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The gold-rush opportunities for low-cost manufacturing in China can put fierce pressure on the bonds of employee loyalty. Last year, at Watertown, Conn., cosmetics-packaging manufacturer Risdon-AMS, those bonds snapped, calamitously, when three key insiders quit to work for an upstart Chinese subsidiary. When Risdon sued to protect business secrets, it was hobbled by the fact the ex-employees neglected to get the Chinese company to sign nondisclosure or noncompete forms. But a recent ruling by Waterbury Complex Litigation Docket Judge Carl J. Schuman holds that, even without the forms, the company is protected by law requiring strict employee loyalty. Schuman ordered the main defector to pay his former employer for wages he earned while wheeling-and-dealing behind its back, but denied Risdon’s bid for a strict ban prohibiting the defendants’ new Southbury-based operation from competing against the Watertown plant. Risdon is a subsidiary of Crown, Cork & Seal Inc. and supplies all the major cosmetic companies, including Chanel, Estee Lauder, L’Oreal and Revlon. Senior Operations Officer Steven Levine, a 13-year Risdon employee from Woodbury, was given the job of overseeing an “Asian initiative” exploring the manufacture of the company’s high-end lipstick, mascara and lip gloss packaging with the Hsing Chung Plastic Products Co. (HCP). In 2002, Levine and Risdon’s president, Stephen Pearlman, traveled to China and met with Jeffrey Chen, managing director of HCP, which was interested in entering the cosmetics-packaging market. After that trip, Crown executives decided that Risdon should explore a joint venture, licensing agreement or outright sale of Risdon to HCP. Levine called it “Project Horizon.” But unbeknownst to his bosses, Levine had a back-up plan. He was negotiating a deal with HCP to create what eventually became Southbury’s HCP Packaging USA Inc., which he would join at a higher salary. He also convinced 35-year Risdon veteran Thomas Holloway, who helped patent Risdon’s reliable lipstick mechanisms, to leave with him. A third defection of Risdon expertise came from Raymond Legassie, at Risdon’s Laconia, N.H., mascara brush and case facility. On June 4, 2003, Chen came to the U.S. and was told by Crown’s president, Frank Mechura, that HCP could buy Risdon for $150 million. Chen never countered with a lower offer, but complained that the price was too high. In July, Levine was scheduled to present “Project Horizon” proposals to HCP directors at a Las Vegas board meeting. But HCP cancelled the event after Risdon’s president, Pearlman, insisted on attending. Levine told his company he would be vacationing in August on Martha’s Vineyard, but instead flew to China with Holloway and Legassie, and presented a PowerPoint demonstration of the HCP America business plan. On Sept. 2, all three men submitted resignations from Risdon, which accepted Levine’s and Legassie’s immediately, and worked without success to retain Holloway. When Risdon went through Levine’s files, it found a nondisclosure agreement between HCP and Risdon — but it was unsigned. A clause in the agreement was a mutual promise that neither company would attempt to hire the other’s employees for 12 months. Last year, Risdon sued Levine, Holloway and HCP Packaging. Among other charges, the suit claimed that Levine breached his fiduciary duty to Risdon when he failed to get the nondisclosure agreement signed by HCP. To Judge Schuman, the case didn’t hinge on the existence or absence of the noncompete and nondisclosure agreements. He turned instead to the black letter law set out in the Restatement of the Law of Agency, � 393, which says an agent has a duty not to compete with the principal concerning the subject matter of his agency. Schuman concluded that Levine breached his fiduciary duty to Risdon. Levine negotiated a Risdon-HCP alliance as “option one,” and a Levine-HCP alliance as “option two” — terms that make the inherent conflict of interest clear, the judge noted. He criticized the fact Levine made plans for his new venture using Risdon laptops and calling cards, and ultimately ruled that Levine must pay Risdon a judgment of $130,559 — his total compensation for the eight months in 2003 when Levine was working both for and against his employer. Schuman also rapped Legassie for following Levine’s advice and filling out his visa to China as an employee of fictitious “H & L Associates.” This, wrote the judge, is “undoubtedly an affront to the Chinese government.” He added, “To the court, it demonstrates Levine’s lack of complete honesty.” Theodore W. Heiser, of Gibson & Behman in Madison, defended Levine, while Barry J. Waters, of Murtha Cullina’s New Haven office, represented Risdon. In an interview last month, Heiser said he was satisfied with the decision. He had argued that there was no written noncompete or trade secret agreement between Risdon and the three employees, and that they never had a contract with HCP or took money from it before leaving Risdon. “The case law on the duty of loyalty in this area is not terribly clear,” Heiser noted. Waters said the Feb. 10 decision in Risdon-AMS v. Levine demonstrates the need to keep a “balance between making plans to do something else, and remaining loyal to your employer to the very last day you work for him.” Schuman did not grant the harshest remedy that Risdon sought against HCP — a broad injunction prohibiting any competitive design and manufacturing. “In a market that allows for fairly rapid entry of new competitors, such an injunction is too harsh,” he noted. Schuman instead issued an injunction against using any Risdon trade secrets or confidential business information, and ordered the defendants to return any unlawfully obtained computer data, documents or illustrations that reveal confidential information or trade secrets. Realistically, the judge noted that there are limits to trade secrets in the world of cosmetics packaging, which is easy to purchase, reverse-engineer, imitate and pirate. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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