SDFL Denies Injunction in Non-Compete Fight Over Client Ernst & Young

A recent case out of the Southern District of Florida provides important guidance into the limits of non-compete agreements under Florida law. The case is one of the most comprehensive Florida non-compete decisions of the past several years, whether in state or federal court. Let’s take a look:

IDMWorks is a company that specializes in corporate network security for commercial enterprises.  The Defendant, a software engineer named Gaurav Pophaly, began working for IDMWorks sometime 2012.  When he was hired, he signed a non-compete and non-solicitation Agreement that prohibited him from providing services to any company for whom he had previously provided services on behalf of IDMWorks.

Shortly after he joined the company, the Defendant was assigned to a project for the accounting firm Ernst & Young (“EY”). The project was not directly between IDM and EY. Instead, IDM contracted the Defendant out to a third party company called ClearPath. ClearPath then contracted with EY. IDM never had a contract for services directly with EY.

In November 2015, EY extended a job offer directly to the Defendant. As EY saw it, its engagement with ClearPath (and therefore IDM) terminated at the end of the year. It wanted to hire Pophaly directly. After receiving EY’s offer, the Defendant did not accept. Instead, he took that offer back to IDM, essentially giving IDM the opportunity to counter-offer. Rather than play ball, IDM confronted EY and advised them that they could not hire Pophaly directly. EY disagreed. In response to IDM’s threats and bravado, EY pulled the plug on the ClearPath project. EY informed everyone that as of December 31, they would be terminating the ClearPath engagement (and therefore the IDM contractors staffed on the project, including Pophaly).

Between November and late December 2015, EY took steps to replace the IDM contractors with consultants from another company. EY had IDM contractors transition their projects over to the new vendor. In early January, once the original engagement had expired EY again approached Pophaly and offered him a job. At that point, Pophaly accepted. EY hired Pophaly as its Assistant Director of Identity Management Engineering. So instead of actually implementing network security, Pophaly manages a team of engineers that do the implementation.

In February 2016, IDM sued Defendant in the United States District Court for the Southern District of Florida. Plaintiff alleged that Defendant had (1) stolen IDM’s confidential information by transferring it/uploading it to outside servers (2) breached his non-compete agreement. Prior to the injunction hearing, the Plaintiff agreed that – for the purposes of the injunction – it would base its claim for an injunction solely on the alleged non-compete violations . (This was likely because Plaintiff realized its claim regarding confidential information was essentially fiction. In reality, Pophaly had transferred EY’s information to EY’s new vendor. Plaintiff somehow managed to transform this into Defendant misappropriating its own confidential information).

In support of its motion for an injunction, the Plaintiff put in an extensive declaration of Todd Rossin, the CEO of IDMWorks. Rossin’s declaration focused almost entirely on the Company’s supposed investment in Pophaly’s education and training. Under Florida law, a company’s extraordinary investment in an employee’s education or training can constitute a legitimate business interest and justify enforcement of a non-compete agreement. The key word, however, is extraordinary. In Rossin’s declaration, he listed numerous trainings that IDM allegedly provided to the Defendant, at a cost of tens of thousands of dollars. When cross-examined at the hearing, however, Rossin was forced to admit that his declaration was not entirely true. For instance, IDM had made a database of Oracle training materials available to Defendant and many of its other employees. In his declaration, Rossin listed these as examples of the extraordinary training IDM provided to Pophaly. Rossin also listed the value of these trainings at thousands of dollars each. This was all smoke and mirrors. As the Court noted:

Plaintiff alleged a substantial monetary investment into Defendant’s training in connection with Plaintiff’s subscription to Oracle. However, Plaintiff’s CEO Todd Rossin retreated from the dollar amounts he described in his declaration. Plaintiff paid a lump sum to Oracle for Plaintiff and all of its employees to have access to the Oracle platform and materials. It was never established that Defendant actually used study materials beyond those he purchased himself.

With respect to relationships, IDM took the position that it had a special, protectable relationship with EY. At the hearing, the testimony established otherwise. Rossin was forced to admit that his company never had a contract with EY, that they never had an exclusive relationship with EY and that EY used other technology vendors.

In addition to live testimony at the injunction hearing, Defendant also filled the record with deposition testimony that countered many of Plaintiff’s key allegations.  Defendant introduced the deposition testimony of Pophaly’s former supervisor, who testified that there was no formal training and that much of the supposed training took place after hours, outside of work.  Defendant also introduced testimony from an EY employee who testified that the company never had a contract with IDM, and that the company did not maintain an exclusive relationship with either vendor.

On June 23, the Court denied Plaintiff’s Motion for a Preliminary Injunction. The Court found that the non-compete agreement was not necessary to protect any legitimate business interest.   With respect to customers, there were no substantial customer relationships to protect.  The statute only protects “substantial” customer relationships and that word cannot be read out of the statute.  On this point, the Court engaged in a thorough analysis of what constitutes a substantial relationship under Florida law. First, the Court noted that where the relationship is made up of multiple layers of contractors and subcontractors, that cuts against the existence of a substantial relationship (relying on a fantastic MDFL case called Concrete Surface). Second, the Court held that Plaintiff did not have anything approaching an exclusive relationship with EY because EY used multiple other vendors. On this point, the Court relied on a recent and important decision Evans v. Generic Sol. Eng’g, LLC, 178 So.3d 114, 116 (Fla. 5th DCA 2015) (holding non-compete only enforceable to protect legitimate business interest and discussing substantial relationships). Third, the Court held that a large, public company like EY could be easily identified by competing companies and targeted as a prospective client. This comes from the seminal Florida case Shields.

With respect to training, the Court held that none of the training Pophaly received on the job at IDM was anything special or unusual.  As such, an investment in training could not justify enforcement of the non-compete agreement. As the Florida appellate courts have repeatedly held, particularly in Shields and Evans: Absent a legitimate business interest, a non-compete agreement is an illegal restraint of trade. And that’s exactly what the Court found here.

The Takeaways:

• Florida: Florida is an aggressively pro-non-compete state. That statute is relatively neutral. But many courts throughout the state routinely issue improvident injunctions and fail to apply the law as it is written. Your best bet is to litigate these cases in federal court, or, in a state complex litigation division if available.
• Customer Relationships: There lots in the decision regarding substantial customer relationships. But I’ll highlight the issue of former customers. Non-compete agreements cannot be used to protect relationships with former customers. If defending a non-compete case that involves former as opposed to current customers, that needs to be a major avenue of attack.   If those relationships have ended, you aggressively need to ferret out the reason why those relationships ended. Did the relationship end on bad terms? If so, that is incredibly significant. Florida law protects “substantial” customer relationships. A customer relationship is not special and protectable if that relationship is terrible and riddled with problems. In every non-compete case that we defend, if customer relationships are at issue, I immediately request anything related to customer complaints, problems, etc.
• Training: Lots of lawyers with no experience in this arena think that any sort of training can constitute a legitimate business interest. That’s wrong. Again, the statute says extraordinary. That word means exactly what it means.
• Judge Goodman: If you are in the Southern District of Florida and Judge Goodman is the magistrate judge on the case, consent to his full jurisdiction. Just read some of his decisions and you’ll understand why.

We represented the Defendant in this case, which is IDMWORKS, LLC v. Pophaly, No. 16-20627, 2016 WL 3566867 (S.D. Fla. June 23, 2016). And, for the record, the Evans case out of Florida’s 5th DCA, cited by the court as controlling authority— That’s our case, too.

Jonathan Pollard is the principal of Pollard PLLC, a Fort Lauderdale-based litigation boutique focused on competition law. The firm and its attorneys have extensive experience litigating non-compete, trade secret and antitrust matters. They represent clients in Florida and throughout the country. Their office can be reached at 954-332-2380.