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Lack of Non-Compete Agreement May Deprive New York Employers of Real Protection

  • June 9, 2009

When an employee who was given confidential information leaves for a competitor, employers often cry foul.  But if there is no non-competition restriction, an employer may have to resort to invoking an “inevitable disclosure” theory to protect its interests.  Under this theory, an employer will argue that its former employee should be barred from working for a competitor because he would be unable to avoid using confidential information gained from working for the former employer to benefit the new employer.  In New York, this may not get the employer very far, as a recent federal court decision suggests.  American Airlines, Inc. v. Charles F. Imhof and Delta Airlines, Inc., 09 Civ. 4535 (LAK) (S.D.N.Y. June 3, 2009).

Charles Imhof worked for American Airlines for 22 years, ultimately rising to a mid-level sales capacity.  Eventually, he left American for Delta Airlines.  Before leaving American, Imhof sent e-mails to his personal e-mail account, attaching various American documents.  He also bought a BlackBerry device to which he transferred the contacts contained on his American-issued BlackBerry.  When American learned of this after Imhof began working for Delta, it demanded Imhof cease his new employment with Delta.  Delta investigated the matter and concluded that Imhof had not disclosed to Delta any American information. Imhof also offered to destroy or return all materials, at American’s option.

Still, American sued Imhof and Delta to uphold the confidentiality provisions of its standards of business conduct, and sought an injunction to bar Imhof’s continued employment with Delta on grounds of breach of contract, breach of the duty of loyalty, misappropriation of trade secrets, unfair competition and the federal Computer Fraud and Abuse Act.  A temporary restraining order was issued.  However, following expedited discovery, Judge Lewis Kaplan denied American’s  motion for a preliminary injunction even without holding an evidentiary hearing. 

Because Imhof never actually disclosed confidential information to Delta or provided to Delta the documents he took, American’s argument hinged on whether Imhof was likely to disclose such documents and information in the future.  Although Imhof in fact took documents which he must have believed would be helpful to him in his new job, Judge Kaplan found Imhof’s offer to return or destroy the documents to be a key factor. He concluded that there was no material risk of irreparable harm based on the taking of the documents.

American also argued, however, that Imhof had substantial confidential information in his head which he intended to disclose or inevitably would disclose.  After quickly concluding that Imhof might have had an intent to disclose confidential information but plainly no longer had such an intent, Judge Kaplan addressed in detail — and rejected — American’s inevitable disclosure argument.  Relying on federal and state court decisions in New York which highlight the narrow scope of inevitable disclosure as a basis for injunctive relief to protect trade secrets, Judge Kaplan noted:

  • Application of the inevitable disclosure theory would bind the employee to an “implied in fact” covenant not to compete, which runs counter to New York’s public policy against such covenants and the strict scrutiny applied by courts in reviewing them.
  • Loose application of the inevitable disclosure theory would stifle competition and the free flow of talent.
  • Inherent in the doctrine are the drawbacks that courts are left without a frame of reference because there is no express non-compete agreement to test for reasonableness and that there are few guideposts for assessment of the likelihood that disclosure or misuse actually will occur.

Judge Kaplan prescribed a number of criteria for application of the doctrine.  These included the employee’s knowledge of actual confidential information and deliberate misappropriation of the information.  This is a high bar.  American did not meet it here, largely because it could not establish that the information at issue was truly confidential and American was vague about the information it believed Imhof possessed and would inevitably disclose.  Finally, Judge Kaplan found the equities balanced heavily in Imhof’s favor as he would be out of work in a bad economy. 

But it is Judge Kaplan’s final remark that employers should take to heart:

If American were as deeply concerned about the risk of Mr. Imhof going to work for a competitor as it now professes, it had the means to prevent it. It could have offered Mr. Imhof an employment contract containing a reasonable covenant against post-employment competition. Had it done so, and had Mr. Imhof accepted, American would not be in the position of which it now complains. Whether it declined that option because it wished to preserve its flexibility to discharge Mr. Imhof at will if that had seemed desirable or for some other reason, it has only itself to blame. Its effort to obtain the substantial equivalent by judicial decree without paying for it and to do so on the basis of vague claims of trade secrets and confidential information is not especially appealing.

Employers concerned about the possibility of an employee going to work for a competitor with confidential business information acquired during his employment would do well to enter into a non-compete agreement with the employee to protect its interests.

Jackson Lewis attorneys are available to assist employers in crafting suitable agreements to safeguard their confidential business information.

©2009 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

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