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

In several states, an employer may--via a non-compete agreement--prevent a departing employee from taking advantage of the relationships the employee developed with the former employer's customers.  This is true whether or not the identities of the former employer's customers are "confidential."

In those states, therefore, the former employer can successfully contend, "We introduced you to our customers and you've developed good relationships with them, but you can't compete with us by taking advantage of those relationships."

There are actually a couple of Texas Supreme Court cases that stand for the proposition that protecting customer relationships is an interest sufficient to justify a non-compete agreement.  However, those cases have been largely ignored in recent years.

In Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 387 (Tex. 1991), the court noted:

The fundamental legitimate business interest that may be protected by such covenants is in preventing employees or departing partners from using the business contacts and rapport established during the relationship of representing the accounting firm to take the firm's customers with him.

In an earlier case, Henshaw v. Kroenecke, 656 S.W.2d 416, 418 (Tex. 1983), the court had stated:

Henshaw had a right to protect himself from the possibility that Kroenecke would establish a rapport with the clients of the business and upon termination take a segment of that clientele with him.

Today, whenever an employee leaves and begins "stealing" his former employer's customers, courts focus on whether the identities of those customers are "confidential."  Usually, they are not.

To determine whether customer identities are confidential, courts ask questions such as, "Can the information be easily located (e.g., in telephone books or trade journals)?, and "Did the employer take reasonable steps to keep the information confidential?"  These standards are difficult to meet.

But in several other states, the employer need not prove that the information is confidential.  Rather, protection of the employer's relationship with its customer--whether or not the customer's identity is secret--is sufficient to support a non-compete agreement.  A few Texas cases used to speak in those terms as well.

• Email This
• Print
• Trackbacks

Very often, a departing employee won't take customer lists or other confidential documents with him, but a lot of the information he has memorized will be considered by his former employer to be confidential.  Customer names and contact information, for example, are routinely memorized by sales representatives.  Nevertheless, the sales representative's employer typically contends that such information is confidential.

Some states have adopted the so-called "memory rule," according to which the departing employee may use anything that's in his head to memory.  Thus, as long as the employee didn't take the customer list with him, he may use the information from that list that he has committed to memory.

In Texas, though, authority exists for the proposition that whether the information is contained on a document the employee has taken or in the employee's head, trade secret protection may attach to the information.  The key inquiries are:  (a) whether the information is really secret (e.g., whether it is widely known in the industry); and (b) what steps did the employer take to keep the information secret?

• Email This
• Print
• Trackbacks

Misappropriation of trade secret lawsuits usually focus on potential civil remedies that might be recovered.  However, a businessman who worked near Lufkin, Texas, was recently sentenced to seven years in prison for allegedly stealing company trade secrets.  The full story is here:

http://www.news-journal.com/news/content/region/ETtoday/stories/2007/03/02/mcclain_sentence.html

• Email This
• Print
• Trackbacks

Even absent an enforceable noncompete agreement, a Texas employer may be able to prevent, or recover damages for, certain forms of unfair competition. For example, an employer may have a claim against a former employee for taking, using or disclosing and wrongfully using the employer's confidential or proprietary information.

In Texas, a claim for misappropriation of trade secrets involves the following elements:  (1) the existence of a trade secret; (2) a breach of a confidential relationship or improper discovery of the trade secret; and (3) use of the trade secret without authorization.  A trade secret is "any formula, pattern, device, or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."  Although employers are entitled not to have their trade secrets misappropriated, former employees are allowed to use the general knowledge, skills, and experience acquired during employment to compete with a former employer.

Texas courts examine the following criteria in determining whether information is entitled to trade secret protection:  (1) the extent to which the information is known outside the employer's business; (2) the extent to which it is known by employees and others involved in the employer's business; (3) the measures taken by the employer to guard the secrecy of the information; (4) the value of the information to the employer and its competitors; (5) the amount of effort or money expended by the employer in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

A frequently-litigated issue involves whether a customer list, or information about a customer, is a trade secret. There is no easy answer to this question, and the particular facts of each case must be examined.  One thing Texas cases are clear about is that, for something to be treated as a trade secret, it must actually be secret. Texas cases routinely consider these factors when determining whether a customer list is a trade secret: (1) what steps, if any, an employer has taken to maintain the confidentiality of a customer list; (2) whether a departing employee acknowledges that the customer list is confidential; and (3) whether the content of the list is readily ascertainable.  The last factor is heavily litigated, as employees often contend that the identities of customers can be found in public sources, such as telephone books.

Regarding the second element-breach of a confidential relationship or improper discovery of the trade secret-a person is liable for disclosure or use of trade secrets if he either (1) discovers the secret by improper means or (2) after properly acquiring knowledge of the secret, he breaches a confidence reposed in him.

If an employer proves that its trade secrets have been misappropriated, it may seek damages and injunctive relief.  Obtaining injunctive relief requires proving that, absent the relief, irreparable harm will occur.  However, courts have held that the threatened disclosure of trade secrets constitutes irreparable injury as a matter of law.

• Email This
• Print
• Trackbacks