Texas Non-Compete Law Blog : Texas Non-Compete Lawyer & Attorney : Robert Wood of Fell & Wood Law Firm : Trade Secrets Law in Denton, TX

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.
 

www.felllawfirm.com
 

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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?

 

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Company X's employee (who is bound by a non-compete agreement) resigns and begins working for Company Y (a competitor of Company X).  Company X sues its former employee for violating his non-compete.  Months later, they reach a settlement, and a final judgment is entered.

Company X can then sue Company Y for tortiously interfering with the non-compete agreement between Company X and its former employee, right?  Maybe not.

In KForce, Inc. v. Surrex Solutions Corp., 436 F.3d 981 (8th Cir. 2006), the federal Eighth Circuit Court of Appeals, applying Missouri law, held that filing a second suit (against the new employer) would result in the plaintiff being compensated twice for the same injury.  Thus, the second suit was barred.

Time will tell whether Texas courts adopt the holding in KForce.  However, just as in Missouri, it is the law in Texas that an injured party cannot be compensated twice for the same injury.  Thus, it's possible that the KForce rationale would apply here.

Lesson:  Be careful about settling with your former employee before you add his new employer as a defendant (unless you have no intention of ever doing so).  If you settle with the former employee, you may not be able to pursue the new employer.  The safest course, if you are inclined to seek relief (including injunctive relief) from both parties, is to name the ex-employee and his new employer as defendants from the outset.
 

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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 

 

www.felllawfirm.com

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