The Business Divorce Law Report
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Although a former executive was bound by a restrictive covenant, the fact that his duties after joining a competitor were directed to a different market made the scope of the restrictions unreasonable.
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A restrictive covenant that is not narrowly tailored to protecting specific interests of the former employer at stake in a lawsuit is less likely to be enforced with a preliminary injunction.
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A company that relies on the inevitable disclosure doctrine faces a high hurdle to show the certain use of a trade secret in a competitive manner.
An attempt by United Health Care to block an executive from joining a competitor failed when a federal judge found the medical insurance and services company had failed to establish it was likely to succeed when the case goes to trial. The dispute identifies some of the steps that a new employer take to prevent its just-hired employee from running afoul of a restrictive covenant.
The defendant Carlos Louro in this this case, United Health Care v. Louro, was an executive supervising the underwriting of national accounts at United. He had recently been promoted to vice president and served on a high-level, national accounts strategy group. He had also received stock options and restricted stock awards, which contained restrictive covenants and non-disclosure provisions..
The trial court construed Louros agreements with United that and restricted him from:“[e]ngag[ing] in or participat[ing] in any activity that competes, directly or indirectly, with any Company activity, product, or service that [Louro] engaged in, participated in, or had Confidential Information about during [Louro’s] last 36 months of employment with the Company” or assist anyone in any of those activities for one year after Louro’s termination of employment.”
After Louro took a position with competitor Anthem, Inc. as a vice president of local accounts underwriting, United filed suit and sought a preliminary injunction that would prevent Louro from assuming his duties. United alleged breach of the restrictive covenant and unlawful disclosure of trade secrets. However, Louro’s position at Anthem covered only local accounts and he was contractually precluded, on paid of being fired, from disclosing United’s confidential information.
The federal district judge hearing the matter in the District of Minnesota, where United is headquartered, held that the restrictions that United sought to impose were overbroad in light of Louro’s duties at Anthem, which concerned local not national accounts.
The looked at both Minnesota and Delaware law, since United is a Delaware corporation. The law of both states, as does the law of New Jersey, require that a restrictive covenant to be enforceable protect a legitimate interest of the former employer and, be reasonable in scope and duration. Here the issue was whether the reading of the restrictive covenant advanced by United was narrowly tailored to protect United’s interest. The trial judge held that the restrictions were too broad.
Plaintiffs argue that their interpretation of the scope of the non-compete is reasonable because the non-compete specifically prohibits competition with activities, products, and services that Louro engaged in, participated in, or had confidential information about. Although Louro disclosed his non-compete prior to interviewing with Anthem and Anthem tailored a job to comply with Louro’s non-compete, Plaintiffs claim that these efforts are insufficient because Anthem’s proposed position only insulates Louro from business segments that he was responsible for (national accounts, the Aon/Hewitt Exchange, etc.) rather than activities that he engaged in (underwriting and corporate strategy).
However, the Agreements do not define “activities,” “engaged in,” or “participated in” and widely restrict any direct or indirect competition with Louro’s previous activities. This broad language appears to give Plaintiffs wide interpretive latitude and could be particularly limiting for an executive, like Louro, who engaged even on the fringes of discussions related United’s corporate strategy. The Court has concerns that, without a more precise definition, the prohibited business activity in the non-compete agreement goes too far and is likely unreasonable unless interpreted more narrowly.
United claims under state trade secrets law and the federal Defend Trade Secrets Act, 18 U.S.C. 1836, also were insufficient to win a preliminary injunction. United did not contend that Louro had improperly taken trade secrets, but relied instead on the doctrine of inevitable disclosure. United argued that based on Louro’s knowledge of United’s pricing strategies, formulas and pricing factors, he could not perform his duties at Anthem without disclosing United’s trade secrets.
Courts consider several factors to determine whether a movant has demonstrated the likelihood of inevitable disclosure, including the degree of competition between the current and former employers; the extent to which the employee’s new position is similar to the position they held with the former employer; the actions that the new employer has taken to prevent the employee from using or disclosing the former employer’s trade secrets; and whether the movant has demonstrated any wrongdoing or nefarious motives on the part of the employee.
Here, Plaintiffs have demonstrated neither misappropriation … nor improper use or disclosure under Delaware law, and their pleadings do not meet the high bar for inevitable disclosure. United and Anthem are certainly competitors, but Louro’s position at Anthem is significantly different from his position at United. Further, the Court relies upon Anthem’s and Louro’s representations that both parties will take affirmative measures to prohibit Louro from disclosing any of United’s proprietary information, levying possible termination from his position at Anthem as a deterrent. United has also not demonstrated any nefarious motives on Louro’s part. United must show more to warrant injunctive relief. Accordingly, the Court finds that Plaintiffs are unlikely to prevail on their trade secret claims.
The holding in this case is a good example of the fit that is often required between the competitive interest that needs protection and the competitive activity at issue. Courts that are fashioning a remedy are often unlikely to enjoin conduct without the close fit that demonstrate that enforcement is reasonable, tightly framed and no broader than necessary.