Opinion
Civil No. SA-03-CA-305-FB.
October 21, 2005
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
Pursuant to the order of referral in the above-styled and numbered cause of action to the undersigned United States Magistrate Judge and consistent with the authority vested in United States Magistrate Judges under the provisions of 28 U.S.C. § 636(b) and rule 1 of the Local Rules for the Assignment of Duties to United States Magistrate Judges in the Western District of Texas, the following report is submitted for your review and consideration.
Docket no. 85.
I. JURISDICTION
The Court has jurisdiction pursuant to 28 U.S.C. §§ 1332.
II. PROCEDURAL HISTORY
The lawsuit was initiated on April 17, 2003, when plaintiff, Nova Consulting Group, Inc. ("Nova"), filed its original complaint and demand for jury trial naming as defendants, Engineering Consulting Services, Ltd. ("ECS"), Robert Burge ("Burge"), Gerald Hernandez ("Hernandez"), Dennis Hunter ("Hunter"), and Earl McIntosh ("McIntosh") (collectively, "defendants"). Nova has alleged twenty-one causes of action. Against defendant ECS, Nova alleges causes of action for: tortious interference with existing contracts, tortious interference with employment contracts, misappropriation of trade secrets, unjust enrichment, common law unfair competition, conspiracy, and common law trademark infringement. Against defendants Burge, Hernandez, Hunter, and McIntosh (collectively, "Managers"), Nova alleges causes of action for: breach of contract, tortious interference with existing contracts, misappropriation of trade secrets, and civil conspiracy. Nova has also alleged claims for breach of fiduciary duty against Hunter and McIntosh. Nova is seeking: actual damages; punitive damages; disgorgement and award of compensation, bonus, and benefits paid to the Managers during the time of the breach; injunctive relief; an order resetting the time periods in the agreements at issue to begin again on the date the Court enters Nova's relief; interest; attorney's fees; and costs.
Docket no. 1.
Although the complaint appears to have alleged twenty-four causes of action, Nova has omitted numerals XVI, XVII, and XXI. The Court notes cause of action XV has been misnumbered as "V."
Id. at 5-24.
Id.
Id.
Id. at 24-26.
ECS filed an original answer, first amended answer, and, on June 18, 2004, a second amended answer and demand for jury trial. The Managers filed their joint original answer and demand for jury trial on May 12, 2003. On September 19, 2003, the Managers filed their combined joint first amended answer, counterclaim, and demand for jury trial. Nova filed its original answer and affirmative defenses to the counterclaim on December 1, 2003. The Managers subsequently filed their combined joint second amended answer, counterclaim, and demand for jury trial and their combined joint third amended answer, counterclaim and demand for jury trial.
Docket nos. 9, 39, 57.
Docket no. 8.
Docket no. 19.
Docket no. 24.
Docket nos. 38, 58.
On December 20, 2004, Nova filed a motion for discovery sanctions against ECS due to the destruction of e-mails, to include the entry of default judgment against ECS or, alternatively, the allowance of evidence of ECS's spoilation and the inclusion of an "adverse inference" instruction to the jury, as well as attorney's fees and costs incurred in connection with the underlying discovery issue and the filing of the motion for sanctions. Nova argued ECS's e-mails were destroyed, not because of a malfunction, but due to IT policy by which stored e-mails are "cleaned out" based on age, so "you have nothing over 90 days because of the storage it takes up" — a policy that, Nova agreed, should have been abated "no later than January 29, 2002 (for Defendant Burge), and April 12, 2002 (for Defendants McIntosh, Hernandez, and Hunter)," when Nova sent letters reminding the individual defendants of their agreements with Nova and which, Nova argued, served as sufficient notice of the need to retain evidence. On January 7, 2005, Nova filed a motion to exclude the declarations and testimony of Michael Wileman ("Wileman") and John Parsons ("Parsons"). Responses were filed to each of Nova's motions and a reply was filed in support of the motion for sanctions. The District Court entered an Order on February 8, 2005, referring the case to the undersigned for disposition of all pretrial matters. On February 14, 2005, the undersigned entered Orders denying Nova's motion for discovery sanctions and denying the motion to exclude the declarations and testimony of Wileman and Parsons. Nova has filed objections to each of the undersigned's Orders, and the objections are pending before the District Court at the time of the issuance of this report.
Docket no. 69.
Docket. no 75.
Docket nos. 76, 77, 84.
Docket no. 85.
Docket nos. 87, 88.
Docket nos. 92, 93.
On February 4, 2005, ECS, Hernandez, Hunter, and McIntosh filed a joint motion for summary judgment. Burge filed a separate motion for summary judgment. A response and replies have been filed. In support of the motions for summary judgment, the response, and replies, the parties have submitted excerpts from multiple depositions, the declarations of various individuals, and numerous exhibits.
Docket no. 82.
Docket no. 81.
Docket nos. 97, 100, 101.
III. FACTUAL BACKGROUND and ALLEGATIONS
The following statement of the factual background is undisputed unless otherwise indicated. The facts are derived from the statement of undisputed facts included in defendants' motion for summary judgment, Nova's response to the extent it reflects agreement with defendants' statement of the facts, the live pleadings, and the evidence attached to the motion and response.
For the purpose of this report, deposition testimony from individuals in cited by the deponent's name and page number; deposition testimony from corporate representatives is cited by corporation name and page number; and declarations from individuals are cited by the declarant's name and paragraph number.
Plaintiff, Nova, is a Minnesota corporation that provides environmental consulting services through eleven offices nationwide. ECS is a Virginia corporation that provides environmental consulting services around the country. Nova and ECS provide consultative services in three basic areas:
Docket no. 1 at 1; docket no. 97 (citing Cummings at 57).
Docket no. 1 at 2; docket no. 57 at 1.
1. evaluating ground conditions for architects and structural engineers and designing a foundation or ground structure for buildings, dams, bridges, etc.;
2. performing construction material testing for property owners and developers, including observing the construction processes and testing construction materials to ensure contractors and subcontractors are properly performing;
3. providing various environmental services such as asbestos testing, air quality testing for toxin or mold contamination, and assessing environmental sites for the sale or purchase of property.
Docket no. 83 at 2-3 (citing Cummings at 20-24 and Gitskin at ¶ 2).
In 1998, Nova hired defendant McIntosh to develop an office in San Antonio, Texas. McIntosh was Nova's Southwestern Regional Manager and "was the primary marketing person responsible for the overall growth, performance and operations" in San Antonio, Phoenix, and Denver. Shortly thereafter, at McIntosh's recommendation, Nova hired defendant Hernandez as a division manager and defendant Hunter as manager of the San Antonio asbestos group. Eventually, Hernandez was responsible for Nova's nationwide mold program. In June 2000, Nova hired defendant Burge, who soon became a San Antonio department manager.
Docket nos. 83 at 3 (citing Cummings at 57); docket no. 97 (citing Cummings at 56-57).
Docket no. 97, exhibit A.
Docket no. 83 at 3 (citing Cummings at 58-59, 62-63 and McIntosh at ¶ 3); docket no. 97 (citing Cummings at 58-59; Hernandez at 15; Hunter at 18).
Docket no. 97 at 2 (citing Hernandez at 15-16).
Id. (citing Cummings at 168-69 and Burge at 13).
Nova employed several measures to protect confidential and proprietary client relationships. In that regard, Nova's San Antonio employees were required to sign employment agreements obligating them to protect the information. Burge, McIntosh, Hernandez, and Hunter each signed a "Nova Confidentiality and Noncompete Agreement" (the "Agreements"). The Agreements each provide in relevant part:
Id. (citing Cummings at ¶ 16).
Id. (citing A. Herrera at 66).
Docket no. 97 at 6 (citing exhibit B).
I desire to be employed by Nova in a capacity in which I will receive or contribute to the confidential information. I understand that such confidential information was acquired and developed by Nova at great time and expense, that it is competitively valuable and that it has enabled Nova to successfully conduct its business. In consideration of my employment with Nova, my compensation package, and also in consideration of being provided with access to confidential information, I agree that:
1. Except as required in my duties to Nova, I will never, during my employment by Nova or thereafter, use or disclose any Confidential Information as defined in Paragraph B above.
2. Upon termination of my employment with Nova all records and any compositions, articles, devices, and other items which disclose or embody Confidential Information, including all copies or specimens thereof in my possession, whether prepared or made by me or others, will be left with Nova. I will return to Nova and stop using upon request or upon termination of my employment all papers, notebooks, reports, manuals, records, compositions, articles, devices and all other property furnished to me by Nova or which was prepared or made in whole or in part by me in connections with my employment by Nova including all copies or specimens thereof in my possession.
3. For a period of one year after termination of my employment with Nova for any reason:
a. I agree not to compete with Nova by providing or marketing services, directly or indirectly, to persons or entities to whom Nova has provided like services within 12 months of the date of termination and/or to whom Nova has a current proposal to provide such services at the time of termination.
b. In addition, I agree that I will not solicit for employment any existing employee of Nova at the time of my termination, or for one year after my termination date.
4. I understand that I am executing this agreement in consideration for new employment by Nova.The Agreement defines "Confidential Information as:
This provision in Burge's Agreement is slightly different and will be discussed further below in the analysis of his motion for summary judgment on Nova's breach of contract claim against him.
Docket no. 97, exhibit B.
[P]roprietary or trade secret information of Nova, including customer furnished information which has been provided to Nova with restrictions of its use or further disclosure, which is used or useful in the conduct of Nova's business and which is not generally known to the public or in a relevant industry, such as information relating to Nova's testing procedures, sample procurement, site analysis, research, development, laboratory procedures, training manuals and documents, purchasing, finances, accounting, engineering, marketing, selling, and present and prospective customers (including proposals to, agreements with and relationships with such customers).
Id.
As a result of its efforts to build and protect client relationships, Nova earned a net profit of $500,000 in 2001 before corporate allocation and predicted a banner year in 2002.
Id. (citing Cummings at ¶ 17 and Nova 206-207).
In approximately April 2001, ECS opened a San Antonio office, which was headed by Mike Harwood ("Harwood"). Harwood immediately began recruiting Burge, who accepted a position with ECS in January 2002. In approximately mid-March 2002, ECS through Harwood offered positions to McIntosh, Hunter, and Hernandez, who each resigned from Nova and began working for ECS in approximately April 2002. "Shortly after joining ECS, each of the [Managers] began soliciting business from clients with whom Nova had done business. In some instances they were quite successful."
Docket no. 83 at 4 (citing Gitskin at 45-46); docket no. 97 at 5 (citing ECS I at 45-46).
Docket no. 83 at 5 (citing Burge at 69); docket no. 97 at 5 (citing ECS I at 49 and Burge at 69).
Docket no. 83 at 5 (citing Harwood at 49, 54-55, 66; Cummings at 217-18;McIntosh at ¶ 15; Hernandez at ¶ 4; Hunter at ¶ 4); docket no. 97 (citing Harwood at 49, 53-54; McIntosh at 65-67, 197; ECS I at 162).
Docket no. 83 at 5.
Nova alleges the Managers violated the non-disclosure and client and employee solicitation provisions of their Agreements as follows:
Burge successfully solicited business for ECS with knowledge of Nova's pending proposal on the same project; took client reports and used the proprietary language to draft reports for ECS; took his business cards when he left Nova, added the information to the ECS client contact database, and used the information to solicit clients for ECS; and recruited McIntosh and other Nova employees to work for ECS;
Docket no. 97 at 8 (citing Burge at 59-60, 62-65, 80, 90, 100, 161-63, 168; McIntosh at 207-08; ECS I at 155-56; exhibits G and H).
Hernandez gave Nova's proprietary mold report formats to ECS; added Nova's client information to ECS's client database and contacted those clients; and recruited Nova employees for ECS;
Id. at 8-9 (citing Hernandez at 100-01, 170; exhibit H).
Hunter took projects for General Growth, a large Chicago-based Nova client, to ECS; used confidential information for, and his relationships with, Nova clients to solicit them for ECS; and recruited Nova employees for ECS;
Id. at 9 (citing Hunter at 54, 62-64; exhibits H and I).
McIntosh took a client proposal from Nova and met with the client after joining ECS; told ECS of Nova's confidential financial information; without permission, took business cards from Nova and used them to contact clients while at ECS; took to ECS a contract he secured with Nextel while working at Nova; and recruited Nova employees for ECS before and after he left Nova; and
Id. at 9-10 (citing McIntosh at 54-57, 60-61, 63, 97, 175; Cummings 218-20; Nova at 51-52; ECS II at 23-25; exhibits H, J, K).
Hernandez, Hunter, and McIntosh conspired in their efforts to violate their Agreements by discussing and coordinating their moves to ECS; prior to leaving Nova, McIntosh approved an Nova expense form for a trip to Corpus Christi, Texas so that Hunter could familiarize himself with an ECS project in which Nova was not involved; and prior to leaving Nova, Hunter and McIntosh began informing clients of their imminent departure and recruited those clients for ECS.
Id. at 10 (citing McIntosh at 65-67; Hunter at 135, 212; Nova at 148-52, 154-55, docket no. 83 at 23; exhibits L, M).
Nova alleges ECS knew and expected the Managers to breach their Agreements with Nova. ECS hired McIntosh because he claimed to be able to obtain large Nova clients. ECS accepted recommendations from the Managers as to which Nova employees and clients to solicit. Nova contends ECS engaged in stealing Nova's confidential information, clients, and employees even despite being informed by Nova of the Agreements. ECS advised the Managers not to worry about the Agreements and took no steps to avoid the breaches. ECS instructed the Managers to add their Nova client contacts to the ECS database in order to maintain certain expected thresholds of client contacts.
Id. at 11 (citing ECS I at 51-52, 125-26; Harwood at 103-105, 131; exhibit E).
Id. (citing ECS I at 178-80).
Id. (citing ECS I at 149-51, 162; Harwood at 70; exhibit D).
Id. at 11 (citing ECS I at 92-95; exhibit N).
Id. at 11-12 (citing Harwood at 115-18, 121; Hernandez at 126-27; ECS I at 99-101, 110-11, 158).
Id. at 12 (citing Harwood at 132-35, ECS I at 188-89, 196; ECS II at 177-78; Hernandez at 94-95, 106-08).
IV. ISSUES
1. Whether a genuine issue of material fact exists that defendants misappropriated trade secrets.
2. Whether a genuine issue of material fact exists that the Managers breached their agreements with Nova.
3. Whether a genuine issue of material fact exists that ECS tortiously interfered with Nova's employment contracts.
4. Whether a genuine issue of material fact exists that defendants tortiously interfered with Nova's existing business contracts.
5. Whether a genuine issue of material fact exists that Hunter and/or McIntosh breached a fiduciary duty owed to Nova.
6. Whether a genuine issue of material fact exists that ECS engaged in willful and deliberate common law trademark infringement.
7. Whether a genuine issue of material fact exists that ECS was unjustly enriched at Nova's expense.
8. Whether a genuine issue of material fact exists that ECS engaged in unfair competition against Nova.
9. Whether a genuine issue of material fact exists that defendants engaged in a civil conspiracy against Nova.
V. SUMMARY JUDGMENT STANDARD
The standard to be applied in deciding a motion for summary judgment is set forth in Federal Rule of Civil Procedure 56, which provides in pertinent part as follows:The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.
Mere allegations of a factual dispute between the parties will not defeat an otherwise proper motion for summary judgment. Rule 56 requires that there be no genuine issue of material fact. A fact is material if it might affect the outcome of the lawsuit under the governing law. A dispute about a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Therefore, summary judgment is proper if, under governing laws, there is only one reasonable conclusion as to the verdict; if reasonable finders of fact could resolve a factual issue in favor of either party, summary judgment should not be granted.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2510 (1986).
Id. at 248, 106 S.Ct. at 2510; Thomas v. LTV Corp., 39 F.3d 611, 616 (5th Cir. 1994).
Anderson, 477 U.S. at 248, 106 S.Ct. at 2510; Wise v. E.I. DuPont De Nemours Co., 58 F.3d 193, 195 (5th Cir. 1995).
Anderson, 477 U.S. at 249, 106 S.Ct. at 2510.
The movant on a summary judgment motion bears the initial burden of providing the court with a legal basis for its motion and identifying those portions of the record which it alleges demonstrate the absence of a genuine issue of material fact. The burden then shifts to the party opposing the motion to present affirmative evidence in order to defeat a properly supported motion for summary judgment. All evidence and inferences drawn from that evidence must be viewed in the light favorable to the party resisting the motion for summary judgment. Thus, summary judgment motions permit the Court to resolve lawsuits without the necessity of trials if there is no genuine dispute as to any material facts and the moving party is entitled to judgment as a matter of law.
Celotex, 477 U.S. at 323, 106 S.Ct. at 2553.
Anderson, 477 U.S. at 257, 106 S.Ct. at 2514.
Hibernia Nat'l Bank v. Carner, 997 F.2d 94, 97 (5th Cir. 1993).
Fields v. City of South Houston, Tex., 922 F.2d 1183, 1187 (5th Cir. 1991).
The movant may satisfy the burden to show the "absence of a genuine issue of material fact by pointing out that the record contains no support for the non-moving party's claim." If non-movant cannot provide some evidence to support its claim, summary judgment is appropriate.
Stahl v. Novartis Pharmaceuticals Corp., 283 F.3d 254, 263 (5th Cir.), cert. denied, 537 U.S. 824, 123 S.Ct. 111 (2002).
Stahl, 283 F.3d at 263.
VI. ARGUMENTS AND ANALYSIS
A. Choice of LawOrdinarily, the threshold issue in a "diversity action is to determine which state's law to apply." To make the determination, the Court "must follow the choice-of-law principles of the forum state[.]" Texas law provides:
National Ass'n of Sporting Goods Wholesaler, Inc. v. F.T.L. Mktg. Corp., 779 F.2d 1281, 1284 (7th Cir. 1985); see also Kostelec v. State Farm Fire Casualty Co., 64 F.3d 1220, 1224 (8th Cir. 1995).
Kucel v. Walter E. Heller Co., 813 F.2d 67, 73 (5th Cir. 1987) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 1021-22 (1941)).
[I]n all choice of law cases, except those contract cases in which the parties have agreed to a valid choice of law clause, the law of the state with the most significant relationship to the particular substantive issue will be applied to resolve that issue.
Id. (citing Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex. 1984)).
The parties have the "obligation to call the applicability of another [forum's] law to the court's attention." "Where the parties fail to raise the issue of choice of law, the Court need not raise the issue sua sponte, and the parties are deemed to have acquiesced in the application of the law of the forum." "[U]nless the parties argue otherwise, it is assumed that the law of the forum and the laws of the applicable jurisdiction are in substance the same."
Employers Ins. of Wausau v. Occidental Petroleum Corp., 978 F.2d 1422, 1430 n. 8 (5th Cir. 1992) (quoting Kucel, 813 F.2d at 74), cert. denied, 510 U.S. 813, 114 S.Ct. 61 (1993).
Keles v. Yale Univ., 889 F.Supp. 729, 733 (S.D.N.Y. 1995) (citing Maine Drilling Blasting, Inc. v. Insurance Co. of N.A., 34 F.3d 1, 4 n. 1 (1st Cir. 1994); F.T.L. Mktg., 779 F.2d at 1284-85; Montana Power Co. v. Public Util. Dist. No. 2, 587 F.2d 1019, 1022 n. 1 (9th Cir. 1978); Clarkson Co. v. Shaheen, 660 F.2d 506, 512 n. 4 (2nd Cir. 1981)), aff'd, 101 F.3d 108 (2nd Cir. 1996).
F.T.L. Mktg., 779 F.2d at 1285; see also Employers Ins., 978 F.2d at 1430 n. 8 ("We need not resolve this choice of law issue on appeal, however, because it has been virtually ignored by the parties.").
In the present case the Agreements provide that "[t]his agreement and any disputes arising under or in connection with it shall be governed by the laws of the State of Minnesota[.]" But, the parties have not raised the question of choice of law and have not cited Minnesota contract law. Accordingly, because the motion for summary judgment and response have predominantly cited to Texas law, the Court assumes that, with respect to the breach of contract cause of action, Minnesota law is substantially the same as Texas law and that Texas law governs the remaining claims.
Docket no. 97, exhibit B.
See Kostelec, 64 F.3d at 1224 ("Indeed, in both courts the partes have argued their respective cases under the laws of Missouri. Accordingly, we deem any objection to the district court's choice of law to have been waived, and we too will decide this appeal under Missouri law without independently examining the conflict-of-laws issue." (giving accord, in part, toEmployers Ins., 978 F.2d at 1430 n. 8)); F.T.L. Mktg., 779 F.2d at 1285 ("Here the parties failed to raise the choice-of-law issue. We deem them, therefore, to have stipulated to the application of Illinois law."); Hudson River Group v. Minute Maid Co., No. 01 CV 10559(KTD), 2004 W.L. 829008, at * 2 (S.D.N.Y. April 16, 2004) ("Since neither party raises an issue concerning the applicable law and both parties rely on Texas law, I decline to raise the choice of law issue sua sponte and will rely solely on Texas law."); Cotracom Commodity Trading Co. v. Seaboard Corp., 189 F.R.D. 655, 666 (D. Kan. 1999) ("The Court is not obliged to investigate whether a conflict of law issue exists, when the parties present no conflict between the laws of potentially interested states."). See also American Int'l Trading Corp. v. Petroleos Mexicanos, 835 F.2d 536, 540 (5th Cir. 1987) ("It is well established that `parties generally are bound by the theory of law they argue in the district court[.]'").
B. Misappropriation of Trade Secrets
1. Summary of Allegations and Arguments
Nova has sued each defendant for intentionally and purposefully misappropriating Nova's trade secret information, "includ[ing], among other things, client lists and details of Nova's relationships with its clients," to: procure for ECS the business of Nova clients; recruit Nova employees to work for ECS; and gain a competitive advantage over Nova. Defendants have moved for summary judgment, arguing Nova's client information is not trade secret because: Nova compiled its client information from public directories; Nova has no evidence that, without the business cards available to McIntosh and Burge, ECS would not have discovered clients from sources such as the San Antonio Business Journal's annual "Book of Lists," an on-line directory for environmental firms, or the on-line Yellow Pages; many of Nova's clients were doing business with multiple engineering firms, including ECS, at the same time they did business with Nova; and Nova's marketing strategies openly disclosed client identities to competitors. Defendants also argue that some clients served by both Nova and ECS openly shared report and billing formats; openly shared procedures for performing their work; and requested proposals from several competing firms, awarding projects to the lowest bidder. Defendants contend some of Nova's jobs were for public sector entities, where bidding is a matter of public record. With respect to Nova's allegations regarding misappropriated confidential information about client preferences, defendants reiterate that Nova's clients have made the information available to other competing firms and also argue Nova is improperly attempting to preclude the Managers from using general knowledge obtained through their employment with Nova. Burge adopts the above arguments and raises others that will be addressed below.
Docket no. 1 at 13-19.
Although Burge filed a separate motion for summary judgment, he has adopted the motion and memorandum of law filed by the other defendants, but adds two additional reasons why summary judgment is proper for the breach of contract and misappropriation of trade secret claims alleged against him. Docket no. 81.
Docket no. 83 at 11-12.
Id. at 12-14.
Id. at 14.
Id.
Id. at 14-15.
Id. at 15.
Id. at 16-17.
Docket no. 81.
In response, Nova asserts the Managers have admitted "taking, disclosing, and using at least five categories of confidential information" that qualify for trade secret protection, including: "client reports and proposals, business cards, financial information, terms of existing agreements with clients, and client relationship information." Nova argues these categories of information are trade secret because it "has invested a significant amount of time, money, and effort [in] protecting them." Because defendants have admitted the use and disclosure of Nova's reports and proposals, financial information, and terms of existing contracts but have not raised arguments that the information is not trade secret, Nova argues summary judgment can be denied on this basis alone. With respect to client relationship information, Nova argues the identities of the clients are not the issue. Rather, the "compilations of client identities and related information, as well as Nova's relationships with its clients and client contacts, . . . comprise the core client-related trade secrets at issue." Nova argues its resources were expended "in identifying and nurturing relationships with the people at those companies[.]" Additionally, Nova asserts that some of its client relationships were provided by Nova's corporate office and are contacts not located in San Antonio. Nova argues the facts belie the contention that Nova "complied its client contact information from public and industry sources" that could be easily recreated. Nova contends evidence showing that its competitors did business with its clients or that Nova's marketing strategies disclosed client identities has "no impact on the value and confidentiality" of Nova's close relationships with client contacts who doled out work in Texas. Nova contends ECS has admitted the "paramount value" of some of Nova's client relationships as well as that the Managers were hired to gain access to these client contacts. Nova asserts "ECS and Mr. McIntosh themselves ascribe hundreds of thousands of dollars of ECS income directly to the relationships they stole from Nova."
Docket no. 97 at 23.
Id. at 24.
Id.
Id.
Id.
Id. at 24-25.
Id. at 25.
Id.
Id.
Id.
Id. at 26 (emphasis in original).
In reply, defendants note Nova's reliance on the declaration of Dana Swindler to support its arguments and argue the declaration should be stricken because Nova failed to disclose Swindler as a potential witness or as an expert and because Swindler does not profess to know how the Managers built Nova's client base in San Antonio. Defendants contend the uncontroverted evidence establishes clients use multiple engineering firms, dictate how reports are to be formatted, and share reports among and between firms. Defendants argue the evidence shows the information in project reports and proposals is readily available to those with the knowledge possessed by the Managers. Defendants also argue the sharing of client reports among competitors precludes trade secret protection. Defendants additionally argue that the "actual evidence" regarding the reports taken by Burge and McIntosh "does not live up to the rhetoric of Nova's brief." With respect to business cards, defendants argue Nova's admission that the information can be obtained from public sources bars trade secret protection. As for misappropriated financial information, defendants argue the evidence Nova cites reflects McIntosh said he felt "Nova's `corporate overhead' and `profits' were `pretty high.'" Regarding "existing agreements of clients," defendants cite evidence to refute Nova's assertions that Hunter and McIntosh worked on projects for ECS that they first obtained for Nova. Burge adopts the above arguments and addresses others that will be addressed below.
As with the motion for summary judgment, Burge has filed a separate reply but also adopts the reply filed by the other defendants. Docket no. 101.
Docket no. 100 at 8 n. 5.
Id. at 9.
Id.
Id.
Id. at 10.
Id.
Id. at 10-11.
Id. at 11.
Docket no. 101.
2. Analysis
Apart from the duties imposed by a written contract, under Texas law, certain duties arise upon the formation of an employment relationship, such as the duty against using confidential, proprietary, or trade secret information "acquired during the relationship in a manner adverse to the employer." The duty against using confidential or trade secret information does not preclude an employee from "the use of general knowledge, skill, and experience." To establish trade secrets have been misappropriated, a plaintiff must show: "(1) the existence of a trade secret; (2) a breach of a confidential relationship or improper discovery of the trade secret; and (3) use of the trade secret without authorization." In the present case, defendants argue, in sum, that Nova cannot satisfy the first element because the information it seeks to protect is not trade secret.
T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 21-22 (Tex.App.-Houston [1st Dist.] 1998, pet. dism'd); Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 600 (Tex.App.-Amarillo 1995, no writ).
Id. at 22.
Guy Carpenter Co., Inc. v. Provenzale, 334 F.3d 459, 467 (5th Cir. 2003).
Under Texas law, a trade secret is "`any formula, pattern, device, or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it." When effort is taken to prevent competitors from learning information important to a business, the information is entitled to trade secret protection. Texas courts have found "[i]tems such as customer lists, pricing information, client information, customer preferences, buyer contacts, market strategies, blueprints, and drawings have been shown to be trade secrets." To be trade secret, the information must not be readily available or generally known. Trade secret protection has been denied when the information was publically disclosed. That knowledge of trade secret information can be obtained through experimentation, analysis, and inspection, "does not preclude protection from those who would secure that knowledge by unfair means."
Id. (quoting Hyde Corp. v. Huffines, 158 Tex. 566, 314 S.W.2d 763, 766 (1958)).
T-N-T Motorsports., 965 S.W.2d at 22; Rugen v. Interactive Business Sys., Inc., 864 S.W.2d 548, 552 (Tex.App.-Dallas 1993, no writ).
T-N-T Motorsports., 965 S.W.2d at 22; Miller Paper, 901 S.W.2d at 601.
Gonzales v. Zamora, 791 S.W.2d 258, 264 (Tex.App.-Corpus Christi 1990, no writ).
T-N-T Motorsports., 965 S.W.2d at 22; Gonzales, 791 S.W.2d at 264.
T-N-T Motorsports., 965 S.W.2d at 22 (citing K G Oil Tool Serv. Co. v. G G Fishing Tool Serv., 158 Tex. 594, 314 S.W.2d 782, 788 (1958)).
The Texas Supreme Court has found that six nonexclusive factors are relevant to whether information is entitled to trade secret protection:
(1) the extent to which the information is known outside the holder's business; (2) the extent to which it is known by employees and others involved in the holder's business; (3) the extent of the measures taken by the holder to guard the secrecy of the information; (4) the value of the information to the holder and its competitors; (5) the amount of effort or money expended by the holder in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 859 (Tex.App.-Fort Worth 2004, no pet.) (citing In re Bass, 113 S.W.3d 735, 739 (Tex. 2003)).
A party claiming trade secret protection does not have to satisfy all six factors "because trade secrets do not fit neatly into each factor every time." The factors are weighed "in the context of the surrounding circumstances to determine whether" information should be classified as trade secret. client information
In re Bass, 113 S.W.3d at 740.
Id.
Defendants have proffered evidence showing that when Nova opened its office in San Antonio, it recruited employees from ATC, one of Nova's competitors, including McIntosh, Hunter, and Hernandez. Nova's employees solicited business from former ATC clients. Nova's employees also developed new clients from sources including: architects, engineers, real estate managers and developers, construction companies, environmental contractors, financial institutions, and insurance companies. Nova's employees obtained the names, addresses, and telephone numbers of potential clients from public and industry publications, including the San Antonio Yellow Pages, the Associated General Contractors directory, the San Antonio Business Journal's annual "Book of Lists," and various websites. Nova would invite those listed in the industry directories to "open houses" and ask attendees to drop their business cards into a bowl for a chance at door prizes. Nova's competitors were frequently invited to these "open houses." Much of Nova's work in San Antonio came from former ATC clients or from contacts made through the industry directories. Occasionally, San Antonio newspapers would publish articles about Nova's business achievements that included the identities of some Nova clients.
Docket no. 83, McIntosh at ¶¶ 1 and 3; Cummings at 58-59, 62-63.
Id., McIntosh at ¶ 3.
Id., McIntosh at ¶ 4; Hunter at ¶ 4; Hernandez at ¶ 2; Cummings at 27-29.
Id., McIntosh at ¶ 5; Hunter at ¶ 3; Hernandez at ¶ 3; Burge at ¶ 3; A. Herrera at ¶ 4; exhibits A1-A5; see also exhibit J.
Id., McIntosh at ¶ 13; exhibit B.
Id.
Id., McIntosh at ¶ 6; A. Herrera at ¶ 6.
Id., McIntosh at ¶ 12; exhibit B.
Defendants have presented evidence showing that some of Nova's clients did business at the same time with multiple engineering firms. Some Nova clients routinely met collectively with approved engineering firms to insure the use of uniform billing and report formats. Some clients shared reports with approved engineering firms as a method of checking the accuracy and quality of the reports. Some clients openly shared with interested firms the procedures for gaining approval and for performing work. At times, Nova employees had to share social occasions, such as dining with a client, with the counterparts of Nova's competitors. Some clients awarded projects to the low bidder after sending requests for proposals to numerous engineering firms. Nova was awarded some work for public sector clients as the result of low bids that were a matter of public record.
Id., McIntosh at ¶¶ 7, 9-10; Hunter at ¶ 5; Parsons at ¶ 5; Wileman at ¶ 5; exhibits K and L.
Id., McIntosh at ¶ 9.
Id.
Id., Hunter at ¶ 5; Wileman at ¶ 5; exhibit L.
Id., McIntosh at ¶ 10; exhibit K.
Id., Cummings at 44.
Id., McIntosh at ¶ 8.
Defendants have presented evidence showing that:
• Hernandez did not take client information to ECS. Rather, Hernandez found the information for his former Nova clients in the Yellow Pages and entered the information into ECS's client database;
• Hunter did not take Nova client information to ECS. Hunter relied on his memory to obtain clients for ECS;
• Burge admits taking his client business cards from Nova with McIntosh's permission. Burge also used the telephone book and industry directories to obtain client contact information for ECS; and
• McIntosh admits taking his client business cards from Nova. Although Steven Cummings, Nova's President, was asked if he wanted to check the items McIntosh was taking on his departure from Nova, Cummings declined, saying he trusted McIntosh. In addition to the client business cards, McIntosh used the telephone book and industry directories to find client contact information for ECS.
Id., Hernandez at 95-97, 102-05.
Id., Hunter at 66-67, 69-71.
Id., Burge at ¶¶ 3, 4; McIntosh at ¶ 14; exhibit C.
Id., McIntosh at 54; McIntosh at ¶ 5; Cummings at 219-20; exhibit D.
Defendants have proffered copies of the client business cards taken from Nova by Burge and McIntosh as well as Nova's client list, produced in response to ECS's second set of interrogatories, and asserts "the business card[s] taken by Burge and McIntosh contained contact information from just 40 of Nova's 450 clients, e.g., less than 10%."
Compare, id., exhibits C and D with exhibit E.
To raise a genuine issue of material fact about whether its client information has trade secret status, Nova has proffered evidence showing that it built the San Antonio client base through several approaches "involving an extensive investment by Nova of time, money, and effort." Some client relationships were developed by Nova's corporate headquarters in Minnesota and passed along to the San Antonio office. Other relationships were the result of the combined efforts of Nova's corporate office and the Managers. Some client relationships resulted solely from the Managers' efforts before and during their employment with Nova. Nova admits that identifying clients can be accomplished by researching public resources, but, according to Cummings' declaration, the more difficult challenge was for Nova to expend its resources to build and maintain important client relationships, specifically by "learning each client's preferences and then tailoring its work product (proposals, reports, etc.) accordingly."
Docket no. 97, Cummings at 13. Nova has proffered the declaration of Dana Swindler, the CEO of Schoell Madson, a full-service engineering firm, describing, in general, the process of developing and maintaining clients. Id. at Swindler Declaration. In their reply, defendants have objected to the submission of Swindler's declaration for several reasons, including that Swindler's opinion "is not in any way tied to this case" because "Swindle does not profess to know anything about this case, much less anything about how the Individual Defendants established and built Nova's Client base in San Antonio." Docket no. 100 at 8 n. 5. Although Nova anticipated in its response to the motion for summary judgment that defendants would object to the submission of Swindler's declaration, docket no. 97 at 3 n. 3, Nova did not subsequently respond to defendants' reply with an explanation for how Swindler's opinion is evidence that Nova expended the effort described in the declaration when it solicited its clients. Because Swindler's declaration does not raise a question of material fact about Nova's efforts in soliciting and maintaining clients, it is not considered for the purpose of the motion for summary judgment.
Docket no. 97, Cummings at ¶¶ 6-8.
Id. at ¶¶ 9-10.
Id. at ¶¶ 11-12.
Id. at ¶ 13.
Id. at ¶ 14.
Id. at ¶ 15.
Nova has presented evidence showing it employed a variety of measures to protect client information it deemed confidential. Nova required its office employees to sign the Agreements which contain nondisclosure covenants. The Nova employee handbook specified that client-related information was to remain confidential. Client information was maintained in Nova's Telemagic database, including contact and personal information and notes regarding conversations. Use of the Telemagic database: was restricted to those with Nova computers and passwords, including the Managers; displayed a confidentiality reminder each time it was accessed; and contained restrictions for printing. Nova's evidence shows that in 2001, its San Antonio office had a net profit before corporate allocation of approximately $500,000, and 2002 was predicted to be a better year. After the Managers left Nova, the net income before corporate allocations of the San Antonio office dropped by 98 percent from 2001 to 2002 and by 1752 percent from 2002 to 2003. The amount of work Nova received from clients, such as Wells Fargo and Farmers Insurance, decreased significantly after the Managers moved to ECS. On the other hand, the amount of work ECS obtained from Nova clients such as Farmers Insurance, General Growth, and USAA, increased significantly after the Managers were hired. ECS attributes the increase to the Managers.
Docket no. 97, exhibit B.
Id., Cummings at 100.
Id. at 30, 32-34.
Id. at 30, 34-36, 40-41.
Id., Cummings at ¶ 17; Nova at 206-07.
Id., Cummings at ¶ 17.
Id., Cummings at 227, 233, 235.
Id., ECS II at 15-16, 21-22, 23-25, 26-28, 29-31.
Id. at 15-16, 21-22, 26-27, 30-31.
In light of the six factors Texas courts have found relevant to the question of whether a trade secret exists and construing the above evidence and all reasonable inferences favorably to Nova, the nonmovant, defendants have failed to establish that there is no fact issue about whether Nova's client information is entitled to protection as a trade secret. Although Nova has admitted, and the evidence shows, client names can be obtained from readily accessible sources such as the Yellow Pages or industry directories, Nova is not merely seeking to protect client identities. Rather, Nova seeks trade secret status for information it has obtained about clients and client contact persons as well as for the relationships Nova has developed with those clients and contacts. The Nova client business cards include not only the client business name, address, telephone number, and website address, but also contact information, including name, cellular telephone and pager numbers, and e-mail address. There is no evidence showing the contact information included on the business cards is readily accessible or generally available to Nova's competitors through public sources. Rather, the evidence suggests the specific information Nova obtained about its clients and the relationships developed with client contacts was not generally known or readily accessible to its competitors. For example, deposition testimony from Brett Gitskin, testifying as ECS's corporate representative, suggests ECS knew of or dealt with some clients served by Nova but did little or no business with those clients before the Managers began to represent ECS to the contact persons. The evidence suggests Nova and its employees expended time, effort, and resources in developing and maintaining its client and client contact relationships. There is evidence Nova attempted to protect the information relevant to its relationships by: having employees sign agreements containing nondisclosure covenants, having client information placed in the Telemagic database and limiting access to the information, and including a confidentiality policy in its employee handbook. The evidence of Nova's declining income and ECS's improved business after the Managers joined ECS suggests Nova's client contact information and relationships were important to both Nova and ECS.
Burge's arguments will be addressed in a separate section below.
Docket no. 97, ECS II at 15-16, 21-31.
With respect to defendants' argument that Nova is attempting to preclude the Managers from using the general knowledge within their memories regarding Nova's client information and relationships, defendants have not cited authority showing that, under Texas law, an employee's memories of an employer's confidential information are not protected trade secrets.
In sum, because the evidence raises genuine issues of material fact about most or all of the six trade secret factors, defendants have failed to establish that Nova's client contact information, including the client business cards, is not trade secret. Therefore, defendants are not entitled to summary judgment on Nova's claims that defendants misappropriated Nova's trade secret client contact information.
other information
Nova has proffered evidence showing the Managers admit taking client reports and proposals, financial information, and terms of Nova's existing agreements with clients. Specifically, Nova's evidence shows: Burge took and used language from a pair of Nova client reports; Hernandez took and incorporated Nova's proprietary mold report formats into ECS's reports; (3) Hunter took mall projects to ECS; and (4) McIntosh took a Nova client proposal and subsequently met with that client after he began working for ECS, discussed Nova's financial information with ECS, and took to ECS a contract Nova had with Nextel.
Id., Burge at 161-63, 168. Nova has cited pages 155-56 of the corporate testimony for ECS, as provided by Gitskin, that supposedly reflect Burge used language from the client contracts he took from Nova. The Court notes page 156 has been omitted from Nova's appendix of evidence. Nevertheless, defendants have included the page in the evidence attached to their reply. Docket no. 100, Gitskin at 156. Accordingly, the Court will consider whether the deposition testimony cited by Nova raises a genuine issue of material fact about Burge's actions.
Docket no. 97, ECS II at 12-13.
Id., exhibit I; Hunter at 54, 62-64.
Id., exhibit J; McIntosh at 56-57, 97; Nova at 51-52; ECS II at 23-25.
Defendants have proffered evidence showing that engineering firms commonly write proposals for work and reports summarizing completed work. Defendants cite testimony and exhibits showing that the content of reports and proposals is governed by "industry standards." Defendants also cite evidence showing clients: "(a) regularly use multiple engineering consulting firms, (b) dictate to those firms how they want their particular reports formatted, and (c) share reports among and between firms." Defendants' evidence reflects that some clients find no significant differences in the reports from different firms.
Docket no. 100, Cummings at 97-99; Cummings at ¶ 15; Parsons at ¶ 6; Wileman at ¶ 6.
Id., Cummings at 98-99; Nova 30(b)(6) at 298-99; exhibits P, Q, R.
Id., McIntosh at ¶¶ 7, 9-10; Hunter at ¶ 5; Parsons at ¶ 5; Wileman at ¶ 4; exhibit L.
Id., Parsons at ¶ 6; Wileman at ¶ 6.
Defendants contend this evidence establishes that the reports, proposal, and mold report formats cannot be trade secret because the information is readily ascertainable to someone with the Managers knowledge and skill and because the reports have been shared among competing firms. But, defendants conclusory arguments are not supported by the evidence. Defendants have not proffered the reports, proposals, or formats at issue for comparison with the evidence. Nor does the evidence upon which defendants rely establish that the specific reports, proposals, or formats at issue fall within the parameters of defendants evidence; for example, that the clients dictated a particular format or shared the documents with Nova's competitors. The evidence does not establish that the specific reports, proposal, and formats at issue are not unique or do not contain unique language. In addition, defendants have cited no authority for the proposition that a report complying with "industry standards" cannot be a trade secret. In sum, defendants' evidence fails to establish the reports, proposal, and formats are readily ascertainable by or have been shared with Nova's competitors such that they cannot be trade secrets.
Defendants have also proffered evidence that specifically addresses the admitted actions of Burge, Hunter, and McIntosh to show that no trade secrets were misappropriated. With respect to Burge, defendants' evidence shows that he took two reports so he could refer to the unique language if he ever came across similar situations, but, at the time of his deposition, he had not referred back to either report. Nevertheless, defendants cite evidence establishing that Burge "did utilize one or two standard paragraphs that he developed while employed at Nova in some geotechnical reports he prepared after coming to ECS." The reports Burge took from Nova are not in the record, the "standard language" is not quoted, and no explanation is provided for what constitutes "standard language." Accordingly, there is a question about the nature of the language Burge took from Nova reports for use in ECS material.
Id., Burge at 161-64.
Id., Gitskin at 156.
As for Hunter, defendants have proffered evidence showing a client did assign a small mall project to him just prior to his departure from Nova. Hunter's April 11, 2005 declaration states he did not work on the project for ECS's benefit and that, to his knowledge, ECS did not work on the project. Although Hunter cited documents allegedly supporting his declaration, the documents have not been offered into evidence. Nevertheless, Hunter's declaration reflects that he obtained similar mall projects for the same client shortly after he was employed by ECS through the same contact person he worked with at Nova. Although Nova has not identified specific trade secret documents that Hunter may have misappropriated from the mall project, the evidence does raise a question about whether Hunter misappropriated confidential client information to solicit mall projects from the client for ECS.
Docket no. 97, exhibit I.
Docket no. 100, Hunter II ¶ 6.
Id., at ¶¶ 1, 3, 5.
In regard to McIntosh, defendants cite his deposition testimony that he inadvertently took from Nova a proposal which was stuck in a book and that he did not realize he had the proposal until the discovery phase in this case. McIntosh testified that he did not review the proposal before his first contact with the client on behalf of ECS, possibly in the fall of 2003. Nova has not proffered evidence that might controvert McIntosh's testimony. Although the evidence shows McIntosh met with the client for ECS more than a year after he left Nova, Nova has not cited evidence suggesting McIntosh used confidential information from the proposal to gain an advantage during the meeting or ECS was awarded business with the client as a result of the meeting. Accordingly, even assuming the proposal is a trade secret, Nova has not raised a genuine issue of material fact about whether McIntosh used confidential information from the proposal, an element of a misappropriation claim.
Id., McIntosh at 57-58.
Id. at 57.
The evidence regarding the Nextel contract and Nova's financial information is more problematic for defendants. McIntosh does not deny that he negotiated a contract with Nextel shortly before he left his employment at Nova. Nor does McIntosh dispute Nova's assertion that it was unable to find the contract after he left. In his declaration, McIntosh denies he worked on a Nextel project for ECS that he first obtained for Nova. The declaration reflects that shortly after he began working for ECS, McIntosh sent his contact at Nextel insurance certifications in order to have ECS added to Nextel's approved list of service providers. But, Nova has cited evidence establishing that ECS was doing work with Nextel prior to the time McIntosh began his employment, suggesting ECS was already on the approved list. The conflict in the evidence raises the question of whether the insurance certifications were necessary for some other purpose, such as for a contract. As for the financial information, McIntosh admitted that he talked with Gitskin about Nova's corporate overhead and profits. Although McIntosh testified "I think from my memory it was just saying that I felt it was pretty high," he admitted the information disclosed was confidential. Questions abound about the context of McIntosh's conversation with Gitskin, the nature of the conversation, and what use could be made of the information.
See docket no. 97, Nova at 51-52.
See id. at 52.
Docket no. 100, McIntosh II at ¶ 6.
Id. at ¶ 5.
Docket no. 97, ECS II at 22-23.
Id., McIntosh at 97.
Id.
In sum, because there are genuine issues of material fact about whether the reports, proposals, financial information, and mold report formats at issue are trade secrets, defendants are not entitled to summary judgment on their argument that the documents taken by Burge, Hernandez, and McIntosh are not trade secret. To the extent the documents may be or may contain trade secrets, there are material issues of fact about whether defendants misappropriated Nova's report language, financial information, and contract with Nextel. Accordingly, defendants are not entitled to summary judgment on Nova's claims that: Burge misappropriated confidential report language for use by ECS; McIntosh misappropriated Nova's financial information; or McIntosh misappropriated a Nova contract with Nextel for ECS. With respect to Hunter, defendants are not entitled to summary judgment on the question of whether he misappropriated mall projects because there are material fact issues about whether he misappropriated confidential client information to obtain mall projects for ECS. As for the proposal McIntosh took from Nova, because the evidence fails to raise a genuine issue of material fact about whether McIntosh or ECS used confidential information from the proposal, if any, defendants should be granted summary judgment on the claim that McIntosh misappropriated a Nova proposal. Burge's client business cards
No argument was raised about whether the evidence showed Hernandez misappropriated the mold report formats.
Burge has moved for summary judgment on the claim that he misappropriated confidential client business cards, arguing he could not have misappropriated the business cards because, at the time of his departure, McIntosh, Nova's highest ranking San Antonio Manager, gave him permission to take the cards. Nova argues in response that McIntosh has admitted taking the business cards violated the Agreement, and Burge misappropriated more than the business cards. In reply, Burge notes Nova did not dispute that McIntosh gave him permission to take his business cards when he left Nova. Burge argues McIntosh's testimony about the validity of the nondisclosure covenant is inadmissible parole evidence.
Docket no. 81 at 2.
Docket no. 97 at 30.
Docket no. 101 at 2.
The evidence establishes that Burge signed the Agreement. In light of the Agreement, there is a genuine issue of material fact about McIntosh's authority to give Burge permission to act in violation of the Agreement. Additionally, given the timing of McIntosh's departure from Nova, there is a question of whether, when Burge left Nova to work for ECS, McIntosh knew he would also soon be employed by ECS. Accordingly, Burge should be denied summary judgment on the claim that he misappropriated Nova client business cards.
C. Breach of Contract
1. Summary of Allegations and Arguments
Plaintiff Nova has alleged, in sum, that Burge, Hernandez, Hunter, and McIntosh, breached their Agreements with Nova by soliciting Nova's clients and employees and by disclosing confidential information to third parties. Defendants have moved for summary judgment on Nova's breach of contract claims. Citing Texas law, particularly §§ 15.50-15.52 of the Texas Business Commerce Code, defendants argue the covenants against soliciting Nova's clients and employees are overbroad and unenforceable as a matter of law. In particular, defendants argue the client solicitation provisions of the Agreement do not specify a geographic location and are not limited to the Nova clients with whom each individual Manager had contact. With respect to the covenants against soliciting Nova employees, defendants argue the provisions are not limited to the employees with whom each individual Manager worked or to solicitation of the employees to work in a competing business. Defendants contend whether he non-compete provisions are enforceable is a "question of law for the Court." With respect to the non-disclosure provisions, defendants argue "Nova's definition of confidential information is substantially identical to the `readily ascertainable' standard under Texas trade secret law." Defendants argue, in sum, that the interpretation of "Confidential Information," as defined in their Agreements, is a question of law for the Court; the business cards furnished to them by Nova customers "do not fall within the definition of "Confidential Information;" and "Nova's client contact information is generally available in public directories and known by its competitors." Burge adopts the above arguments and raises others that will be addressed below.
Docket no. 83 at 7-9, 18-20.
Id. at 7-9.
Id. at 8.
Id.
Id. at 7.
Id. at 19.
Id. at 18.
Id. at 19.
Docket no. 101.
In response, Nova argues, in sum, that the provisions barring the solicitation of its employees are more akin to non-disclosure provisions, which are not subject to § 15.50, than to the non-compete agreements typically governed by that provision. Nova contends the employee solicitation provisions are limited in scope because they were limited to one year after the Managers left Nova and only precluded the Managers from soliciting Nova employees. To the extent the employee solicitation provisions are subject to § 15.50, Nova argues the facts of the case "demonstrate that those provisions were reasonable and, therefore, enforceable even under that statute." Nova argues defendants' assertions regarding the enforceability of the provisions precluding client solicitation "fail on factual and legal grounds" and are narrower than provisions approved by the Texas courts. Nova argues the client solicitation provisions were expressly limited to Nova's existing client list and to the clients with whom the Managers actually worked. Nova argues that even if the client solicitation provisions lack geographic limitations, they are enforceable because the Managers "had client and project management responsibilities spanning the entire country, including Arizona, Florida, Illinois, Kansas, Louisiana, Missouri, and Oklahoma." With respect to the non-disclosure provisions, Nova argues "[t]he fact that the parties explicitly listed specific types of information does not mean that other types of information [such as client business cards] cannot also meet the definition of `proprietary or trade secret information.'" Nova also argues that the parties "explicitly agreed in a further section" that business cards and client information do constitute "confidential information." Nova further argues, in sum, that even if the client business cards and client information are not confidential information, the evidence shows the Managers have admitted taking other information related to Nova's finances, existing agreements with clients, client proposals, and client reports containing information on site procurement and site analysis but have not challenged these items as outside the scope of the definition for confidential information. Nova argues that "if only one of [the three provisions at issue] were enforceable," then the Managers would not be entitled to summary judgment on the breach of contract claims.
Docket no. 97 at 16-18.
Id. at 17.
Id. at 18.
Id.
Id. at 19.
Id.
Id. at 21.
Id. (emphasis in original).
Id. at 21-22.
Id. at 22.
Id. (emphasis in original).
Defendants reply, with respect to the covenants against soliciting clients, that Nova is relying on inadmissible extrinsic evidence to support its argument regarding the terms of the provisions. Defendants also argue the majority of the Managers' work was in San Antonio and Nova has no evidence they "marketed to or serviced every single Nova client nationwide." As for the employee solicitation provisions, defendants argue the cases cited by Nova are inapposite because they do not analyze "whether a non-recruitment covenant is a covenant not to compete subject to the reasonableness requirements of § 15.50." Defendants argue, in sum, that the Texas law recognizing agreements not to solicit clients are governed by § 15.50 is equally applicable to covenants not to solicit employees, and Nova should have crafted the covenants in accordance with the reasonable requirements of that statute. With respect to the nondisclosure provisions, defendants reiterate their summary judgment arguments and argue further, that because the provisions are noncompete covenants lacking time and geographic limitations, they are overbroad and unenforceable. Burge adopts the above arguments.
Docket no. 100 at 1.
Id. at 2.
Id. at 3.
Id. at 4-6.
Docket no. 101.
2. Analysis
noncompete covenants
The record reflects the Managers signed a "Nova Confidentiality and Noncompete Agreement" that included the following relevant provision:
3. For a period of one year after termination of my employment with Nova for any reason:
a. I agree not to compete with Nova by providing or marketing services, directly or indirectly, to persons or entities to whom Nova has provided like services within 12 months of the date of termination and/or to whom Nova has a current proposal to provide such services at the time of termination.
Docket no. 97, exhibit B.
A handwritten statement added to section 3a of Burge's Agreement provides: "Clients listed on the attached list (Attachment A) provided by you will be exempt from this agreement for geotechnical and/or construction materials engineering services." Defendants contend these noncompete covenants are overbroad and unenforceable under Texas law.
Id. at Burge agreement.
The criteria for enforcing a noncompete agreement is set forth in § 15.50 of the Texas Business and Commerce Code, which provides in relevant part:
Notwithstanding Section 15.05 of this code, . . . a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint that is necessary to protect the goodwill or other business interest of the promisee.
TEXAS BUS. COM. CODEANN. § 15.50(a) (Vernon 2002). Sections 15.05 and 15.50 are part of the Texas Free Enterprise and Antitrust Act. TEXAS BUS. COM. CODEANN. §§ 15.01, et seq. (Vernon 2002). In essence, § 15.05 prohibits the restraint of trade or commerce. See § 15.05. Although noncompete covenants are generally considered restraints of trade under Texas law,DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 681 (Tex. 1990), if the requirements of § 15.50(a) are satisfied, noncompete covenants are excepted from the prohibitions imposed by § 15.05 and are enforceable. See § 15.50(a).
In the present case, the parties do not dispute that the noncompete covenants are ancillary to "an otherwise enforceable agreement." Rather, the only issue is whether the noncompete covenants are unenforceable due to unreasonable limitations. Whether a noncompete covenant imposes reasonable restraints is a question of law for the Court.
Peat Marwick Main Co. v. Haass, 818 S.W.2d 381, 388 (Tex 1991).
"Restraints are unreasonable if they are broader than necessary to protect the legitimate interest of the employer," such as "business goodwill, trade secrets, or other confidential or proprietary information." Nevertheless, the employer's "need for protection given by the agreement must not be outweighed by either the hardship to the [employee] or any injury likely to the public." In a personal services occupation, such as that of a salesperson, when a restraint on client solicitation applies to clients with whom the employee had no dealings during his employment, the restraint is overbroad and unreasonable. A reasonable geographic area is the territory an employee actually worked during his employment.
Haass, 818 S.W.2d at 386 (citing DeSantis, 793 S.W.2d at 682).
Id.
Haass, 818 S.W.2d at 386-88.
Justin Belt Co. v. Yost, 502 S.W.2d 681, 685 (Tex. 1973); Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 660-61 (Tex.App.-Dallas 1992, no writ).
The question of ambiguity has not been raised with respect to the noncompete covenants; the language unambiguously embodies each Manager's agreement not to solicit business from clients doing business with Nova during the twelve months prior to his termination for any reason and from potential Nova clients at the time of the termination. The noncompete covenants are limited to one year after termination and to services like those provided by Nova. Even though the noncompete covenants are unambiguous, they may be overbroad and unenforceable. In that regard, defendants argue the noncompete covenants are overbroad because they are not limited to "persons or entities" with whom an individual Manager had contact and do not include specific geographic restrictions.
In an effort to establish that the noncompete covenants are not overbroad, Nova cites the deposition testimony of Steven B. Cummings, its President, to show "the Client Solicitation Provisions not only were limited to existing Nova clients by the express terms, but also were limited only to those clients with whom the Individual [Managers] actually had worked while at Nova[.]" Because the noncompete covenants expressly preclude the Managers from soliciting business from all Nova clients rather than the clients with whom they specifically had relationships, Cummings' extrinsic testimony would vary, or add to, the unambiguous terms of the covenants. "Extrinsic evidence is not admissible to vary, add to, or contradict the terms of a written instrument that is facially complete and unambiguous." Accordingly, to the extent Cummings' deposition testimony has been proffered to interpret the terms of the noncompete covenant, the testimony is not admissible.
Id., Cummings at ¶ 2.
Id. at 19.
Perez v. Alcoa Fujikura, Ltd., 969 F.Supp. 991, 1006 (W.D. Tex. 1997) (Biery, J.) (citing Brannon v. Gulf States Energy Corp., 562 S.W.2d 219, 222 (Tex. 1977) (other citations omitted)).
Absent Cummings' interpretation of the terms, the noncompete covenants might be enforceable if the record established that each Manager had solicited business from all clients with whom Nova did business during the twelve months prior to their termination and from all clients with whom Nova had proposals for business at the time of their termination and if the covenants included geographic limitations specific to each Manager. Nova has cited no evidence showing the Managers each had relationships with all Nova clients, and the covenants have no geographic limitations. Even assuming Nova is correct that geographic limitations are unnecessary because the record shows the Managers "had client and project management responsibilities spanning the entire country," that the Managers worked with clients nationwide does not necessarily mean they worked, or had relationships, with all Nova clients during the relevant time. As written, the covenants are unenforceable without evidence each Manager had relationships with all Nova clients during the relevant time. Although the noncompete covenant in the Agreement signed by Burge includes an exception for some clients, the evidence does not establish that he worked with all other Nova clients. Accordingly, because the noncompete covenants do not restrict the Managers to solicitation of the clients with whom they had relationships and to the geographic areas where they worked, the covenants are overbroad and unenforceable. As the covenants are unenforceable, summary judgment should be granted on Nova's claims that Managers breached the covenants against soliciting Nova clients. covenants not to solicit employees
Docket no. 97 at 19. To establish the national scope of the Manager's work, Nova cites statements from Cummings declaration which reflect that: Hernandez supervised projects in Louisiana and Arizona; Burge in Arizona; and Hunter in Missouri, Kansas, Louisiana, and Oklahoma. Id., Cummings at ¶ 18. Cummings also declared that McIntosh "supervised a project in Florida and had far reaching marketing responsibilities as the head of Nova's Southwest Region, including its Denver, and Phoenix offices." Id. Contrary to Nova's argument, Cummings' declaration establishes that the Managers dealt with clients on a regional basis rather than nationwide. In addition, Nova cites Hernandez's deposition testimony that he was responsible for Nova's national mold program. Id., Hernandez at 15-16. Although the deposition shows that Hernandez had nationwide responsibilities, Nova has cited no evidence showing that, during the relevant period, all Nova clients had mold issues requiring Hernandez's attention or that Hernandez worked with all Nova clients in some other capacity.
Nova notes two cases, Vais Arms, Inc. v. Vais, 383 F.3d 287 (5th Cir. 2004) and Amey v. Barrera, No. 13-01-00130-CV, 2004 WL 63588 (Tex.App.-Corpus Christi, Jan. 15, 2004), and argues the cases held much broader noncompete covenants were enforceable such that the provisions at issue in this case could be enforced even if they were not limited to the clients with whom the Managers had worked. Docket no. 97 at 19 n. 15. These cases lend little support to Nova's arguments against summary judgment.
At issue in Vais was the enforceability of a geographical limitation for "all U.S. states." Vais, 383 F.3d at 295. Based on evidence showing that Vais had marketed his product throughout the United States "via nationally-distributed trade publications, mail order catalogues, and, importantly, the Internet," the Fifth Circuit held the geographical limitation was reasonable given the "nationwide scope of his marketing efforts." Id. at 295-96. Vais had also agreed not to "engage in any business that competes with Vais Arms, Inc." Id. at 289. The enforceability of that provision was not at issue on appeal. Id. at 295. In Amey, the Texas court found that a defendant's agreement not to engage "in any floral business in Corpus Christi or surrounding area for 5 years," 2004 WL 63588 at *2, was an enforceable covenant with "reasonable limitations as to time, geographical area, and scope of activity to be restrained." Id. at * 6. The evidence inAmey established that the defendant who made the agreement had owned and operated a floral shop in Corpus Christi for fifteen years and had been in the floral business for over thirty-five years. Id. at * 2.
In Vais and Amey, the covenants precluded the defendants from engaging in businesses of the type they had previously owned in the geographical areas where they had previously marketed their products. In the present case, there are no geographic limitations, and the Managers are precluded from soliciting business from all who actually were, or might have been, Nova clients during a specific period. Without evidence that the Managers solicited business from all Nova clients in all geographic areas, or even knew of them, the covenant not to compete is overbroad.
Each of the Agreements include the following provision:
3. For a period of one year after termination of my employment with Nova for any reason:
* * * * *
b. In addition, I agree that I will not solicit for employment any existing employee of Nova at the time of my termination, or for one year after my termination date.
The primary dispute over this provision is whether, under Texas law, covenants not to solicit Nova employees are noncompete covenants subject to § 15.50, which requires, in sum, reasonable limitations for time, geographical area, and scope of activity. If the covenants are subject to § 15.50, defendants argue they are overbroad and unenforceable. Texas law appears to be unsettled with regard to covenants not to solicit employees.
TEXAS BUS. COM. CODEANN. § 15.50(a).
In Miller Paper Company v. Roberts Paper Company, the Amarillo Court of Appeals considered whether the trial court "abused its discretion in enjoining [the] breach of an invalid covenant against competition." Although the appeals court did not expressly address the question of whether a covenant not to solicit employees is a noncompete covenant, when setting forth the provisions of the employment agreements relevant to the opinion, the court included the section barring the solicitation of employees. Rejecting the defendants' argument that the provisions constituted "a diversion of trade or nonpiracy clause," the appeals court found the provisions formed a covenant not to compete subject to the requirements of § 15.50. The court then held the provisions were unenforceable because they were not ancillary to an "otherwise enforceable agreement."
901 S.W.2d 593 (Tex.App.-Amarillo 1995, no writ).
Id. at 598.
Id.
Id. at 599.
Id. The courts in three federal cases have citedMiller Paper for the proposition that contract provisions barring the solicitation of employees are noncompete covenants subject to the requirements of § 15.50. Oxford Global Resources v. Weekley-Cessnun, No. Civ. A 3:04-CV-0330, 2005 WL 350580, at * 4 (N.D. Tex. February 8, 2005); Louisiana Transp. v. Race No. Civ. A. 3:02-CV-2609, 2002 WL 32334400, at * 1 (Oct. 11, 2002);Olander v. Compass Bank Compass Bancshares, 172 F.Supp.2d 846, 849, 851 (S.D. Tex. 2001), aff'd, 44 Fed. Appx. 651, 2002 WL 1396903 (5th Cir. June, 3, 2002). The noncompete covenants in all three cases were found to be unenforceable because they were not ancillary to an "otherwise enforceable contract." Oxford Global, 2005 WL 350580 at * 7-8; Race, 2002 WL 32334400 at * 1; Olander, 172 F.Supp.2d at 855.
In Brown Services, Inc. v. Brown, an opinion not designated for publication, the Houston Court of Appeals-First District, considered whether the trial court erred in granting a directed verdict because certain clauses in an employment agreement were overbroad and unenforceable. The clauses were included in a paragraph entitled "Non-Competition" and included restrictions for engaging in any oilfield and/or modular jail manufacturing business, soliciting customers, and soliciting employees. Relying on § 15.50 and Texas case law and noting the clauses were found to be nonseverable, the appeals court affirmed trial court's decision. With respect to the clause barring solicitation of employees, the appeals court explained:
No. 01-98-00304-CV, 1999 WL 681964, at * 6 (Tex.App.-Houston [1st Dist.] Sept. 2, 1999, pet. denied) (not designated for publication).
Id. at * 6-7.
Id. at *6-7 n. 1.
this clause prevents Mike Brown from hiring anyone employed by Brown Services, in any capacity. Under this clause, if Mike Brown hired a Brown Services employee to paint his house, he would be in violation of this agreement. Because this clause is not limited to hiring away employees to work in a competing business, it is too overbroad.
Id. (emphasis in original).
Other opinions from these two appellate courts do not analyze covenants not to solicit employees under § 15.50. In Anderson Chemical Company, Inc. v. Green, the Amarillo Court of Appeals affirmed a trial court finding that a noncompete covenant was unenforceable under § 15.50 because it was not ancillary to an otherwise enforceable agreement. The employment agreement in that case also included a provision entitled "Non-Solicitation of Employees." The appeals court found sufficient evidence supported the trial court's finding that Green had not breached the terms of the covenant not to solicit employees. The covenant not to solicit employees was not analyzed under the requirements of § 15.50.
66 S.W.3d 434, 439 (Tex.App.-Amarillo 2001).
Id. at 443.
Id.
Id.
In Totino v. Alexander Associates, Inc., an opinion not designated for publication, the Houston Court of Appeals-First District, considered whether the "noncompetition and employee nonrecruitment covenants" signed by former employees violated the Texas Free Enterprise and Antitrust Act ("TFEAA"), Texas Business and Commerce Code §§ 15.01, et seq. The appeals court construed the noncompete covenants pursuant to § 15.50, found covenants signed by three defendants were enforceable and affirmed the injunctive relief granted by the trial court. Because a fourth covenant was not ancillary to an otherwise enforceable agreement, it was not valid and the injunctive relief was dissolved as to that covenant. With respect to the nonrecruitment covenants, the appeals court affirmed the injunctive relief temporarily barring the defendants from soliciting plaintiff's employees. Noting the issue of whether a nonrecruitment covenant was subject to § 15.50 had not been timely raised, the appeals court considered whether the covenant was a restraint on trade in violation of § 15.05(a). The nonrecruitment covenants at issue inTotino "prohibited each former AA employee, for two years after his termination, from soliciting, recruiting, or inducing AA employees to leave AA or to terminate or violate their contractual or fiduciary duties with AA." After reviewing opinions from other jurisdictions, the appeals court found the nonrecruitment covenants were analogous to nondisclosure covenants which "do not restrain trade and are not against public policy" because they "do not necessarily restrict a former employee's ability to use, in competition with the former employer, the general knowledge, skill, and experience acquired in former employment." The appeals court found "nonrecruitment covenants like that under consideration do not necessarily restrict a former employee's ability to compete with" a former employer and "should not significantly restrain trade." The appeals court explained that the nonrecruitment covenants did not preclude current employees from leaving their employment or from working with former employees. Rather, the former employees "simply may not recruit or solicit" current employees.
No. 01-97-01294-CV, 1998 WL 552828 (Tex.App.-Houston [1st Dist.] 1998, no pet.) (not designated for publication).
Id. at * 7-8.
Id. at * 9.
Id. at * 9 n. 31.
Id. at * 8-9.
Id. at * 1.
Id. at * 8-9 (citing Smith, Barney, Harris, Upham Co., Inc. v. Robinson, 12 F.3d 515 (5th Cir. 1994) (finding Louisiana statute barring restraint of trade did not apply to nonrecruitment covenant); Harrison v. Sarah Coventry, Inc., 228 Ga. 169, 184 S.E.2d 448 (S.Ct. 1971) (holding covenant was not subject to reasonableness requirements applied to noncompete covenants thus finding implicitly that nonrecruitment covenant did not restrict trade); Oxman v. Sherman, 239 S.C. 218, 122 S.E.2d 559 (S.Ct. 1961) (rejecting arguments that nonrecruitment covenant was invalid because it was of unlimited duration and unnecessary to protect plaintiffs' legitimate interests and construing covenant as embodiment of common law on tortious interference with contractual relations); Wolf v. Colonial Life Accident Ins. Co., 309 S.C. 100, 420 S.E.2d 217, 221 (S.C.App. 1992) (same, citing Oxman); Loral Corp v. Moyes, 174 Cal. App.3d 268, 219 Cal. Rptr. 836 (1985) (finding nonrecruitment covenant did not violate California statute barring restraint of trade); John Jay Esthetic Salon, Inc. v. Woods, 377 So.2d 1363, 1366 (La.App. 1979) (finding Louisiana statute barring restraint of trade did not apply to nonrecruitment covenant).
Totino, 1998 WL 552818 at * 9 (citing Zep Mfg., 824 S.W.2d at 663).
Id.
Id.
Id.
After considering the parties arguments and authorities as well as the case law cited in Totino, the Court concludes that Texas courts specifically considering the issue would find the covenants not to solicit Nova employees do not bar competition and are not restraints on trade or commerce in violation of § 15.05. As in Totino, the covenants in the present case merely bar the Managers from soliciting certain Nova employees for one year after the Managers' employment with Nova ended. The covenants do not prohibit the Managers from working for, or being a, competitor of Nova or prevent other Nova employees from obtaining employment through their own efforts with the Managers or those who subsequently hired the Managers. Because the covenants are not restraints on trade in violation of § 15.05, the exception afforded by § 15.50 for noncompete covenants is not applicable. As defendants have not argued another basis for granting summary judgment on Nova's claims for breach of covenants not to solicit employees, defendants motion for summary judgment on those claims should be denied. nondisclosure covenants
The nondisclosure covenant included in each Manager's Agreement provides in relevant part: "Except as required by my duties to Nova, I will never during my employment by Nova or thereafter, use or disclose any Confidential Information." "Confidential information" is defined as:
Docket no. 97, exhibit B.
[P]roprietary or trade secret information on Nova, including customer furnished information which has been provided to Nova with restrictions of its use or further disclosure, which is used or useful in the conduct of Nova's business and which is not generally known to the public or in a relevant industry, such as information relating to Nova's testing procedures, sample procurement, site analyses, research, development, laboratory procedures, training manuals and documents, purchasing, finances, accounting, engineering, marketing, selling, and present and prospective customers (including proposals to, agreements with and relationships with such customers).
Id.
The Agreements also provide:
Upon termination of my employment with Nova[,] all records and any compositions, articles, devices, and other items which disclose or embody Confidential Information, including all copies or specimens thereof in my possession, whether prepared or made by me or others, will be left with Nova. I will return to Nova and stop using upon request or upon termination of my employment, all papers notebooks, reports, manuals, records, compositions, articles, devices and all other property furnished to me by Nova or which was prepared or made in whole or part by me in connection with my employment by Nova including all copies or specimens thereof in my possession.
Id.
Nova alleges that, by revealing confidential information to ECS, the Managers breached the nondisclosure covenants included in the Agreements. As set forth in the discussion under "Misappropriation of Trade Secrets," Nova has cited evidence establishing that when the Managers left Nova, they took Nova's client reports, business cards, mold report formats, a client proposal, and a contract. Nova has also presented evidence showing that: language from Nova's reports was used on behalf of ECS; the Managers added Nova's client information to the ECS client database; Managers used confidential Nova client information at ECS; and discussed Nova's financial information with ECS.
As noted above, Nova has cited docket no. 97, ECS I at 155-56 to show Burge used language from the client contracts he took from Nova. Page 156 was omitted from Nova's evidence. Nevertheless, defendants have included the page in the evidence attached to their reply. Docket no. 100, Gitskin at 156.
Docket no. 97, Burge at 64-65; Hernandez at 100-01, 170.
Id., Hunter at 54; McIntosh at 55-56.
Id., McIntosh at 97.
Defendants do not contest Nova's assertion that client reports, language from the reports, mold report formats, financial information, mall projects, a client proposal, and a Nextel contract are within the definition of "confidential information." But, defendants do specifically argue the client business cards taken by Burge and McIntosh are not within the definition of "confidential information" because the cards are "customer furnished information" for which Nova has failed to establish that "any client ever placed any restrictions on the use or disclosure of its business cards," Although the definition of "confidential information" includes restricted customer provided information, this is merely one example of a specific type of information protected by the nondisclosure covenant. "Confidential information" is also defined to include "proprietary or trade secret information" used in the conduct of Nova's business that "is not generally known to the public or in [the] relevant industry, such as information relating to Nova's" relationships with present and prospective clients; a definition defendants have not addressed. Accordingly, defendants are not entitled to summary judgment on the argument that client business cards fall outside the definition of "confidential information."
Id. at 19.
Defendants also argue Nova's client information is not confidential, as defined by the Agreements, because the information is generally known in the industry. Defendants correctly note, the definition for "confidential information" is similar to the Texas requirement that to be trade secret information must not be readily available or generally known. As discussed under "Misappropriation of Trade Secrets," defendants have failed to establish the absence of a genuine issue of material fact about whether Nova's client information is generally known or readily available in the industry. Therefore, defendants are not entitled to summary judgment on Nova's claims that defendants disclosed Nova's client information to ECS in violation of the nondisclosure covenant.
Id. at 19.
Gonzales, 791 S.W.2d at 264.
Defendants argue that, because the nondisclosure covenants do not include time or geographic restrictions, they "essentially prohibit the [Managers] from working in the industry anywhere in the world, forever!" In essence, defendants are arguing the nondisclosure covenants, as written, are akin to noncompete covenants and subject to the reasonableness requirement of § 15.50. Texas courts have found nondisclosure covenants are "not necessarily restraints on trade" because they "do not prohibit the former employee from using, in competition with the former employer, the general knowledge, skill, and experience acquired in the former employment." Because nondisclosure covenants are not restraints in the way that noncompetition covenants restrain trade and competition, they are not governed by § 15.50. Defendants have cited no Texas authority expressly holding that a nondisclosure covenant similar to the one at issue is governed by § 15.50. Therefore, defendants are not entitled to summary judgment on the argument that the nondisclosure covenant is unenforceable because it lacks time and geographical restrictions.
Zep Mfg., 824 S.W.2d at 663 (emphasis in original).
Provenzale, 334 F.3d at 465.
The Court notes defendants have cited Oxford Global, 2005 W.L. 350580 at * 2, in which the district court refused to grant an "injunction prohibiting the Former employees from using or disclosing contact information or other confidential information to the extent it is committed to memory." Id. The district court explained that it "consider[ed] the network of acquaintances one comes to know through employment to be an aspect of "general knowledge." Id. The district court did not set down the full text of the nondisclosure agreement so that a comparison of the two provisions is possible. See id. at n. 3. Nor did the district court cite authority establishing that Texas courts view confidential information committed to memory as "general knowledge" and not subject to a nondisclosure covenant. As is applicable to the argument of defendant in this case, to the extent the nondisclosure covenant was a restraint on trade because it included confidential information committed to memory, the district court did not consider whether the terms of the covenant would satisfy § 15.50.
In sum, defendants have failed to establish that the nondisclosure covenant at issue is a restraint on competition under Texas law such that the covenant is subject to the reasonable limitations requirement of § 15.50(a). Defendants have also failed to show that Nova's client business cards and client information are not included in the definition of "confidential information" as defined by the Agreements. Accordingly, defendants' motion for summary judgment on Nova's claims that they breached the nondisclosure covenants should be denied. Burge's agreement
In addition to the above arguments, Burge argues summary judgment is proper on the breach of contract claims alleged against him because he did not receive the consideration of a "certain separation agreement of even date herewith" as promised in the Agreement. Nova argues, in sum, that the evidence does not support the assertion Burge received no compensation for his Agreement because the record shows he received Nova's trade secrets and confidential information as compensation.
Docket no. 81 at 1-2.
Id. at 29-30.
Burge's Agreement provides in relevant part:
I have been employed by Nova in a capacity in which I have received or contributed to the confidential information. I understand that such confidential information was acquired and developed by Nova at great time and expense, that it is competitively valuable and that it has enabled Nova to successfully conduct its business. In consideration of that certain separation agreement of even date herewith, and of any other consideration the adequacy of which is hereby acknowledged, I agree. . . .
Docket no. 97, exhibit B at Burge's Agreement (emphasis added). Unlike Burge's Agreement, the relevant language in the other Agreements is as follows:
I desire to be employed by Nova in a capacity in which I will receive or contribute to the confidential information. I understand that such confidential information was acquired and developed by Nova at great time and expense, that it is competitively valuable and that it has enabled Nova to successfully conduct its business. In consideration of my employment with Nova, my compensation package, and also in consideration of being provided with access to confidential information, I agree. . . .
Id., exhibit B (emphasis added).
Although there is no evidence suggesting Burge received a "certain separation agreement of even date," Nova has cited evidence showing Burge likely received access to confidential information when he began his employment with Nova; evidence Burge has not refuted. Texas courts have recognized that access to an employer's confidential information may be sufficient compensation to satisfy the requirement for forming a contract. Accordingly, the evidence raises a genuine issue of material fact about whether Burge received compensation for the Agreement he signed with Nova, and his motion for summary judgment on the breach of contract claim should be denied.
Id., Cummings at 119-20, 124-25, 170.
See Provenzale, 334 F.3d at 465-66.
D. Tortious Interference with Employment Contracts
1. Summary of Allegations and Arguments
Nova has alleged that ECS purposefully and intentionally interfered with the Agreements between the Managers, other employees, and Nova by inducing the employees to: reveal confidential and proprietary information; solicit Nova's clients; and recruit Nova employees for employment with ECS. ECS has moved for summary judgment on the claim of tortious interference with Agreements, arguing that because the client and employee solicitation provisions are unenforceable as a matter of law, "they cannot form the basis of an action for tortious interference." ECS also argues that summary judgment is proper on the claim for tortious interference with the employment contracts because summary judgment is proper on the claims against the Managers for breach of the nondisclosure provisions.
Docket no. 1 at 12.
Docket no. 83 at 9.
Id. at 20.
Nova responds that, because the Agreements with the Managers are enforceable, ECS's request for summary judgment on the tortious interference claim should be denied as it is solely based on the alleged unenforceability of the Agreements. Because the Agreements contain severability clauses, Nova argues that if even one of the provisions at issue is valid, the Agreements are enforceable and summary judgment should be denied.
Docket no. 97 at 23.
Id.
2. Analysis
The elements of tortious interference with a contract are: (1) the existence of a contract subject to interference; (2) a willful and intentional act of interference; (3) such act was the proximate cause of damage; and (4) actual damage or loss. The Court has found that the covenants not to solicit Nova clients are unenforceable. Accordingly, because the covenants are unenforceable, defendants should be granted summary judgment on the claim that ECS tortiously interfered with the covenants against soliciting Nova's clients.
Friendswood Dev. Co. v. McDade Co., 926 S.W.2d 280, 282 (Tex. 1996); see also Hi-Line Elec. Co. v. Dowco Elec. Prod., 765 F.2d 1359, 1362 (5th Cir. 1985).
Nevertheless, as Nova argues, the Agreements contain a severability clause that provides for the enforcement of all valid provisions in the Agreements. Defendants have not established that the covenants against soliciting Nova employees and the nondisclosure covenants are uneforceable and have not argued another basis for summary judgment. Therefore, defendants' motion for summary judgment on the claim that ECS tortiously interfered with those covenants should be denied.
Docket no. 97, exhibit B.
E. Tortious Interference with Existing Contracts
1. Summary of Allegations and Arguments
Nova has alleged that defendants intentionally and purposefully interfered with Nova's business and contractual relationships with its clients and prevented Nova from realizing the full benefits of its client relationships. Defendants have moved for summary judgment on the claims of tortious interference with existing contracts, arguing "Nova has failed to produce or identify a single contract that could have been subject to interference by the Defendants." To the extent Nova may be alleging tortious interference with prospective business relations, defendants argue, in sum, that Nova has failed to show that defendants' actions were more than sharp or unfair or that defendants conduct was independently tortious.
Docket no. 1 at 8-12.
Docket no. 83 at 24.
Id.
In response, Nova notes that it mistitled these causes of action as "tortious interference with existing contracts" but properly pleaded them as "tortious interference with business relationships." Nova argues the evidence shows "Hunter and McIntosh each took existing Nova contracts with them to ECS, and that ECS then completed, and profited from, those contracts." Nova also contends the evidence shows all defendants "used Nova's confidential information to solicit clients with whom Nova had existing, and in some cases near exclusive, relationships," thus taking "clients with whom Nova had a reasonable expectancy of future business." Nova argues it only has to establish that defendants conduct "would be actionable under a recognized tort." Nova asserts "Defendants' widespread and varied misconduct in this case easily meets this threshold." In reply, defendants reiterate the argument that Nova has no evidence of existing contracts with which they interfered but they do not refute Nova's arguments regarding interference with prospective business relationships.
Docket no. 97 at 28 at n. 19.
Id. at 28.
Id.
Id.
Id. at 29.
Docket no. 100 at 13.
2. Analysis
To the extent Nova has pleaded a cause of action for tortious interference with existing business contracts, as discussed under "Misappropriation of Trade Secrets," Nova has presented evidence that raises genuine issues of material fact about whether McIntosh took a contract between Nova and Nextel and used it on behalf of ECS. Nova has cited no other evidence that would suggest tortious interference with an existing business contract. Accordingly, defendants are not entitled to summary judgment on the claims that McIntosh and ECS tortiously interfered with existing business contracts. To the extent Nova pleaded claims of tortious interference with existing business contracts against, Hunter, Burge, and Hernandez, defendants motion for summary judgment should be granted.
As for tortious interference with prospective business relationships, the Texas Supreme Court has held that "to establish liability for interference with a prospective contractual or business relation the plaintiff must prove that it was harmed by the defendant's conduct that was either independently tortious or unlawful." "Independently tortious" means "conduct that would violate some other recognized tort duty." The plaintiff need only "prove that defendant's conduct would be actionable under a recognized tort." Contrary to defendant's argument in this case, Nova has presented evidence raising a question of fact about whether defendants misappropriated confidential or trade secret client information to solicit business from Nova's clients. Under Texas law misappropriation of trade secrets is a common-law tort cause of action. Defendants have not argued that the misappropriation claims are not the type of tort claims the Texas courts have identified as "independently tortious" for the purpose of interference with prospective business relationships. Therefore, defendants motion for summary judgment on the claims of tortious interference with prospective business relationships should be denied.
Wal-Mart Stores, Inc. v. Sturges, 52 S.W.3d 711, 713 (Tex. 2001).
Id.
Id. at 726.
Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex.App.-Austin 2004, pet. filed).
F. Breach of Fiduciary Duties
1. Summary of Allegations and Arguments
Nova has alleged that Hunter and McIntosh breached their common law fiduciary duty of loyalty to Nova by usurping corporate opportunities and deliberately scheming to divert clients and business from Nova to benefit themselves and ECS. Hunter and McIntosh have moved for summary judgment on the claims, arguing that merely advising clients of their departure from Nova is not a breach of fiduciary duty and that Nova's speculation about Hunter's trip to Corpus Christi is not sufficient to withstand summary judgment. In response, Nova argues Hunter and McIntosh have not addressed each of the ways in which they breached their fiduciary duties, including taking Nova's contacts and projects as well as taking a Nova proposal and business cards. Nova also argues Hunter and McIntosh failed to address the fact that, while working for Nova, they arranged for Hunter's trip to Corpus Christi on behalf of ECS to be paid for by Nova and the fact that after agreeing not to, they contacted and solicited Nova clients for ECS while employed by Nova.
Docket no. 1 at 19-20.
Docket no. 83 at 22-23.
Docket no. 97 at 27.
Id.
In reply, Hunter and McIntosh acknowledge that an employee who steals an employer's trade secret information can be liable for breach of fiduciary duty but argue none of the information at issue is trade secret or confidential. Hunter and McIntosh also argue that the evidence Nova cites does not show that they solicited clients or employees before leaving Nova or that Hunter made the trip to Corpus Christi on behalf of ECS.
Docket no. 100 at 13-14.
Id. at 15.
2. Analysis
"When a fiduciary relationship of agency exists between employee and employer, the employee has a duty to act primarily for the benefit of the employer in matters connected with his agency." The employee has the duty to: not compete with the employer on his own behalf in matters related to the agency; deal fairly with the employer in all transactions between them; deal openly with the employer; and fully disclose information about matters affecting the employer's business. When an employee uses his "position to gain a business opportunity belonging to the employer, such conduct constitutes an actionable wrong." At-will employees may plan to compete with the employer while still employed and have no general duty to disclose the plans to the employer. Nevertheless, "if the nature of the party's preparation to compete is significant, it may give rise to a cause of action for breach of a fiduciary duty." Although an employee "may use the general knowledge, skill, and experience acquired in the former employment to compete," there are limitations on the employee's conduct. The employee may not: solicit the employer's clients during his employment with the employer; appropriate the employer's trade secrets; recruit other employees while working for the employer; or take confidential information such as the employer's client list.
Abetter Trucking Co., Inc. v. Arizpe, 113 S.W.3d 503, 510 (Tex.App.-Houston [1st Dist.] 2003, no pet.) (citingJohnson v. Brewer Pritchard, P.C., 73 S.W.3d 193, 200 (Tex. 2002)).
Id. (citing Bray v. Squires, 702 S.W.2d 266, 270 (Tex.App.-Houston [1st Dist.] 1985, no writ)).
Id.
Id.
Id. at 511 (citing Herider Farms-El Paso, Inc. v. Criswell, 519 S.W.2d 473, 476 (Tex.Civ.App.-El Paso 1975, writ ref'd n.r.e.)).
Id. at 512 (citing Johnston v. American Speedreading Academy, Inc., 526 S.W.2d 163, 166 (Tex.Civ.App.-Dallas 1985, no writ)).
Id. (citing Johnson, 73 S.W.3d at 202; American Speedreading, 526 S.W.2d at 166; Criswell, 519 S.W.2d at 476-77).
In light of the discussion under "Misappropriation of Trade Secrets," Nova has produced evidence that raises a genuine issue of material fact about whether Hunter and/or McIntosh appropriated trade secret and confidential information such as client contact information, business cards, and a contract between Nova and Nextel. With respect to Hunter's trip to Corpus Christi just prior to his resignation, the evidence shows Hunter submitted a Nova "marketing/non-client related expense report" for a 350 mile trip on March 25, 2002 to "N.A.S." The report was signed by Hunter, and a manager's initials reflect approval. The report also indicates that Nova remitted $112.00 for the trip. Hunter testified N.A.S. stands for the Naval Air Station in Corpus Christi. Hunter also testified that, when he began his employment with ECS, he dealt with Landmark Construction, a client who was doing work at the Naval Air Station. Hunter stated that Landmark Construction was not a Nova client. Cummings testified on behalf of Nova that McIntosh initialed the expense report. Given the timing of the trip to Corpus Christi near the time of Hunter and McIntosh's termination from Nova as well as Hunter's testimony that Landmark Construction was not a Nova client, a genuine issue of material fact exists about the purpose of Hunter's trip and McIntosh's knowledge of that purpose. Therefore, defendants are not entitled to summary judgment on Nova's claims that Hunter and McIntosh breached their fiduciary duties to Nova by taking client contact information, client business cards, and a Nova contract with Nextel as well as by making and/or approving the trip to Corpus Christi on behalf of ECS at Nova's expense.
Docket no. 97 at exhibit L.
Id.
Id.
Id., Hunter at 212-13.
Id. at 213-14.
Id. at 214.
Id., Nova at 149.
But, to the extent Nova has alleged that McIntosh breached his fiduciary duty by taking a client proposal, defendants' motion for summary judgment should be granted for the reasons set forth in the discussion under "Misappropriation of Trade Secrets."
In addition, summary judgment should be granted on Nova's claim that Hunter and McIntosh solicited clients on behalf of ECS while employed by Nova. Nova has proffered the letter from a client showing that Hunter informed the client he and McIntosh were resigning from Nova. Nova's corporate testimony, as elicited from Cummings, reflects a client was informed by McIntosh of his resignation prior to his departure from Nova. Cummings testified that both Hunter and McIntosh had promised not to inform clients of their resignations prior to their departure from Nova. At best, the client letter and Cummings testimony, which is based on hearsay statements from a client, reflect that Hunter and McIntosh may have broken promises not to divulge to clients the information about their resignations. But, other than Cummings speculations, Nova has cited no evidence suggesting Hunter and McIntosh were soliciting the clients on behalf of ECS prior to their departure from Nova.
Docket no. 97, exhibit M; see also Hunter at 135.
Id., Nova at 148-49.
Id. at 155.
G. Common Law Trademark Infringement
1. Summary of Allegations and Arguments
Nova has alleged that its "Nova" mark is arbitrary and fanciful, having no relationship to its services. Nova has alleged that, without permission, ECS prepared and sent to a client a project report which included Nova's letterhead and its mark. Nova has alleged that such unauthorized use of its mark caused, and is likely to continue to cause, confusion or mistake or to deceive or mislead consumers into believing the environmental services were provided by Nova.
Docket no. 1. at 23.
Id.
Id. at 23.
ECS has moved for summary judgment, arguing: the use of Nova's mark was not in connection with "selling, offering for sale or advertising goods or services as required for trademark infringement; the use of the mark was not misleading because it was not obscured or removed from the report; and there is no evidence of damage. Nova has responded that ECS "obviously used Nova's trademark in connection with its provision of services, namely the report submitted to its client;" the record shows the client was confused by the inclusion of Nova's mark; and Nova has described its damages as harm to its reputation in the marketplace. In reply, ECS argues that Nova has supported its arguments with inadmissible hearsay evidence and that Nova's damages expert made no attempt to quantify the damages for the alleged trademark infringement.
Docket no. 83 at 21-22.
Docket no. 97 at 26.
Docket no. 100 at 13.
2. Analysis
To succeed with a claim for common law trademark infringement, Nova must establish: (1) the name it seeks to protect is eligible for protection; (2) it is the senior user of the name; (3) the likelihood of confusion; and (4) damages. Defendants do not contest the first two elements of a claim for common law trademark infringement. Even assuming, for the sake of argument, that Nova has presented some evidence suggesting clients were confused by ECS's use of Nova's mark, Nova has failed to proffer evidence to raise a genuine issue of material fact about the damages it might have suffered. Nova cited its deposition testimony, as elicited from Cummings, that people in the market place, specifically the client who received the report, were talking about ECS's use of the Nova mark; the client was confused about certification and permission; Nova's reputation was cheapened; and there was confusion among Nova's clients. This evidence may suggest ECS's actions caused confusion among Nova's clients, but Cummings testimony about Nova's damaged reputation is conclusory and speculative, particularly in light of his testimony that no client said it would stop doing business with Nova because of the incident. Because Nova has cited no other evidence suggesting that its reputation was damaged by ECS's use of its trademark, Nova has failed to raise a genuine issue of material fact about its damages. Therefore, defendants' motion for summary judgment should be granted on Nova's claim of common law trademark infringement.
All American Builders, Inc. v. All American Siding of Dallas, Inc., 991 S.W.2d 484, 488 (Tex.App.-Fort Worth 1999, no pet.).
Docket no. 100, Nova 30(b)(6) at 184, 198. Although Nova cited to page 184, 198 of its deposition testimony, the pages were not included in Nova's appendix of exhibits. Nevertheless, defendants have included the pages in the appendix of exhibits attached to their reply brief.
Id. at 200.
H. Unjust Enrichment, Unfair Competition, and Civil Conspiracy
Nova has alleged that ECS was "unjustly enriched at the expense of Nova by soliciting Nova's employees, clients, and potential clients" as well as by "wrongfully using Nova's mark, employee, and certification." Nova has also alleged that ECS engaged in unfair competition by: its unauthorized use of the Nova letterhead "to obtain business in such a manner as to cause confusion or misunderstanding as to the source, sponsorship, approval, affiliation, connection or association with Nova" with the "intention of trading on the goodwill established by Nova;" misappropriating the benefits of Nova's efforts and money expended in establishing its reputation under the Nova mark; wrongfully soliciting Nova's employees to work for ECS; and inducing former employees to breach their employment contracts with Nova. Further, Nova has alleged that the defendants conspired to engage in each of the various acts alleged in the original complaint.
Docket no. 1 at 20.
Id. at 21.
Id. at 22.
Defendants argue summary judgment is appropriate as to the claims of unjust enrichment, unfair competition, and civil conspiracy because they are derivative claims and "there is no wrongful or actionable underlying act" to support the claims. Nova responds that "the requisite underlying wrongful acts for Nova's . . . claims are present in spades, and summary judgment for Defendants" should be denied. Nova's argument is well-taken. Based on the preceding discussion of Nova's other claims, there are genuine issues of material fact about whether defendants engaged in wrongful acts that might underlie the causes of action for unjust enrichment, unfair competition, and civil conspiracy. Accordingly, defendants' motion for summary judgment on these claims should be denied.
Docket no. 83 at 25; docket no. 100 at 16.
Docket no. 97 at 29.
VII. RECOMMENDATION
Based on the foregoing analysis, it is recommended that defendants' motion for summary judgment be GRANTED in part and DENIED in part as follows:Summary judgment should be granted on Nova's claims that: (1) McIntosh misappropriated a client proposal, (2) the Managers breached the covenants against soliciting Nova's clients, (3) ECS tortiously interfered with the covenants against soliciting Nova's clients, (4) Hunter, Burge, Hernandez tortiously interfered with Nova's existing business contracts, (5) McIntosh breached his fiduciary duty to Nova by taking a client proposal, (6) Hunter and McIntosh breached their fiduciary duties to Nova by soliciting clients on behalf of ECS while employed by Nova, and (7) ECS infringed on Nova's trademark.
In all other respects, the motion for summary judgment should be denied.
VIII. INSTRUCTIONS FOR SERVICE AND NOTICE OF RIGHT TO OBJECT/APPEAL
The United States District Clerk shall serve a copy of this Memorandum and Recommendation on each and every party either (1) by certified mail, return receipt requested, or (2) by facsimile if authorization to do so is on file with the Clerk. According to Title 28 U.S.C. § 636(b)(1) and FED. R. CIV. P. 72(b), any party who desires to object to this report must serve and file written objections to the Report and Recommendation within 10 days after being served with a copy unless this time period is modified by the District Court. A party filing objections must specifically identify those findings, conclusions or recommendations to which objections are being made and the basis for such objections; the District Court need not consider frivolous, conclusive or general objections. Such party shall file the objections with the Clerk of the Court, and serve the objections on all other parties and the Magistrate Judge. A party's failure to file written objections to the proposed findings, conclusions and recommendations contained in this report shall bar the party from a de novo determination by the District Court. Additionally, any failure to file written objections to the proposed findings, conclusions and recommendations contained in this Report and Recommendation within 10 days after being served with a copy shall bar the aggrieved party, except upon grounds of plain error, from attacking on appeal the unobjected-to proposed factual findings and legal conclusions accepted by the District Court.
See Thomas v. Arn, 474 U.S. 140, 150, 106 S.Ct. 466, 472 (1985).
Acuna v. Brown Root Inc., 200 F.3d 335, 340 (5th Cir. 2000); Douglass v. United Serv. Auto. Ass'n., 79 F.3d 1415, 1428 (5th Cir. 1996).