Opinion
No. CV 02-0390074 S
June 3, 2003
SUPPLEMENTAL MEMORANDUM OF DECISION ON THE PLAINTIFF'S APPLICATION FOR A TEMPORARY INJUNCTION
I DISCUSSION
This memorandum supplements a preliminary decision issued by the court in response to the plaintiff's, NewInno, Inc. d/b/a Innotech, application for a temporary injunction against the defendants. NewInno v. Peregrim Development, Superior Court, judicial district of Fairfield at Bridgeport, Docket No. CV 01 390074 (November 27, 2002, Stevens, J.). The relevant facts of this controversy are set out in the preliminary decision and will not be repeated in full here. In summary, the court found that the individual defendants were former employees or agents of the plaintiff who now work for a competitor, Peregrim Development, doing business as Paragon Development (Paragon). Paragon was designed and incorporated by defendant John Peregrim (Peregrim) after he left the plaintiff's employ. The court found that the plaintiff had met its burden of proving that one or more of the defendants had violated the Lanham Act, 15 U.S.C. § 1125 (s) et seq., the Connecticut Uniform Trade Secret Act, General Statutes §§ 35-51 et seq., and employment non-disclosure agreements. The court reserved decision on the individual defendants' claim that the non-disclosure agreements they executed during their employment with the plaintiff were unenforceable because the agreements were unreasonably broad and violative of public policy. The parties further briefed this issue at the court's direction. For the following reasons, the court agrees with the position of defendants Peregrim, Barbara Hemlich and Renee Gill that the non-disclosure agreements they executed are unreasonably broad, but the court further concludes that these agreements may nevertheless be enforceable through the application of the "Modifications of restrictions" provisions of the contracts. The court rejects the position of the defendant Russell Koch and concludes that the non-disclosure agreement he executed is reasonable and enforceable. Thus, the court also concludes that the plaintiff has met its burden of proving a likelihood of success on its claim that the non-disclosure agreements are enforceable only as to defendant Koch on the present record. See generally, Branch v. Occhionero, 239 Conn. 199, 207, 681 A.2d 306 (1996) (an applicant seeking a temporary injunction has the burden of proving a reasonable likelihood of success on the merits, irreparable harm and lack of an adequate remedy at law).
The "Patent And Confidentiality" agreements executed by defendants Peregrim, Heimlich and Gill were identical, and provided the following in their most relevant parts:
3. Disclosure of information. (a) Nondisclosure. Except as required in my duties to the Company, I will never, directly or indirectly, use, disseminate, disclose . . . any information disclosed to me or known by me as a consequence of or through my employment by the Company; (i) not generally known in the industry in which the Company is or may become engaged, about the Company's products, processes, and services, including information relating to research and development programs, inventions, idea concepts, manufacture, purchasing trade and service marks, accounting, engineering, marketing, merchandising, and selling; (ii) relating to an actual or potential client's products, business plans, technical specifications, operating parameters, inventions, designs, methods, processes, manufacturing know-how, systems, improvements, trade secrets and other private matters; (iii) relating to the names or other information included in the Company's BrainBank; and (iv) relating to the Company's lead/prospect and customer lists, and action and/or contact reports, all such information collectively referred to herein as "Confidential Information."
Defendant Koch executed a "Nondisclosure Agreement." This agreement concerned the protection of certain information for two years from the date of its disclosure to Koch, and stated the following in relevant part:
I hereby covenant and agree with INNOTECH as follows: FIRST: That all knowledge and information which I may acquire from INNOTECH or from INNOTECH'S employees, clients or consultants respecting INNOTECH's and its client's inventions, designs, methods, processes, manufacturing know-how, systems, improvements, trade secrets and other private matters, and all such information which I may acquire on INNOTECH premises or which may be disclosed to me, shall for all time and for all purposes be regarded by me as strictly confidential and held by me in trust and solely for INNOTECH's benefit and use, and shall not be directly or indirectly disclosed by me to any person whatsoever excepting to INNOTECH or with INNOTECH'S prior written permission, except the I shall not be prevented from using or disclosing information: a) Previously known to me or subsequently legally acquired form sources not connected in any way with INNOTECH; b) In the public domain as of this date, or subsequently coming into the public domain.
The law is well established that non-competition agreements are enforceable only if they impose reasonable restraints on trade. "Under common law, the well-settled rule is that an anticompetitive covenant ancillary to a lawful contract is enforceable if the restraint upon trade is reasonable . . . To satisfy this requirement of reasonableness . . . the restraint must be limited in its operation with respect to time and place and afford no more than a fair and just protection to the interests of the party in whose favor it is to operate, without unduly interfering with the public interest." (Citations omitted; internal quotation marks omitted.) Eilda, Inc. v. Harmor Realty Corp., 177 Conn. 218, 225-26, 413 A.2d 1226 (1979). This reasonableness test has been described as follows by the Appellate Court:
A covenant that restricts the activities of an employee following the termination of his employment is valid and enforceable if the restraint is reasonable. Scott v. General Iron Welding Co., [ 171 Conn. 132, 137, 368 A.2d 111 (1976)]. There are five criteria by which the reasonableness of a restrictive covenant must be evaluated: (1) the length of time the restriction is to be in effect; (2) the geographic area covered by the restriction; (3) the degree of protection afforded to the party in whose favor the covenant is made; (4) the restrictions on the employee's ability to pursue his occupation; and (5) the extent of interference with the public's interests. Id., 137-38. The five-prong test of Scott is disjunctive, rather than conjunctive; a finding of unreasonableness in any one of the criteria is enough to render the covenant unenforceable.
New Haven Tobacco Co. v. Perrelli, 18 Conn. App. 531, 533-34, 559 A.2d 715, cert. denied, 212 Conn. 809, 564 A.2d 1071 (1989).
There are no Connecticut cases holding that the enforceability of a confidentiality agreement is governed by the same reasonableness standard that governs the enforceability of non-compete agreements. In Connecticut, this question is one of first impression. Nevertheless, there can be no doubt that the enforceability of confidentiality agreements must be guided by the same considerations that govern the validity of non-compete agreements. Certainly, a person should not be able to accomplish through some other agreement what would be a restraint of trade violative of public policy if done through a non-compete agreement. Consequently, Connecticut courts and those in other jurisdictions have applied this reasonableness standard to a variety of contracts other than non-compete agreements, such as commercial leases, Eilda, Inc. v. Harmor Realty Corp., supra, 177 Conn. 225-26; deeds, Dick v. Sears-Roebuck Co., 115 Conn. 122, 160 A. 432 (1932); contracts for the sale of a business, Domurat v. Mazzaccoli, 138 Conn. 327, 84 A.2d 271 (1951); and confidentiality agreements, Carolina Chemical Equipment Co. v. Muckenfuss, 322 S.C. 289, 293-94, 471 S.E.2d 721 (St.Ct. App. 1996) (holding that an agreement not to divulge trade secrets will be judged by the same criteria as a covenant not to compete when the former has the same effect as the latter).
The substance of the parties' dispute is not so much about whether a reasonableness standard should govern the enforceability of the parties' confidentiality agreements, but rather concerns the exact manner in which the test should be defined or applied. The case law on this issue is split, particularly on whether the rule requires confidentiality agreements to contain time and geographic limitations.
For example, some states have adopted statutes that provide that secrecy agreements should not be considered presumptively invalid simply because they lack time or geographical restrictions. See, e.g., Equifax Services v. Examination Management, 216 Ga. App. 35, 37, 453 S.E.2d 488 (1994), cert. denied, 1995 Ga. LEXIS 560 (relying on a Georgia statute, the court stated that "a contractual duty to maintain a trade secret or limit use of a trade secret shall not be deemed void or unenforceable solely for lack of a durational or geographic limitation on the duty"); PepsiCo. Inc. v. Redmond, 1995 U.S. Dist. LEXIS 19437 (N.D.Ill. 1994), aff'd., 54 F.3d 1262 (7th Cir. Ill. 1995) ("the fact that the confidentiality agreement here has no time limitation does not invalidate the agreement. Rather the ITSA explicitly provides that `a contractual or other duty to maintain secrecy or limit use of a trade secret shall not be deemed to be void or unenforceable solely for lack of durational or geographic limitation on the duty' "). The plaintiff requests that the court adopt this position as the Connecticut rule.
On the other hand, the defendants request the court to follow the rule of jurisdictions that treat secrecy agreements as restraints of trade and invalidate them if they lack time or geographical restrictions. See, e.g., State Medical Oxygen v. American Medical Oxygen, 240 Mont. 70, 72-75, 782 P.2d 1272 (Mont. 1989) (a non-disclosure agreement that, among other things, prohibits any disclosure or use of customer lists, and which contains no time limitations, violates Montana statute prohibiting contracts that restrain the lawful exercise of a trade or business); CT Page 7855 Services Centers of Chicago v. Minogue, 180 Ill. App.3d 447, 455, 535 N.E.2d 1132 (Ill.App. 1989) (a "confidentiality agreement [that] amounts in effect to a post-employment covenant not to compete which is completely unrestricted in duration or geographical scope . . . is unreasonable and will not be enforced").
The court agrees with the plaintiff's contention that confidentiality agreements are not presumptively invalid because they lack time and geographic restrictions, but not so much for the reasons articulated by the plaintiff, but because Connecticut law does not require any such presumption of invalidity even as to non-compete agreements. Connecticut courts have upheld non-compete agreements that fail to contain geographical limits, most notably, agreements involving anti-sale covenants. See, e.g., New Haven Tobacco Co. v. Perrelli, supra, 18 Conn. App. 531. Furthermore, courts have also upheld covenants that are worldwide in scope. See Branson Ultrasonics Corp. v. Stratman, 921 F. Sup. 909, 913 (D. Conn. 1996). As to time restrictions, Connecticut courts have upheld non-compete agreements that impose lifetime restrictions. Styles v. Lyon, 87 Conn. 23, 86 A. 564 (1913); Cook v. Johnson, 47 Conn. 175, 178 (1879) ("the mere fact that the duration of the restriction as to time is indefinite or perpetual will not of itself avoid the contract if it is limited as to place, and is reasonable and proper in all other respects").
The court also agrees with the plaintiff that in applying the reasonableness standard to test the enforceability of confidentiality agreements, the court should take into consideration the qualitative differences between these agreements and non-compete covenants. These distinctions were explained by the Supreme Court of Iowa as follows:
Nondisclosure-confidentiality agreements enjoy more favorable treatment in the law than do noncompete agreements. See Terry Morehead Dworkin Elletta Sangrey Callahan, Buying Silence, 36 Am.Bus.L.J. 151, 156-57 n. 30 (1998) [hereinafter Dworkin Callahan]. This is because noncompete agreements are viewed as restraints of trade which limit an employee's freedom of movement among employment opportunities, while nondisclosure agreements seek to restrict disclosure of information, not employment opportunities. See id. The distinction is based on the idea that "[o]nce a secret is disclosed, knowledge of the information cannot normally be confined to a particular area." Restatement (Third) of Unfair Competition § 41 cmt. d. (1995). Thus, imposition of geographic or durational limitations "would defeat the entire purpose of restricting disclosure, since confidentiality knows no temporal or geographical boundaries." 2 Rudolf Callmann, The Law of Unfair Competition, Trademarks Monopolies, § 14.04 at 222-23 (Sup. 1998) [hereinafter Callmann]. Thus, nondisclosure agreements lacking in geographic or time limitations have been held to be enforceable. See Dworkin Callahan, at 156-57 n. 30.
Revere Transducers, Inc. v. Deere Co., 595 N.W.2d 751, 761 (Iowa 1999).
In short, the application of the reasonableness standard to determine the enforceability of an employee's post-employment activities requires consideration of the "nature and operation of the particular covenant at issue." New Haven Tobacco Co. v. Perrelli, supra, 18 Conn. App. 534. Consequently, the court should apply the same criteria used to determine the validity of non-compete agreements to non-disclosure agreements, but should take into consideration the purpose of confidentiality covenants and the specific information sought to be protected. The absence of time or geographical limitations in non-disclosure agreements will not make such agreements presumptively unenforceable. Nevertheless, the lack of such restrictions is obviously a factor considered in the court's evaluation. As applied here, the absence of durational and geographical restrictions, coupled with the extraordinarily broad scope of the nondisclosure covenants, indicates that the plaintiff's agreements with the defendants Peregrim, Heimlich and Gill cannot satisfy any reasonableness test.
The non-disclosure agreements signed by the defendants Peregrim, Heimlich and Gill are divided into four sections. In brief, the first section prohibits the defendants from disclosing information about the plaintiff's business that is "not generally known in the industry in which [the plaintiff] is or may become engaged." The second section prohibits the defendants from disclosing any information relating to actual or potential clients' products, business plans, designs or trade secrets. The next section prohibits the defendants from disclosing information from the plaintiff's "BrainBank." The last section prohibits the defendants from disclosing information relating to the plaintiff's "lead/prospect and customer lists." See footnote 1 of this decision.
The provisions of these non-disclosure agreements are not limited to trade secrets. Although an employer may by agreement define any information as confidential and preclude its employees from disclosing the information even when the information does not involve trade secrets, a broad, unrestricted confidentiality covenant of this type may be deemed to be beyond the reasonable interests of the employer when balanced against the effect on the employee's ability to pursue his trade and the effect on the public interest. Such is the problem here because the plaintiff has defined confidential information to include virtually all the information that an employee may acquire about the plaintiff's business or its clients during the course of his or her employment.
The first section of these agreements precludes disclosure of information which is not generally known in the industry in which the plaintiff is engaged or " may become engaged." The breadth of this provision is too wide and indefinite to be viewed as reasonable. The second section seeks to protect trade secrets and confidential information of the plaintiff's clients, but includes language that is so broad that it would preclude the defendants from ever discussing a client's products with the client or anyone else even after the product reaches the open market.
As to the third section, in its preliminary decision the court held that the "BrainBank" contains some information that represents trade secrets and some that does not. Specifically, the court found that the names and identification information about experts contained in the "BrainBank" are not trade secrets. The court agrees with the defendants that it would be an unreasonable restriction on the defendants' ability to pursue their livelihood in the consulting business if the plaintiff could prohibit them from contacting experts, whose names and expertise are in the public domain, simply because these experts' names are included in the "BrainBank."
The last section seeks to protect the plaintiff's "lead/prospect and customer lists." Under this section, the defendants are prohibited from contracting or communicating with those companies listed on the plaintiff"s customer lists, even though the lists are available to the general public through the plaintiff's marketing materials. Moreover, these lists contain more than 200 customers, including such companies as Ford, EXXON, DuPont, and Johnson Johnson.
The most applicable authorities support the conclusion that the provisions of these non-disclosure agreements are unenforceable because they are unreasonably broad. For example, in Equifax Services v. Examination Management, 216 Ga. App. 35, 453 S.E.2d 488 (1994), the court rejected an agreement that provided, in pertinent part: "I will not release or disclose any . . . confidential information during the course of my employment with Equifax or at any time thereafter." Id., 491. The court explained that "[t]o restrict an employee from utilizing the experience gained and using information not designated as trade secrets and attempting to extend the restriction beyond the employer's business in perpetuity to that of its clients, customers, consultants, licensees or affiliates without geographic restriction reaches beyond the scope permitted in Georgia in terms of time, territory, and activities protected. Although the employer is attempting to protect confidential information relating to his business, the restraint is so broad as to be unreasonable." Id.
Similarly in Gary Van Zeeland Talent, Inc. v. Sandas, 84 Wis.2d 202, 216, 267 N.W.2d 242 (Wis. 1978), the court held that an employment contract that precluded the defendant from ever disclosing the former employers' customer list and contained no time or geographic restrictions was an unreasonable restraint on trade and unenforceable. Accord, Service Centers of Chicago, Inc. v. Minogue, supra, 535 N.E.2d 1132; Medical Oxygen and Supply Co. v. American Medical Oxygen Co., supra, 782 P.2d 1272.
However, the court's conclusion that portions of these non-disclosure agreements are unreasonably broad and unenforceable does not end the inquiry because the next issue is whether the unreasonable parts may be severed from the agreements so that the remaining provisions may be enforced. See generally, Beit v. Beit, 135 Conn. 195, 63 A.2d 161 (1948); Timenterial, Inc. v. Dagata, 29 Conn. Sup. 180, 277 A.2d 515 (1971); Industrial Technologies, Inc. v. Paumi, Superior Court, judicial district of Fairfield at Bridgeport, Docket No. 96-0335925 (Stevens, J., May 28, 1997) ( 19 Conn.L.Rptr. 573). As articulated by our Supreme Court in Beit v. Beit, "[w]hether the promises in a contract will be treated as severable or not is primarily a matter of the intent of the parties, determined by a fair construction of all the provisions of the contract." Id., 135 Conn. 204. The non-disclosure agreements at issue have an express provision which authorizes the rejection of any unenforceable parts of the agreements so that the agreements may be deemed modified and enforceable. This section of the agreements reads as follows:
4. Modification of restrictions. In the event any of the covenants contained in Section 3 hereof shall finally be determined by any court or arbitrator to be void or unenforceable in any particular area or jurisdiction, or effective only if modified as to scope or duration, then the parties hereto shall consider such covenants to be amended and modified so as to be enforceable, or if it cannot be so amended or modified, then the unenforceable portion of such covenant shall be eliminated therefrom and the other terms and provisions thereof shall remain in full force and effect as originally written.
Consequently, under section four of the agreements, the court may have the authority to "blue pencil" the non-disclosure covenants to modify or eliminate unreasonable provisions of the contract. Such action would allow the court to enforce the remaining provisions of the contracts and to grant appropriate injunctive relief for the defendants' violation of these provisions. Although the court recognizes the enforceability of these agreements to this more limited extent, for the following reasons, the court nevertheless declines at this time to define the precise parameters of the parties' reconstituted contracts or the relief available under them. The plaintiff has not requested the court to engage in a process to blue pencil the terms of the non-disclosure covenants, and neither party has fully addressed the applicability of section four of the agreements to the issues being presented. Moreover, the court has already scheduled further hearings regarding the nature and scope of the injunctive relief to be issued. Consequently, these parties may request the opportunity to be heard further on this particular aspect of their confidentiality agreements.
The provisions of the non-disclosure agreement executed by defendant Koch stand on a different footing. The terms of his agreement are limited in duration to two years, and do not apply to information "in the public domain . . . or subsequently coming into the public domain." See footnote 1 of this decision. These restrictions operate to circumscribe the scope and impact of the agreement on Koch's business activities and make the agreement more similar to those that have been upheld in other cases. See, e.g., Revere Transducers, Inc. v. Deere Co., supra, 595 N.W.2d 751, 762-63 (enforcing a confidentiality agreement which, among other things, only precluded disclosure of technical and confidential information that was not "generally published and available to the public").
II CONCLUSION
Therefore, for the court finds that on the present record, the plaintiff has met its burden of proof that it is entitled to injunctive relief for breach of contract only against the defendant Koch as alleged in the Fifth Count of the complaint.
So ordered the 3rd day of June 2003.
STEVENS, J.