It's Not Only the Formula to Coke ...

For years any speech I have heard on trade secrets inevitably talks about the formula for coke. For those wanting to show a little variety, try Thomas English Muffins. According to a lawsuit that has been filed in district court in Pennsylvania, Chris Botticella is one of the fewer than 10 people in the world "with full knowledge of how to produce them." He does know the recipe, but not clear that is such an exclusive club. The artful wording that I quoted makes me think that number could be a little larger. You can see a copy of the complaint here. Bimbo Bakeries Trade Secret Complaint and TRO Request.

When Botticella was just retiring it was one thing, but when it was learned he was going to Bimbo's competitor, Hostess, that's when the complaint was filed.

Besides perhaps helping change the example used in CLE speeches, it might also be a very good case to test the contours of the inevitable disclosure doctrine. That doctrine has not fared well in all courts. I don't know what Pennsylvania or 3rd Circuit law is on that particular issue, but my guess is -- quite favorable.

Hat tip to the folks at Employment Law 360,  English Muffin Maker Slaps VP With Trade Secrets Suit ($).

Texas Law of Covenant Not to Compete Takes Another Step Forward

Anyone who has dealt with the law of non-compete agreements in Texas is aware of a tangled history that grew out of a battle between the legislature and the Supreme Court and culminated in the now infamous decision of Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642 (Tex. 1994). It was a dozen years later before the Supreme Court in its Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006), untangled some of the issues caused by Light and took a step in refocusing the debate in covenants not to compete onto the reasonability of covenants as opposed to what it referred to as "overly technical disputes".

Today, the Supreme Court takes another wording dispute and removes it from the mix. In Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding (Tex.. 4/17/09) the Court dealt with a covenant in an at-will contract where the employee promised not to disclose confidential information, but there was no explicit promise to provide confidential information by the employer. In short, enforceable:

We hold that if the nature of the employment for which the employee is hired will reasonably require the employer to provide confidential information to the employee for the employee to accomplish the contemplated job duties, then the employer impliedly promises to provide confidential information and the covenant is enforceable so long as the other requirements of the Covenant Not to Compete Act are satisfied.

The Court ducked another issue -- whether or not the covenant not to compete statute pre-empts attorneys fees under the Declaratory Judgment Act. Here, the employee filed a declaratory judgment action, got a favorable ruling that the covenant was not enforceable, and was awarded his attorneys fees. Since the Court reversed the underlying favorable ruling, the basis for the attorneys fee award went away, and the Supreme Court did not provide any indication of how it would rule when the case is presented.

The Unloyal Employee - May End Up Owing a Tidy Sum

That's the lesson to be learned from the 5th Circuit's affirmation of a $3 million dollar jury verdict in a case where two employees were found guilty of breaching their fiduciary duty when they negotiated behind their employer's back to sell the portion of the business in which they were engaged. Navigant Consulting, Inc. v. Wilkinson (5th Cir. 11/15/07).

Interestingly even though the employees in question had non-competes, it was the broad Texas law on breach of a fiduciary obligation that was the basis for the recovery. The trial court had eliminated damages for misappropriation of trade secrets finding it duplicative of the breach of fiduciary claim.

One of the "bad acts" was negotiating and signing a 4 year lease and then using the lease as "leverage" against their employer in attempting to force a sale of the business to them. An additional "bad act" was that they had been negotiating with several buyers to sell the business that they were hoping to acquire.

Navigant Consulting is a good overview of the law in an area where I think we are going to see more litigation.

Mixed Results on 43 Million Dollar Raiding Case

Although the case turned strictly on interpretations related to a covenant not to compete and a related tortious interference with contract claim, the dispute between two title companies that resulted in a $43 million dollar judgment is really a "raiding" case, where 30 employees switched from one title company to another.

Raiding cases are unusual in that they are a form of behavior that is quite problematic, but one where there is no clear cut cause of action specifically designed to fit it. There are a number of causes of action that are brought to bear in these situations but no "silver bullet" even though as can seen by the lower court judgment reviewed in Chicago Title Insurance v. Magnuson (6th Cir. 5/21/07) [pdf], it is apparent that in the right circumstances a jury can be considerably offended. $32 million of the judgment was for punitive damages.

The Court of Appeals affirmed liability, reversed the punitive damage award and sent the case back to the lower court for a re-trial on the compensatory damages.

While the discussion of liability and compensatory damages may shed some light on covenant not to compete law in Ohio, the ruling on punitive damages carries a broader message and continues to show how such damages are currently in disfavor.

Ultimately the Court found the award could not pass constitutional muster under the U.S. Supreme Court precedent contained in State Farm and BMW of North America. Focusing on the 5 factor test for reprehensibility derived from those cases:

1. the harm caused was physical as opposed to economic;
2. the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others;
3. the target of the conduct had financial vulnerability;
4. the conduct involved repeated actions or was an isolated incident;
5. the harm was the result of intentional malice, trickery, or deceit, or mere accident

the Court assumed the conduct was intentional and felt only two of the other factors merited further discussion since the conduct was economic not physical, and the health or safety of others was not in danger.

The Court gave little weight to financial vulnerability, in large part because of Chicago Title's own claim that notwithstanding the defections they remained the number one company in the contested markets. The Court also limited the review of repeated actions to actions against other parties (of which there were none), as opposed to repeated actions against Chicago Title, distinguishing State Farm's teaching that damages (as opposed to liability) can not be based on conduct against third parties.

The bottom line, no punitive damage award available.

11th Cir. Applies Georgia Law to Non-Compete

Stepping gingerly into the world of conflicts of law as applied to covenants not to compete, the 11th Circuit wisely asked the Supreme Court of Georgia for clarification. Having received it, the Court had no problem finding that Georgia would apply its own law to a former employee's non-competition agreement, and find it unenforceable. The employee's victory was not unmitigated however, as the Court struck down the lower court's permanent injunction against enforcing the covenant not to compete in any other jurisdiction. The reach of Georgia's power to enforce its view of whether the non-compete was enforcible extended only to its boundries and the injunction needed to be revised accordingly. Keener v. Convergys, Inc., No. 02-11324 (11th Cir. 8/21/03).

Even Low Level Employees Have Duty to Employer

All was not harmony on the island paradise of Hawaii as two lower level employees prepared to compete with their employer before leaving their employment. Mere preparation was not a problem, but actually submitting a competing bid for a government contract and winning while still employed was. At least that is how the 9th Circuit thought the Supreme Court of Hawaii would rule. In Eckard Brandes, Inc. v. Riley et al ((th Cir. 8/11/03) [pdf] the court found that the violation of the duty of loyalty would create a cause of action, that it would be governed by the six year statute of limitations and that disgorgement of the profits on the government contract was a proper remedy. What is interesting is not only the 9th Circuit's enforcement of the duty of loyalty against lower level employees, but the irony that it was the employees' lawsuit for wage and hour violations that led to a counterclaim for the breach of the duty of loyalty. A good example of why one should think twice of one's own conduct before initiating litigation.

Employee's Duties While Preparing To Compete With His Employer

The First Court of Appeals gives a good overview of the law on an employee's obligations when preparing to compete with his employer. In Abetter Trucking Company v. Arizpe (Ct. App. - Houston [1st] 7/3/03) it upholds a jury verdict that the employee did not breach his fiduciary duty to his employer, even though he resigned and a dozen of the company's drivers went to work for him at his new company the next day.

Retreat By First Court of Appeals - Movant for Temporary Injunction in Non-Compete Case Must Show Probable Harm

Resolving a dispute it created with the Beaumont Court of Appeals reported here last month, the First Court of Appeals has re-examined its holding in Norlyn Enterprises and reversed its opinion on the impact of Section 15.51 of the Texas Business & Commerce Code on traditional equitable principles for a temporary injunction. In Cardinal Health Staffing Network, Inc. v. Bowen (Tx. Ct. App. - Houston [1st Dist.] 4/3/03], it now holds that in order to obtain a temporary injunction in a non-compete case, a court must find that there will be irreparable harm. Interestingly in doing so, it points to two contrary decisions by the Dallas Court of Appeals in 1990 and 1993 and now respectfully disagrees with them. It also declines the invitation of Cardinal Staffing to adopt the 'inevitable disclosure' rule, saying it would not matter in this case even if adopted, but raising doubts about whether it should be. The opinion notes that Court voted to consider it en banc, presumably necessary since it was overruling a prior decision of the court.

Temporary Injunction for Covenant Not To Compete - Irreparable Harm Required or Not?

The Texas law on covenants not to compete, has unusually strong language on the pre-emption of the common law. This was a result of a 1990's feud between the Texas Supreme Court and the legislature. The Court took a generally restrictive view of covenants not to compete, while the legislature favored enforceability. The pre-emption language is now the center of an important question: does it abolish the traditional requirements for a temporary injunction, such as showing irreparable harm? It is no exaggeration to say in many cases, that will be determinative of whether or not a party can obtain a temporary injunction. Within the last three months the question has been answered definitively by two separate courts of appeal. Unfortunately, for those who like predictability, it has been answered differently. In Norlyn Enterprises, Inc. v. APDP (Tex. App. - Houston [1st Dist.] 12/12/2002), the Court found irreparable harm was no longer required in light of the statute, reversing a district judge who had refused to enter a temporary injunction, sending the matter back for further proceedings in conformity with their ruling. However, this week, while noting the Norlyn Enterprises decision, reported here on 12/16/02, another court held that the traditional rules for temporary injunction were not displaced by the covenant not to compete statute, and upheld the denial of a temporary injunction because there was no showing of irreparable harm. NMTC, Corp. dba Matco Tools v. Conarroe.


Given the frequency of temporary injunction proceedings on covenant not to compete cases, and the importance of this issue, it seems likely it will end up in the hands of the Supreme Court. Hopefully soon.

Divided San Antonio Court Finds Breach of Covenant Not To Compete To Be "Illegal Activity" for Purposes of Libel

Parker, a former employee of Cram Roofing, with a valid covenant not to compete, sued his former employer for libel based on a letter sent to 12 companies that were prospective customers of Parker's new, and competing, business. In that letter, the former employer said: "Cram Roofing will seek to recover all profits obtained by your company as a result of ....Parker's illegal activities." Holding the covenant had the force of law, the majority opinion of Justice Duncan found the statement made by the employer was "substantially true", and could not be the basis for a libel claim. The Court rejected Parker's argument that "illegal activities" implied a violation of a penal statute. Cram Roofing Co., Inc. v. Parker (Tex. App. - San Antonio 2/26/03).


Justice Stone in her dissent noted that two business men had testified that to them the phrase implied engaging in criminal type activities. She would have affirmed the judgment.

No Damages for Covenant Not To Compete, No Attorneys' Fees

After being told by the Supreme Court to review whether an employer who prevailed in enforcing a covenant not to compete, but did not recover damages, was entitled to attorneys fees under the Civil Practice and Remedies Code, the San Antonio Court of Appeals, hold no. Perez v. Texas Disposal System, Inc. (Ct. App. - San Antonio, 2/5/03). The Court also reaffirmed its earlier ruling that the employer doesn't recover them under 15.51 of the Texas Business & Commerce Code either.

Covenants Not To Compete - At the Highest Level

BellSouth took to the offensive to block Vice Chair Gary Forsee's move back to Sprint. See the story here. Although not clear, sounds like an ex parte TRO by a Georgia state court judge. Maybe a little home court advantage? Will be interesting to see how long it sticks, if it does.

Non-Compete Covenant Not Up to Light v. Centel Cellular Standard

Although recognized by every court as the standard for determining the validity of a covenant not to compete, the application of Light v. Centel Cellular [pdf] is not always that easy to follow. In Strickland v. Medtronic, Inc. (Ct. App. - Dallas 1/29/03) decided yesterday, the Dallas Court of Appeals makes the standard clear.


Importantly, it also rules on a question that comes up repeatedly, holding that general language about providing confidential information will not be enough to constitute a non-illusory promise (and therefore is not enough to support a covenant not to compete). Even if such general language were an implied promise (which the court finds it is not), it would still not be sufficient because it would require that the employee work for a certain period of time. Since the court found the employee relationship to be at will, any promise conditioned on a period of employment would be illusory.

Covenants Not To Compete - Pro-enforcement holding

The trial court refused to grant a temporary injunction because he found there was no proof of irreparable injury or lack of adequate remedy at law, which are traditionally required for a temporary injunction. The First Court of Appeals, relying on its earlier opinion in Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 795 (Tex. App.—Houston [1st Dist.] 2001, no pet.), reversed finding the trial court abused its discretion in denying the injunction on those grounds. The money language is as follows:

Section 15.52, entitled “Preemption of Other Law,” provides, “The criteria for enforceability of a covenant not to compete provided by section 15.50 of this code and the procedures and remedies in an action to enforce a covenant not to compete provided by Section 15.51 of this code are exclusive and preempt any other criteria for enforceability of a covenant not to compete or procedures and remedies in an action to enforce a covenant not to compete under common law or otherwise.” Tex. Bus. & Com. Code Ann. § 15.52 (Vernon Supp. 2002); Butler, 51 S.W.3d at 795. Thus, a showing by the promisee of an irreparable injury for which he has no adequate legal remedy is not a prerequisite for obtaining injunctive relief under the Covenants Not to Compete Act. Tex. Bus. & Com. Code Ann. §§ 15.50, 15.51(a); Butler, 51 S.W.3d at 795.

Norlyn Enterprises, Inc. v. APDP, Inc.



The plaintiff still might not prevail as the Court sent it back for a further hearing. However, at least in the First Court of Appeals, the traditional injunction requirements seem to be trumped by Section 15.52.

No Class Action For Determining Validity of Covenants Not To Compete

Although in the past class actions were primarily a creature of federal courts, more parties are turning to state courts to bring such actions. A group of insurance agents who sought to represent a large class of such agents in an effort to declare the covenants not to compete contained in employment agreements were invalid succeeded in convincing a trial judge that they should be allowed to do so. The Beaumont Court of Appeals felt otherwise, finding that the individual determinations of reasonable geographical scope and the requirement to revise each agreement if were not, make it unsuitable for class treatment. American National Insurance v. Cannon (Beaumont 9/26/02).