International Bus. Machines Corp. v Simonson (2014 NY Slip Op 50268(U))

International Bus. Machines Corp. v Simonson

2014 NY Slip Op 50268(U) [42 Misc 3d 1229(A)]

Decided on February 27, 2014

Supreme Court, Westchester County

Connolly, 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This opinion is uncorrected and will not be published in the printed Official Reports.

The following documents were read in connection with the parties' motions for summary judgment:

The plaintiff International Business Machines Corporation (hereinafter IBM) commenced this action against its former employee, the defendant Thomas Simonson (hereinafter Simonson), alleging that his violation of noncompete provisions entitled IBM to rescind or "clawback" stock option awards that Simonson received during the course of his employment. The complaint seeks to recover the principal sum of $534,465.40, representing the gains Simonson recognized upon his exercise of the options. Simonson denies that he violated the noncompete provisions, and asserts a counterclaim alleging that IBM failed to pay him the full severance he was promised. IBM now moves for summary judgment on its complaint, and for summary judgment dismissing Simonson's counterclaim. Simonson cross-moves for summary judgment dismissing the complaint.

It is undisputed that Simonson was employed by IBM from the mid-1980's through 2005, during which time he held various positions, progressing from the position of sales representative to the title of Vice-President of IBM Competitive Sales Worldwide.

While working for IBM, Simonson participated in the IBM 1999 and 2001 Long-Term Performance Plans (hereinafter the plans).^[FN1] The plans, which contain nearly identical language, permit awards of stock options and other incentives to employees for the stated purpose of attracting, motivating, and retaining select employees by providing the employees with a proprietary interest in the growth and development of the company. Both plans contain forfeiture clauses, or what are sometimes referred to as "clawback" provisions:

Pursuant to the plans, Simonson was granted five stock option awards in the years 2000, 2001, 2002, 2004, and 2005 (hereinafter the awards). The final award, granted to Simonson on March 8, 2005, contains a "Cancellation and Rescission" clause establishing a 12-month rescission period for the options granted pursuant to the award (see Plaintiff's Exhibit L at 2). The award further states: "In consideration of this award, you agree . . . that by your acceptance of this award, all awards and options previously granted to you under the Plan or prior IBM plans are subject to the terms set forth above under Cancellation and Rescission'" (see id.). Thus, IBM contends—and Simonson does not dispute—that the rescission period for all the stock option awards at issue in this case was extended to 12 months from the date of the exercise of the option.

On May 31, 2005 Simonson and IBM executed a Noncompetition Agreement, which states in relevant part: "As consideration for the awards granted to you on March 8, 2005 . . . if you engage in conduct in breach of this Agreement prior to, or within (12) months after, any delivery or payout pursuant to any [Long-Term Performance Plan] Awards, then such conduct shall also be deemed to be a breach of the terms of such [Long-Term Performance Plan] Awards, justifying cancellation or rescission of any such [Long-Term Performance Plan] Awards" (Plaintiff's exhibit M ¶ 5).

According to Simonson, in the Spring of 2005, his workgroup at IBM was being disbanded or downsized (see Simonson deposition at 11). At about the same time, a position became available [*4]with an IBM business partner, Mainline Information Systems (hereinafter Mainline) (see id. at 11-12). Simonson, with the help of his IBM manager, Mark Elliot, was able to obtain a position at Mainline through an IBM-sanctioned program called "Skills for Growth" (see id. at 12). Mainline became Simonson's employer and paid his salary, however, his medical benefits were covered by IBM, his service time at IBM continued to accumulate, and his stock options continued to vest (see id. at 14). Simonson claims Elliot promised that, if IBM was unable to offer Simonson a position at the conclusion of his assignment with Mainline, IBM would pay him a severance of $190,000, which was equal to one-half of his annual salary (see Simonson affidavit in opposition ¶ 38). Simonson was initially granted a one-year "leave of absence," from July 1, 2005 to June 30, 2006, pursuant to the Skills for Growth program (see Simonson affidavit in opposition, exhibit K). IBM's letter to Simonson granting him leave under the Skills for Growth program states that Simonson's IBM Career Manager would "maintain appropriate contact with [Simonson] during his leave" and "actively assist in finding [him] a comparable position upon [his] return" (id.). Simonson extended his leave under the Skills for Growth program for two additional one-year periods (for a total of three years) (see Simonson deposition at 12-13). Simonson believed that he could return to IBM if a position became available, but understood that he was not guaranteed a job with IBM after the conclusion of his Skills for Growth leave (see id. at 14). In June 2008, when Simonson's tenure at Mainline concluded, he contacted IBM, but it was unable to offer Simonson a position (see id. at 40-41). On October 24, 2008, Simonson and IBM entered into a separation agreement, pursuant to which Simonson received a $122,000 lump-sum payment (see id. at 43).^[FN2] Simonson contends that Denise Williams, an IBM employee, informed him that $67,000 was deducted from the $190,000 severance he was promised to account for gains he made from the exercise of stock options (see id. at 44-48). The agreement provides that Simonson's "full-time active employment with IBM was terminated on July 31, 2008," and that, "[u]ntil that time [Simonson's] employment remained subject to all policies and practices of IBM" (see Plaintiff's exhibit O, ¶ 1 [a]). The agreement acknowledges that the terms and provisions of stock options previously awarded continue to apply after the termination of employment, "including, but not limited to, those dealing with cancellation and rescission of awards" (see id. at ¶ 4).

By contrast, according to IBM, Simonson left IBM voluntarily in 2005 to work for Mainline (see Hoey deposition at 7). Robert Hoey, IBM's General Manager of Information Technology Services, testified that Simonson's position was not threatened with elimination when he decided to leave (see id. at 6). Hoey explained that IBM's "Skills for Growth" program, under which Simonson left, permits an IBM employee to resign and work for a business partner under the theory that the relationship would strengthen both firms (see id. at 11). In 2008, when Simonson's tenure with Mainline under the Skills for Growth program concluded, Simonson contacted Hoey, asking whether there were any opportunities for him at IBM, and Hoey referred him to an IBM human resources leader, Denise Williams, regarding the potential for further employment with IBM (see id. at 15). [*5]

It is undisputed that Simonson exercised his stock options on several dates from February 25, 2008 to August 1, 2008, deriving a total gain of $534,465.40 (see Plaintiff's exhibit N).^[FN3]

On February 12, 2009, within a year of exercising the options, Simonson commenced employment with Unisys Corporation (hereinafter Unisys) (see Simonson deposition at 55). In an affidavit, Simonson avers that he presently holds the title of Vice President and General Manager of Unisys' Division of Technology, Consulting and Integrated Solutions (see Simonson affidavit in support ¶ 2). He states his role at Unisys is to lead sales functions for his division, which includes supporting and directing a strategic alliance between Unisys and IBM (see id. ¶ 5). He lists several joint initiatives between IBM and Unisys, with which he is involved, and notes that IBM directs customers to Unisys through its website and publicly refers to Unisys as a strategic partner (see id. ¶¶ 6, 12-15). Simonson indicates that since joining Unisys, his efforts have resulted in new business contracts that benefit both Unisys and IBM (see id. ¶ 22). Simonson does not consider his employment with Unisys to compete with IBM, but rather views Unisys to be an IBM business partner (see id. ¶ 38).

In a letter dated March 26, 2009, IBM wrote to Simonson rescinding and canceling his stock option awards, and demanding that he repay IBM $534,465.40, the amount of gains he realized from the exercise of his stock options (see Plaintiff's exhibit 10).

When the parties were unable to come to an agreement, IBM commenced this action, seeking to recover the sum of $534,465.40. Simonson asserted a counterclaim, alleging that he was entitled to a severance payment equal to six months of his final salary, which he did not receive pursuant to the separation agreement.

IBM now moves for summary judgment on its complaint and for summary judgment dismissing Simonson's counterclaim. Simonson opposes and cross-moves for summary judgment dismissing the complaint.

IBM contends that the dispute is governed by the so-called "employee choice" doctrine, whereas Simonson contends that the doctrine does not apply. On this point, the Court agrees with Simonson.

Under New York law, "noncompete clauses in employment contracts are not favored and will only be enforced to the extent reasonable and necessary to protect valid business interests" (Morris v Schroder Capital Mgmt. Int'l, 7 NY3d 616, 620 [2006]). The test for enforcing a noncompetition [*6]covenant is generally one of reasonableness (see BDO Seidman v Hirshberg, 93 NY2d 382, 388-389 [1999] Reed, Roberts Associates, Inc. v Strauman, 40 NY2d 303, 307 [1976]).

However, the "employee choice" doctrine, which "applies in cases where an employer conditions receipt of postemployment benefits upon compliance with a restrictive covenant," constitutes a recognized exception to the general disfavor of noncompete provisions (Morris v Schroder Capital Mgmt. Int'l, 7 NY3d at 620-621). "The employee choice' doctrine is applicable in cases involving economic relief, rather than injunctive relief" (id. at 621, n 2). Pursuant to the doctrine, a noncompete provision will be found to be reasonable "if the employee is given the choice of preserving his rights under his contract by refraining from competition or risking forfeiture of such rights by exercising his right to compete" (id. at 621). The employee choice doctrine "assumes that an employee who leaves his employer makes an informed choice between forfeiting his benefit or retaining the benefit by avoiding competitive employment" (id.). Stated another way, "[i]t is no unreasonable restriction of the liberty of a man to earn his living if he may be relieved of the restriction by forfeiting a contract right or by adhering to the provisions of his contract" (Kristt v Whelan, 4 AD2d 195, 199 [1st Dept 1957] aff'd 5 NY2d 807 [1958]).

"An essential element to the doctrine is the employer's continued willingness to employ the employee" (Morris v Schroder Capital Mgmt. Int'l, 7 NY3d at 621 [internal quotation marks omitted]). "Where the employer terminates the employment relationship without cause, his action necessarily destroys the mutuality of obligation on which the covenant rests as well as the employer's ability to impose a forfeiture'" (id., citing Post v Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 NY2d 84, 89 [1979]). "[A]lthough a restrictive covenant will be enforceable without regard to reasonableness if an employee left his employer voluntarily, a court must determine whether forfeiture is reasonable' if the employee was terminated involuntarily and without cause" (Morris v Schroder Capital Mgmt. Int'l, 7 NY3d at 621).

Thus, the question of whether to apply the employee choice doctrine in this case rests on whether Simonson's termination from IBM was voluntary. IBM frames this issue by arguing that Simonson voluntarily left IBM in 2005 to work for Mainline. However, the Court disagrees and finds that the relevant inquiry relates to the year 2008, when Simonson's leave under the Skills for Growth program ended and he entered into a separation agreement with IBM. Whether Simonson's participation in Skills for Growth was voluntary or not, his participation in that program did not constitute a resignation from IBM. Indeed, the letter granting Simonson's application to the Skills for Growth program specifically refers to the program as a "leave of absence." While Simonson worked for Mainline, his medical benefits were covered by IBM, his service time at IBM continued to accrue, and his IBM stock options continued to vest (see Simonson deposition at 14). IBM provided Simonson with a human resources career counselor during his leave who would "actively assist in finding [him] a comparable position upon [his] return" (see Simonson affidavit in opposition, exhibit K). Moreover, the 2008 separation agreement states that Simonson's "full-time active employment with IBM was terminated on July 31, 2008" (see Plaintiff's exhibit O, ¶ 1 [a] [emphasis added]). Under any view of these facts, it cannot be said that IBM and Simonson permanently severed their relationship as employer and employee in 2005. Rather, it is apparent that, [*7]although Mainline paid Simonson's salary from 2005 to 2008, he remained tethered to IBM during that period.

Accordingly, to determine whether the employee choice doctrine applies, the Court must look to whether Simonson freely chose to leave IBM in 2008 after his Skills for Growth leave of absence had concluded. It is clear from the record that his separation from employment with IBM in July 2008 was not voluntary, but was the result of IBM's inability or unwillingness to offer him a position at that time. Therefore, viewing the evidence in the light most favorable to IBM, since Simonson's separation from IBM was not his own choice, the employee choice doctrine is inapplicable and the Court must examine the reasonableness of the noncompete provisions in the clawback provisions (see Post v Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 NY2d at 89 ["in the case of an involuntary discharge, the [employee choice doctrine] does not apply"] see also Morris v Schroder Capital Mgmt. Int'l, 7 NY3d at 621).

II. Reasonableness of the Noncompete Provisions

Simonson argues that the noncompete provision is unreasonable since it does not protect IBM's interest in trade secrets and confidential customer data, and he does not possess a special or unique skill set constituting a protectable interest. He claims that he had no access to confidential customer data, particularly since he performed no "active" work for IBM since July 2005, approximately three years and eight months prior to beginning employment with Unisys. He also contends that his work in fact benefits IBM though the companies' strategic partnership, and that his employment with Unisys did not result in the release of confidential customer information since his work at Unisys primarily involves interaction with IBM.

In opposition, IBM contends that the forfeiture clause is reasonable in that IBM has a legitimate interest in protecting its confidential information. IBM argues: "By the time [Simonson] left IBM, he was the vice-president of IBM's competitive sales worldwide. At such a high-level position, Defendant had access to sensitive information not known to people outside of IBM, which would be of significant value to a competitor" (IBM Memo of Law in Opposition at 12).

For the reasons articulated below, the Court finds that the forfeiture clause is unreasonable as a matter of law as applied to Simonson and, therefore, denies the branch of IBM's motion that is for summary judgment in its favor, and grants Simonson's cross motion for summary judgment dismissing the complaint.

The reasonableness of a covenant not to compete is reviewed under a three-pronged test: "A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public" (BDO Seidman v Hirshberg, 93 NY2d at 388-389; see Reed, Roberts Associates, Inc. v Strauman, 40 NY2d 303, 307 [1976]).

The "violation of any prong renders the covenant invalid" (BDO Seidman v Hirshberg, 93 [*8]NY2d at 389). Here, Simonson's arguments relate solely to the first prong.

In Reed, Roberts Associates, Inc. v Strauman, the Court of Appeals limited the cognizable employer interests under the first prong as follows: "[R]estrictive covenants will be enforceable to the extent necessary to prevent the disclosure or use of trade secrets or confidential customer information" (40 NY2d at 308). More stringent restraints may be imposed where the employee's services are "unique or extraordinary" (id.; see BDO Seidman v Hirshberg, 93 NY2d at 390 ["the cognizable employer interests under the first prong of the common-law rule [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"]).

In this case, Simonson has met his prima facie burden for summary judgment by establishing that the forfeiture provision at issue does not protect a legitimate interest of IBM, specifically, that he is not privy to trade secrets or confidential customer information, and that his skill set is not extraordinary or unique (see Zuckerman v New York, 49 NY2d 557, 562 [1980]).

As an initial matter, there appears to be no serious argument that Simonson, who was employed in a sales-related position, is a risk for divulging trade secrets, as "mere knowledge of the intricacies of a business is simply not enough" to constitute a trade secret (Marietta Corp. v Fairhurst, 301 AD2d 734, 739 [3d Dept 2003] see Ashland Mgmt. v Janien, 82 NY2d 395, 407 [1977] Locke v Tom James, Co., 2013 US Dist Lexis 48987 at *22-23 [SDNY 2013]). Nor is there any serious argument to be made that his skill set in the field of technology sales is "extraordinary or unique," such that his services are irreplaceable (see BDO Seidman v Hirshberg, 93 NY2d at 389 [members of learned professions are deemed to provide unique or extraordinary services] Purchasing Associates, Inc. v Weitz, 13 NY2d 267, 274 [1963] ["It must also appear that [the employee's] services are of such character as to make his replacement impossible or that the loss of such services would cause the employer irreparable injury"] Frederick Bros. Artists Corp. v Yates, 271 AD 69 [1st Dept 1946], aff'd 296 NY 820 [1947]).

Rather, the inquiry in this case must focus on whether Simonson's employment with Unisys implicates IBM's interest in protecting confidential customer information. Although protection of an employer's confidential customer lists is recognized as a protectable interest, the information sought to be protected must actually be confidential and not "readily discoverable through public sources" (Reed, Roberts Associates, Inc. v Strauman, 40 NY2d at 308; see Columbia Ribbon & Carbon Mfg. Co. v A-1-A Corp., 42 NY2d 496, 499 [1977] [a covenant not to compete will be unenforceable "where the employer's past or prospective customers' names are readily ascertainable from sources outside its business"]). Under the facts and circumstances of this case, Simonson has established that his employment with Unisys does not risk the disclosure of confidential customer information (see BDO Seidman v Hirshberg, 93 NY2d at 390 ["the application of the test of reasonableness of employee restrictive covenants focuses on the particular facts and circumstances giving context to the agreement"]). Simonson's work primarily involves joint initiatives between IBM and Unisys. Moreover, to be actionable, a threatened release of confidential customer information must involve the misappropriation of highly specific information produced through great [*9]effort and expense of the employer (see Stanley Tulchin Assocs., Inc. v Vignola, 186 AD2d 183, 185 [2d Dept 1992] [client lists were protectable confidential information where the lists contained the names and telephone number of clients, the names of key contacts with those clients, as well as information relating to the clients' businesses] Giffords Oil Co. v Wild, 106 AD2d 610, 611 [2d Dept 1984] [noncompete clause in oil salesman's employment agreement was enforceable where customer lists contained "information such as fuel oil capacity of customers' tanks, and the amount certain customers are willing to pay, which aids plaintiffs in establishing prices and which could only be achieved through personal solicitation"] cf. Reed, Roberts Associates, Inc. v Strauman, 40 NY2d at 308 [there was no finding of the employee "acting wrongfully by either pilfering or memorizing the customer list]).

In opposition to Simonson's prima facie showing, IBM failed to raise a triable issue of fact (see Zuckerman v New York, 49 NY2d at 562). Although IBM argues that Simonson "had access to sensitive information not known to people outside of IBM" (see IBM Memo of Law in Opposition at 12), it has failed to support that claim through admissible evidence identifying the type or quality of information it claims Simonson possesses (see Zuckerman v New York, 49 NY2d at 562 ["unsubstantiated allegations or assertions are insufficient" to raise a triable issue of fact]). Critically, "[t]he use of information about an employer's customers which is based on casual memory is not actionable" (Levine v Bochner, 132 AD2d 532, 533 [2d Dept 1987]).

In summary, the Court finds that the noncompete provisions in the stock option plans and awards are, in this case, unreasonable as a matter of law as applied to Simonson.^[FN4] This result comports with New York's long-standing policy that "no restrictions should fetter an employee's right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment" (Reed, Roberts Associates, Inc. v Strauman, 40 NY2d at 307). "[O]ur economy is premised on the competition engendered by the uninhibited flow of services, talent, and ideas" (id.). Accordingly, since Simonson's employment with Unisys does not threaten one of IBM's recognized protected interests, Simonson is not required to return the $534,465.40 in gains he derived from the exercise of his stock options.^[FN5]

Finally, the Court addresses IBM's contention that the forfeiture provision in this case should be evaluated under a different or less stringent standard of reasonableness than the ordinary covenant not to compete. IBM cites to Lenel Sys. Intl. v Smith (10 Misc 3d 890 [Supreme Court, Monroe County 2005], aff'd 34 AD3d 1284 [4th Dept 2006]), where the trial court held that a reasonableness test did not apply. However, in that case, the noncompete agreement did not contain a forfeiture provision, and the plaintiff was seeking common-law rescission of the options awards altogether as a remedy for breach of contract (see Lenel Sys. Intl., Inc. v Smith, 34 AD3d at 1284). Therefore, [*10]Lenel is not analogous to the case at bar.

Likewise, IBM's reliance on Int'l Bus. Machines v Martson (37 F Supp 2d 613 [SDNY 1999]), a case involving similar stock option awards to the ones at bar, is misplaced. IBM cites to the portion of Martson that states: "A restraint on an employee's ability to work for a competitor is not the same thing as a restraint on the alienability of his stock options" (id. at 618-619). However, neither Martson, nor the case at bar, involve a restraint on alienation, i.e, a prohibition on the transfer of property, which is why the Martson court rejected the defendant's contention that the stock option plan was unenforceable on that ground (see id.). Notably, the court in Martson went on to find an issue of fact as to the applicability of New York's employee choice doctrine based upon the defendant's claims of constructive discharge (id. at 619-620), which, by implication, indicates that the issue of reasonableness under the BDO Seidman and Reed, Roberts Associates, Inc. line of cases could be reached if the defendant's separation from his employer were found to be involuntary. Accordingly, the Court is satisfied that the three-pronged standard for reasonableness is the appropriate standard under which to judge the forfeiture provision at issue.

III. IBM is entitled to summary judgment dismissing Simonson's counterclaim

With respect to Simonson's counterclaim alleging that he was promised a greater severance than the one he accepted in his separation agreement, IBM has met its prima facie burden for summary judgment (see Zuckerman v New York, 49 NY2d at 562). Here, despite Simonson's claim that he was promised a $190,000 severance at some earlier date, he nevertheless executed the separation agreement in 2008 agreeing to accept a severance of $122,000. Absent a showing of fraud or misrepresentation, that agreement, which contains a merger clause, is presumptively enforceable (W.W.W. Assocs. v Giancontieri, 77 NY2d 157, 162 [1990] ["[W]hen parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms"). In opposition, Simonson failed to raise a triable issue of fact (cf. Pellerito v Russo, 176 AD2d 713 [2d Dept 1991]), and therefore, his counterclaim must be dismissed.

ORDERED that the defendant's cross motion for summary judgment dismissing the complaint is granted; and it is further

ORDERED that the branch of the plaintiff's motion which is for summary judgment dismissing the defendant's counterclaim is granted, and the motion is otherwise denied; and it is further

This constitutes the decision and order of the Court.

Dated:White Plains, New York [*11]