Cases don’t try very often. Doubly so in trade secret/non-compete litigation. So many of these disputes get resolved at the injunctive relief phase of the proceeding that, when one goes the distance, it is almost always worth peeking under the hood.
In MWK Recruiting, Inc. v. Jowers, No. 1:18-cv-444-RP (W.D. Tex.), a federal district court judge recently entered a judgment for $3.6 million—before fees and costs—against a former external law firm recruiter. The facts are not complex. A recruiter left his employer and joined a competitor. But before the recruiter left his former employer, he began using his personal email for candidate submissions and allegedly laundered six lateral candidates through the founder of his new employer. His former employer sued him and alleged that he misappropriated trade secrets and breached non-compete and non-solicitation covenants in his employment agreement. At trial, the district judge found in the plaintiff/employer’s favor on both claims and entered a $3.6 million damages award, with about $500,000 awarded under the misappropriation claim and $3 million under the breach of contract claim.
Three aspects of the order piqued my interest. First, this was a bench trial—not a jury trial. As we have previously blogged, opting for a bench trial might be more advantageous, depending on the facts of the dispute. This case is a good example of a case where a judge might be preferable to a jury, as there is no immediately apparent avenue for a blockbuster damages finding, and a district court judge will not shrink from imposing a large judgment.
Second, the district court easily found that the information the recruiter collected about clients and potential clients qualified as a trade secret under Texas law. The court specifically found that the candidates’ names, clients, book value, language skills, goals for switching firms, and their law school records constituted trade secrets. The district court emphasized the recruiter’s testimony that candidates expected their information to be kept confidential and that another recruiter could not simply learn this information and monetize the information.
Third, the district court awarded the amount of placement fees that the recruiter received as damages for breach of contract. The only reason the district court could do so is because this agreement included a liquidated damages provision. Normally, disgorgement-type damages are not available for a breach of contract. Instead, the classic contractual remedy for this type of breach is expectation damages—the lost profit that the employer would have received had the breach not occurred. This employer requested and received more because this agreement included a liquidated damages provision. That provision reads as follows:
9.1 The actual damages resulting from violation of Sections 7 and/or 8 of this Agreement by the Employee will be difficult or impossible to ascertain. In the event of such a violation, the Employee shall pay the Company, upon demand, as liquidated damages, and not as a penalty, the following:
9.1.1 Any fee paid for services rendered in violation of Sections 7 and/or 8, whether paid to the Employee or to any other person, firm or entity; plus
9.1.2 All costs and expenses, including reasonable attorney’s fees, incurred by the Company in the enforcement of its rights relating to such violation.
In my view, this liquidated damages provision functionally creates a disgorgement remedy for a breach of contract claim. The benefit to doing so is that, unlike a normal lost profit damages showing, the former employer did not need to show that the former employer would have made the same placement. Instead, the former employer met its damages showing by establishing (1) a violation of a covenant and (2) receipt of fees by the recruiter in connection with that breach. As a result, the former employer could make an easy showing based solely off activity by the recruiter without needing to prove up its ability to seal the placement.
If this approach sounds too good to be true, it might be. Normally, a liquidated damages provision would be challenged on the basis that it was an unenforceable penalty clause rather than a liquidated damages provision. While the exact requirements vary from state to state, most states will enforce liquidated damages in a contract only if actual damages are difficult to calculate or not readily ascertainable and when the amount is a reasonable estimate of the damages that would result. But here, the recruiter waived his ability to challenge the enforceability of the liquidated damages provision.
Implementing a liquidated damages provision might make a damages showing easier, but it would very likely draw an objection as a penalty clause in resulting litigation. So any employer considering whether to add a liquidated damages provision to a restrictive covenant agreement should seriously examine the law in the relevant jurisdictions before revising its form restrictive covenant agreement.
Overall, the decision and judgment provides a strong reminder that pre-employment bad acts determined by a trier of fact can generate material liability and that candidate information may be viewed not only as confidential information, but also even reach the level of a trade secret if a sufficient showing is made. And the decision provides an intriguing look at the benefits of a liquidated damages provision—though any reader should also be cognizant of the associated risks.