Non-Competes and Tap Dancing

Once a Court enters an order upholding a non-compete, it can enforce its ruling through contempt. In some cases this can lead to jail time - even for a dance instructor (see the story below).

http://www.star-telegram.com/448/story/982818.html

Texas Occupation Code Part 2

In a previous posting we discussed placement professionals' obligations under Chapter 2501 of the Texas Occupations Code. There is only one reported case addressing this provision. In Joseph Chris Personnel Services, Inc. v. Donna Rossi, et al., Joseph Chris, a real estate recruiter, sued former employees for alleged breach of employment contract, breach of fiduciary duty, and violation of the Texas Occupations Code. Essentially, Joseph Chris claimed the Defendant employees started a competing recruiting company by taking information from the Joseph Chris database among other things. The Defendants did not reside in Texas.

Joseph Chris' occupations code claim was based on the provision that provides an employee of a personnel services company "may not disclose information about an applicant, an employer, and employment position, or the operation of the personnel service." The Court did not reach the merits of the claim because it ruled that the Texas Occupations Code did not apply to these non-Texas employees. There is no reported case that we are aware of, where a Plaintiff has alleged and a court has actually addressed whether a job candidate's service file as defined within the occupations code as trade secret under Texas criminal law would qualify as a trade secret under the standards set forth by the Texas Supreme Court and discussed in the October 6th entry.

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Non-Competes and Insurance Brokers

Insurance brokers, like many professionals often confront non-compete agreements when they consider making an employment change. Below is a synopsis of two cases dealing with non-competes in the insurance industry:

Spring v. Walthall, Sachse & Pipes, Inc., 2005 Tex. App. Lexis 6825 (Tex. App. - San Antonio 2005, no pet.) Defendant Rosemay Spring was an insurance broker for Plaintiff Walthall, Sachse & Pipes ("WS&P"). Spring resigned from WS&P and within a week contacted thirty-three of her former customers. Twenty-five signed agent of record letters indicating their desire to do insurance business with Spring. WS&P filed suit against Spring and obtained an injunction preventing her from soliciting WS&P customers or disclosing WS&P trade secrets.

The San Antonio Court of Appeals considered Spring's appeal of the injunction. Spring's non-compete with WS&P prevented her from acting as an insurance broker/producer for a period of 1 year within a twenty-five mile radius of WS&P's principal place of business. Her "non-piracy covenant" prevented her from soliciting or accepting WS&P's customers for a period of 3 years. Spring testified during the injunction that she was soliciting WS&P clients and essentially competing.

The court of appeals held that WS&P met its burden to obtain a preliminary injunction. Spring did not challenge and the Court did not address whether the non-compete or "non-piracy covenant" actually were enforceable under Texas law.

Hargrave v. Giuffre, 1999 Tex. App. Lexis 9618 (Tex. App. - Beaumont 1999, no pet.) Richard Giuffre worked for Hargrave as an insurance broker. At the outset of his employment he was required to sign a "Producer's Contract", that among other things, prohibited him from soliciting or accepting any insurance business from any of the insurance accounts of the agency.

The Beaumont Court of Appeals ruled "We find that the covenant in this case is not reasonable with regard to the scope of activity to be restrained in that it is not limited to those clients whom Giuffre serviced or had dealings with while at the agency." The opinion seems to suggest that the outcome might have been different if the non-compete was tailored to Giuffre's customers.

The Hargrave non-compete failed to satisfy Texas Business and Commerce Code 15.50. By drafting a non-compete that was overly-broad, Hargrave lost any opportunity to legally prevent Giuffre from competing.

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Trade Secrets under Texas Law

In many instances non-compete agreements are designed to protect trade secrets provided to employees during the course of their employment. The sensitive nature of some trade secrets are apparent, like the formula for Coke. But what about customer lists, sales techniques, or other items that are not a secret formula or chemical composition? Courts often look to Restatements of Law for authority and guidance. The Restatement (Third) of Unfair Competition states “It is not possible to state precise criteria for determining the existence of a trade secret.” Determination of whether something is a trade secret is left to a case by case analysis.

The Texas Supreme Court has held that a trade secret is “any formula, pattern, device or compilation of information which is used in one's business and presents an opportunity to obtain an advantage over competitors who do not know or use it.” Computer Assocs. Intern. v. Altai, 918 S.W.2d 453, 455, (Tex. 1994). To determine whether a trade secret exists, Texas courts apply the Restatement of Torts' six- factor test:

(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of the measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

In upcoming entries we will address specific claims for trade secret protection and how Texas courts have ruled.

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Placement Professionals

Today I had the opportunity to speak with the DFW Recruiters Network. Placement Professionals are faced with a variety of legal issues including covenants not to compete, non-solicitation covenants, anti-raid provisions, and the general enforceability of fee agreements with clients. All of these topics are the subject of this blog, but I wanted to take this opportunity to provide some helpful links to placement professionals.

Chapter 2501 of the Texas Occupations Code governs "Personnel Services". Personnel Services "means a person who, regardless of whether for a fee, directly or indirectly attempts to obtain permanent employment for an applicant or obtains or attempts to obtain permanent employment for an employee." Chapter 2501 places a number of requirements on those offering personnel services including a bond requirement, caps fees in certain circumstances, and sets forth a laundry list of 10 "Prohibited Practices". A plaintiff who files a lawsuit and asserts a violation of the statute can obtain attorneys' fees. Further, a violation of 2501 can also constitute a violation of the Texas Deceptive Trade Practices Act.

In terms of protection of placement professionals, 2501 states that a service file (defined as "a job order, resume, application, workpaper, or other record containing information related to: (A) an applicant; (B) an employer; (C) an employment position; or (D) the operation of a personnel service.") is a Trade Secret pursuant to Section 31.05 of the Texas Penal Code, the Theft of Trade Secrets criminal statute. Thus an individual who attempts to take a service file from his or her employer could potentially be subject to not only civil proceedings but criminal as well.

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