What You Should Know About Non-Compete Agreements in Your Industry

kkAccording to a recent study,* at least one in four workers have signed a non-compete during their work-life, and at least 12% of the U.S. labor force are currently working under one. However, only 10% of the study participants reported bargaining over the terms of their non-compete agreements before signing them.

According to this study, the chances of being bound a non-compete increase with the higher level of education – 9% without college degree v. 27% of those with a graduate degree are bound by a non-compete. They also rise with the increase in salary, with one in three workers making over $100K a year having agreed to a non-compete.  So, if you are an MBA/Ph.D. graduate who makes over $100K, your employment paperwork will most likely have some version of a non-compete clause.

The researchers found that the following occupations tend to have non-compete agreements most frequently:

  • Engineering and architecture (30%)
  • Computer and mathematical occupations (28%)
  • Business and financial (23%)
  • Managers (22%)
  • Life, Physical & Social Sciences (20%)

Not surprisingly, the study also determined that non-compete agreements are more likely to be signed in states with higher non-compete enforcement policies. Texas is one of such states.

Furthermore, according to the study, the biggest predictor of whether an employee will be asked to sign a non-compete is whether he or she will be working with trade secrets.  About 10-20% of those who work with clients or have access to client-specific information sign non-competes, and about 24-30% of those who have access to trade secrets sign non-compete agreements, regardless of income, education, occupation, industry or firm size.

Out of all the participants in the study, 40% reported that they either did not read their employment contract or read it very quickly and only 8% stated that they consulted with a lawyer before signing one.

TAKEAWAY FOR EMPLOYEES: Employees should not blindly sign their employment paperwork, without carefully reading it first. Understanding whether an employment agreement contains a non-compete clause and what its limitations are, can help employees negotiate the reach and length of the clause, negotiate a higher salary, and/or plan exit strategy for when they want to leave their employer.

TAKEAWAY FOR EMPLOYERS:  Explaining to a potential or a new hire their non-compete restraints before they sign an employment agreement can help create a transparent working relationship and set everybody’s expectations, which leads to employees being more productive.   The above study found that, overall, employees who sign non-compete agreements typically get more training and advancement opportunities.  If that is the case in your organization, pointing that out to an employee how is asked to sign a non-compete may help employee understand that the non-compete agreement is mutually beneficial.

Leiza frequently litigates non-compete and trade secrets lawsuits on behalf of employers and employees in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete situation, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

* The study titled “Noncompetes in the U.S. Labor Force” is authored by Mr. Evan Starr, University of Illinois at Urbana Champaign, School of Labor and Employment Relations and the Department of Economics (estarr@illinois.edu); Mr. Norman Bishara, University of Michigan, Ross School of Business (nbishara@umich.edu); and JJ Prescott, University of Michigan Law School (jprescott@umich.edu).

How to Protect Your Intellectual Property When Getting Involved in a Startup

kkOne of the factors that distinguishes successful startups from those that fail, is not just a great idea, but an idea that’s legally protected from theft. A source code that solves a major need in the market place is worthless unless the inventor can show that he is the legal owner of the code and can prevent others from copying it or using it without authorization.  There is a reason, after all, that Mr. Wonderful on Sharktank always wants to know if the invention that’s being pitched has been patented.

Think about it this way. When you buy a car, you want to know who owns it and you want to see the registration and the certificate of title before you give the seller money. If the person selling the car does not have the proper paperwork or there are multiple people claiming ownership of that car, you are probably going to walk away. Intellectual property is no different. Whether you are trying to sell it or get somebody to invest money in it, you are going to have to show that you own it.

I have previously explained the four different ways of protecting intellectual property here. Each type of intellectual property protection is designed to protect a different aspect of a product or invention, and a combination of these methods of protection can increase the value of a startup and the product it offers many times over.

Thus, for any startup owner, partner, contributor, or anybody who is involved in developing or improving a product offered by a startup, it is important to understand what rights each person or entity involved has with respect to that product.

Patent Ownership

As a default matter, unless there is an agreement to the contrary, each inventor is considered to be a co-owner of the patent. This means that each joint owner may make, use, sell, and import into the US the entire invention without seeking the permission of the other inventors and without accounting to the other inventors for any profits. If several inventors are listed on a patent application, it would be wise to have an agreement that assigns their ownership or licenses the patent to the startup, so that the startup entity and not individual patent-holders decide when or how to use, market or sell the invention in question.

Copyright Ownership

Just like patents, a copyrighted work which consists of parts that the authors intended to be merged, is co-owned by each author, absent an agreement to the contrary.  Thus, any co-owner of a copyright can use or license the entire work without the permission of other owners. However, unlike patents each co-owner must account to the other owners for any profits they receive.  This arrangement may be changed by the parties’ agreement and often is changed so that the copyright is assigned to the startup entity by individual authors so that the company controls who or when can use the copyrighted material.

If a startup employs independent contractors to create distinct parts of a product, their employment or independent contractor agreements should have an assignment of work clause so that there is a clear understanding that the finished product belongs to the company and not the independent contractor.

Trade Secrets

As I have explained before, in Texas, “trade secrets” are defined very broadly and may include any confidential information of a startup as long as it (1) has economic value because it is not generally known and (2) is subject to efforts to maintain its secrecy that are reasonable under circumstances. Thus, even those ideas and business processes that do not qualify for patents, copyright or trademark protection, can be protected by the owner as trade secrets. In Texas, this includes a “negative know-how,” which is information about what business processes or product development ideas have failed in the past.

Whereas an application for a patent or copyright forces startup owners to define their invention or idea for purposes of obtaining legal protection, trade secrets protection does not require an owner to put down on paper what he or she claims as a trade secret. Thus, an idea of a trade secret is a lot more amorphous and very few startup owners try to identify what type of trade secrets they have until it is too late – such as when they are embroiled in a litigation with a competitor or a former employee or partner.  Non-disclosure and non-compete agreements are a great tool for protection of trade secrets, but must be drafted carefully so as to make them enforceable in Texas.  Identifying what is a “trade secret” early on in a startup life is key to being able to protect such trade secrets down the road.

CONCLUSION:  While intellectual property law is a complicated area that many lawyers, much less startup owners, know little about, implementing certain basic measure at the beginning of a startup, can drastically decrease the chances of a lawsuit over the ownership down the road and significantly increase the chances of obtaining investment capital. Spending just a few hours on identifying all the existing and possible sources of intellectual property within a startup and then deciding on how to protect them will pay 10-fold down the road.

Leiza litigates non-compete and trade secrets cases in federal and states courts around Texas, and frequently advises business owners and startups on how to protect their trade secrets against misappropriation by competitors and employees. Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

No Non-Compete Agreement? No Problem! – What Texas Companies Can Learn from Oculus Rift Lawsuits

kkI advise all my business clients in Texas to have non-compete and non-solicitation agreements with their key employees. Why? Well, first of all, because Texas courts enforce such agreements, so it only makes sense to take advantage of them. Second, because clear, specific, and reasonable non-compete and non-solicitation restrictions are usually a fair trade for providing key employees with access to customer lists, confidential information or expensive specialized training.

However, what happens if an employee does not have a non-compete? Does that mean that he or she can set up a competing shop across the street with no repercussions from the former employer? Well, not exactly. One only has to take a look at a few recent high-profile cases out of California courts to see that employers have many other ways to prevent employees from taking their confidential information and opening a competing business.  Since California does not allow non-competes, its employers have spent years perfecting other remedies to prevent unscrupulous employees from misappropriating their trade secrets. So, while Texas hates to look to California for, pretty much, anything, and while Texas and California law often diverge significantly, on this specific issue it pays to take note of what California companies have been cooking in their own courts.

Most recent example of an employer v. former employee battle waged in California-land that did not involve a non-compete agreement is a lawsuit by Total Recall Technologies (TRT) against Oculus Rift – a company that manufactures virtual 3D-reality headsets for gaming – and its founder, Palmer Luckey.  TRT filed a complaint in a federal court in California alleging a breach of non-disclosure agreement and “wrongful exploitation and conversion of plaintiff’s intellectual and personal property in connection with TRT’s development of affordable, immersive, virtual reality technology” by Luckey and Oculus Rift.  TRT alleged that Luckey was hired in 2011 to help develop a prototype head-mounted display, and as part of his job, he received information and feedback to modify the design.  According to TRT, Luckey used this confidential information to create Oculus Rift, his own version of the head-mounted display, which he launched via Kickstarter.  The lawsuit demands both punitive and compensatory damages in an unspecified amount. Given that Oculus Rift has recently been acquired by Facebook for $2 billion, the timing of this lawsuit could not be better for the plaintiff.

This is not the first time that Oculus Rift and its founder are being sued for alleged misappropriation of trade secrets. In 2014, ZeniMaxIP sued the same defendants in the U.S. District Court for the Northern District of Texas alleging that Occulus Rift breached its non-disclosure agreement with ZeniMax and, among other things, hired ZeniMax’s employees knowing that they would inevitably disclose ZeniMax’s trade secrets. Other claims included copyright infringement, unfair competition, trademark infringement, unjust enrichment, and false designation under the Lanham Act.

Notably absent from the suits were statutory claims for misappropriation of trade secrets.  The claim was not included in the ZeniMax v. Oculus lawsuit because Texas Uniform Trade Secrets Act (TUTSA), which governs such claims now, did not apply to misappropriations that occurred prior to September 1, 2013 – its effective date.  Why TRT did not plead a claim under the California Uniform Trade Secrets Act (CUTSA) is less clear, but just like TUTSA such claim is often plead in many employer v. former employee lawsuits in California.

Takeaway:  Just because a former employee never signed a non-compete or a non-solicitation agreement, does not mean that he or she can set up a competing business by using the trade secrets of its former employer. In Texas, TUTSA allows employers to go after employees who misappropriated their trade secrets (even in absence of non-compete or non-solicitation restraints) or where there is a threat of misappropriation. Moreover, a lot of times, a good non-disclosure agreement will give grounds to other claims. So, although having a non-compete or a non-solicitation clause in an employment agreement makes it easier for an employer to stop a departing employee from using its confidential information, all is not lost if no such restraints have been put in place.

Leiza frequently litigates non-compete and trade secrets cases. If you suspect that your business’s trade secrets have been misappropriated or you are looking to implement measures within your organization that will prevent or minimize the chances of trade secrets being misappropriated, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

My Employer Defamed Me to the Government! Not So Fast, Says the Texas Supreme Court.

dojIn Texas, a person cannot be sued for defamation for statements made in judicial or legislative proceedings. However, the rule has not been so clear with respect to statements made before such proceedings begin, such as those made during an internal investigation of employee misconduct by employer. Last week, the Texas Supreme Court in Shell Oil Co., et al. v. Writt held that a company’s statements made during an internal investigation while a company itself is under investigation are absolutely privileged against defamation, i.e. what a company says about an employee in that situation cannot serve as grounds for defamation.

In this case, the Department of Justice (DOJ) approached Shell about their investigation of one of the company’s subcontractors for violation of the Foreign Corrupt Practices Act (FCPA).  The DOJ suspected that the subcontractor was paying bribes to local officials in violation of the FCPA.

Understanding that Shell could face similar charges if its employees knew about the subcontractor’s violations, Shell cooperated with the DOJ and conducted an 18-month long internal investigation into its employees. As a result, it provided the DOJ with a report that stated that one employee was aware of “several red flags” concerning the subcontractor’s activities. In addition to providing the report to the DOJ, Shell terminated the employee, stating in the termination letter that the employee’s conduct was a “significant, substantial and unacceptable” violation of the company’s General Business Principles and Code of Conduct.

The employee sued Shell for defamation and wrongful termination based on the statements in the company’s report provided to the DOJ, claiming that the company falsely accused him of approving bribery payments and participating in illegal conduct. Shell sought a summary judgment on the grounds of absolute privilege, and while the motion was pending, the DOJ charged Shell with violations of the FCPA. It then entered into a deferred prosecution agreement because of the company’s cooperation in the investigation. The trial court granted Shell’s summary judgment motion, but was reversed by the court of appeals, to be later reversed by the Texas Supreme Court.

As the Supreme Court explained – in Texas, any statements made during judicial or legislative proceedings are protected from a claim of defamation. Additionally, statements that are made preliminary to a proposed judicial proceeding or as part of a judicial proceeding in which a person is testifying, are also immune from defamation claims if they have some relation to the proceeding.

Thus, statements made before a judicial proceeding has been initiated will still be privileged from defamation as long as: (1) the statements relate to the contemplated proceeding and (2) the party making the statements in good faith believes that it will be a party to the proceeding once it is initiated.

In this case, because the DOJ told Shell that it was investigating its employee and Shell, Shell’s report was given to the DOJ as part of the ongoing DOJ investigation, Shell compiled and provided the report under serious and good faith contemplation of a judicial proceeding – the statements in the report were privileged from defamation, and the employee’s claim against the company arising out of such statements failed.  The result would have been different if Shell had provided the report voluntarily, without the threat of prosecution from the DOJ.

TAKEAWAYS:  Under Shell Coruling, if a company’s internal investigation is conducted under a threat of being involved in litigation, any statements about third parties that are related to such potential litigation and are made during the investigation are likely to be protected from defamation claims. However, a company that voluntarily provides information to a government agency without a threat of prosecution might not have that protection.

This case is a great example of how complicated defamation law can be in Texas. Contrary to the media’s portrayal of defamation lawsuits, very few of those cases are straightforward, as that area of law is full of nuances, privileges, and defenses. When in doubt, an employer should consult with an attorney before making any statements about a former (or current) employee to third parties, including government agencies.

Leiza Dolghih practices business and employment litigation and often advises employers on how to prevent or minimize the risk of litigation before it occurs.  For more information, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

Break Time for Nursing Mothers at Work – A Right or a Privilege?

gisele-bundchen_0Many businesses routinely face the question of what to do when a nursing employee asks that she be allowed to take a break to express milk at work and that she be allowed to do so in a private space? Does an employer have to grant her request? What if a business does not have a private place for a mother to use? How many breaks is she allowed to take? For how long? Does an employer have to pay for the break time? This blog post answers these and many other questions that arise from this simple but very common situation and explains why, even when not required to do so under the law, it might be wise for a business owner to permit its female workers to nurse at work. Read more of this post

Lunch Invitations Are Not Sexual Harassment – Says the Texas Supreme Court

lunchLast week, the Texas Supreme Court reversed a $1 million award to a former San Antonio Water System (SAWS) employee, who claimed that she was terminated because she confronted a male vice president about his repeated lunch invitations to two female employees outside his department. The Supreme Court in San Antonio Water System v. Nicholas, held that “no reasonable person could have believed” that the lunch invitations constituted sexual harassment in this case.

Under the Texas Commission on Human Rights Act (TCHRA), an employer may not retaliate against an employee who opposes a discriminatory action (such as sexual harassment), makes or files a charge, files a complaint, or testifies, assists, or participates in an investigation, proceeding, or hearing. Tex. Lab. Code §§ 21.051, 055(1).  However, the employee’s actions must be based on a good-faith reasonable belief that discrimination is taking place, even if a later investigation shows that no such discrimination actually occurred.

The question in this case was whether Nicholas’s belief that sexual harassment had occurred was a reasonable good-faith belief? If so, then firing her for complaining about the VP’s conduct would have been retaliation and would have violated the TCHRA.  However, if her belief that the lunch invitations constituted sexual harassment was not reasonable, then she was not entitled to damages under the statute.

The Supreme Court concluded that Nicholas’s belief that the lunch invitations equaled sexual harassment was not reasonable:

“Flores’s lunch invitations may have been unwelcome, but no reasonable person could believe they constituted sexual harassment actionable under the law. We do not mean to say that lunch invitations can never be a component of a viable sexual-harassment claim, but under the facts of this case the lunch invitations were not so severe or pervasive as to alter the conditions of employment or create an abusive work environment.”

The Court then compared the facts of this case to other instances where offensive but isolated conduct by employees was found to be insufficient to form the basis of good-faith reasonable belief that the law had been violated, and noted that this case “paled in comparison” to the following claims of sexual harassment that the Court had previously rejected:

  • a single incident of male employee reading aloud sexual innuendo contained in a psychological evaluation, at which he and another male employee chuckled, could not reasonably been seen as violating the law;
  • a single instance of male employee entering women’s restroom and “gawking” at undressed women could not create objectively reasonable belief that claimants suffered illegal sexual harassment;
  • a female employee could not reasonably believe she had been sexually harassed when male supervisor commented on her underwear being visible under her uniform;

The Court concluded that because Nicholas could not have reasonably believed that Flores’s lunch invitations constituted an unlawful employment practice, her retaliation claim against SWAS failed.

TAKEAWAY FOR EMPLOYERS: Sexual harassment claims, even those that are baseless, can cause significant business disruption, lower morale, and cost a lot in attorney’s fees. Having the following at your workplace can significantly reduce such claims: (1) sexual harassment training; (2) having a process that allows employees to report their complaints; (3) documenting the complaints and subsequent investigation properly; and (4) reacting to those complaints that have merit.

The above case went all the way to the Texas Supreme Court because the three key persons involved in the investigation – the CEO, the general counsel, and Nicholas – had different memories about what the female employees told them about the lunch invitations.  It is possible, that Nicholas’s claim could have been shut down much earlier if the investigation notes contained a uniform and consistent account of what occurred.

TAKEAWAY FOR EMPLOYEES:  To make out a statutory sexual-harassment claim, an employee must prove more than that she found the harassment offensive.  Sexual harassment is actionable only if it is so severe or pervasive as to alter the conditions of the victim’s employment and create an abusive working environment.  Offhand comments and isolated incidents, unless extremely serious, typically will not amount to discriminatory changes in the “terms, conditions, or privileges of employment.”

Leiza Dolghih frequently advises employers on how to handle troublesome employees, assists with responding to EEOC charges and investigations, and litigates employment disputes. For more information, Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

10 Tips on Preventing Trade Secrets Theft by Employees Who Work from Home

workfrom homeIn 2013, Marissa Mayer’s memo to Yahoo employees cancelling Yahoo’s work-from-home policy sparked a debate on whether working from home hurts or benefits companies, and whether any cost-savings associated with such an arrangement are outweighed by a decrease in productivity of remote employees. Very few critics, however, discussed the added risks of trade secrets theft by remote employees.  It seems that many companies put a lot of emphasis on in-the-office security measures, but apply a much laxer set of rules to those who work from home. Because of that approach, the work-from-home arrangements often become the Achilles heel of the companies’ security measures.

Here are 10 tips on how to eliminate, or at least reduce, the risk of trade secrets theft by remote employees:

1. Do Not Allow Employees with Access to Highly Sensitive Information to Work from Home. While almost every employee would prefer to work from the comfort of their home, when a high-level employee has access to a highly sensitive information, working from home should not be an option.  The risk of somebody duplicating or downloading the company’s proprietary information at their “home office” is much higher than in the regular workplace. So, have your key employees come in the office if they are going to handle your top-level proprietary information.

2. Have Remote Employees Sign Confidentiality and Non-Disclosure Policies.  If a company allows its employees with access to less sensitive but still confidential information to work from home, it should require employees to execute a non-disclosure and confidentiality policy that describes what types of information the company considers confidential and what repercussions the employees will face if they violate the policy.

3. Have Log-In Reminders Emphasizing Confidentiality.  If employees are required to log into a proprietary software or a program that contains the company’s proprietary data, have the software vendor create a pop-window that reminds the employees when they log in that they are accessing confidential information.  This acts as a constant reminder to the employees that the data they are accessing does not belong to them.

4. Allow Remote Employees to Work Only on Company-Issued Computers.  There is no question that allowing employees to do work from home on their own laptops, saves companies on the costs of purchasing, maintaining, and upgrading the equipment. However, those savings can be easily dwarfed by legal costs should an employer want to examine an employee’s personal computer for evidence of trade secrets theft. When an employee uses a company-owned laptop, the company can easily retrieve it from the employee upon request.  However, when an employee uses his or her personal device, the company’s road to retrieval of its data from that device becomes much thornier (and much more expensive).

5. Have A Remote-Wipe or Lock-Out Measures. This is a no-brainer and is a must for every company that allows employees to work remotely. A company’s IT department should be able to quickly terminate any remote employee’s access to proprietary information. It should also be able to wipe the company’s confidential information from the employees’ devices, when appropriate.

6. Control Access to Confidential Information. Not every remote employee needs to access every software program or every database that a company has.  Determine which employees need access to what types of programs or data, and keep track of that information as part of their personnel file.  When such employees are terminated, the company should have a clear idea of what they had access to and what they could have potentially taken with them. This is especially important for employees who have non-compete or non-solicitation agreements.

7. Monitor What Accounts, Programs, or Devices Are Used by Remote Employees. Whether a company is using a cloud-based sharing system, VPN, or is allowing its employees to log into particular databases online, somebody at the company should monitor the use and flag any suspicious activity. The level and frequency of monitoring will depend on the size of the business, the type of the confidential data, and the manner in which such data is kept.

8. Set Up Red Flag Alerts, if Possible.  A company should work with its IT department and software vendors to determine if they can set up alerts that would notify the company when somebody downloads or copies an unusually large amount of data, prints an unusually large number of documents, or deletes a large amount of information from the company’s system.

9.  Have A System in Place for When You Need to Recover Company-Issued Computers. Figure out ahead of time whether, upon a remote employee’s termination, the company will be sending somebody to their house to collect company equipment or will be requiring them to return the equipment themselves. Whatever the system is, getting company equipment quickly after an employee’s termination, should be a priority.

10.  Plan Ahead Before Terminating a Remote Employee. There is a reason why a fired employee is usually walked out of the office right away. Being upset about getting fired may cause some employees to destroy company property or take it with them as a way of payback to the employer.  This is even a bigger concern for remote employees, as there is a time gap between them receiving a termination notice and a company being able to get its equipment back. Therefore, it is crucial for a company to be able to terminate remote employees’ access to sensitive information swiftly, instruct them clearly on how to return the company’s equipment, and follow-up with enforcement if an employee fails to follow the instructions.

Some of the above measures are cheap and easy to implement (e.g., written policies).  Others, require assistance of an IT person or a department or a purchase of a costly monitoring software.  It is up to each company to determine whether the confidential information that their remote employees work with justifies the cost of implementing the above measures.  However, every company that has employees that work from home, should at least analyze its weak spots with respect to its proprietary information, and determine how it can reduce the potential of data and trade secrets theft by remote workers.

If you suspect that your business’s trade secrets have been misappropriated or you are looking to implement measures within your organization that will prevent or minimize the chances of trade secrets being misappropriated, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

Trends in CEO Non-Compete Agreements

CEOEarlier this year, three law professors* published an analysis of non-compete and non-solicitation restraints in a sample of 874 CEO employment agreements. You can find the entire article here. This is the first empirical study of non-compete restraints.

The professors drew their agreements from a random sample of 500 S&P 1500 companies who are required by law to disclose to the public the terms of their CEO contracts. Here’s a summary of their findings:

  • most of the CEO contracts (80%) had 1 or 2-year covenants not to compete (CNCs)
  • 89% of CNCs prohibited CEOs from working for a competitor, but only 25% prohibited CEOs from financing one
  • almost 40% of CNCs barred CEOs from working anywhere where the company had operations
  • 75% of CEO contracts barred them from soliciting companies’ employees, but only 50% barred CEOs from soliciting clients
  • almost 90% of the contracts had a non-disclosure clause
  • more than half of CNCs were triggered by any departure of the CEO, whether voluntary or not
  • KEY: CEOs are more likely to have CNCs in their employment contracts if their contracts are being enforced in jurisdictions that permit strong CNC clauses, e.g., Texas.
  • KEY: There is a significant trend toward greater usage of CNC clauses in CEO employment contracts
  • KEY: Longer employment contracts (more than one year) are more likely to includes CNCs

TAKEAWAY:  In 2015, non-compete agreements for higher level executives, including CEOs, are the norm rather than an exception. The longer the CEO or a high-level executive works for a company, the more they learn about the business and its proprietary processes, inventions and strategic data that can be used to form a competing business. Therefore, a lot of times a reasonable non-compete restraint is justified and even necessary to protect the company.  CEOs, of course, have a lot of negotiating power when it comes to the exact parameters of such restraints and the appropriate amount of compensation that will justify their sitting on the sidelines for a year or two after their departure from the company.

If an employment contract is governed by Texas law, both the company and the CEO should approach the negotiations with the understanding that non-compete agreements in Texas are governed by the Covenants Not to Compete Act, which allows companies to put reasonable non-compete restraints on employees if they are tied to a legitimate business interest. Thus, for example, for a CEO of a company that has world-wide operations, a 2-year world-wide non-compete might be reasonable under the Act and might be enforced by Texas courts. Knowing that before beginning contract negotiations should help parties assess the appropriate parameters of the restraints and the corresponding compensation package.

*  Norman D. Bishara, Associate Professor of Business Law and Business Ethics, Stephen M. Ross School of Business, University of Michigan; Kenneth J. Martin, Regents Professor of Finance, College of Business, New Mexico State University; and Randall S. Thomas, John Beasley II Professor of Law and Business, Vanderbilt Law School, Professor of Management, Owen School of Business, Vanderbilt University. 

Having represented both companies and employees, Leiza Dolghih has been on both sides of non-compete disputes and knows what employees and employers typically do when a non compete dispute arises. If you need help in this area, contact Leiza Dolghih for a consultation at Leiza.Dolghih@GodwinLewis.com.

A Major Victory for Pregnant Working Women in the US Supreme Court – Young v. UPS

pregnant_at_work

This week, the United States Supreme Court issued a long-awaited ruling in Young v. UPS addressing how employers should treat pregnant employees under the Pregnancy Discrimination Act.

The Pregnancy Discrimination Act prohibits discrimination based on pregnancy and states that employers must treat pregnant women at work the same as “other persons” who are not pregnant but are similar in their ability or inability to work.  42 U.S.C §2000e(k).

Young, a UPS driver whose doctor told her not to lift over 20 pounds after she became pregnant, sued UPS because the company refused to put her on a modified light duty, while it provided such modified light-duty accommodations to employees who: (1) suffered on-the-job injuries; (2) required accommodation under the Americans with Disabilities Act (ADA); and (3) lost their Department of Transportation (DOT) certification. Under the UPS light-duty policy, an employee who could not lift heavy packages because he suffered an on-the-job injury, would be given a light-duty assignment, while Young, who was similar in her inability to lift heavy packages, would not be.  Young argued that this was discrimination based on pregnancy in that she was not treated the same as “other persons” similar in their inability to work.

Lower Courts’ Rulings:

The trial court and then the Fourth Circuit Court of Appeals rejected Young’s argument finding that she was comparing herself to categories of employees who were not similar to her and that the UPS’s policy was “pregnancy-blind” in that it treated all employees who suffered an off-the-job injury that limited their working ability the same.  Buying into the UPS’s argument, the Fourth Circuit explained that Young more closely resembled “an employee who injured his back while picking up his infant child or  . . . an employee whose lifting limitation arose from her off-the-job work as a volunteer firefighter,” neither of whom would have been eligible for accommodation under UPS’s policy; so, UPS was really not treating Young any different from other employees.

US Supreme Court Ruling

The Supreme Court did what it often does – it vacated the lower courts’ rulings, rejected both parties’ arguments, and came up with its own framework for determining whether an employer’s policy violates the Pregnancy Discrimination Act.

The Court rejected Young’s argument that an employer who provides accommodations to some workers, must provide such accommodations to all pregnant employees, noting that pregnant women were not entitled to a “most favored nation status.” However, the Court also rejected UPS’s argument that its policy treated all pregnant and non-pregnant employees similarly, noting that UPS’s interpretation of the law would “fail to carry out an important congressional objective” of treating pregnancy disability like disabilities stemming from disease and accidents.

Instead, the Court held that an employee who asserts a disparate treatment claim under the Pregnancy Discrimination Act, should have her claim analyzed under the McDonnell Douglas burden-shifting analysis.In a nutshell, the analysis works like this:

1.  A pregnant employee shows that the employer treats pregnant and non-pregnant employees differently in providing accommodations.

2.  The employer must then justify its different treatment by establishing a legitimate, non-discriminatory reason for the difference. While this burden traditionally set a comparatively low bar for employers to overcome, the Court cautioned that an employer’s reasoning that “it is more expensive or less convenient” to extend protection to pregnant women will not suffice.

3.  Even if the employer establishes such a reasons, the employee may then show it’s just a pretext.  While showing “pretext” traditionally has presented a comparatively high bar for plaintiffs to overcome, here the Court held that this burden may be met if the employee can point to evidence that the employer’s policies “impose a significant burden on pregnant workers, and that the employer’s ‘legitimate, non-discriminatory’ reasons are not sufficiently strong to justify the burden, but rather – when considered along with the burden imposed – give rise to an inference of intentional discrimination.”

After applying the above-described analysis to Young’s claim, the Supreme Court concluded that her claim should not have been dismissed by the lower courts and sent it back to the district court to analyze whether Ms. Young could prove her claim of discrimination under the Pregnancy Discrimination Act.

WHAT THE RULING MEANS FOR EMPLOYERS: The Court’s ruling makes is substantially easier for plaintiffs to succeed in pregnancy discrimination and accommodation claims, and employer’s policies that tend to negatively impact pregnant employees – particularly where there is evidence that the requested accommodations have been provided to non-pregnant employees – are likely to be scrutinized and may well be deemed to be unlawful.

Employers should review their policies and practices with the Court’s ruling in mind, and make whatever changes necessary to ensure appropriate accommodation of, and no adverse effect with respect to, pregnant employees. Employers should take all requests for pregnancy-related accommodations seriously and evaluate them thoroughly and consistently, so as to ensure compliance and help prevent claims under the Pregnancy Discrimination Act.

Employers should pay special attention to employees’ pregnancy-related claims that might also qualify as disability accommodation requests.  In 2008, Congress amended the ADA and expanded the definition of “disability” under the ADA to make clear that “physical or mental impairment[s] that substantially limi[t]” an individual’s ability to lift, stand, or bend are ADA-covered disabilities.” Thus, most pregnancy-related disabilities would now likely be protected by the ADA and subject to its reasonable accommodation requirements.

WHAT THE RULING MEANS FOR EMPLOYEES: This case does not provide an affirmative right to pregnant workers to receive an accommodation. Thus, an employer who does not provide accommodations for any workers with a temporary disability are under no obligation to do so for pregnant workers.

However, according to the US Supreme Court’s ruling, if an employer provides accommodations to certain employees, but refuses to accommodate pregnant employees, a pregnant employee might have a claim under the Pregnancy Discrimination Act.  Similarly, if an employer treats pregnant employees differently from non-pregnant employees in the workplace, a pregnant worker might have a claim under the Pregnancy Discrimination Act.

Leiza represents both employers and employees in handling pregnancy accommodation and pregnancy discrimination claims.  If you need help in this area, contact Leiza Dolghih for a consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

A Texas Company’s Chairman is Personally on the Hook for $1.3 Million for Hiring a COO Without Board Approval

employmentcontractEarlier this month, the First Court of Appeals  in Wilmot v. Bouknight upheld an award of $1,337,500 against a company executive and the chairman of the board who hired a chief operating officer (COO) for a 5-year term knowing that he did not have the authority to enter into such agreement without the board approval and knowing that the board would not approve the agreement.

For two years, the chairman proceeded to give the COO assignments, provided him paychecks, promised him additional compensation, and treated him like he was working for the company. Then he fired him, almost three years before the contract was to expire.

The COO sued the chairman in his personal capacity arguing that he fraudulently induced him into the employment agreement by representing that he had the authority to enter into the agreement while knowing full-well that he did not have such authority. The chairman claimed that he was not liable for the remaining compensation because: (1) there was no valid contract; (2) the “merger clause” in the contract subsumed any oral representations; (3) he was acting as an agent of the company; and (4) employees cannot sue for fraud in Texas. The trial court rejected all of his arguments and found that the chairman committed fraud when he told the COO that he had the authority to bind the company to the employment agreement while knowing full well that he did not have it.

TAKEAWAY: It’s not uncommon for employees to complain that their compensation structure or other terms of employment turned out to be different from what the employer promised when they were originally hired. And, typically, while disappointing, such difference in what was offered vs. what the employee actually received, does not give rise to a legal claim. This is because Texas is an at-will employment state, which means that an employer may change the terms of employment or compensation at any time and if an employee does not like it, they can leave.

However, as illustrated in the above case, where an employee is not at-will (has a guaranteed term of employment) and the company (or in this case, the chairman of the company) make representations about the future employment or conditions of employment, without any intention of fulfilling them, then the person making such representations may be liable for fraud. Moreover, making representations on behalf of the company does not absolve a corporate agent from being personally liable for such statements.

Thus, while proving fraud in employment agreements in Texas has become harder after Sawyer v. E.I. DuPont de Nemours & Co., it is not out of the realm of possible, especially, where an employee has a guaranteed-term contract.

Leiza often helps employers and employees negotiate and draft employment agreements and advises in employment-related disputes. If you need help in this area, contact Leiza Dolghih for a consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

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