Articles Posted in Litigation

As promised, we write about another recent trade-secret case where the court refused to enforce an employer’s claims that its information was secret.

After plaintiff was indicted for a host of crimes, some of its employees left to form a competing business, in violation of their non-compete and confidentiality agreements. These employees argued that because of the indictment, their past employer had unclean hands and could not enforce the non-compete, which is equity-based relief and unavailable generally where the other party does not act equitably.

Judge Emerson, of Suffolk County Supreme Court, first addressed the non-compete issue by noting the “powerful considerations of public policy which militate against sanctioning the loss of a person’s livelihood.” This principle resulted in the general rule that restrictive covenants that prevent an employee’s work in a similar line are “disfavored by the law.” She then found that the non-compete provisions, which bound the employees for three years and contained no geographical limitation, to be overbroad, unnecessary to protect the employer, and therefore unenforceable.

Two cases, one State and one Federal, declined to prevent a competitor from using what was alleged to be another’s secret information.

In Art and Cook, Inc. v. Haber, the Eastern District court found that the secrets alleged to have been infringed or disclosed were in fact not secrets, legally speaking. The plaintiff claimed that Haber, an ex-salesman of plaintiff’s cookware and kitchenware, had been caught emailing himself a list of buyers and separately, marketing, sales and customer list information. After Haber’s termination, he began to compete against plaintiff.

In declining to find that these lists were protectable trade secrets, the court addressed each of these two categories of information that Haber had sent himself. The court discussed the reason and manner of how a customer list could be deemed a trade secret. Specifically, a customer list created through significant effort and which contains unique or valuable information generated by a business, and maintained by the business as a secret, may be enforced as a secret. But, a “contact list [that] contains little more than publicly available information, even if it takes considerable effort to compile, it is not accorded protection… .” In this case, the court determined that the customer list was a compilation of names that the plaintiff hoped to solicit but which did not reflect unique information. That the list took substantial time to create would not convert a list consisting of largely public information into a secret. Finally, the court noted that where “the contacts on Plaintiff’s customer lists are generally known within Plaintiff’s industry is fatal [to a claim of infringement]. Simply put, knowledge that is generally known within an industry cannot be said to constitute the trade secret of one industry participant.”

A guarantor was sued for the failure of the obligor/tenant to pay rent. The tenant had defaulted on a commercial lease and under the lease’s acceleration clause owed the landlord more than $1,740,000. When the guarantor was sued, he claimed that the landlord’s re-letting of the space precluded full recovery under the acceleration provision and that his liability was limited to what the tenant owed.

The First Department recently rejected that argument. While not disputing that a tenant might not be liable for the period of time for which the premises had been rented to a new tenant, the guarantor did not have the benefit of that provision to offset the amounts due. The court stated that in this setting, a guarantor’s “liability can be greater than that of the obligor tenant, as the lease and guaranties were separate undertakings, and the latter are enforceable without qualification or reservation.”

Essentially, the guaranty agreement, while guaranteeing the underlying lease, was a separate agreement governed by its own set of rules which were not the same as the underlying lease. We saw a similar outcome in a case about a dispute over a brokerage agreement that resulted in a settlement agreement. The settlement agreement was a document distinct from the brokerage agreement, with its own terms and conditions, and enforceable as such. We wrote about it here.

For any contract to be enforced, it must address the transaction’s core elements. It must identify the parties, the property sufficiently for it to be identified, and the price. And it must be signed. What if the contract does not detail how or when the balance is to be paid or the closing held?

The Second Department enforced a contract missing those two terms, finding that where the form of payment is missing it is presumed to be money and paid in exchange for the delivery of the deed. The missing closing date was not fatal to the deal because “the law will presume that the closing will take place within a reasonable time.”

One wonders if litigation took place over that vague term.

Plaintiffs own a number of commercial properties in Brooklyn. In connection with that ownership, plaintiffs retained defendant broker to arrange for insurance coverage for the buildings.

At the time of issuance, in 2002, the policies did not cover flood-related damage. In 2007, defendant offered plaintiffs flood coverage. Plaintiffs agreed and believed that the buildings were covered for flood damage. However, plaintiffs were never informed that the policies excluded coverage for properties within specified flood zones. The buildings at issue were in flood zones so that they were in fact not covered for flood. The policies were renewed annually.

In 2011, before Hurricane Sandy hit the New York area, plaintiffs requested that defendant affirm to them in writing that the buildings were covered for flood damage. Defendant did so, writing that the buildings had $1 million of flood coverage. Only after Hurricane Sandy damaged plaintiffs’ buildings did plaintiffs learn that the buildings had no flood coverage. Plaintiffs sued for negligence, breach of fiduciary duty and misrepresentation.

While some businesses believe that all of their business information can be deemed a “trade secret,” the Second Department recently reaffirmed that not to be the case.

In an action by a lighting company seeking to prevent an ex-employee from working for a competitor, the company’s claim that the employee was misappropriating trade secrets was dismissed. In discussing that claim, the Court noted that for a secret to be such, it must be maintained as a secret. This means that where information is “readily ascertainable outside the employer’s business as prospective users or consumers of the employer’s services of products, trade secret protection will not attach and courts will not enjoin the employee from soliciting his employer’s customers.” Because the lighting company’s alleged secrets were “customer lists, prices, and profit margins,” which were described as “distinctive” by the company, the company’s failure to maintain that information as secret within the company defeated its claim.

This is not to say that customer lists, for example, cannot be confidential and enforced as a secret. However, to accomplish that designation, there must be a demonstration of how the information is maintained. Therefore, where a business seeks to keep its information secret, it must take specific steps to treat that information as secret, including by documenting how and for whom the information is available.