If you were unsure whether customer information held by your client — like customer contact information, sales reports, prices and terms books, sales memos, sales training manuals, commission reports, and vendor information — can be considered a "trade secret", the Business Court’s opinion this week in Southern Fastening Systems, Inc. v. Grabber Construction Products, Inc., 2015 NC 40 should resolve your uncertainty.
The Parties And The Claimed Trade Secrets
Defendant Farrell had been a sales representative for the Plaintiff Southern. He left Southern to work for Defendant Grabber, a competitor in the business of selling construction supplies.
Farrell had not signed a non-competition agreement, but he had signed a Non-Disclosure Agreement during his employment with Southern. The NDA said that Farrell would "not directly or indirectly disclose or use for any reason whatsoever any Confidential Information obtained by" him due to his employment. Op. ¶6.
"Confidential Information" was defined under the NDA to include:
customer lists containing customer names and addresses; customer sales records and reports containing product preferences and usual prices charged; price lists containing product sales prices and their cost; sales invoices, packing lists, routing books, customer files, personnel files, computer records, financial records and marketing plans containing tactics and strategies.
Op. ¶7. The NDA contained an acknowledgment that Southern’s "Confidential Information constitutes Trade Secrets." Op. ¶8.
Southern filed suit against Grabber and Farrell alleging a substantial loss of business after Farrell began working for Grabber. The Defendants moved to dismiss, asserting that Southern had not adequately identified the alleged trade secrets, that the information in question was "readily available . . . from customers and potential customers," and that Southern had not identified any steps that it took to keep its claimed trade secrets a secret. Op. ¶22.
Judge Bledsoe disagreed. On the point of whether the trade secrets were adequately identified, he cited six court decisions, four from the North Carolina Court of Appeals, recognizing that this type of description of customer information is sufficient to plead a trade secret. Op. ¶23. He also cited and called "persuasive" an unpublished decision from Judge McGuire of the Business Court finding a similar description by the same Plaintiff to be adequate. (I missed that case — Southern Fastening Systems, Inc. v. Duo-Fast Carolina, Inc. (February 9, 2015) — and I really try hard not to miss much of interest in the Business Court. Sorry about that.)
The Court rejected the other defenses given the Plaintiff’s allegations in its Complaint that its trade secrets involved "non-public information" that it did not disseminate to its employees unless they first executed an NDA.
The Validity Of The NDA
This decision represents the first time I can remember seeing a Defendant argue that the validity of an NDA should be determined based upon the standard applied to a covenant not to compete. The Defendant argued that the practical effect of the NDA was to keep Farrell from working for the Plaintiff’s competitor so it therefore needed to be supported by consideration and be reasonable as to time and to territory.
Judge Bledsoe ruled that the NDA only restricted Farrell from disclosing Southern’s Confidential Information and required him to return that information upon the termination of his employment. He said that the NDA "permits Farrell to work for any person or entity provided he does not disclose [the Plaintiff’s] Confidential Information." Op. ¶33. The NDA was therefore not a restrictive covenant subject to the requirements of G.S. §75-4.
Even after deciding that this NDA did not need to be evaluated under covenant not to compete principles, the Court went on to consider the issues of consideration and time and territory.
On the point of consideration the Court did not need to resolve the question whether continued employment by Farrell was sufficient consideration for the NDA since Farrell had been provided with Confidential Information in exchange for signing the NDA.
The question whether the lack of limitation as to time and territory rendered the NDA invalid had already been resolved by the NC Court of Appeals in Chemimetals Processing v. McEneny, 124 N.C. App. 194, 476 S.E.2d 374 (1996). There, the COA held that such an agreement can be valid "even when the agreement is unlimited as to time and area upon a showing that it protects a legitimate business interest" of the employer. Id. at 197, 476 S.E.2d at 377. Judge Bledsoe ruled that protecting customer relationships and goodwill was a legitimate business interest of the Plaintiff.
Claims For Tortious Interference And Conversion
The Grabber Construction decision is particularly interesting for its treatment of the claims against the Defendant Grabber for tortious interference with contract and conversion.
Tortious interference claims between competitors are unusual, because the North Carolina Supreme Court has held that "competition in business constitutes justifiable interference in another’s business relations and is not actionable so long as it is carried on in furtherance of one’s own interests and by means that are lawful." People’s Security Life Ins. Co. v. Hooks, 322 N.C. 216, 221, 367 S.E.2d 647, 650 (1988).
This tortious interference claim survived dismissal. Judge Bledsoe held that:
[Plaintiff] alleges facts showing that [the corporate Defendant] has improperly acquired, disclosed and used [Plaintiff’s] confidential and trade secret information ‘to sell [the corporate Defendant’s] products at prices below [Plaintiff’s] prices in order to block [Plaintiff] from those customer accounts’ and to cause [Plaintiff] financial damage.
Op. Par. 45. Thus, the Plaintiff had "adequately alleged that [the corporate Defendant] acted for a ‘wrong purpose’ and thus without legal justification." Op. Par. 45.
The survival of the conversion claim on the motion for summary judgment might seem odd since the harm to Plaintiff was the loss of its customers and the NC Court of Appeals has held that "intangible interests such as business opportunities and expectancy interests" are not subject to a conversion claim. Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 414, 537 S.E.2d 248, 264 (2000).
What made this case different was that the Complaint alleged that Farrell had taken seven boxes of documents containing Southern’s customer information upon his departure, and had then destroyed them. Farrell had also taken the names and contact information for Southern’s customers and stored these on his cellphone and computer. That was enough to make out a claim for conversion.