Preliminary Injunctions in Non-Compete Cases

G THE B IN EN V C R H E

A N 8 8 D 8 B 1 AR SINCE www. NYLJ.com ©2009 Incisive Media US Properties, LLC Volume 242—NO. 65 THURSDAY, OCTOBER 1, 2009 SOUTHERN DISTRICT CIVIL PRACTICE ROUNDUP Expert Analysis Preliminary Injunctions In Non-Compete Cases

or employees who possess confiden- The Second Circuit has not yet sought to tial business information, the threat re-tool the longstanding standard operative of a preliminary injunction can make in this circuit for entry of a preliminary Fchanging jobs a highrisk proposition. injunction,7 and we do not read Winter as To prevent, or at least forestall, the loss of overruling the Second Circuit’s approach. confidential information to the competi- We do note, however, that Winter could be tion, employers occasionally seek prelimi- read to require consideration of the private nary injunctions, regarded as “one of the By ByAnd equities as well as the public interest in most drastic tools in the arsenal of judicial HowardEdward M.B. TheodoreJudith L. A. every case, including where the plaintiff remedies,”1 to enjoin departing employees EpsteinSpiro KeyesMogul has established both irreparable injury from working for competitors. The decision and a likelihood of success on the merits. whether to grant such relief generally turns A party must demonstrate either (1) a likeli- Many cases already consider these factors, on resolution of the tension between pro- hood of success on the merits of its claim or and thus, as a practical matter, Winter is tecting proprietary business information (2) “sufficiently serious” questions making unlikely to result in a significant change in on the one hand, and the strong public the merits “fair ground for litigation” plus Second Circuit law. policy against limiting competition and an a balance of hardships “tipping decidedly” 3 individual’s ability to work on the other. in the movant’s favor. Employer-Employee Cases As a number of recent decisions from The Supreme Court’s decision last year in the U.S. District Court for the Southern Dis- Winter v. Natural Resources Defense Council4 In non-compete cases, because an trict of New York illustrate, employers and may introduce a new gloss on this long- employer’s entitlement to an injunction employees alike can take steps before and established Second Circuit standard. The ultimately turns on whether it can show during litigation that may influence how the standard as articulated in Winter requires that the former employee is likely to reveal balance between these competing interests a plaintiff to show that “he is likely to suc- confidential business information, “the will be struck. ceed on the merits, that he is likely to suffer irreparable harm analysis and the likelihood of success on the merits analysis are 8 Legal Standard closely related and often conflated.” Courts focus heavily on the nature At each stage of the inquiry, courts focus In the U.S. Court of Appeals for the Sec- of the information at stake and heavily on the nature of the information at ond Circuit, a party seeking a preliminary evidence indicating whether an stake and evidence indicating whether an injunction must establish the likelihood employee is likely intentionally, or employee is likely intentionally, or even of irreparable injury in the absence of an even unintentionally, to reveal that unintentionally, to reveal that information. injunction. The risk of irreparable injury information. They also give significant weight to whether must be actual and imminent rather than there is an effective non-compete contract remote or speculative.2 Once the prereq- irreparable harm in the absence of prelimi- between the parties. Three recent Southern uisite of irreparable injury is met, the Sec- nary relief, that the balance of equities tips District cases, reaching different conclu- ond Circuit charts two alternative avenues in his favor, and that an injunction is in the sions as to whether a departing employee for obtaining preliminary injunctive relief. public interest.”5 According to one commen- should be enjoined from working for a com- tator, this formulation calls into question petitor, illustrate the significance of these EDWARD M. SPIRO and JUDITH L. MOGUL are princi- the Second Circuit’s “second avenue” for factors. pals of Morvillo, Abramowitz, Grand, Iason, Anello & obtaining a preliminary injunction absent Bohrer, both concentrating in commercial litigation. a likelihood of success on the merits, where Mr. Spiro is co-author of “Civil Practice in the Southern ‘IBM v. Papermaster’ there are only serious questions going to the District of New York,” 2d Ed. (Thomson West 2008). GRETCHAN R. OHLIG, an attorney, assisted in the merits plus a balance of hardships decidedly In International Business Machines preparation of this article. favoring the moving party.6 Corp. v. Papermaster,9 IBM succeeded THURSDAY, OCTOBER 1, 2009

in enjoining Mark Papermaster, a former Judge Karas’ finding of irreparable harm not outweigh the harm Mr. Johnson would executive with extensive knowledge of IBM was bolstered by the fact that Mr. Papermaster suffer if forced to stay on the sidelines of technology, from working for Apple Inc. had signed a non-competition agreement a rapidly changing field.14 Mr. Papermaster, an expert in microproces- expressly acknowledging that IBM would What also distinguished Johnson from sors, had worked at IBM for 26 years in a suffer irreparable harm if he violated it. Papermaster was the fact that Mr. Johnson senior capacity, and was a member of an Recognizing that such a contract does not had avoided properly signing a non- elite group of IBM executives that developed per se entitle the employer to a finding of competition agreement despite IBM’s corporate strategy. He had access to highly irreparable harm, Judge Karas neverthe- repeated attempts to get him to do so. In an confidential technical information as well less concluded that the agreement’s explicit effort to delay entering into the agreement, as information regarding strategic plans, provision and common sense contributed Mr. Johnson had initially signed in the space product development and longterm busi- to making the finding of irreparable harm provided for the company’s signature, and ness opportunities. He was hired by Apple more than mere speculation in that case. thereafter ignored requests to execute a new to be a senior vice president responsible version of the document in the correct place. for the iPod and iPhone products. ‘IBM v. Johnson’ Judge Robinson found that IBM faced a In granting IBM’s request for a prelimi- “daunting, if not insurmountable, task” in nary injunction, Southern District Judge Southern District Judge Stephen C. proving that Mr. Johnson was bound by the Kenneth M. Karas noted that a determina- Robinson’s decision to deny the requested tion of irreparable harm requires more than injunction in International Business Machines The preliminary injunction is a potent 12 the mere showing that the employee is in Corp. v. Johnson also turned in substantial weapon that courts are hesitant to un- possession of confidential business infor- measure on the nature of the information mation. IBM also would have to show either possessed by the departing employee and leash against former employees absent that the employee had misappropriated the the risk of harm to his former employer clear evidence that the new employ- information or that his new employment (again IBM) posed by its potential disclo- ment poses a real risk that conﬁdential “create[d] a risk that disclosure of this sure. (Interestingly, the court considered information will be divulged. information [was] inevitable.” this issue in the context of the balance of Judge Karas found no evidence that hardships inquiry, underscoring the extent non-compete agreement, and that, accord- Mr. Papermaster actually had misappropri- to which the various prongs of the prelimi- ingly, IBM had not established a likelihood ated IBM’s trade secrets, but did conclude nary injunction standard ultimately turn of success on the merits of its breach of that he would inevitably disclose secrets he on similar factors). contract claim.15 Had Mr. Johnson properly did possess to Apple. In reaching that con- In Johnson, IBM sought to prevent David signed the agreement the court may well clusion, Judge Karas applied a four-factor Johnson, its former vice president of cor- have reached a different conclusion on test considering: (1) the extent to which porate development, from moving to its the ultimate question of whether to enjoin the new employer is a direct competitor competitor, Dell Inc. Like the defendant in Mr. Johnson’s move to Dell. of the former employer; (2) whether the Papermaster, Mr. Johnson was a member of employee’s new position is nearly identical the elite management group privy to con- ‘American Airlines v. Imhof’ to his old one; (3) the extent to which the fidential strategic initiatives. IBM claimed trade secrets at issue would have value to that Mr. Johnson was aware of confidential, The employee-defendant also prevailed his new employer; and (4) the nature of the competitive information concerning IBM’s in American Airlines Inc. v. Imhof,16 where industry and its trade secrets.10 clients’ needs, its competitors’ strategies, Southern District Judge Lewis A. Kaplan Judge Karas held that Mr. Papermaster and its own strategies for carrying out busi- refused to find that the departing employee had been “inculcated” with some of IBM’s ness opportunities. would inevitably disclose confidential infor- most valuable technical and strategic Acknowledging that IBM faced some risk mation to his new employer, despite the secrets and that it was inevitable that he from disclosure of this information, Judge fact that he had clearly misappropriated would use his IBM experience and expertise Robinson found that IBM nevertheless had information in anticipation of switching in his new position with an IBM competitor. overstated its case, characterizing its sub- jobs. The defendant, Charles Imhof, was He rejected Mr. Papermaster’s argument missions as “long on generalities and rather the senior-ranking manager of American that the new position would merely call on short on details.” He specifically contrasted Airlines’ New York Sales Division when he Mr. Papermaster’s general engineering skills, Mr. Johnson to Mr. Papermaster, who had left to assume a similar position for Delta finding that Apple hired Mr. Papermaster technical knowledge regarding IBM’s “crown Airlines. Before leaving American, Mr. Imhof precisely because of his knowledge of semi- jewels,” observing that the information e-mailed himself or copied to an external conductors and microprocessor design. Mr. Johnson possessed was “not the sort hard drive information that American Judge Karas concluded that “by drawing of information that is considered quintes- contended was confidential and competi- upon IBM-developed proprietary infor- sential trade secret information—detailed tively sensitive. After discovering that mation in these fields, Mr. Papermaster technical know-how, formulae, designs, or Mr. Imhof had taken this information, will harm in unquantifiable ways IBM’s procedures.”13 He concluded that any harm American sought to enjoin Mr. Imhof from ability to compete….”11 IBM would suffer absent an injunction did working for Delta. THURSDAY, OCTOBER 1, 2009

Judge Kaplan rejected American’s Concluding that American had failed to Practice §65.22[5][b] (3d ed. 2009) (cited in Int’l Bus. Machs. Corp. v. Johnson, 629 F.Supp.2d 321 contention that Mr. Imhof’s undisputed mis- point to specific information that would (SDNY 2009) (Robinson, J.)). appropriation of American’s information give Delta a material competitive advan- 7. See, e.g., Faiveley Transport, 559 F.3d at 116; Mullins v. City of New York, 307 Fed. Appx. 585, 586 (2d. Cir. automatically gave rise to a presumption tage, Judge Kaplan held that American 2009). of irreparable harm, in light of the Second had made only a weak showing as to 8. Int’l Bus. Machs. Corp. v. Papermaster, 2008 WL 4974508, at *6 (SDNY Nov. 21, 2008) (Karas, J.) (citing Int’l Circuit’s recent decision in Faiveley Trans- inevitable disclosure. Creative Mgmt. Inc. v. Abate, 2007 WL 950092, at *2 port Malmo AB v. Wabtec Corp.17 Faiveley However, Judge Kaplan assumed that (SDNY March 28, 2007) (Leisure, J.)). 9. 2008 WL 4974508. held that mere use of trade secrets is often even the weak showing regarding the 10. Id. at *7. fully compensable through monetary dam- inevitable disclosure created fair grounds 11. Id. at *9. 12. 629 F.Supp.2d 321 (SDNY 2009). ages, and that the rebuttable presumption for litigation such that the propriety of an 13. Id. at 335 (citing American Airlines Inc. v. Imhof, 620 of irreparable harm arises only when there injunction rested on a balancing of the F.Supp.2d 574, 582 (SDNY 2009) (Kaplan, J.)). 14. S ubsequently, IBM sought leave to file a second is risk that those secrets will be dissemi- equities. He determined that an injunc- motion for a preliminary injunc-tion against nated.18 tion would effectively prevent Mr. Imhof Mr. Johnson, but the court also denied that request, noting that IBM had appealed its earlier de- Judge Kaplan observed that “Imhof ha[d] from working in the industry to which cision to the Second Circuit and that the district learned—by reason of American’s claim, he had devoted two decades and from court should not encroach on the Second Circuit’s re-view of the issue. In addition, the court decried Delta’s reaction, and consultation with his supporting his family in troubled finan- IBM’s piecemeal litigation strategy and its attempt own newly acquired counsel—that there cial times. He concluded that the harm to file seriatim motions re-questing the same relief. 2009 WL 2356430 (SDNY July 20, 2009). Oral argu- are substantial limitations on his freedom to American, which was speculative at ment of the appeal took place on Sept. 9, 2009. of action,” and had offered to return or best, could not outweigh the substantial 15. 629 F.Supp.2d at 333. 16. 620 F.Supp.2d 574 (SDNY 2009). destroy the materials. That fact, coupled hardship to Mr. Imhof, and accordingly 17. 559 F.3d 110. with Delta’s assurances that it would not denied the injunction. 18. Id. at 118-19. 19. 620 F.Supp.2d at 580. accept confidential information, dispelled Finally, Judge Kaplan clearly was swayed 20. Id. at 582. any risk that Mr. Imohof would retain, much by the absence of a non-competition agree- 21. Id. at 587. less disclose, the confidential material to ment. Not only did he express trepidation Delta.19 about using the inevitable disclosure Judge Kaplan then considered whether doctrine to impose a de facto non- American could establish irreparable harm competition agreement where none existed, through the inevitable disclosure doctrine, but he admonished American for what he noting, at the outset, that the doctrine viewed as “[i]ts effort to obtain the substan- stood in “considerable tension with other tial equivalent by judicial decree without principles that inform decisions in cases paying for it.”21 like this.” Specifically, he commented that the doctrine permits creation of an implied- Conclusion in-fact restrictive covenant not to compete, contrary to New York’s public policy against The preliminary injunction is a potent such agreements, and, if applied too read- weapon that courts are hesitant to unleash ily, would suppress healthy competition in against former employees absent clear the marketplace. evidence that the new employment poses Judge Kaplan concluded that appli- a real risk that confidential information cation of the doctrine required consid- will be divulged. The existence of a writ- eration of whether the information at ten non-compete agreement can be an issue is “highly technical or specialized important factor, but an employer seeking scientific data as opposed to perhaps less a preliminary injunction must also come valuable and sensitive sales or general armed with concrete evidence of the harm business management information.”20 it claims it will suffer in the absence of an He found much of the information at injunction. issue here, involving sales of a widely used service, was readily ascertainable ••••••••••••••••••••••••••• from public sources or was “so obvious 1. Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 60 (2d Cir. and so general as to be virtually mean- 1985). ingless.” (Judge Kaplan provided as an 2. Moore v. Consol. Edison Co. of N.Y., 409 F.3d 506, 510 example, that “American hoped to be one (2d Cir. 2005). Reprinted with permission from the October 1, 2009 edition of 3. Faiveley Transport Malmo AB v. Wabtec Corp., 559 the NEW YORK LAW JOURNAL © 2009. Incisive Media of the two top airlines in New York and F.3d 110, 116 (2d Cir. 2009); Fed. Express Corp. v. Fed. US Properties, LLC. All rights reserved. Further duplication Espresso Inc., 201 F.3d 168, 173 (2d Cir. 2000). without permission is prohibited. For information, contact to build a profitable business by cater- 4. 129 S. Ct. 365 (2008). ing to corporate and leisure travelers.”). 5. Id. at 374. 877-257-3382 or [email protected]. 6. S ee 13 James Wm. Moore et al., Moore’s Federal # 070-09-10-01