Tuesday, May 7, 2013

Indiana Court of Appeals Upholds Preliminary Injunction Against Former Employee

Indiana Court of Appeals Upholds Preliminary Injunction Against Former Employee
      In a recent decision, the Indiana Court of Appeals upheld a preliminary injunction issued against a former employee who began competing with his employer prior to leaving its service and who thereafter continued to use its trade secrets.  Snyder v. Classic Restaurant Services, LLC, No. 29A02-1207-CT-592 (Ind. App. April 3, 2013).
      Synder was an employee of Classic Restaurant Services, LLC, it being in the restaurant HVAC, refrigeration and cooking equipment industry.  Snyder was not subject to a non-compete agreement and was, it would appear, an at-will employee.  His terms of employment allowed him to “moonlight” on residential jobs.
      In July 2011, Synder convinced two of Classic’s customers, both Subway sandwich shops, to shift their work to him individually.  That fall he proceeded with organizing a competing venture by purchasing and stocking a new van, obtaining business cards and insurance, and prepare marketing materials.  In February 2012, he organized a new LLC under the name A Plus Air, LLC.
      While still employed by Classic, Snyder solicited additional of Classic’s clients to shift their business to him.  At the same time he failed to relay to Classic certain customer service complaints.  When one Classic customer said they would shift their business to Snyder’s new company, he asked that they delay doing so until he had opportunity to use up his Classic paid vacation days.
      Having completed his vacation, Snyder gave notice of his resignation, effective immediately.  While he returned to Classic the company-provided van and service equipment, he kept a listing of all of Classic’s vendors and customers, that document having been marked “Confidential;”  Snyder continued using that information in soliciting Classic’s customers.
      Another Classic employee, Doris Warswick, the office manager, was aware that Snyder was planning to set up his own competing business and soliciting its customers.  Immediately before Snyder submitted his resignation, Warswick e-mailed to him confidential documents from Ruby Tuesday’s, one of Classic’s largest customers.  She then resigned from Classic.
      Class brought suit against Snyder (this decision is silent as to any claims made against Warswick) seeking a temporary restraining order and a temporary injunction, both being based upon tortious interference with business relationships or misappropriation of trade secrets.  After an evidentiary hearing a temporary injunction was entered, it precluding Snyder from having any business dealings with specific Classic customers; he could otherwise participate in his chosen industry.  Snyder appealed.
      Snyder’s first argument was that, consequent to his resignation, no further fiduciary obligations limited his conduct, and such, there was not a reasonable likelihood of success on the merits of a claim for tortious interference.  Under Indiana law, tortious interference requires “some independent illegal action,” which may be a breach of the duty of loyalty.  Under Indiana law, an employee owes a duty of loyalty to his or her employer.  It upholding the temporary injunction, the Court of Appeals wrote:

On appeal, Snyder does not dispute that he actively violated his fiduciary duties to Classic during the last year of his employment.  He argues only that this prior misconduct should not affect his ability to complete with Classic following the termination of his employment.  In other words, Snyder claims essentially that once he resigned, he became free to enjoy the fruits of his breach of fiduciary duties.  Snyder cites no relevant authority in support of this assertion.
In a related context, we have held that termination of a fiduciary relationship does not shield the fiduciary from its duties or obligations concerning “transactions that have their inception before the termination of the relationship.”  Abdalla v. Qadorh-Zivan, 913 N.E.2d 280, 286 (Ind. Ct. App. 2009) (quoting Thompson v. Ctr. Ohio Cellular, Inc., 639 N.E.2d 642, 649 (Ohio Ct. App. 1994)), trans. denied.  See also Sandage v. Planned Inv. Corp., 772 P.2d 1140, 1144 (Ariz. Ct. App. 1998) (“Where a transaction has its inception while the fiduciary relationship is in existence, an employee cannot by resigning and not disclosing all he knows about the negotiations, subsequently continue and consummate the transaction in a manner in violation of his fiduciary duties.”) (quoting Microbiological Research Corp. v. Muna, 625 P.2d 690, 695 (Utah 1981)); Duane Jones Co. v. Burke, 117 N.E.2d 245-46 (N.Y. 1954) (“[n]or is it a defense that the defendants-appellants did not avail themselves of the benefit of the customers … diverted from plaintiff until after the defendants [had left employment]”; the benefits realized by defendants’ new company were “merely the results of a predetermined course of action” and early breach of fiduciary duty.  Although Snyder’s fiduciary relationship with Classic terminated when the fiduciary relationship ended, he may not capitalize on opportunities (i.e., customers) that he usurped or transactions that had their inception before the termination of the fiduciary relationship.

      This decision, had the case arisen in Kentucky, should have been no different.  Under Kentucky law, an employee, even one at will, owes a fiduciary duty of loyalty to his employer.  See Stewart v. Kentucky Paving Co., Inc., 557 S.W.2d 438 (Ky. App. 1997).  This is also the law under the new restatement of employment law that is currently in the works.  See Restatement (Third) of Employment Law § 8.01(a) (tentative draft no.3 (April 8, 2010)).  Kentucky applies the same law as does Indiana with respect to claims of tortious inference with contract.
      Snyder continued his appeal on the basis that Classic was not likely to prevail on its claim of violation of trade secrets law.  The court was able to set that concern aside on the basis that the grounds for the temporary injunction were in the alternative.  Having upheld it on the basis of tortious interference, whether or not the additional grounds cited were valid was essentially a moot point.

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