Suspicion and Speculation Do Not Prove Unlawful Solicitation or Misappropriation of Trade Secrets
Published by Eric A. Welter and Kimberly Kauffman on May 23, 2018
The Fifth Circuit cautions that a company must provide more than mere speculation to proceed on claims that a former employee breached her non-solicitation agreement and misappropriated trade secrets.
In GE Betz v. Moffitt-Johnston, one of the defendants, Michelle Moffitt-Johnston, went to work for a new employer in competition with her former employer, GE Bentz (“GE”). During her employment with GE, Moffitt-Johnston signed an agreement prohibiting her from soliciting any GE’s customers or prospective customers with whom she had had contact or learned confidential information about for 18 months following termination of her employment. Thereafter, Moffitt-Johnston provided notice of her resignation and informed GE that she had accepted a position at another company, AmSpec. Moffit-Johnston, however, did not indicate that she would be directly competing with GE in her new role. Had she done so, GE would have probably denied Moffitt Johnston access to GE’s network and terminated her employment immediately, in accordance with its standard practice.
After Moffit-Johnston announced her resignation, GE noticed that someone had downloaded over 27,000 files from her computer to an external hard drive. GE alleged Moffitt-Johnston had initiated this download whereas Moffitt-Johnston countered that the IT Department was backing up her computer. There was another attempted download from Moffitt Johnston’s computer a few weeks later that was blocked by recently installed exit controls. Two days after Moffitt-Johnston left GE, she was observed speaking with at least two GE customers at an event as a representative of her new employer, but it was not known what was said during these conversations. Over the course of the next year, AmSpec provided services to many customers who had been recent customers of GE.
GE then sued Moffitt-Johnston and AmSpec and later appealed the district court’s grant of summary judgment on its breach of a non-solicitation agreement, tortious interference with prospective business relationships, and misappropriation of trade claims. It also appealed the grant of attorney’s fees against GE.
In upholding summary judgment on the breach of a non-solicitation agreement claim, the Fifth Circuit found that GE’s evidence amounted to mere speculation. First, the Court held that GE’s contention that Moffitt-Johnston must have solicited clients because she allegedly misappropriated their information was speculative. Additionally, the agreement did not prohibit Moffitt-Johnston from speaking with GE’s customers, only from soliciting GE’s customers, and GE provided no evidence as to the substance of the conversations Moffitt-Johnston had with its customers. Similarly, GE did not provide sufficient evidence to show the substance of email exchanges between Moffitt-Johnston and a GE customer, whom AmSpec later provided services to.
Moreover, the Court held that the fact another employee Moffitt-Johnston supervised pursued leads with GE customers did not show that Moffitt-Johnston herself directed these activities. Finally, the Fifth Circuit found that the fact AmSpec was able to quickly compete with GE soon after first offering competing services does not show Moffitt-Johnston solicited customers, especially given that AmSpec had previously provided other services to some of these customers.
The Fifth Circuit also affirmed the grant of summary judgment on GE’s misappropriation-of-trade- secrets claim. GE alleged several circumstances showed Moffitt-Johnston used the trade secrets at issue: Moffitt-Johnston’s creation of a business plan for her AmSpec interview; Moffitt Johnston’s emailing of GE’s most recent financial data to her AmSpec account on her last day at GE; and AmSpec’s success with clients whose financial data Moffitt-Johnston had sent over. The Court held that this evidence was not sufficient to show Moffitt-Johnston may have actually used the allegedly misappropriated information.
For example, the Court held that it could not be inferred that information was misappropriated merely based on the fact that AmSpec provided services to customers whose information Moffitt-Johnston allegedly took. The Court again noted that AmSpec had previously worked with many of these customers in other capacities. The Court also emphasized that evidence of improper acquisition of information is not sufficient to show actual use of the information.
Finally, the Court vacated the attorneys’ fees award to Moffitt-Johnston. It held that Moffitt Johnston failed to show that GE knew the non-solicitation agreement was unreasonable when it executed the agreement, as is required to recover attorneys’ fees on a non-compete claim under Texas law. In reaching its decision, the Court noted that a covenant not to compete may still be enforceable in Texas even without a geographic limitation when it is limited to the employee’s clients.
The Fifth Circuit’s holding in GE indicates that companies, especially those within the Fifth Circuit’s jurisdiction, must have specific evidence that a former employee has directly solicited customers in violation of an agreement or improperly acquired and used trade secrets. Evidence that the employee spoke with the employer’s clients after leaving (without evidence regarding the nature of the conversations) and improperly took confidential information and trade secrets before leaving will probably not be sufficient to succeed on such claims. Companies should adopt procedures for handling departing employees to mitigate the risk that confidential information is improperly acquired in the first place. Additionally, companies should strive to draft enforceable non-compete covenants, as drafting an unreasonable non-compete provisions could subject them to attorneys’ fees later down the line.Topics: Business and Franchise Litigation, non-solicitation agreements, Trade Secrets, unfair competition and trade secrets, unfair labor practice