Summary
reforming a non-compete for a salesman to only prevent contact with clients on accounts that he developed at employer rather than all clients, including those he had before he joined the company
Summary of this case from Transperfect Translations, Inc. v. LeslieOpinion
CIVIL ACTION NO. 3:07-CV-0928-K.
August 28, 2008
MEMORANDUM OPINION AND ORDER
Before the Court are Defendant Alan Sandler's ("Sandler") Motion for Summary Judgment (Doc. No. 19), and Plaintiff's Cross Motion for Partial Summary Judgment against Sandler as to Liability Only (Doc. No. 33). The Court GRANTS in part Defendant's motion, finding the terms of the noncompetition agreement to be overbroad and therefore unenforceable as written. The Court DENIES without prejudice the remainder of Defendant's Motion for Summary Judgment.
The Court further GRANTS in part Plaintiff's motion on the general enforceability of the covenant not to compete and DENIES without prejudice the remainder of Plaintiff's motion.
I. Factual and Procedural Background
Defendant Alan Sandler began his career selling office supplies in Dallas, Texas, in 1987. Over the past twenty-plus years, he has worked for a host of supply firms, including Staples, Inc., and Preferred Office Products, Inc., as well as for a computer accessory company. Because of consolidation and buyouts in the office supply business, Sandler worked first for Johnson Ribbon until it was purchased by Prime Office Products. Sandler then worked for Prime until it was purchased by Staples, Inc., in 2005. Sandler became a Staples employee in March 2006, continuing to serve his previous customers.
Upon joining Staples, Sandler signed a "Proprietary and Confidential Information Agreement," a "Non-Compete and Non-Solicitation Agreement," and a "Code of Ethics Acknowledgment." He had earlier signed a confidentiality and noncompetition agreement with Prime.
During his employ with Staples, Sandler met with acquaintances who were also representatives of Preferred Office Products. At these meetings in January and February 2007, the Preferred officials offered Sandler a position at their company.
Dissatisfied with his compensation and employment at Staples, Sandler decided to leave the company and submitted his two-weeks' notice on February 9, 2007. Sandler claims he had not decided where he was going to work after he left Staples on February 23, 2007. He subsequently joined Preferred on February 26, 2007, creating a rift that apparently led to the filing of this lawsuit.
This case comes before the Court on diversity jurisdiction under 28 U.S.C. § 1332. Staples, Inc., is a Delaware corporation with its principal place of business in Massachusetts. Sandler is a Dallas resident and a citizen of Texas. Plaintiff Staples filed this action on May 24, 2007, seeking damages for various business torts and breach of contract and a permanent injunction to prohibit Sandler from his alleged continuing violation of the noncompete agreement. Defendant Sandler moved for partial summary judgment on December 24, 2007, claiming the noncompete agreement was invalid as a matter of Texas law and denying the other claims. Plaintiff amended its complaint on April 16, 2008, adding Defendants Preferred Office Products, Inc., and Philbo Enterprises, Inc. Plaintiff filed a Cross Motion for Partial Summary Judgment against Alan Sandler as to Liability Only on May 7, 2008. The Court on July 14, 2008, ordered Defendants to produce specific documents, electronically stored information, and tangible things.
II. Summary Judgment
Summary judgment is appropriate when the pleadings, affidavits and other summary judgment evidence show that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). All evidence and reasonable inferences must be viewed in the light most favorable to the nonmovant. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
III. Defendant's Motion for Summary Judgment
Sandler moves for summary judgment on all of Plaintiff's claims against him, with the apparent exception of an unjust enrichment claim. A federal court must apply the substantive law of the forum state in a diversity case. Ideal Mut. Ins. Co. v. Last Days Evangelical Ass'n, 783 F.2d 1234, 1240 (5th Cir. 1986). Because this Court is sitting in diversity, Texas state law is controlling.
A. The Noncompetition Agreement is Ancillary to an Otherwise Enforceable Agreement and Therefore Enforceable.
Sandler asserts the covenant not to compete is unenforceable because it was not ancillary to an otherwise enforceable agreement and was unreasonably broad in scope. Staples refutes these assertions.
The enforceability of a covenant not to compete is a question of law. Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642, 644 (Tex. 1994). Texas law places limits on these agreements as restraints of trade, but it does not invalidate them. See TEX. BUS. COM. CODE § 15.50(a). For a noncompetition agreement to be enforceable, it must be (1) ancillary to or part of an otherwise enforceable agreement at the time the agreement is made, and (2) contains reasonable limitations on time, geographical area, and the scope of activity to be restrained that are reasonable and do not impose greater restraints than are necessary to protect the goodwill or other business interest of the promisee. Id. If these requirements are met, noncompete covenants may be enforced in an at-will employment relationship. Alex Sheshunoff Mgmt. Services, L.P., v. Johnson, 209 S.W.3d 644, 654 (Tex. 2006).
For a covenant not to compete to be ancillary to an otherwise enforceable agreement between employer and employee: (1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer's interest in restraining the employee from competing; and (2) the covenant must be designed to enforce the employee's consideration or return promise in the otherwise enforceable agreement. Light, 883 S.W.2d at 647.
1. The Noncompetition Agreement was Conditioned upon a Unilateral Promise that was Enforceable through Performance by Staples.
The Texas Supreme Court in Light found that consideration in the form of confidential information or specialized training must be provided an at-will employee at the time the agreement is made. See Light, 883 S.W.2d at 647. But a seminal 2006 decision instead found that a unilateral promise to perform could become adequate consideration upon performance. In Alex Sheshunoff, the Texas Supreme Court found an agreement to provide confidential information and specialized training was illusory because it depended upon continued employment of the at-will employee. Alex Sheshunoff, 209 S.W.3d at 649-50. Yet the court held that an illusory promise to perform may nevertheless make the covenant enforceable upon performance. See id. If an "employer performs his promise [to disclose confidential information] under the agreement and a unilateral contract is formed, the covenant is enforceable if all other requirements under the Act are met." Alex Sheshunoff, 209 S.W.3d at 649.
Sandler claims that Staples provided no consideration for the noncompetition agreement beyond his continued employment and his compensation. Staples contends that it promised to provide confidential information and specialized training that constitute consideration, and that the noncompete was ancillary to an enforceable confidentiality agreement.
In the noncompetition agreement, Staples provides that it "has and will entrust Employee with proprietary information, strategies, knowledge, customer relationships and know-how which would be detrimental to the Company if disclosed." Defendant contends that these were merely recitals, but under the reasoning in Alex Sheshunoff, they form a unilateral contract conditioned upon performance. Further, the confidentiality agreement signed contemporaneously with the noncompete provided a promise of confidential information. Thus, Staples promised to provide Sandler with confidential information that would give rise to its interest in restraining Sandler from competing. Only by performing this promise — by providing confidential information — could Staples then seek to enforce the terms of the noncompete.
2. Staples Provided Sandler with Confidential Information as Consideration Giving Rise to Enforcement of the Noncompetition Agreement.
The Texas Supreme Court has warned against "overly technical disputes" over noncompetes, "including the amount of information an employee has received, its importance, its true degree of confidentiality, and the time period over which it is received." Alex Sheshunoff, 209 S.W.3d at 655. In that case, material that fit within the definition of "confidential information" contained within the confidentiality agreement was considered confidential by the court for purposes of its analysis. See id. at 647. Confidential trade secrets may include pricing information, customer lists, and sales reports. See, e.g., Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 859 (Tex.App.-Fort Worth 2003, no pet.).
Staples has established that it provided Sandler with access to cost margins, pricing lists, sales figures, and assorted business information, including customer information. Although not necessarily trade secrets of the highest order, these may be confidential in the sense that they are not readily available to the public. They are not "freely available to anyone," as Defendant claims, even though some functionally equivalent information on pricing, contacts, and the like appears relatively well-known within the office supplies community based on deposition testimony. They may be deemed confidential without assessing their "true degree of confidentiality." Alex Sheshunoff, 209 S.W.3d at 655. Two of Sandler's current employers at Preferred stated in depositions that they would consider similar information proprietary.
Staples cites the fact that Sandler had to enter a password to access what it claims was confidential information. Such "password protected" information is a feature of nearly all businesses. Simply requiring an employee to enter an access password does not make all information behind the password confidential in this context. It does, however, further indicate that the information was not freely available.
B. The Restrictions in the Noncompetition Agreement are Overbroad and Render the Restrictions Unenforceable as Written.
A covenant not to compete is unenforceable unless it meets the reasonableness standards set forth in section 15.50 of the Texas Business and Commerce Code. See John R. Ray Sons, Inc. v. Stroman, 923 S.W.2d 80, 85 (Tex.App.-Houston [14th Dist.] 1996, writ denied). The restriction must be reasonable and not impose a greater restraint than necessary to protect the goodwill or other business interest of the employer. TEX. BUS. COM. CODE § 15.50(a). These convenants must contain limitations on "time, geographical area, and scope of activity to be restrained" that meet this reasonableness standard. Id. A covenant not to compete is a restraint of trade and will not be enforced unless it is reasonable. Travel Masters, Inc. v. Star Tours, Inc., 827 S.W.2d 830, 832 (Tex. 1991). A restraint is unreasonable if it is broader than needed to protect the legitimate interests of the employer. DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 682 (Tex. 1990).
If the restraints in the noncompetition agreement are overbroad, a court may reform the covenant. See Butler v. Arrow Mirror Glass, Inc., 51 S.W.3d 787, 794 (Tex.App.-Houston [1st Dist.] 2001, no pet.) ("[I]nstead of invalidating a covenant not to compete, Texas courts have usually reformed the covenant, revising the provisions to those which are reasonable under the circumstances."). The Covenants Not to Compete Act, as codified in the Texas Business and Commerce Code, provides:
If the covenant is found to be ancillary to or part of an otherwise enforceable agreement but contains limitations as to time, geographical area, or scope of activity to be restrained that are not reasonable and impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee, the court shall reform the covenant to the extent necessary to cause the limitations contained in the covenant as to time, geographical area, and scope of activity to be restrained to be reasonable and to impose a restraint that is not greater than necessary to protect the goodwill or other business interest of the promisee and enforce the covenant as reformed, except that the court may not award the promisee damages for a breach of the covenant before its reformation and the relief granted to the promisee shall be limited to injunctive relief.
TEX. BUS. COM. CODE § 15.51(c). It is important to note that injunctive relief, rather than damages, is appropriate under a reformed covenant not to compete.
Assessing the reasonableness of the noncompete, it is reasonable with regard to time and geographical area, but unreasonably restrains Sandler's activities. The noncompete lasts for one year and extends for one-hundred miles from Sandler's principal location, an area that covers the Dallas-Fort Worth metroplex but excludes other major metropolitan areas in the state. Texas courts have found similar restrictions on time reasonable and even more onerous geographical restrictions reasonable. See Alex Sheshunoff, 209 S.W.3d at 657 (enforcing a one-year restriction on providing consulting services to employer's clients and two-year restriction on selling a competing product with no restriction on the geographical area covered); John R. Ray Sons, Inc. v. Stroman, 923 S.W.2d 80, 85 (Tex.App.-Houston [14th Dist.] 1996, writ denied) (finding a five-year limitation was not unreasonably long).
The legitimate interests of Staples in enforcing the noncompete are much narrower in scope than the activity it seeks to restrain. Staples asserts the interest giving rise to the covenant stems from the confidential information it provided Sandler during his eleven months of employment. The terms of the noncompete, however, restrain him from doing business with "each and every customer or prospective customer whom . . . he serviced during the last two years . . . including, without limitation, customers or prospective customers that Employee knew, serviced, or was familiar with prior to joining the Company." Staples thus is trying to restrain Sandler from servicing customers he had before joining the company because of information it gave him after it employed him.
The interests in Alex Sheshunoff are distinguishable from the case before this Court. There, the employee worked for the employer for nearly a decade, was promoted to a director position, engaged in high level confidential discussions about new products, and left to join a direct competitor on the very product he was helping to develop. Alex Sheshunoff, 209 S.W.3d at 647.
Sandler, in contrast, was given access to pricing lists, margins, and customer information. These are necessary tools for any salesman and are far below the consideration provided in Alex Sheshunoff. Sandler's employment with Staples lasted just eleven months, during which time he primarily serviced the customers he brought along from Prime.
Although the Texas Supreme Court in Alex Sheshunoff cautioned against focusing on "overly technical disputes" about whether the noncompete is ancillary to an otherwise enforceable agreement — "including the amount of information an employee has received, its importance, its true degree of confidentiality, and the time period over which it is received" — that court notably found that such concerns may be used "in determining whether and to what extent a restraint on competition is justified." Alex Sheshunoff, 209 S.W.3d at 655-56. Here, it is apparent that the restraint on competition is not justified to the extent contemplated in the covenant not to compete given Sandler's relatively short employment, the minimal amount of confidential information he received, and Staples' legitimate interest in protecting the confidential information it provided him during his tenure.
Thus, the Court finds that Staples' legitimate interest in confidentiality gives rise only to a restraint on Sandler that prevents him from competing by doing business with customers he gained during his eleven-month tenure with the company. A restraint that prevents him from continuing long-standing relationships that he brought with him to Staples is overbroad, unrelated to Staples' legitimate interest in confidentiality, and would further unreasonably burden these third-party customers. The restraint is overbroad as written. The Court hereby reforms the agreement to prohibit Sandler from competing with Staples on the accounts he gained while employed by the company. Because only injunctive relief is appropriate for any breach of a reformed covenant not to compete, the Court recognizes that its holding today effectively moots claims going forward by Staples against Sandler to enforce the agreement, which by its terms lasted for one year after Sandler left the company. See TEX. BUS. COM. CODE § 15.51(c) ("[T]he court may not award the promisee damages for a breach of the covenant before its reformation and the relief granted to the promisee shall be limited to injunctive relief."). The covenant as reformed would limit the scope of activity during this one-year period, which ended February 23, 2008, but no application for preliminary injunction was sought within this time period. The Court is unwilling to reform the agreement to extend its time restraint.
C. Summary Judgment on Defendant's Remaining Claims is Not Appropriate.
In addition to the noncompete agreement, Sandler challenges Plaintiff's claims for breach of his confidentiality agreement, breach of fiduciary duty, conversion, and other obligations owed to the company. Because Sandler was ordered by this Court on July 14, 2008, to produce various discovery information that could bear on these claims, summary judgment is not appropriate, and the motion is DENIED without prejudice with respect to these contentions.
IV. Plaintiff's Motion for Partial Summary Judgment
Staples moves for summary judgment on all its claims against Sandler, seeking a judgment of liability only. For the foregoing reasons, Plaintiff's motion is GRANTED in part and DENIED in part.
V. Conclusion
Staples' cross motion for partial summary judgment is GRANTED in part with respect to the general enforceability of the covenant not to compete and DENIED in part as the unreasonable restraints contained in the covenant may not be enforced. Sandler's motion for summary judgment is thus GRANTED in part on the enforceability of the specific terms of the covenant not to compete and DENIED in part with respect to other claims.
Because of the altered posture of the case due to the Court's determination on the enforceability of the noncompetition agreement and the order to compel production from Defendant, these denials are without prejudice to the filing of new motions for summary judgment on matters consistent with this opinion. The summary judgment deadline of September 5, 2008, is hereby extended. Each side may file one additional motion for summary judgment on or before October 10, 2008. This case, currently set for trial on the Court's November 2008 docket, is consequently RESET for the three-week trial docket beginning May 4, 2009.