It is well known that courts interpreting their respective states’ versions of the Uniform Trade Secret Act (“UTSA”) have not uniformly applied UTSA’s preemption provision. While some states hold that their acts only preempt claims involving information that constitutes a “trade secret,” others hold that their acts also preempt claims based on information that may not technically meet the “trade secret” definition. See, e.g., Spitz v. Proven Winners N. Am., LLC, 759 F.3d 724, 733 (7th Cir. 2014) (concluding that Illinois’s UTSA preempts claims “that are essentially claims of trade secret misappropriation, even when the alleged ‘trade secret’ does not fall within the Act’s definition”); Am. Biomedical Grp., Inc. v. Techtrol, Inc., 374 P.3d 820, 827 (Okla. 2016) (holding that Oklahoma’s UTSA preempts “conflicting tort claims only for misappropriation of a trade secret” and “does not displace tort claims for information not meeting this definition” (internal quotation marks and citation omitted)). Continue Reading 5th Circuit Provides Guidance on the Scope of Louisiana Uniform Trade Secrets Act’s Preemption Provision

shutterstock_113020912A long-running non-compete clause dispute has reached the Louisiana Court of Appeal three times.  Last month, the court affirmed a $600,000 judgment, plus attorneys’ fees and costs, against an ex-employee who assisted his son’s start-up company compete with his father’s former employer.  Pattridge v. Starks, No. 50,351-CA (Louisiana Court of Appeal, Feb. 24, 2016) (Endurall III).

Summary of the case.  Endurall, Inc. — a Louisiana manufacturer and seller of rod guides used in the oil and gas industry to prevent well tubing leaks — terminated the employment of corporate officers Billy Joe Edwards and Jimmy Starks, two of its three 33% stockholders.  The company and the owners of the other 34% sued Billy Joe, Starks and others in a Louisiana state court alleging, in part, that Billy Joe violated his non-competition agreement by helping his son Gregory Edwards make and sell rod guides.

After a trial, the judge ruled that Billy Joe violated his non-compete agreement, that the company’s four shareholders were irreconcilably deadlocked, and that their stock should be auctioned.  That order was affirmed on appeal  (149 So.3d 820 (2014) (Endurall I).  Next, the trial judge permanently enjoined Billy Joe from, or assisting others in, competing in the rod guide industry.  That decision also was upheld (Endurall II ).  The trial court then presided over an evidentiary hearing on damages and awarded $600,000 to the plaintiffs.  In Endurall III, the Court of Appeal affirmed.

The non-compete and confidentiality agreements.  At the time Endurall was created, each shareholder signed a confidentiality agreement.  They acknowledged that the non-competes were an essential condition of their stock purchases, and each promised not to participate in any competitive business for two years after he ceased to own Endurall stock

Billy Joe’s alleged breach of his non-compete.  In 2012, Billy Joe, his son Gregory, and Starks formed Vector Energy Solutions.  Billy Joe was elected vice-president of development.  When Endurall and its other two shareholders learned about Vector, they accused Billy Joe and Starks of disclosing Endurall’s confidential information to Vector.

At the court-ordered auction of Endurall’s stock in 2013, the successful bidders were its two shareholders who were not involved with Vector.  They paid Billy Joe and Starks $1.1 million each for their stock.  Billy Joe went to work for Skye Petroleum which made paraffin products for the oil and gas industry.  He and his wife loaned their son Gregory hundreds of thousands of dollars to start DHE, LLC.[1]  Billy Joe helped to acquire the building (a few blocks from Endurall) where both he and DHE had their offices, and he touted DHE to his Skye Petroleum customers who had a need for rod guides.  In addition, Gregory wrote a letter announcing the creation of his new company, made reference to his work experience with his father, and stated that DHE’s rod guides were superior to those made by Endurall.  Quickly losing customers and sales representatives to DHE, Endurall filed suit.

Damages calculation.  The plaintiffs called an expert damages witness; the defendants did not.  The witness testified that Endurall was injured as “a result of impaired operations” caused by DHE.  He said that the damages amount could be determined by (1) comparing the company’s performance before and after the impairment, or (2) using a discounted future earnings approach.  The “before and after” method, the expert said, considered Endurall’s sales history and gross profits, minus (a) avoidable costs, and (b) variable costs incurred but not due to lost sales.  The discounting approach extrapolated sales data for six years from late 2014, assumed a 14% annual volume increase, and used an “aggressive” time-value-of-money discounting rate.

The expert was cross-examined “rigorously” according to the trial judge, and “ably and thoroughly” in the words of the Court of Appeal.  The expert admitted that, among other suppositions, he presumed that Endurall’s current cost of production would not change and that customers lost to DHE would never return to Endurall.  He conceded that a 14% annual sales increase was not supported by Endurall’s history, and he acknowledged that DHE’s actual sales volume was substantially less than the amount of sales Endurall claimed to have lost to DHE.  However, he said that over time and on average the model he used would be supported.  He concluded that, regardless of which method was employed, Endurall lost approximately $900,000 in profits as a result of sales to customers poached by DHE.

The trial judge decided to award damages only through 2016, not all the way to 2020 as the plaintiffs’ expert witness proposed.  The court reasoned that technological advances might render rod guides obsolete and, in the appellate tribunal’s words, the trial judge “recognized the significant uncertainty and generous assumptions built into [Endurall’s] damages model,” “the volatile nature of Endurall’s business,” and that the “projected sales over time were speculative.”   Even though the trial judge admitted that his computation was “somewhat arbitrary,” the Court of Appeal affirmed because “the record reveals no manifest error . . ., [the] damage award was based on . . . the evidence presented and not on mere speculation,” and “no abuse of discretion” was detected.  By awarding 33% less than the expert’s calculation of lost profits, moreover, the trial court adequately took into account the complexity of computing damages.

Billy Joe contended that damages should not have been awarded beyond 2015 when the two-year non-compete expired.  The Court of Appeal disagreed.  It explained that DJE’s early entry into the market gave Endurall no time to prepare for the competition, and that  Billy Joe could have mitigated Endurall’s losses by delaying assistance to his son.

Takeaways.  Endurall III contains several important lessons.

First, a signatory to a non-competition agreement who assists someone else to compete can be found liable for violating it notwithstanding the signatory’s apparent lack of a personal profit motive.

Second, the decision provides a thoughtful analysis of the difficulties faced by a trial court called upon to compute damages sustained by a well-established market leader at the hands of a start-up competitor assisted by a knowledgeable alleged non-compete clause violator.

Third, the opinion reminds us that calling a damages expert to testify is not always required just because the adversary has such a witness.  Without calling an expert witness, Billy Joe apparently was able to provide “rigorous”, “able” and “thorough” cross-examination of the plaintiffs’ damages expert.  Billy Joe avoided incurring the expense of a testifying expert who, in any event, might have been unnecessary or even potentially counter-productive.

[1] Coincidentally or otherwise, Endurall’s original name was Down Hole Enterprises.

A recent Louisiana non-compete case involving two appellate decisions addresses three significant issues in non-compete litigation: 1) whether a former employee’s referral of customers to a new employer violated the employee’s non-solicitation of customer covenant; 2) the consequences of violating the covenant and court injunction; and 3) the appropriate standard of proof for contempt proceedings.

Summary of decision. Five years into her employment with Acadian Cypress & Hardwoods as a sales representative, Acadian had Joy Stewart sign a non-solicitation agreement.  It provided that for two years after her employment terminated, Stewart would not solicit Acadian’s customers in more than 20 specified Louisiana parishes, eight identified counties in Mississippi, and two specific counties in Alabama.  Several years later, she resigned from Acadian and went to work as a sales representative for one of its competitor.   

Acadian sued Stewart and obtained a preliminary injunction against soliciting sales in the restricted territory.  The new employer’s headquarters was in one of the restricted parishes, and she lived in another one.  Because of the covenant and injunction, she scrupulously avoided selling her new employer’s products to Acadian’s customers, or even calling on them.  However, she phoned other customers from her home, and she had materials shipped to them.  Further, if Acadian’s customers contacted her, she invited them to communicate with her new employer’s other salespersons or its warehouse.  Acadian accused her of violating the injunction and committing contempt of court. The trial court agreed with Acadian.  She appealed but, in a 2-1 decision last week, the Louisiana Court of Appeal affirmed.  Acadian Cypress & Hardwoods, Inc. v. Stewart, 2012 CA 2002 (La. App., 1st Circ., Sept. 3, 2013) (McClendon, J.) (not for publication).

The first appellate court ruling.  This case went to the Court of Appeal twice.  The first time was when Stewart appealed from issuance of the preliminary injunction.  She argued that the covenant was ambiguous and lacked consideration.  Those arguments were rejected.  Perhaps because the applicable statute provided a temporal limitation on restrictive covenants (two years) but was silent with respect to the maximum allowable territory, she did not take issue — at the injunction hearing or on appeal — with the breadth of the non-solicitation’s territorial restriction.

The injunction order was affirmed.  Case No. 2012 CA 1425 (La. App., 1st Circ., Mar. 22, 2013) (McClendon, J.) (also not for publication). Judge Whipple, concurring in the result, expressed concern with regard to “the extensive geographic area set forth in the agreement, which I find comes perilously close to rendering such a contract unenforceable as an overly broad restriction on the interests of free enterprise.  However, this issue was not specifically challenged on appeal.”  Judge Whipple did see merit in Stewart’s argument regarding a lack of consideration for the covenant, and cited “the well-reasoned dissenting opinion” in an earlier Court of Appeal case, but concluded that the court was required to follow the majority’s ruling in that older case to the effect that continued employment was adequate consideration. 

The second appellate court ruling.  The second appeal was taken from Stewart’s appeal of the finding of contempt.  After an evidentiary hearing regarding the motion for contempt, the trial court ordered her “to pay all costs regarding the motion.”  No conditions were attached to the order, apart from paying those costs, and there was nothing else that she was required to do to purge herself of the contempt. 

In a 2-1 decision on her appeal, the majority voiced misgivings about the proceedings below but nonetheless again affirmed the lower court.  The initial problem dealt with was whether Stewart was properly charged with criminal contempt for which the relevant standard of proof is “beyond a reasonable doubt.”  A “preponderance of the evidence” would suffice for civil contempt.  The majority reasoned that because the judgment below ordered payment of court costs and “is an unconditional penalty, one that Ms. Stewart cannot affect or end, it is criminal in nature.”     

The majority agreed with Stewart that the trial court’s interpretation of the injunction — seemingly prohibiting her from (a) speaking with customers outside the area by phone from her home (which was within the restricted territory), and (b) asking the home office (also within the territory) to send materials to those customers — “could effectively prevent her from engaging in her business anywhere in the United States.”  Still, the majority found that referring Acadian’s customers to her new employer “constituted a violation of the non-solicitation provisions of the injunction.  Therefore, based on the record before us, we conclude that any rational trier of fact could find the essential elements of criminal contempt beyond a reasonable doubt.”  The dissenting judge did not write an opinion.

Takeaways.  Stewart may have made two mistakes.  First, at the injunction hearing, she could have challenged the scope of the non-solicitation covenant’s territorial restriction.  Her challenge below might or might not have succeeded, but at least she would have preserved the issue for appeal.  Second, at the time the injunction was issued, and before engaging in any sales activities, she probably should have insisted on clarification with respect to permissible and impermissible conduct. In sum, the case demonstrates that there can be serious consequences for violating a customer non-solicitation provision, including criminal contempt.

A reporter for a business publication somehow obtained information contained in a privately held company’s confidential interim financial statements. As the reporter was about to disseminate that information in an email alert to the publication’s subscribers, the company sued, described the financials as trade secrets belonging to the company, and obtained from a Louisiana state court judge a TRO enjoining issuance of the email. The defendant removed the case to the Eastern District of Louisiana federal court where a magistrate judge conducted a preliminary injunction hearing and then ruled that freedom of speech and of the press guaranteed by the First Amendment trumped the company’s efforts to prevent a potential violation of the Louisiana Uniform Trade Secrets Act. Rain CII Carbon, LLC v. Kurzy, Civ. Ac. No. 12-2014 (E.D. La., Aug. 20, 2012).

Rain CII Carbon, LLC is one of the largest coke calciners in the world (coke calciners convert a by-product of the oil refining process into a material essential to aluminum smelting). Its quarterly financial compilation statements are confidential, made available only on a secure, password-protected website to persons who have a right to the information and who sign a non-disclosure agreement.

The day after a compilation of Rain’s 2012 second quarter financial results appeared on the company’s website, business publication Debtwire, a member of the Financial Times Group, prepared the email alert reporting Rain’s earnings. What particularly rankled the company was that its highly confidential gross margins could be calculated from information in the email alert.

Rain immediately filed suit against Debtwire in a Louisiana state court, requesting a TRO — and preliminary and permanent injunctions — to stop the publication. That court granted the TRO. Debtwire’s emergency appeal was unavailing, whereupon Debtwire removed the litigation to federal court based on diversity jurisdiction. Rain promptly filed an amended complaint, adding Kurczy (the reporter who broke the story) and corporate affiliates of Debtwire as defendants, and Rain moved to remand on the ground that complete diversity was lacking. The motion to remand was denied. A preliminary injunction hearing was scheduled for one week later, the parties stipulating that the TRO would remain in place until the hearing.

The hearing took place on a Friday. Among the documents admitted into evidence was Kurczy’s affidavit in which he swore that he had not accessed Rain’s secure website and had not seen the earnings compilation itself. The court issued its ruling the following Monday which was only three weeks after the compilation had been prepared. For purposes of the motion for preliminary injunction, the judge accepted Rain’s contentions that its earnings compilation constituted a trade secret and that publication might cause irreparable economic harm to the company. Nevertheless, finding that the information in the email alert was truthful and was of potential interest to the email’s subscribers, the court held that Rain had failed to overcome the strong presumption against a prior restraint.

First Amendment cases suggest that a litigant must overcome significant obstacles in order to persuade a federal court to enjoin the press from publishing truthful information on a matter of public concern, even if what is to be published is a trade secret. Having had more success in the state courts than in the U.S. District Court , Rain currently is in the process of appealing to the Fifth Circuit Court of Appeals denial of the motion to remand.

Many recent decisions concerning the enforceability of a covenant not to compete in a strictly employment context (as contrasted with a covenant arising out of the sale of a business, which is a very different situation) seem to focus on the following three principles: (a) ascertain the permissible scope set out in all relevant legislative enactments; (b) assign to the ex-employer the burden of producing evidence that the covenant fits within the statutory limits and is no broader than necessary to protect the ex-employer’s legitimate business interests; and  (c) if the ex-employer meets its burden, assign to the former employee the burden of persuading the trier of fact that enforcement would be oppressive.  These principles are not always applied.  Even when they are present, they sometimes lurk beneath the surface and are not always easy to discern in or from court rulings.  Moreover, judicial precedents within a given jurisdiction – to say nothing of those from diverse locales – often appear irreconcilable.  As a result, lawyers must be very cautious in providing advice and predictions to an employer, particularly one with operations in several states, regarding the enforceability of covenants.

Judicial interpretations of state statutes run the gamut from highly protective of ex-employers to virtually stripping covenants of any effectiveness.  (The American Law Institute’s current project drafting Restatement (Third) of Employment Law could perform a real service by trying to bring order out of this chaos.) 

Louisiana is a state that has “a strong public policy disfavoring non-competition agreements between employers and employees.”  Vartech Systems, Inc. v. Hayden, 951 So.2d 247 (La. App. 2006).  Yet, a recent Louisiana appellate court decision, Ticheli v. John H. Carter Co., Case No. 43,551-CA (La. Ct. of Appeals, Sept. 17, 2008), provided protection to an ex-employer under surprising circumstances.  In Ticheli, the Court of Appeals reversed a trial court and upheld the enforceability of a non-compete clause in an employment agreement even though (a) the clause contained a very broad geographical and subject-matter scope, (b) the non-competition requirement was to last for two years, (c) the employee was terminated by the employer seeking to enforce the clause, and (d) the issue of enforceability was not raised in the trial court.

Brian Ticheli went to work for John H. Carter Co. (“Carter Co.”) in February 2006 in the company’s West Monroe, Louisiana branch.  Carter Co. sold and repaired valves, pump regulators, filtration equipment and related instrumentation for industrial uses.  Ticheli’s job title was “Valve Repair Coordinator.”  Although his duties were not described in the reported decision, one might surmise from the job title that he was not at the top of the managerial totem pole.  He signed an employment agreement containing a clause which stated, in relevant part, the following:
 

While employed by the Employer, and for a period of two years from … the termination of Employee’s employment with Employer … with cause, Employee shall not : (a)(1) carry on or engage in a business similar to Employer’s Business within the Territory,  (2) engage or participate, directly or indirectly, whether as proprietor, partner, joint venturer, employer, employee, consultant, office or agency … of any corporation that carries on or engages in a business similar to Employer’s business within the Territory, or (b) solicit or cause to be solicited any customers or clients of Employer. 

The phrase the “Territory” was defined in the agreement by naming each and every parish in the state of Louisiana and certain counties in Arkansas, Mississippi, Alabama and Florida.  There was no elaboration of the phrases “with cause” or “business similar to Employer’s Business.”

In June 2007, Ticheli sent an offensive e-mail to several co-workers.  The e-mail violated Carter Co.’s “Sexual Harassment Policy,” and the employment agreement lists “Offensive Behavior” as a reason for termination.  He was discharged, and shortly thereafter he went to work for BC Industrial Sales, LLC (“BC”), a company that sells, maintains and repairs valves and related instruments throughout Louisiana and in parts of nearby states.  From time to time, BC and Carter Co. have purchased products from each other as needed in order to complete a sale and have visited the same customers seeking business, and the two companies once discussed merging. 

Ticheli sued Carter Co., asserting that he was terminated without cause and that, therefore, the covenant was invalid.  Carter Co. responded that his termination was for cause and sought an injunction against his employment by BC.  After conducting a trial, the lower court agreed with Carter Co. that Ticheli’s conduct was cause for termination and enjoined him from violating the covenant.  However, holding that BC and Carter Co. were not competitors, the court declined to preclude Ticheli from working for BC.  Carter Co. appealed.

The Court of Appeals first addressed the issue of whether BC was engaged “in a business similar to [Carter’s] Business within the Territory.”  The trial court’s narrow interpretation of Carter Co.’s business, and emasculation of the requested injunction for that reason, was rejected since both companies sell valves and instrumentation within Louisiana. 

Ticheli’s second contention, that the trial court erred in finding that he was not terminated for cause, was given short shrift.  Next, the appellate court held that the applicable Louisiana statute permits a non-compete clause like the one at issue in this case.  Louisiana R.S. 23:921 expressly authorizes employment agreements restraining an employee “from carrying on or engaging in a business similar to that of the employer and/or from soliciting customers of the employer within a specified [geographical area] so long as the employer carries on a like business therein, not to exceed a period of two years from termination of employment.”  Prior Louisiana cases held that each parish where competition is to be prohibited must be identified in the covenant, hence Carter Co.’s inclusion in the agreement of the name of every parish in the state.  Although the words “similar” and “like” business as used in the statute are not defined, the appellate court reasoned that since both companies sell diverse types of industrial valves and instrumentation, they are engaged in “similar” and “like” businesses.   The result, naturally, was that the trial court’s decree was modified to the extent that the entire requested injunction was issued.

What is most confusing about this opinion is the appellate court claim that the validity of the non-compete cause was not raised at the trial level, when in fact that appears to have been a substantive portion of the trial court’s opinon:   “The validity of the non-compete cause was never raised at trial, and therefore is not an issue on this appeal.  Nevertheless, we find the non-compete clause is enforceable.”  Perhaps the appellate court added this to avoid a remand, another trial, and another appeal.  Chief Judge Brown concurred in the result, but nonetheless opined on the enforceability of the non-compete using the traditional analysis for non-competition agreements.  Judge Brown wrote: 

Ticheli was employed by [Carter Co.] simply as a Valve Repair Coordinator in the West Monroe branch.  He had no particular knowledge, contacts or confidential information that would disadvantage [the company] outside of the West Monroe area.  There is a strong public policy not to lock former employees out of their ability to earn a living.  Even though [the company] operates statewide, it appears in the circumstances of this case that such a blanket prohibition is overly broad.  A savings clause in the non-compete contract would allow a reformation to make the geographic limitation conform to the parishes where Ticheli actually worked.

Unlike Judge Brown’s concurrence, the majority’s decision seems to run counter to two of the three principles set forth at the outset of this post.  First, the court did not require Carter Co. to show a bona fide need for enforcement of the non-compete before being awarded an injunction. Second, the court did not examine the hardship to Ticheli as a potential a mitigating factor.   So, although the Court found the covenant enforceable, it gave neither the parties nor readers any indication why.