Identifying confidential information at risk is critical to enforcement
Overly broad agreements will not be enforced
Undue hardship and punitive clauses may harm enforceability
Handling a departure
Whether seeking to enforce non-compete agreements or to defeat them, all employers have much to learn from IBM v Visentin.(1) To the extent followed by other courts, this decision may render the enforcement of non-compete agreements substantially more difficult. While waiting to see whether New York state courts will follow the federal court's reasoning, employers should consider the impact that this decision may have on the enforceability of restrictive covenants.
In IBM v Visentin IBM sought a preliminary injunction to prevent Giovanni Visentin from joining IBM's competitor, Hewlett-Packard. Visentin had worked for IBM for 26 years and at the time of his resignation was the general manager of a $2.5 billion business.
Visentin signed a non-compete agreement that prohibited him, for a 12-month period following the termination of his employment, from engaging or associating with any "business enterprise" or "competitor" in any geographic area in which he had job responsibilities during the previous year at IBM. A 'business enterprise' was defined as a business that competes with "any business unit or divisions [sic] of the Company in which [Visentin] worked at any time" during the preceding three years. IBM argued that Visentin was privy to trade secrets by virtue of his position and his service in a leadership group charged with developing IBM's corporate strategy and a sub-group focused on analysing client data to assist clients in their businesses.
The Southern District of New York denied IBM's preliminary injunction motion, effectively permitting Visentin to join Hewlett-Packard. The Second Circuit summarily affirmed the decision, leaving practitioners and employers to sift through the lower court's 62-page ruling for guidance.
In analysing each category of confidential information alleged by IBM, the court noted IBM's inability to specify confidential information that Visentin had actually possessed or had access to while at the company, and thereafter misappropriated or would inevitably use in his new job at Hewlett-Packard. The court repeatedly discussed the 'general' nature of Visentin's work and exposure, pointing out that:
- he lacked technical knowledge;
- he had a global view of operations;
- he had a general sense of revenue; and
- "the real thrust of his position was to manage his teams to make them as efficient as possible".
Critics of the decision have argued that the court appears to have concluded that Visentin was so senior that he could not know anything specific enough to cause irreparable harm to IBM – taken to the furthest extreme, this would mean that restrictive covenants could become less enforceable as an executive becomes more senior.
Thus, an injunction-seeking employer must be prepared to show the specific nature of the information to which the employee has had access and with which he or she was directly involved. The court articulated the following key tips:
- Exposure to confidential information via a 'distribution list' is unlikely to be protected as a trade secret.
- Timing of the receipt of confidential information is relevant.
- Competitive companies already have some competitive intelligence that is generally available in the marketplace – a restriction may not be justified by an employee's access to information that is already known to competitors.
- Proof of the actual taking or misappropriation of information is more persuasive than the 'inevitability' of sharing information.
- Provisions acknowledging that a violation of the agreement would cause irreparable harm do not actually prove that such harm has, in fact, occurred.
- The employer must show that the former employee would be required to disclose confidential information in order to perform the new job – mere knowledge of unrelated confidential information does not prove inevitability of disclosure.
The court analysed in detail what it found to be overly broad restrictions in Visentin's non-compete agreement. Noting that restrictive covenants should be drawn up narrowly to protect legitimate business interests, the court found that IBM's agreement was overbroad because it purported to prohibit Visentin from working for a competitor in areas in which IBM did not do business and should have been limited to a restriction on working in the same business areas in which he worked for IBM. Moreover, the court appeared to take a narrow view of what constituted the 'same business area'.
To remedy this, the court suggested that employers specifically tailor their agreements to address the unique information that each employee will have access to and consider listing the business areas that the employer seeks to protect.
Although ultimately unnecessary to its decision – as it had already ruled that IBM had failed to demonstrate a legitimate business justification supporting enforcement of the restrictions – the court held that enforcement of the agreement would impose an undue hardship on Visentin. The court credited Visentin's claims that being sidelined for a year would put him at a disadvantage in a fast-moving industry and would hamper his ability to prove his worth to a new employer.
In addition, the court was persuaded that the true nature of the IBM agreement was not to protect trade secrets, but instead to retain employees – indeed, an IBM witness testified that the company viewed its non-compete agreements as "retention devices". Further, the court found that a clawback provision contained in the agreement was punitive in that its "only real purpose was to make it prohibitively expensive for an employee to leave his current employment".
Upon receiving notice of Visentin's resignation, IBM rejected his offer to continue working during a transitional period and immediately retrieved his laptop. The court viewed such conduct harshly, noting that IBM's refusal of Visentin's continued employment option triggered its purported need for a preliminary injunction because its conduct essentially forced Visentin to begin working for its competitor immediately.
The court also discussed IBM's general practices when employees leave the company and challenged its differential treatment of Visentin. Evidence was presented that when an employee leaves IBM, the company frequently assists the departing employee in understanding how to work for a new employer without violating his or her continuing obligations to IBM. The court was persuaded that Visentin was treated differently and that IBM simply refused to engage in a similar process with him.
The court clearly had a strong reaction to the particular facts presented in this case. Nonetheless, it may be expected that its broad pronouncements and legal conclusions will regularly be cited by parties seeking to avoid enforcement of restrictive covenants. Thus, even though the decision is not binding on New York state courts, employers should consider the court's guidance when negotiating future non-compete agreements and considering enforcement of existing agreements.
Employers seeking to recruit individuals who are subject to non-compete agreements can also glean useful guidance from this decision. To the extent feasible, a competitive employer should consider structuring the new job so as to avoid the employee's prior responsibilities, clients and business areas. In addition, limiting work to existing clients of the new company, as opposed to clients from a prior employer, may insulate an employee from being deemed to have violated a non-compete agreement. Finally, acknowledging and upholding the obligation to keep client information confidential can be a critical factor in avoiding a finding of irreparable harm.
For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email (email@example.com or firstname.lastname@example.org).
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.