A recent Texas appellate decision demonstrates the importance of ensuring that settlement agreements are properly worded. In the case, three employees of Company A left and formed Company B. Company A sued the former employees, as well as Company B, for misappropriation of trade secrets and unfair competition.
As often happens in unfair competition cases, the parties entered into a settlement agreement. The settlement agreement provided that Company B and the individual defendants would not “knowingly initiate contact with any individual or entity who was actually known by [Company B] and the Individual Defendants prior to the direct contact . . . to be a client of [Company A].”
The settlement agreement also contained a liquidated damages provision requiring payment of $50,000 in damages merely for knowingly initiating contact.
Company A later sued Company B and its former employees for allegedly contacting two of Company A’s clients. Company A claimed that its former employees had, while they were employed by Company A, worked with these clients and thus knew who they were.
In response, Company B and the individual defendants argued that the alleged clients were actually “former” clients of Company A, and thus were not covered by the settlement agreement. The trial and appellate courts agreed with the defendants.
The potential importance of this case is that if a client is a “former” client, then a prohibition against contacting or doing business with that client may not be effective. This could come into play, for example, with respect to a client which is not currently sending business, but which could be reasonably expected to do so in the future. In other words, if a repeat client is not currently doing business with one of its vendors, does that mean that it is no longer a client of the vendor? The dissent in this case made a similar point. We will have to see the ramifications of this decision in future cases. In the meantime, lawyers who are drafting settlement, noncompete and nonsolicitation agreements meant to protect their clients’ customers should be aware of this opinion, and should perhaps draft restrictions that apply both to current and former customers.