Thursday, December 18, 2008

Injunction Issued in New York Mass Exodus Case (Ikon Office Solutions v. Usherwood Office Technology)

IKON, a well-known purveyor of office equipment systems and related technology, recently filed a sweeping injunction complaint against eight former employees and their new employer, Usherwood Office Technology. The employees systematically left IKON in late October and early November and all joined Usherwood.

The crux of the defendants' rationale for leaving en masse relied on the impact of an acquisition by Ricoh of IKON. As a result of the merger, IKON could not sell Canon products. Correspondingly, Usherwood could not sell Ricoh equipment. The defendants all claimed that they spent a substantial portion of their time at IKON selling Canon products, and that their migration to Usherwood was motivated by legitimate career concerns. Collectively, the defendants were responsible for nearly $20,000,000 in sales for IKON.

As one might expect, IKON was not pleased with the mass exodus and pursued sweeping injunctive relief against the defendants and Usherwood under an array of legal theories.

The two main issues decided by the Supreme Court (which is New York's trial level court) involved whether IKON made a required showing of trade secret theft and whether defendants breached enforceable non-compete agreements.

Trade Secrets

As one of the few remaining states not to adopt the Uniform Trade Secrets Act, the court relied on New York's common law (as interpreted under Section 757 of the Restatement of Torts) to determine the trade secret status of the customer information at issue. The defendants claimed the information was largely available through lawful, alternative means. However, the court noted that, even if customer names and identies could be gleaned from directories available to anyone, the specific buying habits and customer preferences would take a substantial investment of time and effort to recreate. IKON met with less success, however, concerning information that Canon itself provided about end-user customers. The evidence showed that Canon possessed in its own right a great deal of information about the customers' purchases, including type of equipment, on-site contact information, billing, and service details.

The court, however, found no clear evidence of misappropriation of trade secret information. Several of the defendants were dispensed with entirely. A few had e-mailed business information to their home on or around the day of their resignation, ostensibly so they could use it or print it while out of the office. The court noted that IKON raised "legitimate suspicions" concerning the activity, but opined that it fell short of the level of proof needed to make a finding of misappropriation. The court also rejected the "inevitable disclosure" theory of misappropriation, citing PepsiCo v. Redmond, 54 F. 3d 1262 (7th Cir. 1995), and noted that the theory in New York is "disfavored absent an actual misappropration of trade secrets." Why the court would need to use the inevitable disclosure doctrine if there was actual misappropriation is unclear...

Non-Compete Agreements

Finding no basis for trade secret theft, the court then turned to IKON's claim for enforcement of post-employment covenants not to compete.

Of the eight defendants, most of the non-compete clauses were identical. Some varied in temporal scope (18 months v. 2 years), and one only restricted solicitation of customers. IKON disclaimed any reliance on the geographic restrictions and only sought enforcement of the customer/account based restraints. The parties also appeared to agree that the terms of the non-compete were reasonable, particularly since the court construed the term "prospective" customer to be limited to those accounts actually assigned to each particular employee.

The bulk of the opinion centered on whether IKON demonstrated a legitimate business interest that could support the non-compete agreements. Under New York law, an employer can demonstrate a protectable interest through: (a) unique or extraordinary services; (b) trade secrets and confidential customer information; or (c) customer relationships and goodwill.

The court issued a curious decision relative to the claimed protectable interest in trade secrets. After finding no misappropriation earlier in the opinion, and jettisoning use of the "inevitable disclosure" doctrine, the court returned to inevitable disclosure and held that its application could be used to enforce the non-compete agreements: " is difficult to envision how the individual defendants could service their former customers without utilizing the information learned through their employment with IKON. These factors all support application of the inevitable disclosure doctrine as a basis for enforcement of the express restrictive covenants agreed to by the individual defendants."

In reality, the questionable reasoning relative to inevitable disclosure did not matter because the court also found that IKON demonstrated a protectable interest in the customer relationships and goodwill the ex-employees developed while working at IKON. The following passage sums up the reasoning best:

"It is apparent that the customer relationships and goodwill developed at IKON's expense will play an important role in the customer's decision-making process. IKON's customers of Canon brand equipment who are inclined to remain with a familiar and/or preferred manufacturer may well be apprehensive about turning to a new and untested vendor for their critical service and support needs. Certainly, the assurances and presence of their long-time IKON account representatives, who carry with them the goodwill cultivated over many years at IKON's expense, may well prove decisive in this calculus."

The court noted that the equities favored IKON, stating specifically that each of the defendants was given guaranteed, multi-year contracts for which they would earn a certain level of income even if their restrictive covenants prevented them from performing any work for Usherwood. The court's order did not require the defendants to leave Usherwood's employment - only to stay away from their former accounts for 18 months or 2 years. (The court also gave some credence to an acknowledgment clause in the non-compete agreements where each defendant acknowledged that irreparable harm would result if he or she breached the covenant. Normally, such clauses have no binding effect, but apparently they might be "viewed as an admission.")

Finally, the court upheld the no-hire covenants in 7 of the 8 agreements, covenants which barred IKON employees from soliciting fellow employees to quit. The defendants apparently did not challenge the enforceability of such anti-raiding restrictions. Usherwood, also, was not barred from soliciting future IKON employees.

But here's guessing they won't.


Court: Supreme Court of New York, Albany County
Opinion Date: 12/12/08
Cite: Ikon Office Solutions, Inc. v. Usherwood Office Tech., Inc., 2008 N.Y. Misc. LEXIS 7059 (Sup. Ct. Alb. Cty. Dec. 12, 2008)
Favors: Employer
Law: New York

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