When an employee has signed an enforceable non-competition and non-solicitation agreement, he will be prohibited from soliciting the employer’s customers for a certain length of time after the employment relationship ends. In the absence of an express non-competition clause, a former employee is generally free to compete with his former employer, even if that means contacting the former employer’s customers and offering lower prices. Without the benefit of contractual noncompetes and the remedies they provide, employers who pursue their former employees in court often argue that the employees violated their post-employment fiduciary obligations by making inappropriate use of the employer’s customer list and/or pricing data. In a recent opinion authored by Judge Liam O’Grady of the Eastern District of Virginia, the court held that customer lists aren’t automatically entitled to trade-secret or other “confidentiality” status, and that whether former employees can use the data depends on the steps taken by the employer to keep it confidential.
In Contract Associates, Inc. v. Atalay, Contract Associates, Inc. (“CAI”) sued its former employees, Senem Atalay and Michael Spade, claiming that they breached their fiduciary duties and misappropriated trade secrets when they left to form their own competing company. Neither employee had a written employment agreement. Within hours of tendering their resignations, they called three of CAI’s major clients to announce their resignations and the formation of their new, competing company. Shortly thereafter, virtually all of CAI’s major clients terminated their at-will agreements with CAI and moved their business to the defendants’ new company, costing CAI “nearly its entire revenue stream.” CAI sued for breach of fiduciary duty, misappropriation of trade secrets, tortious interference with existing and prospective contracts, and statutory business conspiracy.
A claim for breach of fiduciary duty can be based on a showing that the defendant misappropriated trade secrets, misused other confidential information, or solicited existing clients or other employees prior to termination of employment. These fiduciary duties survive the termination of employment. In this case, CAI claimed that Atalay and Spade “used CAI’s client list and contacts and fee rates to solicit CAI’s entire roster of clients,” which it claimed was an improper “use of confidential information” sufficient to show a breach of the fiduciary duty of loyalty. The court disagreed and entered summary judgment in the defendants’ favor.
Why? Primarily because there was no evidence to suggest that CAI formulated any policies or took any actions to keep its customer list or pricing information confidential. CAI’s president, Badie Farag, testified that he assumed that “honest, decent people with a high level of integrity” would not share such information, but the court found such assumptions insufficient, noting that CAI failed to explicitly instruct the defendants to keep CAI’s information confidential.
The lesson for small business owners? If you don’t want your competitors using your customer lists, pricing data, or other commercial information, take affirmative steps to preserve its confidentiality. Restrict access to the information. Share it with your employees on a need-to-know basis only, and when you do share it, make sure the employees are given express instructions to keep the information secret. And of course, make them sign employment agreements that include confidentiality provisions as well as non-competition and non-solicitation restrictions.