Litigating Raiding Cases

A. STRATEGIES FOR ENFORCEMENT 1. Framing the Issues

Although all “raiding” cases share a common theme � your client’s employees have been poached by a competitor � each case is as unique as in any other area. Properly framing the issues before pursuing litigation will not only allow you to understand your client’s needs and goals better, but often makes the difference between success and failure in achieving those goals.

The most important thing to keep in mind during the entire proceeding is what your client hopes to accomplish. Not every client will want � or need � to prevent its former employees from working for a competitor. Often, your client will be satisfied with preventing its former employees from soliciting its customers or forcing them to return any confidential and proprietary documents that they have removed. Keeping your client’s goals in mind will help ensure that you do not appear overreaching to a judge or other factfinder and that you maximize your success in gaining the desired result.

Beyond your client’s goals, there are a number of key issues to consider when developing your case theory:

(a)Who is your client?

It is important to determine the nature of your client’s business in general and of its position within the industry. Is your client’s business one in which the existence of trade secrets will be obvious and probably presumed by a judge or other factfinder, or will the existence of trade secrets likely be a hotly contested fact, if not the focus of the litigation? Is your client a market leader, a former market leader on the slide down, or an up and coming contender in the industry? What is your client’s status in the geographic region and specific business area at issue in the “raiding” case?

Where does your client fit within its industry as a whole? Is the industry a highly competitive one, where even a slight competitive advantage could produce magnified repercussions in the marketplace?

Although by no means dispositive, you may also want to inquire into your client’s own hiring practices. Whether your client hires entry-level employees and trains them internally or hires trained employees from competitors � perhaps even the competitor in the subject litigation � will have to be incorporated into your case theory. At minimum, you will have to be prepared for your adversary’s arguments that such recruiting practices are commonly accepted in your client’s industry.

(b)Who is the competitor? Once you understand your client and its place within the market, you should learn what you can about its former employees’ new employer. Is the competitor an industry leader or an upstart? Where does it fit within the industry as compared to your client?

How has the competitor built its business? Does it have a history of “raiding” its competitor’s employees? Did the competitor have a significant presence in the particular geographic location or field of business before the “raid”?

The answers to these questions will affect your portrayal of the competitor and its “raiding” activity and should affect your overall litigation strategy. The answers to these question are significant not only from a legal standpoint, but in helping to frame your client’s strategic goals as well. If the competitor had no meaningful presence in the particular geographic location or field of business before the “raid,” for example, it becomes much more important to prevent your client’s former employees from working for the competitor, to protect your client’s continued viability in that geographic location or field of business. If the competitor already had a significant position, however, your case theory may best be limited to the former employee’s customer relationships and possession of confidential and proprietary information.

(c)Who are the former employees?

It is hardly surprising that the employees’ roles both in their former employment with your client and in their new employment with its competitor are an important issue to be considered. Were the employees highly trained professionals or technicians, with skills inherently valuable to a competitor?

Is their value to a competitor based on the former employees’ own skills brought with them to your client, or based on the fact that they had worked for your client? Did the former employees hold any special relationship with your client that would have given them heightened duties, such as access to particularly sensitive materials and information? Did they have a role in strategic decision-making for your client? Would this give their new employer a particular competitive advantage?

A judge or factfinder will want to know the answers to these and similar questions before granting any relief, so it is essential to consider these issues as early as possible.

(d)What was the nature of the “raid”?

Before developing any litigation strategy and case theory, you must understand the nature of the “raiding” activity, not only as to which employees were taken, but how they fit within your client’s overall business organization, and what precisely is at stake in their departure and joining your client’s competitor.

The more employees taken at one time the easier of course it will be to establish “raiding” activity. But how these employees fit together is at least equally important. Were the employees all employed in the same division or unit, or were they spread out throughout your client’s organization? Have they been hired by your client’s competitor into the same division or unit? Did the competitor “raid” an entire division or unit? Did the competitor randomly hire employees, or just the “cream of the crop,” perhaps with the assistance of a ringleader within the group?

The employees’ role with their new employer is an important piece of a successful case theory. Does the group of employees hold a special place in their new employer’s business plans? Perhaps the “raided” employees will allow entry into an otherwise impenetrable market niche or geographic area. Has the competitor attempted such entry unsuccessfully in the past?

Did the competitor “raid” the manager or supervisor along with other employees? Perhaps the manager or ring-leader even helped the competitor orchestrate the “raid” while still employed by your client.

The effects to your client as a result the “raid” must also fit into the case theory. How has your client been adversely affected or likely to be adversely affected by the “raiding” activity? Has its operations been disrupted? Will your client be able to replace the “raided” employees with either its own employees or new hires? How quickly will your client be able to resume normal operations following the “raid”?

Is the “raid” likely to have continuing affects after the initial “raiding” activity? Depending on the circumstances, a “raid” can prejudice your client’s ability to service its existing clients or even retain its remaining employees. What information did your client’s employees take to their new employer? Theft of original documents not only will impact your client’s ability to compete with its own former employees, but is likely to persuade a judge or other factfinder that more than an innocent change of employment is at issue.

All of these issues can be summed up as the process of identifying exactly what the employees are taking to their new employer. Whether it be their skills or training, the years of experience, knowledge of your client’s product line, customer relationships or acquired knowledge of your client’s confidential and proprietary information, you will want to be prepared to argue why your client deserves protection from its appropriation by a competitor.

2. Facts and Witnesses

Concurrently with framing the issues, it will be necessary for you to interview as many fact witnesses as possible in order to develop a case theory. Although Many “raiding” cases must be filed quickly, particularly where your client is seeking temporary or preliminary injunctive relief, factual investigation is as, or even more, important in this context than in other litigations.

When a judge or other factfinder decides whether to issue a temporary restraining order, he or she has usually seen only the movant’s papers. While having the law “on your side” is of course a great help, such decisions often turn on the facts. Because the only facts before the judge or other factfinder will be contained in the papers you file, your factual investigation and affidavits take on special importance.

You should therefore use the opportunity to provide a clear picture of the former employees’ conduct in leaving your client’s employment for a competitor. Interview the former employees’ coworkers, mindful that certain facts can almost jump off a page for a judge or other factfinder. That a former employee recruited his or her coworkers to join a competitor while he or she was still employed by your client is such a circumstance. In that regard you should collect all agreements, handbooks or other documents that governed the former employees’ employment relationships with your client. These documents are important not only in establishing non-competition and non-solicitation restrictions, but also to define the former employees’ obligations concerning confidential information. Additional lines of inquiries to pursue and incorporate into the fact affidavits are: a) the former employees’ conduct preceding the “raid,” both with coworkers and your client’s customers; b) whether the former employees took originals or copies of your client’s files when they left; c) whether the former employees or their new employer have contacted any other employees or their new employer has contacted any other employees following the “raid”; and d) whether the former employees or their employer have contacted any of your client’s customers.

3. Selecting the party defendants

Deciding whom to name as party defendants can involve a number of strategic issues. In some instances, naming just the competitor can fit perfectly with a case theory that the competitor essentially walked in and stole your client’s employees and information. Where, however, there is evidence that the former employees were more than just passive beneficiaries of the “raid,” it will often be appropriate to name one or more of your client’s former employees as party defendants. It may even make sense in some cases to forego the new employer’s “deep pocket,” naming just the former employees, particularly where those “deep pockets” will translate into a vigorous defense to your action. By contrast, the individuals, standing alone, are far more vulnerable defendants.

One consideration in making this decision will be the forum chosen for the action. A forum appropriate for one possible party defendant may be inappropriate for other possible party defendants. Where one or more parties are subject to arbitration agreements, whether in an employment agreement or as part of a licensing or registration procedure, for example, bringing an action in court against those employees may not be possible (except for temporary or preliminary injunctive relief, as discussed below). But arbitration may not be an option for other employees or their new employer. In such a case, the forum selected for the litigation (i.e., court or arbitration) will narrow the field of possible party defendants.

The choice between state and federal court may likewise limit the choices for party defendants. If you prefer bringing an action in federal court, for any number of reasons, you will have to be mindful of the residences of the possible party defendants. Diversity will likely be the only basis for jurisdiction, so care must be taken not to name as a party defendant anybody who would destroy diversity.

Although perhaps less obvious, the strategic naming of a party defendant can also ensure that you can remain in a state court even where diversity jurisdiction exists. Defendants can normally remove a state court action to federal court where there is diversity of parties, but only where no party defendant is a resident of the state in which the action is brought. Naming as a party defendant a former employee who, while potentially liable for the “raiding” activity, is not absolutely necessary as a named defendant in the litigation can therefore preserve your choice of a state court forum. Another consideration in deciding whom to name as a party defendant is the expected reactions of the former employees and their new employer. If naming just one or more of the employees is likely to result in their new employer “throwing them to the wind,” this may be an important strategy in obtaining a quick and favorable settlement, thus achieving your client’s goals with minimal cost.

It may be inappropriate to name former employees in some cases, however. If one or more of the former employees could potentially bring counterclaims of their own (e.g., discrimination or breach of contract claims) against your client if they were named as party defendants, you may decide to leave them out as parties to the litigation. While this may not eliminate the possibility of their bringing such claims, it will keep those claims away from the factfinder deciding your “raiding” case. Of course, the new employer’s ability to pay large judgments is always a good reason to name the new employer in the action, particularly if your case theory focuses more on damages than on injunctive relief.

B. FORUM SELECTION As discussed above, the strategic naming of a party defendant can ensure that the forum you select will remain the forum for the “raiding” case. What forum you select, however, will be the result of a number of considerations. The three primary fora available in which to litigate a “raiding” case are the state court, federal court and arbitration. In some cases, the choice may have already been made, through the existence of an arbitration agreement (although, as discussed below, temporary or preliminary injunctive relief can often still be sought in court). Even where there exists an arbitration agreement, it may not bind all possible party defendants. In such cases, forum selection must be made along with choosing party defendants, as discussed above. As with any forum selection, the choice between court and arbitration is essentially a strategic decision, with each choice having its benefits and drawbacks. Arbitration can often be less costly and result in a quicker final decision. Immediate temporary injunctive relief is often not available in arbitration, however. If your client needs prompt temporary or preliminary injunctive relief in a “raiding” case subject to arbitration, you will usually have to pursue such relief in court and therefore argue the case in two separate forums. Moreover, with increasing complexity in arbitration procedures, including ever-broadening discovery and pre-hearing motion practice, the cost savings usually associated with arbitration have been shrinking. Arbitration can offer the benefits of expertise, however, especially where it is to be conducted in an industry arbitration forum. Even where court is selected over arbitration, you may have to choose between state and federal courts if there is possible diversity jurisdiction, as discussed above. Beyond the normal considerations in deciding between state and federal court (e.g., motion practice, appealabilty, caseloads, etc.), an additional consideration exists where you are seeking immediate temporary or preliminary injunctive relief. Whereas some state courts allow ex parte applications for temporary restraining orders, the federal courts generally require notice to the adversary wherever practicable. State and federal standards for granting temporary or preliminary injunctive relief may also differ to a considerable degree, as discussed below. C. TEMPORARY RESTRAINING ORDERS AND PRELIMINARY INJUNCTIONS Even where a dispute is subject to arbitration, a party can usually seek temporary or preliminary injunctive relief in a court. Many arbitration agreements expressly allow for such court-ordered relief, although most jurisdictions recognize the availability of court-ordered relief even in the absence of such language. Although immediate temporary or preliminary injunctive relief is also available in some arbitration fora, the time and standards for such relief may vary. Although the precise language varies in each jurisdiction, the elements generally required to obtain a temporary restraining order or preliminary injunction are the likelihood of success on the merits, the prospect of irreparable injury if the provisional relief is withheld, and a balancing of the equities weighing in favor of the moving party. See, e.g., Kensington Court Assocs. v. Gullo, 180 A.D.2d 888, 889, 579 N.Y.S.2d 485 (1992); Crowe v. DeGioia, 90 N.J. 126, 132-33, 447 A.2d 173 (1982); Branson Ultrasonics Corp. v. Stratman, 921 F. Supp. 909, 913 (D. Conn. 1996); Ross-Simmons of Warwick, Inc. v. Baccarat, Inc., 102 F.3d 12, 15 (1st Cir. 1996); Marcam Corp. v. Orchard, 885 F. Supp. 294, 296-97 (D. Mass. 1995); Ingraham v. University of Me. at Orano, 441 A.2d 691, 693 (Me. 1982). In New York state, for example, the standard for granting temporary or preliminary injunctive relief in aid of arbitration is a significantly less onerous standard than the normal elements. Under the New York Civil Practice Law and Rules (“CPLR”), a preliminary injunction may be issued “upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.” CPLR � 7502(c). The standards for temporary or preliminary injunctive relief should therefore be considered a strong factor in selecting a forum. In establishing likelihood of success on the merits, it will usually be helpful to establish not only valid and enforceable non�competition, non-solicitation or confidentiality agreements, but also evidence of the former employees’ violations of their agreements or common law fiduciary duties. As discussed above, useful facts involve the former employees’ conduct in connection with co-workers, customers or confidential and proprietary information. Evidence of actual use of misappropriated confidential and proprietary information, while fairly presumed, can be difficult to establish, particularly in the time frame of seeking immediate temporary or preliminary injunctive relief. Recognizing that use of such misappropriated information can be fairly presumed, courts are increasingly recognizing the “inevitable disclosure” doctrine. In one such case, the U.S. Court of Appeals for the Seventh Circuit upheld an injunction which restrained an employee from assuming certain responsibilities for a new employer/competitor for five months, and which permanently enjoined him from using or disclosing any of his former employer’s trade secrets or confidential information. The court found that the employee would not be able to avoid relying on information learned from a former employer in carrying out his new duties; in this regard, it recognized that unless the employee “possessed an uncanny ability to compartmentalize information, he would necessarily be making decisions…by relying on his knowledge of [his former employer's] trade secrets.” The court explained that it was not restraining an employee from using his general skills and knowledge for a competitor, but rather, from using highly confidential and proprietary information. Pepsico, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995). There was no contractual covenant not to compete in that case between the former employee and his ex-employer; the employee had however entered into a confidentiality agreement with the former employer. See also Merck & Co., Inc. v. Lyon, 941 F. Supp. 1443, 1460 (M.D.N.C. 1996) (despite absence of non-compete agreement between former employee/employer, new employer and employee preliminarily enjoined from discussing certain topics for a two year period; the former employee/employer did however have a confidentiality agreement); DoubleClick, Inc. v. Henderson et al, 1997 WL 731413, Index No. 116914/97, (Sup. Ct. N.Y. Cty., November 5, 1997)(granting preliminary injunction in the absence of any agreement and holding that “it appears to the court that the defendants will inevitably use [the former employer's] trade secrets….the centrality of [the executives] in [the former employer's] operations make it unlikely that they could ‘eradicate [the former employer's] secrets from [their] mind” and that “even in the absence of a contract restriction, a former employee is not entitled to solicit customers by fraudulent means, the use of trade secrets, or confidential information”). As with the “inevitable disclosure” doctrine, courts have generally recognized that interference with employee and customer relationships, particularly where confidential or proprietary information is used, will lead to irreparable harm. See, e.g., McLaughlin, Piven, Vogel, Inc. v. W.J. Nolan & Co., 114 A.D.2d 165, 168, 498 N.Y.S.2d 146, 152 (2d Dep’t 1986) (disclosure of confidential information given to competing brokerage firm by customers caused plaintiff brokerage firm irreparable harm); Jensen Tools, Inc. v. Contact East, Inc., Civ. A. No. 92-10970-Z, 1992 WL 245693 (D. Mass. Sept. 9, 1992) (holding that a plaintiff suffers irreparable injury where, as a result of a former employee’s conduct in misappropriating confidential and proprietary information, the plaintiff loses a competitive advantage); Weseley Software Development Corp. v. Burdette, 977 F. Supp. 137, 145 (D. Conn. 1997) (holding that “[l]oss of trade secrets is not measurable in money and damages and is thus considered ‘irreparable harm’”); Ross-Simmons of Warwick, Inc. v. Baccarat, Inc., 102 F.3d 12, 19 (1st Cir. 1996) (affirming preliminary injunction where the court found irreparable harm because “absent a restraining order, [the plaintiff] would lose incalculable revenues and sustain harm to its goodwill”). It is important nevertheless to establish in your fact affidavits that this is true in your particular “raiding” case. Balancing the equities is necessarily a fact-specific inquiry, but some general facts will make it more likely to establish this element. When framing the issue for the court or arbitral panel, it is important to stress that your goal is not to put your client’s former employees out of work or prevent them from working for a competitor, but instead to prevent the former employees and their new employers from engaging in unfair competition using your client’s relations, resources and confidential and proprietary information. You should emphasize that it is your client who will be harmed more by the denial of the preliminary relief sought because of its inability to compete without the missing information or some other specified injury. D. EXPEDITED DISCOVERY There are two reasons a plaintiff should consider seeking expedited discovery: first, to obtain additional evidence with which to support the ultimate motion for a preliminary injunction and, second, to obtain further proof to assist in bolstering the strength of your case if the dispute proceeds to a hearing. In determining whether you should seek expedited discovery, there are several issues to consider. One important question to ask yourself is whether you will be able to establish your client’s need for preliminary relief without such accelerated discovery. To determine this, you must review the available evidence to determine whether it will satisfy both the jurisdiction’s requirements for preliminary relief and the elements of the underlying claims, such as breach of fiduciary duty, misappropriation of trade secrets, conversion, etc. Evidence that you might aim to uncover through expedited discovery includes either written or electronic (i.e., computerized) items such as:

(a) your client’s misappropriated confidential and proprietary information furnished by the former employees either by their duplication and/or theft of those documents, or from their personal knowledge;

(b) the raiding company’s business plans or other evidence indicating a strategy of encouraging your client’s departing employees to bring confidential and proprietary information with them, either explicitly or implicitly as a requirement of employment or in return for additional compensation;

(c) the raiding company’s strategic plans or other evidence indicating a scheme to carry out successive raids on your client; and

(d) the raiding company’s internal scheme or other evidence of a strategy of encouraging your client’s departing employees, before or after their resignation, to solicit other employees to join their new employer. For this last type of evidence, you may particularly wish to focus on any telephone and/or facsimile logs indicating the communications between the former employees while at their new employer and your client’s remaining employees. [FOOTNOTE 1]

Nevertheless, even if you believe that you have sufficient evidence to demonstrate your client’s right to preliminary relief, you should consider the forum in which the dispute would ultimately be resolved. If the dispute will likely be resolved in arbitration, expedited discovery may be extremely valuable because the rules of arbitration generally provide for limited disclosure. As a result, once a preliminary injunction in aid of arbitration is granted, your client may have an inadequate opportunity to obtain evidence to assist you in proving the ultimate case and thereby obtaining permanent injunctive relief and damages. Expedited discovery, before the dispute is sent to arbitration, may be helpful in countering this disadvantage of that forum. However, even if you conclude that expedited discovery would likely be beneficial, it is important to keep in mind that discovery is generally a two-way street. You should discuss candidly with your client whether there is any reason that it would not wish to provide the opposing side with the opportunity to obtain discovery as well. This may particularly be of issue in cases where your client has previously solicited a significant number of employees from the raiding competitor, or, perhaps more importantly, has indicated to you an intent to do so in the future. If documents or testimony indicating such a plan are disclosed, it would likely significantly weaken your client’s right to interim, and possibly all, relief. Moreover, even documents regarding your client’s solicitation of employees from companies other than the competitor at issue could undermine your claim if these documents reflect that your client uses a corporate strategy similar to that of the competitor at issue. More generally, there is the possibility that your client might be forced to turn over sensitive corporate information and strategies not directly relevant to the employment issue at hand, yet still within the broad scope of discovery; of course, you can object to such requests, but as the party who requested the expedited discovery, the judge may be less willing to entertain your objections regarding its scope than those made by your opponent. Thus, while you should always consider the possibility of seeking expedited discovery as part of a preliminary injunction motion, you and your client should not make that decision without weighing the benefits and the risks involved. E. MEASURE OF DAMAGES Depending on the size and impact of the raid, you should consider arguing one of the following methods for framing the issue of damages. Either way, however, it is important that you ensure that the losses of both human and material resources are taken into account. If the raid on your client has not dramatically affected the client’s business, then you will probably decide that it is most sensible to simply add several discrete amounts that together should represent the value of the lost resources. First, you must ascertain the cost of recruiting, hiring, training and integrating into your client’s business all the necessary replacement personnel. Second, you must calculate the value of any confidential and proprietary information misappropriated by the former employees. While this may be difficult to precisely value, you should take into account both the cost of developing and arranging any data generated in-house and the market value of any data purchased in the marketplace. Finally, and often most significantly, you must include the value to your client of any customers that your client lost to the competitor as a result of the employees’ defection. While this first method of assessing the monetary injury to your client usually results in a smaller damage estimate than the other calculation technique discussed below, it also does not expose your client to as much potential risk. Another method of calculating damages may be employed in cases where the raider, by hiring a significant number of key individuals, has significantly harmed your client’s business or a subdivision thereof. In such cases, you should consider whether your client should value the loss as the theft of a “going concern.” If you take this position, you are essentially asserting that your client’s competitor has hired away so much of your client’s intellectual experience and industry knowledge that it is as if the competitor had bought the whole enterprise and simply “changed the name over the door.” Following this logic, if the raiding company had been interested in legally acquiring this business, it would have had to purchase the business on the open market. Accordingly, if you decide to employ this theory, you should compute the damage done by the raider by calculating (1) the profit that had been gained by the going concern per year (using the largest determinable result provided by your client) times a multiple, which should be based on the amount of time required to re-build such the business from “scratch” including recruiting, hiring, and training new employees, plus (2) the cost of such re-building. Because this method of calculating damages is based on the total profit of the business, it will usually lead to a much larger amount than the first method. However, before deciding to use this approach, you should recognize and make clear to your client that your client would be taking the position that it has lost the capacity to compete, at least temporarily, in the industry at issue. While you may be taking an expansive view of the damage generated by the raid for litigation purposes, your client should be made aware of the potential perils if this assertion become well-known, either by those within your client’s company or by your client’s customers. Specifically, some of the dangers of such a tactic include: (1) implicitly sending a message to your client’s customers that your client is unable to handle their business, thereby encouraging customers that might otherwise be loyal to your client to move to the raiding company or another competitor; and (2) suggesting to your employees that your client’s business is seriously damaged and will need a significant period of time to re-build, thus making them nervous as to the stability of their positions during the re-building process and perhaps causing them to approach the raiding company or another competitor for more secure employment. Therefore, it is possible that such a position could, ironically, do more damage to your client’s business than the actual raid itself. Thus, it will be a matter of your strategic judgment as to whether the raid inflicted enough harm to justify dealing with these potential consequences. F. CAUSES OF ACTION Raiding cases typically give rise to multiple potential causes of action, which can result in liability against the departing employee, the business that hired him or her, or both. Consideration should be given to the following causes of action, as well as others that may apply in particular situations.

1. Misappropriation of Trade Secrets

To state a prima facie case of misappropriation of trade secrets, a party must generally show that: (i) it possessed a “trade secret” and (ii) that the former employee is using “that trade secret in breach of an agreement, confidence, or duty, or as a result of a discovery by improper means.” DoubleClick, 1997 WL 731413 at *3; Integrated Cash Management Servs., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 173 (2d Cir. 1990).

(a) Establishing The Existence of A Trade Secret

Success on a misappropriation claim will depend on proof that “trade secrets”, as opposed to, for example, information that is readily accessible and in the public domain, is at risk. [FOOTNOTE 2] Strategies for countering defense that such information does not constitute a trade secret are discussed later in this article in Section G.2. There is no single definition for a trade secret. “A protected trade secret can be a formula, process, device or compilation of information used in one’s business which confers a competitive advantage over those in similar businesses who do not know or use it.” Garvin GuyButler Corp. v. Cowen & Co., 155 Misc.2d 39, 588 N.Y.S.2d 56 (Sup. Ct. New York Cty. 1992); Double-Click, 1997 WL 731413 at *4. Fisher Org., Inc. v. Ryan, 122 Misc.2d 305, 470 N.Y.S.2d 968 (N.Y. Civ. Ct. 1983) (“[w]here the information was compiled by the employer only after a considerable effort and expense over a period of time it becomes a valuable asset of the business and is protected as a trade secret”). The Uniform Trade Secrets Act, which has been adopted by a majority of states, defines a “trade secret” as referring to any:

information, including a formula, pattern, compilation, program, device, method, technique or process that:

(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(ii)is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Uniform Trade Secrets Act � 1(4).

Customer information which an employer seeks to protect may constitute a trade secret. For example, in McLaughlin, Piven, Vogel, Inc. v. W.J. Nolan & Co., Inc., 114 A.D.2d 165, 173, 498 N.Y.S.2d 146, 152 (2d Dep’t 1986) the “records to which the defendants allegedly had access, many of which the defendants allegedly converted, contained client names, addresses, telephone numbers, investment activity, annual income, liquid assets, net worth, and employment data”. The Court held that:

under the circumstances, the description of the subject customer lists by the plaintiff as trade secrets is not inaccurate. Such customer lists, the result of effort and expense on the plaintiff’s part, and containing information which the defendants would not have obtained absent their former employment with the plaintiff are deserving of protection.

McLaughlin, 114 A.D.2d at 173, 498 N.Y.S.2d at 152 (emphasis added).

Even the names of customers, with little other data, can constitute trade secrets, provided the customer list cannot be easily duplicated by others. Courts have often recognized that the fact that customer names and telephone numbers can be readily ascertained by outsiders does not mean that the compilation of names is unprotected:

[Defendant] says…the names of the customers whom she contacted are readily available from the phone book. This may be true. Lists containing only customer names do not constitute a trade secret… However, the detailed information needed to provide insurance to these former customers is not in the phone book. Such detailed information was available to [defendant] in the confidential customer lists and papers which were not returned to John Hancock… In addition to customer names, these papers contained information involving customer coverage, premium amounts, cash values, and loans against existing customer information.

John Hancock Mut. Life Ins. Co. v. Austin, 916 F. Supp. 158, 164 (N.D.N.Y. 1996) (emphasis added).

(b) Misappropriation in the Absence of Trade Secrets

A party’s inability to establish the existence of a trade secret is not necessarily fatal to a misappropriation claim. A number of courts have held that where a defendant has physically misappropriated confidential information, he can be enjoined from using it, even if information does not rise to the level of a trade secret. “[I]f there has been a physical taking or studied copying of confidential information, the Court may in a proper case grant injunctive relief, not necessarily as a violation of a trade secret, but as an egregious breach of trust and confidence while in plaintiff’s service.” GuyButler Corp., 155 Misc.2d at 44, 588 N.Y.S.2d at 60.

2. Breach of Fiduciary Duty

While treatment of fiduciary duty claims by the courts have not been uniform, many states also recognize that employees owe fiduciary duties to their employers.

Employees may not utilize information obtained through their confidential employment relationship with the employer where the information was obtained by years of business effort…This fiduciary duty survives termination of the employment relationship.

Fisher Org., 122 Misc.2d at 305, 470 N.Y.S.2d at 968; Computer Task Group, Inc. v. Professional Support, Inc.,88 A.D.2d 768, 451 N.Y.S.2d 502 (4th Dep’t 1982) (“[t]here is an implicit duty upon an employee not to use confidential knowledge acquired in his employment in competition with his principal, even after the employment is terminated”); DoubleClick, 1997 WL 731413 at *4 n.2 (“defendants owed their employer a duty not to divulge confidential information…’[e]ven in the absence of a contract restriction, a former employee is not entitled to solicit customers by fraudulent means, the use of trade secrets, or confidential information”); GuyButler Corp., 155 Misc.2d at 44, 588 N.Y.S.2d at 60.

An employee may also be deemed to have breached his or her fiduciary duties by engaging in activities that are inimical to the employer’s interests while still employed. Solicitation of clients on behalf of the new enterprise, for example, while still employed by the former employer may constitute a breach of the employee’s fiduciary duties.

3. Unfair Competition

Unfair competition exists where the departing employee is “endeavoring to reap where it has not sown.” International News Serv. v. Associated Press, 248 U.S. 215, 239-40 (1917). “A claim of unfair competition will lie where a former employee misappropriates and exploits confidential information belonging to her former employer in abuse of [a] relationship of trust.” DoubleClick, 1997 WL 731413 at *7. It has been held that:

An employee’s right to compete with his former employer is indeed protected, but this protection does not extend so far that an employee can, with impunity, unlawfully seize his employer’s property…, in this case, customer information not easily obtainable elsewhere and which the employer has apparently gone to considerable expense and effort to create. That kind of employee conduct disadvantages the employer in a manner that is patently unfair,…the crux of an action for unfair competition… in short, an employee’s illegal physical taking or copying of an employer’s files or confidential information constitutes actionable unfair competition.

Advanced Magnification Instruments, Ltd. v. Minuteman Optical Corp., 135 A.D.2d 889, 891, 522 N.Y.S.2d 287, 289-90 (3d Dep’t 1987) (emphasis added). See also Allan Dampf, P.C. v. Bloom, 127 A.D.2d 719, 720, 512 N.Y.S.2d 116, 117 (2d Dep’t 1987) (“The defendant has engaged in unfair competition with the plaintiff by his misappropriation and exploitation of confidential information in abuse of his relationship of trust with the plaintiff and his improper use of this information to solicit plaintiff’s patients”).

Some individual states have statutory causes of action for unfair competition that may exist instead of, or alongside with, the common law claim. See, e.g., Mass. Gen. L. Ann. � 93(A) and Augat, Inc. v. Aegis, Inc., 409 Mass. 165, 565 N.E.2d 415 (1991) (holding an employer liable under Mass. Gen. L. ch. 93A for its employee’s unlawful solicitation of his former employer’s employees). The elements of a state’s statutory claim may be similar, but not identical, to its common law counterpart. Statutory claims may also provide powerful additional remedies, such as double or treble damages and/or attorney’s fees.

4. Conversion

A claim will also generally lie for conversion. “Conversion is any unauthorized exercise of dominion or control over property by one who is not the owner of the property, which interferes with and is in defiance of a superior possessory right of another in the property”. Della Pietra v. State of New York, 125 A.D.2d. 936, 941, 510 N.Y.S.2d 334,336 (4th Dep’t 1986), aff’d, 71 N.Y.2d 712, 530 N.Y.S.2d 510 (1988); 7th Sense, Inc. v. Liu, 220 A.D.2d 215, 631 N.Y.S.2d 835 (1st Dep’t 1995) (enjoining competitor from using manufacturers’ designs and methods of production, based, inter alia, on theory of conversion).

5. Tortious Interference with Contractual Relations

A party may also have a claim based on the former employee’s tortious interference with its contractual relations with its customers. Generally speaking, to state a claim for tortious interference with contractual relations, a plaintiff must show (1) the existence of a valid contract between the plaintiff and a third party; (2) defendant’s knowledge of the contract; (3) the defendant’s intentional inducement of the breach of that contract; and (4) resulting damage to the plaintiff. Universal City Studios, Inc. v. Nintendo Co., 797 F.2d 70, 75 (2d Cir.), cert. denied, 479 U.S. 987 (1986). In American Para Prof’l Sys., Inc. v. Examination Management Servs., Inc., 214 A.D.2d 413, 625 N.Y.S.2d 37 (1st Dep’t 1995), the Court enjoined defendants from entering into or inducing the breach of any contractual agreements with persons presently under contract with the plaintiff. The Court held that plaintiff “has met its burden of proving by competent evidence the elements required to state a cause of action for tortious interference with contractual relations by establishing that the defendant had intentionally induced the breach of a contract between the plaintiff and a third party to plaintiff’s detriment.” See also Gold Bond Stamp Co. v. E.F. MacDonald Stamp Co., 17 A.D.2d 17, 230 N.Y.S.2d 467 (1st Dep’t 1962) (enjoining company from inducing competitor’s customers to breach their licensing agreements with competitor).

6. Tortious Interference with Business Relations

Although known by a number of different names, including tortious interference with prospective contract, or tortious interference with economic advantage, the elements of this tort are generally similar. “Tortious interference with business relations occurs when defendant uses “unlawful” or “improper” means to disrupt plaintiff’s business, resulting in injury. Della Pietra, 125 A.D.2d. at 941, 510 N.Y.S.2d at 336.

The crux to such a claim will be proof that the conduct of the former employee is unlawful or improper, and not just aggressive competition. A former employee’s solicitation of a party’s business has been found to be “wrongful” under New York law. See, e.g., Hannex Corp. v. GMI, Inc., 140 F.3d 194 (2d Cir. 1998) (recognizing that a “knowing breach of fiduciary duty” may amount to a fraud or misrepresentation, and constitutes wrongful means for purposes of a claim for tortious interference with business relations

G. DEFENSE ISSUES

1. Public Policy Favoring Competition and Employee’s Ability to Earn a Livelihood

You should be aware that in response to the arguments in favor of enforcing covenants not-to-compete, there are several arguments with which a defense counsel may arm himself in opposition. First, there is reliance on the general public policy argument favoring competition and an employee’s ability to earn a living. Second, there is the more fact-specific defense that the particular information sought to be protected is in the public domain and thus should not be protected as “confidential” and/or “proprietary” information. Rebuttals to both these defenses are addressed below.

To begin with, the contention that public policy favors competition and an employee’s ability to earn a living is, at first glance, a seductive one, and it can be the almost reflexive reaction of some judges to guard against any restriction on either a vigorous and open marketplace, or a person’s right to support himself. Indeed, in almost every jurisdiction there will be caselaw supporting the sweeping proposition that an employer cannot automatically prevent former employees from competing in the same industry and marketplace. For instance, in American Broadcasting Cos. v. Wolf, 52 N.Y.2d 394, 404, 43 N.Y.S.2d 482, 487 (1981), the New York Court of Appeals declared that, “the general public policy favoring robust and uninhibited competition should not give way merely because a particular employer wishes to insulate himself from competition.” See also Purchasing Assocs., Inc. v. Weitz, 13 N.Y.2d 267, 272, 246 N.Y.S.2d 600, 604, rearg. den’d, 4 N.Y.2d 84, 248 N.Y.S.2d 1027, 190 N.E.2d 270 (1963) (describing “the powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood.”).

Your response to this argument will vary depending on the circumstances of the case. Obviously, the easiest reply to this defense will occur where your client can provide non-compete agreements signed by the former employees. In such cases, you can forcefully argue to the fact-finder that the employees (and, vicariously, their new employer) have given up their right to unbridled competition as part of their negotiated deals. In general, such provisions will be upheld in some form, although courts frequently limit such restrictions in time, scope and/or geographic range so the clause is not interpreted unreasonably.

Alternatively, where your client has, instead, signed agreements which contain confidentiality and/or non-solicitation clauses, the defense does not have the benefit of the argument that your client is restricting his client’s right to earn a living. Moreover, by applying the inevitability doctrine discussed above, you can argue to the fact-finder that without some restraint on the former employees’ right to compete, these clauses would be completely ineffective because the employees’ new positions would inevitably require them to violate them. Once that basis has been established, you can once again employ the argument that there has been arms-length bargaining to restrain the right to misappropriate confidential information and/ or solicitation.

In addition, if former employees left shortly after obtaining significant training by your client, you may be able to adopt, and turn to your advantage, the appeal of a “public policy” argument. It is good public policy to encourage a company to devote resources to training its employees without the fear of immediately losing its investment to a pillaging competitor. In such a case, there is a strong public policy argument that your client deserves at least temporary protection and/or recompense for its investment.

In sum, there are several viable replies, one or more of which may be utilized depending on the circumstances, to the argument that the public policies favoring competition and an employee’s ability to earn a living should trump your client’s right to safeguard its confidential and proprietary information and its customers.

2. Information Sought to be Protected in the Public Domain

Another common defense to an attempt to protect information as a trade secret is the assertionthat such data is, in fact, not a trade secret, i.e., that it is neither confidential nor proprietary, but is, rather, in the public domain. This defense is most often offered regarding confidential information such as lists of customer names, addresses and preferences, although it can be raised in cases of a company’s more proprietary documents, such as overall marketing strategies. For instance, in New York, the highest court has endorsed the general propositions: (1) that an employee’s knowledge cannot be considered a trade secret if the information is commonly known in the industry or can be developed from known sources. See Reed, Roberts Assocs., Inc. v. Stauman, 40 N.Y.2d 303, 308, 386 N.Y.S.2d 677, 680 (1976); Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 N.Y.2d 496, 499, 398 N.Y.S.2d 1004, 1006 (1977); and (2) that “the general knowledge and experience that a person acquires in any business” is not confidential, Richard M. Krause, Inc. v. Gardner, 99 N.Y.S.2d 592, 595 (1950). However, the New York Court of Appeals has also declared that:

[T]he courts must also recognize the legitimate interest an employer has in safeguarding that which has made his business successful and to protect himself against deliberate surreptitious commercial piracy. Thus restrictive covenants will be enforceable to the extent necessary to prevent the disclosure or use of trade secrets or confidential customer information.

Reed, 40 N.Y.2d at 308, 386 N.Y.S.2d at 680.

Thus, in order to counter the “public domain” defense, you will have to show that your client’s acquisition and protection of its information establishes that it is a trade secret. Please note that the following comments are not only for consideration at the time of the development of a litigation strategy, but also should be borne in mind when advising your client as to both its employment agreements and its routine management of its trade secrets.

First, it will be important for you to demonstrate that your client’s customer list is not simply a reproduction of the telephone book, or even an amalgam of publicly-available sources, but is, instead, focused on specific customers and potential customers. To support this contention, you should delineate the steps taken by your client to create and maintain its list. For example, your client may have developed its list by proceeding from a general “cold call” list obtained from a related industry to a list based on the positive responses to such calls or, even more narrowly, based on the purchases of your client’s products. Alternatively, your client may have created a list of potential customers as a result of expensive advertising and/or solicitations. Such evidence of the resources invested by your client in order to create such a list will bolster your assertion that it is not readily and publicly available through any other source, and thus deserves trade secret protection.

Regardless of whether your client’s list of customers, by itself, constitutes a trade secret, you should still consider whether you may be able to argue that other aspects of your client’s data — such as each customer’s previous purchasing habits, product preferences, billing rate, and other personal information which assists your client in servicing that customer — should be protected. To do so, you should assess whether you can demonstrate that your client amassed this specific personal customer information through interactions with its customers, and whether this data was provided by the customers with the understanding that it would remain only with your client. This dual strategy was recently successfully employed by the plaintiff in Inflight Newspapers, Inc. v. Magazines In-Flight LLC, 990 F. Supp. 119 (E.D.N.Y. 1997), in which the court refused to hold that the list of customer names itself was protectible as a trade secret, but did find that the removal and use of additional client-specific information taken by the defendants that was “garnered by [the defendants] during their years at Inflight, to prepare a favorable . . . [competing] proposal, . . . is violative of trade secret protections.” Id. at 128.

In addition to demonstrating that the data at issue was procured by your client through a vast expenditure of resources and/ or a private customer relationship, you should also attempt to establish that your client has long held the conviction that the data at issue is of a confidential and/or proprietary nature. You will want to obtain from your client any evidence that it has safe-guarded the information, to the extent practicable, by one or more of the following methods: (1) limiting the number of employees who have access to the data to the minimum required; (2) requiring those employees who have access to the data to sign confidentiality agreements; (3) restricting the ability of those with access to remove or copy such material; and (4) expressly indicating to each departing employee that the company considers the information to be a trade secret and does not authorize any person to take it with them upon departure. If you are able to show significant efforts on the part of your client to safeguard the data, a fact-finder is more likely to conclude that the evidence is not readily obtainable in the public domain; the corollary is likewise true: a fact-finder may be unwilling to protect information that your client has made easily obtainable by failing to treat it as confidential.

Thus, while the “public domain” argument is regularly put forth by defense counsel in response to attempts to enjoin former employees from using information taken from a company, you can respond by demonstrating that your client’s acquisition and preservation of the information establishes its status as a trade secret worthy of protection.

:::FOOTNOTES::: FN1 It is even possible that expedited discovery will provide you with evidence to assist you in demonstrating the violations’ potential irreparable harm to your client. Such evidence would include memoranda or other evidence from the raiding company which forecasts significant damage done to your client’s business as a result of its raiding. FN2 Strategies for countering a defense that such information does not constitute a trade secret are discussed later in this article in section G.2.