Restrictive covenants, often imposed to protect the disclosure to competitors of a company's proprietary and trade secret information, no longer bind only highly-skilled, highly-paid employees. A May 2016 White House Report on Non-Compete Agreements cites research suggesting that about one in five employees (an estimated 30 million Americans) is currently bound by a non-compete clause, including approximately 15% of workers without a college degree, and 14% of individuals earning less than $40,000.1 And employers have been more apt to enforce such restrictive covenants: one study concluded that from 2002 to 2013, the number of employees sued by former employers for breach of non-compete agreements increased by 61%.2 Recently, in addition to California, which generally prohibits noncompete clauses, several states have taken action to limit the scope/enforceability of non-compete clauses, including Utah (limited to one year)3, Oregon (limited to less than 18 months, and only for employees whose annual gross salary/commission equals more than the median family income for a family of four)4, Hawaii (banned for technology jobs)5, and New Mexico (banned for health care jobs)6. Although the enforceability of non-compete agreements in Texas is governed by the Texas Business and Commerce Code, recently the Austin Court of Appeals provided employees with a tool to expeditiously dismiss trade secret misappropriation claims (often brought in the context of an employee's non-disclosure restrictive covenant): the Texas Citizens Participation Act ("TCPA").7
Any employer (regardless of whether it is a Texasbased company) that manages, hires, or employs a Texas worker should be aware of this decision, and its potential to reshape trade secret litigation.
The TCPA: Overview and Recent Caselaw
The TCPA is Texas's version of an anti-SLAPP statute. "SLAPP" stands for "Strategic Lawsuit Against
Public Participation" and is a lawsuit designed to chill protected speech by intimidating and censoring critics, often those who have spoken out against a government entity or on an issue of public interest, by requiring them to spend money to defend against a meritless suit. Anti-SLAPP legislation, enacted by over half of the states, protects persons who exercise their expression rights from such retaliatory lawsuits. The TCPA, like other anti-SLAPP statutes, provides for a burden-shifting expedited dismissal mechanism whereby the court must dismiss a legal action if the moving party shows by a preponderance of the evidence that the action is "based on, relates to, or is in response to" the party's exercise of the rights to free speech, petition, and association, unless the party bringing the legal action establishes by clear and specific evidence a prima facie case for each essential element of the claim.8 If a court grants dismissal under the TCPA, it must award court costs, reasonable attorney's fees, and other expenses to the moving party, along with sanctions against the party who brought the legal action.9 In essence, the TCPA requires a claimant to offer summary-judgment-type evidence at the motion to dismiss phase.
In Elite Auto Body LLC, v. Autocraft Bodyworks, Inc., the plaintiff auto-repair shop ("Autocraft") sued a competing auto-repair business ("Precision") and former Autocraft employees who went to work for Precision.10 The plaintiff accused an individual defendant and another former employee of providing Precision with Autocraft's confidential, proprietary and trade secret information, and alleged that Precision and its employees were unlawfully using Autocraft's proprietary information, including to improperly solicit current Autocraft employees. In defense, the Precision defendants invoked the TCPA, seeking dismissal because the "legal action" "is based on, relates to, or is in response to" the defendants' exercise of the right of association and free speech. Autocraft sought to prevent application of the TCPA by arguing that its claims sought to remedy theft and misuse of trade secrets, which was distinguishable from "communications" or "free expression" under the TCPA, and that the First Amendment does not prohibit restrictions on the unauthorized disclosure of confidential information. In ruling against Autocraft, the Austin Court of Appeals textually applied the TCPA and held that the bases for Autocraft's claims--the alleged communications between defendants and Precision employees, and between defendants and Autocraft employees--were "communications" within the meaning of the TCPA. Further, the court found nothing in the text of the TCPA limiting its application to lawsuits based on a party's exercise of constitutional rights. It remains to be seen whether the Autocraft decision will be further considered by the Texas Supreme Court, or if its analysis will be adopted by other Texas appellate courts.
The Autocraft opinion raises as many questions as it answers in terms of strategy and tactics when seeking to hold Texas employees accountable for misappropriation of confidential, proprietary, or trade secret information, including:
- Should an employer file a misappropriation lawsuit? An employer may be leery about filing a misappropriation claim based on speculation, not supported by evidence available at the time of filing. Although the TCPA authorizes "specified and limited discovery relevant to [the TCPA dismissal] motion,"11 if an employer, at the dismissal stage, cannot establish by clear and specific evidence a prima facie case for each essential element of the claim, the action will be dismissed and the employer not only must pay court costs, attorney's fees, and expenses, but will be subjected to courtordered sanctions.12 On the other hand, the failure to file expeditiously may lead to a defense of laches if the plaintiff were to move for a preliminary injunction without due haste.
- Is application of the TCPA dependent on choice of law/choice of venue? In drafting contractual choice of law and venue provisions, especially when an Erie analysis may become applicable, employers must remember that the TCPA appears to provide a procedural mechanism for early dismissal inextricably tied to the substantive nature of the plaintiff's claims.13 This means that an employer bringing a misappropriation claim in Texas state court, even if litigated under another state's law, could face dismissal under the TCPA if the court applies the TCPA as a procedural rule.14 However, in an Erie analysis, both the Eastern and Southern Districts of Texas applied the TCPA to state law claims, finding the statute functionally substantive and not in conflict with dismissal rules under the Federal Rules of Civil Procedure.15 In contrast, the D.C. Circuit held that a federal court exercising diversity jurisdiction could not apply the DC AntiSLAPP Act, and instead was bound by the Federal Rules of Civil Procedure.16 The Fifth Circuit has not ruled on the applicability of the procedural aspects of the TCPA, but allowed a federal-court defendant to bring a motion to dismiss "under the materially similar Louisiana anti-SLAPP statute" because the procedural special motion to dismiss was functionally substantive,17 and, in another case, "assume[d], without deciding, that the state procedural rules [governing the TCPA] . . . do in fact apply in federal court."18
- What if the misappropriation claim is arbitrable in Texas? Many employment agreements contain mandatory arbitration provisions; courts are only to be used for injunctive relief. Arbitration typically occurs in the state where the employee resides-- this is especially common in the employment agreements private equity companies require of key personnel in purchased companies. Parties can choose to have the procedural law of the place of arbitration apply; otherwise, arbitration procedure is determined by federal or state arbitration law, or the rules of the arbitral forum. If Texas procedural law governs the arbitration, the TCPA could be employed to quickly and summarily dismiss a misappropriation claim, which may cause employers to re-think the arbitral seat. A practical effect of the Autocraft ruling may be that employers seeking to hold an employee accountable for a non-disclosure/misappropriation violation may hesitate before running to the courthouse seeking injunctive relief prior to establishing a stronger factual foundation.
- Will a new employer be more likely to hire/ retain an employee bound by a non-disclosure covenant? A new employer often is leery of hiring an employee bound by restrictive covenants, as it does not want to be subjected to potential claims (tortious interference, misappropriation, etc.) itself, nor does it want to be drawn into expensive, time-consuming litigation as a third-party. If the new employer does not know about the restrictive covenant, it may need to terminate the employee's position once notified by the former employer that the employee may have misappropriated the former employer's trade secret information. However, if the employee can use the TCPA to expeditiously dismiss any misappropriation claim, the new employer may be more apt to hire/retain such employee.
- Considerations of the Departing Employee: Employees accused of trade secret theft may be less likely to settle with their former employer, and instead, will seek dismissal through the TCPA. However, the TCPA cannot save employees who have actually committed misappropriation, because clear and specific evidence of the employee's theft, which can be obtained through targeted discovery at the TCPA-dismissal stage, defeats a TCPA defense.
Application of an anti-SLAPP statute to defend against trade secret misappropriation claims is novel, yet could have far-reaching effects--both on every employer with Texas workers, and on every employee subjected to a misappropriation claim under Texas law/procedure. Although an anti-SLAPP defense could result in a decrease of misappropriation suits (perhaps the true aim of the Austin Court of Appeals), it should not deter employers who possess/obtain specific evidence of unlawful misappropriation, but it should cause drafters of restrictive covenant agreements (typically found in employment agreements) to carefully consider potential pitfalls in accompanying provisions such as choice of law, choice of venue, dispute resolution, etc.