Ashland Management Inc. v. Altair Investments

59 A.D.3d 97, 869 N.Y.S.2d 465

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: December 23, 2008
• Status: Published

Opinions

OPINION OF THE COURT

Acosta, J.P.

The primary issues in this case involve the denial of defendants’ motion for summary judgment dismissing the complaint, which alleges, among other things, defendants’ blatant theft of confidential information in violation of confidentiality agreements as well as breach of fiduciary duties. Thus, contrary to the dissent, which focuses primarily on defendants’ version of events, this Court is constrained to view the evidence in the light most favorable to the party opposing, summary judgment (Toure v Avis Rent A Car Sys., 98 NY2d 345, 353 [2002]). It is in this context that we highlight plaintiffs claims, which have been established with evidence in admissible form, and which the motion court found sufficient to defeat defendants’ motion (Zuckerman v City of New York, 49 NY2d 557, 562 [1980]).

Plaintiff is in the business of providing investment advice and management to high net worth individuals and entities. Defendant Jones, the son of one of plaintiffs cofounders, worked for plaintiff for 17 years until he resigned in August 2003 to form Altair with defendant Obuchowski. At the time of his resignation, Jones was a managing director, portfolio manager and member of plaintiffs Investment Advisory Committee. Obuchowski was hired by plaintiff in January 2002 on Jones’s recommendation as vice-president for quantitative research.

In December 2000, Jones entered into an employee confidentiality agreement with plaintiff, which provided in relevant part that the employee

“will not, at any time during or after the termination of his or her employment by the Company for any reason whatsoever, use for any purpose other than the performance of his or her duties with the Company, reveal, divulge or make known to any person (other than the Company) any records, data, trade secrets, know-how, methods of operations, strategies, processes, computer programs, personnel information ... or any other confidential or proprietary information of the Company or any Client whatever (the ‘Confidential Information’) used by the Company and made known (whether or not with the knowledge or permission of the Company, and whether or not developed, devised or otherwise created in whole or in part by the efforts of the Employee) to the Employee by reason of his or her employment by the company. The Employee further covenants and agrees that he or she shall retain all such knowledge and information which he or she shall acquire or develop respecting such Confidential Information in trust for the sole benefit of the Company and its successors and assigns. Upon termination of his or her employment with the Company, the Employee will deliver to the Company any and all copies of any Confidential Information which is in the possession or under control of the Employee and shall not, directly or indirectly, copy, take, or remove from the premises of the Company, any of the books or records, client lists or client information or any other documents of the Company including, without limitation, those which incorporate any Confidential Information” (emphasis added).

Obuchowski entered into a substantially similar confidentiality agreement.

Prior to January 2003, and while still employed by plaintiff, Jones and Obuchowski started planning Altair, and on January 15, 2003, the domain name Altairinvestments.com was registered to Obuchowski. Then, in the summer of 2003, while still in plaintiff’s employ, Jones and Obuchowski prepared and distributed to plaintiffs clients a commentary on investment performance for the second quarter of 2003 and their forecast for the third quarter. This was done on plaintiffs letterhead without its Investment Advisory Committee’s approval and in breach of company policies. Obuchowski misstated his title on the commentary as “Director of Research,” rather than vice-president for quantitative research. According to plaintiff, these actions were in violation of defendants’ fiduciary duty and confidentiality agreements, and designed to increase their visibility to plaintiffs clients immediately prior to their resignation so that they would be more likely to attract those clients.

Plaintiff also asserts that in a further effort to cause it damage and take its clients, defendants contacted plaintiffs clients to advise them that defendants would be leaving plaintiffs employ even though it was plaintiffs contractual obligation to notify its clients of changes to its Investment Advisory Committee. Plaintiff was not only blindsided by angry clients who were upset that plaintiff had failed to notify them of Jones’s departure, but defendants’ actions also damaged its relationship with at least three clients.

Less than a week after defendants resigned from plaintiff, Altair was officially formed on August 21, 2003. Then, on at least 40 occasions, Altair, without plaintiff’s knowledge, used plaintiffs Federal Express account to send packages of information to plaintiff’s clients, which plaintiff asserts was for the purpose of soliciting business from plaintiffs clients on behalf of Altair. In addition, Jones called plaintiff’s clients to solicit their business.

According to plaintiff, defendants contacted plaintiffs clients using improperly obtained confidential information that could not have been readily ascertained from publicly available sources (such as the Internet as defendants had alleged), and that considerable money and effort had been expended in obtaining that information. Over the years, plaintiff had identified and developed relationships with certain individuals who were brokers, custodians, or consultants for specific types of investment accounts that comprised its clients. Indeed, as plaintiff notes, some Internet sites do not have addresses, some individuals are not listed on the sites, and, in some cases, defendants even stole the wrong address right out of plaintiffs files. Defendants also stole plaintiffs performance data, which they used in their solicitation materials sent to a client of plaintiff.

In January 2004, when plaintiff discovered that defendants had apparently hacked into plaintiff’s computer and sent promotional materials to plaintiffs clients via Federal Express, it commenced an action against defendants (.Ashland I) seeking damages and injunctive relief. Finding that plaintiff had demonstrated a likelihood of success on the merits with respect to its claims for breach of fiduciary duty and breach of the confidentiality agreements, Supreme Court issued a preliminary injunction enjoining and restraining defendants from “(1) using, disseminating or exploiting information derived or copied from any of plaintiffs records, data, trade secrets, know-how, methods of operation, strategies, processes, computer programs, personnel information, client lists or client information and any other confidential or proprietary information” and “(2) soliciting any of the individual brokers, custodians or consultants of plaintiffs institutional clients that Jones and Obuchowski were either introduced to through their employee relationship with plaintiff or learned of from any of the Confidential Information.”

The action was thereafter discontinued without prejudice while the parties attempted to resolve the dispute. The settlement discussions were unsuccessful, however, and the action was then recommenced in October 2005. In the current action, which demands compensatory and punitive damages as well as injunctive relief, plaintiff accuses Jones and Obuchowski of having, among other things, “combined and conspired to form a new investment advisory company . . . and to divert business away from plaintiff and misappropriate such business to Altair by stealing plaintiffs confidential information.” The complaint asserts, in that regard, seven claims for, respectively, (1) a preliminary and permanent injunction that would direct defendants to “immediately cease and desist from any use, dissemination or exploitation of information derived or copied from any of plaintiffs records, data, trade secrets, know-how, methods of operation, strategies, processes, computer programs, personal information, client lists or client information and any other confidential or proprietary information,” (2) and (3) both breach of fiduciary duty, (4) breach of contract (confidentiality agreements), (5) conversion, (6) tortious interference with contract, and (7) unfair competition as against Altair.

Defendants responded by moving for summary judgment dismissing the complaint, and plaintiff cross-moved for an order reinstating the preliminary injunction that it had been previously granted in Ashland I. By order dated September 26, 2006, Supreme Court granted defendants’ motion only to the extent of dismissing plaintiff’s fifth and sixth causes of action for conversion and tortious interference with contract, pointing out that plaintiff “did not oppose that part of defendants’ motion,” and denied the broad injunctive relief sought by plaintiff in its cross motion (2006 NY Slip Op 30532[U], *9). The court found that there “are issues of fact such that summary judgment is not appropriate at this time” (id..), and, concerning plaintiffs request for a preliminary injunction, stated that the “preliminary injunction from Ashland I dissolved automatically on June 9, 2005 when Ashland I was voluntarily discontinued by written stipulation. The discontinuance contained an agreement that [plaintiff] could recommence an action through an identical complaint if the parties did not resolve the matter,” and under such stipulation, the preliminary injunction previously issued in Ashland I “was replaced with a narrower and more precisely defined agreement, which was limited in scope to certain individuals set forth in an annexed list” (id. at *2).

The motion court properly declined to dismiss the complaint in its entirety. Restrictive covenants, such as the confidentiality agreements herein, are subject to specific enforcement to the extent that they are “ ‘reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee’ ” (BDO Seidman v Hirshberg, 93 NY2d 382, 389 [1999], quoting Reed, Roberts Assoc, v Strauman, 40 NY2d 303, 307 [1976]). With respect to covenants aimed at protecting against misappropriation of an employer’s trade secrets or confidential customer lists,

“courts . . . 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, Roberts Assoc., 40 NY2d at 308).

Whether a plaintiffs customer list and/or other proprietary information constitutes a trade secret or is readily ascertainable from public sources is ordinarily a triable issue of fact (see Suburban Graphics Supply Corp. v Nagle, 5 AD3d 663, 666 [2004]; Bender Ins. Agency v Treiber Ins. Agency, 283 AD2d 448, 450 [2001]; Spectron Glass & Elees, v Marianovsky, 273 AD2d 374 [2000]).

Further, if the parties entered into a confidentiality agreement and the proprietary information at issue constitutes a trade secret, whether defendants’ use of that information was a result of casual memory is irrelevant (see North Atl. Instruments, Inc. v Haber, 188 F3d 38, 47 [2d Cir 1999], explaining Leo Silfen, Inc. v Cream, 29 NY2d 387 [1972], and quoting 4 Milgrim on Trade Secrets, App 15A-3 [1998] [“(T)he majority rule is . . . that appropriation by memory will be restrained under the same circumstances as will appropriation by written list”]).¹

Here, the record establishes that the individual defendants took plaintiffs proprietary material and made use of it to further their own business interests in their new endeavor. Although defendants argue that their conduct did not violate the confidentiality agreements because the subject material was publicly available, plaintiff has presented evidence in admissible form showing that defendants targeted Altair’s promotional materials to specific brokers, consultants and custodians, all of whom were plaintiffs clients, and that defendants only learned the identities of these individuals through their employment with plaintiff. Viewing the evidence in the light most favorable to the party opposing summary judgment (People v Grasso, 50 AD3d 535, 544 [2008]), it is for a jury to decide whether the targeted information was confidential or ascertainable through public records. Accordingly, defendants cannot demonstrate that they are entitled to dismissal of the complaint on the ground that they did not, as a matter of law, violate their confidentiality agreements with plaintiff by taking its trade secrets (compare Fredric M. Reed & Co. v Irvine Realty Group, 281 AD2d 352 [2001], lv denied 96 NY2d 720 [2001]).

Contrary to the dissent, the mere fact that the confidentiality agreements were not limited in duration does not necessarily make them ipso facto unenforceable. We find no legal support for the dissent’s core position that the absence of a durational limitation renders a confidentiality agreement void as a matter of law in cases where the employee does not provide “unique or extraordinary” services. A restrictive covenant is unenforceable if its duration is unreasonable (see e.g. Maxon v Franklin Traffic Serv., 261 AD2d 830, 832 [1999]) because of the “ ‘powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood’ ” (Reed, Roberts Assoc., 40 NY2d at 307, quoting Purchasing Assoc, v Weitz, 13 NY2d 267, 272 [1963]), as well as the general public policy favoring robust and uninhibited competition (American Broadcasting Cos. v Wolf, 52 NY2d 394, 404 [1981]). Protecting trade secrets and truly confidential information, however, does not have to be time limited in every instance where the covenant does not otherwise prevent a former employee from pursuing his or her livelihood or interfere with competition (6 Lord, Williston on Contracts § 13:5, at 291-292 [4th ed] [“basic test for determining permissible time . . . limitations is whether the restraint as to time ... is necessary for the protection of the promisee, but neither oppressive on the promisor, nor injurious to the interests of the general public” (citing, inter alia, Restatement [Second] of Contracts § 188 [1] [a], [b])]; cf. Karpinski v Ingrasci, 28 NY2d 45, 50 [1971] [in enforcing permanent restraint on competition against oral surgeon in limited rural area, Court stated that “a covenant will not be stricken merely because it contains no time limit or is expressly made unlimited as to time” (internal quotation marks omitted)]).

Thus, although covenants restraining competition by a former employee whose services were “unique or extraordinary” are given wider latitude (BDO Seidman, 93 NY2d at 389-390), such as in Karpinski, the reasonableness of the duration of a covenant of a nonunique employee nonetheless necessarily depends on the circumstances. Otherwise, the rule would not be stated in terms of reasonableness, but rather by a fixed durational requirement.²

In the present case, there is “no reason to suppose that [an unlimited durational] limitation [on the use of confidential information] will prevent defendants] from pursuing [their] livelihood or that it will have the effect of precluding [them] from operating a successful [competing business]” (Chernoff Diamond & Co. v Fitzmaurice, Inc., 234 AD2d 200, 202 [1996]). In any event, if a jury were to find that defendants violated an otherwise valid agreement, the court could simply modify the agreements’ duration to one more reasonable under the circumstances.

Courts have the “power to sever and grant partial enforcement for an overbroad employee restrictive covenant” as long as the covenant does not otherwise “violate the tripartite common-law test for reasonableness” (BDO Seidman, 93 NY2d at 394, 393); that is, the covenant “(1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public” (id. at 388-389). Thus, as BDO Seidman v Hirshberg explains,

“when . . . the unenforceable portion is not an essential part of the agreed exchange, a court should conduct a case specific analysis, focusing on the conduct of the employer in imposing the terms of the agreement. Under this approach, if the employer demonstrates an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct, but has in good faith sought to protect a legitimate business interest, consistent with reasonable standards of fair dealing, partial enforcement may be justified” (93 NY2d at 394 [emphasis added and citations omitted]).³

Whether the performance is an essential part of the agreed exchange depends on its relative importance in the light of the entire agreement between the parties (Restatement [Second] of Contracts § 184, Comment a).

Here, the essential part of the agreements is not their duration but the prohibition against using, copying or removing confidential information. Moreover, at least with respect to Jones, the agreement was not imposed as a condition of his initial employment. Instead, he was asked to sign it after working for plaintiff for approximately 14 years. And, although Obuchowski was asked to sign the agreement when he commenced his employment (cf. Restatement [Second] of Contracts § 184, Comment b [“(t)he fact that the term is contained in a standard form supplied by the (former employer) argues against aiding (the former employer) in this request”]), there is no evidence that plaintiff was motivated by some “general plan to forestall competition” or otherwise “imposed the covenant in bad faith, knowing full well that it was overbroad” (BDO Seidman, 93 NY2d at 395). Rather, viewing the evidence in the light most favorable to plaintiff, as we must, it was legitimately attempting to protect information that it had taken years to develop. The fact that plaintiffs president was unable to state at his deposition the actual amount of time and money plaintiff had spent developing these contacts does not, as the dissent suggests, defeat its position.

The dissent also posits that a court cannot “sever” a nonexistent durational requirement. We disagree for the reasons stated above. There is a durational requirement in these contracts; the duration is unlimited. A court, however, may find that the unlimited durational requirement is overbroad in this case and reduce it to a more reasonable one, especially if it were to find that the client information was in fact a trade secret, but a secret which professionals in the business would have ultimately determined on their own after working in the industry for a period of years. That plaintiff did not insert a limited or reasonable durational limit in the contracts is of no moment. In the circumstances of this case, a court has the power to enforce the covenants to the extent it deems reasonable.

Furthermore, while “[a]n employee may create a competing business prior to leaving his employer without breaching any fiduciary duty unless he makes improper use of the employer’s time, facilities or proprietary secrets in doing so” (Schneider Leasing Plus v Stallone, 172 AD2d 739, 741 [1991], lv dismissed 78 NY2d 1043 [1991]), defendants have failed to establish that they did not use any confidential or proprietary information for the benefit of Altair in violation of the confidentiality agreements and their fiduciary duties to their former employer. Indeed, the opposite is true. Evidence in the record establishes that in the summer of 2003, while still working for plaintiff, defendants prepared and distributed to plaintiffs clients a commentary on investment performance for the second quarter of 2003 and their forecast for the third quarter. As previously noted, this was done on plaintiffs letterhead without its Investment Advisory Committee’s approval and in breach of company policies. Moreover, although the dissent correctly finds that plaintiffs past performance data was available to the public and therefore was not a protected trade secret, the manner in which defendants used that information as part of the promotional literature they sent to plaintiffs clients might nonetheless be found by the trier of fact to be in violation of their fiduciary duties of good faith and fair dealing to plaintiff (see Leo Silfen, 29 NY2d at 391-392; Duane Jones Co. v Burke, 306 NY 172, 188-189 [1954]).

Plaintiffs cross motion for reinstatement of the previously issued preliminary injunction was properly denied in circumstances where plaintiff agreed to a more limited injunction in the stipulation between the parties that discontinued the prior action without prejudice.

Accordingly, the order of the Supreme Court, New York County (Shirley Werner Kornreich, J.), entered October 4, 2006, which granted defendants’ motion for summary judgment solely to the extent of dismissing the fifth and sixth causes of action and denied plaintiffs cross motion to reinstate a previously issued preliminary injunction, should be affirmed, with costs.

1 . The casual memory cases cited by the dissent (Leo Silfen, Inc. v Cream, 29 NY2d 387 [1972], supra; Falco v Parry, 6 AD3d 1138 [2004]; Arnold K. Davis & Co. v Ludemann, 160 AD2d 614 [1990]; Levine v Bochner, 132 AD2d 532 [1987]) are inapposite inasmuch as there were no express agreements in those cases. Thus, the courts’ holdings in those cases that the lists at issue could have been ascertained by public sources are of no moment to this case where there are confidentiality agreements. As the court in North Atlantic explained:

“Numerous cases applying New York law have held that where ... it would be difficult to duplicate a customer list because it reflected individual customer preferences, trade secret protection should apply . . . “Leo Silfen, Inc. v. Cream does suggest that one factor in analyzing a trade secret claim against an employee who has solicited a former employer’s customers is whether the solicitation was merely ‘the product of casual memory.’ 29 N.Y.2d at 391 . . . [W]e do not [, however,] read Leo Silfen to describe a broad rule dictating that anything an employee remembers casually is not a trade secret. Rather, Leo Silfen expressly notes that customer lists ... in which customers are not readily ascertainable and in which patronage has been secured only through the expenditure of considerable time and money[ ] are protectable trade secrets. See 29 N.Y.2d at 392-93 . . . ; accord Webcraft Techs., 674 F.Supp. at 1045; cf. 4 Roger M. Milgrim, Milgrim on Trade Secrets, App. 15A-3 (1998) . . . Moreover, Leo Silfen implies that its holding is limited to cases lacking an express confidentiality agreement protecting customer lists—a clear distinction from the instant case. See 29 N.Y.2d at 395” (188 F3d at 46-47 [footnote and some citations omitted]; but see Columbia Ribbon & Carbon Mfg. Co. v A-l-A Corp., 42 NY2d 496, 499 [1977] [covenant unrestrained by any limitations keyed to uniqueness, trade secrets, confidentiality or even competitive unfairness is unenforceable]).

Buhler v Maloney Consulting (299 AD2d 190, 191 [2002]) does not dictate a different result inasmuch as the Court held that the list in question was not a trade secret but rather was “prepared by plaintiff based on her knowledge of the financial services industry and on information that was publicly available.”

2 . Airline Delivery Servs. Corp. v Lee (72 AD2d 731 [1979]), cited by the dissent, does not dictate a different result. In that case, this Court noted that “covenants which perpetually restrict an employee from working for another are invalid and must fail” (id., citing Kaumagraph Co. v Stampagraph Co., 235 NY 1 [1923]). In this case, however, the confidentiality agreements do not perpetually restrict defendants from working for someone else or in a similar business. Indeed, there is no evidence in the record that defendants were unable to operate a successful business once they left plaintiff. Rather, the agreements at issue merely attempt to prevent defendants from unfairly using plaintiffs trade secrets. In this respect, Kaumagraph supports plaintiffs position in this case. There, the Court noted that the contracts at issue were

“unlimited as to time and [were] valid as a basis for equitable relief only as they protected] trade secrets acquired during a confidential employment. They merely expressed] the implied contract of one who enters into such an employment not to carry elsewhere into competition with his employer confidential knowledge obtained from him” (id. at 6).

3 . In rejecting the concern that partial enforcement would require the rewriting of the parties’ agreement, the Court noted that the only revision required was to narrow the restriction. It also went on to note:

“Moreover, to reject partial enforcement based solely on the extent of necessary revision of the contract resembles the now-discredited doctrine that invalidation of an entire restrictive covenant is required unless the invalid portion was so divisible that it could be mechanically severed, as with a ‘judicial blue pencil.’ The Restatement (Second) of Contracts rejected that rigid requirement of strict divisibility before a covenant could be partially enforced (see, Reporter’s Note, Restatement [Second] of Contracts § 184, at 32). Thus, we conclude that severance is appropriate, rendering the restrictive covenant partially enforceable” (id. [citation omitted]).