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The Importance of Carefully Drafted Non-Compete Covenants and Confidentiality Provisions

A November 2013 Nebraska Supreme Court opinion – First Express Services Group, Inc. v. Easter, et al. – underscores for employers the criticality of crafting legally enforceable non-compete covenants, the high hurdles faced in establishing what information qualifies as a "trade secret," and the importance of designating, in the employment contract, what types employer information should be treated as proprietary and confidential.

 

For nearly twenty years, the former employee, Arlene Easter, sold crop insurance for First Express. In her employment agreement, Arlene acknowledged her handling of "confidential information of a special and unique nature and value relating to [First Express'] trade secrets and customer lists, as well as the nature and type of product used and preferred by [First Express'] customers." She also agreed that she would not, "at any time ... divulge or disclose any of the confidential information that [had] been obtained by [Arlene] as a result of the services provided," nor would she disclose to any competitor "any information or lists or records with respect to the business of [First Express.]"

 

Arlene resigned to work for her son, who owned a competing crop insurance agency. Upon leaving First Express, she kept a document listing "all of First Express' customers" along with "other significant information about each customer" including "what crops the farmers had, what counties the crops were located in, what insurance plan the farmers brought, what percentage of coverage each farmer had, and what commission First Express had earned." Within three months of resigning, Arlene successfully moved 90% of her former First Express clients to her son's agency.

 

Notably, the parties did not dispute that the employment agreement's independent non-compete clause was overbroad and, under Nebraska precedent, unenforceable. Moreover, the Supreme Court held that the misappropriated customer information did not constitute "trade secrets" under governing law. Noting that Nebraska's statute defines a "trade secret" as confidentially held information which derives value "from not being known to, and not being ascertainable by proper means by other persons," the Court agreed that "under the literal terms of the language, if an alleged trade secret is ascertainable at all by any means that are not 'improper,' the would-be secret is peremptorily excluded from coverage under the Act." Because Arlene theoretically could have recreated the customer list she stole, for example, through time-consuming internet searches and phone calls to farmers, First Express' trade-secret claim failed as a matter of law.

 

It is also important to note, however, that much of what the employer could not recover by way of the contract's non-compete clause and the Nebraska Trade Secrets Act it did successfully recover under the employment agreement's confidential-information provision. Specifically, the trial court entered a $365,000 verdict against Arlene for breaching her contractual covenant not to "divulge or disclose" First Express' confidential "information or lists or records," and the Supreme Court did not revisit or disrupt this judgment on appeal.

 

In sum, this opinion highlights the importance of drafting carefully tailored, legally enforceable non-compete covenants and the difficult standards an employer must meet to demonstrate that its confidentially held customer information constitutes a "trade secret" entitled to statutory protection. On the other hand, where the employment agreement memorializes what types of information the employee must treat as proprietary and confidential, the employer is much more likely to succeed in recovering damages unavailable through other avenues.

Ryan D. Wilkins

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500