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

                                       

 In a recent entry in the Delaware Employment Law blog, Molly DiBanca recounts the story of a employee who gives two weeks notice of intent to resign and then proceeds to email confidential and proprietary information to his new employer from his work email account. Note to employers, lock down or at least seriously monitor a departing employee’s work email account. If they are going to take information they may be emailing it from their work account to a hotmail account. Of course, this employee was audacious enough to actually send the email from the work account to the competitor.

What about when email is not used? Can the IT department monitor flashdrive downloads or printouts or in the middle of the night ? IT can and should monitor this type of strange activity. At the same time also monitor the employee’s whereabouts if entry (or exit) into the workplace requires some type of access card or other device. I don’t mean to sound like big brother, but  we are talking about protecting business assets..
 

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As you probably know, HP filed a lawsuit against former CEO Mark Hurd in California seeking to prevent him from going to work for competitor Oracle.  The Wall Street Journal has a solid account of the lawsuit and analysis of the claims.

The lawsuit asserts causes of action against Hurd for breach of contract and and threatened misappropriation of trade secrets. California law disfavors non-compete agreements, unlike Texas, so Hurd's employment agreements are not called non-competes but have the same effect. The “Protective Covenants” section of his employment agreement prevent Hurd from disclosing trade secrets and soliciting HP customers, employees, and suppliers. There is also a provision which has the net effect of a non-compete:

(a) No Conflicting Business Activities. I will not provide services to a Competitor . . . that would involve Conflicting Business Activities in the Restricted Geographic Area (but while I remain a resident of California and subject to the laws of California, the restriction in this cause . . . will apply only to Conflicting Business Activities in the Restricted Geographic Area that will result in unauthorized use or disclosure of HP’s confidential information).

 The crux of HP's claim is that because Hurd was exposed to trade-secrets and business strategies while CEO for HP he will disclose or use that information while working for Oracle - this sounds like the inevitable disclosure doctrine but is styled as threatened misappropriation of trade secrets. What is the doctrine? Here is Linda Stevens take:
 

There are circumstances in which trade secrets inevitably will be used or disclosed, even if the defendant swears that he or she will keep the information confidential. Courts applying the doctrine have differed over its reach and the circumstances required for its application, but, generally speaking, the doctrine applies when a defendant has had access to trade secrets and then defects to the trade secret owner's competition to perform duties so similar that the court believes that those duties cannot be performed without making use of trade secrets relating to the previous affiliation.

Texas Court do not recognize the inevitable disclosure doctrine but have come close – California does not appear to either. HP now seeks an injunction to prevent Hurd from working for Oracle based on his contractual obligations and threatened misappropriation of trade secrets.

Hurd was forced out at HP after a sexual harassment scandal, but he was paid millions of dollars. It will be interesting to see how the Judge balances the equities on this case. Is the protective covenant enforceable under California law? (I’ll leave that to a California lawyer to determine.) Will the Court consider the fact Hurd has been paid a significant amount of money to sign these agreements?  Most importantly, will the Court believe he will disclose HP trade secrets at Oracle?  We will keep you posted.
 

 

 

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As discussed previously, in some situations Texas courts will afford customer lists trade secret protection.  In most non-solicit/non-compete cases, the departing employee doesn't walk out with the company customer list.  In some cases that list doesn't exist.  In other cases the former employee will simply reconstruct the customer list from memory, contact information they maintain, or even the phone book - the "phone book defense".

Texas courts have held that "A customer list of readily ascertainable names and addresses will not be protected as a trade secret."  So if a departing employee sells construction equipment there is a limited number of potential customers like contractors and sub-contractors.  Those trades advertise in the phone book on the internet and in trade publications.  As a result the customer list can be reconstructed quite easily and will little effort.

In most circumstances the employer simply can't rely on protecting their business by identifying their customer lists as a trade secret.  They will also need a robust and enforceable non-compete and non-solicit. 

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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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Picking up on last week's entry: 

Upon receiving the case, Eagle began an analysis of what documents Jones and Francis had accessed or stolen. The Court ordered the defendants to turn over any flash drives or laptops that they had. With the help of a former Treasury agent, Taylor and Walton found numerous documents Jones had taken on a flash drive. The most important item was an Eagle business plan that Paper Tiger took and simply changed the name. Walton paraded this document in front of the jury throughout the trial. Besides the documents that were produced, Eagle’s case also focused on documents that were not produced. He prepared a spoliation scorecard identifying all the documents that were missing.   Walton and Taylor successfully tried the case in front of a jury and obtained a multi-million dollar verdict that is now on appeal.

With respect to maintaining the integrity of trade secrets, Walton makes the following recommendations: (1) image the laptops or computers of any departing employees to determine what they have on their computers; (2) have policies in place that restrict access to company trade-secrets; (3) have a relationship with a vendor to perform any type of imaging or forensic services the company needs; and (4) don’t leave these tasks to the company IT person. With respect to new employees, Walton recommends that new employees sign off on some type of document that indicates they are not using former employers’ trade secrets.

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Dave Walton is a labor and employment attorney with Cozen O'Connor and is based in West Conshohocken, Pennsylvania.

Last year Dave and Seattle lawyer Ed Taylor obtained a multi-million dollar jury trial verdict in a theft of trade secrets case.  The case is instructive on how to employ and use electronic discovery to trace trade-secret theft and then present that evidence to a jury.  I have changed the names of the parties and altered some of the facts to preserve some anonymity.

The Facts

Eagle Distributor is a Richmond based distributor of Liquid X.  Liquid X is used in all sorts of applications including tooth-paste, car lubricants, and even motor oil.  It is produced on the outskirts of Shanghai, China by a company called Paper Tiger.  Eagle has two divisions, sales and supply. Sales, as you might expect, handles customer accounts throughout the United States.  Supply handles negotiations with Paper Tiger and ensures delivery of product to the U.S. for distribution.

 Rick Jones and Susan Francis were at one time employees of Eagle.  Rick worked in sales and handled the Texas market.  Susan was in supply and primarily handled negotiations with Paper Tiger.  In June 2006 Rick announced he was moving to Nova Scotia to take care of his sick mother.  Around that same time, Susan announced she was leaving the company after 25 years so she could take time off and receive treatment for a health condition. She even accepted Eagle’s offer to remain on the payroll so she could secure health benefits and receive treatments for her condition.  Eagle did not know at that point that, within a few days of their resignations from Eagle, Rick and Susan traveled overseas to secretly help Paper Tiger set up a competing company.

In September 2006, Paper Tiger and Eagle began negotiations over pricing for Liquid X for the first quarter of 2007.  Generally the negotiations took place through phone calls and follow up emails.  For the first time, Paper Tiger requested information regarding Eagle’s customers and two new individuals names appeared on the cc line of the various emails, Sydney and James.  Rick and Susan were using these aliases at Paper Tiger so they could secretly review emails from Eagle and hide their involvement with Paper Tiger.  Later, during a meeting with Paper Tiger, Eagle was told that Paper Tiger would no longer supply Liquid X to Eagle and that Paper Tiger was going to compete directly against Eagle.  At the time, Paper Tiger denied that they had hired any former Eagle employee to help them with this new competing venture. 

Later, Eagle discovered that Paper Tiger had secretly hired Rick and Susan. Management then began a review of former employees access to documents over the past few months.  It turned out that Susan accessed and took company information several days before she left.  Similarly, Rick refused to return a flash drive containing an extensive amount of Eagle’s confidential information.  There was no need for them to have the information and of course the access took place at odd times during the day.  Management called their lawyers.

(Part II will appear next week.)

 

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In a survey of 950 former employees, 60 percent admitted to taking confidential information from their former employers. 

Most of the data takers (53 percent) said they downloaded the information onto a CD or DVD, while 42 percent put it on a USB drive and 38 percent sent it as attachments via e-mail, according to the survey.

The survey also found that many companies seem to be lax in protecting against data theft during layoffs. Eighty-two percent of the respondents said their employers did not perform an audit or review of documents before the employee headed out the door and 24 percent said they still had access to the corporate network after leaving the building.

                                               

With layoffs taking place across the employment spectrum, employers must be vigilant in protecting their proprietary information from walking out the door with their former employees.  I've previously addressed what a trade secret is under Texas law, but just because something isn't a trade secret doesn't mean a former employee can take it with them.  So what can be done?  Here are a few suggestions:

1. Ensure that your employee manual or agreement contains defines what the proprietary information is and requires the departing employee to return it at the conclusion of their employment term.
2. Ensure there are appropriate safe-guards for proprietary information.  Is it password protected? Can you determine when employees have accessed databases or other company information?  If so, you can prevent or at least ascertain whether an "information dump" has taken place.
3. During exit interviews with the employee, have a candid conversation with them about their obligations under the aforementioned agreements and confirm they have returned all proprietary information.
4. Cut off the the departing employee's access to the company network. 
5. Keep an eye on what former employees are doing.  Are they using company information with a new employer or new venture?

 

 

 

 

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I liked Jay Shepherds' remarks in Eight Ways to Lose a Non-Compete Case blog entry.    Here they are with my thoughts in italics:

• Putting too much faith in the belief that the court will enforce the language of the non-compete agreement as written.
• Trying to enforce a non-compete against employees who really don't possess any confidential information or customer relationships.   Does the employee really have trade secrets?
• Drafting the non-compete too broadly.
• Focusing only on geography, duration, and scope of the non-compete rather than on the existence of protectable interests. 
• Waiting too long to file.
• Asking for an injunction before you've developed enough evidence. Texas permits TROs and a party can secure limited discovery for the injunction hearing.
• Filing in the wrong jurisdiction. If you want to enforce a non-compete file in the jurisdiction where the former employee is based or working.
• Focusing on the law instead of on the story of the case.

I agree with most of the eight but here is what I would add:

1. Know the law from state to state, the enforceability of a non-compete in Texas is quite different from California;
2. Make sure the state law you want will control.  Along the same lines, if your non-compete specifies Texas law and the employee is in California, make sure the choice-of-law provision will stick;
3. Don't wait to file.  Sometimes you may have to file a lawsuit and seek an injunction before you have all the evidence - but filing early can protect your business and possibly make your former employee think twice about violating the non-compete.
4. Contact your clients.  Just because your company's contact person with the client has departed doesn't mean the business will go.  Call your clients and be up front with what has occurred and how valuable their business is to your company.
5. Marshall your evidence.  Odds are your departing employee began preparing to compete before they left your company.  See if they left a papertrail.  (email, phone calls, accessing company databases, and printing out company information)
6. Remember your targets.  Not only the employee who left, but the company they left for or formed.

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As with most lawsuits, the previously discussed IBM/Mark Papermaster lawsuit has settled.

Papermaster will not go to work with Apple until April and must certify to IBM he is not using any of its trade-secrets in the course and scope of his employment. Bottom-line, most non-compete cases are resolved after an injunction hearing (like this case) and after a significant amount of attorneys' fees are expended by both sides.

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Commentators have described inevitable disclosure as the following:

There are circumstances in which trade secrets inevitably will be used or disclosed, even if the defendant swears that he or she will keep the information confidential. Courts applying the doctrine have differed over its reach and the circumstances required for its application, but, generally speaking, the doctrine applies when a defendant has had access to trade secrets and then defects to the trade secret owner's competition to perform duties so similar that the court believes that those duties cannot be performed without making use of trade secrets relating to the previous affiliation.

Linda K. Stevens, Trade Secrets & Inevitable Disclosure, 36 TORT & INS. L. J. 917, 929 (Summer 2001).

Some form of an inevitable disclosure argument is usually made when a Plaintiff is attempting to obtain a temporary restraining order or injunction to enforce a non-compete. The Texas Supreme Court has never recognized the doctrine.

In 1999, the Dallas Court of Appeals in an unpublished opinion stated: "this Court has recognized that a former employee may be enjoined from using or disclosing the former employer's confidential or proprietary information if the employee is in a situation where use or disclosure is probable." Conley v. DSC Communs. Corp., No. 05-98-01051-CV, 1999 Tex. App. LEXIS 1321 (Tex. App. Dallas --- 1999, no pet.)(not published).

That opinion stated the Dallas court was not adopting the inevitable disclosure doctrine. Whether "probable disclosure" is actually a viable theory under Texas law remains unresolved by the the Texas Supreme Court.

Read David Knight's analysis of a recent Ohio inevitable disclosure case here.

Disclaimer

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The departure of a doctor from a medical practice group is not always amicable. In some situations, the medical records of a departing doctor's patients may be held hostage. The Texas Occupations Code and Texas Medical Board Rules (located in the Texas Administrative Code) both contain provisions addressing medical records.

Chapter 159 of the Occupations Code addresses the confidentiality and release of patient records. (159.002(2) & 159.005)

Texas Medical Board Rules Section 165.5 requires that the departing physician post a sign in her office informing the patients of the departure, publish notice in the newspaper, and send letters to all patients. Section 165.5(c) prevents other physicians from preventing the departing doctor from posting a sign or withholding contact information for patients.

A departing doctor should instruct her patients to fill out appropriate releases so the patients' records are transferred to the doctor's new office. The departing doctor should also follow all departure requirements contained in the Texas Medical Board Rules.

Disclaimer

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Happy holidays to you and your family.

Below is a link to an article written by Seattle attorney Jill Pugh regarding a Nebraska Court of Appeals opinion affirming the enforceability of a non-solicitation agreement. Aon Consulting, Inc. sued to enforce the agreement against a former employee. The agreement was actually signed by the employee with a predecessor company that was acquired by Aon.

Here is a link to the opinion.

Here is a link to the blog.

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In many instances non-compete agreements are designed to protect trade secrets provided to employees during the course of their employment. The sensitive nature of some trade secrets are apparent, like the formula for Coke. But what about customer lists, sales techniques, or other items that are not a secret formula or chemical composition? Courts often look to Restatements of Law for authority and guidance. The Restatement (Third) of Unfair Competition states "It is not possible to state precise criteria for determining the existence of a trade secret." Determination of whether something is a trade secret is left to a case by case analysis.

The Texas Supreme Court has held that a trade secret is "any formula, pattern, device or compilation of information which is used in one's business and presents an opportunity to obtain an advantage over competitors who do not know or use it." Computer Assocs. Intern. v. Altai, 918 S.W.2d 453, 455, (Tex. 1994). To determine whether a trade secret exists, Texas courts apply the Restatement of Torts' six- factor test:

(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.

In upcoming entries we will address specific claims for trade secret protection and how Texas courts have ruled.

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