Non-Compete and Trade Secrets Case Brought by Former Employer Dismissed

A former employer’s claims against a former employee and the former employee’s new employer for breach of a non-compete agreement and violating the Tennessee Uniform Trade Secrets Act (“Trade Secrets Act”) were dismissed in a case that is instructive on a couple of fronts.

Mainly, the case illustrates the futility of a former employer attempting to claim that information a former employee acquired during employment amounts to “trade secrets” under the Trade Secrets Act when the former employer allowed third parties to have access to the same information.

Here are the key facts:

• Daniel was employed by one of the two Plaintiffs in the case (Plaintiff One)

• Daniel’s position, at the time of his termination with Plaintiff One, was supervisor of Plaintiff One’s billing department

• Prior to that, Daniel worked as a bill collector for Plaintiff One

• Plaintiff One was in the business of collecting amounts owed to Plaintiff Two

• Plaintiff Two provided services to healthcare providers for which it was entitled to a percentage of those providers’ claims each month

• Daniel went to work for a company called Premier Mobile (“Premier”) after his employment with Plaintiff One ended

• Premier had a prior business relationship with both Plaintiffs

• During that relationship, Premier engaged in the same business as Plaintiffs, but only in Virginia

• About two weeks before Premier hired Daniel, its relationship with Plaintiffs ended

• Premier hired Daniel as a “scheduler.”

• Daniel performed work in Virginia at Premier’s headquarters after being hired

• Daniel’s non-compete agreement with Plaintiff One prohibited him from competing against it in any state where Plaintiff One derived more than 2% of its annual revenue from customers

• After Daniel went to work for Premier, Plaintiff One sued him for breaching his non-compete agreement, and Plaintiffs One and Two sued Daniel and Premier for violating the Trade Secrets Act

Trade Secrets Act Claim

The Plaintiffs claimed that a number of documents qualified as trade secrets under the Trade Secrets Act and that Daniel had taken and used them with Premier. The documents included materials on how to provide dental treatment and receive payment, “transmittal letters,” emails, spreadsheets, invoices, dental progress notes, memos, orders, and similar documents.

To qualify as trade secrets under the Act, information must meet the definition of trade secrets, and the party claiming protection must show that it took reasonable efforts, under the circumstances, to maintain its secrecy. Moreover, if a third party can readily obtain the information through proper means, the information cannot qualify as trade secrets.

In this case, the court found that all of the information Plaintiffs claimed to be trade secrets was available to, and regularly shared with, patients, nursing homes, and state agencies. As a result, the court dismissed the Trade Secrets Act claims.

Breach of Non-Compete Agreement

The court also dismissed Plaintiff One’s claim that Daniel breached his non-compete agreement. Although Plaintiff One filed the claim, when faced with a motion for summary judgment it failed to produce any proof that it derived 2% or more of its annual revenue from Virginia, the state where Daniel worked for Premier. Because Plaintiff One could not establish this critical element, the court dismissed its claim.

In my estimation, former employers (and others, since the Trade Secrets Act protects more than just employers) too often claim that information constitutes protected trade secrets when it should be obvious those claims will not hold up—particularly where third parties have been given the same information or can readily obtain it.

For lawyers representing defendants accused of taking and using trade secrets, a first line of inquiry in written discovery and depositions should focus on identifying who else had access to the information at issue or could readily obtain it.