Statco Wireless v. Southwestern Bell

• Decision Date: 15 January 2003
• Docket Number: No. CA 02-391.,CA 02-391.
• Citation: 80 Ark. App. 284,95 S.W.3d 13
• Parties: STATCO WIRELESS, LLC v. SOUTHWESTERN BELL WIRELESS, LLC.
• Court: Arkansas Court of Appeals

95 S.W.3d 13

80 Ark. App. 284

STATCO WIRELESS, LLC v. SOUTHWESTERN BELL WIRELESS, LLC.

No. CA 02-391.

Court of Appeals of Arkansas, Divisions I, II.

January 15, 2003.

COPYRIGHT MATERIAL OMITTED

Friday, Eldredge & Clark, by: Harry A. Light and Ellen M. Owens, Little Rock, for appellant.

Kaplan, Brewer, Maxey & Haralson, P.A., by: Philip E. Kaplan and Joann C. Maxey, Little Rock, for appellee.

JOHN B. ROBBINS, Judge.

In this appeal, we are asked to review an order of the Pulaski County Circuit Court enjoining appellant from violating the terms of a covenant not to compete and from misappropriating trade secrets. We affirm, with slight modification, that part of the order pertaining to the covenant not to compete, and we reverse that part of the order pertaining to trade secrets.

Appellee Southwestern Bell Wireless (SWBW) is in the business of selling cellular phone service, sometimes referred to as cellular radio service (CRS) or commercial mobile radio service (CMRS). Its service is marketed through three primary channels: company stores, national retailers (such as Best Buy), and exclusive authorized agents. In 1997 and 1998, appellant Statco became an authorized SWBW agent for the Little Rock and Hot Springs areas, selling and promoting SWBW services exclusively in return for commissions paid by SWBW. The agency agreements executed by the parties contained a covenant not to compete in which Statco essentially promised that, for one year following termination of the agreements, it would not induce customers to choose the services of a SWBW competitor, nor otherwise sell or promote services offered by SWBW's competitors.

Between 1997 and 2000, Statco became one of SWBW's most successful agents, enrolling thousands of subscribers. However, disagreements arose between the two companies over compensation, and Statco notified SWBW that, beginning March 1, 2001, its stores would become "multi-line" stores, offering the services of SWBW competitors. SWBW immediately sought an injunction to enjoin Statco from misappropriating trade secrets and from violating the contractual covenant not to compete. A trial was held, and after an extensive hearing involving thirteen witnesses and seventy-one exhibits, the circuit judge agreed `that Statco's decision to market the services of competing carriers violated the covenant not to compete and violated the Arkansas Theft of Trade Secrets Act. The judge entered a twentyeight-page letter-ruling containing her findings and entered the following order:

Statco is permanently enjoined from violating the terms of the noncompete provisions in its agency agreements, including:

(1) Entering into any relationship with a SWBW competitor to market, sell, or distribute CMRS for a period of one year from March 1, 2001;

(2) Marketing, selling, or distributing CMRS for a SWBW competitor for a period of one year from March 1, 2001;

(3) In any manner attempting to contact a SWBW CMRS customer with the intent or purpose of inducing or encouraging that customer to change service from SWBW to a SWBW competitor;

(4) Any further misappropriation of SWBW's trade secrets.

Statco filed a timely notice of appeal from that order, and its first argument on appeal is that the trial judge erred in ruling that the covenant not to compete had been violated.

Covenants not to compete are not favored by the law. Federated Mut. Ins. Co. v. Bennett, 36 Ark.App. 99, 818 S.W.2d 596 (1991). Nevertheless, they have been enforced in some instances. See Dawson v. Temps Plus, Inc., 337 Ark. 247, 987 S.W.2d 722 (1999); Borden, Inc. v. Huey, 261 Ark. 313, 547 S.W.2d 760 (1977); Girard v. Rebsamen Ins. Co., 14 Ark.App. 154, 685 S.W.2d 526 (1985). The burden is on the party challenging the covenant to show that it is unreasonable. Moore v. Midwest Distrib., Inc., 76 Ark.App. 397, 65 S.W.3d 490 (2002). Covenants not to compete are reviewed on a case-by-case basis. Id. We will not reverse a trial court's findings regarding a covenant not to compete unless the findings are clearly erroneous. Bendinger v. Marshalltown Trowell Co., 338 Ark. 410, 994 S.W.2d 468 (1999); Jaraki v. Cardiology Assocs., 75 Ark.App. 198, 55 S.W.3d 799 (2001). A finding is clearly erroneous when, although there is evidence to support it, we are left, upon viewing the entire evidence, with the definite and firm conviction that a mistake has been made. See Jaraki v. Cardiology Assocs., supra.

For a covenant not to compete to be enforced, three requirements must be met: (1) the covenantee must have a valid interest to protect; (2) the geographical restriction must not be overly broad; (3) a reasonable time limit must be imposed. Duffner v. Alberty, 19 Ark.App. 137, 718 S.W.2d 111 (1986). Statco does not challenge the geographic or time restrictions in the covenant. Instead it argues that: (1) SWBW had no valid interests to protect; (2) even if SWBW had valid interests to protect, the covenant was overly broad and not reasonably tailored to protect those interests; and (3) there was a failure of consideration.

Where a covenant not to compete grows out of an employment or other associational relationship, the courts have found an interest sufficient to warrant enforcement of the covenant only in those cases where the covenantee provided special training or made available trade secrets, confidential business information or customer lists, and then only if it is found that the associate was able to use the information he obtained to gain an unfair competitive advantage. Duffner v. Alberty, supra.

Statco contends that it was provided with no special training by SWBW, but the evidence was disputed on this point. Statco witnesses testified that they received only a short video training session at the beginning of their agency relationship. However, SWBW witnesses testified that agents were provided with various training opportunities, both formal and informal. Subjects of training included not only education in the products and services offered by SWBW, but in sales techniques such as closing, responding to competitors' promotions, and preventing de-activations (churn). Conflicts in testimony are to be resolved by the trial court, and we will defer to that court's superior position to judge and determine the credibility of witnesses. Dewitt v. Johnson, 349 Ark. 294, 77 S.W.3d 530 (2002). In any event, the furnishing of special training is just one matter to be considered under the Duffner analysis. We must also consider whether SWBW made trade secrets, confidential information, or customer lists available to Statco.

The trial court found that SWBW had a vital interest in protecting the confidential information contained in its customer lists, agent compensation plans, written bid proposals, and marketing strategies, to which Statco had access during its agency. We do not think the trial court's finding on this point was clearly erroneous. Customer lists have been looked upon by the courts as a most valuable asset that is especially worthy of protection, particularly in a situation, such as the one here, where an agent is servicing customers away from the principal's place of business and builds up personal relationships that bind the customer to him instead of the principal. See Borden v. Huey, 261 Ark. 313, 547 S.W.2d 760 (1977); Girard v. Rebsamen Ins. Co., supra. The customer lists provided to Statco by SWBW contained not only the names of thousands of customers, but valuable information regarding those customers, including the customer's contract expiration date. This is not the type of information that could be readily ascertained in another manner, such as by looking in the telephone directory. See Jaraki v. Cardiology ASSOCS., supra at 205, 55 S.W.3d 799. Such information would allow a competitor or a former agent to contact the customer at a time when the customer was vulnerable to changing his service provider.

Statco makes much of the fact that it, not SWBW, developed the customer list and developed relationships with the customers through its own efforts. However, it must be remembered that Statco was acting as SWBW's agent, not on its own behalf. The agency contract recognizes that, when a subscriber is enrolled for services, the subscriber becomes a customer of SWBW.

We likewise agree with the trial court that SWBW had a protectible interest in the information contained in its agent compensation plans and bid proposals, although we recognize that its interest in those items is not as strong or as apparent as its interest in the customer list. The agent compensation plans detailed the particular manner of an agent's compensation for various services and features sold. According to SWBW witness testimony, companies in the cellular industry do not usually know how their competitors' agents are compensated. The witnesses also testified that a competitor who viewed SWBW's agent compensation plans could gain considerable insight into SWBW's pricing strategies and that the competitor could discern what products and services were being emphasized, based on incentives given for the sale of those items.

Bid proposals were the written proposals formulated when Statco would compete with other CRS providers for corporate customers. In doing so, it would submit the proposals to SWBW for special rates, discounts, or features for the customer. SWBW would then reply, on that proposal sheet, regarding whether or not such a bid would be accepted. According to a SWBW witness, the information on some of these proposals would be considered confidential because competitors could learn how low SWBW could go on its rates and possibly discern SWBW's average revenue per unit (ARPU) figure. Further, the bid proposals could give a competitor insight into the manner that the company deals with corporate customers.

Based on the above, we agree with the trial court that SWBW had a protectible interest in the items discussed, in particular the customer...