Is Your Non-Compete Agreement Hidden in Your Stock Option Plan?

reading_document-300x253Many employees assume that a non-compete agreement will be clearly titled so as to provide them notice that they are agreeing not to compete with their employer on certain terms after they leave. However, that is not always the case. In fact, a lot of times, a non-compete agreement is just a clause in an another contract, buried among many other terms and conditions of employment or a compensation package.

After the Texas Supreme Court ruled in 2011 that an employer’s grant of stock options to an executive employee constituted sufficient consideration to support the enforcement of a non-solicitation of customers provision (in an employment agreement) against a former executive when he jumped ship to work for a competitor, employers in Texas began to include covenants not to compete and/or non-solicitation clauses in their stock options plans. Soon, Texas employees began to challenge them, and we are now seeing a new wave of opinions addressing these covenants not to compete coming out of the Texas Appellate Courts. I have previously written about the Texas Supreme Court’s ruling in ExxonMobil v. Drennen that came out in early September, and now, the Houston Court of Appeals in Cameron Int’l Corp. v. Guillory upheld the employer’s application for a temporary injunction because of a covenant not to compete included in the employee’s stock award agreement.

In Guillory, in recognition of its employee’s exceptional performance, Cameron awarded him 283 shares of restricted stock.  The employee was sent a copy of the restricted stock agreement online via http://www.etrade.com and was prompted to “accept” its terms electronically. Included in those terms was the covenant not to compete, solicit or disclose confidential information. Guillory accepted the terms, but then left to work a competitor. Cameron filed a lawsuit seeking a temporary injunction based on the non-compete provision that Guillory accepted in return for receiving Cameron’s stock.

The Court of Appeals found that a temporary injunction was justified, that Guillory’s electronic acceptance of the contract was valid under Texas Uniform Electronic Transactions Act, and that I-didn’t-read-the-contract-before-I-agreed-to-it was not a defense (duh!).

So, what’s the conclusion?

If you are an employee, read your employment agreements and your compensation agreements carefully before signing them and make sure you understand them. If you can, negotiate the restrictive covenants. If you cannot negotiate, plan for contingencies before leaving your employer.

If you are an employer, make the covenant not to compete prominent in the agreement to alert the employee that they are agreeing to certain restrictions.  If an employee is aware that s/he has agreed to such a covenant and the covenant is reasonable, they are less likely to violate it and you are less likely to have to spend your money on enforcing the agreement.

Also, when an employee leaves, remind him or her, either during the exit interview or via a separate letter, that they are subject to a covenant not to compete or a non-solicitation clause.

A Lost Employment Agreement Costs an Employer a Lot of Money

document-loser1In United Rentals, Inc., et al. v. Smith, the company tried to force the employee to arbitrate their wrongful termination dispute pursuant to an arbitration clause contained in the employment agreement that Mr. Smith had allegedly signed when he was hired by the United Rental.  The catch was that the company could not find the original agreement and all the copies on file were illegible.

So, in support of its motion to compel arbitration, the employer submitted a “digitally enhanced” copy of an employment agreement and a statement by its former human resources director, who swore that Mr. Smith signed an employment agreement when he was hired, but did not identify the “digitally enhanced” copy as being that agreement or its “true and correct” copy. The employee’s counsel argued that the copy produced by the employer was not authentic and, therefore, there was no proof that Mr. Smith ever agreed to arbitrate its disputes with the United Rentals.  Both the trial court and the Eighth Court of Appeals agreed.

Thus, instead of going through an arbitration, the employer in this case ended up having to defend itself in court, spend thousands of dollars on an appeal of the trial court’s order, and spend even more time and money to continue to defend in state court after losing the appeal.

Moral of the Story? While record keeping is not a fun part of running a business, it is a key component of a successful enterprise.  Employers should always keep a good and legible copy of all employment (and independent contractor) agreements on file.

Leiza Dolghih frequently advises Texas business owners regarding a variety of employment and business issues with the goal of reducing their risk of litigation from employees and the companies with whom they do business.  For more information, contact Leiza at Leiza.Dolghih@godwinlewis.com.

How Long Does a Trade Secret Injunction Last in Texas?

downloadAccording to a recent decision from the Dallas Court of Appeals, a permanent injunction should last forever, unless the company or the person accused of misappropriating the trade secrets provides sufficient proof that a lesser time period is adequate.  What does this mean? Well, it means that a business suing for a theft of trade secrets will be able to permanently prevent the thief from using its trade secrets, unless the thief can prove that its competing product incorporating the stolen trade secrets is a simple product, the construction of which is obvious and easily imitated.

In other words, if the competing product that was made using the stolen trade secrets is complex and would have required reverse engineering or complex research to make, then a perpetual injunction is proper.  If the competing product is a simple one, then the defendant can prove in court that an injunction should last only a short period of time, so as to eliminate any advantage the thief gained in the market place by stealing the trade secrets.

If you are facing a trade secret misappropriation claim or are suspecting that a theft of trade secrets occurred at your company, contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com.

Common Defenses to a Breach of Contract Claim in Texas

Being sued for a breach of contract can be unpleasant, but it is not the end of the world. Texas recognizes dozens of statutory and common law defenses to a breach of contract claim, one or more of which may be available to a party who is being accused of breaching an agreement.

Depending on the terms of the contract and the dealings between the parties, a breach of contract claim may be straightforward or very complicated, and it may involve one or two events or multiple events spanning over a long period of time. However, regardless of how simple or complicated the case is, the defenses are the same.  Not all of them apply in each case, and their application, of course, depends on the facts of each case, but here is a quick list of the most commonly used ones:

1.  The contract was required to be in writing (State of Frauds) - Certain contracts in Texas must be in writing and signed. If they are not, they are not enforceable in court.  For example, a contract for the sale of real estate, a lease of real estate for a term longer than one year, or an agreement which is not to be performed within one year from the date of making the agreement, must be in writing and signed by the party against whom a breach of contract claim is being asserted.

2.  The contract is missing essential terms (Indefinite) - For example, if a contract is missing pricing information or the length of the term, and it is not clear what the parties intended such terms to be, such contract might not be enforceable.

3. A party entered into a contract because it relied on fraudulent information (Fraudulent Inducement) - A party who enters a contract based on misrepresentations of material facts made by the other party may be able to defends itself on the grounds of fraudulent inducement.

4. A required condition failed to happen (Condition Precedent) - If a contract specifies that a certain event must happen before the parties or a party must perform its obligations under the contract and such event has not occurred, the party accused of breaching the contract may claim failure of condition precedent.

5.  Too much time has passed since the breach (Statute of Limitations) - in Texas, a breach of contract claim must be filed within four years, unless a contractual provision lessens it to two years.

6.  The circumstances have drastically changed (Impracticability) - if, since the contract has been created, the circumstances beyond one of the party’s control have changed so drastically that it is no longer possible for it to perform its duties under the contract, the party may claim a defense of impracticability.  For example, if the house subject to a lease has burnt down, or the goods were destroyed by a force of nature, or the person that was supposed to perform has died or become incapacitated, such circumstances may give rise to a defense of impracticability.

7.  The party now suing had earlier indicated that it will not perform under the agreement (Repudiation) - if one party to a contract has repudiated the contract, the other party may be able to raise that repudiation as a defense to any claim of breach by the repudiating party.  Repudiation occurs if, without a just excuse, a party to a contract indicates by unconditional words or actions that it will not perform its contractual obligations.

8.  The party now suing has already accepted a lesser payment (Accord and Satisfaction) - where the parties now involved in the lawsuit have entered into an express or implied agreement, in which they agreed to discharge an existing obligation by means of a lesser payment tendered and accepted, the defense of accord and satisfaction may apply. 

9.  Waiver - where a party to a contract has acted inconsistent with that agreement, it may have waived its right to enforce the contract.

10. Mistake (Mutual or Unilateral) - in a situation where either both parties were mistaken about the terms of the contract, or one party was mistaken and the other party knew about that mistaken belief, a party may claim that the agreement is not enforceable due to a mistake.

11. The contract in dispute has been replaced by a new one (Novation) - if the parties had entered into a new valid agreement, the old agreement between them might not be enforceable.

12.  Approval of an act or non-act by the party who is now being sued (Ratification) - if a party being sued for breach of contract can establish that its action or non-action was approved by the party who is now suing, it may establish a defense of ratification.

This above list is by no means exhaustive, and there are dozens of other defenses that a party facing a breach of contract claim may use depending on whether the contract was for provision of goods or services, whether it was in writing or established through the parties conduct, and many other circumstances that are different in each case.

If you have been sued in Texas on a breach of contract claim, contact Leiza Dolghih at leiza.dolghih@GodwinLewis.com.

The Texas Supreme Court Declares That Forfeiture Provisions in Executive Stock Incentive Programs Are Not Covenants Not to Compete

The Texas Supreme Court in ExxonMobil Corp. v. Drennen held that forfeiture provisions in non-contributory profit-sharing plans are not covenants not to compete, but stopped short of opining on whether they constitute an unreasonable restraint of trade in violation of Tex. Bus. Code 15.05.

In Drennen, ExxonMobil’s engineer and Exploration Vice President of Americas, was awarded restricted stock options through the company’s incentive program, which allowed the company to terminate Drennen’s outstanding awards if (among other conditions) he engaged in activities “detrimental” to the company, including working for ExxonMobil’s competitors.

Drennen retired from ExxonMobil in 2007, after working there for 31 years. At the time of his retirement, he had 73,900 shares (approximately $6.2 million) of stock through the company’s incentive program.  When he went to work for a competitor shortly after his retirement, ExxonMobil notified him that his incentive awards were cancelled. Drennen filed a declaratory action seeking a declaration from the district court that the “detrimental activity” forfeiture provision in ExxonMobil’s incentive program was an unenforceable covenant not to compete under Texas law because it did not contain geographic, time, or scope limitations.

Although the incentive program stated that it was governed by New York law, the Court of Appeals decided that Texas had a materially greater interest and a strong public policy interest in the dispute involving the enforceability of a covenant not to compete used against Texas employees, and, therefore, applied Texas law in ruling that the forfeiture provision was unenforceable under Section 15.50 because it did not contain reasonable time, scope, and geographical limitations.  The Texas Supreme Court  disagreed, ruling that New York law governed the forfeiture provision, but even if Texas law applied, the forfeiture provision used by ExxonMobil was not a covenant not to compete subject to Section 15.50 requirements.

The Supreme Court explained that covenants not to compete are generally defined as “covenants that place limits on former employees’ professional mobility or restrict their solicitation of the former employers’ customers and employees.”  Such covenants are governed by the Texas Covenants Not to Compete Act (TCNCA) and, pursuant to it, must be: (1) ancillary to or part of an otherwise enforceable agreement at the time the agreement is made; and (2) contain limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

The forfeiture of stock provision contained in ExxonMobil’s incentive program, however, did “not fit the mold” of covenants not to compete because it did not limit Drennen’s professional mobility or restrict his future employment opportunities. Instead, according to the Court, the provision simply rewarded Drennen and other employees for continued employment and loyalty to ExxonMobil. Unlike a non-compete, where employer would have to bring a breach of contract suit to enforce the clause, the forfeiture provision simply allowed the employer to stop the incentive program, which belonged to the employer in the first place. Thus, forcing an employee to chose between competing with the former employer without restraint from the former employer and accepting benefits of the retirement plan to which the employee contributed nothing, does not create a covenant not to compete.

The Court concluded this part of the analysis as follows:

Whatever it may mean to be a covenant not to compete under Texas law, forfeiture clauses in non-contributory profit-sharing plans, like the detrimental-activity provisions in ExxonMobil’s Incentive Programs, clearly are not covenants not to compete.  . . . Whether such provisions . . . are unreasonable restraints of trade under Texas law, such that they are unenforceable, is a separate question and one which we reserve for another day.

CONCLUSION:  Because the Texas Supreme Court ruled that forfeiture provisions of that type used by ExxonMobil are not covenants not to compete, they do not have to comply with the requirements of TCNCA, i.e. such forfeiture provisions do not have to be “ancillary to an otherwise enforceable agreement” or be limited in scope, time or geographical reach. The question remains whether such forfeiture provisions constitute an unreasonable restraint of trade under the Section 15.05 of the Texas Free Enterprise and Antitrust Act of 1983, which states that “every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.”  However, the Court’s decision took away an easy way for employees to fight the forfeiture provisions by pointing to the fact that they don’t contain limitations.

In light of this opinion, employers should take a close look at ExxonMobil’s incentive plan and determine whether their own programs have the same characteristics, and employees with significant stock option or profit sharing arrangements as part of the compensation package should carefully review the forfeiture provisions before agreeing to them and, where possible, negotiate their reach.

For more information regarding non-competition agreements in Texas, contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com.

A Reminder from the Dallas Court of Appeals That Non-Compete Agreements Without Time Limit Are Unenforceable

Earlier this week, the Dallas Courts of Appeals sided with an employee in Richard P. Dale, Jr., d/b/a Senior Healthcare Consultants v. Hoschar in ruling that her non-competition agreement was unenforceable because it did not contain a reasonable time limitation.

Hoschar, who worked as an insurance sales agent for SHR had the following clause in her independent contractor agreement:

Upon Termination of the Agreement, the Agent shall return to General Agent any and all information and supplies provided to Agent including any and all information and agrees to take no action either directly or indirectly, as an agent, employees, principal, or consultant of any third party or to utilize and [sic] third party, to attempt to replace business with any policyholder by soliciting or offering competing policies of insurance to any policyholder to which Agent sold any policy of insurance pursuant to the terms of this Agreement.  During the bench trial, the trial court held that the non-competition agreement was unenforceable as a matter of law because it did not contain reasonable time and geographic limitations.

SCR argued that the covenant not to compete was reasonable. Hoschar argued the opposite. No other arguments were raised, and the Court of Appeals sided with Hoschar.  It explained that in Texas, Tex. Bus. Com. Code §15.50(a) requires that a covenant not to compete must contain limitations as to time, geographical area, and scope of activity to be retsrained that are reasonable.  The Dallas Court of Appeals and many other Texas courts have previously interpeted Section 15.50 and ruled that a covenant not to compete in an employment agreement that is indefinite in its time limitation is unreasonable and therefore unenforceable as a matter of law.  Neither party challenged the application of Section 15.50 to independent contractors, and, therefore the Court of Appeals applied it to the covenant not to compete at hand here.

At the oral argument, SCR argued that the phrase, “attempt to replace business . . . by soliciting or offering competing policies of insurance,” reasonably limits the restrain on Hoschar to the duration of the current policy held by the insured. Thus, the “replace business” restriction was limited to the current policy held by each policyholder and did not restrict Hoschar from soliciting policyholders after they renewed their coverage.  Hoschar argued that the language of the non-compete agreement did not contain an express exclusion of renewal policies, which policy holders could renew repeatedly for decades, and, therefore, was indefinite as to time and unenforceable.

Having decided that the covenant not to compete was unenforceable because it did not contain a time limitation, the Court of Appeals did not consider whether it also failed to contain reasonable geographic limits.

TAKEAWAY: Non-competition agreements are enforceable only if they contain reasonable time, scope, and geographic limitations (and meet a few other requirements).  A vague, sloppy, one-size-fits-all, or simply an overreaching non-compete, can backfire on an employer when it comes to enforcing the agreement in court.   A non-compete covenant may be clear when the company first begins its business, but it can become less than clear as the company expands or begins to operate new businesses. Updating agreements to make sure that time limits, geographic limits, and the scope of activities restricted under the agreement are clear and reasonable is key to maintaining competitive advantage.

For more information on drafting, enforcing or fighting the enforcement of non-compete and non-solicitation agreements please contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com.

An Employee Claiming Unlawful Discharge Based on Religious Beliefs Must Show That the Management and not Coworkers Knew About Such Beliefs – Explains the Fifth Circuit

The Fifth Circuit Court of Appeals is notorious for being pro-business and pro-employer, and its last week’s ruling in Nobach v. Woodland Village Nursing Center, Inc., et al. does little to change that reputation.

In this case, Kelsey Nobach, a nursing home activities aide was discharged by Woodland Village Nursing Center after she refused to pray the Rosary with a resident, which was a regularly scheduled activity when requested.  She sued Woodland for violating Title VII of Civil Rights Act of 1964 by unlawfully discharging her because of her religion. The jury found in Nobach’s favor and awarded her $69,584 with $55,200 being for emotional distress and mental anguish, but the Fifth Circuit Court of Appeals reversed.

On September 19, 2009, a certified nurse assistant (“CNA”), a non-supervisory employee with no responsibilities over Nobach, told Nobach that a resident requested that the Rosary be read to her. Nobach told the CNA that she could not read it because it was against her religion.

The resident complained to management, and five days later, the Woodland’s activities director called Nobach into her office and told her she was fired for failing to assist a resident with a prayer.  She told Nobach: “I don’t care if it’s your fifth write-up or not. I would have fired you for this instance alone.” Nobach—for the first time—then informed the director that performing the Rosary was against her religion, stating: “Well, I can’t pray the Rosary. It’s against my religion.” The director’s response was: “I don’t care if it is against your religion or not. If you don’t do it, it’s insubordination.” After Nobach was fired, she explained that she was a former Jehovah’s Witness and still adhered to many of their beliefs.

The Court explained that Title VII makes it unlawful for an employer to discharge an individual “because of such individual’s . . . religion.” 42 U.S.C. § 2000e-2(a)(1). An employee may prove intentional discrimination “through either direct or circumstantial evidence.” Nobach argued that she offered direct evidence of Woodland’s discriminatory animus that motivated her discharge, which was evidenced by Woodland’s acknowledgement that she was fired for not praying the Rosary with the resident, and the Woodland’s director’s statement that she did not care if performing the Rosary was against Nobach’s religion, she still would have been fired because to refuse to perform the Rosary was insubordination.

The Fifth Circuit, however, found that Nobach failed to provide even one piece of evidence that showed that Nobach ever advised anyone involved in her discharge that praying the Rosary was against her religion. Nor did she claim that the CNA told any of Nobach’s supervisors that her refusal was based on her religion. The only time that Nobach actually advised her supervisor that her refusal to perform a job duty was motivated by her religious beliefs, was after she had already been discharged. As the Court said, “[i]n sum, she has offered no evidence that Woodland came to know of her bona-fide religious beliefs until after she was actually discharged.”

TAKEAWAY FOR EMPLOYEES:  When requesting a religious accommodation such as a deviation from a job duty that would violate their religious beliefs, employees must convey their request to their supervisors or the management and not just other coworkers.

TAKEAWAY FOR EMPLOYERS: When firing or letting go an employee, saying less is almost always better. It is possible that if the director who discharged Nobach used less inflammatory language instead of telling Nobach that she didn’t care if reading the Rosary was against her religion, Nobach would have been less likely to file a lawsuit. Firing an employee can get emotional, especially if there is a troubled history with the employee, however, it is important to remain cool and collected and not make any statements that the employee can later use as an ammunition to bring an unlawful discharge claim.

Leiza Dolghih frequently advises employers on how to handle troublesome employees, assists with responding to E.E.O.C. charges, and litigates employment disputes. For more information, e-mail Leiza.Dolghih@GodwinLewis.com.

Follow

Get every new post delivered to your Inbox.

Join 912 other followers