Back in 2018 I gave a one-hour presentation on Key Issues in Departing Employee Litigation to the Houston Bar Association Litigation section. If you couldn’t make it, this is the five-minute version.
Five key issues in five minutes. For each one, I’ll give you a practice tip (or two) and a key case that will help you understand the issue.
Here we go.
No. 1: Preservation of ESI
What’s the first question a lawyer should ask the client in a departing employee case? I say it’s “what company documents did the employee take?” As I explain in this video, the departing employee almost always takes—or keeps—something, even if it’s not for any sinister reason.
This is important to know, whether you represent the original employer, the employee, or the new employer. This fact tends to color all the other issues. A judge is more likely to enforce a non-compete, for example, if there is evidence that the employee downloaded the company’s confidential customer list on the way out the door.
And of course the question is relevant to misappropriation of trade secrets. As a practical matter, the documents taken will determine the strength of any trade secrets claim. I call this Wolfe’s First Law of Trade Secrets: whatever company documents the employee takes will be the alleged “trade secrets” in the subsequent lawsuit.
Press the client for details about documents early in the case. This is important for the reasons I’ve already mentioned, but also to meet the duty to preserve relevant electronically stored information (ESI).
You’ve got to press, especially if you represent the employee, because it’s too easy for the employee to say “no, I don’t have anything” without really thinking it through. No, you don’t have a “customer list,” but what about the contacts on your iPhone?
Cases to Read:
In re Methodist Primary Care Group, 553 S.W.3d 709 (Tex. App.—Houston [14th Dist.] 2018) (orig. proceeding). In Weekley Homes, the Texas Supreme Court laid out the procedure for obtaining direct access to another party’s computer or other device in discovery. This case applies the Weekley Homes standard to a departing employee dispute.
First Western Capital Mgmt. Co. v. Malamed, No. 16-cv-1961-WJM-MJW, 2016 WL 8358549 (D. Colo. Sept. 30, 2016). I wrote about this case here. It’s a good lesson on what not to do if you’re the employee in a customer list case. It also illustrates a Catch-22 for the employee: admit the customer list is a trade secret you help the plaintiff prove its case; if you deny the customer list is a trade secret, the judge may see this as evidence you intend to use it.
No. 2: Confidentiality Agreements
Usually the departing employee signed an employment agreement that includes a confidentiality clause or “NDA.” Often the NDA will require the employee to delete or “return” confidential company documents after termination of employment.
But as I explained here, deleting or returning company documents is not always advisable. First, deleting documents could violate the duty to preserve relevant evidence when litigation is reasonably anticipated. Second, the employee might need those documents to prove her own case, especially if there is a dispute about whether the employee is owed compensation. Then there’s the practical problem: how do you “return” electronic files?
Practice Tip: Exercise judgment about deleting or “returning” company documents. On this issue there is no one-size-fits-all solution. You have to think through the issues and make a judgment call. You may decide, for example, to return that portable hard drive the employee used but to have an expert make a forensic copy that you retain in case of litigation.
Case to Read:
Daugherty v. Highland Capital Management, L.P., No. 05-14-01215-CV, 2016 WL 4446158 (Tex. App.—Dallas Aug. 22, 2016, no pet.) (mem. op.). In this case, evidence that the employee took confidential information supported granting a permanent injunction against the employee, despite the jury’s finding of zero damages.
No. 3: Non-Competes
Texas has a lot of case law on non-competes. If you’ve got 30 minutes you can watch my video series Essentials of Texas Non-Compete Litigation.
But if you only have a minute, I can sum up Texas law on non-competes in just seven words. I call it Wolfe’s First Law of Texas Non-Compete Litigation: you can’t take your customers with you.
It’s just a general rule. But most of the time it will hold true.
First, evaluate the confidential information issue early. In the typical case where the non-compete is tied to a confidentiality agreement, the issue is whether the employer made the agreement enforceable by following through on its commitment to provide confidential information to the employee. If the employee is going to take the position that he didn’t receive any confidential information, you need to test that position and, if it holds true, prepare the employee to stick to it.
Second, if you represent the employee or his new employer, you need to understand the business plan. Is the employee going to go after new customers he didn’t deal with at his previous company? Then the non-compete probably won’t be a problem. But if the plan is to bring all of the employee’s old customers over to the new company, you may have a problem.
Case to Read:
Republic Services, Inc. v. Rodriguez, No. 14-12-01054-CV, 2014 WL 2936172 (Tex. App.—Houston [14th Dist.] June 26, 2014). This is a good example of a Texas case upholding a non-compete. The court rejected the employee’s argument that the employer never provided confidential information, citing the employee’s testimony that she received training on software, access to the company’s invoices, and information on pricing. The court also rejected the employee’s argument that the non-compete was a prohibited “industry-wide exclusion,” where there was evidence the employee could work in the legal services industry without working for a competitor of the company.
No. 4: Trade Secrets
Big trade secrets cases tend to grab headlines. There was the Waymo v. Uber trial, where Google accused a former employee of stealing its confidential self-driving car technology. There was the recent Zhang case where the FBI arrested a former Apple engineer as he was getting ready to board a plane to China with Apple’s secret technology for . . . you guessed it, self-driving cars.
But the typical trade secrets claim does not involve cutting-edge technology. More often it’s the company’s customer list or pricing information. The company will argue that information about the identity and needs of customers is a trade secret, and that knowledge of the company’s confidential prices would allow a competitor to “undercut” the company and take its customers.
Practice Tip: Understand the client’s industry. Whether customer information or price information is a trade secret is usually a fact-intensive issue that requires understanding how the industry works.
Is it an industry where everyone knows who the target customers are? Are prices widely available in industry publications? Do the prices change daily, weekly, monthly? These are the kinds of facts that will determine whether the information at issue is “not readily ascertainable,” which is the key to trade-secret protection.
Case to Read:
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) (mem. op.). This case illustrates that even the most mundane information can potentially be a trade secret. The court held there was a fact issue on whether the company’s daily rental logs constituted trade secrets where “[t]he information would allow competitors to slightly undercut Space Place’s prices and take its business.”
No. 5: “Fiduciary” Duty
What if the employee didn’t have a non-compete? What if there are no trade secrets? The employer may still have a claim against the employee for breach of fiduciary duty.
The employee doesn’t have a true “fiduciary” duty, because there is a lot the law allows an employee to do that a true fiduciary couldn’t do. Texas law says it is not a breach of the employee’s fiduciary duty for the employee to make plans to compete with the employer and to conceal those plans from the employer. That’s why I call it “Fiduciary Duty Lite.”
But if there’s one thing an employee shouldn’t do, it’s diverting customers to a competitor while still employed by the company, especially if the employee receives compensation for doing so. That would be a breach of the employee’s fiduciary duty.
Don’t assume the Texas Pattern Jury Charge question and instruction on fiduciary duty applies to employees.
If you’re the plaintiff, you love the Texas Pattern Jury Charge question and instruction on breach of fiduciary duty. It places such a heavy burden on the defendant. For example, the defendant must prove it “acted in the utmost good faith and exercised the most scrupulous honesty” toward the plaintiff. How can an employee who concealed his plans possibly meet that standard?
He can’t, and that just shows that the Pattern Jury Charge question and instruction on breach of fiduciary duty was not intended for departing employee cases.
Case to Read:
Orbison v. Ma-Tex Rope Co., 553 S.W.3d 17 (Tex. App.—Texarkana 2018, pet. denied). In this case, the employee started competing with his employer before leaving, resulting in the court ordering the employee to forfeit a portion of the salary earned at the first company and two weeks of his salary from his subsequent employer. The dollar amounts at issue were small, but the principle provides a warning for any employee thinking about diverting customers to a competitor while still employed.
Of course I’ve only scratched the surface of these issues here. Send me an email if you have questions, or to book me for your next one-hour time slot.
Zach Wolfe (firstname.lastname@example.org) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation.
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.