Wednesday, November 4, 2009

Court Will Not Convert Broad Non-Disclosure Agreement Into a Non-Solicit Restriction (Softchoice Corp. v. MacKenzie)

We often confront a situation where an employee has jumped ship to compete directly with his ex-employer, only to be bound by a garden-variety non-disclosure clause. Inevitably, the non-disclosure clause contains a lengthy, non-exhaustive list of potentially "confidential information," almost always including something along the lines of client identities, preferences, and purchasing details (such as rebates or discounts).

The question becomes whether use of this so-called confidential information can form the basis for an injunction prohibiting direct client competition - even in the absence of a restrictive covenant. The answer should depend on whether the information alleged to have been taken or used was truly confidential.

The case of Softchoice Corp. v. MacKenzie illustrates the usual outcome. In that case, the employee pointed to a wide range of third-party sources to demonstrate clearly that identities of customers were widely known in the industry of computer technology resellers. He identified social networks, leads websites, and other sites made available to all resellers, each of which contained the very information Softchoice claimed was confidential and therefore off limits. The employee also introduced evidence that customers themselves readily disclosed information to vendors to obtain the best possible pricing and services.

The court was unwilling to conclude that the employee misused any confidential information by targeting Softchoice's customers and entered summary judgment in the employee's favor. In so holding, the court noted: "Softchoice...could have limited MacKenzie's contact with his former customers, and consequently protected its pricing information, through a narrowly drawn, valid and enforceable covenant not to compete, but it did not do so. Softchoice cannot achieve by way of a nondisclosure agreement what it could have obtained via a nonsolicitation agreement."

Softchoice's dilemma illustrates the problem with relying only on non-disclosure clauses: they are incredibly hard to enforce. Any relief from breach usually is narrowly limited and does not extend to what is necessary to secure client relationships or goodwill.

Of course, there can be situations when confidential information is truly misused - perhaps brazenly so - and a court will retain the discretion to create a broader activity-based restriction. However, many judges are unwilling to take this step for fear that the injunction order extends beyond what is necessary to strike the proper balance of competing rights.


Court: United States District Court for the District of Nebraska
Opinion Date: 7/2/09
Cite: Softchoice Corp. v. MacKenzie, 2009 U.S. Dist. LEXIS 56513 (D. Neb. July 2, 2009)
Favors: Employee
Law: Nebraska

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