Hi-Line Elec. Co. v. Dowco Elec. Products

• Decision Date: 25 July 1985
• Docket Number: No. 84-1245,HI-LINE,84-1245
• Parties: ELECTRIC COMPANY, Plaintiff-Appellee, v. DOWCO ELECTRICAL PRODUCTS, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1359

765 F.2d 1359

HI-LINE ELECTRIC COMPANY, Plaintiff-Appellee, v. DOWCO ELECTRICAL PRODUCTS, Defendant-Appellant.

No. 84-1245.

United States Court of Appeals,

Fifth Circuit.

July 25, 1985.

Jack R. Bailey, Pete W. Weston, Houston, Tex., for defendant-appellant.

Robins, Zelle, Larson & Kaplan, Michael Sean Quinn, Dallas, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GEE, POLITZ, and WILLIAMS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

Hi-Line Electric Co. (Hi-Line) instituted this diversity action, seeking injunctive relief and damages for DowCo Electrical Products' (DowCo) alleged tortious conduct. After a bench trial, the district court found for Hi-Line and granted the requested relief. The district court premised its award of damages on the conclusion that DowCo could be held liable in tort for inducing Hi-Line's employees to breach an unenforceable covenant not to compete contained in the employment contracts between those employees and Hi-Line. We reverse.

I.

Hi-Line is in the business of selling a variety of electrical supplies to construction contractors, retail stores, and various other consumers of electrical products. At the time Hi-Line initiated this suit, it employed eighty people and operated in seventeen states. Most of Hi-Line's sales were attributable to its commission-paid field personnel who sold Hi-Line products directly from the trucks they operated. As a condition of employment with Hi-Line, all employees were required to sign employment contracts that contained, in part, a covenant not to disclose trade secrets ¹ and a three-year covenant not to compete. ²

One of the states in which Hi-Line sold its products was Florida. From January 18, 1982, to April 27, 1983, Hi-Line employed Robert Dowling as one of its Florida salesmen. While employed by Hi-Line Dowling organized and formed DowCo, a company that sold the same or substantially similar products as Hi-Line had. Thereafter, Dowling quit Hi-Line and solicited several of Hi-Line's current and former salesmen and billing personnel to work for DowCo. DowCo successfully competed with Hi-Line in three geographical markets Hi-Line previously had dominated--Miami, Atlanta, and Dallas/Ft. Worth. It did so by encouraging Hi-Line's ex-employees to appropriate and use confidential information, particularly customer account lists, those employees had access to and used while employed by Hi-Line.

Hi-Line instituted this suit, alleging that DowCo's successful efforts to induce some of its current and former employees to work for DowCo and DowCo's theft and use of its trade secrets constituted tortious interference with contractual relations and unfair competition under Texas law. DowCo answered that the covenant not to compete in the employment contracts was unenforceable, and therefore no claim for tortious interference with contractual relations could lie against it. DowCo also asserted that the allegedly confidential material DowCo secured from Hi-Line's former employees, including customer lists and related information, did not constitute valid trade secrets and therefore could not be misappropriated.

In the Rule 52(a) findings of fact, the district court found that DowCo had (1) photocopied and used a number of Hi-Line's business documents, including customer account cards, daily sales reports, credit forms, order forms, pricing codes, and sales handbooks; (2) created a display book that consisted of photographs of DowCo's products in one of Hi-Line's specially developed display cases; (3) printed decals very similar to Hi-Line's; and (4) intentionally persuaded Hi-Line's former employees to breach their employment contracts with Hi-Line. The district court also found that the contents of the documents DowCo had appropriated were neither generally known nor readily ascertainable and were treated by Hi-Line as trade secrets. In its conclusions of law, the district court held that under Texas law ³ the covenant not to compete was unenforceable but its unenforceability was not a defense as a matter of law to a claim for tortious interference with contractual relations. The court agreed with Hi-Line and determined that DowCo's conduct constituted tortious interference with contractual relations and unfair competition.

In its complaint and at trial, Hi-Line had sought the full array of damages for DowCo's tortious conduct--lost profits and compensatory damages for DowCo's misappropriation of its trade secrets and for DowCo's inducing the breaches of the covenant not to compete and the covenant not to disclose trade secrets, expenses incident to hiring new personnel, punitive damages, attorney's fees, etc. The district court, however, awarded Hi-Line only damages to recompense Hi-Line for the expenses incident to finding and training replacement personnel. The district court explicitly denied Hi-Line's request for an award of lost profits, finding that Hi-Line failed to present adequate proof on this issue. Nor did the court award Hi-Line compensatory or punitive damages for DowCo's successful efforts in inducing Hi-Line's ex-employees to breach the covenant not to disclose trade secrets or DowCo's misappropriation of Hi-Line's trade secrets. Instead, the sole relief ordered to remedy this tortious conduct was an injunction of two years duration that prohibited DowCo from either contacting or selling products to any of the customers Hi-Line was servicing in April 1983. This injunction expired by its own terms in April 1985. Hi-Line did not file a cross-appeal challenging (1) the amount of the damages awarded, (2) the denial of any other aspect of damages it had sought, or (3) the scope or duration of the injunction.

II. Tortious Interference with Contractual Relations

Hi-Line alleges that DowCo induced Hi-Line's ex-employees to breach two provisions of the employment contracts between Hi-Line and those employees--the covenant not to disclose trade secrets and the covenant not to compete. Under Texas common law, the elements of a cause of action for tortious interference with contractual relations are: (1) a contract; (2) an intentional and willful act interfering with the contract that was calculated to cause damage to the plaintiff; (3) the lack of any legally justifiable cause or excuse on the part of the defendant; and (4) actual damages. White v. Larson, 586 S.W.2d 212, 215 (Tex.Civ.App.--El Paso 1979, no writ); Armendariz v. Mora, 553 S.W.2d 400, 404 (Tex.Civ.App.--El Paso 1977, writ ref'd n.r.e.); see also C.E. Services, Inc. v. Control Data Corp., 759 F.2d 1241, 1248 n. 10 (5th Cir.1985).

1. Inducing the Breach of the Covenant Not to Compete

The district court found that the duration of the covenant not to compete rendered the covenant unreasonable and unenforceable. ⁴ Relying upon Clements v. Withers, 437 S.W.2d 818 (Tex.1969), the district court nevertheless held that the unenforceability of the covenant was not a defense to an action for tortious interference with contractual relations. In Clements, the purchaser of real estate induced the seller to breach an oral exclusive listing agreement between the seller and the realtor. Although the listing agreement was unenforceable (as between the parties to the agreement) because it did not comply with the statute of frauds, the Texas Supreme Court held that the unenforceability of that agreement did not provide a non-contracting third party with a defense to an action by the realtor against that party for tortious interference with contractual relations. The Texas Supreme Court explained that the underlying contract was neither void nor illegal but merely voidable and that no public policy existed opposing its performance. As such, a party not in privity with either of the principals could not rely upon the unenforceability of the contract and escape liability in tort. Id. at 821.

After the district court issued its decision in this case, this Court decided a case raising the identical issue raised here. In NCH Corp. v. Share Corp., 757 F.2d 1540 (5th Cir.1985), a former employer sued his ex-employees' subsequent employer for inducing the ex-employees to breach a covenant not to compete contained in the employment contracts between the former employer and the ex-employees. As in this case, the underlying covenant was unenforceable. Citing Clements v. Withers, this Court recognized that ordinarily the mere voidability of a contract between the contracting parties is not a defense to an action against a third party for inducing one of the contracting parties to decline performing the contract. Public policy opposes the performance of a contractual provision that is void, however, and a cause of action will not lie against a third party for inducing a breach of a void provision. See NCH Corp., 757 F.2d at 1543; Clements, 437 S.W.2d at 821. The NCH Corp. court found the covenant not to compete was void and unenforceable under Texas law because of the strong public policy against restraints of trade and the concomitant hardships resulting from interference with a person's means of livelihood. 757 F.2d at 1543. The court accordingly held that the unenforceability of the covenant not to compete in the employment contracts was a valid defense to a tortious interference with contractual relations claim against the subsequent employer. We are bound to follow our NCH Corp. holding. See McClure v. Mexia Independent School District, 750 F.2d 396, 401 n. 4 (5th Cir.1985); Affholder, Inc. v. Southern Rock, Inc., 746 F.2d 305, 311 (5th Cir.1984). We hold, therefore, that the unenforceability of the covenant not to compete is a complete defense to the claim of tortious interference with contractual relations insofar as the claim is based upon that covenant.

The only damages the district court awarded in this case were attributable to Hi-Line's hiring and training of...