“Direct Access” to Computers in Departing Employee Litigation

“Direct Access” to Computers in Departing Employee Litigation

Imagine a criminal case where the government sends the defendant’s lawyer a request to produce emails between the alleged conspirators, bank records showing payments to the defendant’s offshore account, or a recording of a key meeting. You wouldn’t expect to get much, would you? That’s why we have search warrants.

Civil litigation is different. In a civil case, the system largely relies on the parties themselves to search for and produce documents that the requesting party can then use to prove its case. Generally, you don’t get to search the opposing party’s office for relevant documents.

The same general rule applies to computer files: you don’t get to search the other side’s computers or other devices. There are exceptions, but the Texas Supreme Court has set the bar high for obtaining an order authorizing “direct access” to an opposing party’s electronic files.

In In re Weekley Homes, 295 S.W.3d 309 (Tex. 2009), the court held that intrusive measures such as direct access to a computer or other electronic storage device require, at a minimum, that the benefits of the discovery outweigh the burden imposed. Permitting direct access “is particularly intrusive and should be generally discouraged,” the court said, “just as permitting open access to a party’s file cabinets for general perusal would be.” To obtain direct access, “the requesting party must show that the responding party has somehow defaulted in its obligation to search its records and produce the requested data.”

More recently, the Texas Supreme Court applied Weekley in In re Shipman, 540 S.W.3d 562 (Tex. 2018). The court held that the responding party’s late production of responsive documents and testimony that some files had been deleted years earlier was insufficient to justify direct access. The responding party testified by affidavit that he had searched both electronic and paper files and produced all responsive documents, and the requesting party made no showing that the responding party was incapable of searching his computer.

Weekley Homes and Shipman were not “departing employee” cases—the type of case I handle most often—but direct access is an important issue in departing employee litigation. Let’s look at the transcript of a hypothetical hearing to see how these cases might apply in a typical departing employee case.

Hearing Transcript

Judge Lansing: Alright, next case up is Cause Number 19-24601, Paula Payne Windows v. Dawn Davis. Mr. Livingston, who are you here for?

Livingston: Good morning, judge. I’m here with Phil Hamilton for the plaintiff on a motion to compel.

Reynolds: Maria Reynolds here for the defendants, Your Honor.

Judge: Good morning, Ms. Reynolds. Was there a response to the motion?

Reynolds: Yes, we filed a response yesterday.

Judge: Well if I can get this computer on, maybe I can pull it up. Can you . . .

Reynolds: I have a binder with the motion and response if that would make it easier.

Judge: Sure, I’ll take your binder. This looks like a lot of material. Have y’all talked about this already?

Reynolds: Not really. All I got was an email from Mr. Hamilton demanding we turn over Ms. Davis’s laptop. That’s part of the problem, we’ve been trying . . .

Hamilton: Your Honor, that’s not exactly right. We talked about these issues at Ms. Davis’s deposition. That’s when she said . . .

Judge: Ok, well, I’ll hear your arguments on the motion. But first back up a little and remind me what this case is about. Mr. Hamilton?

Hamilton: Yes, of course. This is a case about theft of trade secrets. Dawn Davis worked for my client, Paula Payne Windows, for five years. She was very well paid. She rose up their top sales position, and she had access to all of their confidential information and trade secrets. Then about six months ago she suddenly left and went to work for a competitor, and that’s the other Defendant, Real Cheap Windows.

Judge: Ok, I remember this case now. But what kind of trade secrets does a windows company have?

Hamilton: There are two things we’re most concerned with, Your Honor. First, Paula Payne has a Master Customer List spreadsheet that has detailed information about every one of their customers. Second, for each customer there is a Sales History spreadsheet that has every sale including price, quantity, date, margins—everything a competitor would need to try to undercut my client.

Judge: I see. So you want me to compel Ms. Davis to produce those documents?

Hamilton: Actually, you already did that. If you take a look at tab C, that’s your order requiring Defendants to produce “all documents Davis received from Paula Payne during her Employment Period, including all customer lists and sales records.” We’re asking you to order her to produce her laptop so our forensic expert can see if our Master Customer List and Sales History spreadsheets were on it.

Judge: Ok, hold that thought. I want to hear from Ms. Reynolds.

Reynolds: Thank you, judge. I’ve been biting my tongue. This is an outrageous demand for direct access to my client’s computer. It is no different than a request to rifle through her file cabinets.

Judge: Well hold on, let’s take this one step at a time. Did your client comply with my previous order?

Reynolds: Absolutely. Ms. Davis searched her home office and produced a banker’s box full of documents. But she didn’t find any customer list or sales history documents. Now they’re asking for native Excel files, but they never specifically requested those. If I could approach, here is a copy of Rule 196.4:

Screen Shot 2019-05-11 at 5.26.40 PM.png

Judge: What the hell is “magnetic” data?

Reynolds: Honestly, judge, I think that was a little before my time, but the issue here is electronic data. Paula Payne wants to search my client’s computer for electronic files, like Excel spreadsheets, but they never specifically asked for electronic files.

Hamilton: Actually, we did. This is from our First Request for Production:

Screen Shot 2019-05-12 at 9.32.38 AM.png

Judge: That’s pretty general. Wouldn’t it be better practice to include the electronic files you want in the specific request for production? You could have said “including native Excel spreadsheets and other electronic files” in your request, right?

Hamilton: We could have, Your Honor, but the two leading cases on this, Weekley Homes and Shipman, both say it’s sufficient if we clarify in our motion to compel that we’re asking for electronic files. Here is an excerpt from Shipman, citing to Weekley:

Screen Shot 2019-05-11 at 6.57.07 PM.png

Hamilton: The situation here is the same. Our definition of “documents” included electronic files, and our motion makes it abundantly clear what we’re asking for.

Judge: Ok, I think you’ve sufficiently asked for computer files, so let’s talk about direct access. What’s your basis for that?

Hamilton: We are allowed to obtain direct access to an electronic device if we “show that the responding party has somehow defaulted in its obligation to search its records and produce the requested data.” That’s straight out of Shipman, quoting from Weekley. And that’s exactly what we have here. After Ms. Reynolds produced the box of hard copy documents, we sent her a letter pointing out that her production did not include any electronic files, and we specifically asked if Ms. Davis had searched her laptop. She responded in an email and said “my client has conducted a reasonably diligent search and has produced all responsive non-privileged documents.”

Judge: So she doesn’t have the documents. What’s the problem?

Hamilton: Later we took Dawn Davis’s deposition, and here’s what she said:

Screen Shot 2019-05-11 at 8.43.04 PM.png

Hamilton: It’s obvious from her evasive answers that she did not conduct a diligent search of her laptop for the documents we requested, even after we specifically inquired about electronic files. That’s a default in her obligation to search her records and produce the requested records.

Judge: Alright, let me hear from Ms. Reynolds on this.

Reynolds: Your Honor, there is no default. This case is just like Weekley and Shipman, where the Texas Supreme Court ruled against direct access. In Weekley the court said you cannot rely on “mere skepticism or bare allegations that the responding party has failed to comply with its discovery duties.” That is all we have here, just mere skepticism and speculation. There is no proof that Ms. Davis failed to search her laptop.

Judge: Mr. Hamilton, how is this case any different from those cases?

Hamilton: It’s totally different. Weekley was about whether deleted emails were specifically requested; that’s not our issue. Shipman was a case about late production. Here is an excerpt from Shipman with its key facts:

Screen Shot 2019-05-11 at 8.47.27 PM.png

Screen Shot 2019-05-11 at 8.48.09 PM.pngHamilton: So there are two key differences. First, Shipman searched his computer and produced documents he found. Second, Shipman signed an affidavit specifically stating that he searched his computer files and produced all responsive documents. We don’t have either one here.

Judge: Ms. Reynolds, do you have an affidavit from your client saying she searched her computer?

Reynolds: No, Your Honor. But that’s not my burden. If you look closely at Shipman, the court made it clear that the requesting party has the burden to prove that the responding party has defaulted on its discovery obligations. “Mere skepticism” doesn’t meet their burden:

Screen Shot 2019-05-11 at 7.52.04 PM.png

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Reynolds: It’s the same thing here. Paula Payne hasn’t offered any evidence that my client is incapable of searching her computer or that she hasn’t conducted a diligent search. You have to say no to this.

Judge: What about her deposition testimony? Isn’t that evidence she didn’t do a diligent search.

Reynolds: She said she wasn’t sure if she transferred the customer list or sales histories to her laptop. That’s just like Shipman. The court said that Shipman’s “equivocation about the existence of discrete documents at his deposition” did not “transform general skepticism into discovery default.” Shipman was asked about “discrete, individual documents” from more than five years before the deposition and stated he was “unsure if they existed.” My client’s testimony was similar.

Judge: I understand, but did she search her computer? The defendant in Shipman signed an affidavit that specifically said he searched both electronic and hard copy records.

Reynolds: I don’t know all the details of her search. She has stated that she conducted a diligent search and produced all the responsive documents she found. If Paula Payne wants to ask her about all the little details, they can do that in a deposition.

Hamilton: Your Honor, we tried! We asked . . .

Judge: You can sit down, Mr. Hamilton. I’ve heard enough. I’m going to grant the motion to compel and order Ms. Davis to turn over her laptop to Paula Payne’s expert. Counsel are to confer on the details of a forensic protocol and put it in a proposed order. If y’all can’t work that out, come back and see me.

Reynolds: Your Honor, I really think it would be error to do this. The Texas Supreme Court has been clear.

Judge: Well that’s my ruling. And if y’all have to take it up to the Court of Appeals on mandamus, I won’t be offended. Good to see all of you. Even you, Mr. Livingston [laughter in courtroom]. So did you catch any bass last weekend?

Livingston: I’m afraid not. Nothing biting last weekend except the mosquitoes.

Judge: Well that’s too bad. Anyway, give Connie my best.

Livingston: Thank you, judge, I’ll do that.

Judge: Alright, everyone can be excused.

What Did We Learn Today?

As this hypothetical illustrates, Weekley and Shipman are pretty simple in principle: you have to show the other party defaulted on its discovery obligations before you get direct access. But in practice this can be a difficult principle to apply.

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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.

 

Metroplex Courts Push Back on Broad Application of TCPA

Metroplex Courts Push Back on Broad Application of TCPA

If you just returned from a two-year sabbatical to the Himalayas, you should know the Texas Citizens Participation Act (TCPA) has become kind of a big deal in Texas litigation.

You remember the TCPA, right? It’s the “anti-SLAPP” statute the legislature passed to solve the problem of people filing lawsuits “regardless of whether the claim is valid.” See the Fort Worth Star-Telegram, Your right to share your opinion is threatened by this proposed state law.

The TCPA has taken on a surprising life of its own. This is partly because Texas courts have applied the statute’s broad definitions literally, allowing defendants in cases the legislature never intended to file motions to dismiss that require the plaintiff to prove its case before taking any discovery.

But in a pair of recent opinions, the Dallas-Fort Worth appellate courts have pushed back on broad application of the TCPA, especially to the kind of “departing employee” case I often handle.

First, in Kawcak v. Antero Resources, the Fort Worth Court of Appeals held that the TCPA’s broad definition of “right of association” is not so broad that it includes a conspiracy between a departing employee and a single alleged co-conspirator.[1] After a painstaking textual analysis of the statute’s phrase “common interest,” the court said “[o]ur opinion is long but our holding is narrow: the plain meaning of the word ‘common’ in TCPA section 27.001(2)’s definition of ‘the right of association’ requires more than two tortfeasors conspiring to act tortiously for their own selfish benefit.”

Second, the Dallas Court of Appeals held in Dyer v. Medoc Health Services that the TCPA’s broad definitions of “right of association” and “right of free speech” are not so broad that they encompass communications between a departing employee and an alleged co-conspirator about misappropriating an employer’s proprietary software and confidential information to set up a competing business.[2]

You see a theme here?

These propositions may sound uncontroversial. But other Texas appellate courts have applied the TCPA’s expansive definitions more literally. For example, the Austin Court of Appeals has held that the TCPA applies to allegations that a departing employee disclosed a company’s trade secrets to his new employer, and to a claim for conspiracy to misappropriate trade secrets. The Tyler Court of Appeals and Houston Court of Appeals have made similar rulings. See the cases summarized here.

But in Dyer, the Dallas Court of Appeals was just not having it. The court found that applying the TCPA to an alleged scheme to misappropriate confidential information would be illogical and even absurd:

Because the text messages between Basiti and Dyer were private communications related to an alleged conspiracy between the two men and did not involve public or citizen’s participation, it would be “illogical” to apply the TCPA to those communications.

Further, construing the statute such that appellants would have a “right of association” based solely on Dyer’s and Basiti’s private communications allegedly pertaining to the misappropriation of appellees’ proprietary software and confidential business information is an absurd result that would not further the purpose of the TCPA to curb strategic lawsuits against public participation.[3]

The Fort Worth Court of Appeals reached a similar result, but it was not so quick to blow open the “absurd results” escape hatch. The Kawcak opinion is notable for the lengths Justice Bassel went to justify the holding on textualist grounds—citing no less than four dictionaries and Scalia and Garner’s Reading Law. It shows you just how much cache textualism has acquired among a significant chunk of Texas appellate judges.

There was a more pragmatic era when Texas judges would have brushed aside the defendant’s argument in Kawcak without giving it a second thought. As if to say, “The ‘right of association’ includes a conspiracy between two people? Don’t be silly.”

Don’t get me wrong. Kawcak is not a bad opinion. It is meticulously written and reasoned. But part of me wonders if we really need so much textualist hand-wringing. When interpreting a statute gets down to parsing the order of different definitions in different dictionaries, have we perhaps lost our way?

But these days Texas appellate courts don’t like to say a statute is ambiguous. As the Kawcak court said, “if an undefined term has multiple common meanings, it is not necessarily ambiguous; rather, we will apply the definition most consistent with the context of the statutory scheme.”[4] Rather than calling a statute ambiguous, some judges prefer to explain why one—and only one—side’s interpretation is reasonable.

This isn’t necessarily wrong. But maybe we should cut to the chase and acknowledge the obvious: the definitions in the TCPA have more than one reasonable interpretation. When a text has more than one reasonable interpretation, it’s ambiguous. Or at least vague. When a statute is ambiguous or vague, the courts are free to adopt the reasonable interpretation that makes the most sense.

Of course, you can also look to the purpose of the statute (as the TCPA itself tells courts to do). But the “purpose” of a statute almost always has two sides. In this case, for example, the purpose of the TCPA is to protect constitutional rights and to protect the right to file meritorious lawsuits. So, the purpose is really a wash. The real task, I think, is for the court to pick the interpretation that makes the most public policy sense.

Isn’t that what Kawcak and Dyer are really doing anyway? I’ll save that for my upcoming dissertation, tentatively titled Toward a Legal Realist Critique of TCPA Jurisprudence (The Texas One, Not the Telephone Consumer Protection Act).

The more practical question for litigators who handle departing employee cases is how far Kawcak and Dyer reach. Both cases involved communications about an employer’s confidential information between two individuals. What happens when a departing employee communicates with a group of people about starting or joining a competing venture? (This is not unusual in such cases.) Does that implicate a “common interest” as defined in Kawcak, making the TCPA apply? That’s a harder case.

And would it make a difference if the alleged conduct is not as egregious as it was in Kawcak and Dyer? There is more than a whiff of moral disapproval running through both opinions. One might read the pair of cases as holding that the TCPA does not apply when two or more defendants join together to engage in some kind of wrongdoing.

But that would be going too far. The meanings of “right of free speech” and “right of association” as defined in the TCPA cannot turn on whether the defendants are accused of wrongdoing. The plaintiff is always going to allege that the defendants did something wrongful. This is something the press and the politicians don’t always grasp: there is no quick and easy way to sort out at the beginning of a lawsuit whether the plaintiff is the good guy or the bad guy.

You might even say this is the fundamental problem at the root of the TCPA, from which all its errant branches spread.

It will be up to the Texas Supreme Court to decide which way the branches grow. This recent pair of decisions from the Metroplex sets up a conflict with the cases from the Austin Court of Appeals and other courts that apply the TCPA’s definitions more literally.

If you take another long sabbatical now, we might know the answer by the time you get back. But maybe go somewhere a little warmer this time.

*Reminder: If you love these TCPA issues—and who doesn’t?—then check out the webcast I moderated for UT Law CLE here.

*Update: On 5/10/19 the Texas Supreme Court denied a petition for review in Kawcak. I wouldn’t read too much into this given the narrow holding of the case.

*Further Update: After Kawcak and Dyer, the Texas legislature amended the TCPA to narrow the definitions of “right to free speech” and “right of association.” See my post Turn Out the Lights, the Party’s Over: Texas Legislature Takes All the Fun Out of the TCPA.

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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. His first law job was in that big building with the green lights. 

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] Kawcak v. Antero Resources Corp., 02-18-00301-CV, 2019 WL 761480, at *1 (Tex. App.—Fort Worth Feb. 21, 2019, pet. denied).

[2] Dyer v. Medoc Health Servs., LLC, 05-18-00472-CV, 2019 WL 1090733, at *5-7 (Tex. App.—Dallas Mar. 8, 2019, pet. filed).

[3] Id. at *5.

[4] Kawcak, 2019 WL 761480 at *9 (quoting Thompson v. Tex. Dep’t Licensing & Regulation, 455 S.W.3d 569, 571 (Tex. 2014)).

Can You “Plead Around” the TCPA?

Can You “Plead Around” the TCPA?

Does the First Amendment protect the right to burn the American flag? Well, it depends. Consider three scenarios:

  1. A Boy Scout troop burns a worn-out American flag because that is the proper and respectful way to dispose of it. See 4 U.S.C. § 8(k) (“The flag, when it is in such condition that it is no longer a fitting emblem for display, should be destroyed in a dignified way, preferably by burning.”)
  2. A radical burns the flag at a lawful protest while yelling “down with American imperialism” (which tells you the radical is probably old enough to qualify for Medicare).
  3. A teenager lights an American flag in the school gym as a prank, setting off the sprinkler system and fire alarm.

One of these things is not like the other. The first two examples arguably involve some expressive component. Burning the flag is intended to express a certain viewpoint. But in the third example, there is no real communication, just conduct. Thus, the teenager would be hard pressed to argue that his flag-burning was a communication protected by the First Amendment.

But of course, communication is conduct, so we shouldn’t overstate the distinction. The point is that some conduct does not involve communication.

Conduct vs. communication in TCPA litigation

This point is important in other areas of law, too. Like, oh I don’t know, the Texas Citizens Participation Act (TCPA).

Coincidentally, I may be arguing about the TCPA in court today, and I will give a presentation on it tomorrow for the Houston Bar Association.

The conduct vs. communication distinction can be critical in TCPA litigation. How? First, let’s back up and review what we’ve learned before:

  • The TCPA is an “anti-SLAPP” statute that allows a defendant to file a motion to dismiss that requires the plaintiff to offer evidence to support all elements of its claim.
  • The TCPA applies to any lawsuit that is based on a communication about a “matter of public concern,” which can be just about anything.
  • The TCPA is not limited to its stated purpose of protecting constitutional rights; Texas courts have interpreted the TCPA’s definitions broadly to apply to just about any type of lawsuit.

As a result, the TCPA has fundamentally changed Texas litigation, including departing employee litigation, which I often handle. It has also produced some of Five Minute Law’s greatest hits, like A SLAPP in the Face to Texas Trade Secrets Lawsuits, How to Kill a TCPA Motion, and Houston Judge Calls Out Texas Supreme Court’s Simplistic “Textualist” Approach to TCPA.

As the promotional announcement for my presentation says, the TCPA has “swept through the Texas litigation world like a prairie fire.” Now that’s good marketing.

But sooner or later, you know the Empire is going to strike back. Companies that want to enforce their non-competes and protect their (alleged) trade secrets are going to push back on broad application of the TCPA. But what can they do?

One option is to try to “plead around” the TCPA. I touched on this in Much Ado About Nothing? The TCPA broadly applies to claims that are based on communications. So maybe you can avoid the TCPA by alleging conduct, not communication.

Does the TCPA apply to securities litigation?

This approach was successful in a recent case that involved yet another type of lawsuit, Texas Securities Act litigation. I also have some experience with that, having co-authored Claims and Defenses Under the Texas Securities Act, which critics have praised as the longest Texas Securities Act paper they have ever seen. But I digress.

The case was Smith v. Crestview.[1] It involved a failed investment in a scheme to develop a vaginal rejuvenation product derived from human amniotic cells.

This reminds me of the sage advice my grandpappy gave me before he passed: “Put your money into real estate. They can’t make any more of it. Oh, and one more thing. Don’t ever invest in an unproven vaginal rejuvenation product derived from human amniotic cells.”

But seriously, while the product was unusual, the basic fact pattern was all too familiar. The crucial conversation went something like this:[2]

Armstrong: Hi, Mr. Crestview Managing Partner. I’m Mary Armstrong. I’ve got a great investment opportunity for your company.

Crestview: Well, that sounds interesting, but we adhere to a conservative investment strategy, so I’ll need a lot of information.

Armstrong: No problem. I own a startup called NuVivo Bioscience Solutions. We’ve got a novel product derived from human amniotic cells.

Crestview: That sounds like a pretty speculative investment. How do I know we’ll get a good return?

Armstrong: Let me tell you what we’ve already done. We’ve manufactured prototypes. We’ve hired doctors at Stanford to test it. We have a sales force ready to go. Several surgeons have verbally committed to using the product, and we should be ready to sell it in less than 120 days.

Crestview: 120 days? What about FDA approval?

Armstrong: That’s the beauty of it. It’s a human-cellular or tissue-based product, so it’s not subject to federal testing, approval, and labeling regulations.

Crestview: Ok, that sounds good, but what if it doesn’t work?

Armstrong: Oh, I know it works. I had myself injected with the product, and it worked just like we expected.

Crestview: I’m glad to hear that but still, you’re just one person. I don’t think I can risk our partners’ money on something this risky.

Armstrong: Wait, did I mention that Dr. Jesse Smith has agreed to provide the product? We even have his name on our proposed website design.

Crestview: Dr. Smith, the renowned Fort Worth plastic surgeon? Why didn’t you say so?

Crestview then decided to invest and wired $500,000 to Armstrong’s company.

Let’s just pause here for a moment. Those of you who have experience with securities litigation probably know where this is going.

The rest of you will be shocked to learn that:

  • After receiving the half-million-dollar investment, Armstrong stopped communicating with Crestview.
  • Armstrong spent almost half of the 500 grand, mostly on personal expenses, including a trip to Vegas where she met Dr. Smith. [I will omit the joke my wife cracked when I shared this fact from the case.]
  • Armstrong’s company made no sales of the product.

If these allegations are true, then Crestview probably has a pretty good case against Armstrong. But do you think Armstrong is good for a judgment in excess of $500,000? Probably not.

Does aiding and abetting require a communication?

So, Crestview did what investors often do in these cases. It found a deeper pocket, suing Dr. Smith for aiding and abetting Armstrong’s securities fraud.[3]

Dr. Smith’s lawyers apparently read Five Minute Law, because they knew that Texas courts have broadly applied the TCPA. They filed a TCPA motion to dismiss, contending that the Texas Securities Act claim was “designed to chill Dr. Smith’s First Amendment rights of free speech and association.” The trial court denied the motion, and Dr. Smith appealed.

Crestview’s lawyers, no doubt remembering the flag-burning case from their Con Law course, responded with the conduct vs. communications distinction. They argued that the securities claim was based on Smith’s conduct, not his communications, and the Fort Worth Court of Appeals agreed.

The Court of Appeals relied heavily on Crestview’s pleading:

In this case, Crestview specifically and narrowly alleged that Smith’s actions aided Armstrong in her violations of the TSA, not his communications. None of the allegations leveled against Smith referred to communications with Armstrong. Rather, Crestview focused on Smith’s actions and inactions . . .

Aha! So you can plead around the TCPA. Just be sure to allege only conduct, not communication, by the defendant. For example, in a trade secrets case just allege that the former employee used the employer’s trade secrets after going to work for the competitor, rather than pleading that the employee disclosed the trade secrets to the competitor.

Not so fast. The Crestview court was careful to “recognize that artful pleading cannot be a detour around the TCPA.” Still, the court rejected Smith’s argument that the “actual, yet unpleaded” nature of Crestview’s claim was based on communications with Armstrong.

It appears two factors were important to the court. First, while Smith testified at his deposition that he had discussions with Armstrong about the product, “these discussions are not the basis of Crestview’s narrow claim against him.”

Second, the court did not want to open the floodgates: “The practical effect of Smith’s position—any action he took as an aider under the TSA necessarily involved communications—would seem to extend the definition of communication, and thus the reach of the TCPA, to noncommunications.”

So, Crestview teaches us that the TCPA does not apply to a claim for aiding and abetting liability that is not expressly based on communications between the “aider” and the primary actor.

We can build, a beautiful city . . .

The Crestview holding does not strike me as unreasonable. But it’s a little unsatisfying.

The first problem with the Crestview approach is that communication is implicit in just about any conduct someone can get sued for, but the case doesn’t really tell us how to distinguish between a claim that is based on the communication and one that isn’t. Perhaps the test is whether the cause of action could survive without proof of the communication. Or is it whether the communication was a factor that motivated the plaintiff to sue? We don’t know.

The second problem is more practical. The Crestview holding seems to open the door to plaintiffs “pleading around” the TCPA through “artful pleading.”

Imagine that I burn an American flag outside the Houston City Hall to protest the City’s rules against food trucks parking on downtown streets. To retaliate, the City charges me with burning property without a permit and, to try to get around the First Amendment, the City doesn’t say anything about any communication. Would that legal action be based on communication, or conduct?

As much as I like taco trucks, let’s not test it.

*Update: Avoiding the TCPA would later become much easier, as the Texas legislature, Dallas Court of Appeals, and Fifth Circuit combined to reign in the TCPA. See how the story ends at Shrinkage: TX Legislature and 5th Circuit Cut the TCPA Down to Size.

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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. The only time he was part of any flag-burning was in Boy Scouts.

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] Smith v. Crestview NuV LLC, __ S.W.3d __, No. 02-18-00220-CV, 2018 WL 6215763 (Tex. App.—Fort Worth Nov. 29, 2018, no pet. h.).

[2] Obviously I’m making up this dialog and have no knowledge of how the discussion actually went. But this does give you the gist of the facts recited in the court’s opinion.

[3] The Texas Securities Act does not actually use the words “aiding and abetting,” but the traditional phrase just has a nice ring to it.

When Is a Customer List a Trade Secret?

When Is a Customer List a Trade Secret?

Imagine if I said to every salesperson in Texas: I don’t care whether you signed a non-compete or not. If you quit your job and try to take your customers with you to a new company, your original employer can sue you in federal court and get an injunction to prevent you from contacting any of your customers.

That would amount to saying every salesperson has a de facto non-compete.

Surely this cannot be true, right? But here’s how you get there:

  1. Almost every salesperson has some kind of list of his own customers, even if it’s just contacts on a smartphone. The salesperson knows the identity of the customers, their contact information, what they buy, and the prices they pay.
  2. A customer list is a trade secret under both the Texas Uniform Trade Secrets Act (TUTSA) and the federal Defend Trade Secrets Act (DTSA).
  3. Under the DTSA, the employer can file a trade secrets claim in federal court.
  4. The court can enter a preliminary injunction barring the salesperson from contacting anyone on the customer list.
  5. If the salesperson can’t contact his customers, the effect is about the same as a reasonable non-compete.

Hey, you had a good run, sales people. But you’re stuck where you work now, unless your employer agrees you can leave.

Wait. Is it really that bad?

Not quite. Because I’ve overstated one step in the analysis above: Step no. 2. A sales person’s customer list can be a trade secret, but it’s not always a trade secret. It depends.

That gives judges an important role. It’s up to them to police the boundary between when a customer list is a trade secret and when it isn’t. If judges set the bar too low for giving trade secret protection to a customer list, the result will be what I said: de facto non-competes for all sales people.

The Austin Court of Appeals made this very point the Trilogy Software case: “[I]nformation that a firm compiles regarding its customers may enjoy trade secret status under Texas law. But this does not mean that trade secret status automatically attaches to any information that a company acquires regarding its customers; if it did, it would amount to a de facto common law non-compete prohibition.”[1]

So, preservation of American free enterprise as we know it depends on courts holding companies to their burden of proof when they claim that customer lists are trade secrets.

To prove the customer list is a trade secret, the company has to show three things:

(1) the customer list has “independent economic value”

(2) it is not “readily ascertainable” by competitors

(3) the employer took “reasonable measures” to keep it secret

It’s usually not that hard to establish element no. 3, reasonable measures. Did the company avoid sharing the information publicly, require employees to sign confidentiality agreements, and maintain password protection on company computers? Those things are typically enough.

What about element no. 1, “independent economic value”? That’s a harder one. But it’s usually going to follow from element no. 2. If the customer list is not readily ascertainable by a competitor, that’s a good sign it has independent economic value. If it was readily ascertainable, it wouldn’t have much value.

One warning: there are still some Texas cases that say a readily ascertainable customer list can be a trade secret. This is a mistake, for reasons I explained in my longest-titled blog post ever, Customer List Confusion: The Pesky Persistence of the Brummerhop Rule in Texas Trade Secret Litigation.

No, a readily ascertainable customer list is not a trade secret. But how readily is “readily”? It is of course a matter of degree. If a competitor could compile the same list from spending a day running Google searches, that’s probably “readily” ascertainable. If it would be extremely difficult to compile the list from public sources, that’s not readily ascertainable. Most cases fall in the middle. It’s going to be a fact-intensive issue.

That means it will often be a fact question for either the jury (at trial) or the judge (at a temporary injunction hearing). In those cases, the jury verdict or judge’s ruling will hold up as long as there is at least a little evidence to support it.

For example, in Amway Corp. v. bHIP Global, Inc., there was testimony that the customer contacts and information the employee provided were his own contacts he had previously developed. This was sufficient evidence to support the jury’s conclusion that the information was not a trade secret.[2]

Conversely, in 360 Mortgage Group, LLC v. Homebridge Financial Services, Inc., No. A-14-CA-00847-SS, 2016 WL 900577, at *4 (W.D. Tex. Mar. 2, 2016), there was sufficient evidence that the customer list was a trade secret. The fact that the employee emailed herself a copy of the broker list was evidence the list was not readily available elsewhere. And the list provided more than simply names and addresses. It also included compensation rates that could be used to “undercut” the employer. (See also The Price Undercutting Theory in Trade Secrets Litigation.)

As these cases illustrate, whether a customer list is a trade secret often presents a fact issue. But in some cases, the undisputed facts will establish as a matter of law that the customer list is not a trade secret.

For example, in Alliantgroup, LP v. Feingold, the court granted summary judgment that a client list was not a trade secret. It was undisputed that the client list was very short (under 15 names), the information was limited, and the names were readily ascertainable.[3]

Parker Barber & Beauty Supply, Inc. v. Wella Corp. was a similar case involving, strangely enough, the barber and beauty supply industry. The court held that “basic customer contact and limited sales information” that the company provided about 39 of its customers was readily ascertainable and therefore not entitled to trade secret protection.[4]

In Numed, Inc. v. McNutt, Numed argued that its pricing structure, marketing research, customer lists, and renewal dates were trade secrets. But the court disagreed: “The evidence reflects much of the information Numed wishes to protect is not secret. Instead, it is contained in the contracts distributed to Numed’s customers, which in turn may be discovered by anyone.”[5] This was a pre-TUTSA case, but the principle should still apply.

Finally, Guy Carpenter & Co. v. Provenzale was a pre-TUTSA case where the federal district court denied the employer’s motion for a preliminary injunction, and the employer appealed. The Fifth Circuit, applying Texas law, noted that a “customer list of readily ascertainable names and addresses will not be protected as a trade secret,” citing numerous cases. The court then said:

. . . the district court implicitly found the customer lists were readily ascertainable. We agree. Evidence in the record indicates participants in the reinsurance market freely disclose the identity of their reinsurance broker and the nature of the reinsurance products they regularly consume. We also note that Provenzale’s list of customers was relatively short—it included only those companies he personally serviced while at Guy Carpenter. He could easily reconstitute this list even without the aid of a trade publication. Even though Guy Carpenter took steps to protect its customer list and Provenzale signed a contract stating the customer list was confidential, we conclude the customer list was not a trade secret because it was readily ascertainable.[6]

So, if the employee offers evidence like this, the court may reject trade-secret status of the customer list as a matter of law.

These cases suggest some good deposition questions to ask if you are the lawyer representing the employee:

  • How long is the employee’s customer list in comparison to the entire customer list for the company?
  • Does the company require all of its customers to keep their transactions with the company secret? If not, how is the identity of the customers a secret?
  • Do customers freely share the identity of companies they buy from?
  • Could the employee easily reconstruct her short customer list? If so, doesn’t that suggest the information is readily ascertainable?
  • Are you saying a competitor would pay real money for this customer list? If not, how can you say it has “independent economic value”?

These can be tough questions for the company. But the company’s lawyer always has the best comeback: if the customer list is readily ascertainable and doesn’t have any economic value, why did the employee take it?

*Update: In Marek Brother Systems, Inc. v. Enriquez, No. 3:19-CV-01082, 2019 WL 3322162, at *4 (N.D. Tex. July 24, 2019), the court applied Trilogy Software and held that the plaintiff failed to persuade court that customer information the employee sent to his personal email address was not readily ascertainable.

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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] Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex. App.—Austin 2004, pet. denied) (emphasis added).

[2] Amway Corp. v. bHIP Global, Inc., No. 4:10-CV-549, 2013 WL 2355083, at *2 (E.D. Tex. May 29, 2013).

[3] Alliantgroup, LP v. Feingold, 803 F.Supp.2d 610, 626 (S.D. Tex. 2011).

[4] Parker Barber & Beauty Supply, Inc. v. Wella Corp., No. 03-04-00623-CV, 2006 WL 2918571, at *17 (Tex. App.—Austin Oct. 11, 2006) (mem. op.).

[5] Numed, Inc. v. McNutt, 724 S.W.2d 432 (Tex. App.—Fort Worth Feb. 5, 1987, no writ).

[6] Guy Carpenter & Co. v. Provenzale, 334 F.3d 459 (5th Cir. 2003).

Key Issues in Departing Employee Litigation

Key Issues in Departing Employee Litigation

On September 19 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.

Practice Tip:

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, No. 14-18-00191-CV, 2018 WL 3061321 (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.

Practice Tips:

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.

Practice Tip:

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., No. 06-17-00112-CV, 2018 WL 2993012 (Tex. App.—Texarkana June 15, 2018). 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.

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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.

 

Do’s and Don’ts for Departing Employees

Do’s and Don’ts for Departing Employees

Specialization has benefits. A lawyer who repeatedly handles the same type of case will tend to become an expert in that type of case, understanding the nuances, tricks, unanswered questions, and grey areas. See Do I Need a Specialist to Handle My Texas Non-Compete Case?

But becoming an expert on an area of law can have a less obvious downside: the tendency to forget that things that are self-evident to you may not be so obvious to a client.

For example, if you’re a plaintiff’s personal-injury lawyer, it’s pretty obvious that a person who claims he suffered a debilitating injury probably shouldn’t post photos on Facebook showing himself water-skiing at the lake last weekend. But as I discussed here, you still might need to tell the client to avoid posting social media content that could hurt his case.

Let’s apply this to the type of case I often handle. If you’re an employee planning to quit your job and go to work for a competitor, it’s probably a bad idea to lie to your employer about where you’re going. But even an honest employee could make a mistake like this when caught off guard.

This is just one example. There are a lot of things departing employees should and shouldn’t do.

That’s one reason it’s a good idea for a departing employee to consult with her own lawyer ahead of time. Many common mistakes can be avoided by getting some basic advice from an attorney.

But what if your lawyer inadvertently leaves something out? What if the one thing your lawyer forgets to mention on the phone is the one crucial mistake you make on the way out the door?

If only someone could come up with a simple list of do’s and don’ts for departing employees. Some kind of form that could be shared with both lawyers and clients.

Wait a minute. I could do that.

Here it is: Wolfe’s Do’s and Don’ts for Departing Employees. Download it, study it, follow it, critique it. Whatever you want. Just don’t ignore it.

Of course, I need to accompany this with the usual MASSIVE LAWYER DISCLAIMERS:

*This list is for general educational purposes only. Every case is different. If you are the employee, consult with your own lawyer,  Don’t rely on this as legal advice for your particular case.

*Even if you’re a lawyer, keep in mind these are only general tips that apply to most departing employee scenarios. They don’t cover specific substantive legal questions, like Is the Employee’s Non-Compete Enforceable?, Is the Company’s Pricing Information a Trade Secret?, or How Should a Departing Employee “Return” Company Documents? You may need to consult your friendly neighborhood litigation blogger about these issues.

But hopefully these tips will help people avoid some common mistakes. Like posting that water-skiing photo.

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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.