Designer Skin LLC v. S & L Vitamins, Inc., et al.
EarthWeb, Inc. v. Mark Schlack
71 F.Supp.2d 299, 99 Civ. 10035 (WHP), 1999 WL 980165 (S.D.N.Y., Oct. 27, 1999) remanded for clarification 205 F.3d 1322 (2d Cir. 2000) aff'd 2000 WL 1093320 (2d Cir. June 12, 2000)
Plaintiff EarthWeb, Inc. moved for a preliminary injunction enjoining a former vice president from either working for, or disclosing trade secrets to, a competitor. Such relief was mandated, claimed plaintiff, by a one-year restrictive covenant in the defendant's employment agreement. The court held that this restrictive covenant was unenforceable because, given the nature of the Internet today, it interfered with defendant's employment for an unreasonably long period of time. The court further held that defendant was unlikely to disclose the limited confidential information of which he was aware to his new employer. As a result, the court refused to issue the requested injunctive relief.
EarthWeb provides products and services to information technology ("IT") professionals through a family of websites. The content that appears on plaintiff's site is procured, predominantly, via license from third parties.
Defendant Schlack was employed by plaintiff as Vice-President, Worldwide Content for approximately one year. In this capacity, Schlack had overall editorial responsibility for the content on EarthWeb's websites. Schlack was employed pursuant to the terms of a written employment agreement, which contained both a restrictive covenant and non-disclosure provisions.
Schlack informed EarthWeb that he had accepted a position with ITworld.com, a subsidiary of IDG. Among other things, IDG publishes a number of print-based magazines related to the information technology industry. At the time of suit, ITworld.com was in the process of creating a website that, like plaintiff's, would offer information to IT professionals. The court found, however, that there were differences between EarthWeb and ITworld.com's respective sites. For one, EarthWeb acquired most of its content from third-parties, while ITworld's content was predominantly to be prepared by its own staff. In addition, said the court, "EarthWeb's family of websites appears to offer a richer moraine of technical information while [ITworld.com] concentrates on IT news in a magazine format."
Plaintiff claimed that the restrictive covenant contained in Schlack's employment agreement barred him from accepting employment with ITworld.com for a period of one year. This restrictive covenant prohibited Schlack, for a period of "twelve months after the termination of Schlack's employment," from working for a company that "directly competes" with EarthWeb. The phrase "direct competitor" was defined in the parties' agreement as "companies whose 'primary business' is providing IT professionals with (1) a 'directory' of third party technology, (2) an 'online reference library', or (3) an 'online store.'"
The court found that this restrictive covenant, as written, was unenforceable because its one year duration was unreasonable. "In New York, non-compete covenants will be enforced only if reasonably limited in scope and duration." Given the rapid pace of change in Internet today, the court concluded that a one-year restrictive covenant was not a reasonable duration, and hence was unenforceable. Said the court:
[T]he one-year duration of EarthWeb's restrictive covenant is too long given the dynamic nature of this industry, its lack of geographic borders, and Schlack's former cutting-edge position with EarthWeb where his success depended on keeping abreast of daily changes in content on the Internet.
The court declined to "blue pencil" the parties' agreement (a procedure by which a court modifies a restrictive covenant so that it complies with the laws' requirements, such as by shortening its duration) because it felt the employment agreement at issue "as a whole overreaches" and had "rather onerous terms." In reaching this conclusion, the court relied on the fact that the employment agreement, while providing that Schlack could be terminated at-will, did not provide for the payment of severance in the event of termination. In addition, the court supported its conclusion by pointing to the fact that the contract could be modified quarterly by EarthWeb on notice to Schlack.
The court further held that defendant's employment by ITWorld.com did not fall within the ambit of the restrictive covenant's prohibitions, because the "primary business" of ITWorld.com did not make it a direct competitor of EarthWeb within the meaning of the parties' agreement.
The court's determination that defendant possessed, at most, only limited confidential information which he was unlikely to use in his new position, served as an additional basis for its denial of the requested injunctive relief. A restrictive covenant can be enforced "only to the extent necessary (1) to prevent an employee's solicitation or disclosure of trade secrets, (2) to prevent an employee's release of confidential information regarding the employer's customers or (3) in those cases where the employee's services to the employer are deemed special or unique." Said the court:
To the limited extent that EarthWeb has shown that Schlack is aware of information that could be afforded trade secret protection, EarthWeb has not established an imminent and inevitable risk of disclosure warranting preliminary relief.
Lastly, the court rejected plaintiff's claim that it was entitled to the requested relief to prevent the inevitable disclosure of its trade secrets to ITworld.com during the course of Schlack's employ. Under the "inevitable disclosure" doctrine, an employee who possesses trade secrets or has engaged in "tortious conduct" can be enjoined under certain circumstances from working for a competitor of his employer, even in the absence of a written agreement containing a restrictive covenant. Stating that "absent evidence of actual misappropriation by an employee [which did not exist here] the doctrine should be applied in only the rarest of cases" the court refused to utilize the "inevitable disclosure" doctrine to bar Schlack from working for Itworld.com. The fact that the parties had negotiated and agreed to a restrictive covenant played a large role in the court's decision. Said the court:
Nor can EarthWeb make an end-run around the agreement by asserting the doctrine of inevitable disclosure as an independent basis for relief.