Here’s the general rule in New York: if an employee is fired without cause, any non-compete agreement he or she signed will no longer be enforceable. And the reason for this is fairly straightforward – because once the employer is no longer keeping up their end of the contract, the employee shouldn’t be forced to do so (in legalese, “there no longer exists the mutuality of obligation on which the covenant rests”).  The seminal case in New York addressing the issue of what constitutes termination for cause, and what constitutes termination that is without cause in the context of non-compete agreements (a.k.a. “restrictive covenants”) is Post v. Merrill Lynch, Pierce, Fenner & Smith Inc., 48 NY2d 84, 87 (1979). For more information on that topic, please see “When NY Courts Will Uphold Non-Compete Clauses – No Matter How Unreasonable,” and “When NY Employers Condition Receipt of Post-Employment Benefits on a Non-Compete.”

But what about if the employee is terminated for cause? Will the non-compete be enforceable then under New York law?

The short answer is this: Yes.

Although there are relatively few reported decisions on this particular issue, both New York State and Federal trial courts have read the Post v. Merrill, Lynch decision to permit enforcement of non-compete clauses against employees that were terminated for good cause. See, e.g., Gismondi, Paglia, Sherling, M.D., P.C. v. Franco, 104 F.Supp.2d 223 (S.D.N.Y. 2000); MTV Networks v. Fox Kids Worldwide, Inc., 1998 WL 57480 (Sup.Ct. NY Cty. 1998).

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In a blog piece that was published in yesterday’s Wall Street Journal, it was reported that OfficeMax has sued A & P, the well-known supermarket chain, seeking a restraining order barring them from poaching key employees. Apparently, OfficeMax felt compelled to take this action after 3 of their key employees left, including their former chief operating officer and two of his subordinates.

As part of their claim, they have also charged the former COO, Sam Martin, with violating the non-compete clause of his employment agreement, with breach of contract and breach of fiduciary duty, claiming that his employment contract with OfficeMax explicitly barred him from soliciting, or poaching, employees away OfficeMax’s ranks.

There’s just one big fly in this particular ointment, however.

Since A & P has filed for bankruptcy protection, certain legal actions against A & P are prohibited, such as pursuing litigation against the bankruptcy debtor’s property. (For additional information on this, please see Bankruptcy Code Section 362).

The question is whether this particular claim would also be subject to bankruptcy protection. A & P’s argument that forcing it to defend this lawsuit would effectively deprive it of one of the chief benefits of bankruptcy protection – i.e., immunity from lawsuits – definitely has some merit.

But I don’t think that it is the better policy in cases of this nature. While I understand shielding a bankruptcy debtor from money judgments, that protection should not be without limits; it should not allow them to act deliberately and intentionally raid other companies’ leadership without consequence.

My guess is that OfficeMax will attack A & P’s response as follows: a restraining order is inherently equitable in nature -  it does not seek damages, and therefore is not the type of claim insulated from suit by the Bankruptcy Code. In addition, to the extent any damages are sought, it would appear that they are targeted at the individual defendant, Mr. Martin, rather than at A & P.

For now, we’ll just have to wait and see how this case shakes out.

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Two days ago, the New York Times reported on a lawsuit that was brought by California-based Cybersitter, claiming that two Chinese software companies had engaged in unfair competition, and misappropriated, or stolen, thousands of lines of the code contained in its proprietary software to develop Green Dam, a type of software designed to block users from viewing unwanted websites.

The significance of this particular case lies in its scope, however: apparently, the Chinese government mandated that Green Dam Youth Escort be included with all computers sold in the country, thereby forcing several prominent computer manufacturers, including Acer, Lenovo and Sony to include this software with its computers. According to the lawsuit, these manufacturers continued to market and sell their computers with the software even after they were made aware that the software was indeed pirated.

The lawsuit seeks more than $2 billion in damages, representing the amount of money Cybersitter would have earned had all of these users paid for their software.

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In Shiamili v. Real Estate Group of NY, Inc., an opinion issued by New York’s Appellate Division, First Department (which covers both New York and Bronx Counties), answered this question with an unequivocal ‘no’ – the internet services provider (or “interactive computer service) cannot be held liable for defamation (or unfair competition) unless the internet services provider acts in some editorial or publishing capacity “such as deciding whether to publish, withdraw, postpone or alter content.”

This rule is derived from the Federal Communications Decency Act of 1996 (CDA), which immunizes internet services immunity from liability for publishing false or defamatory material so long as the information was provided by another party, and thus treats internet publishers differently than it does corresponding authors in print, television and radio (see Batzel v Smith, 333 F3d 1018, 1026-1027 [9th Cir 2003], cert denied 541 US 1085 [2004]).

As noted by the Shiamili court, there is one small caveat to this rule, however: the immunity provided by the CDA applies only where the information that forms the basis of the state law claim has been provided “by another information content provider” (47 USC § 230[c][1], emphasis added). In accordance with this caveat to the general rule, an interactive computer service provider remains liable for its own speech (Universal Communication Sys. v Lycos, 478 F3d 413, 419-420 [1st Cir 2007]), or for its material contribution to the content of a third party’s statement (see Fair Hous. Council of San Fernando Val. v Roommates.com, 521 F3d 1157 [9th Cir 2008]). On the other hand, the ” development of information’ . . . means something more substantial than simply editing portions of an e-mail and selecting material for publication.”

In sum, an internet services provider cannot be held liable for the content published on its site unless it had an active role in determining the specific content that was published.

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The fact pattern is all too familiar:  D enters into a contract with small business P to jointly develop certain products, and then not only breaches the contract with P, but then breaches his fiduciary duty to P and uses the proprietary information that he gained during their alliance to try and poach P’s proprietary client database. Moreover, in the process of downloading P’s confidential and proprietary information, D damages the information that remained on P’s hard drive, which forces P to expend thousands of dollars on an expert IT guy to retrieve that data in usable form.

When P confronts D about all that has transpired, D looks P right in the eye, and says “Go right ahead and sue me if you like; I’m judgment-proof. Even if you win, your award will be worthless, because I’ve set up more shell corporations than you can count, and you’ll never get through them to me.” So, here’s the big question: Is D right, or is there something that can be done to effectively fight D?

www.youtube.com/watch?v=qdvSBxFv6ko

As suggested by the title of this article, the answer is yes, under certain circumstances, you can pursue D individually by “piercing the corporate veil.” This is no simple task, however, for in order to prevail on such a claim, the plaintiff will be required to prove not only that D individually exercised total control over the company to the extent that he was effectively the alter ego of the company, but that he did not maintain corporate formalities. A practical example of this would be where he commingled funds, treating the company’s money as his own personal funds and vice versa, or the failure to maintain separate corporate accounts or file corporate tax returns.

Importantly, in a cautionary opinion that was handed down by New York’s Appellate Division, Second Department on Juy 28, blanket allegations that the individual defendant and his company are one and the same will not suffice; the party seeking to pierce the corporate veil must also allege specific facts demonstrating that the defendant had misused the special protections afforded by the corporate form (i.e., showing how these companies were really a sham), and thereby he should be deemed to have forfeited those privileges.

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Over the last several years, I’ve been struck by the frustration people have expressed at poor service providers in a myriad of different contexts, ranging from coatroom attendants who lost their belongings to the non-functional central monitoring of house alarm systems and defective products. And I’ve also found that in most of these cases, the people had little or no idea that all of these scenarios fall within the rubric of breach of contract. Although breach of contract claims are more commonly found in the commercial litigation and/or real estate litigation milieu, the notion that contract law is limited to this application is terribly mistaken.

Consequently, in order to properly evaluate whether you may have a potential breach of contract claim, it is worth investigating the general types of breach of contract claims. While a detailed discussion of these types of claims is well beyond the scope of this (or any) blog post, three (3) of the perhaps less-known, yet commonly litigated categories of breach of contract claims are the following:

• Breach of Express Warranty or Breach of Implied Warranty – these claims are usually raised when a consumer alleges that the product she purchased or used was defective, and suffered personal injuries as a direct result. For a more in depth discussion of this topic, please see our Free eBook, “Why There Are So Few Successful Defective Products Lawsuits“;
• Breach of Contract By an Insurance Company – as a general rule, this type of claim arises when they refuse to pay out on a claim, or to defend or indemnify their insured on a reported claim under the insurance policy (for more on this topic, please see “Why It May Pay to Fight An Insurer’s Disclaimer“; and,
• Anticipatory Repudiation or Breach of Contract – these claims often arise in the real estate context, where one side to the agreement demonstrates that either cannot, or will not, abide by its end of the agreement – before its time to fulfill its obligations under the contract have come due. For additional information on this important type of breach of contract claim, please see our blog article, “When It Becomes Clear That Your Small Business’ Partner Is Going To Breach Your Contract.”

As you can readily discern from this article, there are numerous types of breach of contract claims, and these 3 do not even begin to address what are likely the most common – and most famous (or infamous) breach of contract lawsuits, which involve breach of fiduciary duty or the improper performance (or outright failure to perform) under the terms of a contract.

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In a news story that broke on Friday, July 10, it was reported that 2 Ohio women were indicted on charges that they stole thousands – even hundreds of thousands – of dollars from their employers. And, apparently, neither of these women were compelled to steal from their employers out of economic desperation; they were both long-term, trusted employees who held well-compensated positions. Rather, it seems that they did so in order to pad their take-home pay, and live above and beyond their means.

I’m sticking to my guns. As I’ve previously opined in “(Another) Report Predicts That Employees’ Breach of Duty and Theft To Rise in Down Economy” and “Study Claims That Employee Theft Rises As Economy Worsens,” it’s not the economy that causes people to steal – it’s a lack of ethics.

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Trade secret theft is not just a civil monetary matter that is derived from a breach of fiduciary duty or unfair competition. It has criminal implications as well.

In a story that was published earlier today, a former Goldman Sachs vice president was arrested by the FBI based upon this employee’s alleged trade secret theft, more particularly, claims that he stole Goldman’s proprietary automated trading codes and uploaded them to a remotely located computer server.

According to the FBI, this employee downloaded and then transferred this proprietary information from his work computer after accepting a job offer at a different company, and then tried to conceal his actions by deleting the history of his actions from his desktop computer.

He is currently out on bail.

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I came across earlier this evening entitled “Report: Business Risk of Fraud, Corruption Up Amid Economic Crisis,” which, true to its title, squarely blames the global economic recession for an uptick in employee theft, corruption and dishonesty in the business environment. A careful reading of the article reveals that the holes in the argument advanced by the author are large enough to drive an 18-wheeler through it, however.

First, and as a threshold matter, the article does not even attempt to prove – scientifically or otherwise – a link between the economy and a breach of fiduciary duty.

Ironically, the prime example cited by this article - a crackdown on wealthy companies who engaged in unfair competition by paying out hundreds of millions of dollars in fines for illicitly attempting to secure lucrative oil contracts through bribes – does not support its theory that theft and dishonesty are being perpetrated by the desperate.

In short, as noted in my earlier blog post “Study Claims That Employee Theft Rises as Economy Worsens,”  it seems that people are looking for a convenient scapegoat for unethical behavior when they should be looking in the mirror.

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I recently had an experience where an extremely costly commercial lawsuit about a claimed breach of contract and misappropriation of proprietary intellectual property by a fiduciary of a new york small business was avoided. Although I would like to say that the lawsuit was rendered completely moot, and averted entirely, to be completely candid, my efforts weren’t that successful; however,  they did have the positive effect of making the lawsuit far more limited in its scope, and thereby will likely save both sides significant sums of money on their legal fees. (Yes, believe it or not, there are some of us who actually still take pride in the amounts of money we manage to save for our clients.) So what was the magic formula?

The answer is relatively straightforward: since we believed that our position was especially strong under New York law, particularly given the language in the parties’ contract which gave sole and exclusive ownership of all intellectual property to the LLC, we simply showed the other side a draft of the papers we intended to file with the Court, and gave them a day to mull it over. In response, the other side’s attorney contacted me, and began open and frank discussions about how we could resolve our clients’ differences.

Consider two alternative scenarios:

Scenario #1: we could have merely threatened suit, but as you probably know, most threats of lawsuits are not taken very seriously, and therefore, I’ve found, usually is just a waste of time.

Scenario #2: : we could have immediately filed suit and sought injunctive relief from the Court, and thereby not only incurred thousands of dollars in Court filing and attorneys’ fees for both sides, but this would have almost certainly poisoned the atmosphere between the parties, and made the resolution of this particular issue far more costly and difficult than necessary.

The moral of the story is obvious: if you have a strong and well-reasoned position, it is definitely worthwhile to spend the time and money to prepare legal papers that reflect this, and to let the other side know it. Everyone knows that’s the heavy lifting, and that it takes virtually no effort to walk (or electronically file) those papers over to the court. Taking this important first step may just save you loads of time, aggravation and money.

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