Key Issues When Employees Leave to Compete: Plaintiff and Defense Perspectives Madison Hagopian Sponsel Miller Greenberg PLLC Counsel for Plaintiff Malliburton Oilfield Services Zach Wolfe Fleckman & McGlynn, PLLC 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 T EX. B US. & C OM. C ODE § 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 [1 st 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”), T EX. C IV. P RAC. & R EM. C ODE § 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 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 non- compete 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 , 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”), T EX. C IV. P RAC. & R EM. C ODE § 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 , at * (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, (Tex. App.—Houston [14 th 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 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, (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 Sponsel Miller Greenberg PLLC Zach Wolfe Fleckman &McGlynn,