Trading Secrets : Trade Secrets Lawyers & Attorneys : Seyfarth Shaw Law Firm : Computer Fraud, Confidentiality Agreements, Corporate Espionage

The Texas Supreme Court has once again ruled in favor of enforcing non-competition agreements. On April 17, 2009, the Court held that “if the nature of the employment for which the employee is hired will reasonably require the employer to provide confidential information to the employee for the employee to accomplish the contemplated job duties, then the employer impliedly promises to provide confidential information and the covenant is enforceable so long as the other components of the Covenant Not to Compete Act are satisfied.” Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, No. 07-0490, 2009 WL 1028051, *1 (April 17, 2009). The other components of the Act involve whether the agreement’s terms are reasonable.   

In Light v. Centel Cellular Co. of Tex., the Court interpreted the Act to require employers to promise to provide and actually to provide confidential information or trade secrets to employees “at the time the agreement is made.” 883 S.W.2d 642, 644-45 (Tex. 1994). This almost never happened and thus non-competes were difficult to enforce. 

In 2006, the Court modified Light and held that the employer’s promise to provide confidential information or trade secrets is enforceable as long as the employer provides the information at some point during employment. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006). Thus, non-competes became easier to enforce. 

The Court has now gone further and held that the employer’s promise to provide confidential information or trade secrets within the non-compete need not be express; it may be implied. Fielding at *1. Thus, as long as a covenant not to compete is “ancillary to or part of an otherwise enforceable agreement,” (i.e., an employee’s non-disclosure agreement) and the nature of the contemplated employment will reasonably require the employer to furnish the employee with confidential information, then the employer impliedly promises to provide the information and the contract is enforceable. In such a situation, the only remaining issue is the reasonableness of the terms, i.e., whether the restrictions are reasonable in length of time, geography, and scope of activity restrained by the agreement. This ruling makes it more difficult for an employee to challenge the formation of a covenant not to compete under the Act. 

It is also important to note that the Court held “confidential information” may include client-specific information that a client provides to the employer such as the “clients’ names, billing information, and pertinent tax and financial information.” Id. at *6. 

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Eric Rush (a/k/a Eric Romero), a 37-year old dance instructor in Texas, was jailed last week when he violated the Court's order enforcing his non-compete agreement with his former employer, Arthur Murray Dance Studios in Plano, Texas.  The Associated Press reported that Rush a/k/a Romero was unrepentent. 

Rush acknowledged in a jailhouse interview that he advertised his services and provided forbidden dance lessons to students in the area.

But in his defense, Rush said, he couldn't help himself.

"I love to dance," Rush told The Dallas Morning News. "It's my soul."

(Assoc. Press Oct. 18, 2008.)

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On August 7, 2008, in Edwards v. Arthur Andersen LLP, No. S147190, the California Supreme Court seemingly ruled that Section 16600 of the Business and Professions Code prohibits every attempt by an employer to enforce a non-competition agreement. The court indicated that the only exceptions are those expressly set forth in the statute (agreements in connection with the sale or dissolution of a business).

The same day, a class-action complaint was filed in Contra Costa County Superior Court, Vokes, et al. v. Central Garden & Pet Co., No. C 08-01994, that could test the reach of the Edwards decision.  Plaintiffs are asking the court to invalidate a non-compete agreement signed by Vokes when he became Central Garden’s Senior VP Sales and Trade Relations and, on behalf of all all Central Gardens employees, seeking to invalidate all of Central Gardens’ non-compete agreements as violating Section 16600 and related California statutes.

For more than 20 years prior to going to work for Central Gardens, Vokes had been employed by Doskocil, a competitor of Central Gardens. When he left in January 2007, he was VP of Sales. Upon becoming employed by Central Gardens as its Senior VP Sales and Trade Relations, he signed a non-compete agreement. It provided for 24 months of paid post-termination “independent contractor” status (according to the complaint, however, the compensation amount was “a small fraction of his wages as [a Central Gardens] employee”). The agreement mandated non-competitor employment and non-customer solicitation, in virtually any geographic market served by Central Gardens' market, during and for the 12 months following the “independent contractor” period.

In July 2008, Vokes resigned from Central Gardens and returned to Doskocil, in Texas. Central Gardens immediately sued in Texas to enforce the agreement and obtained a TRO (according to the Contra Costa County complaint, ex parte and without notice) against Vokes and Doskocil. They then filed the Contra Costa County complaint.

Whether the Contra Costa County court will adjudicate the complaint or will stay the action in light of the earlier-filed Texas complaint is uncertain. Also unclear is whether the Contra Costa County Court will certify the class and whether the agreement might be enforceable at least during the 24-months “independent contractor” period. The outcome of this case, if it proceeds, will be interesting.

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