When Non-Disclosure Agreements Can Hinder Employees From Going to Work for a Customer.

In late January, the Cuyahoga County Court of Appeals upheld a preliminary injunction against the plaintiff-employer’s former employee from using knowledge he gained from the plaintiff-employer when – instead of forming his own business or going to work for a competitor -- he went to work for a customer of the plaintiff-employer (which “coincidentally” stopped using the services of the plaintiff-employer). KLN Logistics Corp. v. Norton, 2008-Ohio-212. Rather than require the employee to sign a non-compete agreement when he was hired, the employer instead required a Non-Disclosure and Non-Circumvention Agreement. In that Agreement, the employee agreed to safeguard proprietary information – including trade secrets, methodologies, personal and business contacts or business plans – and to not in any way whatsoever circumvent the employer or to use the proprietary information for personal gain or otherwise for three years following his employment without prior written permission from the employer.

The plaintiff-employer introduced the employee to several of its customers, including Customer H. The employer began negotiating an expansion of their business relationship, and towards that end, the employer went to great expense to lease warehouse space and engage in other preparatory activities in anticipation of an expansion of the relationship with Customer H. Unknown to the employer, the employee began using the employer’s resources for about a month to conduct his own research about how he could meet the needs of Customer H less expensively and was telling other customers that he could ship their freight less expensively than the employer. Customer H then terminated its relationship with the employer and hired the employee with a salary and profit-sharing bonus. Within a few weeks, the employer sought a temporary restraining order and preliminary injunction, which the trail court granted in December 2006 along with finding the employee in contempt of the TRO for continuing to work for Customer H. In particular, the trial court had enjoined the employee from using the proprietary information – including business contacts – and from having other communications with Customer H, “including without limitation by serving as an employee . . . or otherwise consulting with, any competing individual or group, and/or by soliciting any business from . . customer of [employer] (including without limitation, [Customer H] by using the proprietary information . . ..). . . “

On appeal, the court noted that both the employer and employee admitted that the Agreement was not a non-compete agreement and did not prevent the employee from becoming an employee of Customer H. Rather, the Agreement only prevented the employee from using the employer’s proprietary information, which included the names of business contacts, including Customer H, and the names of other “numerous vendors, suppliers, and customers in the freight forwarding industry, . . . and . . . the specialized services [the employer] provided. [The employer] explained that [the employee] was given access to [the employer’s] confidential information including customer lists, rates, profit margins and other business information” as well as the rates of insuring freight shipments.

The court rejected the employee’s argument that the Agreement only prevented him from disclosing the proprietary information to the employer’s competitors. “Circumvent means “to avoid or get around by artful maneuvering.” [The employer] presented evidence at the hearing to show that [the employee], while employed by [the employer] and in a fiduciary relationship, spent considerable time researching how to go into business with [Customer H]. As a result of his actions, [the employee] shares in [Customer H’s] business profits while [the employer] no longer has [Customer H’s] shipping or warehousing business.” Therefore, the trial court had not abused its discretion in enjoining the employee from using the employer’s proprietary business contact information and from using the proprietary information to perform competitive services for the employer’s customer at the employer’s expense.

Nonetheless, despite the terms of the Preliminary Injunction and the Agreement, the Court did not believe that the employee had necessarily violated the TRO in contempt of court by merely continuing to work for Customer H. The employee testified that after the TRO was entered, he stopped using shipping companies utilized by the employer, and instead, returned to using shipping companies with Customer H had utilized prior to working with the employer, such as UPS and FedEx. The employer did not identify any other proprietary information which the employee was using in violation of the Agreement. “Without evidence of something more than mere continued employment with [Customer H], which [the employer] has conceded is not precluded [by the Agreement], there is no evidence that appellant violated the terms of the TRO as written.” The Court does not explain why the business contact with Customer H was not sufficiently proprietary to justify enjoining the employee from working there (as found by the trial court), but it appears to be based on the employer’s concession that the Agreement did not preclude the employee from working for Customer H. Had the employer not made such a concession, it remains an open question whether such an agreement would permit an employee from using business contact information for his own personal benefit by obtaining employment with a customer of the employer at the expense of the customer. Considering that this is a common practice, courts may well require more specific contractual language before inferring or enforcing such an intent by the parties.
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There is no word on whether Customer H ever considered using the employer’s services again after the employee sued Customer H’s employee.

Employers should be aware that recruiting and hiring an employee subject to a Non-Disclosure Agreement could result in the employer being sued for tortuous interference with contract, among other things. In this case, the employee admitted that he had not informed Customer H about the Agreement beforehand because he did not think it applied to his working for a customer. Moreover, had the employer not conceded that the Agreement did not preclude employment with Customer H, it remains an open question whether such an agreement would permit an employee from using business contact information for his own personal benefit by obtaining employment with a customer of the employer at the expense of the employer. Considering that this is a common practice, courts may well require more specific contractual language before inferring or enforcing such an intent by the parties.

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-212.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.