Opinion
603738/05.
Decided March 2, 2006.
Lawrence Peikes, Esq., Monica Bhattacharyya, Esq., Wiggin and Dana LLP, New York, NY, Attorney for Plaintiff.
Paul H. Pincus, Esq., Rubin, Bailin, Ortoli, Mayer Baker LLP, New York, NY, Attorney for Defendant.
Plaintiff Portware, LLC has filed this complaint against Defendant Sachin Barot, a former employee, alleging breach of contract and other causes of action, and moving for a preliminary injunction and temporary restraining order to enforce the non-competition, non-solicitation, and confidentiality covenants in Defendant's employment agreement. For the reasons that follow, I grant Plaintiff's motion for a preliminary injunction in part and deny it in part.
Plaintiff Portware, LLC develops programmable, rule-based software for trading applications at financial institutions. Portware requires each of its customers to sign a confidentiality agreement, to safeguard the confidentiality of information about Portware's software and future development plans, as well as any information that the customer requests be kept confidential. The latter information may include information about how the customer plans to use the product and its specific trading strategies. Portware often enters into confidentiality agreements with a potential customer as soon as it begins to assess the customer's technical and services needs. The information about whether a particular financial institution uses Portware's software is generally not publicly available.
From its fee arrangements with its customers, Portware earns about $10,000 and $60,000 per customer per month. Portware has a database of information about its customer relationships, including information about its normal pricing and special pricing for specific customers.
On March 26, 2004, Portware hired Defendant Sachin Barot as an account manager. Barot's primary responsibilities were to sell Portware products and manage customer relationships. Barot received some training from Portware during the first several weeks or months of his employment. As a condition of his employment, Barot signed the Portware, LLC Employee Covenants Agreement ("Agreement"), which contained non-competition, non-solicitation, and confidentiality covenants.
Specifically, the Agreement included the commitment that, for one year after termination of employment with Portware, Barot would not "engage in any business or other commercial activity" that would be "competitive in the United States" with Portware's business activities.
It further provided that Barot "shall not, directly or indirectly . . . communicate, solicit or transact any business with . . . any of the customers or clients" of Portware or any prospective customers or clients" of Portware being solicited within twelve months of Barot's termination.
The Agreement further provided that Barot would use any confidential information acquired at Portware "only in the performance of [his] duties for the Company" and not "for [his] personal benefit, for the benefit of any other individual or entity, or in any manner adverse to the interests of the Company. . . ." The Agreement defined "confidential information" to include "trade secrets, know-how, show-how, technical, operating, financial, and other business information, . . . other than information" that is generally available.
On August 10, 2005, Barot resigned from Portware. There is no allegation or evidence that Barot took with him copies of any records or files when he left. On August 12, Barot signed a Form of Acknowledgment that was attached as Exhibit A to the Agreement, in which he affirmed that he would continue to comply with the provisions of the Agreement.
In late September 2005, Barot began working as a sales manager for FlexTrade Systems, Inc., a competitor of Portware. FlexTrade, like Portware, develops programmable, rule-based software for trading applications. At FlexTrade, Barot is responsible for identifying potential customers for its software.
On October 20, 2005, Portware filed this complaint against Barot, alleging (1) breach of contract, (2) tortious interference with contractual relationships, (3) tortious interference with business expectancies, (4) misappropriation, and (5) unfair trade practices. Portware moved for a preliminary injunction and temporary restraining order (TRO) enjoining Barot for one year from soliciting customers whose accounts he managed while at Portware, or transacting business with any customers or potential customers of Portware, and seeking money damages and attorneys' fees.
I granted a TRO enjoining Barot from soliciting customers whose accounts he managed while at Portware, conditioned on a $300,000 undertaking, and pending the return date of Portware's motion for a preliminary injunction on November 21, 2005. With the parties' consent, I adjourned the preliminary injunction hearing in order to refer the matter for alternative dispute resolution. The parties were unable to reach a final settlement, however, and so the matter came back to this Court.
On February 1, 2006, Defendant Barot filed a cross-motion for summary judgment, asking the Court to dismiss the complaint's first cause of action for breach of contract as a matter of law. After oral argument on Defendant's motion for partial summary judgment on February 8, 2006, I denied Defendant's cross-motion for partial summary judgment in its entirety, and ordered expedited discovery.
On February 15, 2006, Portware filed an amended application for a preliminary injunction, in which it modified its previous application, in relevant part, to limit the injunction it sought to enjoining Barot from working for FlexTrade, rather than from working for any competitor of Portware.
I held an evidentiary hearing on Plaintiff's motion for a preliminary injunction on February 17, 2006. At the hearing, Eric Goldberg, Portware's C.E.O., gave uncontroverted testimony that Barot had access to information about its pricing for particular customers or potential customers and information about Portware's planned product developments. He also testified that Barot, as an account manager, had access to information protected by Portware's confidentiality agreements, such as efforts made by Portware to get its software running at various clients, trouble-shoot problems, and customize its software to the particular clients' needs.
A party seeking a preliminary injunction pursuant to CPLR § 6301 must show: "(1) a likelihood of success on the merits, (2) irreparable injury if provisional relief is not granted, and (3) that the equities are in his favor." J.A. Preston Corp. v. Fabrication Enterprises, Inc., 68 NY2d 397, 406, 502 NE2d 197, 509 NYS2d 520 (1986).
A. Likelihood of success on the merits
Restrictive covenants in employment agreements are carefully scrutinized by courts in New York, because they are restraints on trade imposed by employers, which are usually in superior bargaining positions. BDO Seidman v. Hirshberg, 93 NY2d 382, 388 (NY 1999) To be enforceable under New York law, a restrictive covenant must satisfy the three-pronged test set forth in BDO Seidman v. Hirshberg. A restraint is reasonable if it (1) is no greater in time or area than is necessary to protect the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) does not injure the public. Id. at 388-89. The only justification for imposing an employee agreement not to compete is to forestall unfair competition. It does not forestall fair competition. Seidman, 93 NY2d at 391.
The Court of Appeals in Reed, Roberts Associates, Inc. v. Strauman, 40 NY2d 303, 353 NE2d 590, 386 NYS2d 677 (1976) explained that a restrictive covenant serves an employer's legitimate interests "to the extent necessary to prevent the disclosure or use of trade secrets or confidential customer information," or where an employee's services are "unique or extraordinary." Reed, Roberts, 40 NY2d at 308. Defendant has not contended or produced any evidence that Barot's services for Portware were unique or extraordinary. Therefore, at issue are Portware's interests only in the confidential information, customer relationships, and good will that Barot acquired or developed during his employment at Portware. Customer information is not considered confidential if it is readily discoverable through public sources. Id. In Seidman, the Court expanded this test to protect an employer's legitimate interest as well, in certain circumstances, in the "good will" and relationships that an employee develops with the employer's client at the employer's expense during his employment. See Seidman, 93 NY2d at 391.
If a restrictive covenant is overly broad, a court may nonetheless partially enforce it, severing the unenforceable portions. Partial enforcement may be justified when the unenforceable portion is not "an essential part of the agreed exchange," and where the employer demonstrates "an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct," did not know that the covenant was overly broad, and "has in good faith sought to protect a legitimate business interest." Seidman, 93 NY2d at 392, 394-95 (enforcing non-compete covenant only as to client relationships that employer enabled former employee to acquire through this employment). Other factors weighing in favor of partial enforcement are the imposition of the covenant in connection with a promotion to a position of responsibility and trust, see Seidman, 93 NY2d at 394, rather than the imposition of the covenant in connection with hiring or continued employment. See Scott, Stackrow Co. v. Skavina, 9 AD3d 805, 807, 780 NYS2d 675 (3rd Dept. 2004) (upholding trial court's refusal to enforce employment agreement, where employer had required the defendant to sign it upon hiring her and thereafter as a condition of her employment).
Although Barot was required to sign the contract at the beginning of his employment, there is no evidence of coercion. I am aware of no caselaw indicating that imposition of a restrictive covenant in an employment agreement is coercive per se. The lawfulness of such a covenant must depend on the facts and circumstances under which it was imposed, and the extent of the restriction.
Here, there is no evidence that Portware imposed the covenants in bad faith, knowing that they were overly broad. I credit Goldberg's testimony that after Barot's resignation, Goldberg received reports from Portware customers or potential customers that raised a reasonable concern that Barot might have disclosed Portware's confidential information to Portware customers or potential customers. Although this testimony is not admissible for the truth of the hearsay statements reported, I do credit it as evidence of Portware's good faith in seeking to enforce the Agreement against Barot.
1. Confidential Information Covenant
Portware contends that Barot has impermissibly disclosed and will continue to disclose confidential information about Portware, its software, and its customers to FlexTrade, causing Portware irreparable harm, and diminishing the value of its trade secrets and confidential information, and causing the loss of customer goodwill and business. Barot maintains that Portware's customer information is not confidential or proprietary, and that in any case he has not improperly used or disclosed it while at FlexTrade.
Portware has a legitimate interest in preventing Barot from disclosing or using confidential information that he learned at Portware, but it has no legitimate interest in preventing Barot from disclosing or using non-confidential information.
I conclude that Barot had access to certain confidential information at Portware that could be utilized by him in his new position at FlexTrade. This information includes pricing information, information about Portware's implementation, trouble-shooting, and customization of its software, Portware's future development plans, and other information covered by confidentiality agreements between Portware and its customers and potential customers.
I find that Portware's list of customers and their contact information is not the sort of confidential information protected under Seidman. Portware's allegations that this information is publicly unavailable are conclusory and insufficient to establish a likelihood that it constitutes confidential information.
Accordingly, I find that the Agreement is valid and enforceable to the extent that it forbids Barot from disclosing or exploiting on behalf of FlexTrade Portware's confidential information, including technical information and customer-related information acquired by Barot as a consequence of his employment at Portware, with the exception of Portware's list of customers and their contact information.
2. Non-Solicitation Covenant
Portware contends that Barot has improperly solicited and will continue improperly to solicit business on FlexTrade's behalf during the twelve-month period following the end of his employment at Portware, causing Portware irreparable harm, and causing the loss of customer goodwill and business. Barot maintains that he has done nothing improper.
Portware's legitimate interest in enforcing the non-solicitation covenant is to protect against Barot's competitive use of customer relationships that Portware enabled him to acquire through his position as account manager at Portware. Seidman, 93 NY2d at 391 (holding that an employer may legitimately seek to protect, in certain circumstances, the "good will" and relationships that an employee develops with the employer's client during his employment).
Portware has no legitimate interest in preventing Barot from competing for the patronage of customers with whom he never developed a relationship while at Portware, customers with whom Barot had established a prior relationship prior to his Portware employment, and customers with whom Barot began a relationship after he left Portware. See Healthworld Corp. v. Gottlieb, 12 AD3d 278, 786 NYS2d 8 (1st Dept. 2004) (affirming grant of preliminary injunction enjoining defendants from soliciting or accepting business from clients or former clients of their former employer was limited to clients of former employer with whom the defendants had contact during their employment).
In accord with the majority of courts, which have upheld twelve-month restrictive covenants, I find that the twelve-month time restriction in the Agreement is a reasonable length of time. See, e.g., Crown It Servs., Inc. v. Koval-Olsen, 11 AD3d 263, 264, 782 NYS2d 708 (1st Dept. 2004) (enforcing restrictive covenant limited to twelve months after employee termination).
Therefore, to the extent that the Agreement bars Barot from soliciting, communicating, or transacting business with customers or potential customers with whom he first developed a relationship at Portware, for a twelve-month period following the termination of his employment at Portware, I find that the Agreement is valid and enforceable.
3. Non-Competition Covenant
Portware's chief demand is that Barot be prohibited from working for FlexTrade for the remainder of the twelve-month period following his August 2005 departure from Portware, pursuant to the non-competition covenant in the Agreement. Portware contends that, while working at FlexTrade, Barot will inevitably disclose confidential information and improperly solicit business on FlexTrade's behalf, causing Portware irreparable harm and diminishing the value of its trade secrets and confidential information, and causing the loss of customer goodwill and business.
The non-competition clause provides broadly that Barot may not "engage in any business or other commercial activity" that would be "competitive in the United States" with Portware's business activities. At oral argument and at the preliminary injunction hearing, Portware's counsel asked that these provisions be interpreted to apply only to FlexTrade, for purposes of this litigation.
Portware has a legitimate interest in protecting the customer relationships that Barot developed with Portware's customers and potential customers during the course of his employment. See Seidman, 93 NY2d at 391; Crown It Services, Inc. v. Koval-Olsen, 11 AD3d 263, 782 NYS2d 708 (1st Dept. 2004) (enforcing non-compete clause limited to former clients of the plaintiff to which its former contractor had been introduced directly or indirectly through the plaintiff).
Consequently, Portware has a legitimate interest in enforcing the non-competition covenant, to the extent that it can show that Barot is engaging directly or has engaged directly in competing with Portware, for instance, if Barot has solicited Portware's customers or potential customers, or Barot has disclosed or used Portware's confidential information.
In fact, however, Portware has not persuaded me that solicitation in violation of the Agreement is likely to have occurred or to be occurring. Although Portware contends that Barot has solicited business from UNX, Inc., a Portware customer, on behalf of FlexTrade, the only direct evidence it submitted in support of this contention is the Declaration of Jeromee Johnson, an employee at UNX, Inc., in which Johnson attested that Barot contacted Johnson on behalf of FlexTrade during Fall 2005. Barot testified at the evidentiary hearing, however, that he did not solicit UNX's business on behalf of FlexTrade, and that his communications with Johnson were social in nature. Johnson did not testify at the evidentiary hearing; moreover, Plaintiff has presented no reason why it did not call Johnson as a witness. Because Johnson's declaration was not subjected to cross-examination, I cannot find that Johnson's declaration rebuts Barot's testimony.
Moreover, Portware has not persuaded me that disclosure of confidential information in violation of the Agreement is likely to have occurred or to be occurring. Goldberg testified at the hearing as to hearsay statements reported to him that Barot had disparaged Portware's implementation of software at Merrill Lynch Canada, a Portware customer, in conversations with personnel of Canada Pension Plan. I also received an affidavit by Dan Kaufman, a Portware salesperson, attesting to various hearsay statements regarding Barot's disclosure of Portware confidential information. Plaintiff submitted a January 2006 letter that it received from Merrill Lynch Canada, Inc. complaining that its use of Portware's software had been disclosed, but the letter makes no reference to either Barot, Canada Pension Plan, or the date of the alleged disclosure.
Barot testified at the hearing, however, that he did not disparage Portware's implementation at Merrill Lynch Canada in conversations with personnel of Canada Pension Plan. Plaintiff has produced no witnesses who have controverted Barot's testimony. Plaintiff has submitted no affidavit from Canada Pension Plan verifying what occurred. Consequently, I cannot find that Portware's hearsay affidavit, hearsay testimony, and non-specific letter have rebutted Barot's testimony that he did not improperly disclose confidential information.
Consequently, Portware is unlikely to prevail on its claim that Barot is engaging directly or has engaged directly in competing with Portware. Therefore, I will not enjoin Barot from working at FlexTrade.
B. Irreparable Injury
Courts will not grant a preliminary injunction unless the plaintiff shows that it cannot adequately protect its interests by a claim for damages. Willis of New York, Inc. v. DeFelice, 299 AD2d 240, 242, 750 NYS2d 39 (1st Dept. 2002). In the absence of a restraint on Barot's solicitation of Portware's customers or disclosure of its confidential information, Portware would likely sustain a loss of business impossible, or very near to difficult, to quantify. Therefore, Portware has shown the irreparable damage necessary to justify the issuance of a preliminary injunction enjoining Barot from disclosing Portware's confidential information and soliciting, communicating, or transacting business with customers or potential customers of FlexTrade with whom he first developed a relationship at Portware, for the remainder of the twelve-month period following the termination of his employment at Portware.
C. Balance of Equities
A plaintiff seeking an injunction must also show that the burden caused to the defendant by the imposition of the injunction is less than the harm caused to the plaintiff by the defendant's activities. Edgeworth Food Corp. v. Stephenson, 53 AD2d 588, 588, 385 NYS2d 64 (1st Dept. 1976). Here, the record offers no basis to conclude that Barot has suffered or will in the future suffer significant professional hardship from the limited restraint on solicitation that I have imposed in a TRO, whereas Portware would likely suffer injury if the restraint were lifted. Therefore, the balance of equities with respect to the solicitation injunction favors Portware with respect to the preliminary injunction that I have ordered with respect to the non-solicitation and confidential information covenants of the Agreement.
In accordance with the foregoing decision, Plaintiff's application for a preliminary injunction is granted in part and denied in part. The original $300,000 undertaking shall be maintained during the pendency of the preliminary injunction. It is further directed that the parties shall settle an order and that the parties shall appear for further proceedings in Part 60 on March 21, 2006, at 10:30 a.m.