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Consider the following scenario: you own a Connecticut cheese-making business, and a key employee leaves your family business, and proceeds to open up a competitive business somewhere else in New England doing what you do best, making cheese. Further the former employee sells to your customers using your customer list and using your family’s “secrets of the trade” for cheesemaking. You sue the former employee and expect to win hands down. You end up winning, but in a narrowly-focused, split decision in the face of an adamant dissent by one of the judges. How can you protect yourself in the future to help insure that you will win hands down next time?

This scenario recently played itself out in a real world decision of Connecticut’s Supreme Court released on October 26, 1999 (at 251 Conn. 59). In that case, Elm City Cheese Co. et al v. Mark Federico et al, the Elm City family business had been manufacturing cheese since 1896, and has been primarily making Italian-style grated cheese since the 1950s. The defendant, Federico, was a long-time friend of the Weinstein family, and served as an accountant to both the Weinstein family and their family business, Elm City. Federico was considered a “first son” of the Weinsteins and he was also entrusted with, and was closely involved in, the day-to-day operations of the Elm City business. In 1995, Federico resigned from Elm City, and started up a new business, called Lomar, which began operations in Rhode Island in 1996. The trial court noted that Lomar intended to manufacture the same product that Elm City manufactures, by the same process, and sell it to Elm City’s customers. The trial court found in favor of Elm City, and issued an injunction prohibiting Lomar, among other things, from “disclosing, using or selling any of Elm City [Italian-style grated] Cheeses” for a period of three years. In affirming the trial court’s decision, the Connecticut Supreme Court noted that Lomar is not prohibited from making “other kinds of cheeses, using other cheesemaking processes”.

In a strong dissent, Judge Berdon noted that Elm City “failed to take very basic, common measures to ensure the secrecy of its business methods and practices.” The judge noted that Elm City failed, among other things, to require any of its employees to sign a confidentiality agreement or a covenant not to compete, and the employee manual failed to make mention of the confidential nature of Elm City’s business. The judge went on to state his opinion that the judgement was wrong by noting “what is frightening about the majority opinion is that this case will make it virtually impossible for an employee to leave his employment and establish a competing business in situations where the employer never considered that its process was a trade secret even though the employee is not bound by a contractual agreement not to compete.”

What family businesses must realize, however, is that this decision could well have gone the other way had Federico’s violations of Elm City’s rights been less blatant. Indeed, the Elm City case serves as a wake-up call for all family businesses in Connecticut. The time and effort that it takes to have prepared an employee agreement concerning the intellectual property of the family business, and gain the consent of the employees, is money well invested. In this time of rapid business change, it is difficult to predict when a disgruntled or even a contented former employee may choose to compete against the family business, and so it is wise to be prepared.