Discoverytel SPC, Inc. v. Ismael Pinho
MEMORANDUM OF DECISION
Plaintiff DiscoveryTel SPC, Inc. seeks a temporary injunction against defendant Ismael Pinho from joining World Telecom Exchange Communications, LLC and from disclosing confidential information obtained from his former employment with the plaintiff.
In 2002, DiscoveryTel, Inc., predecessor to the plaintiff DiscoveryTel SPC, Inc., hired defendant Pinho as a chief financial officer. The employment was at will and terminable any time by DiscoveryTel, Inc. On December 27, 2004, effective as of January 1, 2005, DiscoveryTel, Inc. entered into an employment agreement with Pinho. That agreement changed the term of Pinho's employment from at will to a one-year period renewable automatically. In addition to the agreement on salary, incentive bonuses, vacation, personal days, and health and life insurance, the agreement further provided that for the first time Pinho would get a severance payment in the event of termination without cause, of six months base salary increased by a factor of twenty percent to account for Pinho's loss of benefits, and in the event of non-renewal of the agreement, a severance payment equal to three months of his base salary plus twenty percent.
The new agreement had a confidential information section providing that DiscoveryTel's existing and prospective customers, distributors, carriers, suppliers, business partners, trade secrets, business plans, sales and marketing strategies, contracts, product development activities, and financial data were deemed to be confidential and should not be disclosed to any person or entity. This obligation survived the termination of the agreement.
The agreement also contained restrictive covenants to the effect that Pinho shall not “directly or indirectly conduct or assist others in conducting or be involved in any manner in any business relating to the purchase and sale of international voice and data traffic during the term of this agreement and during any period for which he is entitled to severance pay.” The agreement stated: “It is expressly understood and agreed that the scope of each of the covenants contained in this section ․ are reasonable as to time, scope of activities and geographic area and are necessary to protect the legitimate business interest of DiscoveryTel, Inc.” In the event the employer sought an injunction by reason of any breach of the covenant, Pinho agreed not to use as a defense that the employer has an adequate remedy at law. Pinho also waived the requirement that the company make a showing of irreparable harm or injury, and a requirement that the company post a bond in order to obtain equitable relief herein.
Finally, the employment agreement provided that neither party may assign this agreement to any third party without the prior consent of the other party and the agreement shall be valid and binding upon all heirs, successors and assigns of the parties hereto.
When the employment agreement was executed in 2004, DiscoveryTel was engaged in purchase and sale of international voice and data traffic. It had direct connection with some African countries and also purchased and sold minutes wholesale to others engaged in the international telephone system. By 2010, however, it had lost its direct connection contracts and was mainly engaged in selling telephone traffic to other wholesalers.
In July 2007, DiscoveryTel, Inc. effected a corporation restructuring. DiscoveryTel, Inc. transferred all its assets, properties and rights of every type and description, personal effects tangible or intangible, to a new company known as DiscoveryTel Communications, PLC, organized in Ireland. That transfer agreement provided: “Nothing in this agreement shall be construed to create any rights in any employees of [DiscoveryTel, Inc.] or any other persons as third party beneficiaries or otherwise.” DiscoveryTel Communications, PLC created four subsidiaries, one of which was the plaintiff, DiscoveryTel SPC, Inc. (hereinafter “SPC”). DiscoveryTel Communications, PLC entered into a services agreement with plaintiff SPC wherein the plaintiff agreed to provide services relating to the business of DiscoveryTel Communications, PLC including managerial, sales, technical, legal, personnel, research, advertising, consulting, advisory, accounting, tax, financial, real estate, and other services for an agreed upon fee.
As a result of the restructuring, plaintiff operated exactly as DiscoveryTel, Inc. had operated. Plaintiff occupied the same offices, had the same employees, conducted the same international voice and data traffic business. Pinho continued to work for the plaintiff at the same salary and benefits he had under the employment agreement. Plaintiff paid Pinho eighty percent of his compensation and DiscoveryTel Communications, PLC paid twenty percent. Plaintiff issued W-2 income tax forms to Pinho from the time of the restructuring until Pinho terminated. In 2007, it also issued a 1099 income tax form for non-employee compensation Pinho received.
As a result of the worldwide economic depression which effected the business of the plaintiff, Pinho, as key financial officer of the plaintiff, announced that the company would initiate a reduction of thirty percent of all employee salaries both domestically as well as internationally. The first reduction was to appear on the April 30th payroll. On May 21, 2010, Pinho wrote to Anthony D. Arturino, President of plaintiff, to the effect he wanted to reduce his work hours from 40 to 10 hours a week with a corresponding reduction in pay. The letter indicated he had accepted another employment opportunity on June 1, 2010. Upon questioning by Mr. Arturino, Pinho conceded that his new employment opportunity was with a company known as World Telecom Exchange Communications, LLC (hereinafter “WTEC”). WTEC had been formed by Mohammad Barmawi who had been a former officer and employee of DiscoveryTel, Inc. WTEC was engaged in the business of purchasing and selling international voice and data traffic. At that time it was mainly engaged in the direct voice communications business. While the plaintiff was mainly engaged in the sale of international voice and data traffic to other wholesalers, however, Mr. Arturino testified that the plaintiff was still seeking to obtain direct contracts with other countries.
Mr. Arturino sought to persuade Pinho not to go with WTEC. When Pinho was determined to do so, Arturino accepted his resignation as officer and employee of the plaintiff, effective as of May 31, 2010. Pinho then went to work for WTEC and this action followed.
The purpose of a temporary injunction is to preserve the status quo until final determination of the parties' rights after a hearing on the merits. Fleet National Bank v. Burke, 45 Conn.Sup. 566, 570 [23 Conn. L. Rptr. 516] (1998). Obtaining a temporary and permanent injunction requires that the moving party establish “(1) that plaintiff ha[s] no adequate legal remedy; (2) the plaintiff will suffer irreparable injury absent [the injunction]; (3) the plaintiff [is] likely to prevail ․ and (4) the balance of the equities favor [s] [issuing the injunction].” Waterbury Teachers Association v. Freedom of Information Commission, 230 Conn. 414, 446 (1994). Temporary and permanent injunctions have been regularly granted by our courts when the defendant has breached a restrictive covenant in an employment contract. Wells v. O'Connell, 23 Conn.Sup. 335, 337 (1962). In granting such injunction in such cases the courts recognize “the realities of attempting to prove irreparable harm ․ counsel for the imposition of a more lenient standard which allows for a certain amount of informed prediction of future results to be weighed by the court as evidence than otherwise might normally be the case.” POP Radio, LP v. News America Marketing In-Store, Inc., 49 Conn.Sup. 566, 577 [40 Conn. L. Rptr. 332] (2005).
A covenant restricting the activities of an employee following the termination of his employment is valid and enforceable so long as it affords no more than fair and reasonable protection to the employer's business interests. Scott v. General Iron & Welding Company, 171 Conn. 133, 137 (1976). The enforceability of a covenant not to compete is a question of law to be decided by the court. Hare v. McClennel, 234 Conn. 581, 589 (1995). The five factors to be considered in evaluating the reasonableness of a restrictive covenant ancillary to an employment agreement are: (1) The length of time the restriction operates; (2) the geographic area covered; (3) the fairness of the protection offered to the employer; (4) the extent of the restraint on the employee's opportunity to pursue his occupation; and (5) the extent of interference with the public's interests. Robert S. Weiss & Associates, Inc. v. Wiederlight, 208 Conn. 525, 529, n.2 (1988).
The defendant does not contest the enforceability of the restrictive covenants in the employment agreement relating to disclosure of confidential information or employment by Pinho in the international voice and data traffic business. The employment agreement itself acknowledges that the restriction as to employment of Pinho is reasonable as to time, scope of activities and geographic area and necessary to protect the legitimate business of DiscoveryTel, Inc. Moreover, that restrictive covenant limits Pinho only to the end of his year of annual employment, in this instance until December 31, 2010. On that basis alone the restrictive covenant is reasonable.
The restrictive covenant does not prohibit Pinho from working for a competitor but rather prohibits him from “directly or indirectly” becoming involved in “any business relating to the purchase and sale of international voice and data traffic.” The evidence is clear that WTEC is engaged in that business. Although WTEC mainly has direct connections with the telephone companies of foreign countries, and the plaintiff is mainly engaged in selling international telephone traffic through wholesalers, both companies are nevertheless engaged in the purchase and sale of international voice and data traffic. Consequently, Pinho going to work for WTEC violates the restrictive covenant.
Pinho as a consequence of his employment as plaintiff's financial officer, became privy to plaintiff's financial credit relationship, costs, pricing structure and profits and losses. Defendant argues that Mr. Baramawi had worked for DiscoveryTel, Inc. and knew all this information and therefore it was not confidential. However, Mr. Baramawi ceased working for DiscoveryTel, Inc. in 2002 and would not be apprised of the current confidential information of the plaintiff as to costs, pricing structure, profits and loss and other financial information. Although Pinho promises not to disclose all confidential information, this court concludes that is not adequate protection to plaintiff. See Contra Aetna, Inc. v. Fluegel, No. 07033345, judicial district of Hartford (Feb. 7, 2008, Dubay, J.) [45 Conn. L. Rptr. 12]. Consequently, plaintiff is entitled to an injunction prohibiting this confidential information being disclosed by defendant.
Defendant asserts several defenses to plaintiff's claim for a temporary injunction. The first is that the employment agreement was not supported by consideration when executed. This defense is without merit for two reasons: first, the employment agreement changed the term of employment of Pinho from at will terminable any time in the discretion of DiscoveryTel, Inc. to a term of one year automatically renewed. Some courts have found that that change in employment status is adequate consideration to support the signing of a restrictive covenant not to compete after the commencement of employment. Installation Corporation of America v. Brobston, 677 A.2d 729, 733 (Pa.Super.1995). Moreover, there is a developing line of Connecticut cases holding that an employee's continuation of employment after the signing of the agreement containing a restrictive covenant is sufficient consideration to support the post-amendment restrictive covenant. Sartor v. Town of Manchester, 312 F.Sup.2d 238, 245 (D.Conn.2004, states, “Connecticut recognizes that continued employment is adequate consideration to support noncompete covenants with at-will employees.” Wesely Software Div. Corp. v. Burnlette, 977 F.Sup.2d 137, 144 (D.Conn.1977). Roessler v. Burbewell, 119 Conn. 285, 289 (1934). Piscitell v. Pepe, 2004, No. 04-40022472, judicial district of New Haven (Nov. 5, 2004, Lopez, J.) [38 Conn. L. Rptr. 219]; Russo Associates, Inc. v. Cachina, No. 276910, judicial district of Fairfield (Mar. 1, 1995, Levin, J.).
The second reason is that the new employment agreement granted Pinho a severance allowance which he did not have prior to that agreement. Consequently, the court finds adequate consideration for the new employment agreement containing the restrictive covenants.
Defendant's second defense is that the employment agreement cannot be enforced by this plaintiff. Specifically, defendant claims that the employment agreement was not assigned to the plaintiff with the consent of Pinho and although the agreement provides it is valid and binding on successors of DiscoveryTel, Inc., the plaintiff is not a successor. In response, plaintiff asserts that it is a successor of DiscoveryTel, Inc. based on the following facts: DiscoveryTel, Inc. transferred all of its assets to DiscoveryTel Communications, PLC, which assets included the employment agreement with defendant and DiscoveryTel Communications, PLC entered into a servicing agreement with the plaintiff under which the plaintiff agreed to provide all of the services related to DiscoveryTel Communications, PLC including but not limited to managerial, sales, personnel, research, accounting, tax, financial, and other services. The plaintiff continued to operate the international phone traffic business exactly as it had before the restructuring. Pinho continued to hold the position of Chief Financial Officer in the plaintiff as it had at DiscoveryTel, Inc. and to perform exactly the same services at the same location in Hartford, Connecticut and to receive the same salary and benefits under the employment agreement.
Our courts have recognized that the term “successor” has “many legal applications and it is therefore difficult to define precisely.” Middletown Commercial Associates, Ltd. Partnership v. Middletown, 42 Conn.App. 426, 432 (1996). In Tourangeau et al. v. Uniroyal, Inc. et al., 138 Fd.Sup.2d 259, 265-66, the United States District Court for the district of Connecticut stated:
A successor is a person who succeeds to the rights, responsibilities, or place of another or replaces or follows another. See Blacks Law Dictionary, 1446 (7th Ed.1999). With regard to corporations, a successor is one ‘that through amalgamation, consolidation, or other assumption of interest, is vested with the rights and duties of an earlier corporation.’
In dealing with the issue of whether there was successor liability between two companies, our Appellate Court in Chamlink Corporation v. Merritt Extruder Corporation, 96 Conn.App. 183, 187 (2006), said, quoting from 19 C.J.S. 314, Corporations § 657 (1990): “The mere transfer of the assets of one corporation to another or individual generally does not make the latter liable for the debts or liabilities of the first corporation except where the purchaser expressly or impliedly agrees to assume the obligations, the purchaser is merely a continuation of the selling corporation, or when the transaction is entered into fraudulently to escape liability.” (Italics added.)
The issue of whether a purchaser is a mere continuation of the selling corporation is a question of fact. As to whether the purchaser is a continuation of the selling corporation, “a mere continuation exists ‘if the successor maintains the same business with the same employees doing the same jobs, under the same supervisor, working condition, and produces the same product for the same customers.’ “
This court finds as a fact that the plaintiff is a continuation of DiscoveryTel, Inc. and is its successor because plaintiff operates the same international voice and data traffic business as DiscoveryTel, Inc. uses the same employees who do the same jobs and perform the same services. Specifically, Pinho held the same job with DiscoveryTel, Inc. as he held with the plaintiff and performed exactly the same functions as he had prior to the transfer of assets to DiscoveryTel Communications, PLC and the execution of the servicing agreement between DiscoveryTel Communications, PLC and the plaintiff.
Thus, the court concludes that the employment agreement is binding upon both the plaintiff and the defendant.
The defendant's third defense is that the employment was terminated by mutual consent. This defense also has no merit. The employment agreement specifically provides: “That termination of the agreement results in termination of all rights and obligations except those rights and obligations [set forth in the sections relating to confidential information and the restrictive covenant as to Pinho's employment in the international voice and data traffic business].” Thus the agreement intended that these provisions would survive termination of the agreement.
Defendant's fourth defense is that the agreement does not address voluntary termination. In fact, the agreement does provide for voluntary termination by expressly providing that either party may terminate the agreement on ninety days notice. However termination is accomplished, the agreement provides that the confidential information and restrictions on employment of Pinho survive that termination.
The court concludes that the covenants in the employment agreement are reasonably designed to protect the legitimate interests of the plaintiff, the agreement is supported by sufficient consideration, and the agreement is binding upon the parties by reason of the plaintiff being a successor to DiscoveryTel, Inc. The defendant has waived the defenses of irreparable harm and no adequate remedy at law. There is a reasonable probability that plaintiff will prevail at the trial of this case. Finally, the equities favor the plaintiff.
Therefore, the court grants the plaintiff a temporary injunction prohibiting defendant Pinho from working for WTEC until December 31, 2010 and prohibits Pinho from disclosing confidential information relating to the plaintiff's business to anyone.
Satter, Robert, J.T.R.