By: Thomas S. Tripodianos Published: October 2014

Employee Breach of Non-Compete Agreement

Question.        Does an employer have a claim that employee breached the non-compete agreement based upon nothing more than an allegation that Employee is working for a competitor?

Answer. Yes.

Building Supply Company, alleges that its former Employee, breached a non-compete agreement when he began working for Building Supply Company's Competitor. Whether the non-compete agreement at issue is enforceable will ultimately depend on whether the agreement is "reasonable." This requires a fact-intensive analysis however, by alleging that Employee is working for Building Supply Company's competitor, Building Supply Company has adequately stated a claim that Employee breached the non-compete agreement.

Building Supply Company has over eighty locations around the country from which it is engaged in the business of selling, marketing and installing a wide range of building products, including, but not limited to: wall insulation; attic insulation; spray fiberglass; spray foam; masonry insulation; seamless gutters and leaf protection; metal roofs; soffit and fascia; vinyl shutters, shower doors and bath hardware; shelving and mirrors; custom closets; garage doors; acoustical ceilings; fireplaces and firestopping.

In November 2010, as a term and condition of his continued employment with Building Supply Company, Employee signed the non-compete agreement that is central to the parties' dispute in this case.  As consideration for $12,500.01, paid in three annual installments, Employee agreed to a number of terms, including, as is relevant to the present dispute, the following:

First, an "acknowledgment" by Employee that during his employment with Building Supply Company he had "been given, and will continue to be given, training in the Company's methodologies as well as access to certain confidential and proprietary information concerning the business and financial affairs of the Company…which constitutes trade secrets under state law, as well as certain other confidential and proprietary information concerning the business and financial affairs of the Company and its Affiliates that may not constitute trade secrets under state law, but are nonetheless confidential."

Second, for two years following Employee's departure from Building Supply Company and within a 100-mile radius of Building Supply Company's two specified locations, Employee agreed to not "directly or through others, engage or invest in the business of selling, marketing or installing the building products sold, marketed or installed by" Building Supply Company.. (The overlapping 100-mile radii shut Employee out of most of Western New York, a large portion of Northwestern Pennsylvania, and the Northeastern area of Ohio.) The agreement provides that Employee may not "solicit, call upon, or initiate communication or contact with any customer or prospective customer of Building Supply Company…with whom Employee had contact during the last twelve months of Employee's employment, with a view to selling, marketing or installing any service or product that is sold, marketed or installed by Building Supply Company."  It further provides that Employee may not "attempt to divert any customer, supplies or vendor of" Building Supply Company from doing business with Building Supply Company. The agreement also prohibits Employee, during the restrictive period, from "inducing or attempting to induce" Building Supply Company's employees to leave Building Supply Company.

Third, Employee agreed not to "disclose any of Building Supply Company's Confidential Information" and not to "use any of the Confidential Information for Employee's own purposes or benefit or for the purposes or benefit of any third party”. The agreement defines "Confidential Information" to include "information concerning the financial affairs of  Building Supply Company," as well as "information concerning…product specifications, processes, past, current and planned manufacturing, distribution, sales and installation methods and processes, customer lists, current and anticipated customer requirements, price lists and pricing information, market studies, business plans, computer software and database technologies, the names and backgrounds of key personnel, and any other similar information…whether or not a trade secret under the state trade secret law."

In December 2011, about a year after Employee signed the non-compete agreement, Building Supply Company closed one location, and Employee returned to Building Supply Company's original location where he became the "Insulation and Gutter Foreman and a Residential and Commercial Salesperson." In this role, Employee was the highest-ranking Building Supply Company employee at that location. However, slightly less than two years later, in September 2013, Building Supply Company terminated Employee's employment "because of unsatisfactory performance, including, but not limited to, selling work to one of Building Supply Company's customers at a below-market rate to Building Supply Company's detriment.". Less than one month after his termination, "Employee began employment with Building Supply Company's direct competitor, Competitor

The parties disagree about the nature of Employee's activities after he began his employment with Competitor. Nonetheless, Building Supply Company alleges that after his employment with Building Supply Company was terminated, Employee "will attempt to solicit customers of Building Supply Company with whom he had contact during his last twelve months of employment at Building Supply Company; that Employee "will attempt to induce employees of Building Supply Company" to leave Building Supply Company; and that Employee "is using Building Supply Company's confidential information to gain an unfair advantage, and has in his possession or control confidential information which belongs to Building Supply Company." Based on these beliefs, Building Supply Company sent Employee a letter "requesting that he cease and desist from further violating the noncompete agreement." However, Building Supply Company claims that "Employee has failed or refused to comply with Building Supply Company's request."

Building Supply Company raises six claims: (1) a claim for breach of contract against Employee; (2) a claim for misappropriation of trade secrets against Employee; (3) a claim for breach of the duty of loyalty against Employee; (4) a claim of tortious interference against Competitor as to Building Supply Company's "business and contractual relationships with its existing customers, suppliers, vendors, and employees"; (5) a claim of tortious interference against Competitor as to Building Supply Company's non-compete agreement with Employee; and (6) a claim of unjust enrichment against Employee and Competitor.

The heart of the Building Supply Company's complaint is its allegation that, by working for Competitor, Employee breached the non-compete agreement he signed with Building Supply Company. As discussed below, New York courts limit the extent to which non-compete agreements are enforceable. However, New York courts have not held that non-compete agreements are per se unenforceable. Instead, a non-compete agreement's enforceability generally turns on the fact-laden question of whether the agreement is "reasonable." We do not have enough facts to determine that the non-compete agreement at issue is unenforceable. However, Building Supply Company's allegations are sufficient to state a cause of action against Employee for breach of the non-compete agreement.

In New York, "agreements that restrict an employee from competing with his or her employer upon termination of employment are judicially disfavored because powerful considerations of public policy militate against sanctioning the loss of a person's livelihood.  However, despite New York's generally hostile attitude towards them, non-compete agreements may be enforceable, to at least some degree, when they are properly tailored to address legitimate business concerns. In other words, naked restraints are not enforceable, but restraints that are ancillary to a legitimate business purpose may be.

The New York Court of Appeals put this "reasonableness" standard into more concrete terms by holding that a non-compete agreement is reasonable "only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public." [citations omitted] Further, even if a non-compete agreement is reasonable in light of each of the three factors set forth above, a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area. Finally, New York law limits non-compete agreements in one other significant way. With respect to the first prong — i.e., whether the restraint "is no greater than is required for the protection of the legitimate interest of the employer — the New York Court of Appeals has limited the cognizable employer interests…to the protection 1 against misappropriation of the employer's trade secrets, or 2 of confidential customer lists, or 3 protection from competition by a former employer whose services are unique or extraordinary.” [citations omitted] If the non-compete agreement does not tie its restraint of the employee's activities to one of these three purposes, it is an unenforceable naked restraint on commerce.

The Employee argues that even if the non-compete agreement is enforceable, the Building Supply Company's complaint is nonetheless insufficient as the key allegations relating to the non- compete agreement are all made "upon information and belief." A complaint is not inadequate simply because it contains allegations made upon information and belief. Rather, a complaint may contain information and belief allegations and still be sufficient when the belief is based on factual information that makes the inference of culpability plausible. In other words, a complaint's information and belief allegations may be sufficient to state a claim when the complaint also contains factual content that allows the court to draw the reasonable inference that the Employee is liable for the misconduct alleged.

In this case, the complaint's only factual allegation that Employee is violating the non-compete agreement is its claim that on or about October 15, 2013, Building Supply Company learned that, following his separation from employment with Building Supply Company, Employee began employment with Building Supply Company's direct competitor, Competitor. However, taking this allegation, together with the complaint's description of Competitor as being in the business of selling and installing a wide range of building products, including insulation and assuming that both allegations are true — the reasonable inference may be drawn that that Employee is violating the non-compete agreement, which prevents him from "engaging or investing in the business of selling, marketing or installing the building products sold, marketed or installed by" Building Supply Company.

The Building Supply Company's Remaining Claims

Misappropriation Of Trade Secrets To state a claim for misappropriation of trade secrets under New York law, the Building Supply Company must allege (1) that it possessed a trade secret, and (2) that the Employees used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means.

Duty of Loyalty Employees, as agents of their employers, must act in accordance with the highest and truest principles of morality and, as fiduciaries, are forbidden from engaging in many forms of conduct permissible in a workaday world for those acting at arm's length. Accordingly, an employee owes his or her employer undivided and unqualified loyalty and may not act in any manner contrary to the interests of the employer.

Tortious Interference The New York Court of Appeals has established two lines of analysis for tortious interference claims. The applicable standard depends on the nature of the plaintiff's enforceable legal rights.

First, in cases in which there is an existing, enforceable contract and a Employee's deliberate interference results in a breach of that contract, a plaintiff may recover for tortious interference with contractual relations even if the Employee was engaged in lawful behavior.

Where there has been no breach of an existing contract, but only interference with prospective contract rights, the Court of Appeals has established a higher standard to state a cause of action. In such cases, the plaintiff must show more culpable conduct on the part of the Employee. In the absence of conduct whose sole purpose is to inflict intentional harm on plaintiff, the only wrongful or culpable conduct that will support a claim for tortious interference with business relations are acts that would be criminal or independently tortious such as physical violence, fraud or misrepresentation, civil suits and criminal prosecutions, and some degrees of economic pressure; they do not, however, include persuasion alone

To state a claim for tortious interference with contract, the Building Supply Company must plead "(1) the existence of a valid contract between the plaintiff and a third party; (2) the Employee's knowledge of the contract; (3) the Employee's intentional procurement of the third-party's breach of the contract without justification; (4) actual breach of the contract; and (5) damages resulting therefrom.

Unjust Enrichment As the New York Court of Appeals recently noted, unjust enrichment is not a catchall cause of action to be used when others fail. It is available only in unusual situations when, though the Employee has not breached a contract nor committed a recognized tort, circumstances create an equitable obligation running from the Employee to the plaintiff. Typical cases are those in which the Employee, though guilty of no wrongdoing, has received money to which he or she is not entitled. To prevail on a claim for unjust enrichment, a plaintiff must show that (1) the other party was enriched, (2) at the plaintiff's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered.

For the same reasons that one may infer that Employee is violating the non-compete agreement, one may also conclude that the Building Supply Company has stated a cause of action for the remaining claims.

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