Enforcing Texas Non-Compete Agreements Against Employees in Other States

noncompeteFor Texas companies, enforcing non-compete agreements in other states can be tricky since each state has its own rules about what makes a non-compete enforceable, and some states do not allow them at all. Therefore, any Texas company with out-of-state employees should ask two questions about its employees’ non-compete obligations: (1) are my remote employees’ non-compete agreements enforceable? and (2) will I be able to enforce them in a Texas court if necessary?  I have previously written regarding Question 1 here and here, and recently a Texas Court of Appeals addressed Question 2.

In that case, a Texas company sued its Louisiana employee for breach of his non-compete and non-solicitation clauses, breach of fiduciary duty by using the company’s confidential information to compete with it, and tortious interference with the company’s existing business relationships. The company sued the employee in Texas, and he alleged that Texas courts had no jurisdiction (power) over him because he worked entirely from Louisiana, solicited business in Louisiana, and used the company’s confidential information in Louisiana.  In short, other than being employed by a company based in Texas, he did not have any contacts with that state so he could not be dragged into a lawsuit in Texas.

The Court of Appeals found that Texas courts had jurisdiction over the employee to decide the breach of contract/non-compete claim because he originally called the company’s president in Texas to solicit employment with the company, thus purposefully availing himself of the Texas forum. This contact was enough to subject him to the jurisdiction of Texas courts. However, Texas courts did not have the power to decide other claims brought by the employer because those claims arose out of the employee’s conduct that took place entirely in Louisiana.  

TAKEAWAY:  Texas companies that have employees in other states need to make sure both – that their non-compete agreements are enforceable in those states and that they can enforce those agreements in Texas courts.  Some of this can be achieved via contractual provisions in employment agreements, and some can be done via hiring, training, and other corporate policies that affect remote employees.  

Any Texas business that is planning on expanding outside of Texas in 2016, should conduct an audit of its non-compete agreements and employment practices to ensure that they are properly set up so that the company can enforce the agreements in Texas courts.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at LDolghih@GodwinLaw.com or (214) 939-4458.

Non-Compete Agreements are Not OK in Oklahoma

leoTurns out Oklahoma and California have much more in common than one would imagine – they both prohibit non-compete agreements.  The Fifth Circuit Court of Appeals recently confirmed in Cardoni, et al. v. Prosperity Bank what many Oklahoma businesses already know – non-compete restraints in Oklahoma do not hold up in court.  What makes this case interesting is that the Fifth Circuit refused to apply Texas law to bankers’ non-compete agreements even though they agreed that their agreements should be governed by Texas law, because Texas law was contrary to Oklahoma’s public policy, which prohibits such agreements under any circumstances. As the result, the Oklahoma bankers were allowed to compete despite the non-compete clauses in their employment contracts with a Texas bank.

Prosperity Bank highlights a situation, which has become more common in recent years, where a court will not apply the parties’ selected law because it is either (a) contrary to the fundamental policy of the state where the employee works, or (b) has no substantial relationship to the employment relationship, the employer or the employee.  So, how can companies ensure that they are protected from competition from employees located in other states?  The following basic rules can help companies draft effective post-employment restraints:

  1. Non-compete agreements are governed by different laws in each state.
  2. While the courts usually will defer to the parties’ choice of law to govern their employment contracts, that is not always the case.
  3. Where the law specified in an employment agreement contradicts a “fundamental public policy” of the state where the employee works, courts may refuse to apply the chosen law.
  4. If possible, a company should make sure that its non-competes are enforceable in both – the state specified in the contract and the state where the employee works.
  5. If that is not possible or an employee works in a state that prohibits non-compete agreements, the employer should look to see whether confidentiality or non-solicitations clauses may be used to achieve the same or similar results.
  6. The bottom line is that figuring out which law applies to non-compete agreements in different states and whether they will be enforced in court down the road involves a factually intensive and complicated legal analysis.  For higher-level employees, it pays to have the analysis done before non-compete agreements are signed and not after such employees have already opened a competing business or joined a competitor.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at LDolghih@GodwinLaw.com or (214) 939-4458.

Common Legal Mistakes When Hiring Seasonal Workers for the Holidays

overtimeThe holidays are around the corner, and employers who are considering hiring temporary workers for this holiday season should consider the following issues that often land companies in trouble when it comes to seasonal hiring:

  1. Employment Applications. Employers should remember that applicants for seasonal positions are subject to the same employment eligibility verification requirements and anti-discrimination rules as non-seasonal workers.  Therefore, employers should follow the same application process with the seasonal workers as with the permanent ones.
  2. Employment Offers. Businesses should clearly inform all seasonal employees in writing that their employment is temporary. Creating an impression that temporary employees are hired for a definite term may lead to problems at termination.
  3. Training. Seasonal workers can create the same potential liabilities for their employers as their non-seasonal peers if they engage in discrimination, harassment, or other inappropriate conduct. Therefore, skimping on training for seasonal employees is not a good idea.  While it may save some money in the short term, it can end up costing a lot more in legal fees down the road.
  4. Eligibility Verification. Employers should verify that employees are legally permitted to work in the U.S. just as they do with the permanent employees by obtaining proper Form I-9 records.
  5. Minor Employees. Employers should verify and comply with the limitations on employment of minors, such as work permits for students, limits on the number of hours or how late they can work, and break requirements for minor workers.
  6. Minimum Wage/Overtime Issues. Most seasonal jobs are not exempt from overtime under the federal Fair Labor Standards Act (FLSA) or state wage and hour laws. Employers should take care to pay minimum wage and overtime to seasonal employees. Overtime lawsuits are extremely popular right now among plaintiffs’ lawyers, particularly those alleging that employees were pressured to work through lunch breaks or before or after their shifts without being paid for that time.
  7. Employee /Independent Contractor Classification. A lot of companies wrongly assume that because an assignment is temporary, they can treat a worker as an independent contractor. That assumption is often wrong. When in doubt on how to classify seasonal workers, employers should consult with an attorney, as this is a complicated area of the law.
  8. Criminal Background Checks. Employers should conduct those checks, follow the proper procedures under the Federal Credit Reporting Act (FCRA), and use forms that contain proper authorization language from the potential hires.
  9. Unpaid Interns. In most circumstances, interns must be paid at least minimum wage. When in doubt, employers should consult with an attorney, as the test for determining whether a certain position can qualify for unpaid internship is complicated.
  10. Health Benefits. Employers should determine in advance of hiring, whether hiring seasonal workers will convert a company into a large employer under the Affordable Care Act (ACA) or, if a company is already a large employer, whether it will be required to cover the seasonal employees’ health benefits.
  11. Record-Keeping. Too often companies who keep thorough records for permanent employees, fail to do so for the seasonal hires. Those records, however, may play an important role if a litigation arises out of seasonal employment or if a seasonal employee later becomes a permanent one and claims Family & Medical Leave Act (FMLA) benefits. Thus, keeping good records for seasonal employees is as important as for permanent ones.

Leiza Dolghih represents both COMPANIES and EMPLOYEES in employment litigation and arbitration proceedings.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at LDolghih@GodwinLaw.com or (214) 939-4458.

Negotiating Employment Agreements or the Real Reason Jennifer Lawrence Got Paid Less Than Bradley Cooper

jennifer lawrenceSomebody recently went through Sony’s hacked e-mails and found some that show Jennifer Lawrence and Amy Adams were paid less than the male leads in American Hustle. This prompted Jennifer Lawrence to write an essay titled “Why Do I make Less Than My Male Co-Starts?”

She blamed her lower pay partially on Hollywood being sexist and partially on her not wanting to appear “difficult” and feeling silly about negotiating regarding millions she didn’t really need.  As you can imagine, the essay sparked a whole lot of indignation about the “wage gap” and the sexism in the workplace when it comes to salaries, not just in Hollywood, but everywhere.

However, many of these responses focused on gender issues and failed to address Jennifer’s glaring violation of the cardinal rule of employment negotiations – IF YOU DO NOT ASK FOR IT, YOU WILL NOT GET IT.  This is not a gender specific rule, by the way. Some believe that men are better at asking or demanding to be paid according to their worth than women, but I personally do not think that’s true. In my experience, it’s more of a personality or experience issue than a gender-related trait.  If your personality is like Jennifer Lawrence’s (by her own admission) and does not allow you to ask, find a person who will ask and negotiate for you, i.e. a lawyer or an agent.

I see too often executives (men and women) not asking for what they want in an employment agreement, not asking about what the terms in their employment agreements mean, assuming that their employment terms are not negotiable, or giving up on negotiations too early in the process.  As in any negotiation process, knowledge is power.  So, here is a list of terms that are often negotiable in the executive employment agreements and that you should at least discuss with your employer and your attorney before signing an employment agreement:

1. Severanceis the employer going to provide severance and, if so, how much? Is death or disability a severance trigger? What will happen to medical benefit continuation, prorated bonus, equity vesting acceleration, extension of the option exercise period, or other benefits if the employment is terminated?

2. Term of employment – most executive employment agreements will specify a term of employment, which is, of course, an exception to the at-will approach taken with respect to non-executive employees.  If it is an at-will contract, ask for a specific term. Often, an employer will specify that the company may terminate the executive “for cause.”  What constitutes “cause” is purely up to the parties.

3. Restrictive Covenants – what restrictions will be imposed on the executive after he leaves the company? For how long? The length, geographic scope, term of restrictions and other parameters can be negotiated to strike a balance between protecting the company and allowing the executive to earn a living after he moves on.

4. Cause does the “termination for cause” clause define what the “cause” is? Does it allow for a cure period, i.e. a period during which the executive can address the company’s concerns before being terminated “for cause”? Is the company’s board involved in the termination process and what are the steps in that process that the company and the employee will have to follow?

5. Good Reason – a “good reason” separation provision allows an executive to resign for certain pre-approved reasons, such as demotion, relocation and other events that would materially change the terms of employment.  What constitutes a “good reason” is negotiable.

6. Equity will the executive receive equity in the company as part of the compensation? How much? When does it vest? What happens with it if the employee is terminated for cause v. employee leaves for a “good reason.”  Are there additional restrictive covenants tied to the equity award?

7. Arbitration – if a dispute about the employment agreement arises, where will it be brought?  If in court, will an executive want to give up his/her rights to a jury trial? If in arbitration, what arbitration body will decide the dispute and what rules will govern it? Who will pay for costs?

8. Assignment – what happens to the executive’s rights and obligations under the employment agreement if the company is sold or bought? Can the company assign the employment agreement to the new entity? Will it need the executive’s permission to do so?

9. 409A When possible, severance, other payments and the employment agreement generally should be structured so as not to trigger coverage under Section 409A of the Internal Revenue Code. If the agreement is subject to Section 409A, it should be written to comply with.  Failure to do so can expose the executive, among other things, to a 20 percent additional tax.

10. Other Provisions  –  there are many other employment provisions that an executive can negotiate.  A little bit of planning and persistence in the negotiations at the front end of employment will pay ten-fold at the end of that relationship.

Leiza Dolghih represents both companies and employees in litigation and arbitration proceedings in state and federal courts.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

Small Business Corner: Limiting Competition Through Contract Provisions

download (1)Whether you are hiring a new employee or entering in a contract with your vendor or supplier, if you are planning on giving these persons access to your business’ confidential information, such as customer lists, financial information, proprietary training materials, etc., you should make sure that the person you are sharing it with is not going to take that information and use it to compete against your business. There are several tools available to business owners to make sure that this does not happen.

When properly drafted, the following contractual provisions will serve to protect a business owner from unfair competition by a former employee or business partner:

  • Non-compete clause.  This clause prevents current employees or business partners from joining or forming a competing business after the end of their employment or business relationship with your company.  It is enforceable in Texas when certain conditions are met.
  • Non-solicitation of clients clause.  This clause prevents current employees or business partners from taking the company’s clients with them after their employment or business relationship with that company ends.
  • Non-solicitation of employees a.k.a anti-raiding clause.  This clause prevents current employees or business partners from poaching their former employer’s or business partner’s employees after the end of their employment or business relationship.
  • Non-disclosure clause.  This clause prohibits employees or business partners from using or disclosing confidential information that a company shared with them during their employment or business relationship.

To be enforceable, each clause has to be drafted specifically for your business.  There are some contract clauses that stay the same no matter what the substance of the contract or the business is – these are not those clauses.

A lot of business owners will adopt a friend’s or a former employer’s non-compete and non-solicitation agreements for their own use, or copy an agreement they found online.  However, those agreements usually work only until a company attempts to enforce them, leaving a business owner exposed to unfair competition at the precise moment when it needs the protection the most.

These copycat restrictive covenants often fail because a company that attempts to enforce them in court must show why a particular geographic area or a specified time period is reasonable for a particular employee, and explain exactly what is included in the definition of “confidential information” included in the non-disclosure clause.  This is virtually impossible to do if the agreement that the company is seeking to enforce was catered to a different company’s business, with different types of confidential information, and different employee structure.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

Small Business Corner: How to Hire From a Competitor and Avoid a Lawsuit

Hiring from Competitor A lot of my clients are small business owners, so I’d like to dedicate some of my articles to the common legal issues faced by smaller companies. This is the first of such articles.  As usual, it explains how to minimize the risk of litigation, but should you find yourself in a (legal) pickle, you know who to call.

In this post I describe the steps that a company should take when hiring employees from a competing company. While following these steps will not eliminate the risk of litigation completely (the only thing that would accomplish that is NOT hiring from a competitor), it will greatly minimize the risk of a company getting involved in a lawsuit related to a hiring of such an employee.  The advice is based on my experience in representing companies and their competitors on both sides of disputes arising out of employees jumping ship from one competitor to another:

1.  Gather information about the old job. When hiring from competition, you need to know what the employee did at the old company and whether there will be any overlap with what he will be doing at your company. To that extent, during the interview (or before) have the employee provide you the following information: their title and the job description at the old company, what types of information they had access to, and a copies of any agreements they signed with the old company that might have non-compete or non-disclosure covenants.

During the interview, determine what materials of the former employer the employee might still have in his or her possession (documents, electronic files, laptop, flash drives, e-mails, etc.). Take care not to ask the specifics about the competitor’s clients or other information that the competitor might consider proprietary.   However, do ask about the types of information that the employee had access to at his old job.

2.  If an employee is subject to a non-compete agreement, consider the alternatives.  If the new potential hire has a non-compete with the old company, review the agreement and determine whether it is enforceable. If the agreement is enforceable, consider whether the new hire may be placed in a different geographic area or a position at your company that will not violate the terms of the non-compete covenant until such covenant expires.

3.  Include protective language in the offer letter. Make sure that the offer letter to the new hire clearly states that the employee will not disclose any trade secrets of their former employer during their employment with your company and will not transfer any of the old employer’s information or documents to your company’s computer system.

4.  Do the same with the employment agreement. Include the same language in the employment agreement, and make sure that both the offer letter and the employment agreement’s terms are the same in that respect and that the employee clearly represents to your company that he will not bringing on board or using any of his former employer’s confidential information.

Whether an employee’s former company might sue your company because of your new hire depends on the language of the former employee’s non-compete agreement, the former company’s history of enforcement of such agreements, what information the employee had access to while at the old employer and how high up the corporate ladder he or she was, and a few other factors, all of which should be considered prior to making the hiring decision.  Following the above steps can minimize the company’s risk of being sued for hiring a competitor’s employee, but when in doubt, consult with an employment attorney before making the hire decision.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

Enforcing Non-Compete Agreements in Texas: A Temporary Injunction Must Have an End Date

miles-massey_lAs a company, the last thing you want to do is to spend thousands of dollars obtaining a temporary injunction against a former employee who is violating his or her non-compete or non-solicitation obligations, only to have the injunction reversed on appeal because it failed to contain all the necessary terms.

Schlumberger learned this the hard way when the Houston Court of Appeals reversed a temporary injunction issued by the trial court because it did not contain an expiration date. The court specifically stated that “Texas law does not permit a trial court to enter an open-ended injunction against competition.”

In this case, two of Schlumberger’s employees left the company, opened a competing business, and hired 11 Schlumberger employees, which actions, arguably, violated the numerous non-compete and non-solicitation provisions in these employees’ agreements with Schlumberger.  Despite having evidence – including admissions by the defendant employees – that they have been competing with Schlumberger, the company’s efforts to shut down the competing business were thwarted when the court of appeals found the temporary injunction invalid because it failed to state a specific expiration date.

TAKEAWAY FOR COMPANIES:  Having an enforceable non-compete agreement is only half the battle. Knowing how to properly enforce it and how to obtain an injunction that will stick on appeal, is equally as important.

TAKEAWAY FOR EMPLOYEES:  Some companies will use a threat of temporary injunction or a temporary injunction itself to stifle competition, even when such competition is justified or is not contractually prohibited. Knowing how to defend against or fight an improper injunction can make a difference between shutting down the newly fledged business and keeping its doors open.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

Where CEO Drinks and Sleeps with Employees, A Company Is Not Required to Allow Him to “Cure” His Behavior Before Termination

MadMencocktailsIn Duncan v. Woodlawn Manufacturing, Ltd.the company fired the CEO after he became intoxicated at a work dinner charged to a company credit card and asked a subordinate employee to kiss him. The CEO sued the company for breaching his employment agreement, which required a company to provide him with a 30-day written notice of a specific action so that he could cure, i.e. fix it, before terminating him.

During the litigation, the following facts came to light about the CEO:

  • He had a drinking problem, which his mother, who also worked for the company, helped him cover up;
  • He had sexual relations with multiple female company employees;
  • He hired a prostitute on a company business trip when he was a CEO;
  • He entertained company clients at a strip club;

At trial, the CEO argued that because the company did not provide him with a 30-day “notice and cure” period specified in the employment agreement, it could not terminate such agreement. In his defense, he also argued that his conduct occurred away from the workplace and was not precluded by his contract or company policy (i.e. no morals clause or fraternization policy), and it did not impair his work performance. In fact, the plant’s sales increased from 17 million to 22 million during his tenure as the CEO.

The Court of Appeals rejected Duncan’s arguments after finding that the evidence showed that giving Duncan a 30-day period to cure his behavior would have been futile, “and the law does not require the performance of a futile act.”  With respect to his alcohol problem, he had been counseled for it prior to his termination without success, and by his own admission, he did not recognize that he had a problem with alcohol until three months after his termination when he finally came to the conclusion that he was an alcoholic.  Thus, the Court of Appeals concluded that “[a] jury might have believed that a letter from the company would not have resulted in an earlier solution of this problem, i.e., would have been futile.

Similarly, with respect to Duncan’s sexual escapades with employees, even if he could have ended them upon the receipt of a written demand from his employer to do so, he could not cure the effect of the rampant rumors around the plant, undo the perception of the favoritism garnered by those who had sexual relations with him, or eliminate the possibility of a sexual harassment claim from the employee whom he had attempted to kiss at a company dinner. Furthermore, the company’s owners believed that his efforts to hide these issues from them “completely” broke their trust in him  and there was nothing he could do to cure his lack of integrity or breach of such trust.

Thus, the Court of Appeals concluded that Duncan’s employer did not breach the employment agreement by failing to give Duncan notice prior to his termination.

TAKEWAY: Many executive employment agreements have a detailed description of what constitutes a termination “for cause” and what notice and cure period an executive must be provided before he can be terminated.  Such provisions are often negotiated by both parties to the agreement, ensuring that should an executive fail to meet his or her performance goals, he or she is allowed a certain time period to improve the performance before being terminated.  Having a clear definition of “good cause,” any “notice and cure” steps the company must follow before termination an employees, and an unambiguous statement of exceptions to such provisions is key to avoiding an expensive wrongful termination lawsuit and bad publicity.

The Duncan v. Woodlawn Manufacturing, Ltd. opinion highlights a simple proposition that a breach of employer’s trust by a high-level executive who owes fiduciary duties to the company, simply cannot be cured.  The determination of whether a particular act by an executive rises to the level of an incurable breach of trust depends on the facts of each particular case. Thus, a company considering termination of an employee “for cause,” or an employee who is facing or has been terminated “for cause,” should consult with an employment attorney to determine the best course of action.

Leiza Dolghih represents both companies and employees in litigation and arbitration proceedings in state and federal courts.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

Could Your Restaurant Be Violating A Federal Wage Law?

office-space-flairIn the words of the Fifth Circuit Court of Appeals, “this case concerns coffee and tipping.”  More specifically, Montano v. Montrose Restaurant Associates, Inc. concerns a question of whether a restaurant violated Fair Labor Standards Act (FLSA) by requiring waiters to share their tips with the restaurant’s “coffeman.”  The district court dismissed the waiters’ claim, but the Fifth Circuit reversed the ruling and send the case back to the district court to determine whether the coffeman was a “regularly tipped employee.”

If you own a restaurant, or you work in one, you are probably familiar with the practice of pooling tips, i.e. gathering all tips from the shift and splitting them between waiters, busboys, bartenders, etc. Under the FLSA, only those employees who “customarily and regularly receive tips” may be included in the pool in order for an employer to receive a “tip credit” for such employees.   The Department of Labor (“DOL”) has issued several rules and guidance over the years as to which occupations customarily and regularly receive tips and which do not. For example, waiters/waitresses, bellhops, counter personnel who serve customers, busboys/girls (server helpers), and service bartenders are considered tipped occupations, while janitors, dishwashers, chefs or cooks, and laundry room attendants are not.

The DOL also clarified in some of its opinion letters that one’s status as an employee who “customarily and regularly receives tips” is “determined on the basis of his or her activities,” not on the employee’s job title. Thus, while regular chefs are not tipped employees, sushi chefs who work at a counter in the dining room and directly serve customers may participate in tip pools.  Some courts have found that hostesses were tipped employees because they had “more than de minimis interaction with the customers” in an industry in which “undesignated tips are common.” However, salad preparers were not tipped employees because they “abstained from any direct intercourse with diners, worked entirely outside the view of restaurant patrons, and solely performed duties traditionally classified as food preparation or kitchen support work.”

The Fifth Circuit ruled that “in determining whether an employee customarily and regularly receives tips, a court—or a factfinder—must consider the extent of an employee’s customer interaction.”  It explained that the central difference between employees who are traditionally tipped and those who are not is that the former work primarily in the front of the house where they are seen by and interact with customers, while the latter work primarily or exclusively in the back of the house. Applying this logic, it found that the district court erred in failing to consider the extent of the coffeeman’s customer interaction in determining whether he customarily and regularly received tips.

In conclusion, the Court explained that “determining whether an employee is one who “customarily and regularly receives tips” is a fact-intensive inquiry that requires a “case-by-case analysis of the employee’s duties and activities.”

TAKEAWAY:  In recent years, restaurant industry has faced many wage-and-hour lawsuits involving claims for unpaid overtime and failure to pay minimum wage. Restaurants which use tip pools face additional claims related to such pooling arrangements.  The Montano case illustrates that who is a “tipped employee” and who is not for the purpose of a pooling arrangement is a factually intense question, which means that employers should carefully consider whether certain types of their employees belong in a tipping pool and should consult with an attorney before instituting such a system in their establishment.

Leiza Dolghih represents both companies and employees in litigation and arbitration proceedings in state and federal courts.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

Two Common (and Costly) Mistakes in Trade Secrets Litigation

kkTrade secrets litigation can be expensive, and if you can avoid it by implementing the measures that I’ve previously described here, then you are off to a good start.  But if your trade secrets have been misappropriated and you have no choice but to go to court, here are two important issues that are often not given enough attention until much later into a lawsuit, when it’s, often, too late.

How will your company’s trade secrets be protected during the lawsuit?

Typically, when sensitive information is going to be exchanged by the parties to a lawsuit during litigation, both parties will ask the court to enter, what is called, an “agreed protective order,” which describes how the parties will handle the confidential information that they receive from each other. It also imposes restrictions on how a party in a lawsuit may use the information or with whom it can share it.  Such an order is, basically, a contract between the parties, blessed by the court.

In my experience, however, a standard protective order used in many business litigation cases does not address many of the issues that arise in a litigation battle between two direct competitors, where the risk of confidential information being misused by the other side is magnified in comparison to a typical business case. Some standard protective order provisions are not restrictive enough, while others are so restrictive that the parties may run into roadblocks during discovery, increasing the costs of the lawsuit and frustrating the discovery of relevant documents.

Therefore, when deciding how to proceed with a trade secrets lawsuit, a company and its litigation counsel should discuss the specific aspects of a protective order and consider whether additional above-the-board protections should be put in place once the lawsuit is filed.  Since an agreed protective order is viewed by courts as a contract between the parties, the courts are often reluctant to change their terms unless both parties agree, which can make it difficult to add protections down the road if the other side objects to them.  Thus, it pays to analyze what trade secrets are likely to be disclosed during the litigation and what a provisions a protective order should include to ensure the preservation of their confidential nature during the discovery stage and trial. 

How will you calculate and prove the damages your company suffered from the misappropriation?

Many companies spend a lot of money and time proving that their trade secrets were taken and used by a competitor, only to receive a big fat “zero” in damages from the jury or to have a judge throw out their expert’s opinion regarding the damages the company suffered as being too “speculative” or “unreliable.”  

Sometimes, all that a company wants is for the person or entity that took the trade secrets to return them and/or a court order restraining that person or company from using the information they took. However, if the cat is out of the bag, so to speak, and the information has already been used by the time the company finds out that something was stolen, then the company might want to seek monetary compensation. In that case, analyzing what type of damages a company might be able to recover and how such damages may be proven must be done before the lawsuit is filed or shortly thereafter. Knowing whether a company might have a problem showing the amount of damages or linking such damages to the misappropriation can help the company set a realistic litigation budget and devise a settlement strategy.

Bottom line is that the two issues identified above should be addressed and analyzed early on, rather than in the middle of a costly litigation battle, when substantial funds and resources have been invested by the plaintiff and a non-suit might no longer be an option. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. Contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.


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