Bring in New Salespeople, Yes. But Not Their Old Company's Trade Secrets

Military Services Realty Inc. v. Realty Consultants of Virginia Ltd., 823 F2d 829 (1996)

October 1, 1996

ISSUE: Is a broker guilty of unfair competition and business practices if he affiliates several salespeople who, while employed by another broker, were trained in particular sales, farming, and advertising techniques?

PLAINTIFF: Military Services Realty Inc., Tidewater, Va.

DEFENDANTS: Realty Consultants of Virginia Ltd., Virginia Beach, Va., and five salespeople who were employed by Military Services before affiliating with Realty Consultants.

COMPLAINT: Military Services charged that Realty Consultants violated federal antitrust laws and Virginia conspiracy statutes by conspiring to deprive Military Services of its highly trained key employees.

It also claimed that Realty Consultants conspired to misappropriate Military Services' valuable trade secrets, customer lists, sales literature, advertisements, and other property and persuaded customers from whom Military Services had obtained commitments to purchase, manage, or sell property to transfer their accounts to Realty Consultants.

BACKGROUND: Military Services specialized in working with military personnel relocating to the Virginia Beach area. In March 1995, five salespeople employed by Military Services approached the broker at Realty Consultants and asked about affiliating with the company. The broker interviewed each and offered sales positions to all.

Military Services filed suit, claiming that, in addition to confidential prospect lists, the five salespeople took with them training in farming techniques specifically created by Military Services and not known to other brokers in the area.

According to Military Services, company representatives traveled to naval bases outside the area and interviewed naval officers being transferred to Virginia Beach. Military Services claimed that it developed proprietary information about where to go on the naval bases, when to go, and the best and most accessible hotels to stay in.

The company also claimed that it developed techniques to learn which bases had schools from which officers would be graduating and when, along with who the graduates would be. It also maintained that it learned the locations of the most important and popular bulletin boards that officers on base consulted and that it designed cost-effective advertising and flyers for base newspapers and magazines.

FEDERAL COURT DECISION: The U.S. District Court granted summary judgment to Realty Consultants on the federal antitrust claims and dismissed the remaining state conspiracy claims. The court noted, “It is conclusively established . . . that the trade secrets and confidential sales techniques, advertising, research data, prospect list, mailing list, travel schedules, and personal contacts were not, in fact, trade secrets but . . . commonly used sales techniques in the relevant market.”

THE APPEAL: The U.S. Court of Appeals for the 4th Circuit affirmed the lower court's ruling.

STATE COURT ACTION: Military Services filed another suit, this time in state court, again alleging conspiracy and theft of trade secrets and customers.

STATE COURT DECISION: At trial, the state court also dismissed the claims regarding trade secrets and confidential information. The jury, in 45 minutes, returned verdicts in favor of Realty Consultants on all remaining counts.

STATE COURT'S REASONING: The court determined that the information and techniques that Military Services claimed were confidential and trade secrets were in the public domain.

IMPLICATIONS OF DECISIONS: Military Services was ultimately unsuccessful in convincing two courts of the legal and factual theories it presented, but the case offers a lesson for companies that affiliate experienced salespeople from other companies. Such affiliation is plainly lawful, say NAR attorneys, but caution should be exercised to avoid interfering with the contractual relationship between such salespeople and their former company.

Also, the new company shouldn't encourage, permit, or even condone new salespeople's use of their former company's proprietary information. The stress and expense of protracted litigation can be enormous, but care in associating new salespeople can minimize the risks or unnecessary fears of litigation that might arise.

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