Considering the potential harm that could strike a business when a key employee leaves to work for a competitor, employers are often quick to pursue litigation against employees when they believe the employee may have taken confidential and/or proprietary information with him/her and is now using (or could use) that information to the benefit of a direct competitor (and to the harm of the employer).
Many times, an employer may assume or speculate that a former employee has taken confidential information and is using or will use it with a new employer. However, proving that the former employee stole confidential information and that the information was actually confidential in the first place is often difficult. Courts are generally not likely to take the extra step of imposing a preliminary injunction in these types of cases without solid proof that the former employee has engaged in misconduct. An interesting case out of the Suffolk County Commercial Division recently sided with the employer in this scenario and granted an injunction in its favor.
In First Manufacturing Co., Inc. v. Young, et al. (J. Whelan), plaintiff First Manufacturing Co., Inc. (“First Manufacturing”), a wholesale provider of leather goods and apparel, commenced a lawsuit against two former employees and the company they left to work for, Shaf International – a direct competitor of First Manufacturing. The claims against the defendants included breach of fiduciary duty, aiding and abetting breach of fiduciary duty, misappropriation of trade secrets, and unfair competition. Upon commencing the lawsuit, First Manufacturing also filed a motion seeking a preliminary injunction against the defendants to, among other things, enjoin and restrain them from divulging, disclosing, or reproducing to others any confidential information they obtained during their employment with First Manufacturing and from soliciting First Manufacturing’s customers or employees.
In reviewing the motion for an injunction, the Court referred to the traditional three-prong test for obtaining a preliminary injunction: (1) likelihood of success on the merits; (2) irreparable harm without the injunction; and (3) balance of the equities to favor the party seeking the injunction. Nobu Next Door, LLC v. Fine Arts Hous., Inc., 4 N.Y.3d 839 (2008). Upon review of each of the elements, the Court found that First Manufacturing had met its burden of proof entitling it to a preliminary injunction.
The Court noted that First Manufacturing was likely to succeed on the merits of its fiduciary duty and unfair competition claims because there was uncontroverted proof that the defendants purposely and wrongfully copied and took trade secrets and/or confidential proprietary materials from First Manufacturing when they left their employment. The Court also noted that this information was used by the defendants for the purpose of “competing directly and unfairly with plaintiff following the termination of their employment” and obtaining monetary gains and benefits “through bad faith and tortious conduct.” According to the Court, Shaf International (the new employer) was also complicit in the acts of the former employees of First Manufacturing because it knowingly used the pirated confidential information, undercut First Manufacturing’s pricing, and solicited First Manufacturing’s customers.
The Court found that First Manufacturing established irreparable harm and the balance of the equities tipped in its favor because the evidence produced by First Manufacturing made it clear that the defendants were enjoying a competitive advantage to the detriment of First Manufacturing, which was causing direct harm to First Manufacturing’s good will and reputation.
As a result of the Court’s findings, the Court granted the preliminary injunction against the two former employees and current employer as requested, thus preventing the defendants from disclosing or using any confidential information of First Manufacturing (and requiring them to return any information taken) or soliciting any of its customers or employees. First Manufacturing was required to post an undertaking of $100,000 in order to maintain the injunction.
Unfortunately, the Court in First Manufacturing did not go into great detail with respect to what specific proof in the record demonstrated that the defendants had misappropriated confidential information, but the Court was clearly satisfied that sufficient evidence had been presented documenting the misconduct and that First Manufacturing was harmed as a result. It is very important as the former employer in these types of cases to perform a thorough internal investigation before commencing a lawsuit to determine exactly what information was or may have been taken by an employee who left the company and how it is or will be used so that the Court has the ability to review actual substantive proof as opposed to mere speculation by the employer.