No-Compete clause can save battle time
Published 08/03/06

As illustrated in a recent decision from the New Hampshire Supreme Court, employees have limits on how they compete with their former employers even absent an agreement governing their post-employment conduct.

On July 26, 2006, the Court in the case of Mortgage Specialists, Inc. v. Joseph C. Davey, IV & a . was faced with an appeal of a claim by Mortgage Specialists against its former employees Joseph Davey and Michael Carbone as a result of their taking and using customer information, allegedly making disparaging remarks, and solicited current employees of Mortgage Specialists.

In particular, Davey and Carbone worked as loan originators for Mortgage Specialists and in July 2002 both left Mortgage Specialists to work for competitors. When they left, each took with them copies of customer information retained during the course of their work which they used to their advantage and to the disadvantage of Mortgage Specialists.

Since leaving Mortgage Specialists, Davey and Carbone have both closed loans for customers who previously had business with Mortgage Specialists. Davey and Carbone did not have any agreement prohibiting the use of confidential information, competing with their former employers, or prohibiting the solicitation of former customers or employees. Therefore, Mortgage Specialists in bringing legal claims against Davey and Carbone had to rely on legal theories not based on a breach of contract.

One of those claims was a violation of New Hampshire 's Uniform Fraudulent Transfer Act which prohibits the misappropriation and use of trade secrets. However, the statute also prohibits making other legal claims not based on breach of contract which allege misappropriation of trade secrets, leaving the Act as the only choice for such a legal claim. Simply put, Mortgage Specialists' allegations that their former employees stole and used its customer information against it could only be litigated within the confines of the specific terms of the Act.

A requirement of the Act required Mortgage Specialists to have taken reasonable efforts to maintain the customer information secret in order to obtain damages from its former employees for misappropriation of its trade secrets. The jury ruled in favor of Davey and Carbone in the trade secret claim. The trial court, and then this Court, upheld the jury verdict finding that a reasonable jury could have concluded the customer information was not a trade secret because Mortgage Specialists' customer information was not subject to reasonable efforts to maintain its secrecy under the circumstances.

While the evidence presented showed that Mortgage Specialists did take actions to protect the privacy of its customers, the Court found that those actions could be presumed by a reasonable juror to be for the protection of the customers not for the protection of Mortgage Specialists. The Court in its analysis pointed out the fact that there was no company employment policy that prohibited the use of the confidential information obtained from customers to the detriment of Mortgage Specialists and Davey and Carbone were never required to sign confidentiality agreements. If Mortgage Specialists had such a confidential information policy as to the customer information and secured the customer information so it was accessible only on a need-to-know basis by employees of Mortgage Specialists doing their jobs for that company, then the Court may have ruled differently and supported Mortgage Specialists trade secret claim. Of course, had Davey and Carbone signed detailed confidentiality agreements they may not have even dared to take the customer information and if they did, Mortgage Specialists would have had a much clearer legal claim to first stop their use of the information through a court-ordered injunction, and then obtain damages for whatever economic injury they had caused.

Forcing an employee to sign a confidentiality agreement merely requires them to: (a) use only the confidential information of the company for the benefit of the company; (b) to turn over and not keep any documents or other things containing confidential information at the end of their employment; (c) and not use any confidential information learned during their employment.

While an employee may object to a non-competition agreement which prohibits her competing in her job expertise for a time period after she leaves the company, an employee is generally hard pressed to object to not using the company's confidential customer or other information so long as the definition of confidential information is narrowly defined to information which is truly confidential and proprietary to the company.

Mortgage Specialists, in addition to claiming that Davey and Carbone misused confidential customer information, also claimed they intentionally contacted Mortgage Specialists customers with whom it claimed an advantageous relationship and persuaded them to do business with the defendants and that Carbone informed Mortgage Specialists' customers that it was not properly licensed in the state. Mortgage Specialists also alleged that the defendants solicited employees of Mortgage Specialists. Therefore Mortgage Specialists made out an allegation sufficient to be able to have a trial on a claim for tortuous interference with an advantageous relationship.

The Court also found that Mortgage Specialists could still go forward with its claim for violation of the New Hampshire Consumer Protection Act prohibiting unfair and deceptive trade practices which prohibits the use of any unfair method of competition or unfair deceptive act or practice in the conduct of any trade or commerce within the state. Such conduct includes, but is not limited to disparaging the goods, services, or business of another by false or misleading representations of fact. Mortgage Specialists alleged that Carbone informed Mortgage Specialists' customers that it was not properly licensed in the state and therefore alleged sufficient facts to have a trial on that claim.

In conclusion, while Davey and Carbone were able to convince a jury that they were not liable under New Hampshire's Uniform Trade Secret Act, the Court has sent back down to the trial court other claims against them which do not rely on their use of customer information and as such they are not done with this litigation which was actually initiated shortly after their resigning in July 2002. This approximately four-year old controversy has obviously had a serious detrimental affect on all parties in money and time and it is possible that a clear confidentiality agreement signed as a condition of employment may have avoided this protracted and costly litigation.

J. Daniel Marr is a director and shareholder of Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and business persons on a variety of legal issues, including employment, and advocating on their behalf. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

This information is general information and may not reflect the most current legal developments, verdicts or settlements. The information provided should not be relied upon as an indication of the actual state of the law or of future developments. The information contained on the Hamblett & Kerrigan website is for informational purposes only and does not constitute legal advice. If the information referenced may be of legal importance to you, you should consult with an attorney to provide you with legal guidance and opinion as the the effect of the current law upon your situation.