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I.P. Enterprises, Inc. v. Goldstein

A-846-02T2 (N.J. Super. App. Div. 2004) (Unpublished)

EMPLOYER-EMPLOYEE; TRADE SECRETS—The identities of customers and suppliers in the gray market are generally known and do not constitute trade secrets.

A company sued a former employee, seeking damages for his alleged breach of a non-competition agreement, his misappropriation of trade secrets, his breach of the duty of loyalty to the company, and his alleged tortuous interference with the company’s economic advantage. The employee counterclaimed for unpaid commissions. Following a bench trial, both the complaint and counterclaim were dismissed because neither party had borne its burden of persuasion. The Appellate Division affirmed.

The company was a parallel trader of branded merchandise. Parallel trading is a legal “gray” market in which a trader acquires goods, occasionally from the manufacturer but more frequently from others in the chain of distribution, at favorable prices, and then sells them to wholesalers and retailers at prices more favorable than would be available to them.

When the employee was hired, he had no prior experience in parallel trading, but learned quickly. He substantially increased gross sales and net profits. When he left, he gave no prior notice. He started his own similar business with a partner and financier, a former owner of one of the company’s major customers.

Shortly after being hired, the company asked the employee to sign a restrictive covenant. After discussing it with a lawyer, he marked up the covenant with specific changes, and both sides agreed to a final draft. This led to the key dispute – what did the final version of the non-competition clause provide? Originally, a paragraph read, “in the event of a termination under any cause for a period of ten years following termination, [the employee] will not directly or indirectly” compete with the company. After negotiations, both sides agreed that the term should be twelve months, and the word ‘any’ should be whited-out of the phrase “under any cause.” That changed the meaning to “a firing because of misbehavior on the employee’s part.” After these changes were made, the agreement was signed by the company and its employee.

The company claimed that the employee unilaterally ‘whited’ out the agreement after it was signed and then gave the agreement in that form to the company, which did not notice the change. It pointed to the fact that there was only one set of initials to the change. The lower court held that the whiteout was made at the same time as the initialing of the change of the term. Since this was a determination of fact and the evidence amply supported the finding, the Appellate Division deferred to the lower court. Therefore, the non-competition paragraph applied only if the employee were to be terminated for cause. Because he was not, he remained free to compete with the company.

Furthermore, the remainder of the company’s causes of action against the employee had to be considered in light of his freedom to compete. The Court concluded that the employee intended to directly compete when he resigned, based on the fact that as soon as he left, he started his own company and solicited and acquired business from his former employer’s European sources and its domestic customers. The company contended that such activity, even without a non-competition clause, constituted disclosure of proprietary information proscribed by the restrictive covenant.

First, the lower court held that all of the employee’s knowledge of parallel trading was learned while working for the company. But, application of that general knowledge could not be regarded as a breach of the restrictive covenant. Specifically, the dispute here was over the employee’s solicitation of the company’s suppliers and customers. The company claimed that the identity of its customers and suppliers constituted a trade secret.
To make such a claim, a company must prove that a trade secret existed, that the information was communicated in confidence by the employer to the employee, that it was disclosed by the employee in breach of that confidence, that a competitor obtained the information with knowledge of the employee’s breach, that the information was used by the competitor to the company’s detriment, and that the company took precautions to maintain the secrecy of the information. Specifically, a customer list can constitute a trade secret, but only if the information is not generally known in the industry nor readily accessible to others.

The Appellate Division affirmed the lower court’s findings that the information was both generally known in the industry and easily accessible. It believed that the identities of customers and suppliers in the gray market are generally known. Also, there was evidence presented that the supplier’s identification could be learned from United States Customs lists, from the internet, and from annual trade shows.

In addition to the list of customers, there was also an issue as to the right of a former employee who goes out on his own, not burdened by a non-competition agreement, who solicits his former employer’s customers. Such an employee has knowledge of those customers because he dealt with them. The Court stated that that is exactly what a restrictive covenant is intended to preclude, and absent such a covenant against using that knowledge, a former employee is free to use it in his effort to compete and earn his living.

The company claimed, however, that the employee downloaded confidential information from his laptop while employed, as well as made appointments to meet specific suppliers at a trade show as an employee of the company, having already resigned. The lower court found insufficient proof to support the claim of the alleged downloading, and also found that the employee’s conduct at the trade show did not conflict with his obligation to the company. He went to the trade show on his own, he notified the suppliers that he was no longer employed by the company and that the company would have another representative there to meet with suppliers, which they did.

The Appellate Division agreed with the lower court that in the absence of a non-competition agreement, there was no proof supporting the claim that the employee maliciously interfered with the company’s business. Despite an initial loss of business by reason of the employee’s competition, the company continued to do business and otherwise was going forward.

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