Labor & Employment Law

Texas Non-Compete Agreements: Confidential Information Need Not Rise to Level of Trade Secret

By Robert Wood, David Ellis, and James Landon

A recent case from the federal court in Dallas sheds some light on various issues involving the enforceability of non-compete agreements.

In Staples, Inc. v. Sandler, No. 3:07-CV-0928-K, 2008 WL 4107656 (N.D. Tex. Aug. 29, 2008), the employee, Sandler, upon joining Staples, Inc., signed a “Proprietary and Confidential Information Agreement” and a separate “Non-Compete and Non-Solicitation Agreement” (“Non-Compete Agreement”).

In the “Recitals” section of the Non-Compete Agreement, the employer recited that it “has and will entrust Employee with proprietary information, strategies, knowledge, customer relationships and know-how which would be detrimental to the Company if disclosed.” The court held that, under Sheshunoff, this recital was a “unilateral contract conditioned upon performance.” The court added: “Further, the confidentiality agreement signed contemporaneously with the noncompete provided a promise of confidential information. Thus, Staples promised to provide Sandler with confidential information that would give rise to its interest in restraining Sadler from competing.”

The court confirmed that the confidential information given by Staples to Sandler was sufficient consideration for the non-compete: “Staples has established that it provided Sandler with access to cost margins, pricing lists, sales figures, and assorted business information, including customer information. Although not necessarily trade secrets of the highest order, these may be confidential in the sense that they are not readily available to the public.”

The restrictions contained in the noncompete agreement prohibited Sandler from doing business not only with Staples’ customers, but also with “customers or prospective customers” that he “knew, serviced, or was familiar with prior to joining the Company."

The court held that this restriction was overly broad:

“Here, it is apparent that the restraint on competition is not justified to the extent contemplated in the covenant not to compete given Sandler's relatively short employment, the minimal amount of confidential information he received, and Staples' legitimate interest in protecting the confidential information it provided him during his tenure. Thus, the Court finds that Staples' legitimate interest in confidentiality gives rise only to a restraint on Sandler that prevents him from competing by doing business with customers he gained during his eleven-month tenure with the company. A restraint that prevents him from continuing long-standing relationships that he brought with him to Staples is overbroad, unrelated to Staples; legitimate interest in confidentiality, and would further unreasonably burden these third-party customers.”

OBSERVATIONS:

1.         The court emphasized the need for the employer to promise to convey confidential information. However, the court located part of the promise in a different [but contemporaneously signed] document (the Proprietary and Confidential Information Agreement).

2.         The Court confirmed that confidential information necessary to justify a non-compete agreement does not have to rise to the level of a trade secret. The Court was skeptical of an argument that employers routinely make to prove that their information is confidential (i.e., “The fact that our information is password protected proves it’s confidential”).

3.         The Court found the non-compete restriction overly broad because it applied to customers with whom Sandler worked before he became employed by Staples. It would be interesting to know whether the result might have been different had Staples given Sandler confidential information about these customers. Arguably, if Staples entrusted Sandler with new confidential information (i.e., information that he didn’t previously know) about these customers, the conveying of that information by Staples would have justified the non-compete restrictions.

4.         The Court notes the challenge inherent in binding relatively new employees (11 months, in this case) to non-competes (because they may not yet have been exposed to enough confidential information to justify the restrictions).

Full post as published by Texas Non-Compete Law Blog on October 01, 2008 (boomark / email).