Posted January 10th, 2019 in Top Stories, Legal Insights with Tags Joel O'Malley, Katie Connolly, anit-slapp law, Trade secret litigation, Restrictive covenants, anti-slapp statutes
Avoid Getting SLAPPed on Your Next Non-Compete Case
Your employee quits without notice or explanation. You discover that she moved to a competitor in violation of her non-compete agreement, and what’s worse, days before her resignation, she downloaded your trade secrets onto a thumb drive. You file suit and request an immediate injunction from the court. The last thing you expect is a counter-suit and motion to dismiss claiming you have interfered with the employee’s free speech rights. But that aggressive defense to restrictive covenant and trade secret litigation is becoming far more prevalent. Employers should be prepared for this defense when considering how to enforce their rights against former employees.
Employees are fighting back against restrictive covenant and trade secret litigation by using state “anti-SLAPP” statutes. The term SLAPP refers to “Strategic Lawsuits Against Public Participation.” These statutes originally were intended to discourage lawsuits that were filed with the purpose of trying to chill constitutionally protected rights. They allow a defendant to quickly dismiss a complaint that is based on the defendant’s rights like governmental participation or exercise of free speech. Currently, 28 states have anti-SLAPP laws, though (as described below) state courts interpret the statutes in very different ways.
Anti-SLAPP statutes are powered by their burden-shifting requirements and how they treat immediate appeal rights and attorneys’ fee awards. In other words, when a defendant files an anti-SLAPP claim, all other activity in the case—other than litigation discovery related to the anti-SLAPP motion—ceases until the court reaches a decision on that motion. The statute shifts the responsibility to the plaintiff to show some factual merit to the case, typically “clear and specific” evidence for each essential element of the underlying claim. The court’s decision on the anti-SLAPP motion is subject to immediate appeal. Obviously, anti-SLAPP litigation throws a huge wrench into a former employer’s plan to obtain immediate relief against a misbehaving former employee. Moreover, if the anti-SLAPP motion to dismiss succeeds, the original plaintiff must pay the defendants’ attorneys’ fees—the exact opposite of what happens in many non-compete or restrictive covenant agreements and under trade secret statutes.
Anti-SLAPP Statutes and Restrictive Covenant / Trade Secret Litigation
Legislatures never contemplated anti-SLAPP laws as a defense to non-compete or trade secret cases, but defendant employees are trying to use them in that manner. Some state courts are buying in, with Texas is leading the way.
Under Texas law, communication “in connection with a matter of public concern” implicates an individual’s “free speech” right. “Public concern” includes communications about “health or safety,” “environmental, economic, or community well-being,” or any “good, product or service in the marketplace.” The “association” right defined in the statute requires only a communication “between individuals who join together to collectively express, promote, pursue, or defend common interests.” Clearly, work performed by almost any company, including by its employees, may relate to a “good, product or service in the marketplace” and fall under the anti-SLAPP statute’s ambit.
The Texas statute does contain what courts have called a “commercial-speech exemption,” which exempts some forms of commercial speech, including if the statement or conduct arises out of the sale of goods or a commercial transaction in which the intended audience is a customer. In other words, an employer facing an anti-SLAPP suit may argue that Texas’s anti-SLAPP statute does not apply when the defendant’s conduct relates to commercial pursuits, such as joining a competitor and disclosing a former employer’s trade secrets for business gain. The expansiveness of the commercial-speech exemption obviously is critical for restrictive covenant and trade secret cases.
Unfortunately for employers seeking to enforce their rights, Texas courts have interpreted the exemption very narrowly. In one recent decision, Tejas Vending, LP v. Tejas Promotions, LLC, a Texas court dismissed a trade secret conspiracy claim, finding the defendants’ allegedly wrongful communications related to their right of association. Similarly, in Elite Auto Body v. Autocraft, a Texas court dismissed a trade secret case because the defendants’ communications—using the plaintiff’s confidential information to solicit business—were a protected exercise of free association. And in yet another, Grant v. Pivot Technology Solutions, Ltd., a Texas court dismissed a suit by a company against its former president because the president’s communications in setting up a competing business amounted to the exercise of free speech and association.
Surprisingly, California is not a state that has aggressively applied its anti-SLAPP statute to restrictive covenant and trade secret litigation. For example, in World Financial Group, Inc. v. HBW Insurance & Financial Services, Inc., the court denied an anti-SLAPP motion to dismiss in a trade secret and unfair competition case because the defendants’ alleged communications—primarily customer solicitations—were not a matter of public interest, despite their connection to California’s broad public policy favoring free competition.
Other states’ courts fall in between the extremes of Texas and California, or have not squarely addressed their anti-SLAPP laws’ application to restrictive covenant and trade secret cases.
Employer Strategies in Light of Anti-SLAPP Statutes
Certainly in Texas, but also for other states with anti-SLAPP laws, employers seeking to enforce restrictive covenant agreements or stop trade secret misappropriation by former employees must increase their diligence before filing suit. A complaint in an anti-SLAPP state should reflect substantial evidence supporting each element of each legal claim. The more that allegations rest on improper communications by or between defendants—e.g., sharing confidential information or trade secrets, soliciting customers or employees, or discussions among co-conspirator defendants—the stronger and more evidence-based the allegations should be.
At the very least, vague or unsupported complaint allegations based merely “on information and belief” should be avoided at all costs. Finally, employers should be prepared to invest in an early battle over motions and discovery and should consider those potential costs when deciding whether to file suit in the first place.