Lawsuits involving alleged violations by former employees of non-competition agreements are often hotly contested and involve injunctive relief. These cases can be challenging for the employer to obtain relief because covenants not to compete are governed by statutory law requiring these restrictive covenants to be reasonable as to time, geographical area, and scope of activity to be restrained. Tex. Bus. & Com. Code Ann. § 15.50 (West). There is a tendency for employers to draft these covenants too broadly causing problems when it becomes necessary to seek court enforcement.
In a recent Texas federal district court case involving the alleged breach of employment non-compete agreements, misappropriation of trade secrets, and other complaints, the Court dissolved the temporary restraining order (TRO) and denied the Plaintiff employer’s request for preliminary injunctive relief. Scalefactor, Inc., Plaintiff, v. Process Pro Consultin, LLC; Adam Sharrow; & Andrew Millet; Defendants., 1:19-CV-229-RP, 2019 WL 1317332 (W.D. Tex. Mar. 22, 2019). In this case, the individual Defendants were former employees of Plaintiff, a company engaged in the business of solving finance and accounting problems for small businesses. These individual Defendants had signed non-compete agreements with Plaintiff. After the individual Defendants left their employment with Plaintiff, they formed the Defendant entity, Consultin, LLC, to advise small and medium sized businesses on improving their sales, marketing and customer success processes. Consultin, LLC provided no accounting or finance products or services.
Plaintiff alleged that the Defendants violated their non-compete agreements, misappropriated trade secrets, and committed fraud and other improper conduct. The Court granted Plaintiff’s request for a TRO at a telephonic hearing and ordered the parties to appear before the court only 8 days later to determine whether to grant Plaintiff’s request for preliminary injunctive relief. At this juncture, the Plaintiff was probably feeling pretty confident. Not so fast–the Court dissolved the TRO previously granted and denied the Plaintiff’s request for preliminary injunctive relief.
Beginning with the alleged violations of the non-competition agreements, the court held that the individual Defendants did not violate the agreements because the entity formed by them was not in competition with Plaintiff since the entity did not provide accounting or finance products or services. Thus, Plaintiff failed to establish a substantial likelihood of proving that the former employees breached their non-compete agreements, an essential element that had to be proved to support the award of temporary injunctive relief.
In regard to the misappropriation of trade secret claim, the Court held that Plaintiff failed to demonstrate that the Defendants probably used or disclosed trade secrets–elements that the Plaintiff had to prove in order to prevail on its request for temporary injunctive relief based upon this cause of action. In regard to the remaining alleged causes of action, Plaintiff failed to show that damages would be unavailable or that Plaintiff would suffer irreparable harm if injunctive relief was not granted–also elements Plaintiff had to prove. The Court denied the Plaintiff’s request for preliminary injunctive relief and dissolved the TRO.
Lessons learned. When seeking a TRO and preliminary injunctive relief, the Plaintiff must thoroughly perform an investigation and prepare the supporting evidence well in advance of the TRO and preliminary injunction hearings. This is because, within a couple of weeks after the Court grants the TRO, the Plaintiff will be required to present its proof at the preliminary injunction hearing which is nothing short of a mini-trial. If the Plaintiff fails to have all ducks in a row or there is simply insufficient evidence to support the requested relief, the court will deny the Plaintiff’s request for preliminary injunctive relief.
It is also important for the employer’s attorney to carefully draft the non-competition agreement. Typical boilerplate language won’t do. The agreement should provide a detailed description of the employee’s job duties and an itemized list of any confidential information being provided to the employee. At the same time, the post-employment restrictions imposed upon the employee’s right to compete should be drafted to be reasonable as to time, the scope of the employee’s restricted postemployment activities and the restricted geographic area. If the restrictive covenants are too broad, they will be unenforceable or reformed by the court. If the court reforms the covenants, the Plaintiff will not be allowed to recover any related damages sustained before the court reformation.