Deciding to Enforce A Non-Compete Agreement in Connecticut – 5 Tips

Many Connecticut business owners have agreements (so called "non-compete agreements") in place with their employees concerning competition or solicitation. When an employee leaves a company, business owners have to decide if they should try to enforce the non-compete agreement by filing a lawsuit or engaging an attorney. Here are 5 factors to consider:

 

1. Is the contract reasonable? I have reviewed hundreds of these agreements, and they are all different (even the agreements I draft). There are various legal and factual requirements that you will need to satisfy for enforcement of non-compete or non-solicitation contracts. However, in general, the first question you have to ask is whether the contract is reasonable in light of the business you are in and purpose behind the specific contractual terms.

For this reason, it is always a good idea to have an attorney draft your agreement specifically tailored for your legitimate business concerns. Getting a form template online and applying it to your business may seem like a cost effective approach, but what happens when you really need to enforce your agreement?

2. What are you trying to protect? Generally speaking, it is easier to convince a court to stop a departing employee from taking your customers or manufacturing process than it is to stop the employee from working for a competitor. For example, the chances of successful enforcement increases if your contract was drafted to protect customers the employee was working with as opposed to trying to stop the employee from working in any type of role for a competitor. Additionally, courts are much more likely to entertain an injunction for protection of legitimate confidential information.

3. Are you worried about creating a standard for other employees? Employees that leave always talk to the employees that stay behind. It is a fact of life. In addition, word gets around about the details of any settlement involving non-competes. Why? Well, for one, everyone wants to know whether a business will actually seek to enforce their contracts. If a company continually declines to enforce their non-compete agreements, other employees may get the idea that the same rule will apply. 

4. What are the risks involved?  It may be difficult to know the full extent of the risk posed by a departing employee. However, it is important not to underestimate the risks. I have seen circumstances where a business loses only one small client at first, but suffering major loses many months down the road. Some questions to consider: (1) have you lost clients or are you in danger of losing clients; (2) is there a danger of the employee disclosing or using legitimate confidential information; (3) what did the employee have access to while at work (i.e. client lists, trade secrets, and financial information); and (4) was there an exit interview conducted and return of confidential information verified.

 

5. Litigation costs v benefits. I ask clients to make a business decision by weighing the risks (see # 4) versus the costs involved. Litigation costs are dependent on a number of factors. Some examples of factors that impact litigation costs include (1) the nature of the dispute; (2) the strength of the contract; (3) the ability of the departing employee to defend the case; (4) the lawyer defending the case; and (5) the type of action you decide to bring.

These are only some of the many factors a business should consider when confronting a decision on enforcement of a non-compete.

No Contract, No Problem – Charter Oak Gets A Chance To Prove Its Case

 In a decision that will be officially release tomorrow (download)the Connecticut appellate court ordered a new trial in favor of Charter Oak Lending for the claims it brought against employees who defected to a competitor.   Unless there is a successful appeal to the Connecticut Supreme Court, this means Charter Oak will get a second chance to prove its claims against the key employees despite the lack of a written contract in place covering non-competition.   I originally posted about this case in November of 1999 when Charter Oak lost at the trial level.  The case result had generated media interest surrounding the claims because the damages and the lack of a contract governing the employment relationship. 

As I noted at the time, it is always better to have a written contract in place with employees to govern post termination conduct involving competition, solicitation, confidential information, and trade secrets. However, the lack of contract does not by itself leave a business without a remedy especially if the situation involves use of trade secrets or confidential information or the employees actively competing before departure.  

In Charter Oak, the trial court dismissed the claims finding that Charter Oak failed to make out a threshold case during the trial.  In other words, the case never reached the level of a final decision on the merits because the judge found that the basic elements of the claims were not met.  The basic claims were breach of fiduciary duty, misappropriation of trade secrets and unfair trade practices. 

The appellate court reversed the decision and found that facts existed to make out threshold claims for these causes of action.  Therefore, the trial court judge should have permitted the case to proceed to a final decision on the merits.  Significantly,  the appellate court deemed as sufficient Charter Oak’s claim that its client list was a trade secret entitled to protection under General Statutes 35-51 known as the Connecticut Uniform Trade Secrets Act (CUTSA).  The court stated:

to make out a prima facie case for a violation of CUTSA, the plaintiff was required to present sufficient evidence that, if believed, would prove that the information in its customer list had independent economic value and that the plaintiff made reasonable efforts to maintain its secrecy.

Here were some of the facts that the court found sufficient to afford trade secret protection to the client list:

  • access was limited
  • the computers were encrypted
  • the building was secured where the computers were stored
  • employees were not permitted to share the list
  • employees understood the list was private
  • the lists were not sold or disclosed to third parties
  • the list could not be obtained from any other single source
  • the list gave Charter a competitive advantage

In addition to the ruling on CUTSA, the appellate court reaffirmed some aspects of the law with respect to fiduciary obligations of agents or employees.  The court affirmed the duty of loyalty owed by an agent to his or her principal.  This duty applies regardless of a whether a contract exists.  In the business context, this duty forbids an employee from actively competing against an employer concerning the subject matter of the agency or from using confidential information against the employer in competition.

Whether Charter Oak prevails in the new trial remains unclear.  However, the lack of a contract or written agreement should not prevent Charter Oak from getting a final decision on the merits.

Computer Fraud and Abuse Act In Connecticut

Previously, I have posted about non-compete agreements and the duty of loyalty for employees.  Many times, businesses do not have written contracts to protect confidential and proprietary information from not only competitors and vendors, but also their own employees.  Without a contract, the common law of Connecticut concerning breach of fiduciary duty is one of the ways attorneys can seek to protect business clients against improper use of confidential information.

Another method for attorneys to seek to protect their clients’ confidential information stored on a computer system or network is through the federal Computer Fraud and Abuse Act (CFAA).  The CFAA is largely a criminal statute, but is being used more frequently in civil cases on behalf of businesses faced with loss or theft of confidential and proprietary information and trade secrets.   The CFAA, 18 U.S.C. 1030, essentially provides for civil liability for unauthorized access to protected computers with intent to defraud or cause damage.  There are civil enforcement provisions that allow private actions for recoverable loss related to prohibited conduct if a series of factors can be proved in court.

Recently, Peter J. Toren wrote an excellent article in the New York Law Journal  where he detailed methods in which the CFAA might be useful for attorneys to protect client trade secrets and other confidential information.   Peter listed the six factors necessary for proof of damages.  Peter also noted some of the limitations of the CFAA when it comes to employee theft of trade secrets and described the narrow and broad views taken by different courts when interpreting improper access of a protected computer without authorization. Peter further provides some useful tips for businesses on how to construct a policy in light of the different court interpretations of improper access. 

Lee Berlik, publisher of the Virginia Business Litigation Blog, also has a recent post about the series of hurdles necessary for attorneys to prove loss or damages under the CFAA.  Lee’s post describes a threshold of $5,000 in value that must fit into the categories of potential loss defined in the CFAA.  Similar to Peter’s article, Lee also describes how a case was unsuccessful in court because of insufficient facts to show loss under the CFAA.

In Connecticut federal courts, the reported cases under CFAA, largely have been unsuccessful for a variety of reasons, many of which Peter’s article details.  Some cases were dismissed for failing to meet damages thresholds (Register.com v. Verio, 356 F.3d 393 (2004)) , while another case was dismissed because the facts were insufficient for unauthorized access (Cenveo, Inc. v. Rao, 659 F. Supp. 2d 312 2009)).   However, in a recent case, in the federal district court, Judge Vanessa Bryant issued an order of sanctions and for production of electronic devices for forensic inspection in a case based, in part, and the CFAA. (Genworth Financial Wealth Mngmt. Inc., v. McMullan). 

The takeaway here is that the CFAA provides another potential basis for a business to protect its confidential and proprietary information when the information resides on a computer system or network.  Of course, there are a series of factors that must be met before liability can be established.  Some of these factors may not apply and eliminate the CFAA as a method of recovery as we have seen in several reported cases.  However, the CFAA should be considered and evaluated in any case involving unauthorized access of confidential information through a computer system as it provides an additional basis for potential recovery.  Also, advanced planning with sound internal policies might provide a business with a better chance of success under the CFAA.

I will do a post soon on another statute, Connecticut’s Computer Crime Act, that may provide additional remedies for improper access of a computer system or network.