This was originally published on the SGR Blog.
Would Court Enforce Restrictive Covenants?
ASAPP, Inc. applied to the Court for a preliminary injunction enjoining Samuel Rowbotham from commencing employment with or otherwise providing consulting services to ASAPP’s competitor, Cresta Intelligence, Inc., for a period of one year. Rowbotham opposed the motion.
Rowbotham served as a Director of Strategic Accounts at ASAPP, a technology company with approximately 300 employees whose software is designed to improve customer and employee experiences at call centers. ASAPP hired Rowbotham in April 2021, and he began work in May 2021.
In connection with his employment, on May 5, 2021, Rowbotham signed an Employee Proprietary Information and Inventions Assignment Agreement with ASAAP. The Employment Agreement prohibited Rowbotham from: (i) being employed by any competitor, customer, or supplier of ASAAP for one year following his employment with ASAAP; (ii) soliciting or diverting or taking away or attempting to divert or take away any customer, clients or employees or independent contractors of ASAPP for a period of one year following his employment; and/or (iii) using or disclosing any proprietary information of ASAAP, which was defined to include customer lists, except in connection with his official duties.
Rowbotham attested that he read and understood the Employment Agreement, entered into it freely. He agreed that the Agreement did not prevent him from earning a living and the restrictions contained in Agreement were reasonable, proper, and necessitated by the ASAPP’s legitimate business interests. Above his signature, in bold type and capital letters, Rowbotham acknowledged that he had “the opportunity to seek the advice of independent legal counsel, and I have read and understood all of the terms and provisions of this agreement…”
On January 31, 2022, Rowbotham resigned and informed ASAPP that he accepted employment as a sales executive with Cresta. On February 9, 2022, ASAPP commenced this action asserting causes of action for: (i) breach of the contract; (ii) misappropriation of trade secrets; and (iii) injunctive relief. ASAPP also filed a proposed order to show cause for a temporary restraining order and a preliminary injunction enjoining Rowbotham from commencing work at Cresta. By interim order dated February 10, 2022, the Court granted the temporary restraining order pending further order of the Court.
ASAPP argued that enforcement of the restricted covenants in the Employment Agreement to prevent Rowbotham from working at Cresta and soliciting ASAPP’s customers was warranted, given Rowbotham’s knowledge of current and perspective customers, and its confidential information, particularly since Cresta was its most direct competitor and offered many of the same discrete services that ASAPP spent years investing in, developing, and marketing, In addition, the two firms compete for the same customers. ASAPP characterizes Rowbotham as “a successful and well-regarded sales representative… entrusted with access to some of ASAPP’s most important and valuable accounts,” and had “extensive knowledge of ASAPP’s strategies, strengths and weaknesses in attracting business and investments… including ASAPP’s prices, its products and services.” According to ASAPP, Rowbotham attended technical workshops, had access to ASAPP’s pricing structure, and was presented with numerous confidential documents and ASAPP presentations.
As for customers, ASAPP maintained that Rowbotham “developed deep and substantial relationships with ASAPP’s customers and prospects… and [was] introduced to key stakeholders at ASAPP accounts… [and] had full access to ASAPP’s rolodex of valued and perspective customers.” Moreover, he developed those customer relationships using ASAPP’s resources and contacts. ASAPP’s contracts are often multi-year, multi-million-dollar deals that can take 12-18 months to compete for and negotiate. During his employment with ASAPP, Rowbotham was assigned to an account and was tasked with trying to win back business from a company that Cresta recently secured and which Cresta was working to expand its business. If Cresta gave Rowbotham ownership of the account, he would use his knowledge of ASAPP’s own relationship to formulate a sales strategy for Cresta’s use. Rowbotham also assertedly was privy to confidential information as to the strengths and weaknesses of ASAPP’s primary competitors, including Cresta.
As for Rowbotham’s training, according to ASAPP, he was taught “not just what ASAPP’s technology does, but how it does it” and that the training “uniquely positioned [him] to explain to the customers what the technology services are and how they can improve customer business.” ASAPP maintained that the proprietary information provided to Rowbotham would enable him to know how to undercut ASAPP and give Cresta a significant competitive advantage.
Rowbotham opposed the motion and argued that ASAPP was not likely to prevail on its breach of contract claim on the restrictive covenants since such covenants were disfavored under New York law, and the restrictive covenants were overly broad as they did not provide any geographical limitations. Rowbotham also argued that ASAPP fraudulently induced him to accept its offer of employment and execute the Employment Agreement containing the non-compete clause. Rowbotham averred that when he signed the Employment Agreement, he did not know it had a non-compete clause, and when he accepted ASAPP’s offer of employment, he was not provided with a copy of the non-compete.
Rowbotham also stated that despite his title—Director of Strategic Accounts—he had “no authority to make strategic decisions and had no direct reports… [and] ASAPP had seven other Directors of Strategic Accounts [and that]… [i]nternally we are referred to as Account Executives” and were not provided with key financial information. In addition, he stated he was the Account Executive for a single ASAPP customer, but he did not establish the price the customer paid since the price was previously set. Rowbotham added that he would agree not to contact that customer.
As for confidential information, Rowbotham stated that he did not take, and was not in possession of, any confidential information; he did not have access to confidential technical information, and the technical information to which he had access was shared with customers without requiring a non-disclosure agreement. In this connection, according to Rowbotham, unlike previous sales jobs, he was not trained to demonstrate the product he was selling; the ASAPP products were “extremely complex,” and that a member of the Sales Engineering Team would demonstrate the products. He also denied ASAPP’s assertions that he gained knowledge from certain specified documents and presentations.
In reply, ASAPP submitted the affidavit of Rowbotham’s direct manager, Michael Schlehuber, who stated that with regard ASAPP’s customers, Rowbotham “[was] aware of the identity of each of [ASAPP’s] customers, [knew] the services provided to these customers [and] the sales strategies, pricing models, and contractual arrangements with these customers.” Schlehuber also stated that ASAPP “serve[d] large telecommunication companies, airlines, and other multi-national businesses and… with few exceptions, [their] current and prospective customer’s identities [were] not public” and the “contracts with each of these customers [was] significant.” Rowbotham knew the identity of most of ASAPP’s approximately 100 prospective customers, and was “primarily responsible for leading ASAPP’s efforts to pursue at least a dozen perspective customers.” Therefore, Rowbotham had “detailed knowledge of ASAPP’s strategies with respect to these prospects.”
As for confidential information, Schlehuber stated that, contrary to Rowbotham’s statements, ASAPP’s customers were required to sign non-disclosure agreements protecting ASAPP’s technology, strategy, and pricing and serving models. Rowbotham knew “customer feedback” as to ASAPP products and “pricing models” and “strategies” including “advantages and disadvantages of certain products and how information [was] communicated to customers.”
ASAPP also submitted the affidavit from a manager of the forensic consulting firm Stroz Friedberg, LLC, which reviewed the MacBook Rowbotham used during his employment and certain logs of user activity associated with his user accounts. Specifically, Stroz Friedberg reviewed logs from the ASAPP Google Workspace environment and identified four files that Rowbotham had downloaded before he resigned, which “[b]ased on the timestamps on the logs… occurred after the MacBook was shut down and left at ASAPP, so the files could not have been downloaded to the MacBook… [but to] determine whether Mr. Rowbotham downloaded these files to a personal device, and if these files were subsequently transferred to other devices, Stroz Friedberg would need to be provided with this devices or devices.” Stroz Friedberg added that “each of these files contain confidential information pertaining to existing customers, what and how ASAPP wants to sell to prospective customers, and what and how ASAPP wants to sell with a partner to an existing customer.”
As for the files on the MacBook, Stroz Friedberg “identified four deleted files with names that match those identified in the Namie Affidavit [in connection with the confidential presentations]” and “500 files… moved from the ‘Desktop,’ ‘Documents,’ and ‘Downloads’ folders to the Trash folder and subsequently deleted from the system by the user on January 28, 2022.”
The review also revealed that “on January 28, 2022, Mr. Rowbotham transferred 34 files and one zip file to the My Passport device. Stroz Friedberg had not reviewed these specific files, but based on the file names, they appear[ed] personal in nature.” However, “particularly in light of the fact that Mr. Rowbotham deleted a number of files containing ASAPP information on January 28 (and at the same time the My Passport device was plugged in to the MacBook) in order to determine definitively if files containing ASAPP data were transferred from the MacBook to the My Passport device, Stroz Friedberg would need to be provided access to the My Passport device to preserve and analyze the data it contains.”
Rowbotham denied copying “any ASAPP business related information onto the My Passport device or other device [and that] [i]t would have been impossible for [him] to destroy ASAPP’s confidential information by deleting from [his] laptop because all ASAPP documents that might qualify as ‘confidential information’ were maintained by ASAPP in places other than [his] laptop.” As for Stroz Friedberg’s statement that Rowbotham downloaded four confidential documents to a personal device after he turned in his ASAPP MacBook, Rowbotham maintained that he “did not download or copy any ASAPP document” and that “the only device that [he] could use to access ASAPP’s systems [was his] iPhone XR [and that] [t]o download a document from ASAPP’s Google Drive onto [his] iPhone [he] would have had to use authentication systems provided by OKTA and Duo Mobile. OKTA is an identity platform. If [he] accessed any ASAPP systems or resources through OKTA, [he] would have had to authenticate [his] identity.”
Rowbotham also submitted an affidavit from the managing director of a forensic technology practice at Stone Turn Group, which took possession of Rowbotham’s Western Digital My Passport External Hard Drive and an Apple iPhone XR on February 21, 2022. The resulting files appeared to be personal files or related to the action. The results of the file search of the My Passport and the iPhone using the term “ASAPP” were annexed to the affidavit.
A preliminary injunction substantially limits a defendant’s rights and is thus an extraordinary provisional remedy requiring a special showing. Accordingly, a preliminary injunction will only be granted when the party seeking such relief demonstrates a likelihood of ultimate success on the merits, irreparable injury if the preliminary injunction is withheld, and a balance of equities tipping in favor of the moving party. At the same time, the existence of triable issues of fact does not require the denial of a preliminary injunction when the movant meets its burden of establishing that the three prerequisites for injunctive relief have been met.
Rowbotham claimed that he was fraudulently induced to enter into the Employment Agreement and therefore was not bound by the restrictive covenants. But the elements of fraud were not sufficiently set forth or supported by the record. The Court turned to whether ASAPP demonstrated that the three requirements for a preliminary injunction had been met.
Non-compete clauses in employment contracts are not favored and will only be enforced to the extent reasonable and necessary to protect valid business interests. Thus, enforcement of restrictive covenants has been limited to circumstances where they are found to be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public, and not unreasonably burdensome to the employee.
As for the reasonableness of the restrictive covenants with regard to time and area, the Court found that, despite the lack of geographical limits in the covenants, they were enforceable since Rowbotham was being employed by a competitor located in NewYork. In any event, restrictive covenants without geographical limitations have been enforced when, as here, an employer’s business is conducted worldwide to a global customer base. In addition, the one-year time period could not be said to be unreasonable.
At issue then was whether ASAPP had sufficiently demonstrated a legitimate interest in enforcing the restrictive covenants. New York courts have held that an employer has a legitimate interest in preventing: (i) misappropriation of the employer’s trade secrets or of confidential customer lists; (ii) competition by a former employee whose services are unique or extraordinary; and (iii) former employees from exploiting the goodwill of a client or customer which had been created and maintained at the company’s expense, to the employer’s competitive detriment.
As a preliminary matter, the Court found that Rowbotham’s services as a salesman were not unique or extraordinary nor was the job considered a learned profession.
The next issue was whether ASAPP had shown that Rowbotham misappropriated trade secrets or customer lists. In that connection, a trade secret has been defined by the Court of Appeals as “any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” The determination of whether information is a trade secret generally raises an issue of fact.
Here, ASAPP maintained that Rowbotham’s knowledge of certain information related to pricing strategies, marketing, and the features of its product, learned during his employment, would harm ASAPP’s competitive interest and warranted enforcing the non-compete provision in the Employment Agreement to preclude Rowbotham from working for its direct competitor for a year. However, absent any wrongdoing by the employee, knowledge of the intricacies of a business operation and pricing and marketing strategies are generally not considered to be trade secrets.
An employee’s recollection of information pertaining to specific needs and business habits of particular customers is not confidential. ASAPP did not show that Rowbotham, who was not a high-level executive or supervisor, had access to particularized marketing plans, costing, and price information which might constitute trade secrets. ASAPP did not show that Rowbotham, in his sales position, had access to the type of technical knowledge entitled to trade secret protection. Further, with the exception of the four confidential documents that ASAPP maintained were wrongfully downloaded by Rowbotham, the record contained no evidence that Rowbotham took information, including customer lists, from ASAPP.
ASAPP raised “the inevitable disclosure doctrine” to support its position but the doctrine did not provide a basis for finding that ASAPP was likely to succeed on the merits. The doctrine, which is usually applied to imply a restrictive covenant based on evidence that the employee misappropriated a valuable trade secret was “disfavored” under New York law. While courts have applied the doctrine to support the enforcement of an express covenant not to compete, in contrast to the circumstances here, those cases involved high level executives or other employees with access to trade secret information that the record showed was misappropriated.
With regard to four confidential documents that ASAPP maintained Rowbotham downloaded after he resigned, ASAPP submitted sufficient support that the documents were in Rowbotham’s possession and to make a prima facie showing that it had a legitimate interest in protecting the information in those documents, including because they constituted proprietary information within the meaning of the Employment Agreement. Although Rowbotham denied he had possession of those documents, that factual dispute was not a basis for finding a lack of success on the merits.
ASAPP did show that it was likely to succeed in showing a legitimate interest in preventing Rowbotham from exploiting the goodwill of its clients or customers which had been created and maintained at its expense. That conclusion was supported by evidence that ASAPP’s customer base consisted of large customers that required extensive time and effort to develop and whose identities were kept confidential.
But the Court found that the clause was overbroad to the extent it prohibited Rowbotham from working with any of ASAPP’s customers even those he never met. So the covenant could be partially enforced to prohibit Rowbotham from soliciting any of ASAPP’s customers that he “interacted with or encountered” while employed by ASAPP.
ASAPP also sought to protect prospective customers—but the restrictive covenant did not include prospective customers, and ASAPP did not show that such customers were entitled to trade secret protection, particularly in the absence of evidence that Rowbatham took or memorized lists including such customers.
The remaining issue was whether ASAPP had shown that it would suffer irreparable harm as a result of Rowbotham’s asserted possession of the four confidential ASAPP documents and the potential violation of the non-solicitation clause.
To establish irreparable harm, a party seeking a preliminary injunction must demonstrate that it cannot be compensated by money damages. Here, ASAPP adequately showed that it was likely to suffer irreparable harm should the four confidential documents, which ASAPP maintained were in Rowbotham’s possession, were provided to his new employer. ASAPP showed that it would likely suffer irreparable harm due to Rowbotham’s potential solicitation of ASAPP’s customers. Because in the context of restrictive covenants, irreparable harm is shown when, in the absence of a restraint, a plaintiff would likely sustain a loss of business impossible or very difficult, to quantify. It is very difficult to calculate monetary damages that would successfully redress the loss of a relationship with a client that would produce an indeterminate amount of business in years to come.
In determining the balance of the equities, the Court was required to weigh the harm to ASAPP caused by denial of the injunction against the harm to Rowbotham in granting that relief. ASAPP did not demonstrate it was likely to succeed in showing that Rowbotham’s services were unique or that he had misappropriated trade secrets or would inevitably disclose its confidential information. Thus, the balance of equities did not favor enjoining Rowbotham from working for Cresta, which would be unduly burdensome under the circumstances.
On the other hand, a more limited injunction would prevent Rowbotham from disclosing or otherwise using the four documents identified by ASAPP and from soliciting ASAPP’s customers that he learned about through his employment at ASAPP, and would protect ASAPP without causing a greater harm to Rowbotham and the public interest in protecting an individual’s livelihood and competition.
Accordingly, the preliminary injunction was granted only to the extent of enjoining Rowbotham from using the four ASAAP documents pending further order of the Court, or soliciting ASAPP’s customers that he interacted with or encountered while employed by ASAPP.