So a plaintiff obtains a default judgment against a defendant on a promissory note case.  Defendant fails to appear or defend.   On a motion to enter the default pursuant to CPLR 3215, one would assume that without opposition, judgment would be entered for the amount of the loans.  Interestingly, that’s not quite what happened in Power Up Lending Group, Ltd. v. Cardinal Resources, Inc., where a plaintiff lender sought entry of judgment on two loan agreements in the amount of $66,264.90.  So what did happen?

Justice Stephen A. Bucaria, sua sponte, examined the plaintiff’s submission (which the court must), but then determined that certain provisions in the agreements were illegal as violating New York’s criminal usury laws.   As a result, the Court calculated the amount due to the Plaintiff after severing the provisions deemed by the Court to be illegal, which was far less than that sought by plaintiff.  Plaintiff appealed.

The Second Department in Power Up Lending Group, Ltd. v Cardinal Resources, Inc. disagreed with Justice Bucaria’s approach and reversed, concluding that the court erred when it, sua sponte, severed certain provisions of the loan agreements, which it found on its own to be “illegal pursuant to the criminal usury statute.”   Since the defense of usury is an affirmative defense, it must be asserted by the Defendant affirmatively in its answer or as a ground to move to dismiss the complaint.  Otherwise, the defense is waived.  Here, because the Defendant failed to appear or answer or move, the defense was waived.

Two issues spring to mind.  First, the affirmative defense of criminal usury is far different than most affirmative defenses, which do not involve violations of criminal law (e.g., statute of frauds, statute of limitations and the like).  However, where an affirmative defense involves criminal activity, can a court as a matter of public policy have the power to raise the issue, sua sponte, even if it would otherwise be an affirmative defense?

Interestingly, in Youshah v. Staudinger, the defendant defaulted in an action brought by the plaintiff seeking to recover money owed to him by his former business partner for excluding him from an escort and dating service business, which fosters prostitution. The Court determined that although a party concedes liability by defaulting in an action, it would not, on public policy grounds, award judgment to the plaintiff as a result of an illegal enterprise. The Court held that it would not “enforce provisions of agreements which are patently illegal when public policy is at issue.”

Second, although the usury defense is waived if not raised, that very same defense could be advanced later by a defaulting defendant on a motion to vacate the default to establish a “meritorious defense.”   See, e.g., Blue Wolf Capital Fund II LP v. American Stevedoring, Inc. (citing cases).

In sum, in order to obtain a default judgment against an defaulting defendant, the moving party must submit sufficient proof to establish a viable cause of action.   Affirmative defenses, even if otherwise available to a defaulting defendant, should not stand in the way of entry of judgment.  However, on a later motion to vacate, those affirmative defenses can be used to re-open the case, assuming that an excuse for the default has been established.

Under what circumstances do customer information and business operations constitute “trade secrets” that may be enjoined from use by a former employee ? A recent decision by Justice Elizabeth H. Emerson on this issue serves as a stark reminder that a preliminary injunction requires “clear and convincing” proof that the information is truly a secret.

In Devos, Ltd v. United Returns, Inc., recently-troubled pharmaceutical-return company Devos sought to enjoin its former employees from operating a competitor, United Returns, pursuant to business tort law and non-compete/solicitation provisions contained in the former employees’ employment contracts. In August 2015, Devos obtained a temporary restraining order and sought a preliminary injunction, which United Returns subsequently moved to vacate. 

The court denied the preliminary injunction and vacated the temporary restraints. After finding that the non-compete provisions included in the restrictive covenants were overly broad, the court found that the restrictive covenants were unnecessary, as well. As for Devos’ business tort claims involving misappropriation of trade secrets, the court found that “clear and convincing evidence” of a trade secret was lacking. In particular, the court rejected Devos’ contention that its customer information and business operations were “trade secrets” that United Returns had unfairly exploited to obtain competitive advantages. Crucially, there was no evidence that Devos had taken measures to protect its customer lists from disclosure; in fact, United Returns submitted evidence that the names of Devos’ customers were publicly available and well known within the industry.

Nor did the manner in which Devos conducted its business constitute a “trade secret.” United Returns introduced evidence that Devos’ systems and processes were used throughout the pharmaceutical-return industry, and “an employee’s recollection of information pertaining to the specific needs and business habits of particular customers is not confidential.” Thus, the court reaffirmed and applied the elements of “secrecy”: (1) substantial exclusivity of knowledge of the process or compilation of information and (2) the employment of precautionary measures to preserve such exclusive knowledge by limiting legitimate access by others.

Devos’ failure to meet its evidentiary burden demonstrates how important it is for employers to restrict access to important customer records. But even where efforts have been made to maintain the secrecy of customers’ information, a former employee still cannot be prevented from using that information if it could be easily obtained from publicly available sources.  For example, in Sasqua Group v. Courtney, the Eastern District of New York dismissed a misappropriation action because the  plaintiff’s allegedly “confidential” customer information database could have been duplicated through simple (though lengthy) internet searches. By contrast, in Freedom Calls Foundation v. Bukstel, the Eastern District of New York held that it would be very difficult to duplicate the plaintiff’s efforts in compiling its list of non-profit donors and clients because their personal contact information was not publicly known outside of the industry.  

Merely because a well-trained former employee has successfully competed does not prove that confidential information was misappropriated–all the more reason to take care when drafting non-compete provisions. Absent such an effective provision, Devos serves as a cautionary tale that institutional knowledge sometimes must jump a high hurdle before it can be protected as a trade secret.