NYLJ “Keep It Secret, Keep It Safe: Misappropriation Claims in a Changing Non-Compete Landscape”

By Steve Kramarsky and John Millson

It is no secret that modern technology-enabled firms go to great lengths to protect their proprietary information. Nor is it a secret why. The “formula for Coke” is the quintessential trade secret, but these days a proprietary algorithm for targeted advertising or a “black box” trading strategy that provides an actual or perceived edge over the market can be far more valuable—and its secrecy more central to a company’s ultimate survival—than even that venerable recipe.

Not all proprietary information can be protected by traditional intellectual property regimes such as patents or copyrights, at least not in the long term, so companies must be prepared to employ a variety of other mechanisms to keep their confidential materials from becoming publicly available. For example, employees who have access to proprietary information are often required to sign confidentiality agreements that prohibit the use or disclosure of such information outside the course of their work.

In addition, employees may be required to sign non-compete agreements that restrict their ability to engage in competitive business for some period following the termination of their employment.

Among other purposes, non-compete agreements can be used to keep employees from taking the employer’s confidential information and using it to benefit a competitor—at least until some time has passed and the information has become less valuable.

These agreements have traditionally been enforceable in New York, provided they: (1) are reasonable in duration and geographic scope; (2) do no impose undue hardship on the employee; (3) do not harm the public; and (4) are required to protect “the legitimate interest of the employer.” BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388-89 (1999). New York courts interpreting the BDO Seidman standard have generally seen the protection of proprietary business information—including confidential client lists and business practices—as a “legitimate interest” sufficient to support a reasonably scoped non-compete.

Recently, however, non-compete agreements have come under increasing fire, both in New York and nationally. The New York State Legislature passed a bill severely restricting the use of non-competes (which was vetoed by the governor), and the Federal Trade Commission passed a rule containing similar restrictions (which is being challenged in court).

While reasonable post-employment restrictions thus remain enforceable in New York (at least in the context of confidential information) the increased hostility to them has revived interest in the use of other legal protections for proprietary business materials. A recent case in the U.S. District Court for the Eastern District of New York serves as a good reminder that, even in the absence of non-compete agreements, New York law still provides robust protection for confidential business information. Under appropriate circumstances, claims for misappropriation may be brought not only against former employees, but also against the new employer who hires them. TileBar v. Glazzio Tiles, 2024 WL 1186567 (E.D.N.Y. Mar. 15, 2024).

Read more.

This article first appeared in the New York Law Journal on May 20, 2024. Stephen M. Kramarsky, a member of Dewey Pegno & Kramarsky, focuses on complex commercial and intellectual property litigation. John Millson is counsel at the firm.