualitatively from his duties at the competitor, this wouldn’t violate the non-compete. 

The defendant filed a 12(b)(6) motion to dismiss on the basis that the restrictive covenant was facially overbroad.  The Northern District denied the motion and held that the restrictive covenant was reasonable in terms of time and space under Maryland law.

Q: Why?

A: The Court first validated the Maryland choice of law provision since, under Illinois conflicts of law principles, Maryland had a definite connection to the lawsuit since plaintiff was headquartered there.  There were also no public policy concerns triggered by applying Maryland law.

The Court then applied Maryland restrictive covenant law.  In Maryland, restrictive covenants spanning 50 miles and more than 18 months had been upheld and that this particular non-compete was narrowly drawn only to prevent defendant from competing on matters “about which [he] gained specialized or confidential knowledge while employed at [TEKsystems].”  2013 WL 3389062, *4-5.  The court also stated that even if the plaintiff’s non-compete clause was overbroad, Maryland courts routinely “blue-pencil” such non-compete clauses, paring them down to shorter time and space limits.  Id. at * 5.

In finding that TEKsystems stated a colorable breach of contract claim, the Court found that it sufficiently alleged defendant had access to and contact with plaintiff’s confidential information and customers and was now working in a similar position for a competitor.  Accordingly, for purposes of a 12(b)(6) motion – which accepts as true all facts alleged in a complaint -plaintiff sufficiently stated a breach of contract claim premised on defendant’s violation of the non-compete provision in the TEKsystems employment agreement.

The Court did dismiss plaintiff’s equitable accounting claim on the basis that plaintiff had an adequate remedy at law.  Maryland equitable accounting law (like Illinois) posits that an adequate legal remedy (i.e., a breach of contract claim) will defeat an equitable accounting claim.  Here, since the employment contract contained detailed formulas to compute plaintiff’s lost profits and sales in the event an employee breached the contract, this was a clear legal remedy (i.e., a breach of contract suit) for the plaintiff.

Take-away:  Definitely a pro-employer case.  It upholds a 18 month/50-mile restrictive covenant and makes clear that even if the restriction was too broad, a Maryland court (and likely an Illinois court, too), could simply edit and narrow down the scope of the non-compete. This ability to adjust the non-compete’s reach strikes a balance between the two competing interests that lie at the heart of non-compete and trade secrets cases: protecting the employer’s legitimate business interests while at the same time allowing an employee to earn a living in his chosen field.

Illinois Trade Secrets and Customer Lists

image

Garon Foods v. Montieth, 2013 WL 3338292 (S.D.Ill. 2013), analyzes the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. (ITSA) and the governing preliminary injunctive relief standards in a diversity dispute over the distribution of pepper jack cheese products.

The plaintiff peppers distributor sued a former employee after she resigned and went to work for one of plaintiff’s suppliers.  The distributor sued for breach of contract and violation of the ITSA and claimed the defendant was violating a confidentiality agreement by soliciting business from plaintiff’s customers. After filing its complaint, plaintiff requested a preliminary injunction barring defendant from using plaintiff’s confidential information or trade secrets in connection with soliciting business from various cheese manufacturers.

Held: Preliminary injunction granted in part.

Rules/Reasoning:

A preliminary injunction claimant must show: (1) a likelihood of success on the merits; (2) no adequate remedy at law; and (3) irreparable harm if injunction is not granted.  Once plaintiff establishes elements (1)-(3), the court balances the harms to both parties.  If the court finds that plaintiff has a greater chance of winning on the merits, the less the balance of harms must weigh in his favor.  *1

– Illinois courts will enforce a confidentiality agreement where the information is truly confidential and the subject of reasonable efforts to keep the information secret;

– Customer lists are treated as confidential only where the list’s contents are developed by an employer at great time and expense and kept under tight security;

– Where the customer list is generally accessible by third parties or can be easily reconstructed or duplicated, it’s not confidential. 

Here, since the defendant offered evidence that the manufacturers she contacted in her new position were through her internet research efforts and memory (and not by resorting to plaintiff’s physical customer list), the court found that it wasn’t likely that the plaintiff could show that its customer list was sufficiently confidential.  *4-5. 

The Court did find though that the defendant violated the confidentiality agreement by divulging the plaintiff’s key supplier’s identity (by providing unique product specs information in sales pitches) and by using plaintiff’s customers’ past purchasing history in soliciting business from those customers.  *5. 

On the ITSA claim, the court found that  plaintiff established two trade secrets: (1) the supplier’s identity (to third parties) and (2) its customers’ purchasing needs and sales histories.  

The Court also found that defendant misappropriated (used) plaintiff’s trade secrets by revealing plaintiff’s supplier’s identity and secret product data by sending plaintiff’s product specs to plaintiff’s customers in efforts to induce them to do business with the new employee. 

The Court crafted an 8 month preliminary injunction during which time the defendant was forbidden to contact certain customers of the plaintiff.  *7-8. 

Conclusion.  Garon provide a good synopsis of preliminary injunction standards and some Illinois trade secrets law basics. The case reaffirms how difficult it is for an employer to enforce a restrictive covenant in the context of an employee confidentiality agreement and to show that its customer list merits trade secret protection. 

The case also serves as a good example of a court balancing the harms and considering public interest factors in connection with drafting an injunction that gives equal voice to the countervailing interests of an employer (protecting its confidential business data), a former employee (the ability to make a living) and the general public (free and open business competition).