Breach of contract cases are sometimes considered boring, and the results predictable. Recently, however, a reminder of the unpredictable nature of commercial litigation came across my desk. In that case an executive lured a competitor away from a company without suffering legal consequences other than legal fees and court costs.
The Parties. Two companies entered into a contract with a covenant not to compete. Diligent contracted with Clarence Meyers (President and majority owner of BOC Trucking) and BOC Trucking (BOCT) to transport freight for Diligent’s customer, Ameriforge. Everything proceeded under the contract for ten months until Meyers cut Diligent out of the deal. Meyers formed another company, BOC Logistics (BOCL). BOCL acquired Diligent’s customer, Ameriforge, and then contracted BOCT to transport Ameriforge’s freight.
Diligent sued Myers and BOC Trucking for breach of contract, violating the covenant not to compete, tortious interference with a contract and violations under the Texas Uniform Trade Secrets Act. Diligent should have won on at least one issue when Myers disregarded the covenant not to compete and stole Diligent’s client. Right?Not quite. The outcome of this case is not as you might expect.
Trade Secret Claim. The trial court granted a directed verdict in favor of BOCT and Myers regarding pricing.In other words, Diligent was not entitled to compensation for exposing a trade secret, pricing. The court determined Diligent did not present evidence that their pricing information was used to persuade Ameriforge to leave Diligent and work directly with the new competitor, Myers and company. The court held: “The jury found that BOC Trucking breached the no-solicitation provision of its contract with Diligent. Proof of breach of this provision, however, is not proof that Meyers used Diligent’s confidential pricing information for Ameriforge.” (Central States Logistics, Inc. v. BOC Trucking, LLC, First District Court of Appeals, November 1, 2018).
Tortious Interference with a Contract. The jury found Meyers liable for tortious interference with an existing contract. However, the trial judge ignored the jury findings and granted Meyers’ motion for a judgment notwithstanding the verdict. Diligent did not prove Meyers actions were “so contrary to BOC Trucking’s interests that Meyers could only have been motivated by personal interest.” Meyers and BOCT were moving freight for Ameriforge when contracted with Diligent, and then Meyers and his newly formed company, BOCL, moved freight for Ameriforge without Diligent as the middleman.
Breach of Contract. The jury found BOCT liable for breach of contract and awarded damages under the covenant not to compete.Not so fast. The appellate court reversed and held that the time period under the agreement was unreasonable. The non-compete time period was merely 24 months, well within established Texas case law of enforceable non-compete time frames of two to five years. According to the appellate court, the issue of how the 24 months was calculated under the contract was the issue.
The Never-Ending Covenant. “Under the terms of the covenant not to compete, then, the covenant lasts for two years after BOC Trucking’s last contact with any client of Diligent, regardless of whether the interaction was during or after the agreement. This creates the potential for a covenant not to compete that does not end. Adding to this… Diligent considered its client base to be a trade secret. Accordingly, BOC Trucking has no way of being able to determine when it has had its last contact with a client of Diligent.”
“Because BOC Trucking cannot determine when the time of the covenant not to compete has ended, it cannot be enforced as written.” Central States Logistics, Inc. v. BOC Trucking, LLC, First District Court of Appeals, November 1, 2018.
Lessons Learned. How was Meyers able to start a second company, and steal a client under contract with his first company?
• Don’t get too creative. Diligent or Diligent’s lawyer got too crafty when drafting the 24-month provision in the covenant not to compete. Trying to prevent stealing all clients,whether or not Meyers had a relationship with them was part of the problem. But, defining the client relationship as “last contact” instead of using language like “within six months of the last date freight was hauled” backfired.
• Conflicting language. In this case Diligent claimed their client base was a trade secret. Not unusual. However, when Diligent calculated the non-compete time frame based on the client base, a conflict arose.
• Carry your burden at trial. The knowledge of a trade secret, price, is not enough to prove a breach. At trial, the causal relationship must be proven, i.e. that the pricing information was used to persuade a customer to change vendors.
The ultimate outcome of this case has yet to be written. However, breach of contract disputes, violation of trade secrets and tortious interference with contract claims are the basis of many commercial litigation lawsuits. When you find yourself in need of a commercial lawyer or breach of contract attorney, we are ready to put our decades of winning experience to work for you.