Statco Wireless, LLC v. Southwestern Bell Wireless, LLC

95 S.W.3d 13, 80 Ark. App. 284, 2003 Ark. App. LEXIS 31

• Court: Court of Appeals of Arkansas
• Decided: January 15, 2003
• Docket: CA 02-391
• Status: Published

Opinions

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 twenty-eight-page letter-ruling containing her findings and entered the following order:

Statco is permanendy 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 list’s 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. 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 CR.S 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 lists.¹ However, Statco argues that the confidential value to SWBW of the abovementioned items is belied by SWBW’s actions in dealing with its other agents. In particular, Statco points out that (1) SWBW allowed three of its former agents to sell a competitor’s product within one year of terminating their relationship with SWBW; (2) certain confidential information in the hands of those agents was not retrieved by SWBW upon termination of the relationship; and (3) SWBW had no formal written procedures for retrieving such information from terminated agents or for monitoring an agent’s compliance with the covenant not to compete.

It is undisputed that three former SWBW agents terminated their relationship with SWBW and, when they began selling for one of SWBW’s competitors, they were not enjoined by SWBW from doing so. Two of the agents were operating under contracts with AT&T that were entered into before AT&T was acquired by SWBW. The AT&T contract had a covenant not to compete. The third agent was operating under a “McCaw” contract (a company acquired by AT&T prior to 1997), and that contract had no covenant not to compete.

Statco cites no authority for its proposition that SWBW’s failure to be diligent in enforcing the covenant against two former agents or in failing to monitor the retrieval of information from terminated agents precludes SWBW from asserting a protectible interest in the above items; nor have we found any such authority in our own research, although the extent of measures taken by a company to guard its information is a factor in determining whether a matter is a trade secret. See Conagra, Inc. v. Tyson Foods, Inc., 342 Ark. 672, 30 S.W.3d 725 (2000).² In any event, the trial court found that SWBW presented credible evidence that it took steps to protect the secrecy of the information contained in the customer lists and other items, and we do not think that finding is clearly erroneous. Agents were required to sign confidentiality agreements and abide by a code of conduct; SWBW was very careful about who it provided customer lists to; and it had a policy to retrieve confidential information from terminated agents. Further, the fact that certain agents were able to sell for a competitor did not present the same kind of risk to SWBW as the defection of a major agent like Statco. SWBW’s minor lapses in enforcement in this case do not necessarily preclude it from asserting a protectible interest in the items at issue herein.

Finally, Statco argues that SWBW could not show that Statco was able to use the confidential information to gain an unfair competitive advantage. They cite the testimony of former agents and of SWBW’s own witnesses that it would be possible for an agent to sell for a competitor without disclosing confidential SWBW information. However, the fact that such a thing would be possible does not necessarily prevent enforcement of the covenant. The question is whether Statco would be able to use the information obtained to gain an unfair competitive advantage. See Bendinger v. Marshalltown Trowell Co., supra at 417, n. 3. The very nature of the information at issue here, especially the customer lists, is such that a former agent would be able to use it to draw customers away from SWBW or assist a competitor in a manner that would be impossible had the agent not had access to the confidential information.

In light of the foregoing, we conclude that SWBW had a protectible interest sufficient to warrant enforcement of the covenant and that the requirements set forth in Duffher v. Alberty have been satisfied.

We turn now to Statco’s argument that the covenant was overly broad. The covenant reads in pertinent part as follows:

AGENT [Statco] agrees that AGENT, its officers, directors, key employees, principals, sub-AGENTS, any Affiliate or the person or persons owning a controlling interest in AGENT or an Affiliate, shall during the term of this Agreement and except as noted below, for a period of one (1) year following the later of the expiration or termination of this Agreementf:]

(1) not directly or indirectly induce, influence or suggest to any Subscriber of SWBW’s CRS to purchase any other CMRS from another Reseller or provider of CMRS in the Area;

(2) not directly or indirecdy influence or suggest to any Subscriber of any other Authorized Service to purchase a competing service from any other provider or Reseller of such competing service in the Area, whether or not the competing service is technologically the same as the Authorized Service in question;

(3) not, under any circumstances or conditions whatsoever, directly or indirectly, as an individual, partner, stockholder, director, officer, employee, manager, AGENT or dealer or in any other relation or capacity whatsoever engage in the sale or promotion of CMRS or any other Authorized Service on behalf of any competing Reseller or provider of such service in the Area[;]

(4) not, direcdy or indirecdy, allow any other person, firm, or other entity to use the name, trade name, goodwill, or any other assets or property of AGENT or SWBW in any manner in connection with such other entity’s sale of CMRS” or any other Authorized Service on behalf of a competing Reseller or provider of service in the Area, and AGENT specifically agrees not to transfer, assign, authorize or consent to the transfer of an AGENT telephone number to such a competing person, firm or other entity upon the expiration or termination of this Agreement.

Notwithstanding any language to the contrary, the restrictive covenants contained herein shall not operate so as to restrict AGENT from the business of providing or selling Paging Services.

The trial court determined that the covenant’s geographic and time restrictions were narrowly drawn and therefore reasonable. The court further found:

[SWBW] has invested its resources to enable its agency representatives to foster a relationship so that the customer will rely on its representative in making purchase decisions. Statco was intimately involved in the process of establishing personal relationships and soliciting customers. It is only fair that Statco be restrained from taking advantage of its relationship with SWBW’s customers, which were built with SWBW’s support, until SWBW has had the opportunity to foster the same relationships with Statco’s successors.

We do not find the trial court’s conclusion to be clearly erroneous because, although the covenant is broadly drawn, it is not unreasonably so.³

We begin our discussion of this issue by noting that the covenant was part of an arms-length contract entered into between business entities. The covenant was a conspicuous part of the contract, and the parties agreed, by the terms of the contract, that:

[T]hey have read this Agreement and understand and accept the terms, conditions and covenants contained herein as being reasonably necessary to maintain SWBW, high standards for CRS and other services, thereby to protect and preserve the goodwill of SWBW’s CR.S, Services and its Marks.

The restraints imposed by a covenant not to compete must not be broader than necessary to protect the covenantee’s interests. See Girard v. Rebsamen Ins. Co., supra. Also, the law will not enforce a contract that merely prohibits ordinary competition. Federated Mut. Ins. Co. v. Bennett, supra. If a covenant prohibits the covenantor from engaging in activities which are unnecessary to protect the promise, the covenant is unreasonable. See Easley v. Sky, Inc., 15 Ark. App. 64, 689 S.W.2d 356 (1985). The extent of restraint in a covenant is critical in determining its reasonableness. Restatement (Second) of Contracts § 188, comment d (1981). The test to be employed is whether the restraint is reasonable as between the parties and not injurious to the public by reason of its effect upon trade. Whether or not the restraint is reasonable is to be determined by considering whether it is such as to only afford a fair protection to the interest of the party in whose favor it is given and not so large as to interfere with the interests of the public. Girard v. Rebsamen Ins. Co., supra at 159.

Statco argues that the covenant is too broad because it applies not only to Statco’s owners, officers, and directors, but also to “key employees,” a term that is not defined in the contract. It further contends that the covenant does not merely prevent solicitation of SWBW customers but prohibits Statco from directing any potential customer to another service provider. Additionally, Statco claims, the covenant precludes Statco personnel, even as stockholders, from engaging in the sale or promotion of a competitor’s service. Moreover, Statco contends that the fourth clause of the covenant would prohibit it from transferring its telephone number or subleasing its premises to a competitor.

We interpret the covenant as being aimed at protecting three SWBW interests: (1) keeping its customers from being appropriated by a former agent; (2) keeping the confidential information possessed by its agent from falling into the'hands of a competitor; and (3) protecting its name, goodwill, and assets. Our supreme court has recognized that covenants not to compete are a legitimate means of protecting a principal’s desire that a former employee not appropriate its customers. See Borden v. Huey, supra; Girard v. Rebsamen Insurance Co., supra. We conclude that the particular restraints objected to by Statco in this case reasonably serve that objective and the objective of preventing a competitor from acquiring confidential information.

Although the term “key employee” has no established definition, it is more restrictive than the term “employee” and indicates a reasonable desire to restrain only important Statco personnel who possess key information from competing with SWBW. As for the fact that the covenant restricts Statco from directing potential customers to a competitor or from promoting a competitor’s product as a stockholder, these restrictions legitimately restrain Statco from serving the interests of SWBW’s competitors, which could lead to the sharing of confidential information with those competitors. Likewise, SWBW would have an understandable desire that its agent’s telephone number and place of business not become a means by which its customers could inadvertently fall into the lap of a competitor.

When these premises are considered, we disagree with Statco that the terms of the covenant are overly broad. We also note that, even though the one-year time restraint is not challenged on appeal, the fact that the covenant’s restraints apply only for a one-year period buttresses our view that the covenant is not unreasonable in its scope.

Statco further argues that there were other less restrictive means that SWBW could have employed to protect its interests. It points out that the agency contract contained restrictions on Statco’s activities, such as a restriction against divulging customer lists and a mandate to return SWBW marketing materials upon termination of the contract. Further, Statco argues that SWBW could simply have included a non-diversion clause in the contract, prohibiting Statco from diverting SWBW customers following termination. -

Statco’s- argument would apply to invalidate virtually every covenant not to compete and, as we have already pointed out, such covenants may be enforceable. A reasonably drawn covenant not to compete is an effective means by which a principal may protect its customers and its confidential information from appropriation and use by former agents or competitors. While the alternative methods suggested by Statco could be of some use, they do not substitute for a temporary ban on competitive activity, which assures the principal that its interests will not be compromised. We therefore affirm the trial court’s finding that the covenant in this case was reasonably drawn.

Next, Statco argues that, because the right to use SWBW marks was a consideration for it signing the covenant not to compete, that consideration failed when SWBW began to market its product under the name “Cingular.” We disagree. First, the trial judge made no ruling regarding consideration. Even if a matter is pled, we will not address it if it was not brought to the trial judge’s attention for a ruling. Britton v. Floyd, 293 Ark. 397, 738 S.W.2d 408 (1987). Second, as the covenant recites, there was consideration for the covenant other than the use of the SWBW marks. Third, SWBW did not begin using the Cingular name in public until after Statco had sent the letter notifying SWBW that it would begin selling competitive products.

The final issue concerns the trial court’s finding that Statco misappropriated SWBW’s trade secrets. A trade secret is information, including a formula, pattern, compilation, program, device, method, technique, or process that derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Ark. Code Ann. § 4-75-601(4) (Repl. 2001). Arkansas courts rely on six factors to determine whether something is a trade secret: (1) the extent to which the information is known outside the business; (2) the extent to which the information is known by employees and others involved in the business; (3) the extent of measures taken by plaintiff to guard the secrecy of the information; (4) the value of the information to plaintiff and its competitors; (5) the amount of effort or money expended by plaintiff in developing the information; and (6) the ease or difficulty with which the information could properly be acquired by others. See City Slickers, Inc. v. Douglas, 73 Ark. App. 64, 40 S.W.3d 805 (2001). To be entitled to injunctive relief, actual or threatened misappropriation must be shown. Ark. Code Ann. § 4-75-604 (Repl. 2001). Misappropriation means:

(A) Acquisition of a trade secret of another person who knows or has reason to know that the trade secret was acquired by improper means; or

(B) Disclosure or use of a trade secret of another without express or implied consent by a person who:

(i) Used improper means to acquire knowledge of the trade secret; or

(ii) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was:

(a) Derived from or through a person who had utilized improper means to acquire it;

(b) Acquired it under circumstances giving rise to a duty to maintain secrecy or limit its use; or

(c) Derived from or through a person who owed a duty to the person seeking relief to maintain secrecy or limit its use; or

(iii) Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

Ark. Code Ann. § 4-75-601(2) (Repl. 2001).

Even if the information acquired by Statco during the course of its agency qualifies as a trade secret, the record is bereft of any evidence that Statco has, or has threatened to, improperly misappropriate a trade secret. Nevertheless, an injunction may issue if there is evidence that an inevitable misappropriation will occur. See Cardinal Freight Carriers, Inc. v. J.B. Hunt Transp. Servs., Inc., 336 Ark. 143, 987 S.W.2d 642 (1999). We do not believe there is enough evidence in this case to support a finding of inevitable misappropriation. Statco has given no indication that it will disclose trade secrets, nor is there any evidence that it must necessarily do so to conduct its business. As mentioned earlier, there was testimony that a former agent could work for a competitor without using confidential information regarding his former principal.

Based on the foregoing, we affirm the trial judge’s finding that Statco violated the covenant not to compete, and we reverse her finding that Statco violated the trade secrets act. We also modify the third part of the trial court’s judgment to add the following phrase at the end of the clause: “for a period of one year from March 1, 2001.”

Affirmed in part as modified; reversed in part.

Stroud, C.J., and Pittman, Hart, and Bird, JJ., agree. Griffen, J., dissents in part.

1 As for SWBW’s marketing strategies, these were contained in marketing bulletins sent by SWBW to its agents. The bulletins communicated SWBW’s upcoming promotions as well as strategies for dealing with competitors’ promotions. SWBW acknowledged that much of the information contained in the bulletins could be discovered by competitors through “shopping,” i.e., calling and pretending to be a customer and that much of the information would lose its confidential status over the passage of time, for example in the case of bulletins that announced upcoming promotions. We agree with Statco that SWBW had no protectible interest in the marketing bulletins but, given our holding that a protectible interest existed in the customer lists, compensation plans, and bid proposals, the operative provisions of the trial court’s judgment are not affected.

2 But see Rector-Phillips-Morse v. Vroman, 253 Ark. 750, 489 S.W.2d 1 (1973), where the court discounted the confidential nature of certain information when twenty-three of thirty-one former RJPM salesmen would have been permitted to compete with R.PM and use the information. However, that scenario is far beyond the scope of what occurred here.

3 Statco points out that the trial court did not specifically rule on whether certain particular provisions of the covenant rendered it unreasonably broad. Were we to fully agree with that characterization of the court’s findings, we would decline to address the issue. It is the appellant’s burden to obtain a ruling from the trial court and, in the absence of such a ruling, we do not reach the issue involved. See Kangas v. Neely, 346 Ark. 334, 57 S.W.3d 694 (2001). However, our reading of the overall findings and conclusions by the trial judge convinces us that she considered the covenant reasonable in all respects. Thus, we will reach the merits of this point.