preliminary injunction

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 875 (6th Cir. Jan. 10, 2019), a Sixth Circuit panel upheld the lower court’s decision to enforce a broad attorneys’ fee provision and award Plaintiff Kelly Services over $72,000 in attorneys’ fees. In the lower court, Plaintiff sought attorneys’ fees after obtaining a preliminary injunction prohibiting Defendants from competing. The underlying provision did not require Plaintiff to ‘prevail’ before seeking fees. Rather, the provision required Defendants to pay Plaintiff’s attorneys’ fees “incurred by” enforcing the employment agreement.

The District Court interpreted the fee provision by its plain language and awarded Plaintiff attorneys’ fees “incurred” in seeking a preliminary injunction to enforce the employment agreement. The Sixth Circuit affirmed.

While the Sixth Circuit accepted the broad language of Plaintiff’s attorneys’ fee provision, it cautioned against potential abuse. The court noted, for example, that a fee award would be unreasonable in cases “made with little or no basis, or made for purposes of oppression or harassment …” under the guise of “enforcement.” Following the court’s ruling, employers should consider creating or revising attorneys’ fee provisions to broaden the scope and eliminate “prevailing party” language.

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.

Facts
In Pacific Packaging Products, Inc. v. Barenboim, et al., Middlesex Superior Court, C.A. No. 09-4320, plaintiff, a distributer of packaging products, sued certain individuals who had been salesmen for the company until they resigned to form Packaging Partners, LLC, a competitor. The plaintiff also sued Packaging Partners, LLC claiming that the defendants had misappropriated confidential information and used it to solicit and obtain business from plaintiff’s customers.

Upon filing the lawsuit, the plaintiff obtained an Order for Expedited Discovery and to preserve evidence. After forensic images were taken from company and personal laptops of the individuals, a large number of electronic and hard copy documents and emails were produced by the defendants. When Plaintiff did not receive all the information it demanded, it obtained a Preliminary Injunction which ordered defendants to produce additional documents, in paper or electronic form, and barred defendants from making sales for one year to any of the plaintiff’s customers for which the defendants had taken documents which plaintiff claimed were confidential. Defendants argued that the information they took was not confidential.
Thereafter, the Court held an evidentiary hearing to determine whether the defendants had violated the terms of the Preliminary Injunction. At the hearing, certain individuals testified that they had complied with the mandates included in the Preliminary Injunctions, but one of the individuals, who had earlier submitted an affidavit supporting compliance, testified that the affidavit she had submitted was not true and that she was threatened by another defendant to submit false information and not to be forthcoming in her testimony.

Ruling of the Court
Based largely on this testimony, the Court found that the defendants had violated the terms of the Preliminary Injunction by:

  • selling certain products to a customer of the plaintiff;
  • spoliating evidence which defendants knew or reasonably should have known might be relevant to the claims in this matter;
  • intentionally failing to produce certain documents;
  • deleting emails after being ordered to produce them;
  • failing to image and produce several USB drives which were used by defendants after the litigation commenced; and
  • committing fraud on the Court by falsely claiming that defendants had complied with the Injunction when the facts demonstrated that documents were withheld, electronically-stored data relating to the claims in the complaint were not preserved, emails were deleted on certain defendants’ computers, and personal computers and devices were not turned over, in spite of representations to the contrary by the defendants’ attorney to the Court.

The Court stated that defendants’ acts described above “‘set in motion [an] unconscionable scheme calculated to interfere with the judicial system’s ability impartially to adjudicate [this] matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party’s claim or defense.’ [citation omitted] The defendants’ actions noted above show a blatant disregard for the judicial process and a disrespect of this Court and its orders.”

Sanctions
Relying on its inherent power to take remedial action in response to the defendants’ deliberate violation, the Court found that sanctions were in order. The Court initially ruled that the appropriate sanctions were: 1) entry of default against the defendant company and certain individual defendants with respect to some of the claims alleged in the Complaint, 2) dismissal of the defendant’s counterclaims, and 3) attorneys’ fees and costs. See Pacific Packaging Products, Inc. v. Barenboim, et al., Middlesex Superior Court, C.A. No. 09-4320 (January 31, 2014). In a subsequent decision, the Court denied the request of the plaintiff to default the defendants on all counts of the Complaint, but issued a default against the defendants as to the plaintiff’s claims that allege that “the defendants took confidential, proprietary information with them when they left Pacific Packaging and that they used that information in seeking to attract customers that had been Pacific customers.” See Pacific Packaging Products, Inc. v. James Berenboim, et al., Middlesex Superior Court, C.A. No 09-4320 (April 1, 2014).

Takeaways
Although defendants’ actions in this case could be considered extraordinary, the decision is a good lesson to companies and their inside and outside attorneys about how seriously courts view their orders, and why employees, company counsel and outside counsel should diligently monitor compliance. This includes taking all reasonable measures to preserve documents and other information, both electronic and hard copies, that reasonably may be relevant to the claims alleged. This means that it is critical that counsel send litigation-hold letters to their clients and follow up to insure that this information is located and preserved properly.

This case also illustrates how judges have become savvy in understanding the technicalities of electronically stored information (ESI), which has become increasingly predominant in litigation in general and in trade secrets and non-compete cases in particular. It provides a good lesson to counsel and employees about how critical it is for companies and their attorneys to take the necessary steps immediately to inventory, analyze and preserve ESI, including taking forensic images of all relevant information that may be on company computers and USB drives, as well as employees’ personal computers.

Such measures are necessary to minimize the risks of receiving the draconian sanctions issued by the Court in this case.
 

Restrictive covenants can be valuable tools to protect your business. However, it is important to consider at the outset what interests you want and need to protect and what conduct would violate any restrictive covenant. If you don’t (or if you later decide that you want and need to prohibit additional or broader conduct), your restrictive covenants may not bar conduct that poses a competitive threat or triggers an emotional response. The recent federal case of Kissell, et al. v. Biosense Webster, Inc. (M.D. Fla.) (Case No. 12-cv-1569) provides an example of how companies will be stuck with the terms of the restrictive covenants they implement, and may not be able to broaden the protections those covenants provide in a credible way.

Kissell involved a dispute between Biosense and 3 former Biosense sales reps and their new employer, St. Jude. Biosense and St. Jude both sell non-implantable diagnostic and therapeutic products used to treat arrhythmias (“Afib Products”). However, St. Jude also sells implantable cardiac rhythm management devices such as pacemakers and defibrillators (“CRM Products”). The 3 former Biosense sales reps signed agreements that contained 2 restrictive covenants. First, the confidentiality clauses in their agreements prohibited them from working for a competitor in a position where they could use or disclose Biosense’s confidential information to disadvantage BIosense or advantage their new employer. Second, the “goodwill clauses” in their agreements prohibited them from selling competing products to customers with whom they had contact during the last year of their employment at Biosense.

After they resigned from Biosense to work for St. Jude, the former sales reps filed a declaratory judgment action seeking confirmation that their agreements do not prohibit them from selling CRM Products to anyone, or from selling Afib Products to new customers or to Biosense customers with whom they had no contact during the last year of their employment. Biosense counterclaimed and sought a preliminary injunction, arguing that the sales reps’ agreements prohibit them from selling CRM products to any Biosense customers and from selling Afib products to anyone.

The Court first examined the scope of the confidentiality clauses. It explained that, in order for information to fall within the scope of the clause, it must pose a genuine risk of affecting Biosense or St. Jude’s ability to compete. Examining the evidence Biosense presented, the Court observed that Biosense relied heavily on conclusory assertions about broad categories of information to which the sales reps had access at Biosense, rather than concrete examples of how particular information could be used to Biosense’s competitive disadvantage in the marketplace. As a result, the court determined that Biosense had failed to provide sufficient evidence to support the issuance of a preliminary injunction based on the confidentiality clause.

Next, the Court turned to the goodwill clause. The Court explained that, in order to demonstrate a violation of that clause, Biosense was required to demonstrate that the sales reps were selling competitive products to Biosense customers with whom they had contact during the last year of their employment at Biosense. Biosense, however, had failed to demonstrate that CRM Products compete with Afib Products but had instead introduced expert evidence that the products typically are not competitive, but complimentary. Additionally, Biosense failed to offer evidence to contradict the sales reps’ declarations that they had not promoted St. Jude’s Afib Products in violation of the clause and had in fact specifically told applicable customers that they could not discuss Afib Products because of their agreements.

As a result, the Court denied Biosense’s effort to obtain a preliminary injunction based on its broad interpretations of its restrictive covenants.

In an exhaustive opinion, dated December 21, 2011, in the case Aon Risk Services, Northeast v. Cusack, Index No. 651673/11, 2011 WL 6955890, Justice Bernard Fried of the Supreme Court of New York, New York County, awarded a preliminary injunction sought by Plaintiffs Aon Risk Services, Northeast and Aon Corporation (collectively, “Aon”) against Aon’s former employee Michael Cusack and its competitor Alliant Insurance Services, Inc. (“Alliant”).

The case arose from a raid upon Aon’s business by Mr. Cusack, a senior executive and Managing Director at Aon, who resigned with several other senior executives on June 13, 2011 to join Alliant. That same day, 38 Aon employees left Aon to join Alliant, and 15 Aon clients soon followed. In the ensuing few months, 60 employees in total resigned from Aon to join Alliant, and Aon received more than 100 broker of record letters from clients transferring more than $20 million in revenue from Aon to Alliant.

After issuing temporary restraining orders in September and October 2011, the Court held a two day preliminary injunction hearing in November 2011, and in December 2011 issued its preliminary injunction, barring Mr. Cusack, Alliant, and other former Aon employees who were subject to restrictive covenants from, during the pendency of the litigation, (1) soliciting business or entering into any business relationship with any Aon client on whose account they worked, or (2) soliciting any Aon Construction Services Group employees to work for Alliant.

The substantial scope of the damage suffered by Aon provided the basis for the Court’s finding of irreparable harm. The Court found credible Aon’s assertions that “the loss of 60 employees and dozens of clients doing business with [Aon] in hundreds of lines of insurance and surety harms Aon’s goodwill, reputation in the marketplace with its clients and prospects, and relations with its remaining employees, because it causes clients to question Aon’s ability to service the business” and that competitors would be encouraged to solicit Aon’s employees, clients and prospects because they believe Aon to be “wounded.” Aon also argued, credibly to the Court, that monetary damages could not compensate for the loss of expertise and relationships of both employees and clients suffered by Aon, and that it was impossible to put a value on the loss of 60 Aon employees in one week.

A company that has been raided and is seeking an injunction sometimes hesitates to articulate in court filings the true extent of damage to its business, for fear that it will suffer reputational harm in the marketplace. If, however, the damage is already well-known and the loss of marketplace confidence is clear, a comprehensive recounting of such facts could help to secure some relief from a court as the company tries to rebuild its business, as shown by this recent court New York decision.
 

A recent decision illustrates the importance for employers of making sure non-competition agreements are correctly executed by employees.

On June 1, 2009, IBM sought a preliminary injunction in the United States District Court, Southern District of New York, enjoining its former Vice-President of Corporate Development, David L. Johnson, from continuing his employment as Senior Vice President of Strategy at Dell Inc.  On that date, doubt was raised as to whether Johnson’s alleged non-competition agreement with IBM had ever been duly executed, and the Court ordered expedited discovery on the issue and another hearing on June 22, 2009.

At the June 22 hearing, the evidence showed that at the time Johnson was first asked to sign the agreement, he was hoping to be promoted, and so in an effort to extend the time during which he could consider whether to enter into the agreement, Johnson purposefully signed the non-competition agreement not on his own signature block, but on the signature block designated for IBM.  Johnson testified that he believed that doing so would prevent the agreement from becoming valid and would allow him more time to consider whether to commit to the IBM non-compete agreement.

As the Court noted, Johnson’s “gambit appears to have worked just as he envisioned.”  Although IBM argued to the Court that the non-competition was valid, on numerous occasions IBM had sought to have Johnson properly sign the agreement, indicating that IBM did not actually consider the incorrectly signed agreement to be valid. Moreover, with respect to Johnson’s incorrectly signed document, IBM had not followed its usual protocols of sending it to an IBM representative for signature or retaining an original copy of the document in its files.

In view of the evidence, the Court found that IBM could not show a likelihood of success on the merits of its breach of contract claim.  The Court also found that the balance of equities favored Johnson, and it denied the preliminary injunctive relief sought by IBM.

A lesson for employers from this decision is that no ambiguity should be accepted as to whether the employee has assented to a restrictive covenant.  Particularly given the public policy of New York and other jurisdictions disfavoring non-competition agreements, when it is time to seek enforcement of such an agreement, the employer must be able to show that the employee unequivocally agreed to its terms.
 

In recent weeks, we have been following the fascinating case between Massachusetts-based EMC Corp. and Hewlett Packard Co., located in California.  EMC won the first round by stopping a former executive, David Donatelli, who was VP in charge of EMC’s Storage Division, from starting his job at HP.  The Massachusetts Court held that to allow Donatelli to work for HP would violate a non-compete agreement he signed at EMC.  The Massachusetts Court enforced the non-compete even though Donatelli had filed an action for declaratory relief in California asking that Court to declare the non-compete unenforceable under California law.  In the Massachusetts action, however, the Judge allowed Donatelli to present additional evidence in a subsequent hearing to demonstrate that his job at HP would have minimal overlap with his former position at EMC.

On May 26, 2009, after hearing additional evidence, the Massachusetts Court modified the preliminary injunction it had issued against Donatelli by allowing him to start working for HP in California.  However, both sides are claiming victory because Donatelli will not be able to take the job he wanted, i.e., Executive VP of StorageWorks, due to the restrictions in the order.  While HP expressed its pleasure with the Court’s decision to allow Donatelli to start working at HP as a Senior VP of Enterprise Servers and Networking, EMC stated it was also pleased with the Court’s ruling because it upheld "the terms of EMC’s key employee agreement."  EMC’s statement went on to say that, "The judge entered an order as proposed by EMC that precludes Mr. Donatelli from being engaged in any aspect of HP’s business that overlaps or competes with EMC’s storage business for a 12-month period."  The case is EMC Corp. v. David A. Donatelli, case number 09-1727-BLS2 in the Suffolk County Superior Court in Massachusetts.

We don’t know if the case is over, but for now, it appears that everyone got something of value from the case. The Massachusetts 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, citing Ivy Mar Co. v. C.R. Seasons, Ltd., 907 F. Supp. 2d 547, 567 (E.D.N.Y. 1995). 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.

In Faiveley Transport Malmo AB v. Wabtec Corporation, __ F.3d __, 2009 WL 636020 (2d Cir. March 9, 2009), Wabtec had manufactured subway brakes under a contract with Faiveley and its predecessor from 1993 through 2005. Faiveley alleges that after expiration of the contract, Wabtec impermissibly continued to use Faiveley’s proprietary information (including various technical specifications, designs, plans, and patents) to produce subway brakes for the New York City Transit Authority. The District Court granted an preliminary injunction enjoining Wabtec from disclosing Faiveley’s proprietary information to the Transit Authority.

On appeal, the Second Circuit vacated the injunction because Faiveley had not demonstrated that it faced irreparable injury. Although the Second Circuit agreed that Wabtec had misappropriated trade secrets, it held that misappropriation alone does not give rise to a presumption of irreparable harm, noting:

Where a misappropriator seeks only to use those secrets – without further dissemination or irreparable impairment of value – in pursuit of profit, no such presumption is warranted because an award of damages will often provide a complete remedy for such an injury. Indeed, once a trade secret is misappropriated, the misappropriator will often have the same incentive as the originator to maintain the confidentiality of the secret in order to profit from the proprietary knowledge.

The Court went on to note in dicta that even where irreparable injury has been shown, only a narrowly drawn preliminary injunction that protects the trade secret from further disclosure or use may be appropriate, and admonished courts in all cases to strive to avoid unnecessary burdens on lawful commercial activity.