Employers Face Significant Difficulty Obtaining Injunctive Relief for Alleged Breach of Non-competition and Confidentiality Provisions

By: Eric Levine, Esq.

In , the Superior Court denied Mega Brand’s application for injunctive relief against two former employees who purportedly violated the non-competition and confidentiality provisions of their employment agreements.  The decision illustrates the burden faced by employers seeking to enforce post-employment restrictions against former employees, as well as the consequences of appearing less than truthful when seeking judicial relief.  

The Facts: Mega Brands is a distributor of stationary products to large retail customers such as Wal-Mart and Target.  Prior to joining Mega Brands, Michael Cerillo and Ben Hoch operated a company that sold stationary products comparable to those offered by Mega Brands.  In 2006, Mega Brands acquired the company through a stock purchase agreement (“SP Agreement”) and hired Cerillo and Hoch under employment agreements containing standard non-competition and confidentiality provisions.  These agreements expired on the later of five years from the date of the SP Agreement or twelve months after Cerillo and Hoch’s termination of employment with Mega Brands. 

In 2008 the parties negotiated amendments to the SP Agreement, including a provision establishing January 26, 2011 as the new expiration date of the non-competition and confidentiality provisions of the employment agreements.  In addition, the amended SP Agreement modified the employment agreements’ definition of “restricted activity” under the non-compete provisions by “carving out” certain activities that Cerillo and Hoch could engage in without violating the restrictions.

In 2010, the parties negotiated amendments to the employment agreements which, among other things, extended the term of employment to December 31, 2013, but did not reference the amended SP Agreement that modified the post-employment restrictions of the original employment agreements.

Cerillo and Hoch resigned from Mega Brands in late December 2013 and began operating a company that admittedly competed with Mega Brands. Mega Brands commenced suit alleging violation of the non-compete provisions of the employment agreements and further, misappropriation of trade secrets as far back as two years prior to the resignations. Mega Brands also sought to temporarily restrain Cerillo and Hoch from breaching their post-employment restrictions pending litigation.  Cerillo and Hoch maintained that the amended SP Agreement setting forth a January, 2011 expiration date for non-competition and confidentiality provisions controlled their post-employment activities and had long expired.   

The Ruling: Notwithstanding the court’s observation that the right to injunctive relief for violation of restrictive covenants is well-settled, it declined to restrain Cerillo and Hoch because Mega Brands failed to show it was likely to succeed to on the merits of its claims.  Among the facts cited by the court militating against injunctive relief were the following:

• Contrary to Mega Brands’ claim that its manufacturing sources, pricing information and customer lists were confidential information and trade secrets, the certification submitted to the court by Cerillo and Hoch indicated that Mega Brands’ manufacturing source data was freely available on-line;  its product development information could gathered by the general public at annual trade shows; and the definition of “trade secret” under the stock purchase agreement was ambiguous.
• The duration of the non-competition and confidentiality provisions of the employment agreements was “highly controverted” because the 2008 amended SP Agreement and the extended employment agreements executed in 2010 created ambiguity regarding the expiration of the non-competition and confidentiality provisions.
• Indicative of the judicial reluctance to enforce covenants not to compete, the court observed that if an injunction was issued, Cerillo and Hoch would be barred from using the experience they gathered in the industry prior to their employment with Mega Brands to earn a living, thus stifling ordinary competition. In contrast, if no injunction issued, the only harm to befall Mega Brands would be contending with one more competitor in an already competitive industry.
• Mega Brands could not establish what business, if any, it lost as a result of Cerillo and Hoch’s actions.
• The court faulted the certifications submitted by Mega Brands in support of its application because they were based on hearsay information and “were simply not true.”
• The court characterized Mega Brands as acting with “unclean hands” throughout the proceedings, recounting its failure to provide critical documents as part of its initial filing that were harmful to its application for injunctive relief, and its blatant disregard for the court’s order that the record before the court be under seal.

The Takeaway: The decision is illustrative of the difficult burden employers face when seeking to enforce non-competition provisions through injunctive relief. If resort to the judicial process is necessary, certain steps should be taken early on to increase the chance of success in enforcing restrictions in employment agreements. First, employers must ensure that the language of any non-compete and confidentiality provision is clear, unambiguous and sufficiently detailed to address the employer’s legitimate concern of protecting its competitive advantage, trade secrets and confidential information. If multiple documents affect an employee’s rights and obligations, employers must ensure that they are explicitly cross-referenced and explain how each document affects the other.

Second, employers need to conduct pre-litigation investigations to ensure that sufficient facts, based on personal knowledge of witnesses, will support an application for injunctive relief.  In light of the he high burden faced by parties seeking injunctive relief in the courts, coupled with a public policy that disfavors barring individuals from engaging in their chosen industry, courts require that the record be thoroughly established before restraints are imposed upon former employees. 

Third, it is crucial to conduct oneself before the court in an open and honest fashion. Withholding evidence and ignoring directives of the court can be devastating to an application and result in the court viewing an application with skepticism and distrust.