Texas Non-Compete Law Blog : Texas Non-Compete Agreements Lawyer & Attorney : K&L Gates : Trade Secret Litigation : Serving Austin, Dallas, San Antonio

The Texas Supreme Court recently made it even easier to enforce noncompete agreements.  Ever since the court’s opinion in the Sheshunoff case, it has been an open question whether, to be enforceable, a noncompete agreement must contain an explicit promise by the employer to provide confidential information to the employee.  In Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 52 Tex. Sup. J. 616 (Tex. April 17, 2009), the court answered this question, and held that the employer’s promise to do so can sometimes be implied.

In Mann, the court held that even if the noncompete agreement does not contain an explicit promise by the employer to provide confidential information, if the employee’s job will reasonably require the employer to do so, then an implied promise to provide confidential information exists.  This implied promise will provide the consideration necessary to make the noncompete agreement enforceable.

This is an important holding, obviously, because it means that some noncompete agreements that were previously thought to be enforceable, now arguably are.  Of course, the employee bound by the non-compete agreement will still be able to challenge whether the information given to him was truly confidential, and he also may be able to contend that the scope of the restriction is unreasonable.

Nevertheless, the combined effect of Sheshunoff and Mann suggests that the supreme court may be tiring of “technical” arguments over the enforceability of noncompete agreements.  Rather than constantly focusing on the precise wording of the agreements, and on when the information which arguably justifies the restrictions was conveyed to the employee, the court may be signaling a desire to focus on what it considers to be the true substantive considerations:  whether confidential information was in fact conveyed and, if it was, whether the information justifies the restrictions contained in the agreement.

For employers whose current or former employees are bound by noncompete agreements(particularly if the agreements were signed years ago), this will make enforceable some agreements that otherwise would be unenforceable.

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A recurring issue in employee mobility cases is the extent to which a non-solicitation provision in an employment contract is enforceable. Typically, an employment agreement will contain a provision prohibiting post-employment competition, provisions prohibiting post-employment solicitation of customers and/or employees, or both. 

It’s not uncommon for a provision prohibiting solicitation of employees to apply to all of the employer’s employees. However, several Texas cases, including a recent one from the Beaumont Court of Appeals, have held that such provisions are too broad.

In Poole v. U.S. Money Reserve, Inc., No. 09-08-137 CV, 2008 WL 4735602 (Tex. App.—Beaumont Oct. 31, 2008), an employer filed suit against two of its ex-employees for, inter alia, violating their non-solicitation agreements. The agreements at issue prohibited the former employees from soliciting or attempting to take away “any existing or potential clients, customers, suppliers, businesses, and/or accounts of [the employer] . . .”

The trial court enjoined the defendants from soliciting any of the plaintiff’s customers. The plaintiffs then filed an interlocutory appeal, seeking a ruling that the injunction was overly broad.

The court of appeals held that the temporary injunction was void because the injunction order failed to state why injunctive relief was necessary (i.e., it failed to explain why the plaintiff would suffer irreparable harm absent injunctive relief). Under Texas law, a temporary injunction, to be valid, must state why irreparable harm would occur absent injunctive relief. Because the injunction in this case did not do so, the injunction was void.

In addition, the court of appeals held that the temporary injunction was overly broad. Specifically, the court held that a “restrictive covenant is unreasonable unless it bears some relation to the activities of the employee.” Because the non-solicitation provision prohibited the former employees from soliciting all of their former employer’s customers, it was too broad.  The injunction should have been limited to the customers with which the defendants themselves did business.

Moreover, the court of appeals held that the restriction on solicitation of potential clients was overly broad. The plaintiff argued that the defendants had access to its marketing and advertising materials, and that these materials informed the defendants of the identities of plaintiff’s potential customers. But the court held that the totality of evidence showed that the defendants, who were salespersons, were not in fact knowledgeable about the plaintiff’s marketing information. Thus, the restriction s pertaining to potential customers was overly broad.

OBSERVATIONS:

1.         For a temporary injunction to be valid, it is not enough for the facts to justify the granting of the requested relief. Rather, the wording of the injunction order must precisely detail why irreparable harm will occur absent the injunction. Failing to comply with this requirement will render the order void.

2.         To maximize the likelihood of enforceability, non-solicitation provisions (as well as non-compete agreements in general) should largely focus on the activities of the employee (e.g., the customers with whom the employee dealt).

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A recurring issue in non-compete cases involves how definite the employer's promise to provide confidential information must be for the agreement to be enforceable.  Historically, disputes have focused on whether an explicit promise to provide the information was required, or whether an implied promise (e.g., language in which the employee "acknowledged" that he would receive information) was sufficient. 

In a recent case from the United States Court of Appeals for the Fifth Circuit, the court held that the following combined to make a non-compete agreement enforceable: 

1.  A definite term of employment.  The agreement provided that the employee would be employed for three years, and that he could only be terminated for good cause; 

2.  A nondisclosure provision.  The employee promised that he would not disclose his employer's confidential information to others; and 

3.  Receipt of confidential information (but no promise by the employer to provide any information).  The employee actually received confidential information from the employee. 

Based upon these facts, the court held that the agreement contained an implied promise by the employer to provide confidential information to the employee.  The court explained: "The Employment Agreement indicates that both Stock and Vybiral anticipated that Vybiral would work at Stock for at least three years. . . . Further, the Employment Agreement itself contemplated that Vybiral would be receiving confidential information, as evidenced by the nondisclosure covenant. Finally, the district court found that Vybiral did in fact have access to Stock's confidential information, including sales strategies, marketing strategies, pricing strategies, vendor arrangements, contractor programs, and customer information."

OBSERVATION: 

This opinion, as well as the earlier opinion from the Corpus Christi Court of Appeals (about which we blogged on October 1, 2008), suggests that, in determining whether the wording of a non-compete agreement is enforceable, courts are less willing than ever to invalidate an agreement because certain words (such as "Employer promises to provide Employee with confidential information") are not used.  Rather, courts seem willing to examine an agreement in its totality, to assess whether the parties envisioned that the employer would convey confidential information to the employee.  The lesson of the Texas Supreme Court's Sheshunoff opinion, and subsequent cases, appears to be that courts are putting substance over style in determining the enforceability of non-compete agreements. As a result, non-compete agreements that formerly might not have been enforceable may now be viable. 

Ray Mart Inc. v. Stock Building Supply of Texas LP, et al., No. 07-50609 (5th Cir. Nov. 5, 2008).

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A recent case from the federal court in Dallas sheds some light on various issues involving the enforceability of non-compete agreements.

In Staples, Inc. v. Sandler, No. 3:07-CV-0928-K, 2008 WL 4107656 (N.D. Tex. Aug. 29, 2008), the employee, Sandler, upon joining Staples, Inc., signed a “Proprietary and Confidential Information Agreement” and a separate “Non-Compete and Non-Solicitation Agreement” (“Non-Compete Agreement”).

In the “Recitals” section of the Non-Compete Agreement, the employer recited that it “has and will entrust Employee with proprietary information, strategies, knowledge, customer relationships and know-how which would be detrimental to the Company if disclosed.” The court held that, under Sheshunoff, this recital was a “unilateral contract conditioned upon performance.” The court added: “Further, the confidentiality agreement signed contemporaneously with the noncompete provided a promise of confidential information. Thus, Staples promised to provide Sandler with confidential information that would give rise to its interest in restraining Sadler from competing.”

The court confirmed that the confidential information given by Staples to Sandler was sufficient consideration for the non-compete: “Staples has established that it provided Sandler with access to cost margins, pricing lists, sales figures, and assorted business information, including customer information. Although not necessarily trade secrets of the highest order, these may be confidential in the sense that they are not readily available to the public.”

The restrictions contained in the noncompete agreement prohibited Sandler from doing business not only with Staples’ customers, but also with “customers or prospective customers” that he “knew, serviced, or was familiar with prior to joining the Company."

The court held that this restriction was overly broad:

“Here, it is apparent that the restraint on competition is not justified to the extent contemplated in the covenant not to compete given Sandler's relatively short employment, the minimal amount of confidential information he received, and Staples' legitimate interest in protecting the confidential information it provided him during his tenure. Thus, the Court finds that Staples' legitimate interest in confidentiality gives rise only to a restraint on Sandler that prevents him from competing by doing business with customers he gained during his eleven-month tenure with the company. A restraint that prevents him from continuing long-standing relationships that he brought with him to Staples is overbroad, unrelated to Staples; legitimate interest in confidentiality, and would further unreasonably burden these third-party customers.”

OBSERVATIONS:

1.         The court emphasized the need for the employer to promise to convey confidential information. However, the court located part of the promise in a different [but contemporaneously signed] document (the Proprietary and Confidential Information Agreement).

2.         The Court confirmed that confidential information necessary to justify a non-compete agreement does not have to rise to the level of a trade secret. The Court was skeptical of an argument that employers routinely make to prove that their information is confidential (i.e., “The fact that our information is password protected proves it’s confidential”).

3.         The Court found the non-compete restriction overly broad because it applied to customers with whom Sandler worked before he became employed by Staples. It would be interesting to know whether the result might have been different had Staples given Sandler confidential information about these customers. Arguably, if Staples entrusted Sandler with new confidential information (i.e., information that he didn’t previously know) about these customers, the conveying of that information by Staples would have justified the non-compete restrictions.

4.         The Court notes the challenge inherent in binding relatively new employees (11 months, in this case) to non-competes (because they may not yet have been exposed to enough confidential information to justify the restrictions).

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Almost two years ago, in the Sheshunoff case, the Texas Supreme Court rejected the notion that an employer must provide the employee with confidential information at the precise moment the non-compete agreement is signed for the agreement to be enforceable. According to the court, it is not fatal to the agreement's enforceability if the information is actually provided sometime later.

But how exactly must the agreement be worded for it to be enforceable? A recent case out of the Corpus Christi Court of Appeals addresses that question. In Shoreline Gas, Inc. v. McGaughey, an at-will employee was bound by an agreement that contained promises by the employee (a) not to disclose the employer's confidential information and (b) not to engage in post-employment competition. 

Significantly, the agreement did not obligate the employer to provide confidential information to the employee. Nevertheless, the court found that the employer had in fact provided such information.

The court first held that the non-compete agreement was an enforceable unilateral contract. The court explained:

McGaughey's promise not to disclose Shoreline's confidential information, though not enforceable when made, constituted an offer for a unilateral contract which Shoreline had the option to accept. Shoreline accepted McGaughey's offer by performing—that is, by supplying McGaughey with confidential information—and so a unilateral contract was formed under which McGaughey became bound by his promise not to disclose that information.  . . . Under Sheshunoff, such a unilateral contract constitutes an "otherwise enforceable agreement" sufficient to support an accompanying non-compete covenant.

The court specifically addressed the employee's contention that the agreement was unenforceable because it did not contain a promise by the employer to provide the employee with confidential information:

McGaughey notes that, unlike in the present case, the Sheshunoff employment contract required the employer to provide to the employee with "access to certain confidential and proprietary information and materials belonging to Employer. . . ." Alex Sheshunoff Mgmt. Serv., L.P. v. Johnson, 209 S.W.3d 644, 647 (Tex. 2006). This promise was illusory, however, because the employer could avoid performance simply by terminating employment. Further, this promise was not of the type that could be considered an offer for a unilateral contract that could be accepted by the performance of the promise. Therefore, it could not have formed the basis of an "otherwise enforceable agreement" capable of sustaining a non-compete covenant. See Id. at 650.

Thus, according to the court of appeals in McGaughey, as long as the employer provides confidential information to the employee (even if the agreement does not contain a promise by the employer to do so), a unilateral contract is formed when the employer does so (with the employee's promise not to disclose the information constituting the other part of the unilateral contract). According to the court, this unilateral contract is an otherwise enforceable agreement sufficient to support a promise by the employee not to compete.

This holding should be examined in light of the following passages from Sheshunoff (with emphases supplied): 

If only one promise is illusory, a unilateral contract can still be formed; the non-illusory promise can serve as an offer, which the promisor who made the illusory promise can accept by performance. For example, suppose an employee promises not to disclose an employer's trade secrets and other proprietary information, if the employer gives the employee such specialized training and information during the employee's employment. If the employee merely sought a promise to perform from the employer, such a promise would be illusory because the employer could fire the employee and escape the obligation to perform. If, however, the employer accepts the employee's offer by performing, in other words by providing the training, a unilateral contract is created in which the employee is now bound by the employee's promise. The fact that the employer was not bound to perform because he could have fired the employee is irrelevant; if he has performed, he has accepted the employee's offer and created a binding unilateral contract . . . .

*           *           *

We agree with Light's recitation of basic contract law in footnote six that "[i]f only one promise is illusory, a unilateral contract can still be formed; the non-illusory promise can serve as an offer, which the promisor who made the illusory promise can accept by performance." Upon further review of the Act and its history, however, we disagree with footnote six insofar as it precludes a unilateral contract made enforceable by performance from ever complying with the Act because it was not enforceable at the time it was made.

*           *           *

We now conclude, contrary to Light, that the covenant need only be "ancillary to or part of" the agreement at the time the agreement is made. Accordingly, a unilateral contract formed when the employer performs a promise that was illusory when made can satisfy the requirements of the Act.

*           *           *

But if, as in the pending case, the employer's consideration is provided by performance and becomes non-illusory at that point, and the agreement in issue is otherwise enforceable under the Act, we see no reason to hold that the covenant fails.

A few observations:

1.         Sheshunoff addressed a non-compete agreement containing a promise by the employer to provide confidential information to the employee, and the opinion speaks of the employer's "promise"—although the promise was "illusory" when made, because the employee could have been fired in the interim—becoming enforceable upon the information being conveyed. Thus, Sheshunoff can be seen as assuming that the employer must promise to provide the confidential information, even if the promise is "illusory" at the time it is made.

2.         The court in McGaughey construes Sheshunoff as only requiring the employer to provide confidential information; the contract need not contain an explicit promise to provide confidential information.

3.         Obviously, in drafting new agreements, the safest course remains to include language by which the employer explicitly promises to provide confidential information to the employee.

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A recent case from the Dallas Court of Appeals explains several concepts that frequently come up in trade secret theft cases. In Global Water Group, Inc. v. Atchley, No. 05-06-00709-CV, 2008 WL 384436 (Tex. App.--Dallas 2008, no pet. h.), the plaintiff had created a water purification system. When the plaintiff's president resigned and formed a competing company, the plaintiff filed suit and contended that its trade secrets had been misappropriated and were being used by the competitor. The jury found in the plaintiff’s favor, but the trial court reversed the verdict.

The court of appeals’ opinion affirming the trial court contained a useful discussion of the proof needed to support a misappropriation of trade secrets claim. 

At the outset, the court noted that to constitute a trade secret, the information in question must actually be secret. The court referenced the Texas Supreme Court’s 1958 holding in the K&G case that “the mere fact that knowledge of a product or process may be acquired through inspection, experimentation, and analysis does not preclude protection from those who would secure that knowledge by unfair means.” But then the court added this key point: “A trade secret must nevertheless be secret.” In other words, even if one obtains his former employer’s information by unfair means, for the employer to be able to make a misappropriation of trade secrets claim, the information must, the court says, still be secret.

This concept, while seemingly obvious, could be very important in a case in which a former employee allegedly steals a customer list. The employer, citing K&G, could argue, “Because the former employee improperly acquired the information, he is precluded from arguing that he could have obtained the information by fair means.” However, the employee, citing this case from the Dallas Court of Appeals will be able to respond, “Even if I obtained the information unfairly, the employer must, as a threshold matter, prove that the information is in fact secret.”

Of course, the employer might have other claims (e.g., conversion) even if it couldn’t prove that the information were secret. But one of the advantages of making a trade secret as opposed to a conversion claim is the increased likelihood of getting injunctive relief with the former claim.

The court discussed at length whether the plaintiff’s water purification formula constituted a trade secret. According to the court, the plaintiff claimed “no secret in any discrete formula, but rather in an approximate 10:90 ratio of KDF (a water purification substance) to carbon. Global asserts this approximate formula is entitled to trade secret protection because it was different from what others in the industry were using.” The court was skeptical of this being a trade secret:

Finally, the imprecise nature of the information weights heavily against it being a trade secret. There is no discrete secret formula at issue, but only an approximate mix of two well-known substances commonly used together. Given the imprecise nature of formula, we question what information Atchley and Aspen should be prohibited from using. For example, should they be prohibited from using a 20:80 ratio, 30:70, 40:60? It thus becomes apparent, it would be difficult to protect such a "formula," without prohibiting fair competition.

Based upon this reasoning, the court of appeals also held that the plaintiff failed to prove “use” of its alleged trade secret:

Global does not contend that Aspen used the same formula, but only that its formula was similar. While two products need not be identical for an inference of use to arise, we nevertheless conclude that similarity under these circumstances is not sufficient to raise such an inference. The similarity lie in the ratio of only two of the components of the mixed media pod, KDF and carbon. As noted above, it is not disputed that others in the industry used canisters with KDF and carbon. Aspen alleged "used Global's trade secret because its product, like Global's, used much more carbon than KDF. While the two products were similar in this regard, there were also differences in the contents of the mixed media pods. For example, Aspen's product contained "separator pads" that kept the KDF and carbon separate. Global's product on the other hand used another purifying substance, PM 1000, as well as gravel. In light of these differences, and the fact that the similarity lie only in the percentages of two commonly used ingredients, no inference of use arises.

The language above could be useful in defending against a claim that one has stolen another’s chemical formula. On the one hand, the defendant can challenge whether the formula is sufficiently distinctive to warrant trade secret protection. Moreover, in the absence of direct evidence of use by the defendant, the defendant can argue that mere similarity between its product and the plaintiff’s is not conclusive evidence of use.

The court of appeals also explained that the plaintiff’s proof was largely conclusory:

Global presented evidence that it guarded its formula, limited access, and required employees to sign confidentiality clauses. There is no evidence however regarding whether or not Global's efforts were successful—specifically whether or not its formula was nevertheless known outside its business.

Further, Global directs us to no evidence of the value of its formula to its business. Global suggests the formula was necessarily valuable because Global had developed the first successful self-contained water purification unit. However, there is no evidence the formula itself was related to the success of the unit. Specifically, Global directs us to no evidence the formula was in any way related to the mobility of the unit or other supposedly novel features of the unit. Weiss did testify that Global's formula removed more contaminates and performed better than anyone else's. This testimony was however largely conclusory and Weiss did not attempt to articulate or explain how Global's formula created better water or how its particular blend gave it a competitive advantage. Nor did he explain how the Global product performed differently than any other product on the market. Indeed, when asked about products that could remove contaminants from water, Weiss responded that he was not an engineer, scientist, or biochemist. Further, there is no expert testimony that the quality of Global's water was superior or that Global's process was cheaper or more efficient. Global has thus failed to point to any evidence to show its formula was valuable. Likewise, Global has not shown the formula gave it a competitive advantage.

This case is a good primer on what a plaintiff in a theft of trade secrets case must prove. Neither secrecy nor use can be assumed; both must be proved. Moreover, conclusory statements of harm are insufficient. The case is particularly informative with respect to trade secret theft cases involving chemical formulas.

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A recent opinion issued by the federal Southern District of Texas sheds a little light on the question of how definite a promise to provide confidential information must be for a noncompete agreement to be enforceable. In Teel v. Hospital Partners of America Inc., No. H-06-3991, 2008 WL 346377 (S.D. Tex. Feb. 6, 2008), the court, quoting the Light case, noted that an "employer's promise to provide an employee with confidential or proprietary information and an employee's reciprocal promise not to disclose such confidential information `would meet the requirement that the covenant be designed to enforce the employee's consideration provided in the agreement.'"

The agreement in Teel stated that the employee's employment "will involve access to and work with" confidential information. The court, without discussion of whether this language was a sufficiently definite promise to provide confidential information, simply confirmed that the employee did in fact receive confidential information and that the restrictions imposed upon the employee were reasonable. 

As noted elsewhere on this blog, several Texas cases discuss how definite the employer's promise to provide confidential information must be for the employee's non-compete promises to be enforceable. Although the Texas Supreme Court in Sheshunoff rejected appellate decisions requiring that confidential information be transferred simultaneously with the signing of a non-compete agreement, it did not explicitly do away with the requirement that the employer actually promise to give the information to the employee.

The question in some cases becomes, "What counts as a promise?" Put another way, "How definite must the promise to provide confidential information be?" In some cases, the employee’s “acknowledgment” that he will receive confidential information gets characterized as an "implied" promise by the employer to convey the information. In the Teel case, the statement that the employee's work "will involve access to and work with" confidential information was evidently deemed to be a promise--either explicit or implied--that the employer would provide such information to the employee.

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In general, an employee or other agent who plans to compete with the principal does not have a duty to disclose this fact to the principal. To be sure, the fact that an agent has such a plan is information that a principal would find useful, but the agent's fiduciary duty to the principal does not oblige the agent to make such disclosure. . . .  In this respect, the social benefits of furthering competition outweigh the principal's interest in full disclosure by its agents.

The relevant facts in the case were as follows:

The plaintiff employer was a national consulting firm. One of its offices was a claims administration practice in Dallas, Texas (the “Claims Practice”). The Claims Practice’s primary business was administering complex class-action settlements. 

The two defendants in the case were high level employees who worked for the Claims Practice. Some of their responsibilities included staffing, business development, client relations, and contract negotiations for the Claims Practice. 

In the spring of 2001, one of the defendant employees was contacted by a competitor of the company. The competitor was interested in buying the employer’s Claims Practice. In response, the defendant employees prepared a proposal for the competitor to purchase virtually all of the Claims Practice’s clients and employees for $22.5 million. The proposal contained confidential business information about the Claims Practice: revenue projections, backlog estimates, margin rates, staff turnover rates, and profit margins on specific employees. The transaction was to be routed through a “management-owned corporation” – a corporation owned by the two defendants and unrelated to their employer. The defendant employees never informed their employer of this proposal to sell the Claims Practice.

Although the first proposal fell through, the defendant employees continued to submit similar proposals to other competitors – at least three different competitors between 2001 and 2002. In addition, the defendant employees brought representatives of the competitors into the Dallas Claims Practice office and introduced other employees to those representatives.

In May 2001 – just after the initial contact between the defendant employees and the competitor – one of the defendant employees negotiated and signed a four-year lease in a Dallas office building on behalf of the employer. The employer was aware of and approved of the lease; however, the employer was not aware of the proposals being submitted to various competitors.

In June 2002, about a year later, another employee– a computer technician – was instructed to copy company data onto a portable, non-company server as a “special project” for one of the defendant employees. The corporate office became suspicious and visited the Dallas office, telling the employees to stop copying company data.

In September 2002, soon after the visit from the company’s corporate office, a defendant employee contacted one of the competitors that had received a proposal and urged that the two parties quickly reach a deal. Soon after, the defendant employees provided that competitor with a new proposal. The new proposal specifically identified the defendant employees and two other individuals as the sellers of the Claims Practice. The purchase of the Claims Practice was again to be routed through the corporation owned by the defendant employees. The purchase of the Claims Practice was to be for $1.2 million cash, payable to the defendants’ corporation, and 250,000 shares of the competitor’s stock. That same defendant employees also sought to become the competitor’s agents for the progression of the deal.

In late September 2002, the defendant employees approached their employer’s corporate office and asked if they could acquire the Claims Practice in exchange for assuming the four year lease on the Dallas office building. The employer rejected their offer and the defendant employees resigned. Soon after, both accepted employment with the employer’s competitor. Less than two weeks later, the employer filed suit against the defendant employees.

In upholding a jury verdict in favor of the employer, the Fifth Circuit had this to say about the breach of fiduciary duty claim:

Based on the foregoing evidence, there was a sufficient basis for the jury to conclude that in attempting to sell the Claims Practice, Wilkinson and Taulman breached their obligation of fair dealing and good faith, and in the process disclosed Navigant's confidential information.. The jury could have concluded that their acts of introducing Navigant employees to competitors' representatives and flying an employee to interview with a competitor rose to the level of solicitation. There was also sufficient evidence for the jury to conclude that Wilkinson and Taulman breached their fiduciary duty by failing to disclose their plan to sell the Claims Practice before the lease was signed. We do not mean to suggest that the mere fact that an employer signs a new lease gives rise to a duty of disclosure in all employees who have plan to compete with the employer. But in this case. Wilkinson and Taulman were the two top employees in the Dallas office, and they had active roles in negotiating, recommending, and signing the lease. There was also evidence that the plan to compete was itself wrongful, and that part of this plan was to use the lease as leverage against Navigant in future negotiations to acquire the Claims Practice on favorable terms. The reasonable inference for the jury to draw was that Wilkinson and Taulman had a conflict of interest on the lease, because though they were charged to act for Navigant's benefit when recommending it, they also had an interest in seeing Navigant burdened with a liability that they could use as leverage against it in the future. Given these specific facts, the jury was entitled to conclude that Wilkinson and Taulman's failure to disclose their activities before Wilkinson signed the lease constituted a breach of fiduciary duty.

            As this case illustrates, determining whether a breach of fiduciary claim exists is a fact-intensive endeavor. In cases in which the employee, while still employed by his employer, telephones the employer’s clients and solicits business for the employee’s new enterprise, the factual and legal analysis is comparatively easy. In this case, though, the conduct was not as egregious—or at least not as blatant—as that. But the cumulative effect of the acts in this case was enough to constitute a breach of fiduciary duty. Perhaps most interestingly, the court held that the employees’ failure to disclose—i.e., their mere silence—was one of their actions forming the basis of the breach of fiduciary duty claim.

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The buyer subsequently sued the seller, contending that the latter was in breach of the non-compete agreement. The trial court granted the plaintiff’s motion for summary judgment and an appeal was taken.

On appeal, the seller contended that the trial court erred in holding that the ending date of the covenant not to compete was five years from the date of judgment (as opposed to five years from when the non-compete agreement was signed). The buyer responded that the trial court was right to “equitably extend” the duration of the covenant because of the seller’s “continuous and persistent” violations of the covenant.

The evidence for the alleged “continuous and persistent” violation was as follows:

The Sale and Purchase Agreement was signed on February 27, 2004. Lezley did not begin working for Unity Dance and the Bratchers until July 11, 2005. On August 31, 2005, the trial court temporarily enjoined Lezley from either directly or indirectly soliciting or encouraging any current and/or potential students of Holley's dance studio, Jenni Holley Dance Designs, to become either her student or the student of any other dance company or teacher within 50 miles of Holley's dance studio. She was not specifically enjoined from teaching dance. Unity Dance and Bill and Donna Bratcher were enjoined from either directly or indirectly using Lezley's name in their advertising. They were also enjoined from soliciting or encouraging by direct contact any persons known by them to be current customers of Holley's dance studio as long as Lezley was working at Unity Dance. There is no indication in the record that Lezley, Unity Dance, or the Bratchers violated this temporary injunction.

Based upon these facts, the court of appeals held that the trial court erred in equitably extending the non-compete covenant.  However, the court also stated, “We do not hold that a covenant not to compete cannot be equitably extended, but hold that the record does not support Holley’s argument that the violations of the covenant, if any, were `continuous and persistent.’” 

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