Key Issues When
Employees Leave to Compete:
Plaintiff and Defense Perspectives
Madison Hagopian
Sponsel Miller Greenberg PLLC
Zach Wolfe
Fleckman & McGlynn, PLLC
Counsel for Plaintiff
Malliburton Oilfield Services
Counsel for Defendants Lumber
Jay Oilfield Services and Steve
Shifty
Round 1:
Argument at Temporary
Injunction Hearing
Facts Supporting Temporary Injunction
Malliburton and Lumber Jay are competitors in
oilfield services
2007: Malliburton hired Steve Shifty as Salesman
2012: Shifty promoted to VP
Malliburton gave Shifty highly confidential
information including customer lists and prices
Facts Supporting Temporary Injunction
2015: Shifty resigned and went to work for Lumber Jay
Shifty has already solicited five Malliburton customers
Two customers have already gone to Lumber Jay
Malliburton can already document $65,000 in lost
profits
Facts Supporting Temporary Injunction
Shifty signed a Non-Compete and Confidentiality Agreement
when promoted to VP
◦Malliburton will pay Shifty a “retention bonus” of
$150,000 in 3 annual installments
◦Shifty will keep customer information and prices
confidential
◦Non-compete limited to Malliburton customers, 3 years
Argument for Temporary Injunction
The 2012 non-compete is enforceable under TEX. BUS. &
COM. CODE § 15.50 because:
◦It is “ancillary to an otherwise enforceable agreement”
◦It contains “limitations as to time, geographical area, and
scope of activity that are reasonable and do not impose a
greater restraint than is necessary to protect the goodwill
or other business interest” of Malliburton
“Ancillary to an otherwise enforceable
agreement”
A confidentiality agreement is an “otherwise enforceable
agreement”
◦ Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d
644 (Tex. 2006)
Implied agreement to provide Shifty confidential information
◦ Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289
S.W.3d 844 (Tex. 2009)
Retention bonus also an otherwise enforceable agreement
◦ See Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011)
“Ancillary to an otherwise enforceable
agreement”
The “gives rise to” requirement no longer applies
◦ See Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642, 647 (Tex.
1994) (consideration for non-compete must “give rise to” the
employer’s interest in restraining the employee from competing)
◦ See Marsh USA Inc. v. Cook, 354 S.W.3d 764, 775 (Tex. 2011)
(rejecting Light’s “give rise to” requirement).
“Reasonable” limitations
Three years is reasonably limited
◦ See Gallagher Healthcare Ins. Servs. v. Vogelsang, 312 S.W.3d 640
(Tex. App.—Houston [1st Dist.] 2009, pet. denied) (two year
restraint was reasonable; “[t]wo to five years has repeatedly been
held as a reasonable time”)
Reasonably limited to Malliburton’s customers
Plus “inevitable disclosure” of trade
secrets
See Texas Uniform Trade Secrets Act (“TUTSA”), TEX. CIV.
PRAC. & REM. CODE § 134A.003(a):
◦“Actual or threatened misappropriation may be enjoined”
(emphasis added)
Facts in opposition to temporary
injunction
Steve Shifty was at-will employee
Built his own customer base 2007-2012
Received no new confidential information after promotion to VP and
signing non-compete in 2012
Territory limited to Texas, Oklahoma, and Louisiana
Has only solicited his own customers
Facts in opposition to temporary
injunction
The information Steve Shifty received was not actually confidential
No evidence that Shifty took any customer list
Customer information is readily available to competitors
Pricing information is readily available and constantly changes
Recital in agreement doesn’t matter
The non-compete is unenforceable
Not ancillary to an otherwise enforceable agreement because
◦ The information Shifty received was not actually confidential (compare Gallagher)
◦ The lump sum payments are distinguishable from stock options (Marsh)
Not reasonably limited
◦ Geographic – see Tranter v. Liss
◦ Three years
◦ Too soon to reform
No irreparable injury
Even if the agreement is enforceable, damages would be an
adequate remedy
Lost profits damages - reasonable certainty
Malliburton itself has calculated $65,000
Irreparable injury should not be presumed, despite what some
courts say
Also consider public policy and equitable circumstances
Malliburton’s Rebuttal
◦ The agreement itself defines the information as confidential
◦ Under Alex Sheshunoff, whether the information is actually confidential is not
the issue:
Malliburton’s Rebuttal
“Ancillary” retention bonus
◦ “reasonably related to an interest worthy of
protection” (Marsh)
◦ Consideration reasonably related to Malliburton’s
legitimate interest in motivating its employees to
maintain Malliburton’s customer base
Malliburton’s Rebuttal
Given worldwide market, the customer limitation is a
reasonable substitute for a geographic limitation
◦ See Gallagher (“A number of courts have held that a noncompete covenant that is limited to the employee’s clients is a
reasonable alternative to a geographical limit”)
◦ Injunction can be limited to Texas, Oklahoma, and Louisiana
◦ We can get to trial in less than three years
Malliburton’s Rebuttal
Irreparable injury
◦ Lost profits difficult to prove
◦ “A highly trained employee’s continued breach of a noncompete
agreement creates a rebuttable presumption that the employer is
suffering an irreparable injury.”
- Tranter, Inc. v. Liss, 2015 WL 1257278, at *7 (Tex. App.—Fort
Worth Mar. 27, 2014, no pet.) (mem. op.)
Round 2:
Summary Judgment
Hearing
Defendants’ “No Evidence” MSJ on
“Trade Secrets”
Texas Uniform Trade Secrets Act (“TUTSA”), TEX. CIV. PRAC. & REM. CODE
§ 134A.002:
Defendants’ “No Evidence” MSJ on
“Trade Secrets”
No evidence that the information Sales received from Malliburton is
“trade secrets”
◦ No evidence of “independent economic value”
◦ No evidence information is “not readily ascertainable”
Defendants’ “No Evidence” MSJ on
“Trade Secrets”
Customer list
◦ Parker Barber & Beauty Supply v. Wella Corp., 2006 WL 2918571, at *1517 (Tex. App.—Austin Oct. 11, 2006, no pet.) (mem. op.) (information on
39 customers was generally known or readily ascertainable)
◦ Guy Carpenter & Co. v. Provenzale, 334 F.3d 459, 467 (5th Cir. 2003)
Prices
◦ Where are the confidentiality agreements with the customers?
◦ Readily available and constantly changing
Plaintiff’s Response to “No Evidence”
MSJ on “Trade Secrets”
Customer list is a trade secret even if readily ascertainable
◦ See, e.g., Jeter v. Assoc. Rack Corp., 607 S.W.2d 272, 276 (Tex.
Civ. App.—Texarkana 1980, writ ref’d n.r.e.) (“The fact that this
information might have been available on the open market is
not determinative”)
Plaintiff’s Response to “No Evidence”
MSJ on “Trade Secrets”
Whether price information has “independent economic value”
raises a fact issue
Affidavit from Malliburton’s General Counsel:
“Malliburton requires its employees to keep prices confidential
and does not publicize those prices. Knowing Malliburton’s prices
would give a competitor an advantage because it would allow the
competitor to undercut Malliburton and get a customer’s
business.”
Defendants’ Rebuttal to Customer List
Argument
Prior to TUTSA, split of authority
◦ Some Texas cases: list not protected if “readily accessible” by
industry inquiry
◦ Other Texas cases: liability if information gained while working for
employer
◦ Dannenbaum, Inc. v. Brummerhop, 840 S.W.2d 624, 632-33 (Tex.
App.—Houston [14th Dist.] 1992, writ denied)
Defendants’ Rebuttal to Customer List
Argument
Better reasoning was always: “[t]he broader rule of trade secrets, that they must
be secret, applies to customer lists.”
◦ Guy Carpenter & Co. v. Provenzale, 334 F.3d 459, 467 (5th Cir. 2003)
That means that a “customer list of readily ascertainable names and addresses
will not be protected as a trade secret.” Id.
That is why the factors Texas courts considered in determining whether a
customer list was a trade secret included “whether the content of the list is
readily ascertainable.” Id.
Defendants’ Rebuttal to Customer List
Argument
TUTSA resolves split of authority by requiring “independent
economic value” and not “readily ascertainable”
Round 3:
Hearing on Motion
for Spoliation Sanctions
Facts Supporting Spoliation Sanctions
Malliburton hired forensic expert
17 documents transferred from Shifty’s desktop computer to USB
drive
Including Malliburton’s U.S. customer list
Transfer happened two months before Shifty left, after he received
job offer from Lumber Jay
Shifty failed to preserve the USB drive
Facts Establish Elements of Spoliation
(1) duty to preserve based on reasonably anticipating litigation
(2) breach of duty
(3) culpable mental state (can be intentional or negligent)
(4) prejudice to the party claiming spoliation
(5) adverse inference instruction is the appropriate sanction
- Brookshire Bros., Ltd. v. Aldridge, 438 S.W.3d 9 (Tex. 2014)
Argument Against Spoliation
Sanctions
Shifty did not reasonably anticipate litigation two
months before leaving
Shifty’s Affidavit:
◦ “At the time when Malliburton claims I transferred the
files, I had not yet accepted the job offer from Lumber
Jay, and I did not expect that Malliburton was going to
sue me.”
Argument Against Spoliation Sanctions
No evidence that Shifty destroyed or deleted the files
No evidence that Shifty intentionally failed to preserve the USB drive
Shifty’s Affidavit:
◦ “I did not intentionally fail to preserve the USB drive.”
◦ “I do not specifically recall transferring these files to a USB drive,
but it was routine for me to copy files to a USB drive so I could
work on my laptop at home. I do not recall taking any USB drive
when I left Malliburton.”
Argument Against Spoliation Sanctions
No evidence of prejudice to Malliburton
◦ Malliburton has copies of the files it claims Shifty transferred
Harsh remedy of adverse inference instruction not justified
◦ Amounts to “death penalty” sanction
◦ Lesser remedies available
Rebuttal Argument for Spoliation
Sanctions
Circumstantial evidence proves intentional spoliation
◦ Shifty had no need for U.S. customer list to do his job
◦ Testimony that he does not recall is not credible
Proof of prejudice not required where spoliation is intentional
◦ Brookshire Brothers
Round 4:
Informal Charge Conference
Plaintiff’s Proposed Instruction on Breach of Fiduciary Duty:
Did Steve Shifty comply with his
fiduciary duty to Malliburton?
As Malliburton’s agent, Shifty owed
Malliburton a fiduciary duty. To prove
he complied with his duty, Shifty must
show—
1. the transactions in question were
fair and equitable to Malliburton; and
2. Shifty made reasonable use of the
confidence that Malliburton placed in
him; and
3. Shifty acted in the utmost good faith
and exercised the most scrupulous
honesty toward Malliburton; and
4. Shifty placed the interests of
Malliburton before his own and did
not use the advantage of his position
to gain any benefit for himself at the
expense of Malliburton; and
5. Shifty fully and fairly disclosed all
important information to Malliburton
concerning the transactions.
Authority for Plaintiff’s Proposed Instruction
PJC 104-2
Decades of Texas Supreme Court Case Law:
◦ Crim Truck & Tractor (1992)
◦ Stephens County Museum (1974)
◦ Fitz-Gerald v. Hull (1951)
◦ Slay v. Burnett (1945)
◦ Kinzbach Tool (1942)
◦ Johnson v. Peckham (1938)
Defendants’ Proposed Instruction on Fiduciary Duty
Did Steve Shifty fail to comply with a fiduciary
duty he owed to Malliburton as an employee of
Malliburton?
In answering this question, you are instructed
that an employee owes a fiduciary duty
(a) not to take the employer’s confidential
information or trade secrets and use it to
compete the with employer,
(b) not to solicit the employer’s customers or
other employees in competition with the
employer while still working for the employer,
(c) not to divert sales or business opportunities
from the employer to another company, and
(d) not to use the employer’s funds to establish a
competing business.
However, it is not a violation of an employee’s
fiduciary duty
(a) to plan to go into competition with the
employer and take active steps to do so,
(b) to form a competing business without telling
the employer, if the employee does not actually
compete until after resigning, or
(c) to hide plans to compete and secretly join
with other employees in making preparations to
compete.
Authority for Defendant’s Proposed Instruction
All fiduciary duties not created equal
“Courts have been and should be careful in defining the scope of the fiduciary
obligations an employee owes when acting as the employer’s agent in the
pursuit of business opportunities.”
◦ Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 199-201 (Tex. 2002)
Secretly making preparations to compete is not a breach of fiduciary duty
◦ Johnson; Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 510 (Tex. App.—
Dallas 2006, no pet.)
Round 5:
Oral Argument
in Court of Appeals
Tortious interference with non-compete
Malliburton’s claim against Lumber Jay: tortious interference
with the non-compete between Malliburton and Shifty
Lumber Jay’s affirmative defense: justification based on alleged
good faith belief that non-compete was unenforceable
Trial court ruled that the non-compete was enforceable
Jury findings
Lumber Jay intentionally interfered with the non-compete
Lumber Jay’s interference caused Malliburton damages of $865,000
Lumber Jay had a good faith belief that the non-compete was
unenforceable
Malliburton’s argument on appeal
No colorable right to interfere
Legally insufficient evidence to support jury’s finding on Lumber
Jay’s good faith belief
Only evidence was testimony from Lumber Jay’s CEO that lawyer
determined non-compete was unenforceable
Trial court erred by overruling Malliburton’s hearsay objection
No testimony, documents, or opinion letter from the lawyer offered
Lumber Jay’s argument on appeal
Malliburton did not even plead tortious interference with contract
◦ Only pled “tortuous interference”
◦ This is not a cause of action in Texas
Lumber Jay’s better argument on appeal
Trial court properly followed Texas Beef Cattle Co. v. Green, 921
S.W.2d 203 (Tex. 1996)
Justification can be based on either
◦ (1) the exercise of one’s own legal rights or
◦ (2) a good-faith claim to a colorable legal right, even though that
claim ultimately proves to be mistaken
Lumber Jay’s argument on appeal
Justification defense established if:
◦ “(1) the trial court determines that the defendant interfered
while exercising a colorable right, and
◦ (2) the jury finds that, although mistaken, the defendant
exercised that colorable legal right in good faith”
Jury question presented “when the court decides that although no
legal right to interfere exists, the defendant has nevertheless
produced evidence of a good faith, albeit mistaken, belief in a
colorable legal right”
Lumber Jay’s argument on appeal
Argument that non-compete was unenforceable was colorable, i.e.
not frivolous
◦ Proven by fact that trial court did not grant summary judgment on
this issue
CEO’s testimony was “more than a scintilla” of evidence of good faith
belief that non-compete was unenforceable
Attorney’s opinion on enforceability was not hearsay
◦ Offered to show basis for CEO’s belief, not for the truth of the
matter asserted
Questions? Comments?
Madison Hagopian
Zach Wolfe
Sponsel Miller Greenberg PLLC
Fleckman &McGlynn, PLLC
hagopian@smglawgroup.com
zwolfe@fleckman.com
@zachwolfelaw