Court of Appeals of Texas, Houston (14th Dist.).

Paula SAUTTER, Virginia Alden, and Agency Source, Inc., Appellants,

v.

The COMP SOLUTIONS NETWORK, INC., Appellee.

No. 14-98-00555-CV.

|

Nov. 19, 1998.

Panel consists of MURPHY, C.J., LEE and DRAUGHN, JJ.⁷

OPINION

DRAUGHN.

*1 By this interlocutory appeal, appellants, Paula Sautter (Sautter), Virginia Alden (Alden), and Agency Source, Inc. (Agency Source), challenge the trial court’s granting of a temporary injunction in favor of appellant, The Comp Solutions Network, Inc. (Comp Solutions). The judgment of the trial court is affirmed as modified.

I. Background

Patricia Barnes (Barnes) is the owner of Comp Solutions, a wholesaler in the insurance industry, serving retail agents in the area of workers’ compensation and alternatives to workers’ compensation.¹ Barnes formed Comp Solutions in 1990. Barnes hired Sautter in 1994 to do marketing for Comp Solutions. Barnes hired Alden to do bookkeeping and accounting, but eventually trained Alden to do marketing.

In early February 1998, Sautter and Alden left Comp Solutions and formed their own company, Agency Source, which competes with Comp Solutions by selling occupation accident products and workers’ compensation insurance, in addition to general liability insurance. Sautter is president and sole owner of Agency Source, and Alden is vice president.

Before leaving Comp Solutions, Sautter and Alden faxed notices of their move and new agency to many of Comp Solutions’ retail agents and customers.² Barnes testified the wording of the notice would lead its customers and agents to believe Agency Source was a “continuation” of Comp Solutions. Sautter and Alden offered Barnes’s other employees employment with their new company.

After Sautter and Alden had left her agency, Barnes learned that they had allegedly taken a copy of her list of customers and agents, which she considers to be a trade secret. Both at her deposition and at the temporary injunction hearing, Sautter denied taking any copies of Barnes’s list of customers and agents. Sautter’s testimony regarding how she came to contact agents and clients of Comp Solutions since leaving is both confusing and inconsistent. At her deposition, Sautter testified with respect to how she contacts customers and agents without a list. With no further explanation, Sautter stated she has phone numbers. At the hearing, she testified she obtained the names of agents to whom she sent the announcements from the telephone book.

Sautter further explained she had worked for Specialty Risk Management prior to working for Comp Solutions, which specialized in providing health and safety programs to non-subscribing employers. Sautter stated that she continued to do business with the same agents at Comp Solutions that she had while at Specialty Risk Management. Sautter claims she has not contacted any of Comp Solutions’ clients since she left other than by the announcements; but rather, those clients have contacted her. Sautter, however, also testified that she initiated contact with Comp Solutions’ customers after sending the announcements. The customers with whom Agency Source has placed polices were all Comp Solutions customers.

Sautter admitted that several requests for “quotes” from Comp Solution’s clients were in her possession when she left Comp Solutions. Barnes explained when an agent needs a quote for insurance, he or she faxes the information for the request to the Comp Solutions office. Although Sautter claims she does not know how the quote requests came to be in her possession, she did not return them to Comp Solutions after she realized she had them. It was not until her deposition that she returned the requests to Barnes. Rather than returning the original requests to Barnes, however, Sautter returned copies of the faxes with the dates and the fax number of the person to whom the requests were sent “whited out.” Sautter could not explain why she had whited out that information. Barnes testified she lost business because of the requests Sautter and Alden had taken with them.

*2 After Sautter and Alden had left, Barnes discovered that many of Comp Solutions’ accounts were being transferred to Agency Source by a “broker of record letter.” This means the agent and/or customer writes a letter on his letterhead naming the new agency, Agency Source, and that agent as the agent of record. Sautter and Alden instructed the agents to write the letters.

Barnes testified that in order for Alden and Sautter to handle marketing for Comp Solutions they each needed a “Group 1” licence and a “solicitor’s” license under Barnes’s “local recording agent’s” (LRA) license. Without Barnes’s knowledge, Sautter had obtained her local recording agent’s license in August 1997. By obtaining her LRA, Sautter had to cancel her solicitor’s license. Also Sautter had contacted one of Barnes’s carriers, without Barnes’s knowledge, to sponsor her for her LRA.

After Sautter and Alden had left Comp Solutions, Barnes determined that 2500 copies above Comp Solutions’ normal monthly usage had been made in January 1998. Also an entire extra case of copy paper had been used in January 1998. Jackie D. Kilpatrick, owner of a property and casualty agency, went to the office of Agency Source on behalf of a client. There, Kilpatrick found what appeared to be fresh copies of files and concluded that these were probably copies of Comp Solutions’ files.

With respect to the errors and omissions policy submitted for Agency Source’s coverage, Sautter admits that some of the information contained in the application is false. For example, the application shows both Sautter and Alden are owners, but Alden is not authorized by law to own any interest because she does not have an LRA license. The application also states that in the past twelve months, the company had $1,000,000 in premiums, and in the current twelve months, the company has done $5,000,000 worth of business in premiums. Sautter testified that neither assertion is true.

Barnes testified that by the time of the temporary injunction hearing, she had lost $100,000 worth of business. She further testified that she would continue to lose business, and eventually be out of business if appellants were allowed to continue using her list of customers and contacting her customers. On February 20, 1998, Comp Solutions filed its application for injunctive relief and original petition claiming breach of fiduciary duty, negligence, conversion, breach of contract, tortious interference, and conspiracy to tortiously interfere with business agreements.

On April 3, 1998, after a hearing, the trial court entered an order for a temporary injunction. The trial court’s order prohibits appellants from (1) refusing to disclose to Barnes and the court the existence of Comp Solutions’s business records, including customer lists and (2) soliciting business from Comp Solutions’s clients with respect to policies placed by Comp Solutions.³ In five points of error, appellants claim the trial court erred in entering the order for temporary injunction because it constitutes a restraint on trade in the absence of a covenant not to compete and Comp Solutions failed to establish the customer list constitutes a trade secret. Appellants, asserting that they have returned all business records to Comp Solutions, claim the first part of the order is moot, and therefore are only appealing the second part of the order.

II. Standard of Review

*3 The purpose of a temporary injunction is to preserve the status quo pending final trial on the merits. See Gaal v. BASF Wyandotte Corp., 533 S.W.2d 152, 154 (Tex.Civ.App.-Houston [14th Dist.] 1976, no writ). Status quo is defined as “the last, actual, peaceable, non-contested status that preceded the pending controversy.” State v. Southwestern Bell Tel. Co., 526 S.W.2d 526, 528 (Tex.1975). The trial court should grant temporary injunctive relief only if the applicant demonstrates a probable right to permanent relief upon a trial on the merits and a probable injury during the pendency of the trial unless the injunction issues. See Allan J. Richardson & Assoc., Inc. v. Andrews, 718 S.W.2d 833, 835 (Tex.App.-Houston [14th Dist.] 1986, no writ) (citing Sun Oil Co. v. Whitaker, 424 S.W.2d 216, 218 (Tex.1968)). The applicant is not required to establish that he will finally prevail in the litigation. See Transport Co. of Tex. v. Robertson Transp., Inc., 152 Tex. 551, 261 S.W.2d 549, 552 (1953).

The appeal of an order either granting or denying temporary injunctive relief is interlocutory. See Tex. Civ. Prac. & Rem.Code Ann. § 51.014 (Vernon Supp.1998). Therefore, the merits of the underlying case are not presented for appellate review. See Davis v. Huey, 571 S.W.2d 859, 861 (Tex.1978). Our review is limited to whether the trial court abused its discretion in either granting or denying the temporary injunction. See Brooks v. Expo Chem. Co., 576 S.W.2d 369, 370 (Tex.1979). The trial court has not abused its discretion when it bases its decision on conflicting evidence. See Davis, 571 S.W.2d at 862. We must draw all legitimate inferences from the evidence in the light most favorable to the trial court’s decision. See Bertotti v. C.E. Shepherd Co., 752 S.W.2d 648, 655 (Tex.App.-Houston [14th Dist.] 1988, no writ). Therefore, we may not substitute our judgment for that of the trial court. See Davis, 571 S.W.2d at 862.

III. Trade Secrets

In their fourth point of error, appellants argue the trial court erred in finding that the customer list constitutes a trade secret. Texas law recognizes customer lists as trade secrets. See American Precision Vibrator Co. v. National Air Vibrator Co., 764 S.W.2d 274, 276 (Tex.App.-Houston [1st Dist.] 1988, no writ). A trade secret is “any formula, pattern, device or compilation of information which is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not know or use it.” Computer Assoc. Int’l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex.1996). Before something can be considered a “trade secret,” there must be an element of secrecy. See American Precision Vibrator Co., 764 S.W.2d at 276. Thus,

*4 [t]he owner of the secret must do something to protect himself. He will lose his secret by its disclosure unless it is done in some manner by which he creates a duty and places it on the other party not to further disclose or use it in violation of that duty.

Furr’s, Inc. v. United Specialty Adver. Co., 385 S.W.2d 456, 459 (Tex.Civ.App.-El Paso 1964, writ ref’d n.r.e.). Furthermore,

[o]ne who discloses or uses another’s trade secrets, without a privilege to do so, is liable to the other if (a) he discovers the secret by improper means, or (b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him.

Id.

The Texas Supreme Court has noted that merely because a trade secret can be discovered by fair and lawful means does not preclude its owner of the right to protection from those who would secure possession of it by unfair means. See K & G Oil Tool & Serv. Co. v. G & G Fishing Tool Serv., 158 Tex. 594, 314 S.W.2d 782, 788 (1958). This general rule applies to customer lists. See American Precision Vibrator Co., 764 S.W.2d at 278. Therefore, although a customer list may be considered a trade secret, to be entitled to the protection of the court, the proprietary information must be more than merely of a kind and character encompassed by the definition. The information must not be publicly available or readily ascertainable by independent investigation. See Allan J. Richardson & Assoc., Inc., 718 S.W.2d at 837 (citing SCM Corp. v. Triplett Co., 399 S.W.2d 583, 586 (Tex.Civ.App.-San Antonio 1966, no writ)). A corollary to this is when a customer list is not considered to be a trade secret and its contents are readily ascertainable from sources other than the employer’s records, the former employee may legitimately compete with his former employer for those customers. See Gaal, 533 S.W.2d at 155.

Barnes testified it has taken a “long time” to develop a relationship with the retail agents-time and money to train agents through workshops, seminars, and one-on-one visits to the agencies. Barnes testified that each of her marketers, including Sautter and Alden, had a copy of Comp Solutions’ customer list during their employment with the company. The customer list is maintained on Comp Solutions’ computers, which must be accessed with a password. The customer list was available for employee access for company purposes only. Moreover, Comp Solutions has an employee manual which set forth the company’s policies with respect to confidentiality of Comp Solutions’ business.⁴ Both Sautter and Alden signed a form stating that they had read and understood the employee manual.

Kilpatrick testified she considers her list of brokers and agents to be her most important trade secret because she has developed business with those agents for over thirty years. If another person tried to enter into this industry, it would also take thirty years to develop the same list and rapport with the agents. Without the list already compiled, it would be almost impossible to book any policies within the first couple of weeks because a new entrant into this niche market would have to determine which agents write non-subscriber business. For example, Kilpatrick stated she had 1200 hundred agents when she decided to move into the nonsubscribers market place, but did not write her first piece of business for eight months.

*5 We cannot say as a matter of law that the customer list in this case constitutes a trade secret. This, however, is not for us to decide in our review. Comp Solutions has presented evidence which reasonably supports an inference that its customer list gave it an advantage over its competitors and the information contained on the list is not publicly available or readily ascertainable by independent investigation. See Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 602 (Tex.App.-Amarillo 1995, no writ). Appellants’ fourth point of error is overruled.

IV. Scope of Order

Appellants argue in their first through third points of error that the injunctive order is overbroad and, in effect, imposes on them a covenant not to compete with Comp Solutions. Appellants contend that without a covenant not compete, they are free to compete with appellee.

Generally, in the absence of a covenant not to compete, an employee may use in competition with his former employee, general knowledge, skill and experience acquired in his former employment. See Reading & Bates Constr. Co. v. O’Donnell, 627 S.W.2d 239, 243 (Tex.App.-Corpus Christi 1982, writ ref’d n.r.e.); Johnston v. American Speedreading Academy, Inc. 526 S.W.2d 163, 166 (Tex.Civ.App.-Dallas 1975, no writ). This rule applies equally to the solicitation of the former employer’s clients. See Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548, 551 (Tex.App.-Dallas 1993, no writ). Even without an enforceable covenant, however, “ ‘a former employee is precluded from using for his own advantage, and to the detriment of his former employer, confidential information or trade secrets acquired by or imparted to him in the course of his employment.’ ” Id. (quoting Johnston, 526 S.W.2d at 166). This ruled has been applied to the use of a former employer’s customer list by a former employee who obtained such list in the course of his former employment. See Johnston, 526 S.W.2d at 166. Injunctive relief, therefore, is an appropriate remedy when necessary to prohibit an employee from using confidential information to solicit the clients of his former employer. See Rugen, 864 S.W.2d at 551.

Comp Solutions contends it places policies in a “very specialized niche market”-alternatives to workers’ compensation insurance. The order, according to Comp Solutions, restricts appellants only from soliciting business from agents, brokers, and customers on those policies currently in force, but does not restrict appellants from soliciting business from those same brokers, agents, and customers for other types of insurance. Appellants interpret the order as prohibiting them from ever soliciting any business on all types of insurance from the brokers, agents, and customers included on Comp Solutions’ customer list. The order states appellants are prohibited from

*6 contacting any and all clients, brokers, agents, customers, insureds, designated on Plaintiff’s exhibit nos. 1 and 2 … and any insurance company providers related to policies and coverages placed by Comp Solutions on behalf of its clients, customers, brokers and agents and/or any other persons or entities currently insured as designated in Plaintiff’s exhibit nos. 1 and 2 and to immediately cease and desist from soliciting, quoting, binding or any in [sic] way dealing with any of the named the named clients, brokers, agents, customers, insureds in Plaintiffs’ Exhibits Nos. ‘1’ and ‘2’ or any insurance company providers related to policy and coverages placed by Comp Solutions on behalf of its clients, customers, brokers and agents as designated in Plaintiffs’ Exhibits Nos. 1 and 2….”

(Emphasis added).

Because of the confusion the order has caused between the parties, we modify the order as prohibiting appellants from contacting, soliciting, quoting, binding, or in any way dealing with Comp Solutions’ clients, brokers, agents, customers, insureds, as designated on plaintiff’s exhibit nos. 1 and 2, and insurance company providers as these parties relate to coverages and policies placed by Comp Solutions, which are currently in force.⁵ Appellants, therefore, are free to solicit business from those same clients, brokers, agents, customers, insureds included on Comp Solutions’ customer list for any insurance other than that in the area of workers’ compensation or alternatives thereto which have been placed with these parties by Comp Solutions and are currently in force.

The injunction, as modified, does not prohibit appellants from competing with Comp Solutions for business not related to the brokers, agents, and customers included in appellee’s customer lists. Thus, appellants are even free to solicit business from Comp Solutions’ customers for other types of insurance except as related to workers’ compensation or alternative thereto. Under such circumstances, the injunction is not overbroad and the trial court did not abuse its discretion in enjoining appellants from soliciting appellee’s customers. See, e.g., Miller Paper Co., 901 S.W.2d at 602; Rugen, 864 S.W.2d at 551; Keystone Life Ins. Co. v. Marketing Management, Inc., 687 S.W.2d 89, 93 (Tex.App.-Dallas 1985, no writ). Appellants’ first through third points of error are sustained.

V. Probable Right to Relief

Appellants, in their fifth point of error, contend that Comp Solutions has failed to satisfy the first element in establishing the right to injunctive relief-the probability of success on the merits of the case.⁶ The plaintiff proves the probable right to relief simply by alleging a cause of action and presenting evidence which tends to sustain it. See Miller Paper Co., 901 S.W.2d at 597 (citing Transport Co., 261 S.W.2d at 552). Appellants merely reiterate the same arguments set forth in their first four points of error. We have concluded Comp Solutions has presented evidence which reasonably supports an inference that its customer list constitutes a trade secret and the temporary injunction order, as reformed, does not impose an unreasonable restraint of trade. Appellants’ fifth point of error is overruled. The judgment of the trial court is affirmed as modified.

	Footnotes
7		Senior Justice Joe L. Draughn sitting by assignment.
1		The alternative workers’ compensation insurance area is a specialized, niche market. Comp Solutions is an “intermediate” agent. Intermediate agents generally have expertise in specialty areas. Retail agents contact intermediate agents, such as Comp Solutions, for their expertise in niche areas. The intermediate agent, in turn, then approaches the insurance carrier for placement of coverage. Comp Solutions’ “customers” are retail agents, from whom it receives most of its business, as opposed to “street customers” who are the customers of the retail agents.
2		The notice stated: Here We Are!!!!! Paula Sautter and Ginny Alden are proud to announce the opening of their new company Agency Source, Inc. We are here to provide you with the excellent service and competitive quotes you have come to expect by working with us in the past[.] Thank you in advance for the opportunity to work with you and provide you Workers’ Compensation Occupational Accident and General Liability quotes.
3		The Temporary Injunction Order states in relevant part: …. The Court, having examined the pleadings, heard the evidence and arguments of counsel finds that the Defendants Sautter and Alden while employed with Comp Solutions solicited and sold specialized insurance through brokers and agents on behalf of insureds and directly to insured in the State of Texas. Comp Solutions business records which included, binder logs, invoice logs, corporate papers, computer print-outs, renewals and/or expirations from computer print-outs and all other business records of Comp Solutions are valuable, confidential and protected trade secrets. In January, 1998, the Defendants Sautter and Alden incorporated Agency Source without the knowledge of Comp Solutions and its owner, Patricia Barnes, and Defendants Sautter and Alden without authority removed and used to their own use and benefit Comp Solution’s business records all to Comp Solutions detriment. Defendants Sautter and Alden have contacted Comp Solutions’ clients, including brokers, agents, insureds and insurance companies as well as other potential clients of Comp Solutions which will make it impossible for Comp Solutions to sustain its clients and business operations. Comp Solutions is sustaining irreparable harm and is losing clients and insureds on a day-to-day basis and stands to lose additional clients and insureds as a result of the unlawful and unfair competition by Defendants Sautter, Alden and Agency Source unless all of the Defendants are temporarily enjoined during the pendency of this cause. Comp Solutions will not have an adequate remedy at law and therefore the Court deems the following Order necessary and equitable. It is ORDERED that the Defendants Sautter, Alden and Agency Source, their agents, servants, employees, representatives and/or assigns are hereby restrained from: 1. Intentionally misrepresenting or refusing to disclose to Plaintiff or the Court, the existence, matter of location of any originals and all copies of Plaintiff’s business records and customers and insureds lists, records and files. 2. Using any and all information which has been illegally and/or improperly obtained from Comp Solutions and to immediately cease and desist from contacting any and all clients, brokers, agents, customers, insureds, designated on Plaintiff’s exhibit nos. 1 and 2 attached hereto and incorporated herein for all purposes and any insurance providers related to policies and coverages placed by Comp Solutions on behalf of its clients, customers, brokers and agents and/or any other persons or entities currently insured as designated in Plaintiff’s exhibit nos. 1 and 2 and to immediately cease and desist from soliciting, quoting, binding or any in [sic] way dealing with any of the named clients, brokers, agents, customers, insureds in Plaintiff’s exhibit nos. 1 and 2 or any insurance company providers related to policies and coverages placed by Comp Solutions on behalf of its clients, customers, brokers and agents as designated in Plaintiff’s exhibit nos. 1 and 2 effective upon the signing of this Temporary Injunction Order and presentment of sufficient bond as required by this Court.
4		The employee policy manual with respect to confidentiality states: All Company matters are confidential including conversation and documents such as legal documents, client information, marketing material and concepts, invoicing, payroll, financial information, etc., are the sole property of the Company. Any duplication or distribution to outside sources must have approval from the President.
5		We have the authority to modify an overbroad injunction. See T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 25 (Tex.App.-Houston [1st Dist.] 1998, n.p.h.); San Augustine Indep. Sch. Dist. v. Woods, 521 S.W.2d 130, 133 (Tex.Civ.App.-Tyler 1975, no writ).
6		Appellants do not challenge the second element-probable injury during the pending of the trial. See Allan J. Richardson & Assoc., Inc., 718 S.W.2d at 835.