No doubt, having a properly drafted agreement is critical if you wish to prevent a former employee from competing against you or soliciting your customers. But, simply having a clear and straight-forward agreement may not be enough to persuade a court to enjoin someone from violating the terms of it. Rather, a plaintiff must show that a post-employment restrictive covenant is necessary to protect “legitimate business interests” before any injunctive relief will issue. Further, and as the Superior Court reconfirmed earlier this month in ABM Industry Groups, LLC v. Palmarozzo, making such a showing is not always easy to do.
Joseph Palmarozzo was a branch manager for ABM Industry Group, a large, public company that provides janitorial and maintenance services to large facilities. In connection with his job, Palmarozzo entered into an employment agreement that included non-competition, non-solicitation and non-disclosure obligations.
In December of 2016, Palmarozzo left ABM to become the General Manager of Compass Facility Services (“CFS”), a much smaller company than ABM, but one that also provided janitorial services. Shortly thereafter, ABM filed suit and moved for a preliminary injunction to prevent Palmarozzo from competing against ABM and soliciting its customers.
As a prelude to its ultimate decision, the Court noted that injunctive relief only can be granted if the plaintiff shows that it is likely to succeed on the merits of its claim. In this case, that meant not just showing that Palmarozzo had contravened the terms of his non-compete and non-solicitation obligations, but also required establishing that those obligations were enforceable. To do that, as the Court explained, ABM would have to show that the restrictive covenants were:
[N]ecessary to protect [ABM’s] legitimate business interests—which include guarding against the release or use of trade secrets or other confidential information, or other harm to the employer’s goodwill … “Protection of the employer from ordinary competition … is not a legitimate business interest,” however, “and a covenant not to compete designed solely for that purpose will not be enforced.”
As for ABM’s situation, the Court found that it was not likely to prove the enforceability of the restrictive covenants against Palmarozzo (and denied the Motion for a Preliminary Injunction) because there were no legitimate business interests at stake. First, while Palmarozzo may have known the identities of some of ABM’s clients and their needs, “such ‘remembered information’ [was] not confidential because the information itself, as distinguished from an employer’s compilation of such information into a list or database, [was] known to the customers and thus not kept secret by the employer.” Second, even though the Court appeared to accept that Palmarozzo knew about its “marketing plans, business strategies, pricing structures, and fees,” it did not believe that such information had been maintained in confidence by the company. Finally, ABM could not convince the Court that any other information Palmarozzo had about ABM genuinely was proprietary or confidential or that he would be in a position to unfairly exploit the company’s goodwill.
ABM Industry Group provides at least two key takeaways for in-house counsel. First and foremost, make sure the business people at your company understand the oxymoronic concept that a non-compete will not be enforceable if its only purpose is to protect against “ordinary competition.” Rather, such agreements only will be enforceable to the extent necessary to protect company trade secrets, confidential information, and goodwill. Second, if there is confidential or trade secret information at issue, make sure that the company takes reasonable steps to keep that information private. Failing to do that can lead a court to rule that the company has waived the right to seek protections for such information.
The bottom line is that while non-compete and non-solicitation agreements can be valuable tools, there are a number of circumstances when they cannot be used as a silver bullet.
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