The Price Undercutting Theory in Trade Secrets Litigation

The Price Undercutting Theory in Trade Secrets Litigation

You can’t take him anywhere: Five Minute Law goes to a cocktail party

Hi, I’m Zach Wolfe.

Good to meet you Zach, I’m Travis Austin. So what do you do?

I’m a lawyer. I do business litigation.

Oh, my cousin’s a lawyer. I think he does corporate law. What kind of litigation do you do?

Mostly non-compete and trade secrets cases.

Trade secrets? That sounds interesting. Like patents?

Not really. [Wolfe pauses to think about whether he can explain without sounding pedantic.] Actually, a patent is kind of the opposite of a trade secret.

Oh, I didn’t know that.

Yeah, like if you file a patent on some new technology you invented, the patent filing makes it public to the world. 

Ok, I see. So if you keep the technology inside the company, it can be a trade secret?

Exactly.

So is that the kind of trade secret litigation you do?

Well, not that much. [Wolfe pauses again to decide whether to explain or change the subject to something less boring.] Most of my trade secret cases involve things like customer lists and prices.

Really? I didn’t think prices were trade secrets.

[Wolfe smiles, sensing an opportunity] They can be. I actually just wrote a blog post about that.

Oh, you have a blog? . . . [now all is lost]

A typical price undercutting scenario

So what’s the answer? Are prices really trade secrets?

It depends. Let’s consider a hypothetical.

Paula Payne Windows orders windows from manufacturers and sells them to residential and commercial builders. The profit is the spread between the cost of buying and shipping the windows and the price charged to the customer.

Dawn Davis is the most experienced sales person at Paula Payne Windows. One day Dawn meets the owner of Real Cheap Windows for margaritas. A month later, Dawn suddenly announces to Paula Payne—these announcements are always “sudden”—that she’s leaving the company to go to work for Real Cheap.

And here’s the hard part for Paula Payne: Dawn never signed any non-compete. In fact, she never even signed a routine confidentiality agreement. “When Dawn started, our whole company was just a little office with three phones and some computers,” the founder of Paula Payne Windows explains. “The last thing I was thinking about was legal documents.”

A few weeks later, it becomes obvious that Dawn’s customers have stopped placing orders with Paula Payne. And that’s not all. Paula Payne discovers that the day before leaving, Dawn emailed herself an Excel spreadsheet containing all of her sales for the previous 90 days, including (1) the name of the customer contact, (2) the window model numbers, (3) the price paid to the manufacturer, (4) the shipping cost, and (5) the price charged to the customer.

Paula Payne Windows sues Dawn Davis and Real Cheap, claiming misappropriation of Paula Payne’s trade secrets under the federal Defend Trade Secrets Act and the state Uniform Trade Secrets Act.

Specifically, Paula Payne claims that after joining Real Cheap, Dawn started selling to her previous customers at prices slightly lower than what customers were paying Paula Payne. “Dawn Davis is using the confidential pricing information in the spreadsheet to undercut Plaintiff and steal its customers,” Paula Payne alleges.

This is the common “price undercutting” theory in trade secrets litigation. It is common because while not every company has secret technology or a “secret sauce,” every business has customers and prices.

So, even if a company doesn’t require its employees to sign non-competes, the company can use trade secret law to try to stop a departing employee from competing, as long as it has customers and prices that are arguably confidential.

When are prices trade secrets?

Returning to the initial question, is that kind of information actually a trade secret?

Like any kind of information, prices charged to customers can be trade secrets, if:

(1) the price information has “independent economic value”

(2) the prices are not “readily ascertainable” by competitors

(3) the company took “reasonable measures” to keep the prices secret

These are the three essential elements of a “trade secret” under both the Texas and federal statutes. Like any type of information, price information that meets these elements can be a trade secret.[1]

carrots-cooking-food-40790
Lower prices. They cut like a knife.

But prices are not just any kind of information. Price competition is at the core of the free competition the law should encourage. We want businesses to “undercut” their competitors on price. We just don’t want them to use another company’s trade secrets to do it.

So it’s important for judges to hold companies to their burden of proving their price information meets the three elements needed for trade secret protection.

Let’s apply this to the Paula Payne Windows case. Paula Payne would argue that the detailed price information in the spreadsheet has “independent economic value” because Dawn can use it to undercut Paula Payne.

But Paula Payne Windows also has to prove the price information is “not readily ascertainable.” In this case, the spreadsheet contains prices charged to Paula Payne and prices charge by Paula Payne. Is it really that hard for a competitor to find out those prices?

To show the information is not a trade secret, Dawn’s lawyer will want to establish that:

– Paula Payne Windows has no agreements with the window manufacturers requiring the manufacturer prices to be kept confidential

– Prices charged by the manufacturers are available in industry publications, on the Internet, or simply by asking the manufacturer

– Paula Payne Windows has no agreements with its own customers requiring its prices to be kept confidential

– Paula Payne’s customers are willing to tell other window companies how much Paula Payne is charging them

These questions go to the heart of the elements of a trade secret. If Paula Payne doesn’t require its customers to sign confidentiality agreements, has it really taken “reasonable measures” to keep the prices secret? If manufacturers and customers are willing to disclose their prices, isn’t the information “readily ascertainable”?

Companies always want to say their prices are highly confidential and valuable, but that claim often doesn’t hold up to scrutiny.

And that’s not the only problem with the price undercutting theory.

Causation rears its ugly head

Let’s say Paula Payne Windows persuades a judge or a jury that the pricing information is a trade secret. That’s not the end of the story. Paula Payne also needs to prove that Dawn Davis used the information to make the sales to the customers. In other words, Paula Payne still has to prove causation.

Ah, causation. The bane of plaintiff’s lawyers everywhere.

You see, it’s not enough to prove the price information was a trade secret and that Dawn Davis sold windows to Paula Payne’s customers. Paula Payne must prove it was Davis’s use of the information—and not something else—that caused Paula Payne to lose the sales.

This requires a counterfactual: imagine that Dawn Davis never took the spreadsheet with the prices. Would she have still made the sales?

To prove Dawn would have made the sales anyway, her lawyer will want to show:

– Dawn has longstanding personal relationships with her customers

– Dawn could have undercut Paula Payne Windows simply by asking the customers what Paula Payne Windows was charging them

– Price is not the only factor for the customers, or even the most important factor

– The customers ordered from Dawn because of their personal relationships

– Prices change daily or weekly, making the numbers in the spreadsheet quickly obsolete

– Dawn didn’t even look at the spreadsheet in making the sales

– In short, Dawn would have made the sales even if she hadn’t taken the spreadsheet.

Proving these points could negate the causation element of Paula Payne’s trade secrets claim.

Wait a minute, you might say. This isn’t fair. Dawn Davis developed goodwill with her customers on Paula Payne’s dime. That goodwill belongs to Paula Payne. Dawn shouldn’t be allowed to exploit it for the benefit of a competitor.

You would have a point. But goodwill is not a trade secret. And there is really only one legal mechanism to protect goodwill: an enforceable non-compete.

But if there isn’t a non-compete, and the employee takes confidential information about the company’s prices, how do you sort out whether the employee made the sales because she had the price information, or because she had relationships with the customers?

Ask me next time you see me at a party.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] See Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 859 (Tex. App.—Fort Worth 2003, no pet.) (a pre-TUTSA case citing price lists and customer lists as information entitled to trade secret protection until trial); T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 24 (Tex. App.—Houston [1st Dist.] 1998, pet dism’d) (same). See also SP Midtown, Ltd. v. Urban Storage, L.P., No. 14-07-00717-CV, 2008 WL 1991747, at *6 (Tex. App.—Houston [14th Dist.] May 8, 2008, pet. denied) (mem. op.) (evidence that customer and price information would allow competitors to slightly undercut plaintiff’s prices and take its business raised a fact issue on whether the information was a trade secret); In re Desa Heating, L.L.C., No. 2-06-088-CV, 2006 WL 1713489, at *2 (Tex. App.—Fort Worth June 22, 2006, orig. proceeding) (mem. op.) (affidavit testimony that competitors could use financial information to undercut company’s pricing to obtain its customers, while “somewhat conclusory and lacking in detail,” was sufficient to establish that information was entitled to trade secret protection in discovery).

The Plain-Language NDA

The Plain-Language NDA

TexasBarToday_TopTen_Badge_VectorGraphicNDAs—also known as Non-Disclosure Agreements or Confidentiality Agreements—have been in the news a lot lately. At the same time, people have been asking me for a form NDA. I wasn’t thrilled with the barnacle-encrusted forms I’d collected, so I figured it was time to write my own NDA from scratch.

NDAs come in all shapes and sizes, but they all have four basic components:

  1. An agreement not to disclose or use the confidential information
  2. A definition of confidential information
  3. Exceptions
  4. Other stuff

And usually the NDA is written with a lot of unnecessary legalese.

That’s not a big problem. When I have a case involving a confidentiality agreement, I’m going to read the agreement—of course—but I’m not going to get too hung up on its specific language.

Don’t get me wrong, the language of the NDA does matter. But regardless of how an NDA is worded, if a dispute about it goes to court, the judge or jury is going to ask themselves the same basic question: did the person who signed the NDA use the company’s confidential information in a way they weren’t supposed to?

The definition of confidential information is the part lawyers tend to make more complicated than it needs to be. You might even question whether any definition is needed at all.

The definition is the first thing I look for when an employee asks for my advice on an NDA proposed by the employer. The most common problem I encounter is that the NDA defines virtually all of the company’s information—confidential or not—as confidential. The problem is that this turns the confidentiality agreement into a de facto non-compete.

Think about it. If, for example, the employee can’t use any information about her customers, then she can’t continue doing business with those customers after leaving.

Sometimes an overbroad definition of confidential information can be fixed simply by inserting the adjective “confidential” before the long laundry list of things the agreement includes in the definition of confidential information.

Another quick fix is to add a simple carve-out: “Confidential information does not include information that is readily available outside the company,” or something like that.

But what if my client is the employer? In that case, I should draft the definition of confidential information as broadly as possible, right?

balance-macro-ocean-235990
You must unlearn what you have learned. About NDAs. Om.

Not necessarily. I view this from the perspective of a trial lawyer. Let’s say there’s a dispute about the employee violating the NDA. The employee is going to have three kinds of information: (1) confidential information, (2) “confidential” information that isn’t really confidential, and (3) information that the employer argues is confidential—but the employee argues is readily available.

If the NDA defines everything as confidential, it’s going to cloud the issue. The employee’s lawyer is going to point out all the non-confidential information the employee has and say “this is ridiculous, how can they argue all this information is confidential?” And that  argument will have some appeal to a judge and a jury.

So whether I represent the employer or the employee, I favor a form of NDA that limits the definition of confidential information to information that is actually, well, confidential.

I also favor plain language. And mainly for the same reason: I’m thinking about how the NDA is going to look to a judge or jury, and there is no good reason not to write it in plain language.

Some of my Fivers may be thinking “isn’t this the same point you already made when you wrote about your Plain-Language Non-Compete?”

Guilty as charged.

But sometimes people just need an NDA, not a non-compete. So here it is: the Plain-Language NDA.

*MASSIVE LAWYER DISCLAIMER* I offer the Plain-Language NDA merely for your consideration. It may or may not be appropriate for your particular situation. And if you are not a lawyer, don’t even think about using it without getting advice from a lawyer.

Also note there is one thing conspicuously absent from my form NDA: a liquidated damages clause, e.g. a requirement that the employee pay $1 million in damages per violation.

You can add one if you want, but liquidated damages clauses are tricky, for reasons I covered in Liquidated Damages Lessons from the Stormy Daniels Settlement. I prefer to avoid that complication.

As with my Plain-Language Non-Compete, some of you may think the Plain-Language NDA doesn’t sound “legal” enough. Others may think it’s not “plain” enough. And some of you may even take issue with some of the substance of it. In any case, let me know. I’d love to hear from you.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. By clicking on the link to the Plain-Language NDA, you agree to arbitrate any dispute about it. 

Just kidding.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

Decisions, Decisions. How Should Employees “Return” Electronic Files?

Decisions, Decisions. How Should Employees “Return” Electronic Files?

TexasBarToday_TopTen_Badge_VectorGraphicRecent press reports like this one say that IBM has a new policy banning its employees from using USB drives. The apparent purpose is to prevent the loss of IBM’s confidential information and trade secrets, whether it’s an employee intentionally taking company files to a competitor or accidentally leaving a USB drive in an airport lounge.

This policy brings to mind that workplace sign, “The floggings will continue until morale improves.”

But I understand where IBM is coming from. Transferring files to a USB drive is the most common way that employees take company files right before walking out the door. With the possible exception of emailing company files to a personal email address. And don’t forget copying files to Dropbox or Google Drive.

Employees do these things all the time, and not necessarily for nefarious reasons. When you need to work at home or on the road, you need some way to get files from Point A to Point B, especially if you use personal devices to do company work. But when a key employee jumps to a competitor, the timing, volume, and content of the copied files can raise suspicion.

A familiar scenario

Let’s consider my favorite hypothetical departing employee case: Paula Payne Windows v. Dawn Davis. As the top sales person for Paula Payne, Dawn Davis routinely emailed herself PowerPoint presentations before hitting the road to pitch to potential customers. These files would include company information on prices and customer preferences.

That was fine with Paula Payne Windows, but things went south when Dawn suddenly announced she was leaving the company—these announcements are always “sudden”—and turned in her company laptop.

Sensing something fishy, Paula Payne had its “IT guy” check Dawn’s laptop for suspicious activity. He found that the day before leaving, Dawn transferred 117 files from the company server to a USB drive connected to her laptop.

Next thing you know, Paula Payne’s lawyer, John Laurens, fires off a letter to Dawn Davis. The letter demands she cease and desist using any of Paula Payne’s confidential information, and that she immediately return all company documents as expressly required by the Non-Competition and Confidentiality Agreement she signed when she joined Paula Payne.

Dawn emails the letter to her lawyer, Maria Reynolds, and asks what she should do.

“Is it true that you transferred company files to a USB drive the day before you left?” Reynolds asks Dawn. “It’s true,” Dawn says. “I needed those documents to prove that Paula Payne owed me $26,000 in commissions,” she adds. “I knew they would stiff me as soon as they found out I went to Real Cheap Windows.”

“And I was right,” Dawn says. “When I asked the CFO about my commissions, she said ‘what commissions?’”

Screen Shot 2018-05-28 at 9.28.43 PM

“Ok,” Reynolds says, “but the letter says one of those files was a complete customer list for the entire company.” “Why did you need that?”

“It doesn’t matter,” Dawn says. “The only thing I’ve done with that drive is copy the files to my personal laptop. I haven’t opened a single one of those files since leaving.”

This is a common scenario. I’ve seen multiple variations on this theme in my own cases and in opinions I’ve read.

A multiple choice test

So what should Dawn’s lawyer do in this situation?

A. Physically deliver the USB drive to opposing counsel and have Dawn delete the files from her laptop. This is the best way to comply with Dawn’s agreement.

B. Have an expert make forensic copies of the USB drive and Dawn’s hard drive, and produce copies of the company documents to opposing counsel. This is the best way to comply with both the agreement and the duty to preserve evidence.

C. Email copies of the documents to opposing counsel and tell Dawn—in writing—not to open any of the files. Even if this is a technical breach of the contractual duty to “return” the files, it is not a breach that causes any damages.

You can make a plausible case for each of these answers, but I think (B) is the safest.

It’s not an easy question, because there are several competing considerations:

– the contractual duty to “return” the company documents

– the duty to preserve relevant evidence, including relevant metadata, when litigation is reasonably anticipated

– the need to preserve evidence to prove the client’s claim to commissions

– avoiding unnecessary expense to the client

Let’s break down how each answer deals with these factors.

Go ahead and give it to me

The first part of Answer (A) is physically delivering the USB drive to opposing counsel. This has the benefit of complying with the contractual duty to return company documents.

But there’s a problem: you can’t be assured opposing counsel will properly preserve the metadata on the USB drive. It may be important later to determine when the USB drive was plugged in, what was transferred from it, etc.

The second problem raised by (A) is what to do with the files copied to the employee’s laptop. The employer may argue the employee has the same duty to return these files as if they were on paper. But “returning” copied electronic files is really a non sequitur.

So maybe you can accomplish the purpose of returning the files by deleting them?

The problem is that the employee has a duty to preserve evidence, including potentially relevant metadata. If the employee deletes the files, the employer could seek sanctions for spoliation of evidence.

The other side of the coin is that the employee may want the files to prove they were not opened. For these reasons, deleting relevant files is generally a bad idea, and (A) is not the best answer.

Answer (B) is safer because it preserves all the electronic evidence, including metadata. You may not always need the metadata, but at least this approach leaves your options open.

But is it enough to produce copies of the files to the employer’s lawyer? The agreement says the employee must return the files. If the employee keeps copies, the employer can argue that the employee breached the contract.

Are you experienced?

This came up in a case I had where an employee kept company documents needed to prove he earned a promised performance bonus. Opposing counsel told me the company was upset when they found out he had the documents. I explained that he kept the documents because he feared (correctly) the company would refuse to pay his bonus, and the documents proved he was entitled to it. “Well he could have returned the documents and then asked for them in discovery,” he said.

Yeah, right.

As this experience illustrates, sometimes you have to make a judgment call and keep copies of the documents, even if it may give the company the argument that your client breached the contract.

Ok, you say, but if you’re going to accept this risk anyway, then what’s wrong with Answer (C), just telling the client not to use the documents?

Here’s the problem. If your client has taken company documents, then opposing counsel, the judge, and the jury (if you get that far) will probably already be suspicious. You don’t want to compound that suspicion. It’s usually better if your client can say—truthfully—“as soon as I found out a lawsuit was likely, I turned everything over to my lawyer and didn’t touch it.”

But I wouldn’t say Answer (C) is always wrong. Sometimes, the expense of making forensic copies may not be justified. The former employer’s demand letter may just be a “shot across the bow” to get the employee to back off a little. In some cases a suit may never get filed.

So there is no one-size-fits-all solution to the problem of “returning” electronic files taken by a departing employee. But if you’re the lawyer representing the employee who took the documents, you should at least discuss the options.

If you’re the employee, consider not taking any documents in the first place.

And if you’re the employer? I hear IBM has some ideas.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

Survey Says? Buc-ee’s Trademark Case Goes to Trial

Survey Says? Buc-ee’s Trademark Case Goes to Trial

TexasBarToday_TopTen_Badge_VectorGraphicThis week on Five Minute Law we have a survey. First take a look at the following photos taken at a store on the side of a Texas highway:

Choke Canyon SnacksChoke Canyon Jars and Drink StationChoke Canyon T-shirtsChoke Canyon CoolersChoke Canyon IceChoke Canyon Logo

And here’s the question: Who do you think owns this store?

If this were a real trademark survey, the question would be open-ended. But to make it more interesting I’m going to make it multiple choice. Pick the answer that comes closest to capturing your reaction:

A. Buc-ee’s, or a company affiliated with Buc-ee’s.

B. A company unaffiliated with Buc-ee’s that is imitating the Buc-ee’s concept.

C. I’m not from Texas. I have no idea what “Buc-ee’s” is.

Answer A would suggest that the owner of this store is infringing on the Buc-ee’s trademarks and trade dress. Infringement occurs when the use of similar marks causes a likelihood of confusion concerning the source, sponsorship, approval, or affiliation of the products or services.

But I’m guessing that most of you–at least the ones from Texas–answered B. I know this because I already did my own little pilot survey. More about that later.

The actual answer is Shepherd Retail, Inc.–and two other corporations you haven’t heard of that operate similar “Choke Canyon” stores. Those companies are defendants in a jury trial pending in federal court in Houston. (The images above are from the First Amended Complaint in that case.)

Buc-ee’s claims the defendants are unlawfully infringing and diluting Buc-ee’s distinctive beaver trademark and distinctive trade dress. As Gabrielle Banks reported in the Houston Chronicle, lawyers made opening statements in the case last Tuesday.

Likelihood of Confusion and Trademark Surveys

So do trademark law experts agree that Choke Canyon is infringing Buc-ee’s trademarks?

That would be interesting to know, but it really doesn’t matter. You see, trademark law is different from other kinds of intellectual property law in that it is almost entirely subjective.

I don’t mean subjective in the sense that there are no fixed governing standards. I mean that it doesn’t matter what some hypothetical reasonable person would think. What matters is whether actual consumers are likely to be confused about the source of a product or service, regardless of whether some smarter person thinks they should be confused.

Contrast that with patent law. The question there would be, for example, does some feature of the Samsung Galaxy phone infringe on a patent for smartphone technology owned by Apple? Even if experts disagree about the answer, that question is entirely objective. You look at the features of the product and compare them with the “claims” set forth in black and white in the patent. If the product does the things disclosed in one or more of the claims, it infringes. It doesn’t matter whether consumers think it infringes.

But in trademark law, what consumers think is everything. For that reason, consumer surveys are usually regarded as the most probative form of evidence.

If you know anything about litigation, you can see where this is heading: a cottage industry of high-priced Ph.Ds who design and supervise the surveys, and a “battle of experts” when there are enough dollars at stake.

My Pilot Survey

The amount of money in play is important because a properly designed and implemented trademark survey is very expensive (if you have to ask, you can’t afford it). So, companies will sometimes have an expert do a smaller–and cheaper–“pilot” survey to get a preliminary indication.

But even a pilot survey by an expert would be an extravagant expense to support a single blog post. So for this post I did my own pilot survey of three consumers: my wife and two kids.

They fit the target demographic: Texas residents who often drive between Houston, Austin, Dallas, and San Antonio. And all three of them are very familiar with Buc-ee’s. We stop there just about any time we are driving to another city in Texas.

So what would they say when I asked them if the products and marks from Choke Canyon were from Buc-ee’s?

Not so fast! You can’t ask the survey question in a way that suggests what the answer is. In a trademark survey, methodology is everything. The way the questions are phrased can have a huge impact on the results.

The classic survey methodology in trademark cases is the Eveready method. A typical Eveready survey would show a consumer a photo of the defendant’s product and ask “who makes this product?” The idea is to avoid bias by making the question open-ended and never even mentioning the name of the plaintiff.

So, to comply with Eveready and to avoid a Daubert challenge, I showed my subjects the images above from the Choke Canyon stores and asked two questions: (1) who do you think puts out the products shown here (or owns the store shown here)? (2) do you think the company that makes this product (or owns this store) is connected with or affiliated with some other company?

Survey Results

Let’s start with my son Eric (nine years old). When he saw the images that do not include the words “Choke Canyon” and I asked who puts out the products, he initially said the “alligator place” but eventually said “I wouldn’t know.” When he saw the images that do include the words “Choke Canyon,” he answered “Choke Canyon.” Why? “Because it says Choke Canyon on it.”

Did he think Choke Canyon was connected with or affiliated with some other company? No.

One thing I learned from questioning Eric is that it can make a difference whether the person taking the survey knows it is ok to say “I don’t know.” I think it’s human nature to want to come up with some answer, rather than admitting you just don’t know.

My daughter Hailey (17 years old) had pretty similar answers. She said “I don’t know” when asked about who puts out the products and owns the store, but in a couple cases she added “I would assume it was some tourist location in Florida” and “I would assume some kind of small local business.” For the products that say “Choke Canyon,” she said Choke Canyon Travel Center was the source “because it says it right on the center of the label.”

Did she think Choke Canyon was connected with or affiliated with some other company? No.

I decided to press a little. “Why don’t you think it’s affiliated with Buc-ee’s?”

“It looks like Buc-ee’s,” she said, “but with an alligator,” so “I don’t think it’s affiliated with Buc-ee’s.” She added, “it’s a completely different logo, obviously a different company.”

When I told her Buc-ee’s is suing Choke Canyon for trademark infringement she simply said, “that’s stupid.” (Folks, I just report the survey results.)

“Buc-ee’s is a beaver. This is an alligator.”

Finally, I surveyed my wife Rebecca. (Caveat: she was a legal assistant and is a really smart cookie, so maybe not representative of consumers generally.)

“Who do you think puts out the products shown here?” I asked. “Choke Canyon Travel,” she said, “but the products look just like stuff from Buc-ee’s.”

Don’t jump ahead!

“Do you think the company that sells this is connected with or affiliated with some other company?” I asked. “Probably not,” she said, but then we got sidetracked talking about what it meant that the trademark had that little (R) symbol next to it.

Stop over-analyzing!

When we got back on track, I showed her the images without the words “Choke Canyon,” and she said “I have no idea” and there was “no possible way” to know who put the products out or owned the store.

“Do you think the company that owns this store is affiliated with or connected with some other company?” No, she said. “I have no reason to think that.”

But why didn’t she think the Choke Canyon store was affiliated with Buc-ee’s? “Buc-ee’s is a beaver, this is an alligator.” Then, unprompted, she asked, “is Buc-ee’s suing them?” Yes, I told her. “That’s the stupidest thing I’ve ever heard.” (She doesn’t mince words.)

My wife then pulled out her phone and showed me a photo she had taken in some gas station. It was something like “Oma’s Choice Texas Quail’s Eggs” in an old-timey mason jar. It had the same kind of “country” look and feel as the jarred products from Choke Canyon and Buc-ee’s, and she said that gas station had the same products like “nuggets” that Buc-ee’s is known for.

Ah, third-party use. A further complication.

I tried to steer back to the issue at hand. “But don’t you agree that Choke Canyon is copying the Buc-ee’s concept?” I asked.

“Yes,” she said, “but you can’t trademark a concept.”

Like I said. A smart cookie.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He didn’t have space here to explain “trade dress,” but you can check out this video at 2:29.

These are not the opinions of his firm or clients (as noted, they are not even his opinions), so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

 

 

 

 

Wolfe’s First Law of Texas Non-Compete Litigation

Wolfe’s First Law of Texas Non-Compete Litigation

It’s my anniversary. Two years ago today I launched this blog with What a Litigator Looks For in the Typical Texas Non-Compete. I thought it best to start with a topic I know. I outlined the five things I look for to determine if a non-compete is enforceable under Texas law.

That post has held up pretty well. Since then, I’ve seen plenty more non-competes. Texas non-compete law hasn’t fundamentally changed, and I still look for those five things. So, if you want an intro to Texas non-compete law, that post is still a good place to start. Or you can watch a video version here.

But two more years have taught me there is a simpler question to ask when a client brings me a non-compete. As a general rule, you can boil down the practical effect of Texas non-compete law to just seven words: you can’t take your customers with you.

What do I mean? If you’re a sales person who has a non-compete and relationships with customers—the most common situation—it is likely a judge will order you not to do business with your customers from your previous company. But the judge shouldn’t completely bar you from working for a competitor.

In other words, you can compete for new customers, but you can’t take your old customers with you. I call this Wolfe’s First Law of Texas Non-Compete Litigation.

It’s really more of a general rule, but I like the sound of “First Law” more than “First General Rule.”

It’s just a rule of thumb because like most legal rules, it has exceptions, and the whole truth is more complicated. Still, experience has taught me that nine times out of ten, my First Law will hold true.

This means if you’re an employer trying to stop an employee from violating a non-compete, you can probably prevent the employee from taking her customers with her, but you probably can’t do more than that.

If that’s all you need to know, you can stop here. If you want to understand why, read on.

The reasoning behind Wolfe’s First Law of Texas Non-Compete Litigation

Here’s how I get there. The Texas non-compete statute has two requirements: (1) a non-compete must be “ancillary to an otherwise enforceable agreement,” and (2) it must be reasonable.

Employers usually meet the first requirement by (a) expressly stating in the non-compete that they will give the employee confidential information, and (b) actually giving the employee confidential information. A Texas Supreme Court case called Sheshunoff clarified that this will do the trick.

This is where the first big exception comes in. You will sometimes run across a non-compete that does not expressly promise to give the employee confidential information. Usually when you see that it’s either a really old non-compete, or a non-compete drafted for a multi-state company without Texas in mind.

If there is no express promise, you have to look at whether there was an implied promise to provide confidential information. A case called Mann Frankfort said the promise is implied if the nature of the employee’s work necessarily involves providing confidential information. That can be a fact-intensive issue.

Most employers avoid this detour by including an express promise to provide confidential information in the non-compete. Then the second big exception comes into play: did the employer actually provide confidential information to the employee?

I have had cases where there was a genuine dispute about whether the information was really confidential. You are more likely to see this in situations where an employee already had a book of business when he joined the company, or where sales people are entirely responsible for generating their own leads and customers. If the employer didn’t provide confidential information, the non-compete is unenforceable.

But most of the time, it’s pretty easy for the company to show that it provided some confidential information to the employee.

Now that we’ve cleared those possible exceptions out of the way, it’s time to turn to reasonableness.

Let’s be reasonable

Like most states, Texas requires a non-compete to be reasonable in time period, geographic area, and scope of activity restrained.

The good news for employees is that there is almost always at least a decent argument that some aspect of the non-compete is unreasonably broad. Especially the “scope of activity” part. While most Texas lawyers are pretty good about including a reasonable time period and geographic limitation, Texas non-competes are often too broad in the scope of activity they restrict.

Maybe this is because the scope of activity limitation is largely defined by the case law, so a lawyer who only reads the statute won’t get the whole picture. The case law says that an “industry-wide exclusion”—a restriction that prevents the employee for working in the same industry in any way—is too broad.

That’s because a non-compete should be limited to protecting the employer’s goodwill, i.e. its relationships with existing customers. The simplest way to do this is to say–usually in one really long sentence with fancier words–that the employee can’t take her customers with her. That’s a reasonable scope (generally). On the other hand, a non-compete that bars the employee from working for a competitor in any way is usually too broad and therefore unenforceable as written.

But employees shouldn’t get too excited. There is also good news for the employer.

First, note I said unenforceable “as written.” The non-compete statute says that if the non-compete is too broad, the judge must reform it—i.e., rewrite it—to the extent necessary to make it reasonable.

Second, even if the non-compete is too broad, as a practical matter a judge can still issue a temporary injunction to enforce the non-compete to a reasonable extent.[1] (A temporary injunction is an order that applies while the lawsuit is pending.)

Now you can see Wolfe’s First Law coming into focus. When you put all this together, you get two likely scenarios. If the non-compete is reasonable in scope because it is limited to preventing the employee from taking her customers with her, then the judge is likely to grant a temporary injunction that enforces the non-compete as written. If the non-compete is unreasonable in scope because it is not so limited, the judge is likely to limit the injunction to a reasonable scope, i.e. preventing the employee from taking her customers with her.

In either case, the effect is the same. And Wolfe’s First Law of Texas Non-Compete Litigation holds true.

Caveat Five-or

Again, there are exceptions. For example, some judges take the “irreparable injury” rule seriously. That rule says that a court should not grant an injunction if damages would be adequate to compensate the company for the employee’s violation of the non-compete.

My personal view—perhaps a post for another day—is that courts should apply this requirement more strictly. In most cases damages would be adequate to compensate the employer for any lost customers.

But most judges are not so fastidious about the irreparable injury rule. If the judge thinks the employee is violating the non-compete by steering competitors to the employee’s new company, a temporary injunction is likely.

Of course, a temporary injunction is not the end of the story. It is temporary, after all.

Still, in most cases a temporary injunction enforcing the non-compete might as well be a permanent injunction. Why? Remember that a non-compete must be reasonably limited in time. Time periods of three years or longer have sometimes been held reasonable, but most non-competes are limited to one or two years.

How long do you think it usually takes for a case to get to trial? (Hint: at least one or two years.) That means that in many cases, the non-compete will expire before the case goes to trial, or around that time. That’s why I say a temporary injunction might as well be a permanent injunction.

So maybe we should modify Wolfe’s First Law to say this: you can’t take your customers with you, until a year or two after you leave.

But that just doesn’t have the same ring to it.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Someday he will come up with a “Wolfe’s Second Law” for something.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] Reformation is a remedy that typically would not be granted until a final judgment after trial. There is some legal question about whether the judge at a temporary injunction hearing should (1) reform the non-compete as a temporary remedy and enter a temporary injunction enforcing the reformed non-compete, or (2) simply enter a temporary injunction that only partially enforces the non-compete to a reasonable extent. The distinction seems largely academic.

The Problem With the “Elevator Speech”

The Problem With the “Elevator Speech”

TexasBarToday_TopTen_Badge_VectorGraphicFlashback to when I had a solo law practice: A recruiter calls me looking for candidates to join a large law firm. I wasn’t really looking to make a move, but I asked about the position because I was curious. “How much portable business are they looking for?” I asked. “At least a million,” she said (meaning dollars per year).

It took some restraint not to bust out laughing. Or to respond with a sarcastic, “a million, is that all?”

And in all seriousness, I wanted to ask, “if I had a million dollars in portable business, why would I need to join another firm?” or “if I had that much business, would I select a firm based on some random cold call from a recruiter?”

But I’m too nice for any of that, so I just said thanks, not interested.[1]

Then I got to thinking, maybe I would have more business if I had a better elevator speech, or honestly, any elevator speech at all.

The Elevator Speech

An elevator speech is a short pre-set summary of what you do that you can share with new contacts you meet. The idea is to briefly promote your professional services in the time it takes for a typical elevator ride (around 30 seconds).

But some business development coaches will tell you it’s not enough to just describe your job. Ideally, you would identify the potential client’s need, explain how you address that need, and convey the value you would add to their business.

So instead of saying “I’m a lawyer, I do business litigation,” I’m supposed to say something like, “I help businesses resolve disputes efficiently and effectively.”

Rather than adding, “a lot of my practice is non-compete and trade secret litigation,” I would say: “Do you worry about your employees running off to competitors with your trade secrets? Well, I help companies like yours protect their goodwill and confidential information.”

You see advice like this a lot. And it strikes me as wrong, for at least three reasons.

Abstract expressionism: good for French art, bad for an elevator speech

First, I’m not big on abstract descriptions of what you do that leave people guessing.

Have you noticed that companies today have a hard time telling people exactly what they do?

When someone contacts me about a dispute or lawsuit, I’ll Google the names of the companies involved and look at their websites. It’s amazing how often the homepage won’t tell me in simple, concrete terms what the business actually does. When I click on “About Us,” it will say something vague like “we provide our clients with cutting-edge solutions for their data management needs” or “we help your business grow and connect with customers.”

Ok, I think, so you’re a software company? Or you do management consulting?

They must teach this in marketing school. But why can’t companies just come right out and say what they do? “We’re a construction company. We build things at refineries and other industrial sites.” There, that wasn’t so hard.

I think the simple and direct approach is better for the elevator speech too. Don’t make the person you’re talking to work too hard to figure out what it is you do. That’s annoying.

But even when your elevator speech is clear and concrete, it’s still a speech. That leads me to the second problem with the elevator speech.

Rehearsal: good for bands, not so good for networking

The second problem with the elevator speech is that it sounds like a speech.

When you meet someone for the first time, do you want to hear a rehearsed presentation about what kind of work they do? Of course not. You want to know some basic things about them and have a conversation (unless you are a misanthrope, in which case you don’t want to talk to them at all).

That’s because effective networking is not about presenting, it’s about connecting.

Wow, that sounded like something from a cheesy motivational speaker. But it’s true. You want to connect with people in a genuine way, because that leads to real relationships. You don’t want to sound like you’re just giving a practiced sales pitch.

Which leads me to the third problem with the elevator speech.

Good pitching: effective for the world-champion Houston Astros, not so much for relationships

The third problem with your elevator speech is that it’s all about you. If you spend your time giving someone a sales pitch, I predict in the future they are more likely to avoid you than to seek you out.

Think about it. If you’re a lawyer, you probably get contacted by various vendors who provide services to lawyers. Do you love hearing their sales pitches?

When legal vendors want to connect with me, I try to accommodate them. I figure they’re people just like me, trying to make a living, and I might need their services sometime. So I will hear them out when I can. But if all they do is ask me to send them my business, it’s not very effective.

For one thing, I usually don’t have a project right that second that I need their help on. But if I actually get to know the person, that’s probably who I will think of later when I have a real need.

For example, I’ve got a friend who works with an e-discovery company. I don’t think he has ever asked me for business, but when my firm needed help managing thousands of documents in a big litigation matter, I thought of him first.

Surely, people who may need a lawyer–or any kind of professional–are no different.

An analogy fraught with peril

Let’s analogize to dating. You’re single and you meet someone you find attractive. Are you going to give that person a little rehearsed speech? Like, “you should know, the ladies [or gentlemen] find me very attractive, I’m smart, highly successful in my career, and people say I have a great sense of humor.”

That’s like what Donald Trump said to Stormy Daniels (allegedly), prompting her to say “does this usually work for you?”

I’m no dating expert (I’ve been happily married almost 20 years now), but I’m pretty sure that telling someone how great you are is not the optimal strategy.

Similarly, business development experts like Karen Kaplowitz will tell you “pitching” is not always the best approach (see her guest blog post here).

So instead of saying, “I’m a lawyer, I handle cases that . . . blah, blah, blah,” how about saying “I’m a lawyer, I do business litigation, what do you do?” And then listen. And then ask more questions.

You might even want to do some reading about “active listening.” See, for example, What Great Listeners Actually Do. I don’t think there is any better way to get to know a person than really listening.

On the other hand, I don’t have a million dollars in portable business, so what do I know?

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IMG_4571

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

After writing this post he realized it has way too many rhetorical questions, but hey, what are you gonna do?

[1] I’m not good, I’m just nice. See Stephen Sondheim, Into the Woods; Allan Bloom, The Closing of the American Mind, Part One, “Relationships.”