[*1]
First Empire Sec., Inc. v Miele
2007 NY Slip Op 51884(U) [17 Misc 3d 1108(A)]
Decided on August 10, 2007
Supreme Court, Suffolk County
Sgroi, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and will not be published in the printed Official Reports.


Decided on August 10, 2007
Supreme Court, Suffolk County


First Empire Securities, Inc., Plaintiff,

against

Lawrence Miele, Defendant.




20247-2007



John T. Bauer, Esq.

Littler Mendlson, P.C.

Attorney for the Petitioner

532 Broadhollow Road, Suite 142

Melville, New York 11747

Davidson & Grannum, LLP

Attorney for Respondent

30 Ramland Rd., Suite 201

Orangburg, New York 10962

Sandra L. Sgroi, J.

ORDERED that the relief requested in the Order to Show Cause is granted only to the extent that the Respondent is enjoined from soliciting any of his former institutional clients that he serviced as the responsible salesperson while employed by the Petitioner; and it is further

ORDERED that the Petitioner is directed to file an undertaking in the amount of $5,000.00 within twenty days of service of a copy of this order; and it is further

ORDERED that the stay shall be lifted without necessity of further motion by order of this Court upon proof that the undertaking has not been filed as directed herein; and it is further

ORDERED that all other requested relief is denied.

Lawrence Miele, the Respondent herein, was employed by the Petitioner, First Empire [*2]Securities, Inc., as a sales person from 1998 through July 16, 2007. Miele resigned from his employment on July 16, 2007 and immediately began working for AG Edwards. While the Respondent was employed by the Petitioner, an employment agreement dated July 6, 1998 remained in effect. That agreement provided that:

(f)or 18 months following your termination as an employee for Employer(the Restriction Period), you shall not solicit or sell to, directly or indirectly, any customer of Employer, for whom you have acted as a sales person (the Restricted Customers). The list of Restricted Customers shall be maintained by Employer and may be updated to keep it current and shall exclude those customers whose business you cultivated prior to becoming an employee of the Employer even though you maintain these customers while an employee of the Employer. A list of your existing accounts is attached as Exhibit A.[FN1] The successors and assigns of those Restricted Customers shall be deemed to be included in the list of Restricted Customers. This paragraph shall apply during the Restriction Period, regardless of the reason for your leaving the Employer.
***You agree never to disclose to any person or entity, or use to solicit customers of the Employer, any trade secrets, secrets, or confidential information of the Employer, including without limitation the identity of Employer's customers, orders placed by Employer's customers, the identities or titles of officers at Employer's customers, Employer's methods of obtaining customers, and the techniques used by Employer to evaluate its customers' needs for products.
***If any part of this Employment Contract is found to be unenforceable, the remainder of this Employment Contract shall be unaffected by such finding, and shall be enforceable. (see, Petitioner's Exhibit "1").


According to an affidavit submitted by John Foley, the Sales Manager for the Petitioner, in support of the Order to Show Cause for injunctive relief, the Respondent earned over $199,000.00 in 2004, over $209,000.00 in 2005 and over $209,000.00 in 2006. Foley states that in January 2007, the Petitioner discovered that Miele had emailed client contact lists, customer investment policies, customer investment portfolios and portfolio analyses to his personal email account. On or about January 16, 2007, Foley met with the Respondent and as a result Miele signed a written agreement where he acknowledged that he emailed documents to his account and that he agreed to destroy all of those documents within 24 hours. The Petitioner has submitted no evidence to indicate that those documents were not destroyed.

In the affidavit submitted in support of the motion for a preliminary injunction, Foley states that:
(d)espite his promise not to raid our customers, the Company has been informed [*3]that Miele started soliciting First Empire's accounts upon joining AG Edwards. Although Miele's accounts at First Empire have been distributed to other salespersons since his resignation, not one account has engaged in a trade through First Empire since July 16, the date of Miele's resignation.


Foley has not disclosed (1) who informed the Petitioner that the Respondent has been soliciting customers, (2) the manner of the alleged soliciting and (3) the customers that were solicited.

Foley also alleges that "the Company has discovered that Miele altered critical customer contact information in a Company database prior to his departure" and more specifically that "Miele deleted the names of individual contact persons." No other specifics have been given by the Petitioner in the moving papers concerning these particular actions of the Respondent, which, if unexplained, appear to indicate that Miele attempted to sabotage Petitioner's records.

In opposition, Miele states that while he was employed by the Petitioner, all of his clients, with the exception of his father-in-law, were institutional clients consisting of banks, credit unions and money managers, that most of these clients had numerous, other brokers servicing them and that the Board of Directors of those institutional clients had to approve Miele personally before he could act as a salesman for their trades. Further, he states that all but approximately seven of his institutional clients had no assets deposited with the Petitioner and that most of the clients that he serviced would place their trades with Miele and Miele would then execute the trades. The clients would deposit money in their accounts for the purpose of settling the executed trade. These institutional clients only dealt in fixed income assets and could not purchase or sell equities. The Respondent alleges that the "(t)o the extent First Empire has failed to do any business with these clients since my resignation on July 17, 2007, it is likely due to its failure to have its brokers approved by the Board of Directors for these clients. Or more likely, the process for Board approval has commenced but not yet been completed." (Affidavit of Lawrence Miele, 8/1/07).

In his affidavit, Miele has explained the reason he emailed information home in January 2007, and he has also stated that he deleted that information from his home computer, as he agreed to do in his written agreement with the Petitioner. He has denied improperly deleting or altering any of Petitioner's files or records and he states that all of the changes in the files were effectuated with management approval. Additionally, the Respondent alleges that the Petitioner owes him approximately $76,000.00.

The Court is aware that the Respondent appears to have freely signed the employment agreement with a restrictive covenant, he has a Bachelor of Science Degree in Finance from Cornell University, he was trained as a banker for CitiCorp, he began studying for his MBA in 2006, and he was a highly compensated employee(see generally, IVI Environmental, Inc. v. McGovern, 269 AD2d 497, 707 NYS2d 107). Under these circumstances, the Respondent, clearly a sophisticated and knowledgeable person, was aware or should have been aware of the import of the employment agreement that he signed. [*4]

The Court is cognizant that this matter will proceed to arbitration, but the rules of FINRA (Financial Industry Regulatory Authority) f/k/a NASD (National Association of Securities Dealers)[FN2] specifically refer to the possibility that in an appropriate situation the Court may issue an injunction that could be subsequently addressed in the FINRA/NASD forum by both parties during arbitration (NASD Manual § 13804[FN3]).

The Petitioner has commenced this proceeding seeking (1) to preliminarily enjoin and restrain the Respondent Lawrence Miele from directly or indirectly contacting, soliciting or doing business with any customer of Petitioner with whom the Respondent was the responsible salesperson during his employment, (2) to preliminarily enjoin the Respondent from using reproducing or disclosing confidential or proprietary material of any kind,(3) to preliminarily enjoin the Respondent from destroying or altering any potentially relevant material; and (4) to direct the Respondent to produce for inspection and imaging all electronic devices used or accessible to the Respondent. The Justice who signed the order to show cause stayed the Respondent from disposing of any documents, records or property that relate to the Petitioner that are in the Respondent's possession and enjoined the Respondent from violating his employment agreement or destroying any records belonging to the Petitioner.

A preliminary injunction will not be granted by this Court unless the Petitioner first establishes (1) a likelihood of ultimate success on the merits, (2) that irreparable injury will occur without the issuance of a preliminary injunction, and (3) a balancing of the equities favors the movant ( see, CPLR 6301; W.T. Grant Co. v. Srogi, 52 NY2d 496, 438 NYS2d 761, 420 NE2d 953). Where the facts are sharply disputed, those elements have not been established and the motion for a preliminary injunction will be denied or the relief granted will be circumscribed and adjusted accordingly ( see generally, Morley Distribs. v. Merinberg, 216 AD2d 544, 628 NYS2d 579; Price Paper & Twine Co. v. Miller, 182 AD2d 748, 582 NYS2d 746; Family Affair Haircutters v. Detling, 110 AD2d 745, 747, 488 NYS2d 204).

The Courts are clearly hesitant to issue injunctions restricting a former employee's ability to work at his chosen profession even where there is a restrictive covenant in an employment agreement and as the Appellate Division, Second Department stated in Price Paper & Twine Co. v. Miller (supra ):
Courts will not impede an employee's ability to compete with a former employer [*5]unless the evidence is clear and convincing that it is necessary to protect the trade secrets of the employer or that fraudulent methods were used by the employee to disparage the employer's business(cites omitted)(emphasis provided by the Court).


In the absence of a restrictive covenant limiting competition, a former employee may freely compete with a former employer "unless trade secrets are involved or fraudulent methods are employed" (Walter Karl, Inc. v. Wood, 137 AD2d 22, 27, 528 NYS2d 94; see, Starlight Limousine Serv. v. Cucinella, 275 AD2d 704, 705, 713 NYS2d 195). The employment agreement signed by Miele does contain a restrictive covenant and that covenant provides that the Respondent " ***shall not solicit or sell to, directly or indirectly, any customer of Employer, for whom you have acted as a sales person (the Restricted Customers)." (emphasis provided by the Court). Where, as here, the employment agreement does contain a restrictive covenant, the Court will not automatically enforce the employment restriction as written without further inquiry into the reasonableness of the terms in the restrictive covenant.

It is clear that a covenant not to compete must be reasonable to be enforceable (see, BDO Seidman v. Hirshberg, 93 NY2d 382, 690 NYS2d 854, 712 NE2d 1220). It has been held that "a restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer's legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee" (Reed, Roberts Assocs. v Strauman, 40 NY2d 303, 307, 386 NYS2d 677, 353 NE2d 590; Michael G. Kessler & Assoc., Ltd. v. White, 28 AD3d 724, 815 NYS2d 631; Elite Promotional Mktg., Inc. v. Stumacher, 8 AD3d 525, 779 NYS2d 528; American Para Professional Sys. v Examination Mgt. Servs., 214 AD2d 413, 625 NYS2d 33).

The legitimate interests of an employer that may be protected by a non-competition agreement are limited to "the protection against misappropriation of the employer's trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary" (see, BDO Seidman v Hirshberg, 93 NY2d 382, 389, 690 NYS2d 854, 712 NE2d 1220). However, a non-compete clause in an employment contract is not looked upon with favor by the Courts and will only be enforced to the extent reasonable and necessary to protect valid business interests (see, BDO Seidman v Hirshberg, 93 NY2d 382, 712 NE2d 1220, 690 NYS2d 854; Post v Merrill Lynch, 48 NY2d 84, 397 NE2d 358, 421 NYS2d 847). A restrictive covenant limited for a period of two years has been found to be reasonable but that period of time does not, prima facie, require a finding that the covenant is enforceable (see, Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 NY2d 496, 398 NYS2d 1004, 369 NE2d 4; Gazzola-Kraenzlin v. Westchester Medical Group, P.C., 10 AD3d 700, 782 NYS2d 115). Instead, the Court is required to look at all of the facts of the case to determine if the covenant not to compete may be valid (see, IVI Envtl., Inc. v. McGovern, 269 AD2d 497, 707 [*6]NYS2d 107).[FN4]

The Courts do not wish to limit an employee, especially an employee who never had an ownership interest in a business entity, from earning a living or pursuing employment. However, concern for the Respondent's right to earn a living does not "immunize" him from "capitalizing on [his] acquaintance with [his] former employer's customers or the favor [he] found with them" when a valid restrictive covenant concerning the non-solicitation of customers exists (Greenwich Mills Co. v Barrie House Coffee Co., 91 AD2d 398, 400, 459 NYS2d 454).

It appears that sales persons in the securities industry are governed by specific rules applicable to their profession (see FINRA Rules and Regulations). The Court agrees that those rules do not permit business entities and individuals governed by those rules to restrict customers from freely choosing the person or entity with which they wish to do business(see FINRA Rules 2110-7)[FN5]. Therefore, to the extent that the restrictive covenant signed by the Miele attempts to prevent the Respondent from taking orders from former clients who contact him without solicitation by the Respondent, it is not reasonable. However, the NASD manual does not bar the Court from restricting a former employee from violating a restrictive covenant to the extent that the restrictive covenant addresses the solicitation of former clients by the former employee (see, Respondent's Exhibit "R"). This decision in no way restricts a client of the Petitioner from soliciting the Respondent to conduct business.

Therefore, the Petitioner has shown its entitlement to an injunction restraining the Defendant from soliciting any persons who were his clients at the time that the Respondent left his employment for the period of time contained in the written agreement (see, Stiepleman Coverage Corp. v. Raifman, 258 AD2d 515, 685 NYS2d 283; Alside Div. of Associated Materials Inc. v. Leclair, 295 AD2d 873, 743 NYS2d 898; HBD Inc. v. Ryan, 227 AD2d 448, [*7]642 NYS2d 913).

Although this Court has determined that the Petitioner is entitled to a limited injunction based upon the restrictive covenant contained in the employment agreement, the Petitioner has asked for other relief based upon alleged improper use of its business records and confidential business information. The legitimate interests of an employer that may be protected are limited to "the protection against misappropriation of the employer's trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary" (see, BDO Seidman v Hirshberg, 93 NY2d 382, 389, 690 NYS2d 854, 712 NE2d 1220).

Clearly, copying computer files of one's employer without permission is wrongful and is actionable as is purloining records (see, Eastern Business Systems, Inc. v. Specialty Business Solutions, LLC, 292 AD2d 336, 739 NYS2d 177). However, the Petitioner herein has failed to establish, for the purposes of this motion, that the Respondent has used trade secrets, proprietary information or fraudulent methods either before or after he left the employ of the Petitioner (see, Pearlgreen Corp. v. Yau Chi Chu, 8 AD3d 460, 778 NYS2d 516; NCN Co. v. Cavanagh, 215 AD2d 737, 627 NYS2d 446).

The employee's intimate knowledge of the intricacies of the business is not enough to establish a trade secret (see, Marietta Corp. v. Fairhurst, 301 AD2d 734, 754 NYS2d 62, 67; Corporate Interiors, Inc. v. Pappas, 2 Misc 3d 1009(A), 784 NYS2d 919). Therefore, the Petitioner cannot establish its right to an injunction based simply on Respondent's intimate knowledge of its business obtained as a result of long term employment (see, Willis of New York, Inc. v. DeFelice, 299 AD2d 240, 750 NYS2d 39).

At the present time New York does not recognize the doctrine of "inevitable disclosure" of confidential or proprietary information to support the issuance of a preliminary injunction(see, Marietta Corp. v. Fairhurst, 301 AD2d 734, 754 NYS2d 62), although this Court does recognize that if the Petitioner eventually establishes that the Respondent wrongfully appropriated Petitioner's business records, it may be entitled to appropriate relief including monetary damages.[FN6] [*8]

The Petitioner, to be successful, generally must present proof showing that the information or document in question was not available to individuals outside the corporation, was available to limited personnel inside , was highly valuable to Petitioner and its competitors, and that considerable effort and money was expended in obtaining or creating the information or document(Eastern Business Systems, Inc. v. Specialty Business Solutions, LLC, supra ; Marietta Corp. v. Fairhurst, supra ).

While the Respondent was employed by the Petitioner, he was bound to exercise good faith and loyalty in the performance of his duties as an employee(see, Western Elec. Co. v. Brenner, 41 NY2d 291, 295, 392 NYS2d 409, 360 NE2d 1091; Lamdin v. Broadway Surface Corp., 272 NY 133, 138, 5 NE2d 66; see also, Royal Carbo Corp. v. Flameguard, Inc., 229 AD2d 430, 645 NYS2d 18). While an officer of a corporation is under a fiduciary duty to refrain from engaging in a competing business (see, Laro Maintenance Corp. v. Culkin, 267 AD2d 431, 700 NYS2d 490 citing Foley v. D'Agostino, 21 AD2d 60, 66-67, 248 NYS2d 121), the Respondent was not an officer of the Petitioner, and there is no compelling evidence in this record that he breached any duty of good faith that an employee owes to its employer while he was still working for the Petitioner.

While the evidence in this record supports the theory that the Respondent planned to leave the employ of the Petitioner for some time prior to his resignation, such conduct does not, without more, constitute actionable employee disloyalty (American Printing Converters, Inc. v. JES Label & Tape, Inc., 103 AD2d 787, 477 NYS2d 660; Maritime Fish Prods. v. World Wide Fish Prods., Inc., 100 AD2d 81, 474 NYS2d 281).

While the improper taking of materials from an employer or the destruction of records of an employer is actionable (see, Advanced Magnification Instruments of Oneonta, NY, Ltd. v. Minuteman Optical Corp., 135 AD2d 889, 522 NYS2d 287, 289), here there are disputed issues concerning whether certain business records were improperly changed, whether the issue involving the business records removed six months before Miele left Petitioner's employ was fully resolved and whether the Respondent has improperly taken orders from clients of the Petitioner. Where, as here, issues concerning wrongful misappropriation of business records are in sharp dispute, broad injunctive relief against a former employee will not be granted concerning that matter(see, Dental Health Associates v. Zangeneh, 267 AD2d 421, 701 NYS2d 106).

______________________Sandra L. Sgroi, J. S. C.

Footnotes


Footnote 1:Exhibit "A" referred to in the agreement is not attached to the agreement.

Footnote 2:NASD merged in 2007and has become part of FINRA.

Footnote 3: The relevant section states in part: "(u)pon a full and fair presentation of the evidence from all relevant parties on the request for permanent injunctive relief, the panel may prohibit the parties from seeking an extension of any court-issued temporary injunctive order remaining in effect, or, if appropriate, order the parties jointly to move to modify or dissolve any such order. In the event that a panel's order conflicts with a pending court order, the panel's order will become effective upon expiration of the pending court order."

Footnote 4:The exception of the "employee choice" doctrine does not apply to this matter because there is no receipt of post-employment benefits conditioned upon compliance with a restrictive covenant (see, Post v Merrill Lynch, 48 NY2d 84, 397 NE2d 358, 421 NYS2d 847).

Footnote 5:FINRA Rule 2110-7 states "(I)t shall be inconsistent with just and equitable principles of trade for a member or person associated with a member to interfere with a customer's request to transfer his or her account in connection with the change in employment of the customer's registered representative, provided that the account is not subject to any lien for monies owed by the customer or other bona fide claim. Prohibited interference includes, but is not limited to, seeking a judicial order or decree that would bar or restrict the submission, delivery or acceptance of a written request from a customer to transfer his or her account. Nothing in this interpretation shall affect the operation of Rule 11870."

Footnote 6:The Court notes that Marietta Corp. v. Fairhurst (supra ) states:

In deciding a trade secret claim, the court must make a factual determination concerning whether the alleged trade secret is truly "secret" by considering: " (1) the extent to which the information is known outside of [the] business; (2) the extent to which it is known by employees and others involved in [the] business; (3) the extent of measures taken by [the business] to guard the secrecy of the information; (4) the value of the information to [the business] and [its] competitors; (5) the amount of effort or money expended by [the business] in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others'"(Ashland Mgt. v. Janien, supra at 407, 604 NYS2d 912, 624 NE2d 1007, {82 NY2d 395} quoting Restatement of Torts § 757, comment b).