The U.S. District Court for the Southern District of New York recently cleared the way for a Michigan watchmaker to pursue claims for trade secret misappropriation, among other things, against two former employees who left to work with a competitor, but not without first dismissing claims based on tortious interference with contract.
For companies whose business model depends on a key contract (e.g., with a licensor, vendor, or supplier), the biggest worry with departing employees might not be the theft of intellectual property or trade secrets—but rather the loss of the contract or business relationship.
In an October 22 opinion that serves as a sort of roadmap for successful pleading, U.S. District Court Judge Jesse Furman rejected the watchmaker’s claim for tortious interference with contract but kept alive its claim for tortious interference with prospective business relations.
In the case, Plaintiff Advance Watch Co. (d/b/a Geneva Watch Group) alleged that former employees Adam Pennington and Neil Martin interfered with the company’s deals with licensors and that defendant Rico Industries (Geneva’s former supplier) “wrongly and unlawfully solicited and caused” the men to breach their employment obligations and duties to Geneva.
In 2009, Geneva purchased the assets of Game Time, a company that sold watches with National Football League and Major League Baseball team logos. As part of the deal, Game Time’s founder, Adam Pennington, headed up Geneva’s new Game Time division. In 2011, Neil Martin was hired to serve as the division’s vice president of sales. Both Martin and Pennington received an employee handbook which included various confidentiality/non-disclosure provisions. The complaint alleges that, in February 2013, the two men left abruptly and began working for Rico. Geneva alleges that, shortly thereafter, the defendants used inside knowledge to ensure that Geneva’s exclusive licensing contracts with the NFL and MLB were not renewed after their expiration dates in 2013 and that Rico would get the licenses instead. According to the complaint, Rico currently sells at least 10 sports watches with designs “virtually identical to the unique designs of Geneva’s Game Time watches.”
The court noted that the “fatal flaw” with Geneva’s claim for tortious interference with contract as to Pennington and Martin was that it didn’t allege that the defendants procured the breach of any contract. The complaint alleged that defendants “interfered” with the MLB and NFL contracts, but also noted that those deals were set to expire in March and December 2013 and were not renewed. Although the defendants “may well have had something to do with that fact,” the court noted, “not renewing a contract is not the same thing as breaching a contract.”
The court also tossed claims for tortious interference with contract brought against Rico, first noting that there was nothing in the pleadings that would plausibly support the contention that Rico was “was aware of or should have been aware of” the restrictive covenants that Pennington and Martin had signed. The court rejected Geneva’s argument that Rico should have this requisite knowledge “by virtue of” the defendants’ employment at Rico, noting that it’s a well-established principle “that knowledge of ‘an implied contractual obligation in all employment contracts not to disclose trade secrets’ is not sufficient.” Second, the court pointed to the fact that Geneva’s complaint did not allege that Rico’s alleged solicitations were the “but for” cause of the former employees’ breaches, noting that Pennington and Martin may well have intended to breach their contracts with Geneva, regardless of what Rico did.
The court allowed Geneva’s claim for tortious interference with prospective business relations because it concluded that Geneva had properly pled that it had business relationships with the NFL and MLB and that the defendants knew of those relationships and intentionally interfered with them using improper or illegal means. The court also allowed Geneva’s claims for trade secrets misappropriation and unfair competition. Noting that “conduct that is not criminal or tortious will generally be lawful and thus [insufficient] to create liability for interference with prospective contracts or other nonbinding economic relations,” the court found that Geneva’s pleadings of those claims raised to the level of “criminal or tortious” conduct.