Author: LegalEase Solutions
You have asked us to research whether a Texas-based company has any remedy at law to prevent recently departed employees from going to work for a competitor, though the employees have never signed employment contracts nor non-compete agreements with the initial employer (but did sign confidentiality agreements). These issues require examination of:
- Texas state and federal case law;
- Louisiana state and federal case law;
- Texas and Louisiana statutes;
- Relevant case law from other federal circuits.
BRIEF STATEMENT OF FACTS
The instant questions involve four former corporate employees, who left their employer, a Houston, Texas-based company, to work with a competing firm. Three of these ex employees had worked with the company for 20 years and the other for over 10 years. One of them is from Louisiana and the others from Texas. Despite their lengthy tenures with the company, they had never signed employment contracts or non-compete agreements. The only document they did sign was a confidentiality agreement. The company now wishes to identify available remedies at law to prevent the former employees from working for the competitor.
Generally, the relationship between an employer and an employee is governed by an employment agreement or contract, which covers issues such as the duties and rights of employer and employee, justifiable reasons for termination, actions to be taken in the event of breach, etc. A non-compete covenant is often a part of such an agreement, included as a clause or as a supplementary agreement. Non-compete agreements had often been considered by many states as contrary to public policy, in that they restrict an individual’s freedom and ability to earn a living. But recently, many courts have upheld non-compete covenants, if the restrictions they place upon the employee are found to be temporally and geographically reasonable.
NECESSITY OF WRITTEN CONTRACT
Typically, a prerequisite for a finding of an enforceable non-compete agreement is the existence of an employment contract, of which the non-compete covenant is a part. A non-compete agreement apart from an employment contract has been thought to be made without sufficient consideration, intended solely to restrict an individual’s right to earn a living, and therefore void.
In the instant situation, there was no employment contract in effect between the company and the departed employees. Under Texas law an enforceable agreement must be in writing and signed by both parties. However this requirement is restricted to the situations enumerated in Tex. Bus. & Com. Code § 26.01 (b). An agreement that will not be performed within one year from the date of its making must also comply with the above requirement. Thus, if an agreement for employment between employer and employee is not capable of being performed within one year of making the agreement, it must be in writing. However, the statute of frauds writing requirement may be satisfied by a fairly broad range of documents. Padilla v LaFrance 907 S.W. 2d 454, 460, 1995 Tex. LEXIS 72 (1995). Additionally, “a valid memoranda of the contract may consist of letters and telegrams signed by the party to be charged and addressed to his agent or the other party to the contract, or even to a third party not connected with the transaction.” Adams v Abbott 151 Tex. 601, 254 S.W. 2d 78, 80 (1952); see also: Key v Pierce 8 S.W. 3d 704, 708 (Tex. App.—Fort Worth 1999, pet.denied); EP Operating Co. v MJC Energy Co., 883 S.W. 2d 263, 267.
Though Texas courts follow the rule that personnel manuals and employee handbooks do not create contractual rights, when an employer’s manual or handbook contains detailed procedures for discipline and discharge and expressly recognizes an obligation to discharge only for good cause, a contract modifying the at-will rule may be found. Zimmerman v HEB, 932 F.2d 469; 1991 U.S. App. LEXIS 11044.
Similarly, under Louisiana law concerning oral contracts of employment, the basic rule governing proof is the second paragraph of La. C.C. art. 1846, which requires that plaintiff prove his case by one credible witness “and other corroborating circumstances.” The plaintiff may be the one credible witness. “Other corroborating circumstances” need only be general in nature; independent proof of every detail of the agreement is not required. William E. Crowe v Homeplus Manufactured Housing, Inc. 877 So. 2d 156; 2004 La. App. LEXIS 1538.
If the company can produce two or more documents, letters, faxes, etc., or one or more witness with corroborating evidence (in the case of the Louisiana employee) that demonstrate the existence of an employer-employee relationship, the court may consider the presence of such documents or witness a sufficient substitute for a written employment contract.
EXISTENCE OF CONFIDENTIALITY AGREEMENT
In the instant matter, the only agreement that the employees signed was a confidentiality agreement. Such an agreement requires employees to keep certain information confidential, or prevent its disclosure to others outside the company. It does not explicitly bar the employees from accepting employment with a direct competitor. But, depending upon the nature of the company’s business, the type of confidential information which the company wishes to preclude disclosure, the employment of a former company operative by a direct competitor may lead to an inference of inevitable disclosure of that information and a resulting breach of the confidentiality agreement. This is in recognition of the notion that the nature of some companies’ business is such that any employment of its workers on the part of direct competitors would automatically require the use of specialized and confidential knowledge, facts, date, etc., gained during the prior employment. Under such circumstances, courts have found that the employer would suffer irreparable injury if the employee were permitted to work with the competitor, and have issued injunctions against the employee and/or competitor from entering into such arrangements.
In a case before a Michigan federal district court, an employer’s motion for a preliminary injunction was granted in part, as applied to two potential customers, and an employee was ordered to abide by the terms of a confidentiality agreement in all respects. The employee’s confidentiality agreement prohibited, during and after his employment with the employer, disclosure or use of any information obtained during his employment which was of a secret or confidential nature. A few days after participating in a meeting regarding pricing strategy for one of two related customers, and telling the employer he would not accept an employment offer from a competitor, the employee resigned and went to work for that competitor. The court found that a preliminary injunction, limited to a six-month period, during which the pricing information would remain current, with regard to two potential customers (but not two others) was appropriate. The court gave no credibility to the employee’s testimony that he would honor the agreement. The court found that the employer’s pricing and new product strategy for the two customers was protected by the confidentiality agreement, and was in danger of disclosure or use by the employee if he were permitted to participate in pricing negotiations. The court also found a threat of irreparable harm to the employer, minimal harm to the employee from an injunction, and a public interest in the integrity of confidentiality agreements. AK Steel Corp., v Robert Colton, 2001 U.S. Dist. Lexis 20314.
In another case a former employer brought an action in equity against a former employee and a competitor, seeking various forms of relief. The court found that in addition to relief for breach of the non-compete agreement, the employer was also entitled to injunctive relief on the basis of their right to protection against improper disclosure of trade secrets and confidential data acquired by the former employee during the course of her employment. The court reasoned that the former employee intended to work for a direct competitor and that such employment was likely to result in the disclosure of information held secret by the former employer, who had no adequate remedy at law. North American Publishing Co. v Claudia Bishop and Reed Publishing, USA, 15 Phila. 448; 1987 Phila. Cty. Rptr. LEXIS 85 (1987).
Courts of equity, if the facts warrant, will restrain an employee from making disclosure or use of trade secrets communicated to him in the course of confidential employment. The character of the secrets, if they be peculiar and important to the business, is immaterial. They may be secrets of trade, or any other secrets important to the business of the employer. However, they must be the particular secrets of the complaining employer, not general secrets of the trade in which he is engaged. The duty of the servant not to disclose the secrets of the master may arise from an express contract, or it may be implied from their confidential relations. Where confidence is reposed, and the employee by reason of the confidential relation has acquired knowledge of trade secrets, he will not be permitted to make disclosure of those secrets to others to the prejudice of his employer. Id. at 458.
Tex. Bus. & Com. Code § 15.50. articulates the criteria for enforceability of covenants not to compete:
(a) Notwithstanding Section 15.05 of this code, and subject to any applicable provision of Subsection (b), a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.”
Nondisclosure covenants have been held to not restrain trade and competition in the same way that non-solicitation covenants restrain trade and competition; as a result, Tex. Bus. & Com. Code § 15.50, neither governs nor impairs the enforceability of nondisclosure covenants. Guy Carpenter & Co. v Provenzale, 334 F.3d 459, 2001 U.S. App. Lexis 12001.
The Court of Appeals applied standard Texas contract law to a nondisclosure
agreement dispute in the unpublished case of In re Marketing Investors Corp No. 05-98-00535-CV, 09-99-007-CV, 1998 WL 909895 (Tex. App. Dallas 1998, no pet.), finding that a former company president breached an agreement by disclosing certain documents to his attorney. The employer sought enforcement of a nondisclosure agreement signed by its former president to force the return of certain documents to prevent the former president from using those documents in litigation. The court noted that nondisclosure agreements are not subject to the same standards as covenants not to compete, because they do not raise the same public policy concerns. Accordingly, the court found, pursuant to the standard law of contracts, that the former president had breached the nondisclosure agreement by revealing the documents at issue to his attorney.
DISCLOSURE OF TRADE SECRETS CAUSING IRREPARABLE INJURY
Threatened disclosure or use of trade secrets has been held to constitute irreparable injury as a matter of law. FMC Corp. v Varco Int’l, Inc. 677 F. 2d 500, 503 (5th Cir. 1982) In granting a temporary injunction, the Varco court stated that the number of trade secrets divulged did not determine the threat of such harm. Rather, it is sufficient that a single secret may be disclosed. See also: Union Carbide Corp. v UGI Corp. 731 F.2d 1186, 1191-92 (5th Cir. 1984).
Texas courts clearly recognize the right of an employer to insist that the nondisclosure provisions of his contract with an employee be specifically enforced. A trade secret case is premised on a breach of contract or wrongful disregard of confidential relationships. K & G Oil Tool & Service Co. v G & G Fishing Tool Service 158 Tex. 594, 314 S.W. 2d 782, 787 (1958) cert. denied, 358 U.S. 898, 3 L. Ed. 2d 149, 79 S. Ct. 223 (1958). The law permits greater restrictions to be imposed on the employee in this regard than in other provisions of employment contracts. A non-competition covenant which continues following termination of the employment is enforceable if the restraint is not unduly onerous and is necessary to protect the employer’s business or good will. Even when he operates in the best of good faith, the former employee working in a similar capacity can hardly prevent his knowledge of his former employer’s confidential methods from showing up in his work. Weed Eater, Inc., v Dowling, 562 S.W. 2d 898, 901-02; 1978 Tex. App. LEXIS 2921 (Tex. Civ. App. Houston [1st Dist.] 1978, writ ref’d n.r.e.); Electronic Data Systems v Powell 524 S.W. 2d at 397-98; 1975 Tex. App. LEXIS 2768. Proof that trade secrets will actually be used by the employee in competition against his former employer afford support for an injunction specifically enforcing the non competition covenant. This is usually the only way use of the secret by the former employee can be prevented. Grace v Orkin Exterminating Co., 255 S.W.2d 279, 285 ; 1953 Tex. App. LEXIS 2156 (Tex. Civ. App. — Beaumont 1953, writ ref’d n.r.e.).
WORKING FOR COMPETITOR
Once a former employee begins working with a direct competitor, no finding of irreparable harm is necessary to support a permanent injunction to protect trade secrets. Thus, in the present case, the employer need not produce any evidence of irreparable harm, as the mere fact that the employees are working with a direct competitor means that the company will suffer irreparable injury.
In a case where an employee sought review of a grant of a permanent injunction to enforce the non-competition and nondisclosure provisions of an employment contract entered into with their former employer, the court held that where the uncontradicted evidence showed that a former employee was working for a direct competitor, no finding of irreparable harm was necessary to support a permanent injunction to protect trade secrets. Williams v Compressor Eng. Corp, 704 S.W.2d 469; 1986 Tex. App. LEXIS 11926 (Tex. App. Houston 14th Dist. 1986).
UNIQUENESS OF SERVICES RENDERED BY EMPLOYEE
If particularly unique services of an employee are available to a competitor, the employer will likely be found to suffer irreparable harm. It is not necessary that the employee in question be the “star” of his employer, or that the business will effectively grind to a halt if the employee leaves. See generally, Comstock v Lopokowa 190 F. 599, 601 (C.C. S.D.N.Y. 1911). Hence, in determining uniqueness, the inquiry focuses more on the employee’s relationship to the employer’s business than on the individual characteristics of the employee. It still remains true that where the employee’s services are “special, unique or extraordinary,” injunctive relief is available to enforce a covenant not to compete, if the covenant is reasonable, and even though competition does not involve specific disclosure of trade secrets or confidential lists. Ticor Title Insurance Co. v Kenneth Cohen, 173 F.3d 63; 1999 U.S. App. LEXIS 9998.
THE LOUISIANA UNFAIR TRADE PRACTICES AND CONSUMER PROTECTION ACT
The Louisiana Unfair Trade Practices and Consumer Protection Act provides a private right of action for both consumers and businesses who have suffered “ascertainable loss of money or property . . . as a result of the use or employment by another person of an unfair or deceptive method, act or practice” which constitutes an unfair method of competition. LSA-R.S. 51:1409(A); LSA-R.S. 51:1405(A); Roustabouts Inc. v Hamer, 447 So. 2d 543, 548 (La. App. 1st Cir. 1984); Morris v Rental Tools Inc., 435 So. 2d 528, 532 (La. App. 5th Cir. 1983). The jurisprudence spawned by the statute has established that while an employee may have the right and desire to leave his position in order to compete with his former employer in a free enterprise system of democracy, the employer “is entitled to protection against wrongful appropriation and use by former employees of things specially developed by the employer in his business, such as lists of customers (particularly in route sales) whose regular patronage has been acquired by the employer’s advertising, solicitation and organized effort.” Huey T. Littleton Claims Service, Inc. v McGuffee, 497 So. 2d 790, 790, 793-794 (La. App. 3d Cir. 1986), citing National Oil Service of Louisiana Inc. v Brown, 381 So. 2d 1269, 1273 (La. App. 4th Cir. 1980).
In the absence of a specific non-competition agreement, a former employee is allowed to rely on his memory and on the general information he acquired while working for his former employer in soliciting customers. After the employee’s relationship with his former employer terminates, the employer is relegated to its claim for damages sustained as a result of the unfair methods of competition by which it is victimized. The solicitation and diversion of an employer’s customers prior to termination constitutes unfair competition entitling the plaintiff to recover damages. An employee owes his employer a duty to be loyal and faithful to the employer’s interest in the business. Prior to the employee’s departure, therefore, the employer is entitled to a preliminary injunction to restrain the employee from engaging in these unfair acts. Subsequent to the employee’s departure, the former employer is only entitled to an injunction preventing the former employee from using customer lists, rolodex cards, equipment, or any tools. Louisiana courts consistently decline to issue an injunction against a former employee’s solicitation of customers when the former employee relies on his memory and did not have a list. See generally Weighing & Control Services, Inc. v Bert Williams, Civil Action No. 88-5211.
Thus, if the departed Louisiana employee can be shown to be in possession of some list or other confidential document which he is or may be misappropriating, an action can be brought against him.
DOCTRINE OF INEVITABLE DISCLOSURE
The Restatement (First) of Torts § 757, (1939), states:
“…one who discloses or uses another’s trade secret, without a privilege to do so, is liable to the other if … his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him.”
The doctrine of inevitable disclosure requires a “real, actual, and substantial” threat that trade secrets will be disclosed. Legally, the doctrine is implicated when employers fail to obtain contractual agreements with their employees, through either a non-compete or general employment agreement, inclusive of a non-disclosure covenant, either of which, or both, prohibits the employee from disclosing the employer’s trade secrets.
The application of the doctrine as a remedial legal tool is always fact dependent on, inter alia, (1) whether the new employer is a competitor of the old employer; (2) the scope of the defendant’s new job; (3) whether the employee has been less than candid about their new position; (4) whether the plaintiff has clearly identified the trade secrets at risk; (5) whether the employee signed a non-disclosure and/or non-competition agreement; (6) whether the new employer has a policy regarding the use of others’ trade secrets; and (7) whether it is possible to “sanitize” the employee’s new position. 7 NAFTA L. & Bus. Rev. Am. 647
Absent written agreement, employers look to the doctrine to provide the protections the employer failed to obtain for itself. A finding of inevitable disclosure, and an associated injunction to prevent the departing employee from working and/or disclosing confidential information, thus becomes a judicially imposed ex-post-facto non-competition agreement. This result subjects the employee to the terms and conditions of the injunction which could be potentially more restrictive in nature than had the employee simply been bound by the terms of a written confidentiality or non-compete covenant.
In PepsiCo. v. Redmond 54 F.3d 1262 (1995); 1995 U.S. App. LEXIS 10903 (1995), the U.S. District Court for the Northern District of Illinois issued a preliminary injunction preventing defendant Redmond from taking a new job with the Snapple drink division of Quaker Oats, PepsiCo’s arch competitor in the “new age” drink category. The Seventh Circuit, in upholding the district court’s preliminary injunction, held that threatened misappropriation can occur when an employee who knows of his employer’s trade secrets is hired by a competitor to perform a job with similar duties. In such circumstances, the inevitable disclosure or use of the trade secrets by the employee in his new job constitutes misappropriation or threatened misappropriation under the Uniform Trade Secrets Act and under common law. Id. at 1269.
At present, twenty-one states support the theory of inevitable disclosure, including Texas and Louisiana. As such, the employer can take advantage of the decided cases in the light of the doctrine and request the courts to invoke the doctrine in this case as well because in the instant situation, the employees have undertaken employment with a direct competitor, and though they never signed written non-compete agreements, their disclosure of the company’s secrets to the competitor may lead to irreparable injury to the company.
LONG TERM EMPLOYEES
Further, the employees in question have been with the company for extended periods of time. Three have been employees for 20 years, another for over 10 years. Two of them are district managers. The facts point towards the inference that these employees had access to tremendous amount of confidential corporate information, that they performed important functions in the company, and may be said to have rendered unique services to the company, as their labor and experience level cannot be easily replaced. The departure of these employees from the company is a significant loss to the company, and the fact of their new employment by a direct competitor magnifies the loss and greatly increases the odds of inevitable disclosure. The competitor has an interest in appropriating confidential information about the initial employer, and may take steps to extract it from the new hires.
If such efforts are made by the competing firm, an action for tortuous interference with the non-disclosure and implied employment contracts may be maintained against the competitor. Trilogy v Callidus 143 S.W.3d 452; 2004 Tex. App. LEXIS 7160.
Generally, a moving party is entitled to a preliminary injunction only several elements are established: (1) the injury, loss, or damage that will be suffered if the injunction is not issued is irreparable; (2) there is no other remedy available at law; (3) the moving party is entitled to the relief sought; and (4) the likelihood that the moving party will prevail on the merits of the case. A trial judge has broad discretion to grant or to deny injunctive relief.
In the light of the foregoing cases, the initial employer can likely demonstrate the potential for irreparable injury resulting from the competitor’s employment of former corporate operatives. There is no other remedy available at law to undo the damage caused by the employment of the departed employed by the competitor, and anything short of an injunction would fail to adequately address the scope of the employer’s loss. Depending on the nature of the information the employer seeks to protect, there may be a substantial likelihood that the employer will indeed prevail on the merits. An injunction, therefore, appears to be the appropriate remedy for the employer in the instant situation.
In light of the above examination of federal, Texas and Louisiana statutes and case law it is possible to conclude that the employer in the present case is not without remedy. The employer may wish to bring an action against the employees for breach of their employment agreement (though oral) and duties there under. Documentation other than a written contract explicitly defining the employer-employee relationship may be sufficient in the case of the Texas employees, under Texas law. Regarding the Louisiana employee, under Louisiana law, the employer will want to secure a witness (can be the employer itself) as well as additional corroborating evidence supporting the existence of a contractual employment relationship, which may be enforced, even if oral. Such an oral employment agreement fortifies the employer’s claim for breach of the existing confidentiality agreement made by the employees. Furthermore, even if the employees or the competing firm raise the lack of a written employment contract as a defense barring enforcement of a confidentiality agreement, the doctrine of inevitable disclosure may provide some remedy for the employer.
In addition, the employer may also bring an action against the employees for misappropriation of trade secrets and breach of fiduciary duty, provided the employer can demonstrate that the company possessed information constituting a “trade secret”, and which the employees have already misappropriated (or may ultimately do so) and that they were under a fiduciary duty to protect corporate secrets and not disclose them to a competitor for their own advantage.