Covenant Not Enforced: In Malcolm Pirnie, Inc. v. Werthman, No. 04701824, NYLJ November 30, 1999, p. 30, col. 5, the New York State Supreme Court in Erie County refused to enforce a non-compete clause and dismissed a lawsuit brought against a professional engineer by his former employer. Unlike a number of prior federal and state cases, including those discussed in the Summer, 1999 issue of this Quarterly (“You Can’t Take It With You”), the court did not pare down the overbroad covenant and enforce it in part, choosing instead to dismiss it in its entirety. The case underscores the ongoing importance of using tailored restrictive covenants that are not vague and do not exude coersion or overbreadth.
Werthman, a professional engineer, was an employee, officer and shareholder of the plaintiff, a nationwide engineering company. After leaving, the plaintiff commenced an action claiming breach of two separate restrictive covenant clauses in his written employment agreement. The first prohibited the solicitation of entities that were clients of the plaintiff during the two years prior to the termination of Werthman’s employment. The second covenant prohibited Werthman from possessing an ownership interest in any business that performs, or has performed, in the preceding year, engineering services for any entity that was a client of the plaintiff during the two years prior to the termination of Werthman’s employment.
Werthman moved to dismiss the lawsuit, contending that the covenants were overbroad.
The Court, citing to the New York Court of Appeals decision in BDO Seidman v. Hirshberg, 93 N.Y.2d 382 (discussed in the Summer, 1999 issue of this Quarterly), agreed with Werthman, refused to enforce the covenants and dismissed the action. The Court applied the three pronged test set out in Hirshberg and held that the covenants were not reasonably limited in scope.
In dismissing the lawsuit, the Court pointed to the breadth of the covenants; in particular, the lack of any geographic limitation. The employer argued that the covenants did not prohibit all competition, but only solicitation of its customers. The Court was not persuaded. It pointed out the absence of any geographical restriction, noted that the employer was a national engineering firm and found that a reference to the employer’s many current and former clients was hardly a geographical limitation. The Court held that a restrictive covenant that precludes a former employee from practicing his profession throughout the country is unreasonable.
Notably, unlike the BDO Seidman case, once the court determined that the covenants were unreasonable and overbroad, it did not partially enforce them, but rejected them in their entirety. In addition to demonstrating the importance of using tailored restrictive covenants, the Werthman case also indicates that employers may indeed find more favorable treatment in federal court.
PART 2: Follow-Up on Restrictive Covenants – Covenant Is Enforced: In North Atlantic Instruments, Inc. v. Haber, No. 98-9423, 1999 U.S.App. LEXIS 18462 (Decided August 9, 1999), the U.S. Court of Appeals for the Second Circuit upheld a district court grant of a preliminary injunction which enjoined a former employee and his new employer from soliciting client contacts contained in a customer list, allegedly misappropriated from the former employer. North Atlantic designed and manufactured industrial electronics equipment used primarily on ships, tanks and aircraft. The plaintiff acquired a company, Transmagnetics, Inc., which marketed and sold customized electronics equipment to a limited number of engineers in the aerospace and high technology industries. At the time of purchase, Haber was the president and one third owner of Transmagnetics in charge of sales. Subsequent to the purchase, North Atlantic and Haber signed an employment agreement in which Haber agreed to keep confidential all matters relating to North Atlantic, including customer lists and trade secrets, and that all documents containing confidential information would be returned to North Atlantic upon Haber’s departure from the company.
When Haber left North Atlantic, he joined a competitor, Apex Signal Group, which sold similar products to the same type of customers which Transmagnetics sold to. Haber, acting on behalf of Apex, solicited Transmagnetics’ customers contained on a printout of confidential clients maintained by North Atlantic, which included names, addresses, telephone numbers and client contacts. The list was developed over many years prior to and after North Atlantic acquired Transmagnetics. Haber made a printout of this list and the list was found in Apex’s files. While the lower court did not prohibit the defendants from soliciting the companies listed in the document, it did enjoin Haber and Apex from contacting or soliciting any personal client contacts at the companies (engineers at the companies who desire customized products), and any other information contained on the customer list, including identities and phone numbers of customer personnel and any product or pricing information pertaining to each customer. The scope of the injunction prohibited the defendants from using customer information which Haber personally developed and nurtured while employed with North Atlantic and Transmagnetics. Haber appealed the decision only to the extent that it restricted Haber and Apex from soliciting client contacts which Haber personally developed with North Atlantic and Transmagnetics.
In rendering its decision, the court reasoned that although the identities of the companies were publicly available to anyone in the industry, the customer list contained the identities of individual engineers at the companies and customer information, which were not readily available to others in the industry. Most importantly, the court concluded that “North Atlantic took numerous appropriate measures to prevent unauthorized disclosure of the information contained in its list of client contacts. . .” and cited to the express language of Haber’s employment agreement. Steps taken by North Atlantic to protect this information included the execution of confidentiality agreements with its employees. The court (citing Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387 (1972)) also rejected Haber’s argument that he could have contacted the people in the list via casual memory, reasoning that (1) simply because an employee remembers confidential information through his casual memory does not disqualify such information from the ambit of protectible trade secrets and (2) the only reason Haber had this knowledge was due to his exposure to the information during his employment with North Atlantic. The court also found that Haber’s actions constituted a breach of an employee’s duty not to disclose trade secrets owed to his former employer even after his departure, as well as a breach of the express terms of the employment agreement. Relying on the express terms of the agreement, the Court of Appeals affirmed the decision despite the fact that Haber personally nurtured certain clients contacts and information contained on the customer list.