When Can a Franchisor Be Liable for Overtime and Minimum Wage Violations at a Franchisee’s Business?

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Earlier this month, the Fifth Circuit Court of Appeals addressed when a franchisor might be liable for its franchisee’s overtime and minimum wage violations as a “joint employer” under the Fair Labor Standards Act (FLSA).  Given the recent rise in the FLSA litigation and rather sizable penalties and damages awards assessed against the violators, Orozco v. Plackis serves as a reminder to franchisors that the more control they retain over their franchisees’ employees the more likely they are to share liability under the FLSA.

In this case, Craig Plackis owned several Craig O’s restaurants around Austin, Texas. In 2005, he entered into a franchise agreement with the Entjers to open a location in San Marcos. In 2011, Ben Orozco, a cook at the San Marcos location, filed a lawsuit against the Entjers and their company alleging that he was not paid overtime or minimum wages as required under the FLSA. After the Entjers settled, Orozco added Craig Plackis as a defendant alleging that the franchisor was also his employer.  The jury agreed with Orozco, but the Fifth Circuit reversed after finding that there was legally insufficient evidence for a reasonable jury to find that Plackis was Orozco’s employer.

Under the FLSA, covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009, and overtime pay at a rate not less than one and one-half times the regular rate of pay for hours worked above 40 hours in a workweek. The FLSA defines an employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. §203(d).

Often, when an employee works for a subsidiary, a franchise, or a professional employer organization (PEO), the question arises which entity is considered the employer for purposes of the FLSA. The courts, therefore, use the “economic reality test” to answer that question.  They look at “whether the alleged employer: (1) possessed the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.” A party need not establish every element in every case, and the dominant theme in the case law is that those who have operating control over employees within companies may be individually liable for the FLSA violations committed by the companies. In joint employer contexts, each employer must meet the economic reality test.

Did the franchisor possess the power to hire and fire employees? 

Orozco testified that the Entjers, and not Plackis, hired him and had the authority to fire him.  He also failed to introduce any evidence showing that Plackis ordered the Entjers to pay Orozco a particular amount or work for a specific number of hours.  Furthermore, Orozco’s attorney admitted during oral argument that there was no direct evidence to support that Plackis had authority to hire or fire Orozco.

Regardless, Orozco argued that the following indirect evidence could have supported the jury’s finding that Plackis was the employer:  (1) several employees worked at both the San Marcos location and the location owned by Plackis; (2) Plackis provided advice to the Entjers regarding how to improve the profitability of the San Marcos location, which resulted in the Entjers adjusting the schedule of their employees.  The Fifth Circuit found such indirect evidence legally insufficient to show “power to hire and fire” on behalf of the franchisor.

Did the franchisor supervise and control employees’ work schedule and conditions? 

Orozco argued that because the Entjers changed their employees’ schedule after a meeting with Plackis, the original franchisor had the authority to supervise or control employees’ work schedule and conditions at the San Marcos location. However, aside from the temporal connection between the meeting and the changes in the schedule, Orozco failed to introduce any other evidence of control.  To the contrary, both the Entjers and Plackis testified that the franchisor’s advice to the franchisee was non-binding, and Orozco himself admitted that Plackis did not set his schedule and never discussed his responsibility or position.

Importantly, the Fifth Circuit explained that the mere fact that the franchisor trained the owners of a particular franchise or reviewed their employees’ schedule in order to increase the franchisee’s profitability, or met with the franchisees and their shift managers frequently, did not mean that the franchisor controlled employees’ work schedule and conditions.

The Fifth Circuit also found that the franchise agreement stating that the Entjers had to follow “policies and procedures promulgated by the franchisor for ‘selection, supervision, or training of personnel,” was insufficient to support a finding that Plackis fired or hired employees or supervised or controlled their work scheduled or employment conditions.

Did the franchisor determine the rate and method of payment? 

Orozco testified that Plackis did not control his rate of pay and the Entjers set his rate and method of payment.

Did the franchisor maintain the employment records? 

Orozco conceded that Plackis did not maintain his employment records.

CONCLUSION:  Things worked out well for the franchisor in this case, but consider the following statement by the Fifth Circuit: “We do not suggest that franchisors can never qualify as the FLSA employer for a franchisee’s employees; rather, we hold that Orozco failed to produced legally sufficient evidence to satisfy the economic reality test and thus failed to prove that Plackis was his employer under the FLSA.”  Had Plackis maintained the employment records for the San Marcos location or directed the Entjers regarding how much they should pay their employees or what work schedule they should implement at their franchise location, the outcome of this case could have been different.

Thus, to avoid a potential exposure under the FLSA as a “joint employer” with its franchisees, a franchisor should make sure that the franchise agreement makes it clear that the franchisees and not the franchisor control the hiring and firing process, employees’ work schedule and conditions, determine the rate and method of payment, and maintain the employment records for their operations. Also, the franchisor should make it absolutely clear that any type of training, advice or guidance that it provides to the franchisees is non-binding and cannot be interpreted as an expression of control over their employees.

For more information regarding minimum and overtime wage requirements, contact Leiza Dolghih.

The Texas Supreme Court Pays Lip Service to Minority Shareholders While Nixing the Common Law Minority Shareholder Oppression Claims

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

In a surprising move last month, the Texas Supreme Court overturned 25 years of legal precedent when it ruled[1] that Texas does not recognize a common-law cause of action for minority shareholder oppression, leaving the appointment of a rehabilitative receiver as the only remedy for oppressive actions by corporate management.

In Ritchie v. Rupe, Rupe, a minority shareholder in a closely held corporation alleged that the corporation’s other shareholders, who were also on the board of directors, engaged in “oppressive” actions and breached fiduciary duties by, among other things, refusing to buy her shares for fair value or meet with prospective outside buyers. The directors essentially admitted to this conduct but insisted that they were simply doing what was best for the corporation. For the most part, the jury sided with the minority shareholder, and the trial court ordered the corporation to buy out her shares for $7.3 million. The Dallas Court of Appeals agreed that the directors’ refusal to meet with prospective purchasers was “oppressive” and upheld the buy-out order.

The Supreme Court reversed and held that the directors’ conduct was not “oppressive” under the Texas Business Organizations Code §11.404, but even if it was, the statute did not authorize courts to order a corporation to buy out a minority shareholder’s interest. Moreover, the Court “decline[d] to recognize or create a Texas common-law cause of action for ‘minority shareholder oppression.’” Whereas before Ritchie, a minority shareholder could use a threat of a court-ordered buyout to force the majority to buy him or her out a certain price, now the minority shareholders’ only relief for “oppressive” conduct by the company is to seek an appointment of a rehabilitative receiver under Section 11.404.

In addition to abrogating the common law claims for minority shareholder oppression, the Supreme Court also narrowed the definition of “oppressive” conduct, which is not defined in the statute, to include only those instances where the majority “abuse[s] their authority with intent to harm the interests of one or more shareholders in a manner that does not comport with the honest exercise of their business judgment.”  Thus, to obtain an appointment of a receiver under Section 11.404, a minority shareholder must show that the majority intended to harm him or her through their actions, and courts must apply the “business judgment” rule instead of the “fair dealing” and “reasonable expectations” tests to determine whether any oppression occurred.  Furthermore, because the appointment of a receiver is a “harsh” remedy and is meant to be used only in “exigent circumstances,” a minority shareholder seeking such appointment must show that all other lesser available remedies based on other claims or other provisions of the statute are not adequate.

In reviewing the various forms of conduct that minority shareholders have often alleged as giving rise to a common-law oppression claims, including the denial of access to books and records, the withholding of dividends, termination of employment, misapplication of funds, diversion of corporate opportunities, and manipulation of stock price, the Supreme Court concluded that other available causes of actions adequately addressed such wrongdoing and, therefore, a common law oppression cause of action was not necessary.  A minority shareholder, for example, can bring derivative lawsuits on behalf of the corporation, and claims for accounting, breach of fiduciary duty, breach of contract, fraud, constructive fraud, conversion, fraudulent transfer, conspiracy, unjust enrichment, and quantum meruit.

BOTTOM LINE: The Texas Supreme Court recognized that there is a gap in protection afforded to minority shareholders in Texas, but refused to create a new common law cause of action that would address this gap because the standard for what constitutes “oppressive” conduct outside of the statute is “so vague and subject to so many different meanings in different circumstances,” that creating an independent legal remedy for “oppressive” actions would be “bad jurisprudence” and would only “foster litigation.”

[1] Justices Guzman, Willett and Brown dissented from the majority opinion.

For more information regarding business litigation in Texas, contact Leiza Dolghih.

A Houston Court of Appeals’ Opinion Highlights What Evidence an Employer Might Need to Defend its Non-Competition Agreements in Court

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Last week, the Fourteenth Court of Appeals issued a ruling in a case involving a non-compete agreement between a legal services company in Texas and its former marketing director. While the facts and arguments made by the parties were pretty ordinary, the Court’s opinion was instructive regarding what evidence employers and employees might need in these types of cases to sway the court in their favor.

Rodriguez worked as a marketing director for Republic Services- a court reporting, process services, and record retrieval services firm – for six years before she went to work for a competitor. While at Republic Services, her duties included making calls to existing and prospective customers, assisting in the pricing of jobs, and assisting other employees in providing customer service.

Rodriguez’s employment agreement with Republic Services contained the following rather standard non-solicitation and non-competitions clauses:

For a period of twelve (12) months after termination of her employment under and pursuant to this Agreement, whether with or without cause, the Employee will not . . . (ii) approach, contact, cause to be contacted, or communicate with any customer or account, for whom Company performed services at any office where Employee performed any duties during the two years immediately preceding Employee’s termination of employment with Company.

* * *

For a period of twelve (12) months after termination of her employment, under and pursuant to this Agreement, whether with or without cause, the Employee will not (i) solicit, divert, or accept orders for record retrieval, court reporting, and other related services for or on behalf of any individual or firm, from any customer for whom Company performed services at any office where Employee performed any duties for two years immediately preceding Employee’s termination of employment with Company or (ii) own any interest in, be an employee of, be an officer or director of, be a consultant to, or be associated in any way with a competitor of the Company within the county, or counties, where Employee worked while employed hereunder. . . .

After Rodriguez went to work for Cornerstone Reporting, Republic Services sued her and her new employer for breach of employment agreement, tortious interference with prospective business relationships, civil conspiracy, and tortious interference with Rodriguez’s employment relationship (against Cornerstone only).

Rodriguez and Cornerstone filed a partial summary judgment motion and argued that the non-compete covenant was unenforceable as a matter of law for two reasons: (1) it contained an industry-wide restriction, which imposed a greater restraint than necessary to protect the business interests and goodwill of Republic Services; and (2) Republic Services failed to provide adequate consideration to make the non-compete enforceable. The trial court agreed with Rodriguez that the non-compete covenant was unenforceable and dismissed all the claims, but the Court of Appeals reversed.

First, the Court of Appeals reasoned that although Rodriguez claimed that the covenant imposed an industry-wide restriction on her, she “offered no evidence about the industry at issue.” In contrast, Republic Services provided evidence regarding specific companies in Harris County that were not its competitors within the “legal services” or “legal support services” industry and for whom, presumably, Rodriguez could have worked despite the covenant not to compete. Thus, Rodriguez failed to conclusively establish that the covenant was an industry-wide prohibition.

Second, the Court of Appeals found that Republic Services provided evidence of adequate consideration to make the non-compete enforceable. It showed that it gave Rodriguez customer and pricing information, trained her on how to use RB8 software, and gave her access to Republic Services’ goodwill. Interestingly, even though RB8 software is not proprietary to Republic Services and can be bought by any company, the fact that Republic Services trained Rodriguez on such software via webinars was sufficient to support the non-compete covenant. This poses an interesting question of whether providing training on Microsoft Suite, for example, or any number of software programs that are not proprietary to the employer who provided the training, is sufficient in itself to establish an adequate consideration for an enforceable non-compete.

Also interesting is the fact that the Court specifically emphasized that Rodriguez often invited her contacts at various law firms to lunches with her boss at Republic Services, which, according to the Court of Appeals, showed that she was provided and took advantage of the company’s goodwill. The natural question here is whether allowing an employee to use the company’s suite or an expense account to entertain potential clients creates sufficient consideration to support a non-compete restriction.

CONCLUSION: An employer should always be able to explain why and how its geographic restrictions, time restrictions and restrictions on the scope of activity of its former employees are necessary to protect its business interests and goodwill. It should also be able to show why such restrictions are reasonable. Documenting what sort of confidential information, training or goodwill has been shared with a particular employee is key to enforcing non-compete agreements. Also, being able to provide evidence about the industry in which the employer operates, its competitors, and companies that are not in competition, can be crucial to defending non-compete restraints.

For more information regarding non-competition agreements in Texas, contact Leiza Dolghih.

 

How Not to Draft a Non-Competition Agreement – A Lesson for Employers from a Texas Court of Appeals

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Earlier this month, the First Texas Court of Appeals found on a summary judgment that a non-competition agreement that covered all of Texas was unenforceable when a company failed to provide evidence that it conducted business in all of Texas or that the employee in question worked in the entire state. Morrell Masonry Supply, Inc. v. Coddou is a good example of how an overly-aggressive non-compete agreement can backfire on an employer.

In this case, MMS, a Houston-based masonry and exterior insulation finishing system (EIFS) supplier, sued Coddou, its former plaster salesman, for breach of the following covenant not to compete, which was included in Caddou’s profit sharing plan:

Employee recognizes and acknowledges that as a participant in employer’s profit sharing program employee will have access to all of employer’s corporate records. . . Employee further recognizes and acknowledges that the information contained in employer[’]s corporate records could be used to its competitive disadvantage. Therefore, employee specifically agrees that for a period of one year following the termination of employment, however caused, the employee will not within he geographical limits of the State of Texas directly or indirectly for himself, or on behalf of, or as an employee of any other merchant, firm, association, corporation, or other entity engaged in or be employed by any stucco and/or EIFS supplier business or any other business that is competitive with employer.

MMS subsequently fired Coddou, and when he went to work for a competitor, sued him for breach of the non-compete covenant.  Coddou filed a motion for summary judgment, arguing that the geographic restriction on the entire State of Texas was unreasonable and, therefore, unenforceable, as a matter of law.  Both the trial court and the Court of Appeals agreed.

The Court of Appeals explained that under the Texas Covenant Not to Compete Act, the burden was on the employer to show than the non-compete covenant was reasonable and did not “impose a greater restraint that is necessary to protect [its] goodwill or other business interest.” Typically, the territory in which an employee worked for an employer is considered to be the benchmark of a reasonable geographic restriction.

Following that same logic, Coddou provided a sworn affidavit in trial court stating that he “had a specific sales territory that encompassed Houston, Beaumont, and the surrounding areas,” and that he never did any sales outside of Houston or Beaumont.

Instead of providing evidence that showed otherwise, such as records of specific sales transactions outside of Houston or Beaumont, MMS’ president and CEO made only conclusory statements that the company did “significant business throughout the entire State of Texas” and Coddou “was responsible for sales throughout the State of Texas.”  The Court of Appeals found that such general assertions were conclusory, self-serving, and not proper summary-judgment evidence.

The Court of Appeals concluded that the “statewide restriction in the covenant not to compete in that instant case [was] too broad to be enforceable because it far exceede[d] the two cities in which Coddou worked on behalf of [MMS], even if MMS’ business extended beyond the area assigned to Coddou.” Furthermore, MMS failed to introduce any evidence to show that its business extended beyond Houston, San Antonio, and Beaumont – far short of the entire state.  Thus, the covenant not to compete restricting activity throughout the entire state was broader than necessary to protect MMS’ business interests.

CONCLUSION:  When determining how far the geographic scope of a non-compete covenant should extend, employers should consider what territory will the employee work in.  A clause that covers the entire state could be reasonable if the employee makes sales calls around the state. At the same time, a clause that covers just one city might not be reasonable if the employee’s territory is much smaller.

While it is easier and, certainly, more tempting, to set restraints on the entire state, entire County, or even entire country, such approach can backfire in Texas courts.  Thus, employers should set reasonable restraints that they could defend in court as being related to their business and employees’ duties.

For more information regarding non-competition agreements in Texas, contact Leiza Dolghih.

A 10-Step Guide to Protecting Your Company’s Trade Secrets

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Under the Texas Uniform Trade Secrets Act (TUTSA), information is not considered a trade secret unless its owner took “reasonable efforts under circumstances to maintain its secrecy.”  So, what efforts should a business be taking to protect its proprietary and confidential information and trade secrets? Here’s a quick step by step checklist.

1. Identify Your Trade Secrets and Proprietary Information.  Before you start implementing any security measures, you need to identify what information you are trying to protect. Ask yourself two questions:  (1) what information do I have that gives my business a competitive advantage? and (2) is this information publicly available? By way of example, under TUTSA, a trade secret can include: “formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.”  This information, however, is not likely to qualify as proprietary if it is “commonly known” or if it is available in the public domain.

2. Implement Access System on the “Need to Know Basis.” If the information you are seeking to protect is stored on paper, make sure your documents are stored in a secure cabinet or a room, which only few key employees can access. If the information is stored electronically, make sure that each employee has a separate log in account and that you keep track of who accessed the information, when, for how long, and what changes were made to such information. If possible, a company should consider having a pop-up window or a reminder that notifies its employees each time they access the program or the database that contains confidential information that such information is proprietary and may not be shared with third parties.

3. Require Key Employees to Sign Non-Disclosure Agreements (NDAs). Employees with access to confidential and proprietary information should be required to execute NDAs prior to receiving access to such information. A typical NDA will require an employee (a) not to disclosure the company’s confidential information to third parties; and (b) to assign all “rights, title, and interest” in the employee’s inventions to the company if they are developed in the scope of his or her employment. The NDA can be part of an offer letter or employment agreement or it can be a free-standing NDA contract.  Make sure that the NDAs are filled out correctly, are current, are consistently being executed by each key employee, and are stored in safe location.

4. Require Third Parties to Sign Non-Disclosure Agreements.  If you are sharing your business’s proprietary information with another party, such as your supplier, marketing agent, insurance company, etc., make sure that they execute a NDA as well.  Ideally, you should not be sharing your proprietary information with anybody who has not executed a NDA.

5. Have a Written Confidentiality Policy. Your employee handbook and/or company policy should contain a statement regarding what information the company considers to be confidential, prohibition of disclosure of such information, description of the consequences of such disclosure, such as disciplinary action, and a requirement that all key employees execute a NDA.

6. Provide Training Regarding the Confidentiality Policy. Among other things, such training can serve to remind employees not to discuss the confidential information in public, not to access such information from public computers, and alert them regarding various ways of inadvertent disclosure that they can encounter in their day-to-day lives.

7. Enforce the Confidentiality Policy.  It is not enough to have NDAs and confidentiality policies, but the employer should monitor employees’ compliance and conduct periodic audits. The rules and contracts are worthless unless the employer consistently enforces them.

8. When Key Employees Leave, Have Them Sign A Non-Disclosure Confirmation Form, Obtain Information About Their New Company, and Conduct Forensic Imaging of Their Computers.  When key employees leave, during the exit interview have them sign a statement in which they acknowledge that they have not taken any of your confidential information.  You should also ask them about where they are going, what duties they will be performing there and other information that will help you assess the likelihood of them using the company’s confidential information at their new company.  Finally, it is worth paying a few hundred dollars to have their computers, iPads, etc., forensically examined to make sure that they have not printed, emailed themselves or otherwise took any of the company’s proprietary information.

9. If You Suspect That an Employee Is Stealing or Has Stolen Your Trade Secrets, Act Quickly. The more time passes between you discovering that your employee has taken or is using your confidential information and your actions, the less likely a court is to find that the information was a “trade secret.” In other words, if you are not trying to prevent other parties from using your information, then why should the court do so?  I have previously written about the typical enforcement actions for violation of non-competition agreements by departing employees here.  A similar analysis will apply to trade secret misappropriations.

10. Be Proactive, Not Reactive in Protecting The Information That Is at The Heart of Your Business.  Many businesses make sure that they protect their tangible assets such as office furniture, equipment, computers, etc., but they often fail to put security measures in place to protect the intangible assets – the information, knowledge, and skills that make their business successful.  Do not wait until an unscrupulous employee, a subcontractor, or a business associate decides to take your proprietary information – protect yourself by implementing the above-described measures.

CONCLUSION:  While following the above steps does not guarantee that your trade secrets will remain confidential, it does provide two advantages. First, from a business stand point, implementing the measures on this list will make it less likely that your employees or third-parties will be successful in stealing your business’s trade secrets. Second, from the legal standpoint, if you end up in court, proving that misappropriated information was a “trade secret” under the TUTSA will be easier.

This list is general guide.  Consider consulting with an attorney to come up with a specific security framework that adequately protects your particular business.  For more information regarding trade secret misappropriation claims in Texas and protection against such misappropriation, contact Leiza Dolghih.

 

Common Misconceptions About Non-Competition Agreements in Texas 

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

A big part of my practice consists of enforcing non-competition, non-solicitation and non-disclosure agreements against the departing employees on behalf of their employers. Conversely, I also advise employees regarding what they can and cannot do in light of the non-competition or non-solicitation restrains imposed on them by their former employers.  Here is a quick list of misconceptions that I have encountered among employers and employees about non-competition agreements in Texas.

1.         Non-competition agreements are not enforceable in Texas.  This is false.  For some reason, a lot of employees still believe that non-competition agreements are not enforceable under Texas law. While this used to be the case roughly a decade ago, all through mid- and late-2000s, Texas courts have been slowly relaxing the requirements that an employer must meet in order to enforce a non-compete agreement. It used to be virtually impossible for an employer to enforce a non-competition agreement, but now as long as the restraints are “reasonable” and a few other requirements are met, a non-compete agreement will be upheld in court. A detailed explanation of the requirements can be found here.

Keep in mind that not all agreements for Texas employees are governed by Texas law. Each state has its own rules about the enforceability of non-competition agreements and, for example, an agreement that would be enforceable under Texas law, would not be enforceable under California law.  Typically, non-compete agreements will state which law governs. If they do not, a more detailed analysis will have to be performed to determine which state’s law applies and how it affects the restraints imposed on the employee.

2.         I never signed a “non-competition agreement,” therefore I can compete with the employer.  Employees rarely sign an actual contract titled “non-competition agreement.” Instead, non-competition clauses are often included in any number of documents, including employment agreements, arbitration agreements, benefits plans, stock option agreements, or employment handbooks and manuals. Thus, employees should carefully read every employment document they sign and keep the most current copy in their files.  When the time comes to leave the employer or start their own company, it helps to know exactly what the non-competition provisions state.

3.         A non-competition clause that is good for one employee is good for all employees.  This is false.  While simply including a non-competition or non-solicitation clause in an agreement often deters employees from competing against their former employers, when push comes to shove and an employer is forced to sue its former employee for violating his or her non-compete agreement, Texas courts will look at whether the restraints imposed by such agreements are “reasonable.”  As part of this analysis, they will consider what duties the employee performed, which customers he or she worked with, what geographic area his or her work covered, and many other factors.  Since this is a very factually intensive analysis, non-compete restraints that might be reasonable for one employee might be completely unreasonable for another employee. Thus, including a cookie-cutter non-compete clause in all of your employees’ contracts might not adequately protect the company’s interests. This does not mean, of course, that an employer must draft a different non-compete clause for each employee, but it does mean that certain positions or certain levels of employees within the company might need different clauses than other types of employees.

4.        Texas courts can always rewrite or “fix” a non-competition clause that is too broad. While technically this is true, practically speaking this kind of thinking can cost an employer a lot of money down the line.  First, employees are much more likely to challenge or violate a non-competition agreement that contains broad or unreasonable restraints because they think it is unenforceable or because they feel that it leaves them no choice by to violate it.  Second, an employer who knowingly attempts to enforce an unreasonable non-competition agreement may end up paying the restrained employee’s attorney’s fees if a court finds that the agreement was unreasonable. See a prior detailed discussion here.

BOTTOM LINE: Employers should attempt to craft non-competition clauses that take into consideration their industry, employees’ duties, the geographic area where employees will be working, and the time limitation that can be justified in court as necessary to protect the business of the company. While it might be tempting to draft a non-compete or non-solicitation clause that is broader than is necessary such approach can backfire if the employee decides to challenge the agreement in court.

Employees should carefully read and make sure they understand and agree with the non-competition or non-solicitation clauses contained in their employment documents.  They should assess the effect of the clause on their employment opportunities after they leave their current employer. If the clause is not clear, they should seek clarification in writing from the employer explaining the geographic scope, time limitations and the scope of restrained activities covered by the non-competition or non-solicitation clause.

For more information regarding non-competition agreements in Texas, contact Leiza Dolghih.

 

A Split Among Texas Courts Regarding Whether Current Employers Should be Included in Temporary Injunction Applications

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Last month, the Thirteenth Court of Appeals addressed the following issue: must an employer who is enforcing a non-compete agreement against a departed employee add the employee’s new employer as a defendant in order to obtain a temporary injunction? The Court found that the new employer must be joined as a party, but not before highlighting the split in authority on this issue.

In Down Time-South Texas, LLC v. ElpsDown Time applied for a temporary injunction seeking to enforce a non-competition agreement signed by its former employee, Elps. At the temporary injunction hearing, Elps’s attorney argued that Down Time should not be allowed to put on evidence to support its application because the agreement was unenforceable as a matter of law for two reasons: (1) it lasted indefinitely; and (2) Elps’s current employer had not been made a party to the suit.  The trial court adjourned the hearing to consider the legal questions raised, and before Down-Time was able to submit any evidence in support of its temporary injunction application, the court denied the application. The Court of Appeals affirmed the denial and held that Elps’s current employer should have been made a defendant.

The Court explained that on the one hand, two Texas Courts of Appeals have previously ruled that a temporary injunction does not require the applicant to join the current employer.  In Whittier Heights Main. Ass’n v. Colleyville Home Owners’ Rights Ass’n  (an unpublished opinion), the Fort Worth Court of Appeals held that the joinder of all necessary parties before issuing a temporary injunction was not required. Similarly, the Beaumont Court of Appeals in Winslow v. Duval County Ranch Co., ruled that a joinder of all necessary parties was not a condition precedent to the issuance of a temporary injunction.

On the other hand, in 1959, the Texas Supreme Court in Scott v. Graham held “that refusal of a temporary injunction when there is an absence of necessary parties, who might readily be joined in the suit, cannot be deemed an abuse of discretion.”  The San Antonio Court of Appeals took a similar approach in Bourland v. City of San Antonioreversing an order granting temporary injunction because only four of forty-six officers were joined in suit.  Likewise, the Waco Court of Appeals in Bays v. Wright held that it is a “well settled rule that in a suit of this kind to cancel a contract or to restrain the enforcement thereof, all parties to such contract are necessary parties to the suit.”

The Corpus Christi Court of Appeals in Down-Time followed the Texas Supreme Court‘s long-standing precedent and found that the trial court did not abuse its discretion when it ruled that Dresser-Rand was a necessary party whose absence from the case precluded a grant of a temporary injunction.  The Court reasoned that because the requested temporary and then permanent injunction prohibited Elps from working for Dresser-Rand, the injunctive relief affected the employment relationship between Dresser-Rand and Elps.  Thus, the relief requested by Down-Time, “if it were granted, would have the direct effect of enjoining both Dresser-Rand and Elps from performing under their existing employment contract.”  The Court concluded that “under these circumstances” the requested relief was against both Dresser-Rand and Elps.  Thus, the trial court did not abuse its discretion in ruling that Dresser-Rand was a necessary party.

CONCLUSION: Employers seeking enforcement of non-compete agreements should carefully consider the pros and cons of adding the current employer as a defendant.  However, they should realize that some Texas courts, including the Thirteenth Court of Appeals, make it clear that adding the new employer is not an option, but a prerequisite to obtaining a temporary injunction.  Thus, depending on where the lawsuit is filed in Texas and what type of relief is requested, the enforcing party might not have a choice but to add the current employer as a defendant.

For more information regarding non-competition agreements in Texas, contact Leiza Dolghih.

North Texas Legal News

Latest business and employment laws explained by a Dallas business lawyer

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