District Court Enjoins Former Executive from Competition

• An executive with national responsibilities may be subjected to a broad geographic restriction in an employment restrictive covenant.

• Courts can and will enjoin a former executive from working for a competitor to prevent irreparable harm to the executive’s former employer when the restriction is reasonable.

• Misappropriation and use of a company’s trade secrets by a former employee may also prevent an employee who has copied information from working for a competitor

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A federal district court judge in New Jersey imposed a preliminary injunction that will prohibit a former executive from working for a competitor for at least a year.  The decision was based on both the existence of a restrictive covenant and the departing executive’s having copied data from his prior employer at the time of his departure.

Resignation by Executive to Work for Competitor

The case,  Sunbelt Rentals, Inc. v. Love (opinion here) is particularly notable as a lesson in how not to resign a high-level position.  Because even if the trial judge had not enforced the restrictive covenant in the executive’s employment contract, the fact that he copied proprietary information by emailing customer lists and other data to his brother before his resignation doomed any defense to the preliminary injunction.

The defendant in the case, Michael Love, was an executive with Interstate Aerials, LLC, an equipment rental company in Paulsboro, New Jersey.  Interstate Aerials, was purchased by Sunbelt.  Love received $4 million dollars at the time of the sale.  After the company was acquired, Love went to work for Sunbelt and executed a new employment agreement that prohibited him from being employed for one year by competitive businesses.  The relevant provisions provided he could not

5.2.4 compete with the Corporation, its successors and assigns by engaging, directly or indirectly, in the Business as conducted at the Designated Stores or in a business substantially similar to the Business as conducted at the Designated Stores, within the “Territory,” as hereinafter defined; or

5.2.5 provide information to, solicit or sell for, organize or own any interest in …, or become employed or engaged by, or act as agent for any person, corporation, or other entity that is directly or indirectly engaged in business in the “Territory” …, which is substantially similar to the Business as conducted at the Designated Stores or competitive with Corporation’s Business as conducted at the Designated Stores; provided, however, that nothing herein shall preclude the Employee from (i) engaging in activities or being employed in a capacity that do not actually or potentially compete with Corporation’s Business or (ii) holding not more than one percent (1%) of the outstanding shares of any publicly held company which may be so engaged in a trade or business identical or similar to the Business of the Corporation.

Geographic Scope of Restrictive Covenant

The principal area of dispute on the appropriateness of the restrictions, but whether Love’s competitive activities fell within the geographic limits of the restriction:

As used herein, the “Territory” means: the geographical area within a fifty (50) mile radius of any of the Corporation’s stores in which, or in connection with which, Employee was assigned to at any time during the twelve (12) month period immediately preceding the termination or expiration of this Agreement for any reason (the “Designated Stores”).

Love argued that the geographic limit applied only the 50 mile radius around the Paulsboro location where he had worked and thus did not include his new employer, EquipmentShare.  Sunbelt, however, argued that his duties and the scope of the geographic limitation were national.  In its factual findings, the district judge found that Love was prohibited from competing in a much broader area that included Sunbelt.  The court was persuaded in significant part by the national scope of Love’s duties and the salary and bonus structure that made him one of the most highly-compensated executives in the organization.

The court went on to find that Sunbelt was stood to suffer irreparable harm if Love were permitted to work for

Courts in the Third Circuit and this District have had no difficulty in finding that the loss of business opportunities and goodwill constitutes irreparable harm. Likewise[,] New Jersey courts recognize that “the diversion of a company’s customers may … constitute irreparable harm…. [T]his is so because the extent of the injury to the business as a result of this type of conduct cannot be readily ascertained, and as such, does not lend itself to a straightforward calculation of money damages.

Trade Secret Law Figures Prominently in Dispute with Former Executive

Even if Love had prevailed on his interpretation of the restrictive covenant, the undisputed fact that he had emailed various materials to his personal email and to his brother, which the court found were trade secrets, gave the court independent grounds to enjoin him from working for his new company, Equipment Share.

In the days leading up to his resignation, the court found, Love had sent out documents that included a “National Accounts Directory” and information about interactions with different clients of Sunbelt.  At the preliminary injunction hearing, Love admitted that he had sent the document, and apologized, but claimed that he had neither accessed or used the documents, and that they had, in fact been destroyed.

Sunbelt included claims for violation of the federal Defend Trade Secrets Act, 18 U.S.C. § 1836,  and the New Jersey Trade Secrets Act, N.J.S.A. 56:15-1 et seq. district judge was not convinced, however, and held that the taking of the documents was a violation of trade secret protection law and that the disclosure of those trade secrets to Love’s new employer was inevitable.

Elements of Claim for Misappropriation, Use of Disclosure of Trade Secrets

To prevail on a claim under the applicable state or federal trade secret statutes, a plaintiff must demonstrate the existed of a trade secret and misappropriation of that secret.  The definition of trade secret is broadly defined as information with independent economic value that the owner has taken reasonable measures to keep secret.  Under the federal DTSA, the court noted, there are three theories of liability: acquisition, disclosure or use.

Here, it cannot be disputed that Love emailing himself Sunbelt’s trade secrets without Sunbelt’s consent and in violation of his contract with Sunbelt, immediately prior to Love’s resignation from Sunbelt and new employment with EquipmentShare, constitutes “improper means.”

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The analysis for improper disclosure is similarly straightforward: Love disclosed the trade secrets — which, as discussed above, he “used improper means to acquire” — when he emailed the document(s) to his brother and himself.  See 18 U.S.C. § 1839(5)(B)(i), {6}; N.J. STAT. ANN. § 56:15-2. Therefore, Sunbelt has also shown that Love violated both the DTSA and the NJTSA when he misappropriated Sunbelt’s trade secrets by emailing them to his brother.

The court went on to find that Sunbelt would suffer irreparable harm if Love continued to work at EquipmentShare:

In considering that standard, it is clear that without the benefit of further discovery and the issuance of an injunction, Sunbelt would have to trust the testimony of a disgruntled former employee who has demonstrated his animus toward his former employer. Because this Court has questions as to Love’s credibility, it will not make Sunbelt proceed on blind trust. It is apparent to the Court that Love wanted to “get even” with Sunbelt — for refusing to give him a national title (as opposed to role) and commissions, among other reasons — by attempting to transform his new employer, EquipmentShare, into a nationwide competitor. He admitted as much … The Court is not satisfied that, absent further discovery, the full extent of the risk of harm to Sunbelt can be appreciated. For instance, forensic analysis may be required to determine whether, and to what extent, Love disseminated Sunbelt’s trade secrets beyond the emails that he sent to himself and to his brother. If Love were permitted to remain at EquipmentShare while having access to Sunbelt’s customer lists, pricing information, and the like, there is the likelihood of irreparable harm to Sunbelt’s relationships with its customers. For instance, if Love were to use such information to interfere with Sunbelt’s contracts or customer relationships, Sunbelt would be irreparably harmed. Indeed, as an example, one of the documents … was a bid drafted by Sunbelt that contained the customer’s … unique requirements. Such document could be used by Love to negotiate with that customer to strike a better deal.

The Lesson: Protecting Trade Secrets in a Business Divorce

The court noted that Sunbelt’s policies, its  employment contract with Love and its employee manual al were sufficient to demonstrate reasonable efforts to protect its trade secrets.  Trade secrets such as customer lists, financial data, needs analysis and other competitive information are often the core of the value and goodwill of a business.  Whether the departure is by an owner or an employee, trade secrets are often at the core of the dispute.

This case is a cautionary tale for many businesses and their owners.  If a relationship has come to an end, the departing party must exercise care not to cross any lines with the collection or use of information.  For the business dealing with a defection, trade secret is a powerful tool in protecting its ongoing operations and good will.