Trade Secrets & Employee Mobility

Employee restrictive covenant agreements often contain fee-shifting provisions entitling the employer to recover its attorneys’ fees if it “prevails” against the employee. But “prevailing” is a term of art in this context. Obtaining a TRO or preliminary injunction is not a final decision on the merits, so does obtaining a TRO or preliminary injunction trigger a fee-shifting provision? A recent case illustrates that an employer can sidestep this potentially thorny issue by using careful and thoughtful drafting.

In Kelly Services, Inc. v. De Steno, 2019 U.S. App. LEXIS ...

In what turned out to be a disastrous result for defendants, a Massachusetts Court issued a default judgment against certain salespeople who left their former company to form the new competing company. The default judgment was based on the defendants' conduct during the discovery phase of the case, in which they failed to follow the terms of the Court's Preliminary Injunction, including misrepresenting their compliance to the Court, destroying evidence, and using confidential information to sell products to certain businesses, all of which was specifically barred by the terms of the Court's Order.

A recent federal case provides an example of how companies will be stuck with the terms of the restrictive covenants they implement, and may not be able later to interpret those covenants broadly.

In a recent New York case, a commercial insurance broker whose business and employees had been raided on a substantial scale by a former employee and competitor was awarded a preliminary injunction barring the former employee, the competing company, and certain other former employees from soliciting business from the broker's clients, and from soliciting other employees of the broker to join the competitor. The Court's finding of irreparable harm was premised on reputational harm and loss of confidence in the marketplace suffered by the broker due to the perception that the broker was badly "wounded" by the extent of the raid.

A recent decision of the United States District Court, Southern District of New York, illustrates the importance for employers of making sure non-competition agreements are correctly executed by employees.

In EMC Corp. v. David A. Donatelli, case number 09-1727-BLS2 in the Suffolk County Superior Court in Massachusetts, the Court modified the preliminary injunction it had issued against Donatelli by allowing him to start working for HP in California. The Court issued a narrow order tied to the protectable interest of EMC while at the same time, not depriving Donatelli his opportunity to pursue his livelihood in a competitive business.

Many New York attorneys, when seeking a preliminary injunction against a party that has misappropriated their clients' trade secrets, will argue that a presumption of irreparable harm to their clients automatically arises upon the determination that a trade secret has been misappropriated. A recent decision of the U.S. Court of Appeals for the Second Circuit, however, holds that misappropriation of trade secrets does not automatically lead to irreparable harm. The aggrieved party only faces irreparable harm if the misappropriator will disseminate the secrets to a wider audience or otherwise irreparably impair the value of the secrets.