Court Issues Injunction Preventing Former IBM Executive from Commencing Employment with Microsoft
December 30, 2020
By: Stephen B. Stern
In IBM v. De Freitas Lima, 7:20-cv-04573, 2020 U.S. Dist. LEXIS 161532 (S.D.N.Y. Sept. 3, 2020), the United States District Court for the Southern District of New York interpreted a noncompete agreement between International Business Machines Corporation (“IBM”) and Rodrigo Kede De Freitas Lima, a former IBM executive, and issued a preliminary injunction that, among other things, precluded De Freitas Lima from misusing confidential business information, soliciting certain customers, and commencing employment with Microsoft Corporation (“Microsoft”) in a capacity that was similar to the one he performed for IBM.
In De Freitas Lima, IBM sued De Freitas Lima claiming breach of contract and misappropriation of trade secrets, among other things. The court issued a temporary restraining order (“TRO”) that prohibited De Freitas Lima from commencing employment with Microsoft and the TRO was extended three times upon showing good cause for the extension. The parties conducted expedited discovery after the issuance of the TRO and proceeded to an evidentiary hearing on IBM’s motion for preliminary injunction.
De Freitas Lima worked at IBM for approximately 25 years, receiving successive promotions. At the time of his resignation in May 2020, he was General Manager of Integrated Accounts, which was a “Band A” executive (the highest rank below Senior Vice President level), and he served on IBM’s Performance Team and its Acceleration Team. As a senior executive, De Freitas Lima executed a noncompete agreement on or about December 3, 2019. According to IBM, De Freitas Lima’s positions gave him knowledge of and made him responsible (in part) for the preparation and/or presentation of IBM’s trade secrets and other confidential business information, particularly as it related to strategies for the cloud computing market, financial services cloud, integrated accounts, strategies to compete with Microsoft, the development of new cloud offerings to compete with Microsoft, financial plans, budgets, revenue and growth targets, and client targets. De Freitas Lima’s knowledge of such information was so substantial according to IBM that it would not be possible for De Freitas Lima to perform his job duties at Microsoft as its Corporate Vice President of Latin America (which included increasing Microsoft’s cloud footprint in Latin America) without using, disclosing, or relying upon the confidential information he learned at IBM.
The court explained that, to grant a preliminary injunction, IBM had to establish (1) it likely would suffer irreparable injury if an injunction was not issued, (2) either (a) it likely will succeed on the merits or (b) there are sufficiently serious questions regarding the merits of the claim that make them fair ground for litigation, and (3) a balance of the hardships decidedly favors the party seeking the injunction (i.e., IBM). The court further explained that, when deciding whether to grant a “status quo” injunction, like it was being asked to do here (as opposed to a mandatory injunction), it looks at the status quo not at the moment before relief is granted but at “the last actual, peaceable uncontested status which preceded the pending controversy.”
When looking at the likelihood of success, the court examined De Freitas Lima’s noncompete agreement, which included nondisclosure provisions and stated in relevant part that De Freitas Lima could not, for twelve months following the end of his employment, “directly or indirectly, within the Restricted Area, Engage in or Associate with (a) any Business Enterprise or (b) any competitor of [IBM], if performing the duties and responsibilities of such engagement or association could result in [De Freitas Lima] (1) intentionally or unintentionally using, disclosing, or relying upon IBM Confidential Information to which [De Freitas Lima] had access by virtue of [his] job duties or other responsibilities with IBM.” A “Business Enterprise” was defined in the agreement as “any entity that engages in . . . competition with any business unit or division of [IBM] in which [De Freitas Lima] worked at any time during the three (3) year period prior to the termination of [De Freitas Lima’s] employment.” The agreement also defined “Engage in or Associate with” to mean acting as an “associate, employee, member, consultant, or contractor” and it defined “Restricted Area” to mean “any geographic area in the world in which [De Freitas Lima] worked or for which [De Freitas Lima] had job responsibilities, including supervisory responsibility, during the last twelve (12) months of [De Freitas Lima’s] employment with IBM.”
The court determined that De Freitas Lima had access to IBM trade secrets, finding that the information was (1) not known outside of IBM and was not shared with the larger IBM operation, (2) shared only with small groups of IBM’s top executives responsible for overseeing strategies, (3) subject to security protocols, (4) not easily acquired or duplicated, (5) valuable to competitors, including specifically Microsoft, and (6) developed through significant investments in terms of time and money. The court noted that even if the information did not constitute a trade secret, the definition of IBM Confidential Information in the agreement was broader than what New York law considered a trade secret and the information at issue met the contract’s definition. The court also found that De Freitas Lima could potentially use, disclose, or rely upon IBM Confidential Information and, despite his claim to the contrary, De Freitas Lima’s new job responsibilities substantially overlapped with his responsibilities at IBM, which was compounded further by the fact that Microsoft was targeting several IBM clients and the fact that the 77 integrated accounts De Freitas Lima managed at IBM also worked with Microsoft. Under these circumstances, the court found that IBM established it was likely to succeed on the merits or, in the alternative, it raised sufficiently serious questions that were fair for litigation.
With respect to undue hardship, the court acknowledged the absence of consideration paid to De Freitas Lima during the noncompete period was a factor it could consider, but that factor was not dispositive. The court further noted that De Freitas Lima received substantial compensation during his employment, totaling nearly $20 million in four years, in return for the commitments reflected in the agreement. The court also found that the agreement did not preclude De Freitas Lima from obtaining employment elsewhere in the industry, including other parts of Microsoft. Additionally, the court placed some significance on the fact that De Freitas Lima expressly acknowledged the reasonableness of the restrictions with language to that effect in certain parts of the agreement. Lastly, the court found that De Freitas Lima could not claim moving his family to Brazil would impose an undue hardship if he was not permitted to begin his new job with Microsoft because his employment agreement with Microsoft expressly stated that he would work in Sao Paulo, Brazil for the first year of his employment before moving to Florida. Thus, the court found issuing an injunction would not impose an undue hardship on De Freitas Lima.
The court then found that the public interest would be served, not hindered, by issuing an injunction because valuable consideration was paid to De Freitas Lima for the commitments he made in his employment agreement and entering an injunction “would tend to encourage parties to abide by their agreements.”
The court ultimately determined that issuing a preliminary injunction was warranted, not only based on the noncompete agreement, but also based on the risk that De Freitas Lima may misappropriate trade secrets (although the court questioned whether the tort theory of misappropriation ultimately would survive in light of the contractual claim and New York law generally does not permit a party to convert a contract claim into a tort claim). The preliminary injunction precluded De Freitas Lima from working for or providing services to Microsoft as Corporate Vice President of Latin America, working or providing services in violation of his noncompete agreement, soliciting customers with which he was involved during his last twelve months of employment at IBM, and retaining, using, disclosing, or otherwise relying on any IBM Confidential Information.
The court’s decision in De Freitas Lima is significant in multiple respects. First, to all the companies that are skeptical about the enforceability of noncompete agreements, the decision is an important reminder that they can be enforceable when drafted narrowly to protect a company’s legitimate protectable business interests. Second, the decision illustrates how nondisclosure and noncompete/nonsolicitation provisions interconnect in protecting a company’s trade secrets and other confidential business information. Third, the decision provides guidance on measures companies should take to protect trade secrets (and establish that the information warrants trade secret protection).