Connecticut Business Litigation Blog : Connecticut Business Lawyer & Attorney : N. Kane Bennett : Aeton Law Partners LLP : Hartford, Middletown, Glastonbury

 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.

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The short answer is yes, a business does need a contract, also known as a "non-compete agreement," to prevent a former employee from fairly competing in business once the employee resigns.  Even with a written agreement, there are limitations on non-compete agreements because they are viewed as a restraint of trade.  To be enforceable, the restrictions in the agreement must be reasonable in time, scope, and geography. The restrictions also must be reasonable in relation to legitimate business interests you are seeking to protect.   

A poorly drafted agreement, or no agreement at all, can leave a business with little legal recourse to stop a former employee from fair competition once the employee resigns.  Simply put, the law in Connecticut permits fair competition upon resignation.  However, the lack of a written agreement does not give free license to employees to unfairly compete in all circumstances. 

For example, what about an employee that starts competing against your business without your knowledge while continuing to work for you?  Is this fair competition that should be freely permitted?  Depending on the circumstances, this type of conduct can be actionable in a civil case for damages.  The actionable conduct is breach of the employee's common law duty of loyalty, which exists without a written agreement in certain circumstances.  There are also statutes in Connecticut that can protect businesses in certain situations that do not require contracts such as unauthorized computer access or misappropriation of trade secrets.   

I just read a story about a recent case that demonstrated some of the legal issues involved when there are no contracts in place with former employees.  According to the small business report by Carlye Adler of CNN, Charter Oak Lending, located in in Danbury Connecticut, lost a trial against several former employees who allegedly left to work for a larger company, CTX Mortgage.  Charter Oak alleged it lost more than a third of its business and a million dollars in fees after a sudden departure of 10 employees to CTX. The litigation lasted four years and ended with a defense verdict for the former employees. Charter Oak is appealing the decision. 

It appears that the decision against Charter Oak was based in part on the lack of contracts and the categorization of the defendants as independent contractors rather than employees.   The Trade Secrets Blog by Womble Carlyle picked up the story and had an interesting take focused on pure versus unfair competition.  The blog post supports the legal concept that a line can be crossed turning pure competition into unfair business. 

Charter Oak's appeal of this case will be interesting to follow.  The outcome will likely depend on what evidence existed at trial to demonstrate unfair competition prior to the employees' departure along with consideration of the duty of loyalty.  The takeaway is that it is always better to have written agreements to protect your business' customers, client lists, and confidential information.  However, the lack of such an agreement will not always give free license to former employees to unfairly compete in all circumstances.   A close examination of the facts of each case must be undertaken to consider common law and statutory remedies that do not necessarily require agreements. 

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Unfortunately, all too often business competitors resort to unfair and improper tactics to gain an advantage in business.  A common example occurs when a competitor maliciously or intentionally interferes with a company's contracts or business relationships.   When this occurs, businesses have to consider whether a legal remedy is available.

In Connecticut, courts have long recognized the business litigation claim of tortious interference with contractual relations as an available remedy for this type of conduct.  To be successful against a competitor in a lawsuit for this claim, a business must prove three essential elements:

• Existence of a contract or beneficial business relationship
• Knowledge of the relationship
• Intentional interference with the contract or business relationship
• Actual loss or damage 

Upon first consideration, tortious interference with a contract might seem to apply to many business competitors.  However, Connecticut courts require more than mere interference for a successful lawsuit.  In particular, not every act of interference is actionable in court. 

In Connecticut, a business must also prove that the interference was "improper" or with an "improper motive."   A business can prove that interference with a contract was improper by demonstrating any of the following:

• Fraud or misrepresentation
• Intimidation
• Malice
• Other improper motive or means

Although the improper motive element is harder to prove, a successful claim could also result in an award of punitive damages.  Additionally, a business does not have to prove that the interference actually resulted in a breach of the contract or business relationship.

As such, if your business is dealing with a competitor that has crossed the line and resorted to fraud or unfair practices to harm your business, a lawsuit for tortious interference with contractual relationship is one of the available remedies in Connecticut.   

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One of the first things lawyers check for when contesting an oral contract is the statute of frauds.  The statute of frauds comes from an English rule dating back to the 1600's.  At its most basic level, the statute of frauds requires certain types of contracts to be in writing or else they are not enforceable in court actions.  However, sometimes, even when a contract is in writing, it still will not satisfy the statute of frauds.

That is what happened in SS-II, LLC v. Bridge Street Associates, an advanced opinion released today by the Connecticut Supreme Court.  The dispute involved an option to purchase property pursuant to a commercial lease that was in writing.  The tenant wanted to exercise the option and the seller did not want to close on the sale. 

When the tenant brought a lawsuit for specific performance trying to force the sale, the owner raised the Connecticut Statute of Frauds as a defense and won in court.  In Connecticut, the agreements that must be in writing under the statute of frauds include the following:

• any agreement by any executor promising to answer damages out of his own property
• any promise to answer for the debt, default or miscarriage of another
• any agreement made upon consideration of marriage
• any agreement for the sale of real property or any interest in or concerning real property
• any agreement that is not to be performed within one year 
• any agreement for a loan in an amount which exceeds fifty thousand dollars.

Not only do these agreements have to be in writing, but they also have to contain the contract's essential terms.  In a contract to sell land, the terms must describe a certain price, the parties to the contract, and the land.  In the SS-II case, the contract did not comply with the statute of frauds because the purchase price was not certain and was subject to some conditions.  Although there are counter defenses to the statute of frauds, such as partial performance, the court deemed that they did not apply. 

The takeaway from this case is to be cautious with oral contacts and do not assume a writing alone will make the agreement enforceable.  A contract has to be in writing, signed, and have the proper terms in it or else you may not have an enforceable agreement if the statute of frauds applies.  

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