Opinion
CV166061264S
07-13-2017
DelVecchio Reporting Services, LLC v. Clifford Edwards et al
UNPUBLISHED OPINION
MEMORANDUM OF DECISION
Thomas Corradino, Judge Trial Referee.
This case involves a request for a temporary injunction. As the verified complaint sets forth the action has been brought to enforce Independent Court Reporter's Agreements entered into by each of the defendants. The defendants maintain that a temporary injunction should not be granted and the agreements should not be enforced. The court will give a brief factual background to the plaintiff's position and cite the relevant portions of the agreements which are the basis of this action.
Mr. DelVecchio started the plaintiff LLC in 1988. As of the date of trial in November 2016 Mr. DelVecchio testified his LLC had 150 clients and had 25 court reporters working for him as independent contractors.
The court will now discuss the nature of his business as testified to by Mr. DelVecchio but will have to address it in more detail when it discusses the legal concepts involved which are prerequisites for temporary injunctive relief. Aside from depositions, the plaintiff company covers arbitrations, planning and zoning hearings, provides video tape services, lines up interpreters, and locates court reporters in other parts of the country. Clients include lawyers and law firms. DelVecchio said that " a client is anybody that would hire you to perform court reporting services." The company is hired by towns, companies, school boards, for example. He said so-called national reporting services subcontract with him to provide court reporters because they do not have their own court reporters in all states. Esquire is one such service and has been a client since 1996. DelVecchio estimates his company has performed " tens of thousands" assignments for Esquire over the time of their relationship. Out of state lawyers and for example, insurance companies contact Esquire if they have to have a deposition done and Esquire would then contact DelVecchio Reporting Services, LLC for a court reporter.
As far as geographical distribution of Connecticut clients is concerned, Mr. DelVecchio testified that the majority of his clients are in Fairfield and New Haven County with some in Hartford County. In four counties the company has only three clients--Middlesex, New London, Litchfield, Tolland. But DelVecchio said even in the counties where his clients are concentrated there are thousands of lawyers who are not his clients. Mr. DelVecchio also testified that there are several Connecticut reporting services who share clients with his company. DelVecchio has built up his client base through hard work advertising and good will. He testified that his client list is very important to him since, armed with a list of his clients competitors could " hone in" on some of his clients and such an effort would be more likely of success because through his open policy with the reporters, they would know the rates that he charged. He, however, has no written agreements with his clients to use his company's services including. But he does have an agreement with Esquire as to rates charged by his company. In this regard Mr. DelVecchio said that only twelve days after the Edwards resigned from his company on November 2016, Esquire said it was lowering the rates it had been paying to him for the five previous years.
Mr. DelVecchio went on to say that he and his wife worked extremely hard to develop his business. He spent $200,000 on advertising alone. He created a unique business model which informed court reporters of how the company operated and was building itself. This fostered loyalty and gave the company a competitive advantage. The Edwardses' violation of the agreements they signed, according to him, placed his business in danger.
The court will now refer to the agreements which form the basis of the plaintiff's complaint. It will then set forth the legal concepts that it will use to decide the case and try to apply those concepts to the facts of the case as brought out by Mr. DelVecchio's testimony at trial reviewing also the cross examination of DelVecchio and the direct of Mr. Clifford Edwards and Mrs. San Edwards, offered to question his claims.
Mr. Edwards started working for DelVecchio in 2001; his wife began working for the company in 1996. On November 9, 2009 they each signed the agreements which are the subject of this law suit and form the basis of the claim for relief in this case.
The agreement at issue was signed by Clifford Edwards on October 27, 2009, San Edwards on November 3, 2009 and by Mr. DelVecchio on November 6, 2009. The agreement is a six-page document entitled " Independent Court Reporter's Agreement." The first paragraph states that " In consideration of the mutual promises, covenants, and conditions set forth herein, and in further consideration of the company's agreement to refer work to the Reporter and the Reporter accepts the engagement upon the terms and conditions set forth in this agreement and the parties hereto agree as follows: (Sixteen paragraphs follow.)
Paragraph two declares reporters signing the agreement sign as: an independent contractor not as an employee. Paragraph 3(c) states that " (c) The reporter is not prohibited from working for other persons or entities provided that performing such services does not interfere or conflict with the reporter's obligations to the company under the terms of this agreement." Subparagraph j provides " (j) all client referrals and assignments shall be handled exclusively by the company."
Paragraph 5 of the agreement, entitled " non-solicitation, " in the introductory subsection states " (a) The reporter agrees that during the term of this agreement and for a period of five years following its termination, the reporter will not, either directly or indirectly, for his/her own account or as a principal, employee stockholder, officer, agent, consultant, advisor, independent contractor or in any other capacity whatsoever." Subparagraphs of (a) state the reporter shall not (i) Provide or attempt to provide services similar to those provided by the company to any clients or prospective client, except as otherwise permitted under this agreement and at the Company's request; (ii) Call on, solicit, induce, take away or divert, or attempt to call on, solicit, induce, take away or divert (by solicitation or other means), or cause the loss of any client or prospective client of the company; (iii) Interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the company any of its clients, prospective clients, employees, referral sources, contracting agencies, agencies providing business opportunities, vendors, or any entity doing business with the company; (iv) Solicit, persuade, attempt to contract with or employ, recruit, or attempt to solicit or recruit any employee or independent contractor employed by or under contract with the company to terminate their employment or business relationship with the company or to be employed by or provide services to any other business entity at the expense of the company.
The term client is not explicitly defined in the agreement but subsection 3 states:
3. Scope of services and relationship. The reporter agrees to perform independent court reporter services as referred and/or assigned to the reporter from time to time by the company for the company's clients ('clients') at clients' places of business or at locations designated by clients ('Services') . . .
Section 6 of The Agreement is entitled " Confidentiality, Trade Secrets, and Non Disclosure" provides that the reporter " will not use for any purpose, disclose or disseminate any confidential information to any third person or party, including the Reporter's family members except as authorized by the company and required for carrying out the Reporter's duties under the agreement." The term confidential information is described in subsection (1). Subsection (1) states the term " Confidential Information" as used in this agreement includes information, whether or not recorded in any medium, disclosed to or known by [the defendants] by virtue of his or her participation and/or providing services under this agreement, including: (I) Company information that gives it a competitive advantage over others who do not know or have access to such information and (ii) non-public client information disclosed to [the defendants] in depositions, examinations, or other proceedings. Examples of Confidential Information include, without limitation, all means and methods by which the Company conducts its business, client and customers lists, identity of clients and prospective clients, client contacts, pricing of company services, company credit terms, company financial information, identity and/or other lists of the company's other reporters, compensation, operational procedures, policies, protocols, work volume, pay structure and any and all other proprietary and/or confidential information of the company that are deemed to be trade secrets.
A.
The court will now discuss the legal concepts involved in deciding this case. The court has relied heavily on an article in 36 COA.2d 103 entitled: " Cause of Action to Enforce Non-competition Covenant in Employment Contract, " Richard Kaye, L.D. It is an extremely lengthy and thorough discussion, 194 pages in length not including the 2016 Supplement containing case annotations.
(i)
In Section 1, page 144 the article starts the discussion by saying: " Although the principles discussed in this article have been applied not only to parties involved in a conventional employer-employee relationship, but also to parties involved in other relationships such as partnerships, franchises or independent contractor' ships, case coverage in this article focuses on employment relationships."
Thus in Deming v. Nationwide Mutual Insurance Company et al., 279 Conn. 745, 905 A.2d 623 (2006), insurance agents brought actions against the defendant insurer " by withholding policy renewal commissions and deferred compensation following agents' " resignation." At page 750 the court noted that " each plaintiff executed a contract with the defendants in which he or she was deemed an independent contractor and agreed to sell only Nationwide insurance products, except under certain conditions." The insurers raised a defense that their former agents were not entitled to deferred compensation because they violated, after their resignation, a provision of the contract the agents had with the insurer to not engage on a competing business after resignation. The court said: " we conclude that the provision in the contract at issue in the present case, under which deferred compensation accrued under the agency security plan is forfeited if the employee engages in a competing business does not differ meaningfully from a covenant not to compete, " id., p. 767. The court's analysis, leading to the conclusion that the trial court's granting of summary judgment for the insurer on this claim was in error, followed the same type of analysis used in deciding whether covenants not to compete in the employer-employee context were reasonable, see pp. 757 et seq., also see cases like Caring Hearts Personal Home Services, Inc. v. Hobley, 35 Kan.App.2d 345, 130 P.3d 1215 (CT of App., Kan., 2006), where plaintiff brought action against nonresident licensed practical nurses who formerly worked as independent contractors for plaintiff, from treating patients they had treated while under contract with agency--cited along with other cases in Section 35, pp. 226-27 of 36 CO A.2d 103 article.
The foregoing is not surprising since the same considerations relevant to whether a non-compete agreement or confidentiality agreement should be enforced and to what extent come into play whether the contracting parties have an employer-employee relationship or involve an entity using independent contractors in its business model--for example, was there adequate consideration for the clause in question, is it overly broad geographically, too lengthy in its application, how does it affect the public interest does it unfairly limit the ability of the former employee or independent contractor to earn a living, or is it necessary and fair to protect an employer in conducting his or her ongoing business.
(ii)
A covenant not to compete or protecting confidential information like any contractual agreement must be based on consideration. As set forth in Section 5 of the 36 COA.2d article, pp. 149-52 states take different views on the adequacy of consideration. Connecticut's position is set forth in two cases. In Rogal v. UTA Peters Randall, 115 Conn.App. 89, 971 A.2d 796 (2009) an employer brought an action against a former employee alleging the employee had violated a non-solicitation agreement in their employment contract. The court held that the trial court erred in finding the " Employment, Non-Solicitation and Confidentiality Agreement" signed by the parties was not enforceable as written. As an introduction to its analysis the court noted that: " it is clear from the evidence that signing the agreement was a condition of the defendant's continuing employment with Hobbs . Indeed, the preamble to the employment agreement recites: 'I understand that if I do not enter into this agreement, the company would not employ me': id., p. 91, also see Roessler v. Burwell, 119 Conn. 289, 292 - 293, 176 A. 126 (1934).
Expanding on this discussion it should be noted that, a district court case applying Connecticut law, Wesely Software Development Corp. v. Burdette, 977 F.Supp. 137 (D.Conn. 1997), has relevant observations. At page 144 the court said:
The restrictive covenant not to compete contained in the Employment Agreement was knowingly entered into by Burdette for adequate consideration. Van Dyck Printing Co. v. DiNicola, 43 Conn.Supp. 191, 196 648 A.2d 898 (Conn.Super.Ct. 1993) (finding restrictive covenant not to compete enforceable even though entered into after employment commenced because parties agreed to the terms prior to employment, and alternatively finding enhanced commission rate constituted new consideration), aff'd, 231 Conn. 272, 648 A.2d 877 (1994); Russo Assocs., Inc. v. Cachina, No. 27 69 10, 1995 WL 94589, *3 (Conn.Super.CT. Mar. 1, 1995) (holding that where " the preexisting contract of employment is terminable at will, no overt consideration is required to support an otherwise valid covenant not to compete. The law presumes that such a covenant is supported by the employer's implied promise to continue the employee's employment; or his forbearance in not discharging the employee then and there.") (internal citations omitted) (citing Osborne v. Locke Steel Chain Co., 153 Conn. 527, 531, 218 A.2d 526 (1966); Iseli Co. v. Connecticut Light & Power Co., 211 Conn. 133, 136, 558 A.2d 966 (1989)); Daniel V. Keane Agency, Inc. v. H.A. Butterworth, Jr., No. 31 31 81, Id. 1995 WL 93387 at *7 (Conn.Super.CT. Feb. 22, 1995) (same). Here, the court finds consideration established by continued employment, an articulated paid vacation entitlement, a new entitlement to severance benefits and stock options.
As said in Osborne v. Luke Steel Chain Co. supra : " An exchange of promises is sufficient consideration to support a contract, " 153 Conn. at 531. In MacDermid, Incorporated v. Selle and Cookson Group, PLC, 535 F.Supp.2d 308 (D.Conn. 2008) the court said: " the Connecticut Supreme Court has long recognized that continued employment may suffice as adequate consideration in an at-will employment situation." citing Dolak v. Sullivan, 145 Conn. 497, 144 A.2d 312, (1958) Roessler v. Burwell, 119 Conn. 289, 176 A. 126 (1934); and Sator v. Town of Manchester, 312 F.Supp.2d 238, 245 (2004), id. at page 316 of McDermid, Inc .
(iii)
Before discussing the legal issues involved in the case the court will try to address the burden of proof issue. In Section 45 of the 36 COA.2d article at page 240 it is said that, " courts have split as to whether, in an action to enforce a non-competition covenant of an employment contract, the plaintiff employer or the defendant employee has the burden of proof as to whether the covenant is or is not reasonable and should or should not be enforced. It appears that the majority would place the burden on the employer, " citing cases from twenty-four states.
Connecticut appears to take the minority view. In Scott v. General. Iron and Welding Company, Inc., 171 Conn. 132, 368 A.2d 111 (1976) a former employee brought an action for declaratory judgment as to the validity of a restrictive covenant prohibiting his disclosure of confidential information concerning the employer's conduct of his business and for a five-year period own, manage, or participate in any business similar to the employer's business at the time of the employee's termination. The court upheld the trial court was correct in requiring the plaintiff former employee had the burden of proof to show that the latter covenant was unreasonable as to area--it applied to the State of Connecticut, 171 Conn. Page 137, see also Tymetrix, Inc. v. Szymonik, (2006 WL 390 855 8, Tanzer J., 2006), citing the Scott case for the proposition that " A party challenging the validity of a covenant not to compete bears the burden of proof on this issue." See also Access America LLC v. Mazzotta, (2005 WL 265 0093, Silbert, J.) [40 Conn.L.Rptr. 12, ], for the same proposition. This court also cited Milaneseo v. Calvanese, 92 Conn. 641, 103 A. 841 (1918), wherein the plaintiff sought injunctive relief whereby the court was asked to enforce an agreement in which the defendant had agreed not to engage in a " fruit, ice-cream, confectionary and vegetable business within the town of Southington, except in employ of the vender (plaintiff) for a period of three years from date." The court upheld the trial court's judgment for the plaintiff. It said agreements such as this are not unlawful if the restraint imposed is only partial, is reasonable and based on good consideration. More to the point the court held that " In this case the burden was upon the defendant, in order to avoid the obligations of the contract, to set up in his answer some facts or circumstances whereby the contract became unlawful, " id., page 642.
(iv)
(a)
In this case the covenants sought to be enforced involve non-solicitation of clients or prospective clients and non-use or disclosure to others of confidential information or trade secrets giving it an advantage over others such as customer lists, business methods of operation, pricing information, client contacts, credit terms, and information on other reports and their pay structure, compensation, work volume and anything else which might be considered a trade secret.
Such covenants are often referred to as covenants in restraint of trade or competition. As said in the 36 COA.2d 103 article: " A restrictive covenant is frequently included in an employment contract to govern the employee's conduct on the termination of the employment relationship. Such covenants are intended to prevent employees from competitively using information or contacts acquired through the employment governed by contract, " see for example Milwaukee Shea Junt Apprenticeship Training Committee for Elec. Industry v. Howell, 67 F.3d 1333, 1339 (CA7, 1995). In other words they are drafted to prevent employees or independent contractors from gaining " an unfair competitive advantage by virtue of their prior employment with the plaintiffs" § 1, page 143 of COA.2d article. In this context the article goes on to discuss customer lists, geographical scope of limits on competition through enforcement of protection of such lists, and confidential information such as business methods of the former employer.
How is the validity of these covenants determined when injunctive relief, declaratory judgments, or damages are sought against the former employer or independent contractor accused of violating such covenants after the termination of employment? An early Connecticut case, Scott v. General Iron and Welding Company, Inc., 171 Conn. 132, 137, 368 A.2d 111 (1976), said that " In order to be valid, a covenant which restricts the activities of an employee following the termination of his employment must be partial and restricted in operation in respect to time and place . . . and must be reasonable--that is it should afford only a fair protection to the interest of the party in whose favor it is made and must not be so large in its operation as to interfere with the interests of the public . . . The interests of the employee himself must also be protected and a restrictive covenant is unenforceable if by its terms the employee is precluded from pursuing his occupation and thus prevented from supporting himself and his family" (read also her, and herself in foregoing quote) As said in May v. Young 125 Conn. 1, 3, 2 A.2d 385 (1938): " Of the principal considerations affecting the validity of restrictive contracts on grounds of public policy, one is injury to the public by being deprived of the restricted party's industry or services. The other the injury to the party himself . . ." As said in New Haven Tobacco Co, Inc. v. Perrelli, 18 Conn.App. 531, 536, 559 A.2d 715 (1989), expanding on the public interest concern: " In determining whether a restrictive covenant unreasonably deprives the public of essential goods and . . . and the probability of the restriction's creating a monopoly in the area of trade must be examined."
More specifically as regards covenants not to compete the court in A.H. Harris & Sons Inc. v. Naso, 94 F.Supp.3d 280, 293 (D.Conn., 2015), said: " When evaluating the reasonableness of covenants not to compete, Connecticut courts look to five factors " (1) the length of time the restriction operates (2) the geographic area covered (3) the fairness of the restraint of the employee's opportunity to pursue his occupation and (5) the extent of interference with the public interest."
The court will now discuss one type of restriction--the use of and access to customer lists.
(b)
Customer lists are treated by the case law as trade secrets, or confidential information the employee cannot rely on to compete with the former employer upon termination of the relationship. The court will discuss cases under this topic which arise under the Uniform Trade Secrets Act which reflects common-law standards, see prefatory Note to the act Uniform Laws Annotated, Vol. 14 at page 434.
In determining the protection that should be given to customer lists and information, an older article in the Harvard Law Review gives a good general statement of the balancing factors. In Developments in the Law-Competitive Torts. 77 Harvard Law Review 688, 955-56 (1963), it says:
The use of customer lists and contacts by ex-employees stands on the periphery of trade secret law. Written customer lists generally have been regarded as trade secrets when the nature of the industry permits the list to be kept secret and the list cannot readily be duplicated by independent means. The size of the list and the type of information it contains about the customers may be relevant to the latter determination, as may the amount of time and effort which went into its composition.
Some economic considerations militate against protecting customer lists. Most are developed in the normal course of business and probably would be produced whether or not protected. The customer benefits from their promulgation, for more firms then compete for his order. Also, once someone has discovered a customer with particular preferences, it is wasted effort for other firms to have to discover him again. Incentive to compile lists may be strengthened by legal protection in a few cases; and without protection businesses will guard lists more closely, with resulting inefficiency and, diversion of resources into industrial security. However, economic arguments for protecting customer lists are at best marginal and the case for protection rests almost entirely on the need to deter employee disloyalty.
The case of Town & Country House & Homes Service, Inc. v. Kenneth Evans, 150 Conn. 314, 189 A.2d 390 (1963), really keyed in on the factors which many of the cases concentrate on:
A list of customers, if their trade and patronage have been secured by years of business effort and advertising and the expenditure of time and money, constitutes an important part of a business and is in the nature of a trade secret. It is the property of the employer and may not be used by the employee as his own property or to his employer's prejudice . . . If in any particular business the list of customers is, because of some peculiarity of the business, in reality a trade secret and an employee has gained knowledge thereof as a matter of confidence, he will be restrained from using that knowledge against his employer . . . On the other hand, where the identity of the customers is readily ascertainable through ordinary business channels or through classified business or trade directories, the courts refuse to accord to the list the protection of a trade secret. Id. pp. 319-20. (Emphasis added.)
In rejecting an argument that customer lists in the case before it were trade secrets a New York court said:
. . . plaintiff's customers were readily ascertainable as likely prospects. Although plaintiff's efforts have demonstrated an investment of time and money in developing a patronage of approximately 15, 000 enterprises, the investment was not an attempt to create a new market for a new type of service . . . Rather, that investment reflected simply widespread canvassing of an obvious and highly competitive market, Leo Silfen, v. Cream, 29 N.Y.2d 387, 278 N.E.2d 636, 328 N.Y.S.2d 423, 429 (1972).
In Ruesch v. Ruesch International Monetary Services, Inc., 479 A.2d 295 (D.C.Ct. of App., 1984), the court said, " The time and money which a business spends in building up a customer list is an important consideration in determining whether the list is entitled to trade secret protection . . . However, when the prospective clients are commercially conspicuous . . . courts have characterized the expenditures of time, money and resources undertaken by businesses to acquire prospective clients as simply widespread canvassing of an obvious and highly competitive market . . . or merely the outgrowth of . . . normal marketing endeavors, id. p. 298. In one case, the plaintiff company, in pressing for trade secret protection, had argued that its complete customer list could not be produced merely by going to directories or going to " sources" in the industry.
" Especially in a market where customers did business with more than one sales company or were open to the possibility of shifting business from one company to another . . . it is simply unreasonable to construe the (trade) act's readily ascertainable's standard as requiring exact duplication of the information on the customer list." Fleming Sales Co., Inc. v. Bailey, 611 F.Supp. 507, 513 (D.C.III. 1985), cf. Consolidated Brands, Inc. v. Mondi, 638 F.Supp. 152, 157 (E.D.N.Y., 1986), Allan J. Richardson v. Andrews, 718 S.W.2d 833, 835 (Tex. 1986) (plaintiff in business of structuring settlements on personal injury cases, clients are insurance companies selling annuities. In finding no trade secret protection for client list court noted " most structured settlement companies use the same markets; " markets" are the insurance companies that sell the annuities used on structured settlements, id., also see Springfield Rare Coin Galleries v. Mileham, 250 Ill.App.3d 922, 620 N.E.2d 479, 485, 189 Ill.Dec. 511 (Ill. 1973).
There are cases that suggest that where there is a large group of only potential customers for a service or product and effort must be spent in ascertaining which of these potential customers would in fact be in the market, then trade secret protection might be afforded-that is, if people or companies who actually might be interested in the service have to be winnowed out from various sources they cannot be defined as " readily ascertainable." Cherre Industries, Inc. v. Grounds & Associates, 278 N.W.2d 81, 90 (Minn. 1979). Inland Rubber Corp. v. Heiman, 237 So.2d 291, 295 (Fla. 1970), Surgidev Corp. v. Eye Technology, Inc., 828 F.2d 452, 454 (CA.8, 1987), Unistar Corp. v. Child, 415 So.2d 733, 734 (Fla. 1982). Cases in this subcategory involve situations where businesses went through special efforts to list customers that had a special receptivity or willingness to do business with companies offering a special type of product or service. Town & Country House & Homes Services v. Newberry, 253 A.D. 616, 3 N.Y.S.2d 552, 560, American Credit Indemnification Co. v. Sacks, 213 Cal.App.3d 622, 262 Cal.Rptr. 92, 97 (1989), Surgidev Corp. v. Eye Technology, Inc., supra . But not all courts agree with even this position. The fact that customer lists are on the periphery of trade secret protection is underlined by a case which did not give such protection where the plaintiff had spent effort winnowing out more likely to buy its particular product. The court said " the customers solicited are openly engaged in business and their names and addresses are readily available in . . ." in an industry directory. A.G.A. Artiebolag v. ABA Optical Corp., 441 F.Supp. 747, 754 (E.D.N.Y., 1977).
What all of these cases appear to be saying is that a customer list or other customer information can constitute a trade secret where the employer developed the information over many years and at great expense, cf. Prudential Ins. Co. of America v. Van Metre, 158 Ill.App.3d 298, 511 N.E.2d 740, 745, 110 Ill.Dec. 563 (III. 1987), see Advanced Magnification Inst. v. Minuteman Optical Corp., 135 A.D.2d 889, 522 N.Y.S.2d 287, 289 (1987). No protection will be given where the information sought to be protected was merely the product of normal marketing endeavors, cf. Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis.2d 202, 267 N.W.2d 242, 250 (Wis. 1978).
Why is all of this so? It is really required, if the trade secret laws, important though they are to ensure fairness in the marketplace, are understood to be exactly what they are--restrictions on competition when they are enforced. There is no indication, for example, in this case that extraordinary effort or expense was required to garner the information as to customer lists and contact persons which it is now claimed are trade secrets. Normal customer contact would reveal the information sought to be ruled confidential. A former employee would not be given an unfair competitive advantage against his former employer through use of customer lists of the former employer because the former employee could develop the same information on its own by its own market activities. The downside of too broad trade secret protection is that customer choices are limited because the field of competitors is narrowed by judicial fiat--the customers certainly do not mind having their names and contact persons bandied about the industry.
In certain situations there is another reason why trade secret protection should not be given to customer lists and contact person information. Cases do say that an employee does not breach the duty of loyalty by taking with him or her a customer list the employee developed, Fish v. Adams, 401 So.2d 843, 845 (Fla. 1981). In First American Ins. Agency v. Gould, 203 Mont. 217, 661 P.2d 451, 454 (Mont. 1983) the court held no breach of a covenant not to disclose confidential information was breached where the defendant testified regarding customer information that it " was solely the result of her work experience." In Fidelity Fund, Inc. v. Disanto, 347 Pa.Super. 112, 500 A.2d 431, 437 (Pa. 1985), the court said there could be no trade secret protection " in the names of customers previously known to the defendant (former employee) or independently developed by him."
The foregoing is derived from an earlier case decided by this court, Custand Insurance Adjusters v. Nardi, 2000 WL 562318.
The court will now discuss further case law on the question of customer lists and the protection that should be afforded them and the question of what might be called the customer contact issue.
An interesting case in Stanley Tulchin Assoc. v. Vignola, 186 A.D.2d 183, 587 N.Y.S.2d. 761 (1992), which held the employer was entitled to injunctive relief as regards its clients list and reasoned as follows:
The client lists, in addition to containing the names and telephone numbers of its clients, include the names of key " contact" employees, as well as the volume of business done with the clients in both the current and prior year. Importantly, there is no published directory for the commercial collection industry containing the names, addresses, or any other vital data of those companies which utilize the services of commercial collection agencies. Thus, it is apparent that STA's client lists contain information relating to clients that is not readily known in the trade and that is discoverable only through effort. Hecht Foods v. Sherman, (43 A.D.2d 850, 351 N.Y.S.2d 711). Further, it cannot be disputed that STA has a substantial interest in retaining its present clients, an interest which may be seriously eroded through a competitor's use of this information.
Section 19 of the 36 COA.2d article on the enforcement of non-competition covenants has useful observations at pages 188-89 that are supported by case law related to the customer list and customer contact issues. The article states that: " Although protecting the employer from business competition is not a legitimate business interest a covenant not to compete may be reasonable when the employee during his or her term of employment has had substantial contact with the employer's customers and has become familiar with the customers' requirements and is thereby in a position to take for his or her own benefit the employer's good will" cases cited include Freiburger v. JUB Engineers, Inc., 141 Idaho 415, 111 P.3d 100, 105 (Id. 2005), Terry D. Whitten D.D.S., P.C. v. Malcom D.D.S., 249 Neb. 48, 541 N.W.2d 45, 48 (Nev. 1995), Merrimack Valley Wood Products, Inc. v. Near, 152 N.H. 192, 876 A.2d 757 (N.H. 2005), at pp. 762-63. The Merrimack Valley case says that " An employee's special influence over an employer's customers obtained during the course of employment is one of the legitimate interests an employer may protect against competition . . . When an employer is put in a position involving client contact, it is natural that some of the goodwill enumerated from the client is directed to the employee rather than the employer. The employer has a legitimate interest in preventing its employees from appropriating this good will to its detriment."
At another point the 36 COA.2d article at Section 19 elaborates on the customer contact interest of the employer stating that: " Whether an employer has such an interest depends in part on whether the former employee has an advantage through his or her former employment in soliciting and diverting the former employer's business that would not be equally available to any competitor. Such as prior knowledge of the needs of the customer the type of product that would satisfy those needs and the proper application of the employer's products to the customer's needs." The case of Coffman v. Olson Co., 906 N.E.2d 201 (Ind.App. 2009), is cited. In Coffman, the plaintiff former employer an accounting services provider sued a former employee and the former employee's accounting firm claiming there had been a breach of a non-compete agreement.
The Indiana Appellate Court affirmed the trial court's ruling in favor of the plaintiff, Olson Company . The non-compete covenant stated that " In the event of the termination of employment between the undersigned (defendant Coffman and Olson Company, the undersigned will not directly or indirectly compete for the clients of Olson Company for a period of two years in a prescribed geographical area as an employee, agent or dependent contractor . . . of any other Certified Public Accounting Firm . . ." The trial court found that after termination . . . " Coffman performed accounting services for seventeen Olson clients, each of whom contacted Coffman after learning that he had left Olson. Coffman advised the clients that he could not solicit their business. The clients terminated their relationship with Olson and hired Coffman. Coffman did not notify or compensate Olson ." In ruling in favor of the former employer Olson, the court said at pp. 207-08.
Coffman argues that Olson has not demonstrated a protectable interest because the former clients for whom be performed work had already discharged Olson and testified that they did not intend to return to Olson under any circumstances and that some had hired other accountants before hiring Coffman. Coffman, however, ignores the competitive advantage that he gained while employed by Olson. Indiana law recognizes a protectable interest in the goodwill generated between a customer and a business. Id. One element of goodwill is the advantage acquired through representative contact. Id. Here, the trial court concluded that Coffman " had acquired an advantage through representative contact with [Olson's] clients. Clearly, Olson has established a legitimate interest that may be protected by a covenant not to compete, " Appellants' App . At 14. We agree.
The evidence at trial established that Olson structured its business to promote a one-on-one relationship between Olson's accountants and the clients in order to build goodwill, trust, and loyalty between the accountant and the client. The Agreement was drafted in such a way to protect Olson's goodwill, business reputation, and client contacts against potential vulnerability in the event an accountant would leave employment with Olson. (Agreement referred to is non-compete agreement.)
Also see, Gleeson v. Preferred Sourcing, LLC, 883 N.E.2d 164, 173 (Ind.App. 2008), a preliminary injunction case to enforce a non-compete agreement, American Hardware Mutual Ins. Co. v. Moran, 545 F.Supp. 192, 195-97 (N.D.Ill. 1982).
(c)
Related to the customer list issue and the reasons advanced to protect them from use by employees or independent contractors who have left their positions is the appropriate ambit of non-solicitation provisions in non-compete agreements. An employer certainly has a right to protect its goodwill interest by prohibiting a former employee or independent contractor working for his business from luring away the employer's customers. Readylink Healthcare v. Cotton, 126 Cal.App.4th 1006, 24 Cal.Rptr.3d 720, 728, 730 (2005), Saturn Systems, Inc. v. Militare, 252 P.3d. 516, 525-28 (Colo. 2011). Very broad covenants with no geographical limitations on the bar against solicitation have been upheld for example, see Wood v. Acordia of West Virginia, Inc., 217 W.Va. 406, 618 S.E.2d 415, 418 (W.Va., 2005).
But courts have put restrictions on these non-solicitation agreements. Such covenants barring solicitation of employer's customers must be limited to customers or clients of the employer at the time of termination, see for example, Palmer & Cay v. Lockton Companies, 280 Ga. 479, 629 S.E.2d 800, 802 (Ga. 2006).
Courts have held that injunctive relief is not appropriate to enforce an agreement that barred former employee from having customers whom the employee had not encountered or serviced while he was employed by the plaintiff employer, Darugar v. Hodges, 221 Ga.App. 227, 471 S.E.2d 33, 36 (Ga.App. 1996). Softchoice Corp. v. MacKenzie, 636 F.Supp.2d 927, 938 (D.Neb. 2009), applying Nebraska law, held . . . " a covenant not to compete is only valid if it restricts the former employee from soliciting or working for clients of the former employee with whom the former employee actually had contact." Applying Texas law, the district court in Rimkus Consulting Group, Inc. v. Cammarata, 255 F.R.D. 417, 435 (S.D. Texas 2008) denied preliminary injunction relief requesting enforcement of a covenant not to compete against a former employee where the former employee had no dealings with and did not serve the clients or customers of the employer.
Finally, another issue should be noted in Lawrence & Allen v. Cambridge Human Resource Group, Inc., 292 Ill.App.3d 131, 685 N.E.2d 434, 441, 226 Ill.Dec. 331 (Id.App. 1997), the courts held that a restrictive covenant not to solicit clients was " unlimited" and therefore, unreasonable. The court said: " Here, the covenant not to solicit is unlimited. It prohibits Sheets from soliciting " any client" of plaintiff but does not define the term " client." Consequently, the phrase " any client" includes any client of plaintiff regardless of whether Sheets developed a relationship with that client during his employment with plaintiff. In other words, the covenant prohibits Sheets from soliciting clients whom he never solicited or contacted while employed by plaintiff. In addition, because the term " client" is undefined, the covenant fails to distinguish between past clients, present clients, clients at the time Sheets left plaintiff's employment, or potential clients. Thus, the lack of a geographic limitation or of any qualifying language not to solicit is unreasonable."
In this regard, Key Temporary Personnel Inc. v. Cox, 884 P.2d at 1213 (Okla.App. 1994), is also of interest. The court held that the nine-month restriction on employee's solicitation on employer's clients was reasonable when the restricted covenant was limited by the trial court to in effect, define " clients" to include only those who were assigned to the employee or which the employee knew to be the employer's client, while she was employed, id., page 1216.
The court first stated because such covenants are in restraint of trade a court must " strictly construe them to ensure their intended effect is not to prevent competition per se." A legitimate business interest must be involved and the court reasoned that such an interest exists " where (1) because of the nature of the business, the customer's relationships with the employer are near permanent and the employee would not have had contact with the customers absent the employee's employment; and (2) the employee gained confidential information through his employment that he attempted to use for his own benefit, " id., page 400. The court at page 402 went on to reason as follows: " we recognize that it is difficult to show a near-permanent relationship with its customers of businesses that are engaged in sales, do not provide a unique product, have customers that engage in cross-purchasing, and have customers whose identities are well known throughout the industry . . . However, to satisfy the near-permanency test a business need not show that its customer relationships are perpetual or indissoluble, that it has an exclusive relationship with its customers or that a near-permanent relationship exits with each customer." The court went on to say that the Illinois courts determine whether a near-permanent relationship exists by considering the following " (1) the length of time required to develop the clientele (2) the amount of money invested to acquire clients (3) the degree of difficulty in acquiring clients (4) the extent of personal customer contact by the employee (5) the extent of the employer's knowledge of its clients (6) the duration of the customer's association with the employer-customer relationships and (7) the continuity of the employer-customer relationship." But the " near-permanent" test is only part of the equation that the Illinois court said must be applied. Not only must the relationship be " near-permanent" but as noted the employee, sought to be enjoined, must have gained confidential information through his employment that he attempts to use for his own advantage. Absence of this added requirement would result in the absence of competitive market places. In any event a section of the COA article is entitled The " Illinois Rule" which sets forth when, in that state, the courts determine the employer's interest in its customers is proprietary and therefore legally protectable. This rule seems very fair to this court at least and is best summed up in the case of Hanchett Paper Company v. Melchiorre, 341 Ill.App.3d 345, 792 N.E.2d 395, 275 Ill.Dec. 164 (Ill., 2003). In that case an employer sought a preliminary injunction against a former employee in an attempt to enforce a covenant not to compete. The employer prevailed; the trial court ordered that the defendant not solicit, sell to or service customers the defendant employee serviced while he was employed by the plaintiff employer. The court affirmed the order of the trial court.
(d)
Pricing information can be claimed to be confidential. But cannot it be said that in a highly competitive industry why would not pricing information be readily available to prospective customers? One would think they would have an abiding interest in letting court reporter services know the rates charged by competitors, to get the best deal for themselves. One consideration is how often do rates change. One court said " Assuming that other information, such as price and discount is confidential, then there is still no protectable interest because then information changes frequently." Jefco Laboratories, Inc. v. Carroo, 136 Ill.App.3d 793, 483 N.E.2d 999, 1003, 91 Ill.Dec. 513 (Ill. 1985).
The court will discuss the law regarding restrictive covenants at issue in this case. Insofar as trade secrets involve methods of business operation that the plaintiff wishes to protect against use by prospective competitors such as employees or independent contractors who have terminated their relationship with the plaintiff the question presented is whether in fact such information is a trade secret in the first place. The court in Town and Country House and Homes Services, Inc. v. Evans, 150 Conn. 314, 319, 189 A.2d 390 (1963), listed six factors to determine that question (1) the extent to which the information is known outside the business (2) the extent to which it is known by employees and others involved in the business (3) the extent of measures taken by the employer to guard the secrecy of the information (4) the value of the information to the employer and to his competitors (5) the amount of effort or money expended by the employer in developing the information (6) the case or difficulty with which the information could be acquired or duplicated by others. Also see Department of Public Utilities of the City of Norwich v. Freedom of Information Commission, 55 Conn.App. 527, 530, 739 A.2d 328 (1999) using the same language. The " information, " claimed in a case such as the one before the court would be the particular mode of operation of the business which an employee or independent contractor who has terminated from the business could use in competition with the former employer or could be used by another business the former employee or associated independent contractor gave the information to, see for example Elm City Cheese Company, Inc. v. Federico, 251 Conn. 59, 69, 752 A.2d 1037 (1999); Allen Mfg. Co. v. Loika, 145 Conn. 509, 514, 144 A.2d 306 (1958).
(f)
The court will now discuss the standards to be applied in determining whether a preliminary injunction or a temporary injunction should be issued. Perhaps because the granting or denial of a temporary injunction is not subject to appeal there is no direct appellate authority on this subject. As noted in Waterbury Teachers Assn. v. Freedom of Information Commission, 230 Conn. 441, 446, 645 A.2d 978 (1994), there is normally a four-part test for the issuance of a temporary injunction " (1) the plaintiff has no adequate legal remedy (2) the plaintiff would suffer irreparable injury absent (the injunction) (3) the plaintiff is likely to prevail . . . and (4) the balance of the equities favors the issuance of the injunction." As Judge Silbert noted in Access America, LLC v. Mazzotta,, 2005 WL 2650093 , " the standard for granting a temporary injunction to enforce a covenant not to compete, however, is somewhat different in that the plaintiff does not need to prove irreparable harm." In the Access America, LLC case the plaintiff was a licensed real estate broker doing business as 21 Century Access America, LLC. The LLC entered into an agreement with the defendant who was to act as a real estate sales person. The contract included a non-compete agreement in which a sales person for a two-year period shall not engage in or carry on a business competing with Access America, LLC within fifteen miles of the latter's office. Request for a temporary injunction was sought after the defendant terminated his association with Access America, LLC. Judge Silbert based his conclusion that in this context irreparable harm is not a prerequisite for temporary injunctive relief by quoting from and citing several trial court cases to the effect that:
While ordinarily proof of imminent harm is essential, in this type of case there is no such requirement. It has long been recognized in this state that a restrictive covenant is a valuable business asset which is entitled to protection . . . Irreparable harm would invariably result from a violation of the defendant's promises . . . The reason for this is that such a plaintiff's actual injury is not susceptible of determination to its entire extent but is estimable largely by conjecture and prediction. (Citations omitted; internal quotation marks omitted.) Gartner Group, Inc. v. Mewes, Superior Court, judicial district of Stamford/Norwalk at Stamford, Docket No. 118332 (January 3, 1992, Mottolese, J.) (5 Conn.L.Rptr. 411, ) (7 C.S.C.R. 275); see also Merryfield Animal Hospital v. Mackay, Superior Court, judicial district of New Haven Docket No. 464586 (July 31, 2002, Hadden, J.T.R.) (32 Conn.L.Rptr. 652, ); Musto v. Opticare Eye Health Centers, Superior Court, Complex Litigation Docket at Waterbury Docket No. 155663, (August 9, 2000, Hodgson, J.).
Another case involving a request for a temporary injunction to enforce a covenant not to compete brought by a business against a former employee is Case v. Zeiff, 10 Conn.Supp. 530 (1942). There the court issued the temporary injunction saying in part: " In the opinion of the court the plaintiff's damage in the present case is not susceptible of determination to its full extent and is not estimable by an accurate standard but is estimable only by conjecture. Under such circumstances then, the damage must be found to be irreparable, " also see Branson Ultrasonics Corp. v. Stratman, 924 F.Supp. 903, 913 (D.Conn. 1996), where court applied Connecticut law in granting a preliminary injunction in an action to enforce a covenant involving trade secrets; the court said " Enforcement of the covenant is necessary to prevent irreparable loss. Loss of trade secrets is not measurable in money damages and thus is considered 'irreparable harm.'"
As the COA.2d article indicates at Section 50, page 254 in discussion preliminary injunctions to enforce non-competition agreements: " although it is not necessary for the employer to show that actual damage has occurred in order to obtain an injunction as the significant circumstance is the potential for damage . . . there must be a clear showing of an actual presently existing threat. Several cases are cited. In Osage v. Glass, Inc. v. Donovan, 693 S.W.2d 71 (MO, 1985), the court granted an injunction in favor of an employer to enforce a covenant not to compete against a former employee of a glass installing company. At page 75 the court made this common sense observation: " Nor is it necessary for the employer to show that actual damage has occurred in order to obtain an injunction. The actual damage might be very hard to determine, and this is one reason for granting equitable relief. The significant circumstance is potential for damage." In AB Chance Co. v. Schmidt, 719 S.W.2d 854 (Mo.App., 1980), the court granted injunctive relief against a former employee's possible use of trade secrets regarding the divulging of methods of production. The court said that " Injunctive relief must be based on a real apprehension that future acts are not just threatened but in all probability will be committed, " id., page 857, if Southtech Orthopedics, Inc. v. Dingus, 428 F.Supp.2d 410, 418 (E.D. N.C., 2006), also see Benfield, Inc. v. Moline, 351 F.Supp.2d 911, 918 (D.Minn, 2004).
B.
The court will now try to apply the foregoing to the facts of this case. The law in this area is complicated and every state seems to have its own variation; this is underlined by the fact that the COA.2d article is 194 pages long not including the 2016 supplement. The court will first discuss the issue of whether there was adequate consideration for the agreements signed by each defendant which set forth the covenants in question. It will then discuss separately questions of confidentiality as regards business operations including pricing, the customer list and the issue related to that topic which concerns customer solicitation.
1.
The court concludes there was consideration for each of the agreements signed by the defendants. San Edwards was employed by the plaintiff since 1996, her husband Clifford Edwards since 2002. It was an at-will employment situation in each case. The defendants signed the agreements containing the restrictive covenants in 2009 and left the employment in 2016. The plaintiff, Mr. DelVecchio testified that unless the Edwards signed these agreements they would not have been permitted to work as independent contractors for his company. The language of the agreement signed by each defendant (Ex.1, 2) states that:
In consideration of the mutual promises covenants and conditions set forth herein, and in further consideration of the company's agreement to refer work to the reporter under the terms and conditions described herein, the company engages the reporter and the reporter accepts engagement upon the terms and conditions set forth in this agreement and the parties hereto agree as follows: " two of the following sections of the agreement provide the basis of this litigation, section 5 is entitled 'Non-Solicitation, ' section 6 is entitled: 'Confidentiality Trade Secrets, and Non-Disclosure.' Section 10 in part states that 'This agreement shall inure to the benefit of and shall bind the parties hereto . . .'"
Mr. Edwards was examined to the effect that the defendants received no extra benefit for signing these agreements, no monetary consideration, additional work, no offer to pay them higher rates. However, in the court's opinion this misses the point; that point is that as DelVecchio says and the above quoted contract language indicates signing the agreements was a condition of the future referral or work to the defendants for which they were to be paid. Parties signing an agreement are presumed to have read it, Denby v. Interlock Insus, Inc., HDC CV075011730, (2008), Pimpinello v. Swift & Co . 253 N.Y. 159, 170 N.E. 530 (1930), 84 Lumber Co. v. Smith, 356 S.W.3d 380, 383 (Tenn., 2011).
As discussed earlier in this opinion consideration is an exchange of premises which can support an agreement. The court refers to the cases cited which indicate that, although some states take a different view, Connecticut case law and district court references to it, support the position that in our state continued employment provides adequate consideration for an agreement such as the ones before the court. Roessler v. Burwell, supra appears to be directly on point, also see MacDermid, Inc. v. Selle and Cookson, 535 F.Supp.2d 308 (D.Conn. 2008), and the other cases cited.
The fact that the agreements are supported by consideration does not mean they should be enforced in their entirety, in any particular way, or at all. But the view that these restrictive covenants must be strictly construed cannot be a reason to turn basic contract law on its head to enforce the strict scrutiny position which still will be operative even if adequate consideration is found.
In the court's opinion the central issue in this case revolves around the request that the defendants be barred from soliciting the plaintiff's clients. Ancillary to this claim for temporary injunctive relief is a request that the defendants be prevented from disclosing or using for their own benefit certain confidential information as to which the plaintiff has a proprietary interest. At trial this claim of the plaintiff seemed to be centered upon pricing rates of the plaintiff and its business model. Before addressing the customer list and customer solicitation issues directly the court will address pricing information.
The court has discussed this issue briefly and will cite further law on it as it tries to address the facts of this case. It is certainly true that a company's pricing and billing procedures can constitute trade secrets entitled to protection, Department of Public Utilities v. Freedom of Information Commission, supra, but as that case notes, relying on the older case of Town & Country House & Home Service, Inc. v. Evans, supra, to garner that protection the prerequisites for meeting the trade secret requirements must be met--the court listed them earlier and they are six in number and were derived from Section 757 of the Restatement of Torts 4th. The underlying rationale for the six-part test is stated in comment (b)--" A trade secret may consist of any formula, pattern device which is used in one's business and which gives him (her or it) an opportunity to obtain an advantage over competitors who do not know or used it." Interestingly enough and reflective of the law in this area is the case of SKF USA Inc. v. Bjerkness, 636 F.Supp.2d 696 (N.D.Ill 2009), applying Illinois law. At page 11 the court agreed with the law just quoted from comment (b) of the Restatement but quoting Illinois law said, " 'an enforceable restrictive covenant may protect material not properly characterized as a trade secret' and thus affords greater protection than trade secret law does . . . In Illinois, confidential information is 'particularized information disclosed to (the employee) during the time the employer-employee relationship existed (which) is unknown to others in the industry and which give(s) the employer advantage over his competitors . . . A trade secret by contrast is information that is sufficiently secret to derive economic value . . . from not being generally known . . ."
Under any heading the pricing information does not appear to qualify for injunctive relief. The twenty-five court reporters who work for the plaintiff know the rates DelVecchio charged. As to some law firms Mr. DelVecchio testified not all the lawyers in the firm used his services these lawyers could find out his rates from talking to their associates who used DelVecchio. He testified he has no exclusive contracts with the clients who use his services so they are free to explore the market for other reporting services and ascertain what their rates are compared to the rates the defendants would be offering.
A good portion of the plaintiff's business involves providing court reporter services to national court reporting services like Esquire which make arrangements to work for different insurance companies on a national basis. They subcontract work to local court reporting firms. DelVecchio described his company as having " many" of these reporting services as his clients. He said Esquire has had a business relationship with his firm for twenty years. He testified over the years he has had tens of thousands of assignments from Esquire. These National Reporting Services know of his rates and all of the lawyers involved in one of these assignments whether they were otherwise clients of DelVecchio would know of the rates the DelVecchio Company charged. The DelVecchio firm has no written agreement with Esquire and it is free to use any other reporting service. Mr. DelVecchio testified Esquire provided assignments for other court reporting services in Connecticut but the majority of this work goes to his company. Based on the foregoing it seems to the court, at least, that the pricing information cannot meet the test that it is confidential in any meaningful sense so the court will not use injunctive relief to order non-release of information which is generally known or capable of easily being ascertained in this industry. However, that is not the end of the problem. At the risk of being repetitive another aspect of the claim that pricing and rates known to former employees would pose a tremendous risk to the plaintiff company must be examined. When, for example, Mr. DelVecchio set his rates he must have done so in the context of a competitive market. He or anyone else entering this market does not pick his rates out of the sky. He must have ascertained what rates were being charged by prospective competitors--i.e. he was able to find out rates being charged. Given the fact that (1) any competitor, who never worked for his company, could enter the market and after ascertaining what he charged offer lower rates and (2) this restrictive covenants are to be strictly interpreted and limited in their operation if competitive markets are to operate, it does not appear to be justifiable or rational to limit the ability of former employees to offer rates competitive with his.
The court cannot rely in reaching this conclusion on the reasoning of cases like Jefco Laboratories Inc. v. Carroo, 136 Ill.App.3d 793, 483 N.E.2d 999, 1003, 91 Ill.Dec. 513 (Ill., 1985), which hold pricing information is not confidential where such information changes constantly. Mr. DelVecchio said his prices changed every three or four years and the current pricing was the same as it was when the defendants terminated their positions with his company. Mr. Edwards said the pricing changed constantly. No evidence on this subject was offered by either side, however, except for verbal testimony.
DelVecchio seemed to say that armed with information as to his pricing the defendants can " hone in" on his clients and lure them to their business by offering lower prices for their court reporting services. This concern is more fully and readily dealt with in the discussion the court will pursue in the section of the opinion related to customer solicitation and the plaintiff's attempt to enjoin it. The lack of confidentiality claim as to pricing, standing alone, does not bar DelVecchio's concerns when the issue is coupled with addressing the solicitation issue.
3.
A subcategory of confidential information which an employer has a proprietary interest in protecting is what might be called a business model which the employer has spent much time or expense in developing and which might be described as unique to his company as opposed to other competitors in the industry.
Mr. DelVecchio testified to what might be described as two business models he has developed for his reporting service.
On the one hand he said he and his wife " are constantly working on the schedule and assignment of reporters that best match and meet our client's expectations and needs and preferences." Over the years they have put over two hundred thousand dollars into advertising and they have developed a web-site. They try to accommodate client's needs and constantly respond to requests for transcripts and efficient delivery of transcripts.
A large part of his activity includes evaluating the skill level of reporters working for him client preferences for reporters, matching up availability of reporters considering the geographical location of the jobs to be assigned. Account must also be taken of reporters' preferences, some like demanding assignments, some short jobs, or cases involving motor vehicle accident cases where depositions are necessary. At one point Mr. DelVecchio said he tries to keep clients and reporters happy and keep his reporters committed to their jobs. He says he built his business by client service and responsiveness, competitive rates and providing client access through providing cell phone numbers for emergencies.
The other aspect of the business model Mr. DelVecchio advances, which he feels is responsible for building up his company, rests on " the relationships that we have built of trust, honesty and transparency with the independent contractors." Mr. DelVecchio went on to say:
In our particular company which is atypical for the industry, I might add, the reporters have control over the invoices. I give them the rates, they do all the production, they do the billing, the mailing, and the reason for that is to have transparency so the reporters know exactly what's being charged. They know there is honesty and integrity in the way we are treating our people.
Mr. DelVecchio described this business model as unique: he came up with it when he first started the company in 1988 to " foster loyalty and work ethic and excellence because (they court reporters) knew what was happening with their product and they knew what was being charged." He then went on to say this model gives his reporting service a " competitive advantage" and is " proprietary." Mr. DelVecchio did not go into any further detail to support this position but on the other hand neither did Mr. Edwards in denying DelVecchio's assertions when he testified that there was not " anything unique about the way that DelVecchio Reporting Services does business." As to assignments made to court reporters Edwards agreed there was nothing unique about how DelVecchio made them as compared to other court reporting agencies.
In so far as the plaintiff claims that confidential protection should be given to the way he runs his business by accommodations to client demands and needs, delivering transcripts, evaluating skills of court reporters before making assignments and their assignment preferences, setting competitive rates, and affording clients access to him by, for example giving them his cell phone, the court cannot consider this information to be confidential or the business model based on these policies unique. These methods of improving business operations and satisfying clients are not some secret formula but would be known by any national competitor in this industry. In SKF USA, Inc. v. Okkerse, 992 F.Supp.2d 432 (E.D.Penn. 2014), brought an action against former employees whom it claimed had violated non-compete agreements. The plaintiff claimed its business operated " on intellectual property and trade secrets, 'including but not limited to methods of doing business, proprietary products and equipment, valuation methods, computer programs and data, bases, customer lists, and any other customer data.'" The court said that such information-including business plans and marketing strategies-" qualifies as protected trade secrets where the degree of secrecy is 'such that it would be difficult for other to obtain the information without using improper means' . . ." id., p. 450. The same reasoning would preclude such methods of operation as DelVecchio testified about here from being considered confidential.
Comment (b) to Section 396 of Restatement of Agency 2d is instructive where in relevant part it states:
b. The duty of an agent not to compete with the principal by using for his own purposes unique assets of the business, such as trade secrets, which are frequently of great value as long as they remain secret, does not terminate with the employment. Such assets a former agent cannot properly use for his own purposes. On the other hand, during his agency, an agent frequently acquires information concerning the methods of his employer in doing business and becomes acquainted with his employer's customer and their desires. Information of this sort is barred from use in competition with his employer only to the extent that, considering all the circumstances, it would be unfair to his former employer for the agent to use it. In determining this, the desirability of permitting employees to be free to terminate the relation and the fact that often their chief assets after such termination consist of the special skill and knowledge acquired during the relation are factors to be considered. Thus, although an agent cannot properly subsequently use copies of written memoranda concerning customers, which were entrusted to him or made by him for use in the principal's business, or processes which the employer has kept secret from other manufacturers, he is normally privileged to use, in competition with the principal, the names of customers retained in his memory as the result of his work for the principal and also methods of doing business and processes which are but skillful variations of general processes known to the particular trade.
In this regard Elm City Cheese Co. v. Federico, 251 Conn. 59, 752 A.2d 1037 (1999), must be read closely. In that case the plaintiff cheese maker brought an action against a former accountant who opened his own cheese making company for among other claims misappropriation of trade secrets. The court considered various aspects of the plaintiff's claim including " specific sources and cost of its supplies, through the production of its cheese, to the distribution of its product to three specific customers and the prices charged them" and concluded together they represented the plaintiff's business operation and were a trade secret, id., p. 73. The court went on to note, however, that each one of the aforementioned components could be considered trade secrets and the trial court specifically found the cheese making process of the plaintiff was unique and was a trade secret. The court upheld the trial court's conclusion concerning its finding of a trade secret as claimed by the plaintiff.
This is not the Elm City Cheese Company case. The business operations of the plaintiff and the manner in which it sought to service customers and comply with their needs were not some secret process or method of doing business that would be undiscoverable and unknown to other competitors or prospective competitors intent on running an efficient business.
The other confidential aspect of his business model that Mr. DelVecchio seems to be claiming is the relationship of trust, honesty, and transparency his company has with the independent contractors working for DelVecchio Reporting Services, LLC. Mr. DelVecchio states the reporters control the invoices, do the billing and know the rates being charged for their work. Honesty and integrity create loyalty. This method of operation was instituted by him when he first started business in 1988 and he believes it gives his company a competitive advantage. It is atypical of the industry and unique to his company according to Mr. DelVecchio. Mr. Edwards disputes these claims of uniqueness and neither of them rely on any factually supported comparative analysis or specifics in making their broad claims about industry practices in this regard.
Beyond that there is no claim here that businesses like that of the plaintiff have difficulty attracting competent court reporters to work for them or even that there is a competitive struggle between reporting services for court reporters so that the model DelVecchio espouses would give him an advantage in this regard. Nor is it argued that in this court reporting industries good workers are constantly jumping from one reporting service to another or leaving to start their own service so that the DelVecchio model can serve as an inducement to stay working for his company. San Edwards worked twenty years for the plaintiff and Clifford Edwards fourteen or fifteen years before they both left.
Apart from that the work product here is a transcript produced after depositions and hearings of various types. Is there a claim that his method of operation allows his company to produce transcripts more quickly or efficiently because of the admittedly admirable business and operational environment he created?
Perhaps more to the point, Mr. DelVecchio and his wife are hardworking people who built their company up from scratch. They are to be respected and admired for creating a work environment based on openness and integrity and consideration for the rights of their workers. But when all is said and done these covenants not to compete or providing protection for what is claimed to be confidential business modes of operation are restraints of trade and affect the functioning of a particular industry as a whole. Courts should be reluctant, under the guise of protecting confidential business modes of operation, to in effect prevent the exporting into any particular industry internal business practices which encourage honesty, integrity, and loyalty between workers and their employers. This is especially so where the methods used are not based on some complicated analysis associated with the making of a particular product but on common sense and fair ways of dealing with one's workers which could be deduced by any employer intent on creating a humane workplace.
In any event, for the foregoing reasons the court does not find the claimed business methods of the plaintiff should be given the protection of confidentiality.
4.
The most difficult part of this case, at least for the court is the issue of customer solicitation in light of the fact that pursuant to the agreement the defendants signed they agreed not to provide services to " any clients or prospective client of the company" or to " call on solicit, induce or take away or divert" or " attempt to do any of this" (Section 5(a)(i)(ii) of the agreement between the parties (Ex. 1, 2). The court has found there was adequate consideration for the agreement. But as said in Deming v. Nationwide Mutual Ins. Co., 279 Conn. 745, 761, 905 A.2d 623 (2006): " By definition covenants not to compete with their employers after termination of their employment restrain trade in a free market . . . Consequently, these covenants may be against public policy, and, thus are enforceable only if their imposed restraint is reasonable, an assessment that depends upon the competing needs of the parties as well as the needs of the public. These needs include: (1) the employer's need to protect legitimate business interests, such as trade secrets and customer lists (2) the employees need to earn a living and (3) the public's need to secure the employee's presence in a labor pool." The court cited Scott v. General Iron & Welding Co., 171 Conn. 132, 137, 368 A.2d 111 (1976), which said such a covenant must be " reasonable--that is it should afford only a fair protection to the interests of the party in whose favor it is made . . ."
On its face Section 5 of the agreement is not reasonable. It provides no geographic limitation on its operation. As said in the Scott case: " The general rule is that the application of a restrictive covenant will be confined to a geographical area which is reasonable in view of the particular situation . . . A restrictive covenant which protects the employer in areas where in which he does not do business is unreasonable with respect to area, " 171 Conn. at page 138. The court must take into account reasonable requirements so that a former employee or independent contractor can make a living. Mr. DelVecchio testified his company mainly in Fairfield and New Haven County but does have clients in Hartford County. He has few if any clients in the other Connecticut counties. The exhibits indicate that the Edwards live in Chester Connecticut. Chester according to a map the court googled is barely ten miles from New Haven County but many more miles from Litchfield County and the far reaches of Tolland, New London, Hartford and Windham counties. If the court required to draw a map of where the agreement ought properly to be enforced given the Edwards' residence, should it take into account the distribution and concentration of lawyers in counties DelVecchio appears to concede would not be a problem?
Furthermore, the agreement talks about " prospective clients" which makes the geographical question even more unresolvable and also goes against the case law that precludes application of these covenants against non-solicitation to clients or customers the DelVecchios did not have at the time the relationship with the Edwards terminated, see Palmer & Cay v. Lockton Companies, supra . Any other conclusion would unfairly limit the former independent contractor's right to earn a living.
It would also prospectively protect the employer from a competitive threat that did not exist at the time of termination and would severely risk the operation of competitive markets in this industry.
In any event there are more substantive reasons to question the issuance of an injunction to enforce the non-solicitation paragraph in the agreements signed by the Edwards. It is true that the plaintiff company spent thousands of dollars to develop its customer base but this is a normal marketing endeavor which would have been engaged in whether or not the agreements were signed. There is nothing unique or confidential in the list of the customers. The customers in question could be located in any business directory or the phone book. If other competitors can try to solicit these customers set forth in the customer lists, why should former independent contractors be barred from doing so, Town & Country House & Home Service, Inc. v. Evans, supra .
As said in the earlier discussion by the court confidentiality of customer lists stand on the periphery of trade secret law. If that is so, why should it be reasonable for a court to enforce these covenants for an employer merely because the employee was compelled to sign an agreement providing for non-solicitation of " customers" which are set forth in a list prepared by the employer. There is nothing peculiar to the court reporting industry or service which require a special or unique effort to locate potential customers of Town & Country House & Homes Service v. Evans, supra . There was no expenditure and effort necessitated by an attempt " to create a new market, " Silfen v. Cream, supra, Cherre Industries, Inc. v. Grounds & Associates, supra . No special product or service was being offered, Town & Country House & Homes v. Newberry, supra . In other words " the customer solicited are openly engaged in business and their names and addresses are openly available:; AGA Artiebolag v. ABA Optical Corp., supra .
If protection of a customer base was so vital to the continued profitable functioning of the plaintiff's business or from another perspective a crucial right that the employer had a vital interest in protecting why were the non-compete agreements prepared in 2009, twenty-one years after the company was founded in 1988, thirteen years after San Edwards started working for it, and seven years after Clifford Edwards did so?
It further came out in Mr. DelVecchio's testimony that he has no contracts with his clients and they are free to engage other court reporters or court reporting services. He agreed it was " possible" that entities or lawyers he described as his clients used other reporting services in addition to his. Some of his clients are exclusive; they have only used his reporting service since the 1980s but he never identified them or how he knew they exclusively used his reporting service--how would he know that? Even as to these clients there was no contract that bound them to use his services. DelVecchio identified certain law firms as clients even if not all the attorneys in the firm have used his services.
The plaintiff LLC does much business with so-called out of state national reporting services that contact DelVecchio's business to arrange for reporting services. He does a great deal of business with Esquire, a national reporting service--they are an important client and the Edwards post-termination contract with Esquire, he suggested at one point, was the motivation for the present litigation. These out of state agencies are free to contract with other Connecticut court reporting agencies and court reporters, he has no contracts with them. In fact, for several years Mr. DelVecchio had an agreement with Esquire for a fee that they would give his company preferential treatment regarding the assignment of cases. But Esquire has rescinded that policy. DelVecchio testified that he did not know if other national reporting services contact directly with court reporters to arrange for work.
Mr. DelVecchio testified that he never compiled a client list until opposing counsel in this litigation " insisted in having one." He then said: " I'm sure that people know some of our clients as I know some of my competitors' clients . . ." He also agreed that some of his law firm clients might be known to other lawyers. How does it help the operation of an efficient and fair competitive model if workers such as this are barred from competing with clients of a former employer who cannot fairly be considered a part of a confidential list of customers?
It should also be noted that although Mr. DelVecchio testified that he believed the Edwards knew that all the entities, firms, and lawyers he listed on the customer list were known by the Edwards to be his clients. But the testimony only revealed that Clifford Edwards only did work for about forty of the 150 " clients" listed and San Edwards worked for about twenty.
He also has a website with testimonials from some of his clients. The list of 150 entities represented clients he has serviced in the last three years. But there is no indication as to whether a firm, attorney, or agency on the list only requested the plaintiff's assistance did so only occasionally or just once or twice, for example, or whether before the three-year cut off they had ever been clients.
All of the foregoing establishes for the court that standing alone, the list presented is not a trade secret or entitled to protection on the basis of common-law confidentiality. For the court at least this is reflected in Mr. DelVecchio's candid testimony that the actions of the Edwardses presented what he said at one point was a " tremendous risk" for his business because the Edwardses' knowledge of his clients was coupled with their knowledge of the rates he charged for his services. He testified as this perceived danger on at least two occasions in his testimony.
But the court must now discuss whether the anti-solicitation provisions of Section 5 of the agreement signed by the defendants should be enforced because such solicitation would be improper whether or not standing alone, the client list is confidential.
(a)
As discussed generally previously solicitation may be inappropriate and subject to injunctive relief where by working for the employer, here DelVecchio, the court reporter who worked for the company had been afforded the type of contact with the lawyer or firm he or she was to work for which would give the reporter an advantage in securing work which he only procured because of the work opportunity given him or her by DelVecchio Reporting Services, Inc. Mr. Edwards testified that DelVecchio secured the assignment, he received notice of it from DelVecchio and would show up at a pre-arranged time and place to do his work. He, of course, met lawyers on both sides of a case but would have no reason to have contact with staff or " contact" people, as described by Mr. DelVecchio, because as DelVecchio said these are the people who he would be in touch with or who would contact him to set up the work assignment. Mr. DelVecchio said he could not say the Edwards would have any knowledge of the contact people he works with such as paralegals and secretaries. This type of " good will" would inure to Mr. DelVecchio's benefit vis-a-vis competing court reporters or court reporter agencies whether or not they had terminated previous employment with DelVecchio Reporting Services. Also the client contact does not appear to rise to the level of one on one relationship referred to in Coffman v. Olson Co., supra or rise to the level of substantial contact that the nature of the court Reporter's assignment would create, Freiburger v. JUB Engineers, Inc., supra . The nature of these assignments naturally entails occasions where a reporter has to call the client or deliver transcripts to them. But as Mr. DelVecchio said in his " business model" testimony he and his wife are the ones who schedule assignments to meet client needs, constantly respond to requests for transcripts and then their efficient delivery, arrange for expedited service at no extra charge. He gives clients his cell phone number so the client can have access to him and try to accommodate client requests for reporters. The latter can hardly be described as good will created by the DelVecchio employment that would benefit former independent contractors who worked for his company and then terminated that association.
(b)
The court has already discussed why the pricing information or the rates DelVecchio Reporting Services should not be considered confidential information and will not repeat that discussion. The fact that a client list which should not be considered confidential is coupled with the pricing information claim, in the court's opinion cannot be combined somehow to make a non-solicitation argument. Mr. DelVecchio seems to base his position that the use of the rates he charged customers by terminated employees would pose a tremendous risk results from the fact that 12 days after the Edwards left working for his company Esquire, the national reporting agency he garners much business from lowered the rates they would pay his company when they assigned court reporters jobs to his company. The Scottish philosopher David Hume established the indisputable proposition that because B follows A does not mean A caused B. There was no other evidence offered that the Edwards, or any attempt on their part to take assignments from Esquire, had anything to do with the reduction in the rates Esquire would pay to DelVecchio Reporting Services. DelVecchio's testimony establishes that Esquire changes its operational practices-they ended the policy of preferential treatment for a fee with firms like DelVecchio's. After reducing their rates for DelVecchio, Mr. DelVecchio was able to negotiate the rates back upward. In any event, why would lower rates it paid to the well run, 25 court reporter business run by DelVecchio on the unforeseen happenstance that two ex court reporters from DelVecchio Reporting Services had entered the market? Mr. Edwards said that after he left DelVecchio's he did secure work from Esquire but that company told him what rate they would pay. There was no evidence to the contrary offered as to what Edwards was actually paid--was it lower than the rate Edwards operated on before he left DelVecchio Reporting Services?
There is another aspect to the pricing issue which at least to the court is of some interest. During the hearing on this matter Exhibit 8 was introduced into evidence to show the rates allowed by Esquire before the Edwards left the plaintiff company. Three invoices were presented indicating the per page charge for a transcript was $3.80 and $2.15 per page for a copy with a $75.00 appearance fee. After the Edwards left DelVecchio Reporting Services Exhibit 10 was introduced indicating Esquire was paying $3.65 per page for the original of the transcript and $2.00 per page for the copy. But it should be noted that Exhibit 18, which is an e-mail from a contact person at Esquire indicates she spoke to San Edwards and repeated the rates that they had discussed, it said the per page price for the original page of the transcript would be $3.15 per page, with a charge of $3.25 per page for originals & med/tech expert, with copies being $1.70 per page and $1.85 when the copy was of the original & med/tech expert. The e-mail is dated February 3, 2016 and the letter from DelVecchio's warning the Edwards of their obligations under the 2009 agreement is dated March 14, 2009. From the receipt of that letter it is the court's understanding that the Edwards did not accept business from Esquire. Also this letter does not mention Esquire and there is no indication the Edwards knew of the percentage of DelVecchio business attributable to Esquire.
But confusingly enough the plaintiff then introduced Exhibit 15 which was sent by Mr. Edwards to DTI another national reporting agency. The e-mail was sent to DTI to show the charges Edwards was offering and was introduced to indicate how Edwards, with their knowledge of DelVecchio's rates, could be undercutting him. The document does show copies would cost $1.75 per page. But the appearance fee remained at $75.00. More to the point the charge for the original transcript was " $3.70 (lay) $3.95 (medical/technical expert" cases see Exhibit 17)--hardly an across the board cut below the DelVecchio rates. Also Mr. DelVecchio on cross said some of the rates for various terms went up and some went down. At page 138 of the transcript the court asked as to the DTI rated proposed by the defendants " How do these rates compare with the rates that DelVecchio charges?" Plaintiff's counsel said she would check with her client to compare the DTI rates between this company and the rates indicated to DTI by the Edwards. No report back was received and Mr. Edwards on further questioning said he did not know if the rates he was charging were " lower rates than what DelVecchio was charging." What does this imply--that the rates charged by DelVecchio could change from one " client" to the next?
In any event all of the foregoing convinces the court that claimed knowledge of DelVecchio's pricing does not provide an independent basis for a non-solicitation order despite the fact that the claimed customer list cannot be given trade secret or common-law confidentiality protection and it relies on its discussion at pages 24 through 25 of this opinion.
(c)
Finally, the court will discuss another consideration which might afford protection to a company such as the plaintiff apart from whether its customer list is confidential. The court would refer to an earlier footnote wherein it discussed a section in the COA article on Illinois law and its near permanent rule.
In this case Mr. DelVecchio testified to the long-term relationship he has had with Esquire, a national reporting agency. He said he had put much time and effort in fostering this business relationship and it represented a substantial source of earnings. Under these circumstances the question becomes why should not at least temporary injunctive relief be granted against the Edwards barring them from accepting work from Esquire. The court in Hanchett Paper Co. v. Melchiorre, supra, which set forth the Illinois rule said at 792 N.E.2d page 400, that such non-solicitation covenants " are a restraint of trade, courts must strictly construe them to ensure that their intended effect is not to prevent competition per se." This comment prefaced the near permanent relationship observation later made by the court and the seven requirements for its operation listed in this court's earlier footnote.
The problem here despite Mr. DelVecchio's testimony, which the court accepts since he struck the court as an honest hard working businessman trying to protect his interests, is that Esquire farms out its transcript assignments not just to DelVecchio Reporting Services but to other reporters and reporting services. DelVecchio has no contract with Esquire for job assignments and Esquire is free to retain any reporter it wants to retain. DelVecchio once had a preferential agreement with Esquire whereby for a fee paid to Esquire they would give preferential treatment to DelVecchio in assigning jobs. But Esquire abandoned the preferential treatment program a few years before this litigation so DelVecchio knew he was in an open competitive field for their business. Why should former independent contractors who have left their position at the plaintiff company be penalized as opposed to any other prospective competitors who had an opportunity and right to compete against DelVecchio for Esquire business?
To hone their skills the independent contractors who work for DelVecchio acquired nothing from the plaintiff company. They brought their skills with them or an efficient businessman like DelVecchio world not have signed them on as independent contractors. As was discussed, the business model argument cannot be relied upon to justifiably limit the restriction on competition that an injunction in a case like this would create. In fact, Esquire itself ended their preferential treatment program with the plaintiff company presumably so that there would be competition for their job assignments. The court does not believe it is proper to thwart this Esquire policy simply by having the plaintiff put the appellation " client" to Esquire. Did not Esquire have a right to end the preferential treatment program and does not that act, in so doing, define the ambit of the client relationship Esquire wished to have? Furthermore, for reasons previously discussed the Edwards work for Esquire through job assignments given by DelVecchio gave them no special " contact" information which they would otherwise not have had an opportunity to develop except for the fact they worked for the DelVecchio company. As Mr. Edwards said he would show up for a job after being assigned one by DelVecchio and what he and his wife do in these circumstances is produce a transcript. DelVecchio, when they worked for him would set up the job ab initio and special requests were funneled through him--that is why they had his cell phone number. The Illinois test though meriting a separate section in the COA article, in the court's opinion, does not afford the plaintiff a convincing argument for injunctive relief.
For all of the foregoing reasons the court will deny temporary injunctive relief.,
The court has tried to address the pricing information issue, the trade secret claim as it applies to customer lists and the business model claims. But the court cannot issue a general injunctive order as to " files, data, and service information" which are not further defined. The same would apply to " all other proprietary and confidential information." None of this was addressed at the hearing of this matter in any detail. In the proposed order for temporary injunctive relief the plaintiff requests an injunction to enjoin the defendants from utilizing " any pricing information, customer information, trade secrets, and all other confidential and proprietary information owned and developed by DelVecchio . . ."
Interestingly the plaintiff's testimony seemed to indicate that public knowledge of the customer list does not present the problem but such knowledge coupled with pricing information of the plaintiff company. The court did not accept that agreement. Perhaps more to the point why would any competitor or prospective competitor have any interest in obtaining the customer list of the plaintiff company? At the trial self dozens of the plaintiff's customers were identified and there has been no motion to seal the transcript. Also no evidence was presented as to why competitors in this industry would have no knowledge of the plaintiff's customers or the means to acquire that knowledge. Perhaps more to the point the fact remains that the identity of the entities listed on the customer list are available in the yellow pages of the phone book and trade journals. The court rescinds its provisional sealing of the customer list. Judge Wilson denied the motion to seal and the court has concluded that nothing developed at the hearing warranted giving the customer list trade secret protection or confidential status for the reasons Judge Wilson and the court has stated in this opinion.