May 2018, Vo. 245, No. 5

Legal Perspectives

Texas Energy Sees Uptick in Non-Compete, Trade Secrets Litigation

By Stephen J. Roppolo, Managing Partner,  Fisher Phillips, Houston

Texas energy companies have been encouraged by the slow-but-steady recovery of the industry.  Activity in Texas (the Permian Basin, for instance) is more robust than in others, but the general improvement has meant a stronger balance sheet for many employers.  The increased financial stability, however, can mean instability in another aspect of the business – an increase in the number of highly qualified personnel jumping ship to go work for a competitor.

Economic downturns tend to discourage employees from leaving current employers mainly because other positions are hard to come by. When conditions improve, employees are emboldened to make career moves they had been putting off. The only thing worse than learning that a key employee is leaving to work for your biggest competitor is to learn that he is doing so armed with your trade secrets and other proprietary information.

Restrictive Covenants 

Many employees in Texas have operated for years under the impression that non-compete agreements in Texas were not worth the paper they are written on. While that may have been the case years ago, in the past 10-15 years, the Texas Supreme Court has issued decisions making it much easier to enforce these agreements. Most employers have reacted by getting employees to sign agreements limiting employees’ ability to work for competitors or solicit customers after they leave. 

As long as restrictive covenants are “ancillary to an otherwise enforceable agreement” – that is, attached to another agreement that is fully enforceable on its own – and are reasonable in terms of geographic scope and duration of the restrictions, they are usually enforced.  In many cases, the “ancillary agreement” is simply a non-disclosure agreement in which the employer agrees to provide the employee with confidential information, and in return the employee agrees to keep the material confidential.

In some cases, an employer conducts a forensic examination of the departing employee’s computers, email, smartphones, and other devices and uncovers suspicious activity prior to the employee’s exit. For example, some employees email customer lists to personal email addresses in the days before leaving. Others might insert a “flash drive” into a USB port and access (and likely copy) important customer or product information.

For the past few years, employers who have seen employees walk out with their assets have initiated litigation to minimize the damage. These lawsuits often assert claims of breach of contract, breach of fiduciary duty, trade secret misappropriation, and violations of the federal Computer Fraud and Abuse Act. In order to block the former employee, most employers will seek a temporary restraining order (TRO).

New Kid on Block

An employer with a valid non-compete or non-solicitation agreement, or that can demonstrate that confidential information was taken, usually pursues these claims pretty aggressively.  In most cases, the only reason not to pursue a “full-court press” legal strategy is the cost of doing so. Recently, however, defendants in these actions have begun tapping into a powerful new statutory scheme in defense of these non-compete and trade secret misappropriation cases – the TCPA.

The Texas Legislature passed the Texas Citizens Participation Act (TCPA) in 2011 in order to curtail what it believed to be frivolous lawsuits designed to deter Texans from exercising certain constitutional rights, including the right of free speech and free association.  

The TCPA is an “anti-SLAPP” statute (where “SLAPP” stands for “strategic lawsuits against public participation”).  The idea behind these statutes is that they deter lawsuits brought less to vindicate a plaintiff’s rights and more to tie up the defendant in court in the hopes that he will no longer afford to be able to exercise his constitutional rights.  

While they are often effectively used in defamation cases, the language in the TCPA is sufficiently broad enough that the statute is being used by defendants in all manner of cases – including in restrictive covenant and trade secret lawsuits. This means that employers seeking to protect their confidential information and to enforce valid agreements may find themselves facing an early motion to dismiss brought under the TCPA.

This is what happened in 2014 when Schlumberger filed suit against its former director of intellectual property for allegedly removing patents onto removable storage media prior to her departure.  The former employee responded with a TCPA motion to dismiss, which requires the plaintiff to come forward with clear and specific evidence on each element of each of its claims – in essence, to prove up its case before the case has barely begun. 

The Harris County judge hearing the motion to dismiss Schlumberger’s claims concluded that circumstantial evidence was not enough for the company to meet its burden on its claims.  He granted the motion to dismiss on most of the claims Schlumberger brought and awarded the former employee $350,000 in attorney’s fees (mandatory under the TCPA) and another $250,000 in sanctions. The appeals court refused to set aside the ruling, leaving the fees and sanctions intact and essentially turning an apparently solid trade secret misappropriation case on its head.

All of this has obviously added an entirely new wrinkle to non-compete and trade secret litigation. For example, if an employer fails to convince a judge to enter a TRO, it could find itself hit with a TCPA motion to dismiss right out the gate. The statute requires that the judge stay the entire legal action subject to the motion, potentially disrupting even a previously set injunction hearing, depriving the employer of the right to put a stop to the former employee’s wrongful conduct. Thus, by filing such a motion, a defendant-employee might be able to evade injunctive relief entirely.   

It is possible that Texas appellate courts will begin to interpret the TCPA more narrowly, since it is unlikely the Texas legislature intended to negatively impact cases in this way.  But until the Texas Legislature decides to dip its toes back into this pool, the best approach for employers seeking to enforce their rights may be to follow that old Boy Scouts motto – be prepared (before coming to the courthouse, that is). P&GJ

Author: Stephen J. Roppolo is the managing partner for the Houston office of Fisher Phillips, a national labor and employment law firm.  

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