New York Law Review

Tag: trade secrets

  • New York Telephone Co. v. Public Service Commission, 56 N.Y.2d 213 (1982): Protecting Trade Secrets in Public Utility Rate Proceedings

    56 N.Y.2d 213 (1982)

    The Public Service Commission has the authority to issue orders protecting the confidentiality of trade secrets presented as evidence in rate-fixing proceedings, notwithstanding the statutory requirement that the Commission’s proceedings and records be public.

    Summary

    New York Telephone Company sought a protective order from the Public Service Commission (PSC) to prevent public disclosure of its “Migration Study,” which contained confidential commercial information (trade secrets) valuable to competitors, during rate revision hearings. The PSC denied the request, arguing that Public Service Law § 16(1) mandates that all proceedings and records be public. The Court of Appeals reversed, holding that the PSC has the authority and responsibility to protect trade secrets presented in its proceedings, balancing the public’s right to access information with the need to protect legitimate business interests. The case was remitted for a determination of whether the Migration Study constituted trade secrets and, if so, for the formulation of a protective order.

    Facts

    New York Telephone Company (NYTel) was undergoing tariff revision hearings before the Public Service Commission (PSC). User parties sought to introduce NYTel’s “Migration Study” as evidence. The Migration Study contained detailed projections of customer transfers to newer phone systems, pricing plans, new product introduction schedules, and sales tactics. NYTel had provided the study to the user parties under a protective agreement. NYTel requested a protective order to prevent public disclosure of the Migration Study, arguing it contained confidential commercial information constituting trade secrets, the disclosure of which would harm the company by giving competitors an advantage.

    Procedural History

    The Administrative Law Judges initially denied admitting the Migration Study pending a PSC determination on the protective order. The PSC initially denied the protective order. NYTel sought a protective order from the PSC again, which was denied again. However, the PSC granted a temporary protective order, effective until September 30, 1980, to allow NYTel to seek judicial review. NYTel then commenced an Article 78 proceeding to annul the PSC’s denials. Special Term dismissed the proceeding. The Appellate Division affirmed, holding that Public Service Law § 16(1) barred the PSC from issuing protective orders. NYTel appealed to the Court of Appeals.

    Issue(s)

    Whether the Public Service Commission has the authority to issue orders protecting trade secrets from public disclosure when the information is admitted as evidence in rate-fixing proceedings, given the provisions of Public Service Law § 16(1) requiring public access to the Commission’s proceedings and records.

    Holding

    Yes, because Public Service Law § 16(1) does not prohibit the Commission from restricting public access to confidential trade secret information presented in its proceedings. The Commission has an affirmative responsibility to protect the utility’s interest in such trade secrets.

    Court’s Reasoning

    The Court of Appeals reasoned that Public Service Law § 16(1), requiring public records, does not explicitly prohibit the Commission from issuing protective orders for trade secrets. Analogizing to Judiciary Law § 4, which mandates public court sessions but does not prevent courts from excluding the public to protect trade secrets, the Court found no reason why the PSC should not have similar authority. The Court emphasized the importance of trade secret protection and its resultant public benefit, citing Kewanee Oil Co. v. Bicron Corp. The Court stated that numerous precedents exist for protecting trade secret information in litigation. The Court held that the PSC had an affirmative responsibility to protect trade secrets made available to participants in the proceeding. “To fail to do so would be arbitrary and capricious and erroneous as a matter of law, subject to being set aside in an article 78 proceeding.” The Court remitted the case to determine if the Migration Study data constituted trade secrets and, if so, to formulate an appropriate protective order.

  • Columbia Ribbon & Carbon Mfg. Co., Inc. v. Trecker, 421 N.E.2d 497 (N.Y. 1981): Enforceability of Overbroad Restrictive Covenants

    Columbia Ribbon & Carbon Mfg. Co., Inc. v. Trecker, 421 N.E.2d 497 (N.Y. 1981)

    A restrictive covenant in an employment agreement that is unreasonably broad and not tailored to protect legitimate business interests such as trade secrets or confidential customer lists is unenforceable.

    Summary

    Columbia Ribbon sought to enforce a restrictive covenant against its former salesman, Trecker, to prevent him from working for a competitor. The covenant prohibited Trecker from selling similar goods within his former territory for two years. The court held the covenant unenforceable because it was too broad, lacking limitations related to uniqueness, trade secrets, confidentiality, or unfair competition. Columbia failed to demonstrate that Trecker possessed or used any confidential information, or that his services were unique. The court refused to rewrite the covenant to make it enforceable.

    Facts

    Trecker worked as a salesman for Columbia Ribbon, a company supplying consumables to the word and data processing industry. He signed an employment agreement with a restrictive covenant preventing him from disclosing customer information or competing with Columbia for two years after termination. After being demoted, Trecker left Columbia and joined a competitor, A-l-A Corporation. Columbia then sued to enforce the restrictive covenant, seeking to enjoin Trecker from competing anywhere in the United States and from soliciting former customers.

    Procedural History

    The trial court (Special Term) dismissed Columbia’s complaint on cross-motions for summary judgment. The Appellate Division affirmed the dismissal. Columbia appealed to the New York Court of Appeals.

    Issue(s)

    Whether a restrictive covenant in an employment agreement is enforceable when it is not reasonably limited temporally and geographically and is not necessary to protect the employer from unfair competition stemming from the employee’s use or disclosure of trade secrets or confidential customer lists.

    Holding

    No, because the restrictive covenant was too broad and not tailored to protect legitimate business interests such as trade secrets or confidential customer lists, and the employer failed to demonstrate the employee’s services were unique or that any confidential information was disclosed.

    Court’s Reasoning

    The court emphasized that restrictive covenants are disfavored because they can deprive individuals of their livelihood. Such covenants are only enforceable if reasonably limited in time and geography, and necessary to protect the employer from unfair competition arising from the employee’s use of trade secrets or confidential customer lists. The court noted that customer lists readily ascertainable from outside sources do not warrant trade secret protection. Referencing Purchasing Assoc. v Weitz, the court stated that injunctive relief may be available if the employee’s services are truly special, unique or extraordinary, even without trade secrets. Here, the restrictive covenant was deemed overly broad because it was not tied to uniqueness, trade secrets, confidentiality, or competitive unfairness; it simply restrained competition. Columbia did not provide sufficient evidence to show that Trecker disclosed any secret information, performed unique services, or caused any actual damage to the company. The court declined to rewrite the covenant, stating that Columbia’s evidence was insufficient to defeat summary judgment. As such, the court affirmed the lower court’s dismissal of the complaint. The court noted, “[T]here are ‘powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood’”.

  • Reed, Roberts Assoc., Inc. v. Strauman, 40 N.Y.2d 303 (1976): Enforceability of Employee Non-Compete Agreements

    Reed, Roberts Assoc., Inc. v. Strauman, 40 N.Y.2d 303 (1976)

    Employee non-compete agreements are enforceable only to the extent they are reasonable in time and area, necessary to protect the employer’s legitimate interests (such as trade secrets or unique services), not harmful to the general public, and not unreasonably burdensome to the employee.

    Summary

    Reed, Roberts Associates sought to enforce a non-compete agreement against its former senior vice-president, John Strauman, who formed a competing company. The court held that the agreement was unenforceable. While non-compete agreements are generally disfavored, they may be enforced to protect trade secrets, confidential customer information, or where the employee’s services are unique. The court found that Strauman’s services were not unique, no trade secrets were involved, and customer information was readily available. Therefore, the court refused to enjoin Strauman from competing or soliciting Reed, Roberts’ customers.

    Facts

    John Strauman was hired by Reed, Roberts Associates, an unemployment tax consulting firm, in 1962 and signed a non-compete agreement. Over 11 years, Strauman rose to senior vice-president, contributing to the company’s forms and computer system. He later resigned to form Curator Associates, a direct competitor. Reed, Roberts alleged Strauman was soliciting its customers. Strauman’s company sustained losses during its first year of operation.

    Procedural History

    Reed, Roberts sued Strauman and Curator Associates seeking to enforce the non-compete agreement. The trial court partially granted relief, enjoining Strauman from soliciting Reed, Roberts’ customers permanently but refused to prohibit him from engaging in a competitive enterprise. The Appellate Division affirmed. The New York Court of Appeals then modified the Appellate Division’s order by reversing the permanent injunction against the defendants.

    Issue(s)

    Whether a restrictive covenant in an employment contract is specifically enforceable when the employee’s services are not unique or extraordinary, no trade secrets are involved, and customer information is readily available through public sources.

    Holding

    No, because the restrictive covenant was broader than necessary to protect Reed, Roberts’ legitimate business interests, Strauman’s services were not unique or extraordinary, there were no trade secrets involved, and the customer information was readily available from public sources.

    Court’s Reasoning

    The court emphasized the general disfavor of restrictive covenants due to public policy considerations against restricting an individual’s livelihood. The court stated that “no restrictions should fetter an employee’s right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment.” While employers have a legitimate interest in protecting trade secrets and confidential customer information, the court found that Reed, Roberts failed to demonstrate such protectable interests in this case.

    The court distinguished between non-compete agreements arising from the sale of a business, where a less stringent reasonableness standard applies, and those arising from employment contracts, where a stricter standard is required. For employment contracts, the covenant must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the public, and not unreasonably burdensome to the employee.

    The court relied on Leo Silfen, Inc. v. Cream, holding that an injunction is not warranted where the employee engaged in no wrongful conduct and customer information is readily discoverable through public sources. Since Strauman did not pilfer or memorize customer lists, and Reed, Roberts admitted that potential customers could be identified through publications like Dun & Bradstreet’s Million Dollar Directory, the court found the customer information was not confidential.

    Regarding Strauman’s knowledge of Reed, Roberts’ business operations, the court stated that absent wrongdoing, an employee should not be prohibited from using their knowledge and talents acquired during their employment. “Where the knowledge does not qualify for protection as a trade secret and there has been no conspiracy or breach of trust resulting in commercial piracy we see no reason to inhibit the employee’s ability to realize his potential both professionally and financially by availing himself of opportunity.”

  • Stanley J. Capelin Associates, Inc. v. Globe Manufacturing Corp., 34 N.Y.2d 338 (1974): Enforceability of Restrictive Covenants in Employment Agreements

    Stanley J. Capelin Associates, Inc. v. Globe Manufacturing Corp., 34 N.Y.2d 338 (1974)

    A restrictive covenant in an employment agreement prohibiting the employment of a person who has obtained confidential information is only enforceable if trade secrets are actually involved and the restriction is reasonable under the circumstances.

    Summary

    Stanley J. Capelin Associates, Inc. sought an injunction and damages against Globe Manufacturing Corp. for employing Peter Libman, a former Capelin employee, allegedly in violation of a restrictive covenant in a contract between Capelin and Globe. The contract prohibited either party from employing individuals who had obtained confidential information from the other party. The Court of Appeals affirmed the Appellate Division’s grant of summary judgment to Globe, holding that Capelin failed to demonstrate that Libman had acquired or divulged any trade secrets, and that the mere disregard of a three-year employment restriction, standing alone, was insufficient to defeat summary judgment.

    Facts

    Stanley J. Capelin Associates, Inc. (Capelin), an industrial engineering firm, contracted to provide services to Globe Manufacturing Corp. (Globe). Peter Libman, a field engineer for Capelin, was assigned to Globe’s plant. The contract between Capelin and Globe contained a provision that for three years after the agreement, neither party would employ someone who had been employed by the other and had obtained confidential information. Libman terminated his employment with Capelin in October 1968, effective after a 45-day notice period, but stayed longer to finish a project. In January 1969, Libman discussed employment with Globe. Globe’s president informed Capelin’s president about the potential employment. Libman was hired by Globe in February 1969 as an administrative executive involved in purchasing materials. Capelin commenced an action 11 months later, alleging breach of contract due to the employment of Libman and the intention to obtain confidential information.

    Procedural History

    Capelin sued Globe for a temporary and permanent injunction and damages, alleging breach of contract. The Appellate Division reversed the lower court’s decision and granted summary judgment to Globe. Capelin appealed to the New York Court of Appeals.

    Issue(s)

    Whether the restrictive covenant in the contract between Capelin and Globe is enforceable to preclude Globe’s employment of Libman, a former Capelin employee, in the absence of evidence that Libman acquired or divulged any trade secrets or confidential information.

    Holding

    No, because Capelin failed to present sufficient evidence that Libman acquired or divulged any trade secrets during his employment with Capelin, and the mere disregard of the three-year employment restriction, without more, is insufficient to defeat summary judgment.

    Court’s Reasoning

    The court emphasized that summary judgment is appropriate when there are no triable issues of fact. The moving party must demonstrate entitlement to judgment as a matter of law. The court noted that Capelin’s claim was based on the breach of a provision in the contract that prohibited the employment of individuals who had obtained confidential information. However, Globe demonstrated that no trade secrets were involved and that Libman’s work with Globe was not in industrial engineering. Capelin’s affidavit in opposition to the motion for summary judgment merely stated in a conclusory fashion that trade secrets were acquired by Libman during his employment. The court stated, “‘Bald conclusory assertions, even if believable, are not enough [to defeat summary judgment]’” (citing Ehrlich v. American Moninger Greenhouse Mfg. Corp., 26 N.Y.2d 255, 259). The court also noted that the opposing affidavit should be made by someone with personal knowledge of the facts. Since there was no showing of trade secrets being acquired and divulged, the remaining issue was the three-year prohibition against employment. The court questioned whether the restriction was reasonable and valid under the circumstances. The court stated that “The burden upon a party opposing a motion for summary judgment is not met merely by a repetition or incorporation by reference of the allegations contained in pleadings or bills of particulars, verified or unverified” (citing Indig v. Finkelstein, 23 N.Y.2d 728, 729). The dissenting judges believed that summary judgment was not warranted because there was a reasonable restrictive covenant governing the re-employment of the plaintiff’s employees, apart from trade secrets (citing Restatement, Contracts, § 516, subd. [f]).

  • Clark Paper & Mfg. Co. v. Stenacher, 236 N.Y. 312 (1923): Enforceability of Employee Non-Compete Agreements

    Clark Paper & Mfg. Co. v. Stenacher, 236 N.Y. 312 (1923)

    An employee’s covenant not to compete will only be enforced if the employee’s services are special, unique, or extraordinary, or if they possess valuable trade secrets that could harm the employer’s business if disclosed.

    Summary

    Clark Paper sought to enforce a non-compete agreement against Stenacher, a former salesman, preventing him from working for a competitor for eight years. The court refused to enforce the agreement, finding that the employment contract lacked a definite term and that Stenacher’s services were not unique or special, nor did he possess any trade secrets. The court emphasized that simply preventing an employee from using general skills acquired during employment is an unreasonable restraint of trade.

    Facts

    Clark Paper & Mfg. Co. hired Stenacher as a salesman of wrapping paper. Stenacher signed an agreement stating that he would not work for a competitor in New York for eight years after leaving Clark Paper. The agreement also restricted him from revealing customer lists or the company’s business methods. Critically, the contract stated Stenacher’s employment term would be “mutually agreed upon between them,” but no such agreement on a specific term was ever reached. Stenacher left Clark Paper after approximately two and a half years to work for a competitor, the George Irish Paper Company. Clark Paper then sued to enforce the non-compete clause.

    Procedural History

    The trial court granted an injunction preventing Stenacher from working for Clark Paper’s competitor. The appellate division affirmed. The New York Court of Appeals reversed the lower courts’ decisions and dismissed the complaint.

    Issue(s)

    Whether a non-compete agreement is enforceable against a former employee when the employment contract lacks a definite term of employment and the employee’s services were not special, unique, or involved trade secrets.

    Holding

    No, because the underlying employment contract lacked a definite term, and the employee’s services were not unique or special, nor did he possess any trade secrets that could harm the employer’s business.

    Court’s Reasoning

    The Court of Appeals reasoned that the employment contract was incomplete because it failed to specify a definite term of employment. The agreement stated the employment period would be mutually agreed upon, but no such agreement was ever reached. This made the non-compete clause, which was tied to the expiration of the contract, unenforceable. Moreover, the court found that Stenacher’s services as a wrapping paper salesman were not special or unique. The court stated that “[t]here was nothing peculiar in the nature of the work undertaken for the plaintiff by the defendant.” The customers were easily identifiable through directories, and there were no secret customer lists. Critically, the court emphasized that the company’s true motivation was to prevent Stenacher from using the general skills he acquired during his employment elsewhere, which is an unreasonable restraint of trade. The court quoted Herbert Morris, Ltd., v. Saxelby, stating that an employer is “undoubtedly entitled to have his interest in his trade secrets protected…[b]ut freedom from all competition per se…he is not entitled to be protected against.” The court concluded that injunctions enforcing non-compete agreements are reserved for “exceptional cases where, by reason of the peculiar or extraordinary character of the services a violation of an agreement will cause injury to the employer for which an action at law will afford no adequate remedy.”

  • Kaumagraph Co. v. Stampagraph Co., 235 N.Y. 1 (1923): Enforceability of Trade Secret Agreements

    Kaumagraph Co. v. Stampagraph Co., 235 N.Y. 1 (1923)

    Restrictive covenants in employment contracts are enforceable only to protect an employer’s legitimate trade secrets; they cannot be used solely to stifle competition, especially when the knowledge in question was derived from publicly available sources.

    Summary

    Kaumagraph Co. sued Stampagraph Co. and former employees, alleging the misuse of trade secrets and breach of restrictive covenants. Kaumagraph sought to prevent the defendants from using its transfer stamp production process, claiming it as a trade secret. The Court of Appeals held that the process was not a protected trade secret because it was based on publicly available English patents and the employees’ pre-existing knowledge. The court also found that the restrictive covenants were unenforceable as they sought to prevent competition rather than protect genuine trade secrets.

    Facts

    Kaumagraph Co. produced transfer stamps using a process allegedly kept secret. The process was based on English patents from 1874 and 1894. George Chadwick and Arthur Turner, former employees of William Briggs & Co. in England (the company using those patents), were hired by Kaumagraph and signed contracts with restrictive covenants. These contracts prohibited them from engaging in similar business or disclosing secrets. Later, Chadwick, Turner, and other former Kaumagraph employees formed Stampagraph Co., a direct competitor. Kaumagraph sued, claiming misuse of trade secrets and breach of contract.

    Procedural History

    The trial court ruled in favor of Kaumagraph, enjoining the defendants based on the trade secret misappropriation and breach of contract. The Appellate Division reversed, finding that the process was not a secret and the restrictive covenants were unenforceable. Kaumagraph appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether Kaumagraph’s transfer stamp production process constituted a protectable trade secret.
    2. Whether the restrictive covenants in Chadwick’s and Turner’s employment contracts were enforceable against them.

    Holding

    1. No, because the fundamental processes were revealed by English patents, and the employees brought pre-existing knowledge to Kaumagraph, rather than obtaining secret information from it.
    2. No, because the covenants sought to prevent competition rather than protect legitimate trade secrets, and they effectively sought to prevent the employees from using the general skills and knowledge they brought to the job.

    Court’s Reasoning

    The Court of Appeals reasoned that a “secret is nothing more than a private matter; something known only to one or a few and kept from others.” However, the court found that the knowledge used by the defendants was not a trade secret because it was derived from publicly available English patents and the employees’ prior experience. The court emphasized that employees may not exploit secrets learned during confidential employment against their employer, but there’s no breach of confidence when no secret is imparted. Since the fundamental processes were disclosed in the patents and Chadwick and Turner possessed this knowledge before working for Kaumagraph, there was no trade secret misappropriation. Regarding the restrictive covenants, the court stated that equity will not enforce them “except to protect plaintiff’s trade secrets.” The court found that the contracts sought to prevent the employees from using the skill, knowledge, and experience they brought to the job. Such broad restrictions on an employee’s ability to work are disfavored and will not be enforced unless necessary to prevent a breach of confidence, not merely to stifle competition. The court emphasized that Kaumagraph hired Chadwick and Scott specifically to leverage their knowledge of the English patents, undermining the claim that this knowledge was a trade secret of Kaumagraph’s. Therefore, the restrictive covenants were unenforceable.