NY Federal Judge Lays Out Blueprint for Defeating Non-Competes
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The opinion recently rendered by New York Federal Judge Jed Rakoff is one of those rare birds, because rather than summarily denying a plaintiff's claims that it finds were not proven, the opinion utterly and with precision eviscerates a plaintiff's claims - fact by individual fact.
But the opinion doesn't stop there; it takes two more steps: first, demonstrating why none of the plaintiff's claims satisfy New York's requirements for entitlement to injunctive relief to protect the plaintiff's "trade secrets" or "business interests," and then goes even further - showing why, on policy grounds alone, plaintiff's claims should absolutely fall flat.
In short, Judge Rakoff's opinion in In re Document Technologies Litigation is an epic takedown of an overly zealous former employer's attempt to tie down their former high-level sales employees.
Plaintiff: The Individual Defendants Conspired to Divert Millions of Dollars of Business to a Chief Competitor
In 3 different lawsuits filed in different courts, Document Technologies, Inc. ("DTI") claimed that while they were in the process of finalizing their purchase of another eDiscovery provider, Epiq, four of their top salesmen were busy colluding and hatching plans to divert their clients and business to a chief competitor, LDiscovery. As a result, DTI sued both LDiscovery and the individual salespeople, claiming that LDiscovery was liable for tortious interference, and the individual defendants, who, parenthetically were all at-will employees, were liable for breach of their respective non-compete and non-solicitation agreements.
Some of the allegations are indeed salacious, and, at first blush, appear damning:
- All 4 of these upper-tier salespeople, who had millions of dollars in their respective books of business, resigned their positions simultaneously - with no notice to DTI;
- That LDiscovery made these individual defendants the proverbial "offer they couldn't refuse," and
"[E]nticed defendants to abandon their contractual obligations to DTI and breach all fiduciary duties and duties of loyalty owed thereto with the promise of nearly $24 million in guaranteed payments in exchange for using the goodwill and customer relationships garnered during their employment with DTI for the benefit of LDiscovery."
- DTI further alleged that the individual defendants used their company-issued thumb drives to copy, and then transfer, DTI's trade secrets and other proprietary information and transferred it to LDiscovery, and then "wiped" these devices (and corporate laptops) before returning them to DTI, in an effort to conceal these efforts.
Although the agreements contained a mandatory arbitration provision, they also contained a clause allowing DTI to pursue injunctive relief in court - and that is precisely what DTI did.
Ultimately, the cases were consolidated before Federal Judge Jed S. Rakoff in the Southern District of New York, who then conducted a three-day hearing to ascertain whether DTI was entitled to a TRO, and, among other things, banning the defendants from working for LDiscovery.
The Court: Plaintiff Didn't Prove a Blessed Thing
In denying plaintiff any of the relief it sought, Judge Rakoff certainly didn't mince any words. Following are just a few examples from this 30-page opinion:
"The Court, however, is unpersuaded that LDiscovery has done anything improper by entering into these agreements with the Individual Defendants, let alone that the Individual Defendants have breached the applicable terms of their agreements with DTI ...the Individual Defendants' agreements with LDiscovery can hardly be read as an inducement to commit such breaches."
"DTI does not have a monopoly on entire geographic regions, and cannot prevent competition in such areas by twisting the contours of trade secrets law."
"The ensuing forensic analysis confirms West's account and shows that West did not access the thumb drive between October 3, 2016 (when he initially copied the files onto his new laptop) and April 5, 2017 (the morning after he was served with the complaint in this action)."
"Given the vagueness of its terms, the [non-solicitation] covenant is thus nothing short of a contractual gag rule on employee complaints, which neither New York law nor common sense could possibly enforce, let alone have a lawful basis for doing so."
Clearly, DTI overreached here, and as a result, they were handed a resounding defeat. Why? Because they couldn't actually prove anything they had claimed in their complaint. It was all conjecture.
And while that's certainly important, in my view, that's only part of the takeaway.
I think the second prong is equally, if not more important:
How much do you think it cost the defendants to fend off these three different lawsuits and having a mini-trial to determine whether a TRO would be issued against them?
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