Recent Decisions and Case Developments

On March 13, 2015, the Texas Supreme Court denied review of Lamont et al v. Vaquillas Energy Lopeno, Ltd. et al, thereby upholding a $4.9 million jury award for Vaquillas in its trade secret misappropriation suit. At the center of the dispute is the seismic map of oil and gas prospects that Ricochet Energy, Inc. generated pursuant to an agreement with Vaquillas in 2003 and 2004. The seismic map, or “treasure map” as both parties had referred to it, had identified a lucrative prospect – a gas reservoir containing natural gas estimated as much as $60 million.

The instant controversy began when Thomas Lamont, a co-owner of Ricochet, separated from Ricochet in 2006, and then formed a new entity, Montecristo II, with another oil and gas investor, Rosendo Carranco in 2007. Because Lamont had continued to own a working interest in the gas prospect, after Lamont’s separation, Ricochet shared the treasure map with Lamont as a potential investor, without signing any confidentiality agreements. Montecristo II then outbid Ricochet to lease property adjacent to the gas reservoir, and depleted it, foreclosing any opportunity for Ricochet to withdraw any gas.

On appeal from the jury’s verdict in favor of Vaquillas, Lamont argued that the trade secret’s status was destroyed when Ricochet shared the treasure map with Lamont after his effective resignation date. However, the court noted that the disclosure to Lamont was in his role as a potential investor, and as such, the limited disclosure did not destroy its trade secret status. The disclosure was never meant to enable a potential investor to compete directly against Ricochet, but instead, to work with them in an investment opportunity. Further, the court noted that Ricochet took proper means to protect its trade secret, by keeping it a secret from its employees, competitors, and the public. Next, the appellate court concluded there was sufficient evidence to support a finding that Lamont and Carranco’s actions fell below the generally accepted standards of commercial morality, because they used improper means to locate the gas reservoir when they misused the map. Notably, Lamont and Carranco had never conducted any independent research, indicating their reliance on the map, which they used to enrich themselves off of Ricochet’s work and investment.

While Texas adopted a version of the Uniform Trade Secrets Act, it only took effect on September 1, 2013, and does not apply to prior misappropriation. As such, in the instant case, the appellate court relied heavily on the 3rd Restatement of Unfair Competition, which notably, is aligned with the Act. Therefore, this case is still persuasive in situations where a company must rely on common law to protect its trade secrets if it is in a state where the UTSA, or any version of the model Act, has not been adopted. Further, and more significantly, this case demonstrates that companies which did not employ confidentially or non-disclosure agreements, may still be protected in the scenario a potential business investor misuses their secrets. While certainly helpful in situations where negotiations could be stalled for such agreements, it is always better to employ these agreements, if for no other reason than it may define the scope of litigation.

On January 28, 2015, the Delaware Court of Chancery released an opinion finding that a choice of law clause in a noncompete contract, designating Delaware as the venue and choice of law for dispute resolution, did not govern the dispute because the state of California had a materially greater interest in the issue. The parties here engaged in an employee investment agreement (“EIA”) in July of 2008, in which Defendant Underwood agreed not to compete with Ascension or its parent for two years after leaving his position at Ascension. Plaintiff Ascension sought to enforce the non-compete clause in the EIA and the Court of Chancery was presented with the question of whether California’s employee friendly statute or Delaware’s contract-friendly policies should govern the validity of the non-compete clause.

In the EIA both parties agreed to Delaware venue as well as Delaware choice of law. However, the court found that California was the state with the strongest contacts to the contract because the EIA was entered between a California resident and a Delaware limited liability company that now has its principal place of business in California, the non-compete clause was negotiated in California, and but for the choice-of-law provision, California law would apply to the EIA. Additionally, California’s interest in its employee-friendly public policy is greater than Delaware’s interest in the sanctity of a contract.

This decision is significant because the Chancery Court, which is historically corporate-friendly, took a strong stance against allowing corporations to contract around unfavorable state laws. The court emphasized that California’s public policy against non-compete clauses is so fundamental that it would prevail over a contracted to term which goes against this policy. This decision empowers employees and ensures that they will be able to rely on his or her state’s employee protection policies as long as he or she is engaging in the employment relationship in his or her state. Even if an employee agrees to a choice-of-law clause, applicable state policies will still be able to protect him or her. In the future, this decision should cause corporations to investigate the state policies on non-compete clauses in the states in which it engages in employee relationships.

On February 6, the 8th Circuit released an opinion finding that a Global Noncompete Agreement was overbroad, and therefore unenforceable. Arunya Suresh began working at NanoMech in 2010, agreeing to the noncompete which was for two years following termination with or without cause, and would have prevented Suresh from working or consulting with any business that competes with NanoMech. The agreement did not state a geographic limitation, and so was presumably enforceable anywhere in the world.

Suresh left NanoMech in May 2012, stating she was going to pursue her doctorate degree. However, NanoMech discovered she had actually accepted a position as a chemist at competitor BASF. At the district court level, NanoMech was unsuccessful in obtaining an injunction against Suresh, and ultimately the 8th Circuit Court upheld the decision.

This sort of global noncompete is frowned upon by most courts, and will often not stand up to the three-part test used in Arkansas (but fairly typical elsewhere), that looks at 1) whether the employer has a valid interest to protect, 2) whether the geographical restriction is overly broad, and 3) whether the time limit imposed is reasonable. In this case, the court ruled the combination of the broad restriction on the things Suresh could not do, considered together with the complete lack of geographic limitation, renders the noncompete overbroad and unenforceable. In the court's words, the lack of geographic limitation was particularly oppressive because the agreement "prohibits her from working in any capacity for any business that competes with the company."

This decision is interesting since Arkansas affords trade secrets particularly strong protection. In fact, Arkansas has previously upheld certain global noncompetes, but as the court pointed out, the restrictions in those cases were far more narrowly tailored as to the prohibited conduct. In both cases discussed, the employees simply couldn't solicit clients with whom they had contact with while employed by their respective former employers. It was this very narrow limitation on what conduct they could not do do that the courts found to justify a lack of geographic limitation in the noncompete agreements.

The Court of Appeals of North Carolina overturned a trial court's ruling that an assigned non-compete was unenforceable.

TSG is a company that specializes in "fabric finishing," or the use of chemicals to effect the color and textures of various textiles. Former employee Bollinger had signed a non-compete agreement with TSG in 2007, and TSG subsequently filed for bankruptcy, and transferred its assets to a subsidiary corporation with a similar name. While Bollinger's job remained the same, he technically now worked for a different company, who had been assigned his employment contract including the non-compete agreement. When Bollinger decided to go work for American Custom Finishing, a competitor located just 5 miles down the road, TSG sued to enjoin him from doing so based on the non-compete agreement. The trial court, however, decided that the agreement was unenforceable, primarily because there was no explicit assignability clause in the non-compete, and the trial court found that a balancing of the equities weighed against enforcement.

The Appellate Court disagreed with the trial court's approach. The Court explained that the case relied on by the trial court, Hess v. Gebhard & Co., 808 A.2d 912 (PA 2002), was different from the present case in that the assignor and the assignee were basically strangers, while here the assignment was just part of a restructuring following a bankruptcy. Thus the non-compete is being enforced by TSG who is certainly not a "stranger to the original undertaking," as was the case in Hess, and so the requirement that there be an assignability clause is substantially relaxed. Further, the fact that Bollinger was given an annual raise of $1,300 and a signing bonus of $3,500 for signing the non-compete, and that he left abruptly after 27 years of service at TSG to work at a competitor 5 miles down the road, both weigh strongly in favor of enforcing the non-compete. While the trial court was persuaded by Bollinger's argument that he is unemployable outside the textile industry, and so enforcing the non-compete would be particularly burdensome on him, the Appellate Court was far less sympathetic.