Wednesday, December 24, 2008
New York Case Provides Paradigm for Impermissible "Indirect Solicitation" of Clients (Marsh USA v. Karasaki)
The State of New York continues to be the venue where some of the most significant non-compete and trade secret issues have been decided in 2008. A week from today (12/31), I will be posting my top 5 developments and cases of the year - and we can be sure New York will be well-represented on the list.
A recent decision on a preliminary injunction motion addresses a common issue in non-compete agreements: to what extent can a contractually bound employee facilitate solicitation of former clients through strawpersons? This type of indirect solicitation is usually quite transparent, and the case of Marsh USA v. Karasaki demonstrates this perfectly.
By all accounts, Chad Karasaki was a highly successful insurance brokerage executive at Marsh & McLennan, responsible for supervising and cultivating construction industry clients in Hawaii. In 2003, nearly 17 years after he started his career at Marsh, Karasaki signed a one-year non-compete agreement (in connection with Karasaki's participation in a discretionary bonus plan) with Marsh prohibiting him from servicing Marsh clients he contacted or supervised for a period of one year after the termination of his employment. Four years later, he signed a similar agreement.
In 2007, Aon - unquestionably Marsh's biggest competitor - had suffered from poor performance in its Hawaii office and began an effort to recruit Karasaki - and other account executives - away from Marsh. Karasaki eventually quit Marsh and joined Aon a week later. Marsh sued to prevent Karasaki from breaching his non-solicitation clauses, and after the case was transferred from Hawaii to New York, Marsh prevailed with relative ease. In fact, the court awarded Marsh its attorney's fees after the preliminary injunction and before any final judgment in the case.
The case is notable in two respects. First, New York courts continue to follow the rule that when the asserted protectable interest in a non-compete is client relationships or goodwill, the employer can only prevent an employee from capitalizing on relationships the company helped create or facilitate. In this respect, New York is similar to Illinois - but unlike a lot of other states - in reasoning that an employer cannot recruit someone with pre-existing relationships, capitalize on those relationships, and then seek to preclude the employee from working on those accounts after he or she leaves. This rule, of course, would not apply if the asserted protectable interest were protection of trade secrets.
Second, the Karasaki case is a textbook example of indirect client solicitation. In other words, Karasaki tried to circumvent his restrictions by funneling client names, key contacts and other important client information to others who would serve as a proxy or conduit for Karasaki. Once again, discovery of e-mail between Karasaki and Aon executives involved in the mass exodus effort provided all the evidence needed to link Karasaki to the ruse. (It is clear Karasaki breached his covenants directly, as well, but the bulk of the competitive activity occurred through others.)
Most well-drafted agreements now specifically provide that a non-compete clause will bar solicitation of clients - either directly or indirectly. Karasaki's did as well. Even in the absence of such explicit language, however, courts will not allow an employee to benefit from this so-called loophole. In fact, as I have always advised clients, many competition cases turn on whether the court views the defendant as dishonorable or sympathetic. Indirect solicitation certainly does not help engender sympathy. Rather, it shows conscious wrongdoing and evasive behavior.
Court: United States District Court for the Southern District of New York
Opinion Date: 10/31/08
Cite: Marsh USA Inc. v. Karasaki, 2008 U.S. Dist. LEXIS 90986 (S.D.N.Y. Oct. 31, 2008)
Law: New York