shutterstock_481529074The San Antonio Court of Appeals recently held that an applicant for a temporary injunction in a trade-secret-misappropriation case under the Texas Uniform Trade Secrets Act is not required to show the defendant is actually using trade-secret information. Instead, the applicant need only show that the defendant possesses trade secrets and is in a position to use them.

Age Industries, Ltd. (“AI”) is a manufacturer of packaging materials for whom Christopher Michael Hughes worked for nearly 20 years as a general manager. In late June 2016, Hughes resigned his employment with AI. Hughes never signed an agreement restricting him from competing with AI. Prior to resigning, Hughes had discussed creating a business to compete with AI. In early June, Diamondback Corrugated Container, LLC (“Diamondback”) was created and, shortly after his resignation, Hughes was hired to be its operations manager.

Two months later, AI sued Hughes and Diamondback for, inter alia, misappropriation of trade secrets under the Texas Uniform Trade Secrets Act, and obtained a temporary restraining order. Following the hearing on AI’s application for a temporary injunction, the trial court granted a temporary injunction against Hughes that (1) required Hughes to account for all documents in his possession belonging to AI, and (2) enjoined Hughes from disclosing AI’s proprietary or trade-secret information, including AI’s sales journals, customer lists, or pricing information.

Hughes appealed the trial court’s temporary injunction against him, contending, among other things, that AI failed to produce sufficient evidence of a probable, imminent, and irreparable injury, because AI only established a fear of possible misappropriation of trade secrets. The court of appeals noted that “the very purpose of an injunction is to prevent disclosure of trade secrets pending trial, [so AI] is not required to show [Hughes] is actually using the information.” Relying on authority from the Dallas, Austin, and Fort Worth Courts of Appeals, the San Antonio Court of Appeals required AI to instead show only that Hughes possesses the trade secrets and is in a position to use them.

Drawing all legitimate inference in favor of the trial court’s order granting the temporary injunction, the court of appeals concluded that AI made the proper showing under this standard. AI presented evidence during the temporary-injunction hearing that shortly before he resigned, Hughes downloaded a large quantity of data from his AI computer onto a USB storage device. Additionally, AI offered evidence that certain financial information Hughes maintained while working for AI could not be located after his resignation, and that Hughes had some of AI’s confidential information on his home computer. Moreover, at the temporary-injunction hearing, Hughes could not testify that emails he sent to a co-worker at Diamondback did not contain AI’s proprietary information.

This evidence—combined with the fact that Hughes left AI to become the operations manager of a company that was formed to compete with AI—established that Hughes was in a position to use AI’s trade secrets to gain an unfair market advantage. Therefore, the appellate court held the trial court did not abuse its discretion in concluding that AI established a probable, imminent, irreparable injury.

This case demonstrates that it is not necessary to present evidence of trade-secret use; mere possession and an opportunity to use is sufficient at the temporary injunction stage.

Hughes v. Age Industries, Ltd., 04-16-00693-CV, 2017 WL 943423 (Tex. App.—San Antonio Mar. 8, 2017, no. pet. h.)

shutterstock_533123590Continuing our annual tradition, we present the top developments/headlines for 2016 in trade secret, computer fraud, and non-compete law. Please join us for our first webinar of the New Year on February 2, 2017, at 12:00 p.m. Central, where we will discuss these new developments, their potential implications, and our predictions for 2017.

1. Defend Trade Secrets Act

One of the most significant developments of 2016 that will likely have a profound impact on trade secret cases in the coming years was the enactment of the Defend Trade Secrets Act (“DTSA”). The DTSA creates a new federal cause of action for trade secret misappropriation, albeit it does not render state law causes of action irrelevant or unimportant. The DTSA was passed after several years and many failed attempts. The bill was passed with overwhelming bipartisan, bicameral support, as well as backing from the business community.

The DTSA now allows trade secret owners to sue in federal court for trade secret misappropriation, and seek remedies previously unavailable. Employers should be aware that the DTSA contains a whistleblower immunity provision, which protects individuals from criminal or civil liability for disclosing a trade secret if such disclosure is made in confidence to a government official or attorney, indirectly or directly. The provision applies to those reporting violations of law or who file lawsuits alleging employer retaliation for reporting a suspected violation of law, subject to certain specifications (i.e., trade secret information to be used in a retaliation case must be filed under seal). This is significant for employers because it places an affirmative duty on them to give employees notice of this provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Employers who do not comply with this requirement forfeit the ability to recoup exemplary damages or attorneys’ fees under the DTSA in an action against an employee to whom no notice was ever provided.

At least one federal district court has rejected an employee’s attempts to assert whistleblower immunity under the DTSA. In Unum Group v. Loftus, No. 4:16-CV-40154-TSH, 2016 WL 7115967 (D. Mass. Dec. 6, 2016), the federal district court for the district of Massachusetts denied a defendant employee’s motion to dismiss and held that a defendant must present evidence to justify the whistleblower immunity.

We anticipate cases asserting claims under the DTSA will be a hot trend and closely followed in 2017. For further information about the DTSA, please see our webinar “New Year, New Progress: 2016 Update on Defend Trade Secrets Act & EU Directive.”

2. EU Trade Secrets Directive

On May 27, 2016, the European Council unanimously approved its Trade Secrets Directive, which marks a sea-change in protection of trade secrets throughout the European Union (“EU”). Each of the EU’s 28 member states will have a period of 24 months to enact national laws that provide at least the minimum levels of protections afforded to trade secrets by the directive. Similar to the DTSA, the purpose of the EU’s Trade Secrets Directive was to provide greater consistency in trade secrets protection throughout the EU. For further information about the EU’s Trade Secrets Directive, please see our webinar “New Year, New Progress: 2016 Update on Defend Trade Secrets Act & EU Directive.”

3. Government Agencies Continue to Scrutinize the Scope of Non-Disclosure and Restrictive Covenant Agreements

Fresh off of signing the DTSA, the Obama White House released a report entitled “Non-Compete Reform: A Policymaker’s Guide to State Policies,” which relied heavily on Seyfarth Shaw’s “50 State Desktop Reference: What Employers Need to Know About Non-Compete and Trade Secrets Law” and contained information on state policies related to the enforcement of non-compete agreements. Additionally, the White House issued a “Call to Action” that encouraged state legislators to adopt policies to reduce the misuse of non-compete agreements and recommended certain reforms to state law books. The Non-Compete Reform report analyzed the various states that have enacted statutes governing the enforcement of non-compete agreements and the ways in which those statutes address aspects of non-compete enforceability, including durational limitations; occupation-specific exemptions; wage thresholds; “garden leave;” enforcement doctrines; and prior notice requirements.

With those issues in mind, the Call to Action encourages state policymakers to pursue three “best-practice policy objectives”: (1) ban non-competes for categories of workers, including workers under a certain wage threshold; workers in occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or workers who may suffer adverse impacts from non-competes, such as workers terminated without cause; (2) improve transparency and fairness of non-competes by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted; providing consideration over and above continued employment; or encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work; and (3) incentivize employers to write enforceable contracts and encourage the elimination of unenforceable provisions by, for example, promotion of the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.

While some large employers have embraced the Call to Action, even reform-minded employers are likely to be wary of some of these proposals. Moreover, this initiative may die or be limited with the new Trump administration.

On October 20, 2016, the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) jointly issued their “Antitrust Guidance for Human Resource Professionals.” The Guidance explains how antitrust law applies to employee hiring and compensation practices. The agencies also issued a “quick reference card” that lists a number of “antitrust red flags for employment practices.” In a nutshell, agreements (whether formal or informal) among employers to limit or fix the compensation paid to employees or to refrain from soliciting or hiring each other’s employees are per se violations of the antitrust laws. Also, even if competitors don’t explicitly agree to limit or suppress compensation, the mere exchange of compensation information among employers may violate the antitrust laws if it has the effect of suppressing compensation.

In recent years, the National Labor Relations Board (“NLRB”) has issued numerous decisions in which workplace rules were found to unlawfully restrict employees’ Section 7 rights. Last year, the U.S. Court of Appeals for the D.C. Circuit denied Quicken Loans, Inc.’s petition for review of an NLRB decision finding that confidentiality and non-disparagement provisions in the company’s Mortgage Banker Employment Agreement unreasonably burdened employees’ rights under Section 7 of the NLRA.

4. New State Legislation Regarding Restrictive Covenants

Oregon has limited the duration of employee non-competes to two years effective January 1, 2016. Utah has enacted the Post-Employment Restrictions Amendments, which limits restrictive covenants to a one-year time period from termination. Any restrictive covenant that is entered into on or after May 10, 2016, for more than one year will be void. Notably, Utah’s new law does not provide for a court to blue pencil an agreement (i.e., revise/modify to the extent it becomes enforceable), rather the agreement as a whole will be deemed void if it is determined to be unreasonable.

In what appears to have become an annual tradition, Massachusetts legislators have attempted to pass legislation regarding non-competes, to no avail. Two other states in New England, however, are able to claim accomplishments in that regard. Specifically, Connecticut and Rhode Island each enacted statutes last summer imposing significant restrictions on the use of non-compete provisions in any agreement that establishes employment or any other form of professional relationship with physicians. While Connecticut’s law limits only the duration and geographic scope of physician non-competes, Rhode Island completely banned such provisions in almost all agreements entered into with physicians.

5. Noteworthy Trade Secret, Computer Fraud, and Non-Compete Cases

In Golden Road Motor Inn, Inc. v. Islam, 132 Nev. Adv. Op. 49 (2016), the Supreme Court of Nevada refused to adopt the “blue pencil” doctrine when it ruled that an unreasonable provision in a non-compete agreement rendered the entire agreement unenforceable. Accordingly, this means that employers conducting business in Nevada should ensure that non-compete agreements with their employees are reasonably necessary to protect the employers’ interests. Specifically, the scope of activities prohibited, the time limits, and geographic limitations contained in the non-compete agreements should all be reasonable. If an agreement contains even one overbroad or unreasonable provision, the employer risks having the entire agreement invalidated and being left without any recourse against an employee who violates the agreement.

The Louisiana Court of Appeal affirmed a $600,000 judgment, plus attorneys’ fees and costs, against an ex-employee who violated his non-compete when he assisted his son’s start-up company compete with the ex-employee’s former employer. See Pattridge v. Starks, No. 50,351-CA (Louisiana Court of Appeal, Feb. 24, 2016) (Endurall III).

A Massachusetts Superior Court judge struck down a skin care salon’s attempt to make its non-compete agreement seem prettier than it actually was. In denying the plaintiff’s motion for a preliminary injunction, the court stressed that employees’ conventional job knowledge and skills, without more, would not constitute a legitimate business interest worth safeguarding. See Elizabeth Grady Face First, Inc. v. Garabedian et al., No. 16-799-D (Mass. Super. Ct. March 25, 2016).

In a case involving alleged violations of the Kansas Uniform Trade Secrets Act (“KUTSA”) and the Computer Fraud and Abuse Act (“CFAA”), a Kansas federal district court granted a defendant’s motion for summary judgment, holding that (a) payments to forensic experts did not satisfy the KUTSA requirement of showing an “actual loss caused by misappropriation” (K.S.A. 60-3322(a)), and (b) defendant was authorized to access the company’s shared files and, therefore, he did not violate the CFAA. See Tank Connection, LLC v. Haight, No. 6:13-cv-01392-JTM (D. Kan., Feb. 5, 2016) (Marten, C.J.).

The Tennessee Court of Appeals held that the employee’s restrictive covenants were unenforceable when the employer had not provided the employee with any confidential information or specialized training. See Davis v. Johnstone Group, Inc., No. W2015-01884-COA-R3-CV (Mar. 9, 2016).

Reversing a 2-1 decision of the North Carolina Court of Appeals, the state’s Supreme Court held unanimously that an assets purchase-and-sale contract containing an unreasonable territorial non-competition restriction is unenforceable Further, a court in that state must strike, and may not modify, the unreasonable provision. See Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, No. 316A14 (N.C. Sup. Court, Mar. 18, 2016).

The Ohio Court of Appeal upheld a non-compete giving the former employer discretion to determine whether an ex-employee was working for a competitor. See Saunier v. Stark Truss Co., Case No. 2015CA00202 (Ohio App., May 23, 2016).

In a clash between two major oil companies, the Texas Supreme Court ruled on May 20, 2016, that the recently enacted Texas Uniform Trade Secrets Act (“TUTSA”) allows the trial court discretion to exclude a company representative from portions of a temporary injunction hearing involving trade secret information. The Court further held a party has no absolute constitutional due-process right to have a designated representative present at the hearing.

A Texas Court of Appeals held on August 22, 2016, that a former employer was entitled to $2.8 million in attorneys’ fees against a former employee who used the employer’s information to compete against it. The Court reached this ruling despite the fact that the jury found no evidence that the employer sustained any damages or that the employee misappropriated trade secrets.

In Fidlar Technologies v. LPS Real Estate Data Solutions, Inc., Case No. 4:13-CV-4021 (7th Cir., Jan. 21, 2016), the Seventh Circuit Court of Appeals affirmed a district court’s conclusion that a plaintiff had produced no evidence refuting the defendant’s contention that it honestly believed it was engaging in lawful business practices rather than intentionally deceiving or defrauding the plaintiff. Even though the plaintiff’s technology did not expressly permit third parties to access the digitized records and use the information without printing copies, thereby avoiding payment of fees to plaintiff, such access and use were not prohibited.

A divided Ninth Circuit panel affirmed the conviction of a former employee under the CFAA, holding that “[u]nequivocal revocation of computer access closes both the front door and the back door” to protected computers, and that using a password shared by an authorized system user to circumvent the revocation of the former employee’s access is a crime. See United States v. Nosal, (“Nosal II”) Nos. 14-10037, 14-10275 (9th Cir. July 5, 2016).

The Ninth Circuit in Facebook v. Power Ventures, Case No. 13-17154 (9th Cir. Jul. 12, 2016), held that defendant Power Ventures did not violate the CFAA when it made copies and extracted data from the social media website despite receiving a cease and desist letter. The court noted that Power’s users “arguably gave Power permission to use Facebook’s computers to disseminate messages” (further stating that “Power reasonably could have thought that consent from Facebook users to share the [Power promotion] was permission for Power to access Facebook’s computers”) (emphasis in original). Importantly, the court found that “[b]ecause Power had at least arguable permission to access Facebook’s computers, it did not initially access Facebook’s computers ‘without authorization’ within the meaning of the CFAA.”

6. Forum Selection Clauses

California enacted a new law (Labor Code § 925) that restrains the ability of employers to require employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where the employee was individually represented by a lawyer in negotiating an employment contract. For companies with headquarters outside of California and employees who work and reside in California, this assault on the freedom of contract is not welcome news.

We also continued to see federal district courts enforcing forum selection clauses in restrictive covenant agreements. For example, a Massachusetts federal district court last fall transferred an employee’s declaratory judgment action to the Eastern District of Michigan pursuant to a forum-selection clause in a non-compete agreement over the employee’s argument that he had signed the agreement under duress because he was not told he would need to sign it until he had already spent the money and traveled all the way from India to the United States.

7. Security Breaches and Data Theft Remain Prevalent

2016 was a record year for data and information security breaches, one of the most notably being WikiLeaks’ release of emails purportedly taken from the Democratic National Committee’s email server. According to a report from the Identity Theft Resource Center, U.S. companies and government agencies saw a 40% increase in data breaches from 2015 and suffered over a thousand data breaches. Social engineering has become the number one cause of data breaches, leaks, and information theft. Organizations should alert and train employees on following policy, spotting potential social engineering attacks, and having a clear method to escalate potential security risks. Employee awareness, coupled with technological changes towards better security will reduce risk and exposure to liability. For technical considerations and best practices and policies of attorneys when in the possession of client data, please view our webinar, “A Big Target—Cybersecurity for Attorneys and Law Firms.”

8. The ITC’s Extraterritorial Authority in Trade Secret Disputes

In a case involving the misappropriation of U.S. trade secrets in China, the U.S. Supreme Court was asked to decide whether Section 337 of the Tariff Act does, in fact, authorize the U.S. International Trade Commission (“ITC”) to investigate misappropriation that occurred entirely outside the United States. See Sino Legend (Zhangjiangang) Chemical Co. Ltd. v. ITC. The crux of Sino Legend’s argument was that for a statute to apply abroad, there must be express congressional intent. Not surprisingly, Sino Legend argued that such intent was missing from Section 337 of the Tariff Act. In Tianrui Group Co. Ltd. v. ITC, 661 F.3d 1322 (Fed. Cir. 2011), the Federal Circuit held that such intent was manifest in the express inclusion of “the importation of articles … into the United States” which evidenced that Congress had more than domestic concerns in mind. On January 9, 2017, the Supreme Court denied Sino Legend’s petition for certiorari, thereby keeping the ITC’s doors open to trade secret holders seeking to remedy misappropriation occurring abroad. For valuable insight on protecting trade secrets and confidential information in China and other Asian countries, including the effective use of non-compete and non-disclosure agreements, please check out our recent webinar titled, “Trade Secret and Non-Compete Considerations in Asia.”

We thank everyone who followed us this year and we really appreciate all of your support. We will continue to provide up-to-the-minute information on the latest legal trends and cases in the U.S. and across the world, as well as important thought leadership and resource links and materials.

texas-imageApplying new Texas Supreme Court precedent, a Texas Court of Appeals recently held that a six-year-old cease-and-desist letter alleging trade-secret misappropriation did not constitute proof of knowledge for purposes of the discovery rule. By allowing for the accrual date of this claim to be deferred, the court appears to have made it easier for trade-secret plaintiffs to overcome the statute-of-limitations defense in the future.

According to the opinion issued by the First Court of Appeals in Houston, Garner Environmental Services, Inc. (“Garner”) provides disaster-response training and related services. In 2008, Garner’s then-vice president quit, formed a competing company called First in Rescue, Safety and Training, LLC (“FIRST”), and hired several Garner employees. In January 2009, Garner sent FIRST a letter accusing it of wrongfully using Garner’s customer lists, contacts, and other trade secrets to solicit Garner’s customers. Garner based these allegations solely on the fact that, shortly before sending this letter, Garner had learned that a client scheduled to attend one of Garner’s training classes switched at the last minute to attend a class held by FIRST instead. Later that month, FIRST responded that it had not stolen Garner’s trade secrets because Garner’s customer lists and contacts were readily available to the general public, could be replicated from memory, and were therefore not confidential information in the first instance. FIRST’s letter also pointed out that none of the former Garner employees had entered into non-compete or non-solicitation agreements while employed by Garner, so they were not prohibited from contacting Garner’s customers. Apparently, this mollified Garner because it did not file suit against FIRST at this time.

Fast-forward nearly five years: In late 2013, FIRST filed suit against a former employee that had gone to work for another competitor. At an unspecified time in 2014, after reviewing documents the employee had filed in that suit, Garner determined that FIRST had unlawfully used Garner’s confidential information. So, in July 2015—more than six years after sending the initial cease-and-desist letter in January 2009—Garner filed suit against FIRST asserting, inter alia, a claim for misappropriation of trade secrets. FIRST filed for summary judgment, arguing that all of Garner’s claims were barred by the statute of limitations because it discovered or should have discovered the nature of its injury in January 2009. Garner argued in response that the discovery rule applied and, as such, limitations did not begin to run until it discovered the injury in 2014 when it reviewed the documents filed in connection with the lawsuit FIRST’s former employee had asserted against a third party. The trial court granted FIRST’s motion and dismissed Garner’s claims with prejudice.

On appeal, the sole issue before the Court of Appeals was when Garner discovered, or in the exercise of reasonable diligence should have discovered, the nature of its injury. Under the discovery rule, the accrual of a claim is deferred until the injured party learned of, or in the exercise of reasonable diligence should have learned of, the wrongful at causing the injury. Garner argued that the court of appeals was bound by the Texas Supreme Court’s recent decision in Southwestern Energy Production Co. v. Berry-Helfand, 491 S.W.3d 699 (Tex. 2016), which involved the discovery rule in the context of trade-secret misappropriation. In that case, the court held that surmise, suspicion, and accusation, even if sufficient to make one aware of a potential for misuse of trade secrets, are not facts that in the exercise of reasonable diligence would lead to the discovery of theft of trade secrets. Furthermore, the Southwestern court held that the defendant asserting the limitations defense “ha[d] not identified any evidence revealing what [the plaintiff] would have discovered had she made further inquiry.”

Finding “no meaningful differences between Southwestern and this case,” the Garner court noted that although Garner alleged in its January 2009 letter that FIRST had stolen its trade secrets, it had no facts to support these allegations other than mere suspicion that FIRST was competing with Garner’s clients. As in Southwestern, accusations were insufficient to establish knowledge of injury, the discovery rule applied. The Court of Appeals further noted that FIRST did not explain why it is entitled to have Garner’s statements of accusation construed as proof of knowledge while having its own statements of denial construed as “lawyer posturing” upon which Garner could not reasonably rely. The court thus rejected FIRST’s attempt to have its cake and eat it too.

FIRST also argued that Garner could have discovered the injury had it conducted presuit depositions under Texas Rule of Civil Procedure 202, which it did not do. In order to take a presuit deposition under Rule 202, the petitioner must show that there is a reason that the deposition must occur before the anticipated lawsuit is filed, and not after. The Court of Appeals, however, reiterated that Garner lacked any proof of its suspicions and thus had no basis to establish that FIRST had any information in its possession that could justify a Rule 202 deposition. A petitioner is also entitled to conduct a Rule 202 deposition if it demonstrates that the likely benefit of the requested deposition to investigate a potential claim outweighs the procedure’s burden or expense. The Court of Appeals stated: “To allow a rule 202 deposition in th[is] situation would require the other party to reveal the confidential information in their possession,” which the court concluded was too heavy a burden on FIRST. Thus, FIRST failed to establish a date (prior to Garner’s stated discovery date in 2014) by which Garner knew or, with reasonable diligence, could have discovered the nature of its injury. Accordingly, the Court of Appeals reversed the judgment of the trial court, and remanded for further proceedings.

The take-away from this case is that potential plaintiffs who, although suspicious, lack concrete proof that a potential defendant has misappropriated its trade secrets, will, on account of the Southwestern and Garner decisions, likely find it easier to assert the discovery rule to defer the accrual date of its misappropriation claim. Moreover, according to Garner, such potential plaintiffs will find it difficult, if not impossible, to meet their burden to establish the necessity of the information to be entitled to conduct a Rule 202 presuit deposition. It remains to be seen, however, if this case might decrease the use of Rule 202 depositions in trade-secret cases. Still, the boot-and-suspenders approach of attempting a Rule 202 deposition may be the better course to preserve the legal rights of a potential misappropriation plaintiff.

Garner Envtl. Services, Inc. v. First In Rescue, Safety & Training, LLC, 01-16-00388-CV, 2016 WL 7671377 (Tex. App.—Houston [1st Dist.] Dec. 22, 2016, no. pet. h.)

Texas CourthouseA Texas Court of Appeals affirmed a summary judgment last month in favor of an ex-employee declaring that a noncompete clause in an asset purchase agreement and separate noncompete agreement did not bar him from competing with his former employer after he had resigned his position. The court’s opinion serves as a reminder that conditions subsequent in noncompete clauses must be drafted with special care in order to avoid the risk that former employees may ignore such clauses with impunity.

Jason Player, a former IT manager for East Texas Copy Systems, Inc. (“Copy Systems”) sold his business to Copy Systems and, in the process, signed an asset purchase agreement (“APA”), as well as a separate noncompete agreement (“NCA”), that contained clauses precluding him from competing with Copy Systems for a certain period of time. Both the APA and the NCA also included nearly identical provisions which provided that “[i]f . . . Player’s employment with [Copy Systems] is terminated prior to two years from the date of this Agreement [July 1, 2013] for any reason other than a for cause termination, this non-compete Agreement will no longer be binding.” Player resigned his position with Copy Systems effective June 30, 2015—one day shy of the two-year period—and immediately began engaging in IT-related business for a competitor. Copy Systems then sent a cease-and-desist letter to Player demanding that, pursuant to its interpretation of the noncompete clauses, he refrain from engaging in any activities that are competitive with Copy Systems.

Player then filed suit in Texas state court against Copy Systems, requesting a declaration that the NCA and noncompete clause in the APA no longer forbid him from competing with Copy Systems. Copy Systems, in turn, filed a counterclaim seeking (1) a declaration that the noncompete provisions at issue remained effective, and (2) damages for breach of contract. As the facts were undisputed, both parties filed motions for summary judgment. After a hearing, the trial court granted Player’s motion and denied Copy Systems’.

On appeal, Copy Systems challenged the trial court’s construction of the parties’ noncompete agreement as reflected in the NCA and APA. Both parties focused on the interpretation of “[i]f . . . Player’s employment with [Copy Systems] is terminated prior to two years from the date of this Agreement for any reason other than a for cause termination, this non-compete Agreement will no longer be binding.” Copy Systems argued that this clause should be interpreted so that the noncompete would remain effective post-termination in the event Player resigned.  This is, the noncompete would cease to apply only if the Player was fired without cause. Player, on the other hand, maintained that the clause was effective if either party terminated his employment, including if he resigned.

Siding with Player, the court of appeals construed this clause, like the trial court had before it, to be a condition subsequent clause, i.e., a clause where the fulfillment of a condition excuses performance of an otherwise binding agreement. The court reasoned that, adhering to the plain and ordinary meaning of the agreements’ terms, the clause at issue was effective if either party terminated Player’s employment, since that clause did not identify which party must terminate the employment relationship. According to the court of appeals, what triggers the condition subsequent clause is “the termination of Player’s employment, not which party initiates the termination.” Copy Systems’ argument to the contrary was, in effect, asking the court to rewrite the agreement to insert the following underlined language: “[i]f . . . Player’s employment with [Copy Systems] is terminated [by Copy Systems] prior to two years from the date of this Agreement for any reason other than a for cause termination, this non-compete Agreement will no longer be binding.” This the court refused to do. Because Player resigned on June 30, 2015, and nothing in the parties’ agreement indicated that the inclusion of this clause was intended to restrict the party initiating the triggering termination to only Copy Systems, the court held that Player was excused from the performance of any obligations prescribed by the APA and NCA.

The takeaway from this case appears to be that employers should be cautious when inserting conditions subsequent in noncompete agreements, especially if the language triggering the condition subsequent does not specify which party terminates the employment relationship. If employers intend for noncompetes to continue to bind an employee post-resignation, they must specifically include language in any condition subsequent clause that the termination was at the instance of the employer. If no such language is included, the courts may decline to reform imprecise agreements and redistribute the contractually allocated risks and benefits. Accordingly, employers may wish to protect themselves by ensuring that an employee’s voluntary resignation is not a triggering event, thereby guaranteeing that the noncompete does not become ineffective upon the employee’s resignation.

E. Texas Copy Sys., Inc. v. Player, 06-16-00035-CV, 2016 WL 6638865 (Tex. App.—Texarkana Nov. 10, 2016, no. pet. h.).

shutterstock_180803939In a clash between two major oil companies, the Texas Supreme Court ruled May 20, 2016 that the recently enacted Texas Uniform Trade Secrets Act (“TUTSA”) allows the trial court discretion to exclude a company representative from portions of a temporary injunction hearing involving trade secret information.  The Court further held a party has no absolute constitutional due-process right to have a designated representative present at the hearing.

A former employee of M-I L.L.C. (“M-I”), a Schlumberger subsidiary, left to work for National Oilfield Varco (NOV) in early 2014.  The employee then filed suit against NOV in April 2014, seeking a declaratory judgment on his non-compete agreement.  M-I counterclaimed for breach of contract and misappropriation of trade secrets and further sued NOV as a defendant.

At a temporary injunction where M-I sought to present evidence through oral testimony of its purported trade secrets, M-I asked the trial court to exclude from the courtroom NOV’s designated representative.  The trial court categorically denied this request, concluding that it would be a denial of due process to prohibit the representative from attending.  The Court of Appeals then denied M-I’s writ of mandamus.

The Texas Supreme Court held, however, that the trial court failed to conduct the necessary due-process analysis balancing NOV’s right to have its representative attend the hearing and  M-I’s right to protect its trade secrets from someone who could have been a competitive decision-maker at NOV.  Specifically, the Court held that the balancing test required the trial court to determine, e.g.,

  • the degree of competitive harm M-I would have suffered from the dissemination of its alleged trade secrets to NOV’s representative; and
  • the degree to which NOV’s defense of M-I’s claims would be impaired by the representative’s exclusion.

This analysis may ultimately result in permitting NOV’s representative to attend the hearing, the Court stated, but the failure of the trial court to conduct any such analysis constituted an abuse of discretion.

The Court further concluded that TUTSA allows a trial court to exclude a company representative from portions of the hearing where trade secrets are being discussed.  Specifically, the Court held the provision of the statute allowing for “in camera hearings” should be interpreted as proceedings where a party or its representatives may be excluded, such as the injunction hearing at issue. Tex. Civ. Prac. & Rem. Code §134A.006.  This interpretation, the Court concluded, was appropriate because “it best gives effect to [TUTSA’s] directive to take reasonable measures to protect trade secrets, and its express authorization for protective orders with provisions ‘limiting access to confidential information to only the attorneys and their experts.’”

Interestingly, the Court also noted that when conducting the balancing due-process test regarding NOV’s corporate representative, the trial court must consider that “even when acting in good faith, [the representative] could not resist acting on what he may learn.”  In support of this position, the Court cited to a federal case from the Court of Appeals for the D.C. Circuit which held that “it is very hard for the human mind to compartmentalize and selectively suppress information once learned, no matter how well-intentioned the effort may be to do so.”  FTC v. Exxon Corp., 636 F.2d 1336, 1350 (D.C. Cir. 1980).  This analysis appears to lend support to interpreting TUTSA to adopting in some form the “inevitable disclosure” doctrine, which has not been otherwise officially recognized in Texas.  This doctrine generally holds that a former employer is entitled to enjoin a former employee if the new employment would result in “inevitable disclosure” of confidential information.[1]

TUTSA became effective in Texas on September 1, 2013.

[1] See, e.g., Harell, Alex, Is Anything Inevitable?  The Impending Clash between the Inevitable Disclosure Doctrine and the Covenants Not to Compete Act, 76 Tex. B.J. 757 (2013).

shutterstock_192971546Three very recent decisions reflect the irreconcilable division of judicial authority regarding the adequacy of at-will employment as the sole consideration for an otherwise valid non-compete.  Compare (a) Standard Register Co. v. Keala, No. 14-00291 (D. Haw., June 8, 2015) (adequate under Hawaii law) (“majority rule”), with (b) Hunn v. Dan Wilson Homes, Inc., Nos. 13-11297 and 14-10365 (5th Cir., June 15, 2015) (inadequate under Texas law) (“minority rule”), with (c) McInnis v. OAG Motorcycle Ventures, Inc., 2015 IL App. (1st) 130097 (June 25, 2015) (2-1 ruling based on the Fifield rule) (“middle ground”).

Status of the Standard Register case.  Several at-will employees of Standard, a distributor of promotional marketing products, executed non-competes and then resigned and went to work for an alleged competitor.  Standard sued them.  Judge Seabright bifurcated and decided the adequacy-of-consideration issue.  Although the non-competes contained an Ohio choice-of-law provision (Standard is an Ohio corporation), he held that Hawaii had the most significant relationship to the parties and the dispute.  So, Hawaii law applied.

Hawaii’s Supreme Court has not decided whether, under that state’s law, “continuing at-will employment is, by itself, sufficient consideration for an otherwise reasonable non-competition agreement entered into during a term of employment (and not at the beginning of employment).”  Judge Seabright observed that courts in several states hold that consideration in such a situation is insufficient, but “the clear majority position is to the contrary.”  The court concluded that “the Hawaii Supreme Court would not require additional consideration beyond continuing at-will employment.”

Status of the Hunn case.  Texas Bus. & Com. Code § 15.50(a), provides that “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.”  Lack, an at-will employee of Hunn’s architectural design company, signed a non-compete.  Lack transferred to his home computer from the company’s computer a copy of confidential plans and specifications relating to a project on which Lack was working for a client of Hunn’s (the company permitted employees to take files home to work on them).  Then, Lack resigned, was hired by the client, and allegedly used the files to complete the project.  Hunn sued Lack for breach of the non-compete, violating the Computer Fraud and Abuse Act, and unlawfully disclosing the company’s confidential information to Hunn’s client.

The Fifth Circuit held that a contract for at-will employment does not qualify as “an otherwise enforceable agreement” under the Texas statute “because the promise of continued employment in an at-will contract is illusory — neither the employer or employee is bound in any way.”  Therefore, the non-compete lacked consideration and was unenforceable under Texas law.  That court also rejected Hunn’s other claims (see below).

Status of the McInnis case.  For three years, McInnis was an employee of OAG, selling Harley-Davison motorcycles.  He quit OAG and went to work for a competitor for one day.  He then returned to OAG which required him to sign a non-compete and confidentiality agreement as a condition of his re-employment.  He resigned 18 months later and resumed employment with the competitor.  OAG sued and sought an injunction.  It was denied on the ground that the covenant lacked adequate consideration because he was an at-will employee employed for less than two years.  A scathing dissent challenged the majority’s rationale.

The conflict among the states. 

The majority position:  According to Judge Seabright in Standard Register, courts in Maryland, Ohio, Vermont, and Wisconsin reason that an employer’s forbearance in exercising a legal right — here, not terminating an at-will employee — is valid consideration for a non-competition covenant and is not illusory.  Further, he referenced the Restatement Third of Employment Law (April 2014 Proposed Final Draft), § 8.06 comment e, and Reporters’ Notes.  Comment e asserts that “Continuing employment of an at-will employee is generally sufficient consideration to support the enforcement of an otherwise valid restrictive covenant.”  The Reporters’ Notes to comment e cite rulings to this effect by courts in more than 20 states.

The minority position:  Citing cases from Minnesota, South Carolina, and Washington, Judge Seabright said that several jurisdictions hold that “continued at-will employment, standing alone, is insufficient consideration for a non-competition agreement entered into during current employment.”  He said that the Restatement Third of Employment Law identifies six jurisdictions, besides those three, that concur with the minority view.

Middle ground:  According to Judge Seabright, the Restatement identifies eight states — including Illinois — that endorse a middle ground, namely, that consideration is sufficient only if the employee is retained for a substantial period after the non-compete is signed.  A leading Illinois case (there is no Supreme Court decision directly on point) is Fifield v. Premier Dealer Services, Inc., 2013 Ill. App. (1st) 120327, holding that continuous employment for two years or more constitutes reasonable consideration for a restrictive covenant.  The majority in McGinnis followed that ruling.

Justice Ellis, dissenting, rejected as indefensible a bright-line two-year rule.  He insisted that a determination of the adequacy of consideration requires a case-by-case analysis in order to protect “at-will employees from the whim of the employer.”  Here, in his view, it was relevant that McGinnis signed the covenant at the time he was hired, that the period of McGinnis’s post-covenant employment (18 months) was substantial, and that he left OAG voluntarily.  The jurist said he could understand the term “additional consideration” in the instance of an existing employee but questioned the logic of requiring “additional compensation” — additional to what? — for a newly hired employee.  He also noted that three of the four federal judges deciding post-Fifield cases predicted that the Illinois Supreme Court would reject the bright-line rule.

Two other issues in Hunn. 

CFAA.  One count of Hunn’s complaint against Lack accused him of violating the Computer Fraud and Abuse Act.  The appellate tribunal held that since Lack was employed by Hunn when he transferred the files to his home computer, and since employees were permitted to transfer files to their home computers, Lack did not exceed authorized computer access.  Therefore, there was no CFAA violation.

Disclosure of trade secrets and other confidential information.  Hunn accused Lack of post-employment disclosure of Hunn’s confidential plans and specifications.  But the Fifth Circuit disagreed because the plans had been disclosed to the client with Hunn’s consent —  through  its agent, Lack — during Lack’s employment by Hunn.

Takeaways. 

  1. Consideration. Determination of the sufficiency of consideration for a non-compete executed by an at-will employee may turn on which state’s law applies.  If the relevant facts and circumstances permit, an employer should include a choice-of-law provision designating the law of a state where at-will employment is adequate consideration.  However, as the Hunn case illustrates, choice-of-law clauses are not always honored.
  2. Confidential information. An employer who gives employees access to confidential information should require them to sign written commitments (a) to return or delete the information promptly after termination of employment, and (b) under no circumstances to use or disclose the information other than in furtherance of the employer’s business.

shutterstock_176119643The parties in a Computer Fraud and Abuse Act case moved for partial summary judgment. Among the issues were whether the plaintiff had incurred the requisite $5,000 in qualifying losses, and whether the complaint was time-barred. The motions were denied, but the court had to do a lot of explaining. Quantlab Technologies Ltd. v. Godlevsky, Case No. 4:09-CV-4039 (S.D.Tex., Apr. 14, 2015) (Ellison, J.).

Status of the case. Judge Ellison ruled that the CFAA damages threshold was met. He held that (a) the value of time spent in an internal investigation could be aggregated with (b) sums paid to two consultants to investigate the intrusions and to assist in the prosecution of resulting litigation. He also decided that the statute of limitations began to run when the plaintiff first learned of the supposed CFAA violations, even though the identity of the perpetrator was unknown. And he ruled that claims against an individual whose alleged wrongdoing was mentioned in the body of the initial CFAA count filed in 2009, but who was not named as a defendant in that count until a third amended complaint was filed in 2014, related back to the 2009 filing.

The alleged violations. Quantlab is a financial research firm that claimed to have valuable trade secrets relating to high frequency stock trading programs. In September 2007, six months after the company terminated its employee Kuharsky, Quantlab discovered that its computer network apparently had been accessed without authorization on four separate occasions between March and August 2007. An internal probe indicated that he was the culprit.

Additional investigation prior to filing the complaint, In 2008, Quantlab retained network security consulting firm Grey Hat to ascertain whether Kuharsky could gain future unauthorized access. No conclusions were reached. Later, Quantlab concluded that he had not accessed the company’s files after all. Rather, it was his friend Andreev, a Quantlab employee, who acted at Kuharsky’s behest and used Kuharsky’s home computer.

The pleadings. Quantlab’s original CFAA count named Kuharsky as a defendant. Quantlab employee Maravina was not named as a defendant, but she was described as a “sleeper mole” who had assisted Kuharsky in stealing trade secrets and confidential information. She was added as a CFAA defendant in the third amended complaint.

Calculating qualifying losses.

  1. Qualifying losses relating to Kuharsky. Quantlab calculated that its internal investigation in 2007 took 10-12 hours and cost the company $2,500-3,000. That sum was not enough, however, to satisfy the $5,000 requirement for bringing a CFAA lawsuit. Gray Hat billed the company $13,400 in 2008 for consulting services, but Kuharsky contended that those services did not include investigation of the supposed computer incursion. The court accepted as true the sworn declaration of Quantlab’s CEO that Gray Hat was hired in response to Kuharsky’s actions. Thus, the requisite qualifying loss total was deemed established.
  2. Qualifying losses relating to Maravina. After the complaint was filed, Quantlab hired consulting firm Pathway Forensics and asserted that payment of its $31,900 bill constituted qualifying losses. Maravina insisted that Pathway’s assignments concerned litigation, not investigating her role in the 2007 events. Quantlab maintained, however, that the lawsuit work was not included in that bill. The court concluded that since Pathway may have contributed to Quantlab’s 2014 decision to add Maravina as a defendant, $5,000 in damages was demonstrated. The court said it was unnecessary to rule on the question of whether all expenses incurred investigating several persons’ intrusions can be used in computing the amount of losses attributable to each person’s involvement.

Statute of limitations.

  1. Kuharsky. Quantlab moved for summary judgment against Kuharsky. He asserted that the two-year statute of limitations began to run in September 2007. Quantlab argued that it had two years from early 2008 when the company first learned that Andreev, not Kuharsky, had accessed the network. The court said that the motion could not be granted because no evidence had been presented regarding the material question of whether Andreev was authorized to access the network from Kuharsky’s home.
  2. Maravina. Seven years elapsed between the intrusions in 2007 and the first time Maravina was named as a CFAA defendant. She asserted a statute of limitations defense. The court reiterated that the original CFAA count called her a “sleeper mole” and said she was “on notice that the lawsuit concerned the same conduct that now underpins the CFAA claim against her.” So, that claim was held to relate back to the 2009 litigation commencement date. Although not mentioned in its recent ruling, an earlier written decision on other motions in the same case stated that she was a named defendant (but not in the CFAA count) in the original complaint, and the court added that she was Kuharsky’s wife.

Takeaways. CFAA litigation can be very complex. For example, judges have not consistently ruled on the two primary issues involved in Quantlab: (a) the meaning of the statutory requirement of a “loss . . . of at least $5,000,” and (b) the date the statute of limitations regarding a CFAA violation begins to run. Moreover, judicial interpretations of the statutory phrases “without authorization” and “exceeding authorized access” as they relate to prohibited contact with a computer network are sharply divided. Some courts hold that those phrases refer only to hacking by an outsider. Other jurists say the statute also is directed at persons who make unauthorized use of their employer’s computer. Both a prospective plaintiff considering filing a CFAA claim, and a defendant who is or may be named, should consult experienced counsel.

An employee executed an employment agreement which included a two-year covenant not to solicit the employer’s customers.  When the employer sold the company’s assets, the sale included that agreement.  The employee then went to work for the assets purchaser but subsequently resigned.  The Texas Appellate Court held that the two-year period began to run on the date the assets seller ceased to be the signer’s employer.  Lasser v. Amistco Separation Products, Inc., No. 01-14-00432-CV (Tex. App. Court, Oct. 2, 2014).

Summary of the Case

The employment agreement between Lasser and the assets seller, ACS, included a confidentiality provision as well as the non-solicitation covenant.  Lasser worked for the assets purchaser, Amistco, for 15 months and then resigned, accepting a job with its alleged competitor.  Amistco sued and sought a preliminary injunction.  The trial court’s first injunction order was dissolved by the Texas Court of Appeals because of a lack of specificity.  After the lower court issued a more detailed order, the appellate tribunal affirmed as to confidentiality but dissolved the non-solicitation injunction, holding that the covenant expired two years after Lasser left ACS’ employ. 

Chronology

Lasser’s employment with ACS terminated on February 29, 2012.  He went to work for Amistco the next day and remained employed by that company until June 1, 2013.  He immediately went to work for Woven Metal Products which assigned him to head a new division that allegedly competed with Amistco. 

Amistco’s lawsuit and first injunction motion

Amistco promptly sued Lasser, claiming that he was about to violate the confidentiality provision and non-solicitation covenant in his ACS employment agreement.  Amistco moved for entry of a preliminary injunction against Lasser’s (a) solicitation of Amistco’s customers, and (b) use of Amistco’s trade secrets and confidential information.  The trial court entered the injunction, and Lasser appealed. 

Two Appeals

Early in 2014, the appellate court reversed the injunction order on the ground that it was insufficiently specific (Lasser I).  Amistco then moved for entry of a more detailed preliminary injunction which the trial court entered.  Lasser appealed again.  Last week, the appellate court affirmed the injunction order insofar as it related to confidentiality but reversed the remainder of the order, holding that the non-solicitation clause lapsed on March 1, 2014 (Lasser II).

The holdings in Lasser II.  

(a) The holding regarding the non-solicitation clause.  The appeals court held that Lasser covenanted with ACS not to solicit its customers for two years after termination of his employment.  By the time Lasser II was decided in October 2014, the non-solicitation prohibition had expired and no longer was enforceable.

(b) The holding regarding the confidentiality clause.  After Lasser left Amistco, that company retained a computer forensics expert to analyze Lasser’s company computer to determine whether he had downloaded any of Amistco’s trade secrets.  The expert concluded that Lasser had taken with him more than 1000 confidential Amistco files.  On appeal, Lasser denied that the files contained secret data.  He also challenged the second injunction as insufficiently specific. 

The first injunction restrained Lasser simply from “using, . . . [or] directly or indirectly disclosing, copying or otherwise reproducing, or giving others access to any of [Amisco’s] confidential information and trade secrets.”  Commenting in Lasser I that “the order neither defines nor in any manner indicates from its context the meaning of the phrase ‘confidential information,’” the Court of Appeals held that the injunction was “not sufficiently clear to provide Lasser with adequate notice of what acts he is compelled to complete and what conduct he is restrained from performing.  In other words, he is left to speculate what conduct might satisfy or violate the order.  This is impermissible.”

The trial court’s second injunction identified two dozen categories of “confidential information and trade secrets” that were the subject of the order.  In Lasser II, the Court of Appeals held that “The specific examples of the items comprising ‘trade secrets’ and ‘confidential information,’ when read in the context of the suit, provided Lasser with adequate notice of the information that he is prohibited from using or disclosing.”

Takeaways

Assignment of Lasser’s employment agreement provided Amistco (a) a cause of action to prevent his disclosure of confidential information, but (b) no defense against his post-termination solicitation of Amistco’s customers.  In order to protect against such soliciting, apparently, Amistco would have had to obtain its own covenant from Lasser.

In a recent Texas federal court ruling, a competitor closely aligned with, and seemingly assisted by, a signatory of a non-compete covenant narrowly avoided a preliminary injunction because the assistance was not shown to have been substantial.

Summary of the case.  In connection with the purchase and sale of a partnership’s assets, a partner of the seller signed a covenant which provided that, for five years, he would not participate in a business competitive with the seller anywhere in or adjacent to the county where the seller’s business was located.  Shortly thereafter, a company owned by the signatory’s wife commenced competition in that territory.  Alleging that the signatory was aiding and abetting the competitor, the assets purchaser sued the signatory, the signatory’s wife, and others.  The purchaser’s motion for entry of a preliminary injunction was granted solely against the signatory.  It was denied as to the remaining defendants because the purchaser was held to have failed to meet its burden of demonstrating that the signatory significantly aided and abetted competition.  Henson Patriot Ltd. Co., LLC v. Medina, Civ. Ac. No. SA-14-CV-534-NB (W.D. Tex., Sept. 11, 2014) (Rodriguez, J.).

The defendants.  Andrew Medina was a partner of, and the signatory for, the seller.  For 15 months after the transaction, he was employed by the purchaser Henson Patriot Ltd. in production and then in sales.  His wife Clara and her future business partner were lower level employees there.  They were not signatories.  The three of them — Andrew, Clara and her future partner — resigned from Henson more-or-less simultaneously, and almost immediately Clara (with her partner) set up a company within the territory of the non-compete.  Both Henson and Clara’s company were specialty commercial printers.  When Clara’s company took several good Henson customers who Andrew had serviced, Henson sued Clara’s company and the three individuals for violating the non-compete.  The defendants maintained that Andrew played no role in Clara’s company.  However, messages found on his phone at Henson after he left, various emails, and other evidence strongly suggested that he had been involved with “the launch and conduct” of that company.

The covenant.  In addition to the provisions relating to its duration and territory, the covenant stated that Andrew “shall not either directly or indirectly . . . engage, [consult] with, advise or otherwise participate in any business that is in competition” with the seller.

The court’s ruling on plaintiff’s motion for a preliminary injunction.  The defendants contended that the length of the term, the breadth of the area encompassed by the non-compete, and the activities prohibition were unreasonable, but the court disagreed.  Previous Texas decisions in asset sales cases upheld similar provisions.  Concluding that “The facts are approaching enough to show Andrew Medina significantly aided, abetted, and consulted with the other defendants,” Judge Rodriguez entered the injunction against Andrew, the signatory. More problematic was Henson’s effort to enforce the non-compete against the non-signatory defendants.

The judge stated that Texas law would “allow an extension of Andrew Medina’s non-compete to entities or persons he significantly aided, abetted, consulted, or advised to compete with Plaintiff.”  Clara, her company, and her partner insisted that Andrew’s involvement was inconsequential.  Judge Rodriguez responded that he was “not convinced Andrew Medina did not aid, consult, or advise [Clara’s company and its principals, but] the Court exercises caution at this time due to the extraordinary nature of a preliminary injunction.”  The Court added that Henson “has not shown enough for the Court to conclude Andrew Medina significantly aided, consulted, or advised the other defendants.”  Emphasis the court’s.  Therefore, as to those defendants, the court held that “Plaintiff, at this time, has failed to establish a substantial likelihood of success on the merits.”

Takeaways.  Henson teaches that, in order to obtain a preliminary injunction against an alleged violator of a non-compete covenant, an employer may have to prove that the violation but, in addition, that the violation was not trivial, at least in this Texas court.  The hard evidence presented by the plaintiff, rebutted only by the defendants’ denials, seems to have indicated that Andrew did what the non-compete prohibited.  But almost every time Judge Rodriguez referred to the covenant’s prohibition against “aiding, abetting, consulting, and advising,” he added the modifier “significantly” (once in italics) although that word is not found there.  Thus, he construed the covenant as implicitly precluding only extensive violations.  Perhaps he was influenced by the legal principle set forth in a few cases — none of which were cited — that aiding and abetting the commission of a tort is actionable only if the assistance is “substantial.”

An employee entered into non-compete and confidentiality agreements with his employer.  Following his resignation from that company, he went to work for a competitor.  His job functions and territory with both employers were similar.  In a suit for violation of the non-compete and confidentiality agreements, a Texas federal court held recently that — absent an injunction — disclosure to his new employer of his former employer’s confidential information was inevitable.  The court concluded that all of the prerequisites were met for a preliminary injunction.  Brink’s Inc. v. Patrick, Case No. 3:14-cv-775-B (N.D. Tex., 6/26/14).

Summary of the Case

Greco was employed by Brink’s, a provider of secure money transport services.  Shortly before resigning from Brink’s to go to work a competitor, he allegedly transferred confidential files from his Brink’s office computer to his personal thumb drive and then deleted the files from the computer.  Brink’s sued him in a Texas state court, and he removed to the federal court.  Brink’s claimed that disclosure of its trade secrets was inevitable unless Greco was enjoined from competing with Brink’s for the entire two-year term of the non-compete.  The court granted the motion in part, limiting the scope of the covenant and enjoining Greco only while the litigation is pending.

Inevitable Disclosure

Injunctions based on the inevitable disclosure doctrine typically involve specialized and particularized information developed in the course of the former employer’s R&D and used in that company’s highly technical or complex workplace.  Often, the new employer is a start-up, or a company planning a significant expansion, which would benefit — by not having to expend significant sums and effort on development — from the former employer’s closely guarded, valuable trade secrets.   In that situation, some judges will prohibit the newly hired employee from using or even inadvertently disclosing the secrets.  

Other judges, however, express reluctance to invoke the inevitable disclosure doctrine, except in “the rarest of cases.”  For one thing, the more experienced the employee, and the more general the information disclosure of which is foreclosed, the harder it is for the parties and a court to differentiate between (a) knowledge gleaned simply from that experience, which the employee should be free to use, and (b) confidential information proprietary to the former employer.  For another, an inevitable disclosure injunction might prevent the employee from providing meaningful services to a new employer in the industry in which the employee knows best.  Those jurists maintain further that the inevitable disclosure doctrine adds little of substance to a non-compete if the employee agreed to one, but if there is none courts should not impose on the ex-employee a functionally equivalent substitute.

The injunction in the Brink’s Case

Duration.  The court declined to issue a two-year “preliminary injunction” as requested by Brink’s because such an order would, in effect, grant 100% of the relief requested but at a time when the dispute’s merits have not yet been adjudicated. 

Geography.  Greco objected to the request by Brink’s to restrain him from working for a competitor located in Chicago.  Although he had been employed in the Chicago office of Brink’s, he maintained that the company’s operations there were outside his responsibility for his final two years with that company.  However, the non-competition covenant stated in relevant part that the territory covered includes the entire area served by the office where the employee was located at termination.  So, Greco was ordered not to compete with Brink’s in the territory serviced by its Chicago office, but he was not precluded from competing outside that region or providing non-competitive services within that area.

Inevitable disclosure.  Brink’s alleged that Greco was intimately familiar with its confidential “customer names, contacts, volume of business and routes for customers, service specifications, service delivery strategies, and staffing and pricing models.”  Agreeing with Brink’s that the non-compete was necessary to protect the company’s good will, the court concluded that Greco inevitably would cause irreparable harm by performing competitive services for Garda in the relevant territory.  Most courts issuing an inevitable disclosure injunction would emphasize efforts the former employer made to protect the confidentiality of the trade secrets, a subject the Brink’s court did not mention.

Takeaways

Greco was bound by both confidentiality and non-compete covenants.  Any employer that wants to maximize protection of trade secrets should insist that high-level employees execute both.  Whether the same result would have been reached in the absence of a non-compete, in other words, based solely on the inevitable disclosure doctrine, is unclear.  The court’s decision clearly was influenced by the near identity of Greco’s job responsibilities with both employers and by his apparent misuse, as he was exiting, of the computer Brink’s had provided to him.  Attorneys representing employers seeking to enforce a confidentiality covenant should stress facts showing why misuse of trade secrets is particularly likely and that the trust placed in the ex-employee by the former employer was abused.