Breach of Contract; Tortious Interference with Contract; Unjust Enrichment; Constructive Trust; Non-Compete Covenants; Trade Secrets
By: Anastasia Galstian | Staff Writer
Plaintiff engaged in the sale, installation, and maintenance of reverse osmosis water purification and filtration systems (“RO Systems”). Defendants were hired by Plaintiff as salespeople. Plaintiff required all salespersons to sign an Independent Business Owner Contract (“IBO Agreement”). The IBO Agreement provided that Defendants were required to purchase a demonstration set and water filtration system. In addition, Defendants were required to sign a Salesperson Agreement, which provided that salespeople could “not at any time and for any reason whatsoever disclose to anyone or use any Confidential Information.” Notably, this obligation would survive future termination of Defendants as the customer information and customer list trade secrets were considered trade secrets. The Salesperson Agreement further contained a “Non-Competition” Clause, which prohibited salespeople for a period of two years immediately following their termination to: (i) participate or engage in production, distribution, sale and/or advertisement of products similar to products produced and distributed by plaintiff; (ii) solicit or treat any customers who have received services from plaintiff or purchased products from plaintiff prior to or during term of agreement; and (iii) act in any way that could be harmful to the goodwill or business of plaintiff. Later, Defendants formed Edens, a limited liability corporation that sells, distributes, and installs water ionizers, which allow tap water in a home to pass through its system to make ionized anti-oxidant water.
Believing that Defendants formed Eden to solicit its own customers, Plaintiff commenced suit alleging four claims: (1) breach of contract, on the basis that individual defendants breached the restrictive covenants in both by engaging in the same business as Plaintiff, thereby competing with it; (2) tortious interference, on the basis that Edens improperly interfered with the IBO Agreements and the Salesperson Agreements by engaging Defendants to sell products similar to its products; (3) unjust enrichment, on the basis that defendants have been unjustly enriched by profiting from such breaches; and (4) constructive trust, as a remedy imposed to compensate Plaintiff from Edens’ profits because such profits were acquired in violation of the restrictive covenants. Defendants moved for summary judgment on the basis that Plaintiff’s allegations lacked verifiable proof.
The Court granted Defendants’ motion for summary judgment because Plaintiff could not raise material issues of fact. First, the non-compete clause was unreasonable. Restrictive covenants not to compete are “justified by the employer’s need to protect itself from unfair competition by former employees.” The Court held that the restraints here were unreasonable because they imposed an undue hardship on the individual Defendants, were injurious to the public because they curtailed freedom of competition and were greater restrictions than required to protect any conceivable legitimate interest of Plaintiff. Additionally, the covenants imposed an undue hardship on the individual Defendants. Plaintiff failed to establish that individual defendants possessed a trade secret or confidential information. The Court, therefore, found the restrictive covenants to be unenforceable since they were overly broad, as they both seek to prevent the individual Defendants from soliciting or performing work for any customer of Plaintiff and contain no geographical limitations. No partial enforcement of the restrictive covenants was warranted.
In regards to the tortious interference action, the Court held Plaintiff could not raise an issue of fact on Defendants’ actual knowledge that individual defendants’ and Edens were not engaging in the production, distribution, sale/or advertisement of products similar to the products produced and distributed by Plaintiff. Through the use of expert affidavits and professional opinions regarding the products, the Court determined that the individual Defendants’ and Edens have established that Plaintiff’s systems are technically and functionally different from the products sold by Edens and no factual issue remains for trial. Third, the Court held that Plaintiff’s claim of unjust enrichment lacked merit. In order to prevail, a party must show that: (1) the other party was enriched; (2) at that party’s expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered. Here, the Court determined that Plaintiff may not assert a claim of unjust enrichment against individual Defendants because the theory of unjust enrichment relies upon a quasi-contract claim, not one governed by the restrictive covenants. Even assuming, arguendo, the elements are met, the covenants were found to not have been violated here and Edens cannot be found to have been unjustly enriched in any manner at Plaintiff’s expense.
Fourth, the Court found that there was no basis to impose a constructive trust upon Edens’ profits. To impose an constructive trust, Plaintiff must prove: (1) the existence of res (property or some interest in property); (2) the right of the complaining party to that res; and (3) some wrongful acquisition or detention of the res by another party who is not entitled to it.” Here, the elements of a constructive trust were not met because a constructive trust is based on the existence of some form of unjust enrichment. Since the Court found no unjust enrichment by individual Defendants in this case, the Court granted Defendants’ motion as to this point.
The Court, therefore, granted summary judgment for Defendants dismissing Plaintiff’s claims.
Aqualife Inc. v. Leibzon, Index No. 2717/13, 1/5/16, (Demarest, J.).