Smooth Transitions : Rob Radcliff : Texas Non-Compete Lawyer & Attorney : Langley Weinstein LLP Law Firm : Dallas Employment & Employee Departures : Smooth Transitions Law Blog

In a breach of non-compete or non-solicit lawsuit, the former employer will almost always claim their customer lists are trade secrets.  Texas Courts consider the following factors when determining if something is a  trade secret:

(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of the measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Texas Courts have found that customer lists can be trade secrets:

The Texas Supreme Court has noted that merely because a trade secret can be discovered by fair and lawful means does not preclude its owner of the right to protection from those who would secure possession of it by unfair means. See K & G Oil Tool & Serv. Co. v. G & G Fishing Tool Serv.,  314 S.W.2d 782, 788 (1958). This general rule applies to customer lists. See American Precision Vibrator Co., 764 S.W.2d at 278. Therefore, although a customer list may be considered a trade secret, to be entitled to the protection of the court, the proprietary information must be more than merely of a kind and character encompassed by the definition. The information must not be publicly available or readily ascertainable by independent investigation. (citations omitted)  A corollary to this is when a customer list is not considered to be a trade secret and its contents are readily ascertainable from sources other than the employer's records, the former employee may legitimately compete with his former employer for those customers. 

Adco Indus. v. Metro Label Corp., 2000 Tex. App. LEXIS 5644 (Tex. App. Dallas Aug. 23, 2000).

An employer claiming a customer list is a trade secret must treat it as such.  Lists should not be "floating" around the office and should be protected via a computer password or some other type of precaution.  The employer should also be a able to document and demonstrate the origins of the list (i.e. developed over many years) and should identify it at as a trade secret in any non-compete, non-disclosure, or non-solicit agreement.  This will not guarantee trade secret protection but is a good start.

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A couple of quick hits on issues previously addressed:

Arbitration

BofA is one of a number of banks to drop mandatory arbitration provisions in their agreements with credit card holders. It follows JP Morgan Chase which stopped referring credit card disputes to arbitration last month.  The tide seems to be turning against arbitration in the consumer context.  We'll see if that sentiment has any effect in the employment arena.

BofA/SEC Bonus Settlement

Executive compensation at Merrill Lynch was covered at length in the media and this blog during the early part of 2009.  Merrill attempted to settle complaints raised by the SEC but a federal judge in New York put the brakes on the settlement and has yet to rule on whether he will approve the settlement.

Cuomo Sues Schwab over Auction Rate Securities

New York Attorney General Andrew Cuomo, who earlier in the year challenged Merrill bonuses, filed a lawsuit today against Charles Schwab over auction rate securities it sold to its customers. In a statement released today, Mr. Cuomo stated:

Charles Schwab owed its customers a duty to properly understand and make accurate representations concerning auction-rate securities. Today we commenced a lawsuit to remedy Schwab’s repeated breach of that duty.

There are numerous auction rate lawsuits pending throughout the country as investors, large and small, are unable to obtain funds invested in these securities.

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High-tech companies have been vigorous in their attempts to keep employees from departing to competitors as evidenced by the Mark Papermaster lawsuit filed by IBM and Steven Johnson case.  According to some reports, Google and Microsoft entered into an unofficial agreement not to poach each others' employees.  Essentially, neither company would actively pursue or recruit the company's talent. 

Here is a redacted email that was included in the TechCrunch report between Google and a prospective Apple candidate:

From: XXXXX XXXXX <XXXXX@google.com>
Date: XXXXXXX XX, 2008 X:XX:XX AM PDT
Subject: Re: Google Opportunities- Follow up email…

Thanks for getting back to me.  I don’t believe that we have been in
contact previously - apologies if I am wrong about this.

From your reference to the [APPLE DIVISION], I take it that you are
currently working there.  If this is the case, we will not be able to
proceed with your application.  Google has an agreement with Apple
that we will not cold call their staff.  If you are not currently
working at Apple and are interested in learning more about [A GOOGLE DIVISION]
please let me know and I would be happy to chat with you.

Thank you again for returning my email.

Both companies are headquartered in California making the enforcement of a non-compete almost impossible.  Of course, this type of agreement could violate antitrust laws and according to the Washington Post, the Justice Department has launched a probe into the alleged practice.

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Mark Garmaise, an Associate Professor at UCLA's Anderson School of Management, recently published "Ties that Truly Bind: Non-Competition Agreements, Executive Compensation and Firm Investment." 

Garmaise concludes that enforcement of non-competes promotes executive stability, results in reduced executive compensation, shifts compensation towards a greater use of salary, and reduces research and development spending.  The paper also scores each state in a "Non-competition Enforceability Index" based on 12 components.  Louisiana scored zero during the sample time period, meaning non-competes were almost impossible to enforce. Texas scored a 3 during 1995-2004, while the high scorer was Florida with a score of 9 between 1997-2004.  In light of several rulings from the Texas Supreme Court that are favorable to non-compete enforcement I would imagine Texas' score will rise over the next few years.

The article is a fascinating read on the effects of non-competes and well worth your consideration.

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My last post addressed BofA's failure to join The Broker Protocol.  Entering into the Protocol would severely limit BofA's ability to sue departing financial advisors for violations of non-compete and non-solicitation agreements. 

A few days later, BofA sued several departing financial advisors who left for Kansas City based UMB Financial Services, Inc.   The lawsuit claims the advisors are improperly soliciting former clients and attempting to hire other BofA employees.  BofA alleges:

In essence, UMB has attempted to cripple BOA's Kansas City trust and investment services through its unfair, anti-competitive and tortious actions.

BofA has been losing employees in the Kansas City area since it announced it was cutting its salesforce after its acquisition of Merrill Lynch.  It doesn't appear BofA will be joining the Protocol any time soon when it can use litigation to attempt to mitigate losses it sustains from the departure of financial advisors.

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