Lessons from a Staff Hijacking and Non-Competition Lawsuit – Trade Secrets
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Cases don’t try very often. This is doubly the case in trade secret/non-competition disputes. So many of these disputes are resolved in the injunction phase of the process that, when going the distance, it’s almost always worth taking a look under the hood.
In MWK Recruiting, Inc. v. Jowers, No. 1:18-cv-444-RP (WD Tex.), a federal district court judge recently granted a judgment for $3.6 million, before costs and expenses, against a former outside recruiter of a law firm. The facts are not complex. A recruiter leaves his employer and joins a competitor. But before the recruiter left his former employer, he started using his personal email for applications and allegedly cleared six side candidates through the founder of his new employer. His former employer sued him and alleged that he misappropriated trade secrets and violated non-competition and non-solicitation clauses in his employment contract. At trial, the district judge ruled in favor of the plaintiff/employer on both claims and awarded $3.6 million in damages, with approximately $500,000 awarded as part of the claim. for misappropriation and $3 million for the breach of contract claim.
Three aspects of the order piqued my interest. First of all, this was a bench trial, not a jury trial. As we have already said, opting for a trial en banc could be more advantageous, depending on the facts of the dispute. This case is a good example of a case where a judge might be preferable to a jury, as there is no immediately apparent path to a successful damages finding, and a district court judge is not not hesitate to impose significant judgment.
Second, the district court easily concluded that the information the recruiter collected about clients and potential clients was considered a trade secret under Texas law. The court specifically found that the candidates’ names, clients, book value, language skills, business change goals and their law school records were trade secrets. The district court pointed to the recruiter’s testimony that candidates expected their information to be kept confidential and that another recruiter could not simply learn of that information and monetize it.
Third, the district court awarded the amount of the placement fees that the recruiter received as damages for breach of contract. The only reason the district court could do this is that this agreement included a liquidated damages clause. Normally restitution type damages are not available for breach of contract. Instead, the classic contractual remedy for this type of breach is the expectation of damages – the loss of profits the employer would have received had the breach not occurred. This employer demanded and received more because this agreement included a liquidated damages clause. This provision reads as follows:
9.1 The actual damages resulting from the breach of Articles 7 and/or 8 of this Agreement by the Employee will be difficult or impossible to ascertain. In the event of such breach, the Employee shall pay the Company, upon demand, as damages and not as a penalty, the following:
9.1.1 Any remuneration paid for services rendered in breach of Sections 7 and/or 8, whether paid to the Employee or to any other person, firm or entity; more
9.1.2 All costs and expenses, including reasonable attorneys’ fees, incurred by the Company in enforcing its rights in respect of such breach.
In my view, this liquidated damages provision functionally creates a remedy for restitution for breach of contract. The advantage of doing so is that, unlike a normal proof of damages for loss of profits, the former employer doesn’t need to demonstrate that the former employer would have made the same placement. Instead, the former employer paid its damages by establishing (1) a breach of covenant and (2) receipt of fees by the recruiter in connection with that breach. As a result, the former employer could make an easy demonstration based solely on the activity of the recruiter without having to prove their ability to seal the placement.
If this approach sounds too good to be true, it might be. Normally, a liquidated damages clause would be challenged on the grounds that it was an unenforceable penalty clause rather than a liquidated damages clause. Although the exact requirements vary from state to state, most states will only apply liquidated damages in a contract if the actual damages are difficult to calculate or not easily ascertainable and when the amount is a reasonable estimate. resulting damage. But here, the recruiter has waived his ability to challenge the enforceability of the liquidated damages clause.
Implementing a liquidated damages clause might make it easier to present damages, but it would most likely result in an objection as a penalty clause in the resulting litigation. Thus, any employer considering adding a liquidated damages clause to a restrictive covenant agreement should seriously consider the law in the relevant jurisdictions before revising their restrictive covenant agreement form.
Taken as a whole, the decision and judgment are a strong reminder that pre-employment wrongdoing determined by a trier of fact can give rise to material liability and that candidate information can be considered not only confidential information, but also reach the level of a commercial secret if a sufficient demonstration is made. And the decision offers an intriguing look at the benefits of a liquidated damages clause, although any reader should also be aware of the associated risks.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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