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Employment Law

The official Frantz, McConnell, and Seymour, LLP blog.

Lessons from Good News - Analyzing Recent Non-Compete Cases

Disappointment often presents us with difficult but valuable learning opportunities. Every now and then, however, we can enjoy some good news and still take in a lesson or two.

Last week presented such an opportunity for me when I received court orders dismissing claims against clients in two different lawsuits filed by their former employers. The former employer in each lawsuit sought to prevent or substantially limit my client from performing work activities for a subsequent employer based on a non-compete agreement or some alleged misuse of confidential information. In each, the former employer attempted to obtain a restraining order against my client shortly after suit was filed. When the former employers failed to obtain restraining orders, the claims were exposed as having no merit and ultimately dismissed. Each case probably should never have been filed in the first instance and a brief evaluation of each claim may be valuable to those of you who may need to decide whether to pursue similar claims in the future.

The Non-Compete Lawsuit.   In this claim, my client was a sales representative for a manufacturer of scientific equipment used in the nuclear industry and at research universities. He signed a 3 year non-compete agreement while employed with the former employer.  When my client left that employment he understood he could not immediately take a job that would place him in competition with the former employer.  He therefore accepted a position in another industry that required him to regularly travel away from his family.  Eighteen months later, he had an opportunity to accept a position in the same industry as his former employer that did not involve such extensive travel.  After accepting that position, his former employer filed suit against both my client and his new employer alleging a violation of the non-compete and non-disclosure agreements (a non-disclosure agreement prohibits former employees from disclosing trade secrets and other “confidential information” of the former employer).

We determined that while the new employer was in the same industry, the former and new employers in reality served different niches in that industry, so there really was very little competition between them for common customers.  Further, my client was in sales, not product design or R&D.  To make matters more difficult for the former employer, while my client was involved in product sales, he did not set prices, develop pricing and costing strategies or have access to information on how those strategies were developed.  For that reason, we were able to present a compelling 2-pronged attack demonstrating (1) that my client never had access to truly confidential information that could be used to damage the former employer; and (2) even if he did, pricing and costing methods and strategies that are over 18 months old essentially are “out of date,” and of little value to a competitor.

There are two valuable takeaway points from this dismissed claim.  First, judges are human beings and they have no interest in putting someone out of work unless true irreparable harm is likely to occur by the subsequent employment.  While my client technically had 1.5 years remaining on a 3 year non-compete, he remained out of the industry for the first 1.5 years and any danger associated with his reentry in that industry was reduced to almost nothing.  Second, it is important to remember that a “competitor” may not simply be any other employer within the same industry.  When two businesses in the same industry serve different types of customers, a judge may be able to fashion a workable limitation on subsequent employment activities to allow the employment to proceed; or she may simply find no competitive activities are likely to occur.

The Lawsuit for Alleged Disclosure of Confidential Information.  My client in the second claim left a cabin rental business to immediately go to work for a competitor in the same market.  She believed she could do so since she never signed a non-compete agreement.  The only agreement she signed was a confidential information non-disclosure agreement. Her former employer filed a lawsuit not for the purpose of preventing her from working in competition, but instead claiming she had access to highly confidential and valuable “customer information” and that she should be precluded from using that customer information in her new position.  The former employer immediately filed a motion asking the court to enter a “restraining order” against my client which would place limitations on her ability to compete while the lawsuit was pending, including her ability to converse with former customers.  The court refused the employer’s request. Following that, the claim was dismissed. 

Why did the employer fail in this case?  The first problem was that the former employer simply could not prove my client ever had access to truly “confidential” information.  Tennessee law is very clear that customer identities and contact information (“customer lists”) simply are not protectable as trade secrets or as “confidential” information.  Second, even if such customer information was protectable, a former employer seeking to protect it must have undertaken efforts on its own to protect the information.  In other words, if you are going to claim something is confidential, you better be able to show you treated it as confidential. In this matter, there was no such evidence.  In fact, there was evidence that when my client terminated her employment the former employer allowed her to transfer her company issued cell phone to her personal account AND keep all customer contact information on the phone.

The lessons here are (1) if you wish to pursue a former employee for using your confidential information to compete against you, invest in research on the front end of the process to understand what type information is truly regarded as “confidential” under Tennessee law.  Businesses invest thousands of dollars in attorney fees to fight these battles and they should receive focused and informed advice on their prospects of success before making that investment.  (2) If you claim misuse of your “confidential” information, be prepared to show you in fact treated it as confidential.

If you would like to speak to John Lawhorn on this or any other subject, he may be reached at (865) 546-9321.

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