David J. Clark
David J. Clark

Last month, two New England states enacted laws restricting the use of non-competition provisions in agreements governing an employment, partnership or other professional relationship of a physician.

Broadly speaking, the aim of both of these laws is to protect patients’ choice regarding medical care by limiting the ability of employers or partners to contract with physicians such that the physicians’ ability to practice medicine would be restricted at the end of the professional relationship.

Effective on July 12, 2016, the new law in Rhode Island (R.I. Gen. Laws §5-37-33) prohibits non-compete language in most physician agreements.  It renders void and unenforceable “any restriction on the right to practice medicine” found in virtually any contract creating the terms of employment, partnership or other professional relationship involving a state-licensed physician.  The new law therefore invalidates non-competition or patient non-solicitation provisions for Rhode Island physicians.  The new law does not apply in connection with the purchase and sale of a physician practice, provided the restrictive covenant is less than five years in duration.

Effective on July 1, 2016, the new law in Connecticut (Public Act No. 16-95) is less sweeping than the Rhode Island law.  Rather than prohibiting physician non-competes, the Connecticut law limits the allowable duration (to one year) and geographical scope (up to 15 miles from the “primary site where such physician practices”) of any new, amended or renewed physician agreement.  The new law also renders physician non-competes unenforceable if the physician’s employment or contractual relationship is terminated without cause.

Rhode Island and Connecticut are the latest in a slowly growing number of states that have taken legislative action to limit the use of physician non-competes.  Their neighbor Massachusetts was an early adopter of such a statute.  Mass. Gen. Laws chapter 112, §12X (enacted in 1977) bars physician non-competes which include any restriction of the right of a physician to practice medicine in any geographic area for any period of time after termination.  Much of the language in the Massachusetts law appears in the recently enacted Rhode Island statute.

Similar language appears in Delaware and Colorado statutes dating from the early 1980s, which state that covenants are void if they restrict the rights of physicians to practice medicine upon termination of the agreements containing the covenants.

More recently, Texas (in 1999) and Tennessee (in 2012) both enacted statutes (as did Connecticut) applying stricter standards to physician non-competes than are applicable to employee non-competes in general, while stopping short of invalidating such physician non-competes.

It remains to be seen if the enactment this summer of these statutes in Connecticut and Rhode Island is merely a coincidence, or foreshadows more state legislatures pursuing such limitations of physician non-competes.

After a bench trial, a Connecticut state court rejected a violation of trade secret complaint by an employer against a former employee in BTS USA v. Executive Perspectives, Superior Court, Waterbury, Docket No. X10-CV-116010685 (Oct. 16, 2014). The plaintiff, BTU USA, provides training and consulting services to corporate clients using learning maps, computer simulations and board games. The defendant, Executive Perspectives (“EP”), offers essentially the same services and products.

Marshall Bergmann, a former BTS Senior Director who had access to much of BTS’ proprietary information, had signed a non-compete clause stating, among other things, that when he left, he would not solicit current BTS customers, or any client BTS had, during the last two years of his employment. BTS claimed that after Bergmann left his employment, he violated the non-compete provision by contacting and soliciting BTS clients through LinkedIn, and he stole some of the technology and products, such as packaging, the name of the packaging vendor and client lists, in violation of the Connecticut Uniform Trade Secrets Act. Other claims included Connecticut Unfair Trade Practices Act Violation, tortious interference with business relationships and breach of contract.

The Court found that there was little evidence that BTS made an effort to conceal the claimed product trade secrets, because the products were widely distributed to clients and prospective clients. Also, a third party – a former BTS Australia employee who was not bound by any restrictive covenant agreement that banned sharing of information – had already shown EP photographs of the products at issue. EP had the products in place before Bergmann was hired by EP. Therefore, the product and vendor names were not misappropriated through improper means. Moreover, BTS failed to prove that it lost business to EP, and actual loss or harm is a prerequisite to monetary recovery. Therefore, BTS failed to carry its burden of proof.

In addition, BTS claimed Bergmann breached his employment contract by the way he used the LinkedIn page he had while he was employed at BTS. He did not change his BTS-related LinkedIn connections when he joined EP, and he announced his new job on LinkedIn. In response, Bergmann claimed that BTS had no policy barring what he did.

The Court ruled that absent an explicit provision in an employment contract, which governs, restricts or addresses an employee’s use of social media, the Court would not read such restrictions into an employment agreement since social media “has become embedded in our social fabric.”

BTS USA v. Executive Perspectives is another example that an employer must actively maintain the confidentiality of trade secrets in order to seek trade secret protection. In addition, the case demonstrates that employment contracts, company policies and procedures should include explicit provisions regarding an employee’s use of social media during and after employment with the employer, and the employer should require ex-employees to delete clients or customers from LinkedIn accounts on termination of employment, if that is what the employer expects.

On October 23, 2013 Judge Hiller of the Connecticut Superior Court declined to enforce a one year non-compete brought by a lighting and lighting design company against one of its former designers, Chris Brown.  See the decision in Sylvan Shemitz Designs, Inc. v. Brown.

In March 2013, Brown resigned his job for the plaintiff, and went to work at Acuity, a larger company that had four separate divisions focused in lighting controls. The plaintiff sued Brown and alleged that he breached a 2011 non-compete agreement, which indicated he could not work for one year for businesses in the United States that receive 25 percent of revenue from developing, manufacturing or selling lighting control systems. The court found that the geographic restraints and one-year duration of the noncompete agreement were reasonable. The restriction on “any” employment, no matter how important or menial, was not reasonable. Signing a new non-compete mid employment was deemed sufficient consideration where it reduced the length of the restriction from two years to one.

The Court determined that the plaintiff failed to prove that the defendant currently is involved in research and development in the area of lighting controls or that Acuity intends to pursue the same product lines in which the defendant obtained experience when working for the plaintiff. Currently, the defendant is responsible to design control layouts. He does not appear to be in a position to use his knowledge of the plaintiff’s business operations to harm the plaintiff. “Taken as a whole,” wrote the court, “the plaintiff has failed to demonstrate how the defendant, whose efforts for Acuity are both of a different character and deal with different products than those on which he worked while with the plaintiff, is in a position to cause irreparable harm.”

Finally, the court held that plaintiff failed to prove irreparable harm. Plaintiff needed to show it had or would likely suffer some economic harm beyond attorneys’ fees in prosecuting the action. Mere speculation of harm was not sufficient to justify a finding of irreparable harm.

We reported in earlier blogs on May 28 and June 13, 2013, that the Connecticut House of Representatives proposed to regulate non-compete agreements and codify the common law by a bill entitled, “Employer Use of Non-Compete Agreements.” The bill would have voided certain Connecticut non-compete agreements entered into, renewed or extended on or after October 1, 2013, when the agreements followed an acquisition or merger, “unless the employer provides the employee with: (1) a written copy of the agreement; and (2) at least seven days, and more if reasonable, to consider the merits of entering into the agreement.” Connecticut Governor Dannel P. Malloy, however, vetoed the bill on Friday, July 12, 2013.

Governor Malloy states that “the bill leaves certain key terms undefined or unclear” with “the potential to produce legal uncertainty and ambiguity in the event of a merger or acquisition,” and likely would result in costly and time-consuming litigation.

The Governor requests greater clarity from the General Assembly and suggests that “additional protections for employees may be warranted to guarantee a reasonable period of time to renew a written non-compete agreement before entering into such an agreement in the first instance.”

Whether the non-compete agreement issue will be revisited in 2014 remains to be seen. For now, Connecticut common law regarding the use and scope of non-compete agreements remains unchanged.

We reported in an earlier blog on May 28, 2013, that the Connecticut House of Representatives proposed to regulate non-compete agreements and codify the common law. The prior proposed bill has been modified to be applied only under circumstances of companies involved in mergers and acquisitions.

The bill that has been passed is entitled, “Employer Use of Non-Compete Agreements,” and it voids certain Connecticut non-compete agreements entered into, renewed or extended on or after October 1, 2013, subject to the following requirements.

These rules apply, only under two specific circumstances concerning mergers and acquisitions: “(1) an employer is acquired by or merges with another employer; and (2) as a result of the acquisition or merger, an employee’s continued employment is conditioned on the employee entering into a non-compete agreement.” The non-compete agreements will be void, “unless the employer provides the employee with: (1) a written copy of the agreement; and (2) at least seven days, and more if reasonable, to consider the merits of entering into the agreement.”

An employee may waive his or her right to have a non-compete agreement voided by signing a separate waiver agreement before entering into the non-compete agreement.

The bill will become law on October 1, 2013, if it is signed by the governor.

A bill entitled, “Employer Use of Non-Compete Agreements,” pending before the Connecticut House of Representatives, proposes to regulate all Connecticut non-compete agreements entered into, renewed or extended on or after October 1, 2013, and codify the common law.

The bill, which has passed the Judiciary Committee, allows an employer to use a non-complete agreement if: (1) it is reasonable as to its duration, geographical area and type of the employment or business; and (2) the employer provides the employee with not less than ten business days to seek legal advice relating to the terms of the agreement prior to entering into it.

In addition, the bill would allow any person aggrieved by a violation of the law to bring a civil lawsuit in the state Superior Court to recover damages, together with court costs and reasonable attorneys’ fees, however, it would not require such an award for a successful challenge to the agreement. It would also allow a court to limit the agreement to render it reasonable in light of the circumstances in which it was entered and to specifically enforce the agreement as limited by the court, which would codify the “blue pencil” provision now typically included in restrictive covenant agreements for courts to limit, but enforce, overboard agreements.

The proposed bill is more simplified and not entirely the same as the five factor analysis that Connecticut courts presently use to evaluate the reasonableness of a restrictive covenant: (1) the length of time; (2) the geographic area; (3) the fairness of the protection afforded the employer; (4) the extent of the restraint on the employee’s opportunity to pursue an occupation; and (5) the extent of interference with the public interest. Courts would likely continue to apply certain of those factors and the existing case law to their analysis of the codified law, assuming the bill passes.

Saylavee, LLC v. Hunt demonstrates the willingness of Connecticut courts to enforce restrictive covenants that are reasonable in length of time and geographic scope.

The defendant Rhonda Hunt worked as an exercise instructor for an exercise studio called Bodyfit, with whom she signed an agreement restricting her for two-years from becoming involved as an employee “in any business which engages in the same or similar business of the company or otherwise competes with the business of the company within a ten mile radius of any exercise studio owned and operated by the company.” Hunt acknowledged in the agreement that she was capable of earning a living in a field for which she was qualified without violating the terms of the covenants. The agreement also addresses protected trade secrets and provides for equitable relief without the necessity of proving irreparable harm or the inadequacy of money damages.

Hunt resigned her job at Bodyfit on August 12, 2011, and at first, honored the non-compete by working at exercise studios more than 10 miles from Bodyfit. In July 2012, she began working at the Equinox gym less than two miles from the Bodyfit gym. She taught exercising classes at Equinox similar to those offered at Bodyfit, and Equinox had the same potential clientele.

In its May 7, 2013 decision , the Superior Court of the State of Connecticut found that the non-competition agreement was in “plain speak” and that Hunt had signed it without showing it to her husband, who was a lawyer. With reference to trade secrets and non-competition covenants, the Court found, “that all of these expensive facilities like to have what they call at Equinox, their ‘signature programs’”, which Hunt was teaching to the same potential clientele as she had taught at the Bodyfit location only two miles away from Equinox and with another year remaining on the term of the non-compete agreement, which prohibited her conduct.

Based on these facts and a plain reading of the restrictive covenants, the Court entered a temporary injunction enjoining: (1) Hunt from working at Equinox or any other exercise establishment within 10 miles of Bodyfit; (2) revealing any of Bodyfit’s proprietary business information to anyone; and (3) soliciting any current or former Bodyfit clients for business.

Failure to protect corporate trade secrets had dire consequences for AGC, Inc., a Connecticut aviation component manufacturer forced to file a Chapter 11 bankruptcy on April 16, 2013. AGC blamed its circumstances in substantial part on the theft of its trade secrets by one of its former key executives who joined a rival competitor where he used the valuable proprietary information. AGC obtained little judicial sympathy because it failed to keep its trade secrets secret in the fashion required to be awarded injunctive relief.

Former AGC Vice President David J. Baillargeon was laid off in July 2009, due to a downturn in AGC’s business; and on his departure, he told the AGC President that he would regret terminating his employment. Baillargeon left the company with about one thousand pages of documents stored on a computer memory stick, including presentations, strategic plans, personnel information and pricing information, along with a three-ring binder containing AGC blueprints. He brought the information to his next job at an AGC competitor, Twin Manufacturing Co., and he used it to compete against AGC, resulting in AGC’s loss of approximately $2 million in annual revenue in addition to the expenses of a costly and largely unsuccessful trade secrets litigation against Baillargeon and Twin.

AGC sued Baillargeon and Twin in Connecticut state court in May 2010, alleging causes of action for violation of the Connecticut Uniform Trade Secrets Act (CUTSA), the Connecticut Unfair Trade Practices Act (CUTPA), breach of fiduciary duty and tortious interference with business and contractual relations. Unfortunately, AGC’s failure to protect its trade secrets and keep them confidential was a textbook example of what not to do if a company needs injunctive relief.

The particular trade secret at issue was AGC’s rubber injection molding work on aircraft engines by which rubber of appropriate shape and thickness is attached to various parts within the aircraft engine. Although AGC policies prohibited employees from disclosing confidential company information, AGC did not enter into a noncompete agreement with Baillargeon, and it failed to take the steps courts require for trade secret protection to be awarded. For example, AGC made a trade show PowerPoint presentation to showcase its capabilities to thousands of attendees, which included many competitors. There were no indications that any of the presentation was confidential or secret. No one attending the trade show was required to sign any confidentiality agreement. Color photographs of the rubber injection molding parts and devices were clearly visible during the presentation and customers were given the same presentation on a memory stick with no restrictions on its use. Also, AGC offered facility tours to customers, potential customers and competitors, who visited nearly every room in the facility, including the injection molding department, as well as a viewing of the injection apparatus and the mold that was used for it, while the visitors stood within mere feet of the apparatus. The mold designs were on public display for marketing purposes. Documents and drawings in plain view were not stamped “Confidential Trade Secrets”. No one was told that anything visible on the tour was confidential or secret. There was no controlled or limited disclosure during the tour, no legends of confidentiality on documents, no shielding of processes from plain view, and no segregation of proprietary information.

Consequently, in a March 2011 decision, the state court ruled that AGC failed to preserve the secrecy of its manufacturing processes or pricing and denied any relief under CUTSA. The court granted limited injunctive relief under CUTPA against Baillargeon for unfair or deceptive trade practices based on his theft and misuse of AGC’s property, which the court found had given Twin a minor head start in setting up its rubber injection molding business because it saved time in Twin’s creation of its drawings. There was insufficient evidence to hold Twin in violation of CUTPA. To prevent continuing violations of AGC’s property rights, Baillargeon was enjoined from using or disclosing AGC’s property and confidential and proprietary information, and he was ordered to return to AGC any property that he had taken when he was terminated.

AGC’s litigation and bankruptcy confirm how essential it is for a company to take proactive and diligent steps to protect its confidential and proprietary trade secrets by keeping them secret, designating the information as “Confidential” and securing the trade secrets from plain view at the risk of great financial peril or even the company’s survival for failure to do so.

An employee who joined a corporate employer that was not a competitor with his former employer was still enjoined and restrained by restrictive covenants he signed with his former employer when his new employer merged with his prior employer’s competitor.

In Amphenol Corporation v. Paul, 3:12-cv-543, (D. Conn. Jan. 8, 2013), the United States District Court for the District of Connecticut granted an injunction and temporary restraining order because after the new employer merged with a competitor of the employee’s former employer, the new employer did not take adequate measures to insulate the employee from information and activities that provided the possibility that documents could be used to violate non-competition agreements signed by the employee with his former employer. Also, before his departure for his new position, the employee had emailed to his personal email thousands of work related emails and downloaded business files.

Amphenol is a multi-national corporation that designs, manufactures and markets electronic and fiber optic connectors, cable and interconnect systems. Richard Paul, a former decades-long employee was the business unit director of Amphenol’s high speed interconnect unit, with an expertise in a device that joins electrical circuits together. He had unlimited access to marketing information regarding sales history, markets and customers.

Paul and Amphenol executed various non-competition agreements over the years, which restricted him from engaging in the development, production, sale or distribution of any product, sold, distributed or in development: (i) by the operation of Amphenol during the 12 months preceding Paul’s termination of employment, or (ii) by Amphenol or its subsidiaries about which Paul received Confidential Information. The agreements also restricted Paul’s ability to divert customers or employees from Amphenol for 24 months following his termination.

The Defendant, TE Connectivity, Ltd., designs and manufactures products that connect and protect data and power, serving customers worldwide in some of the same industries as Amphenol. Although TE and Amphenol were not direct competitors, within the past year, TE merged with Deutsch Group, a manufacturer of electrical and fiber optic connectors that is in direct competition with Amphenol. When Amphenol learned of that merger, it created a team to form a strategic response to the merger, and Paul had access to the team’s findings and documents during his employment with Amphenol.

Paul voluntarily terminated his employment with Amphenol to join TE in March 2012, as global vice president for production management and pricing for TE’s aerospace, defense and marine business unit. The business unit that Paul oversees is not in competition with Amphenol; he works from home; and he does not have direct physical contact with any TE or Deutsch employee who deals with connectors. While those facts are strong arguments against enforcement of Paul’s restrictive covenants, the Court found that after joining TE, Paul was copied on various emails related to TE’s merger with Deutsch and the pricing and marketing connectors. Also, a forensic study of Paul’s computer activity at Amphenol before his departure found 2,000 work related emails forwarded to his personal email address, and the computer hard drives that Paul returned to Amphenol revealed that he had removed various files which had business relevance.

The Court found that Paul could continue in his current capacity, subject to certain restrictions. He was restrained from having any involvement or input regarding the merger, acquisition or integration of TE with Deutch. Also, he was restrained from using Amphenol’s confidential information, trade secrets or sales information and restrained from soliciting Amphenol’s employees, customers and suppliers, among others.

In addition, the Court required TE to implement precautions to confirm that Paul did not share Amphenol’s confidential, trade secret or proprietary information. TE had to distribute a memo reminding senior leaders and managers about Paul’s restrictions; search TE’s IT systems for any evidence that Paul uploaded Amphenol’s documents or data; certify that those IT searches were performed; implement a word-based filter including the terms “Amphenol” and “Deutch” on Paul’s email accounts so that Paul remained “fire walled” from competitive activities; and required Paul to work in the TE’s secure and limited access facility when he was not working from his home.

When corporations merge, the employers and employees must be proactive and consider steps to protect against claims that the merger created a violation of restrictive covenants that did not exist before the merger. Also, an employee who sends work emails to his personal email address and who downloads business files is likely to be caught and to create adverse legal consequences for himself and his new employer. Requiring new hires to certify that they have not brought to the new job any of their work product from past employers, and incorporating the same rule in company policies, are proactive steps employers should consider.

The Supreme Court of Connecticut has ruled that a public agency, the University of Connecticut, can create and maintain trade secrets that are exempt from disclosure under the state’s Freedom of Information Act (“FOIA”). The trade secrets are databases of customer lists identifying the persons who paid to attend, donated to, inquired about, or participated in educational, cultural or athletic activities at the University, such as season ticket holders, donors and program subscribers.

In University of Connecticut v. Freedom of Information Commission, 303 Conn. 724, __A. 3d__ (Feb. 21, 2012), the Court rejected the State Freedom of Information Commission’s decision that the University’s databases could not be “trade secrets” under the FOIA disclosure exemption, based on the Commission’s conclusion that the University was a public entity that did not engage in “trade.” The Court ruled that a public agency that creates and maintains trade secret information is entitled to the same protection that would constitute a protected trade secret if the information was created by a private entity. The Court examined the nature of the information in the databases, the purposes for which the information was used, potential competitors and the economic benefit that the information might confer on competitors.

The Court concluded that the University is a public agency under the FOIA and required under the act to disclose public records, with certain exceptions, such as for trade secrets, including customer lists, that: (i) derive independent economic value, actual or potential, from not being generally known to and not readily ascertainable by proper means by other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain secrecy.

The Court reasoned that the FOIA definition focuses exclusively on the nature and accessibility of the information, not the status or characteristics of the entity creating and maintaining that information. Also, the definition of a “person” protected by the Connecticut Uniform Trade Secrets Act includes “government, governmental subdivision or agency or any other legal or commercial entity.” There is no requirement that the entity must be engaged in a “trade.” The Court found that the University spends considerable resources of the state, on its own or in partnership with others, for research and development of intellectual property and takes appropriate steps to maintain its secrecy. The Court concluded that the state’s ability to recoup costs or reap the financial benefits for those efforts would be undermined if anyone could obtain the information by a simple FOIA request. Therefore, the information met the statutory criteria for a trade secret exempt from the FOIA request.

Consequently, the Court’s decision allows a public agency, such as a public university, the same rights as a private person or entity to profit from research, investment and development of trade secrets that otherwise meet the requirements of the Connecticut Uniform Trade Secrets Act.