|FROM:||The Legal Taxi|
Can a former senior manager, who is fired from the company, without a non-compete agreement in place, solicit customers that our client, ABC MRI, Inc.? The Defendant, XYZ MRI, Inc. was set up after two former managers left the company, and XYZ MRI, Inc. is actively and aggressively soliciting physicians who refer MRI scans to our Client.
The shareholders of ABC, MRI Inc. are A and the defendants, B and C . A owns 65% of the company, but was not involved in active management until April of 2011. The defendants did not invest in the company, but owned 35% and operated the business. When A noticed unusual withdrawals from the company, issues arose; he fired the defendants as managers, and took over operations. The defendants then formed a competing company, XYZ MRI, in August of 2011, and have been actively soliciting ABC MRI’s referring physicians (our customers). Both companies receive referrals from physicians who need MRI, CT scans, X-rays etc. performed on patients. Both companies charge insurance companies, Medicare and direct bill patients for the services. The MRI, CT scans and X-rays are read by radiologists who work as contractors for the companies. The reputation and quality of the read is, obviously, very important to physicians referring their patients to ABC and XYZ.
I need a research analysis on tortious interference of former employees who have formed a competing business after their termination.
Originating Jurisdiction only
Standard Research Memo
Can a former senior manager, who is fired from the company, without a non-compete agreement in place; solicit customers of our client, ABC MRI, Inc.?
Texas Statue and Case Laws
In the present matter, the ABC MRI Inc. has fired the prospective defendants as managers and A has taken over operations. The prospective defendants (former employees B and C) then formed a competing company, XYZ MRI, in August of 2011, and they have been actively soliciting ABC’s referring physicians. The research revolves around tortious interference of former employees who have formed a competing business after their termination.
The scope of research will address whether a terminated employees, without a non-compete agreement in place, can start a competitive business and solicit customers of the previous employer.
In general, two types of tortious interference are common in employment cases. One involves tortious interference with an existing contract. The elements of tortious interference with a contract are:
- (1) the existence of a contract subject to interference;
- (2) the occurrence of an act of interference that was willful and intentional;
- (3) the act was approximate cause of the claimant's damage; and
- (4) actual damage or loss occurred. Merely entering into a contract with a party with the knowledge of that party's contractual obligations to someone else is not the same as inducing a breach. Moreover, inducing a contract obligor to do what it has a right to do is not actionable interference.
- Baty v. Protech Ins. Agency, 2001 Tex. App. LEXIS 2276 (Tex. App. Houston 14th Dist. Apr. 5, 2001)
The other kind of tortious inference involves a prospective business relationship. The present query falls under this situation. ABC has enjoyed an ongoing relationship with the referring physicians (assuming there is no long-term contract), so this creates a prospective relationship with each physician.
Following are cases in which different courts from Texas have discussed the key elements of tortious interference with a prospective business relationship.
In Baty v. Protech Ins. Agency, 2001 Tex. App. LEXIS 2276 (Tex. App. Houston 14th Dist. Apr. 5, 2001) citing Sturges and Bradford, the court discussed the elements of a claim for tortious interference with a prospective business relationship. The court listed the following elements:
- (1) a reasonable probability that the plaintiff would have entered into a business relationship;
- (2) an independently tortious or unlawful act by the defendant that prevented the relationship from occurring;
- (3) the defendant did such act with a conscious desire to prevent the relationship from occurring or the defendant knew the interference was certain or substantially certain to occur as a result of the conduct; and
- (4) the plaintiff suffered actual harm or damages as a result of the defendant's interference.
After termination, the two former employees or “defendants” formed a competing company, XYZ MRI, and it has solicited customers served by ABC; i.e., referring physicians. These facts appear to meet the first and fourth essential elements of tortious interference laid down by the court. Both companies receive referrals from physicians who need MRI, CT scans, X-rays etc. performed on their patients and both companies charge insurance companies, Medicare, and direct bill patients for the services. Thus, neither ABC nor XYZ has a contractual relationship with the referring physicians.
Defendants’ active solicitation of ABC’s referring physicians can help establish the third-listed essential of a tortious interference claim. XYZ seems in a position to argue that the solicitations were conducted for the unlawful purpose of causing damage and loss without right or justifiable cause on the part of the defendant.
In the same case, the court explained:
- To recover on a claim for tortious interference with a prospective business relationship, the plaintiff must establish the defendant's conduct is independently tortious Id. at 726. In Sturges, the Texas Supreme Court emphasized that it is not necessary for the plaintiff to prove an independent tort, only that the plaintiff establish the defendant's conduct would be actionable under a recognized tort. Id. In so defining this claim, the Sturges court concluded that the concepts of justification and privilege are subsumed in the plaintiff's proof and, restrict the availability of the affirmative defense of justification or privilege to those cases in which justification or privilege is a defense to the independent tortiousness of the defendant's conduct. Id. at 726-27.By way of example, the Sturges court pointed out that "a statement made against the plaintiff, though defamatory, may be protected by a complete or qualified privilege." Id. at 727. "Otherwise, the plaintiff need not prove that the defendant's conduct was not justified or privileged, nor can a defendant assert such defenses." Id. In explaining its rationale for this rule, the Texas Supreme Court stated:
- In reaching this conclusion we treat interference with prospective business relations differently than tortious interference with contract. It makes sense to require a defendant who induces a breach of contract to show some justification or privilege for depriving another of benefits to which the agreement entitled him. But when two parties are competing for interests to which neither is entitled, then neither can be said to be more justified or privileged in this pursuit. If the conduct of each is lawful, neither should be heard to complain that mere unfairness is actionable. Justification and privilege are not useful concepts in assessing interference with prospective relations, as they are in assessing interference with an existing contract.
Defendants knew about the referring physicians from their work at ABC, and they have been actively soliciting them. ABC can argue that this constitutes a taking of confidential information ABC in form of the customer lists i.e. the names of referring physicians. What we do not know at this point is whether any knowledge of customers, even without a physical list, constitutes a wrongful taking that supports the underlying tort. If so, then how long must the new entity desist from contacting ABC’s customers? This requires a further investigation that could determine whether a viable cause of action exists.
In Wal-Mart Stores v. Sturges, 52 S.W.3d 711, 726, 44 Tex. Sup. Ct. J. 486 (Tex. 2001)the court discussed the legal standard for "independently tortious" conduct. The court stated:
- In most Texas cases in which plaintiffs have actually recovered damages for tortious interference with prospective business relations, the defendants' conduct was either independently tortious * * * or in violation of state law* * * We therefore hold that to recover for tortious interference with a prospective business relation a plaintiff must prove that the defendant's conduct was independently tortious or wrongful. By independently tortious [conduct] we do not mean that the plaintiff must be able to prove an independent tort. Rather, we mean only that the plaintiff must prove that the defendant's conduct would be actionable under a recognized tort. [Emphasis added.]
In the facts presented to us, defendants have been actively soliciting ABC’s referring physicians. In Bluebonnet Petroleum, Inc. v. Kolkhorst Petroleum Co., 2008 Tex. App. LEXIS 5263 (Tex. App. Houston 14th Dist., July 15, 2008), the court discussed issues surrounding a departing employee. The court stated:
- An employee may use general skills and knowledge obtained through previous employment to compete with the former employer. Sharma v. Vinmar Intern., Ltd., 231 S.W.3d 405, 424 (Tex. App.--Houston [14th Dist.] 2007, pet. dism'd). However, the conduct of a former employee in competing with his former employer is not unlimited. A former employee may not use confidential or proprietary information acquired during the employment relationship in a manner adverse to his former employer. T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 22 (Tex. App.--Houston [1st Dist.] 1998, no pet.). Further, a former employee may not: "(1) appropriate the company's trade secrets; (2) solicit his employer's customers while still working for his employer; (3) solicit the
- departure of other employees while still working for his employer[;] or (4) carry away confidential information, such as customer lists." [Emphasis added] Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 512 (Tex. App.--Houston [14th Dist.] 2003, no pet.).
Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 512 (Tex. App.--Houston [14th Dist.] 2003, no pet.), deals with a situation where a former employee left to set up a new, competing business, taking many fellow employees with him. The court noted:
- Absent special circumstances, once an employee resigns, he may actively compete with his former employer. Id. In Texas, to resign from one's employment and go into business in competition with one's former employer is, under ordinary circumstances, a constitutional right. Ledel v. Bill Hames Shows, Inc., 367S.W.2d 182, 184 (Tex. Civ. App.--Fort Worth 1963, no writ). There is nothing legally wrong in engaging in such competition or in preparing to compete before the employment terminates. M P I, Inc. v. Dupre, 596S.W.2d 251, 254 (Tex. Civ. App.--Fort Worth 1980, writ ref'd n.r.e.). Moreover, the possibility of crippling, or even destroying, a competitor is inherent in a competitive market. Augat, 565 N.E.2d at 422. An employer who wishes to restrict the post-employment competitive activities of a key employee may seek to accomplish that goal through a non-competition agreement. Id. at 419.
Tortious interference exists when a person intentionally damages a plaintiff's contractual or other business relationships. The situation presents a potential instance of tortious interference with prospective business relationships. The relationship between ABC and the referring physicians is a matter of established custom and not of contract.
Of the four elements in Baty vs. Protech, element No. 2 seems key in this instance. It requires an underlying independent tort or violation of public law. One potential underlying tort could come from evidence of defamation; however, we currently have no evidence of such conduct or other tortious conduct or any evidence of a violation of public law.
Bluebonnet Petroleum, Inc. v. Kolkhorst Petroleum suggests that taking a customer list could constitute a breach of fiduciary duty needed to support a claim. In the present instance, we assume that B and C knew of the customers without having to take a physical list. Bluebonnet, while not directly addressing the issue of a customer list, does suggest that information taken must constitute a “trade secret” to support a claim. Based on the facts and analysis in Bluebonnet, a claim based on use of an actual or recalled customer list appears doubtful under our current facts. However, further careful consideration of this element is justified if we establish that ABC had some measures of security about its customer base. If so, this may support a claim. A claim based on the customer list would likely be much easier to prove than, for example, a claim of defamation.
Thank you for using The Legal Taxi. We hope that we that you will ask us to serve you again soon.
NEITHER MIND MERCHANTS, THE LEGAL TAXI, ANY OTHER SUBSIDIARY OF MIND MERCHANTS, OR ANY AGENTS OR VENDORS OF MIND MERCHANTS (TOGETHER, "MIND MERCHANTS"), NOR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, OR REPRESENTATIVES (TOGETHER, "PERSONNEL"), PROVIDES LEGAL SERVICES OR LEGAL ADVICE IN THE UNITED STATES, UNITED KINGDOM, OR INDIA. MIND MERCHANTS IS NOT A LAW FIRM, AND IT DOES NOT AND CANNOT RENDER LEGAL SERVICES OR LEGAL ADVICE TO THE GENERAL PUBLIC. MIND MERCHANTS IS NOT ENGAGED IN THE PRACTICE OF LAW, NOTWITHSTANDING ANY PERFORMANCE OR DELIVERY OF SERVICES BY LAWYERS WHO ARE OR MAY BE AUTHORIZED TO PRACTICE LAW IN THE UNITED STATES, UNITED KINGDOM, OR INDIA. THE SERVICES AND RELATED WORK PRODUCT PROVIDED BY MIND MERCHANTS AND ITS PERSONNEL ARE PERFORMED AND PROVIDED SOLELY AT THE REQUEST OF LAWYERS AND ARE BEING PROVIDED DIRECTLY TO THOSE LAWYERS, OR THEIR DESIGNEE(S), IN SUPPORT OF THE LEGAL SERVICES THAT THOSE LAWYERS ARE PERFORMING FOR THEIR CLIENTS.