Tuesday, January 12, 2010

Customer Contact May Be Prohibited In Absence of Non-Compete Agreement (Taxsalelists.com v. Rainer)

One issue that frequently comes up in my practice is the extent to which an employer can prevent an ex-employee from contacting customers when there is no non-compete or non-solicitation agreement. Though it's difficult to obtain this remedy, the circumstances are not quite as narrow as many attorneys believe.

Most frequently, post-employment competition without a valid non-compete can be restrained when an employee steals some proprietary data that bears a direct nexus to customer names or goodwill, or when the employee engages in pre-termination competitive activity with certain accounts.

As to the former, it is perfectly logical to prevent customer contact if proprietary customer information (such as a secret list) has been taken. Regarding the latter, courts call this a "headstart" injunction because it purges the unfair competitive advantage gained by an employee before his fiduciary duty of loyalty ended. So the reasoning goes, if an employee has moonlighted and diverted a customer account away for 6 months, then he or she should be restrained from working with that same customer for the same period of time.

A recent case from Colorado illustrates these two situations. In Taxsalelists.com, LLC v. Rainer., a business engaged in providing complete property tax sale lists to affiliates and subscribers suffered a bizarre familial fallout in November and early December. The owner of Taxsalelists.com, John Lane, hired his two stepsons and their wives in 2008 as employees. In July of 2009, one of the two stepsons, Matthew, resigned. While employed at Taxsalelists.com, Matthew had enabled his Gmail account to forward any personal e-mail to his company account. When Matthew quit, he forgot to disable this feature.

This might not have been a big deal, except that the plaintiff claimed Matthew was providing Taxsalelists.com's customer database to a direct competitor both before and after his employment at Taxsalelists.com ended. At the time of an injunction proceeding, a review of e-mail information seemed to confirm that the other step-son, who is still employed by Taxsalelists.com, was enabling Matthew to provide such proprietary information illegally to a direct competitor.

The court had little trouble issuing a temporary restraining order on a complaint charging violation of the Computer Fraud and Abuse Act, breach of fiduciary duty, and a host of other common-law claims. The TRO ruling is interesting in a few separate respects:

(1) It was issued ex parte (i.e., without notice) on the basis that the defendants may seek to destroy electronic evidence, hard drives and relevant information if given notice of the TRO hearing.

(2) The TRO prohibited all of the defendants from contacting any of plaintiff's customers contained on the appropriated e-mail/customer lists.

With compelling evidence of misappropriation of customer data, the court was able to fashion what amounts to a non-compete even though no contract prohibiting customer competition was in place. Under most state trade secrets statutes and the common law of fiduciary duty, courts have wide latitude to remedy acts of unfair competition, and in many cases a strong case on one of these theories may enable a plaintiff to restrain more competitive acts than even the most airtight agreement.

UPDATE X1: This matter settled with no admission of liability by the Defendants who strongly denied any misappropriation ever occurred.


Court: United States District Court for the District of Colorado
Opinion Date: 12/11/09
Cite: Taxsalelists.com, LLC v. Rainer, 2009 U.S. Dist. LEXIS 122274 (D. Colo. Dec. 11, 2009)
Favors: Employer
Law: Federal

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