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.

Anti-Raiding Provisions with Clients, Vendors and Subcontractors – Why It’s a Good Idea

imagesMany companies have basic non-compete provisions that prevent employees from working for a competitor for a certain period of time, but they often fail to address a situation where an employee goes to work in-house for a client of the company or jumps ship to work for a vendor, supplier, or a subcontractor of the company. While, technically, such move by an employee may not constitute “competition” with his/her former employer, a lot of times it eliminates a client’s need for the company’s services in the area that is now being covered by the new employee or it otherwise affects the company’s relationship with a vendor or a sub resulting in a reduction of revenue to the company.

One solution to this problem is including an anti-raiding provision in the vendor and client agreements, which states that the vendor/client/sub will not recruit, hire, or solicit the company’s employees.  Of course, a company is always free to waive such restraint for a particularly large client or after it receives assurances that there will be no reduction in business from the employee’s departure, but it will protect the company in all the other situations.

However, just as with other employment covenants, the anti-raiding clause must be clear and reasonable. Just last week, the Fourteenth Court of Appeals in Houston held that a sub-contractor’s anti-raiding clause did not prevent it’s contractor from indirectly employing sub-contractor’s employees.[1]

In this case, LyondellBasell hired Modis (contractor) to provide technical personnel for computer-related projects. Modis, in its turn, hired NetMatrix as a subcontractor. The sub agreement, among other provisions, stated that Modis “shall not recruit, hire or otherwise solicit” NetMatrix’s personnel assigned to the project.

Two years into the sub agreement, one of NetMatrix’s technicians quit and went to work for Millenium – another subcontractor employed by Modis. The technician proceeded to work on the same project for LyondellBassell to which he was assigned while at NetMatrix.

NetMatrix argued that Modis breached the sub agreement’s anti-raiding clause because it allowed NetMatrix’s employee to work for Modis’ other subcontractor and, therefore, it “indirectly hired” the technician in violation of the above clause.

The Court of Appeals disagreed, finding that other employment covenants in the sub agreement prohibited both “direct” and “indirect” activities, but the anti-raiding clause did not address “indirect” hiring. Therefore, it was clear that the parties meant to prohibit only direct hiring, and, consequently, Modis did not violate that clause when it allowed its sub to employ NetMatrix’s employee.

TAKEAWAYS: First, make sure that your vendor, sub, and client agreements have anti-raiding clauses. Second, make sure that the clauses are precise, reasonable, and are consistent with other restraints contained in such agreements. Finally, if you are considering waiving such a clause for a particular employee, make sure that you don’t create a permanent waiver that would render the anti-raiding clause unenforceable in the future.

[1] Although the Court applied Florida law per the parties’ agreement, similar analysis would follow under Texas law as well.

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.

Four Ways to Protect Your Business Ideas: Patents, Trademarks, Copyright, and Trade Secrets

pictureWhether you are an owner of an established business or a budding entrepreneur working on a start-up, understanding how you can protect your business ideas is key to making your company attractive to investors, securing funding, growing the company and ensuring the longevity of your business.

Depending on the type of idea that you have, the state of the idea, and the amount of money at your disposal, you have the following four ways to protect your intellectual property:

1. PATENTS.   There are three types of patents in the U.S.: utility patents (90% of all patents); design patents, and plant patents. Having a patent for an invention or a design allows the owner to exclude others from making, using, or selling the invention or design for a certain period of time.  To obtain a patent, a person must file an application with the U.S. Patent and Trademark Office (USPTO).

Utility patent may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof.  Approximately 90% of the patent documents issued by the USPTO in recent years have been utility patents, also referred to as “patents for invention.”  Utility patents last up to 20 years from the date of patent application.

Design patent may be granted to anyone who invents a new, original, and ornamental design for an article of manufacture.  In general, a design patent is obtained for the aesthetically appealing features of a product. It gives the owner the right to prevent others from making, using, or selling a product that so resembles the patented product that an “ordinary observer” might purchase the infringing article, thinking it was the patented product.  An example of a famous design patent is Coca-Cola’s unique bottle shape. Also, many clothing companies often patent a unique design to prevent other companies from imitating it.  Design patents last for up to 14 years from the date of the grant.

In many circumstances, one may obtain a design patent in addition to a utility patent for the same invention. Also, to the extent that the subject qualifies as a work of art, there may be an opportunity to obtain a copyright for the same, and if the design is embodied in a physical article, and also functions as a trademark, a trademark registration may be obtained.

Plant patent may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant.

The patent application process is complicated and can cost thousands of dollars as most applications require help from a qualified patent attorney or agent.  To maintain the force of the patent, you must pay fees due at 3.5, 7.5 and 11.5 years after the patent grant.  The total amount of maintenance fees for a small entity (such as an independent inventor) is $4,430, while bigger entities must pay $8,860.

2. COPYRIGHT. Copyright protects original works of authorship including literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. Copyright does not protect facts, ideas, systems, or methods of operation, although it may protect the way these things are expressed.  You do not have to register your work to have copyright protection.  However, only registered works may be eligible for statutory damages and attorney’s fees in a copyright infringement suit. Thus, you should register your work with the U.S. Copyright Office, which can be done online for just $35 – $55 fee.

The term of copyright for a particular work depends on several factors, including whether it has been published, and, if so, the date of first publication. As a general rule, for works created after January 1, 1978, copyright protection lasts for the life of the author plus an additional 70 years. For an anonymous work, a pseudonymous work, or a work made for hire, the copyright endures for a term of 95 years from the year of its first publication or a term of 120 years from the year of its creation, whichever expires first.

3. TRADEMARKS. A trademark is a word, phrase, or design that distinguishes the source of the goods of one business from its competitors.  A right in a trademark is acquired by use, but registration with U.S. Patent and Trademark Office (USPTO) makes it easier to enforce such right.

To apply, you must have a clear representation of the mark, as well as an identification of the class of goods or services to which the mark will apply.  You can submit an online application, and filing fees vary according to the type and the number of classes of goods or services, among other factors. Filing an application for trademark is complicated, so, as with patents, most people hire attorneys who specialize in trademarks to handle the process.

4. TRADE SECRETS. Trade secrets in Texas are protected by the Texas Uniform Trade Secrets Act (TUTSA).  A Texas business or a person may claim as a trade secret any information that (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. Trade secrets may include, but are not limited to the following: formula, pattern, compilation, program, device, method, technique, process, financial data or list of actual or potential customers or suppliers.

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, as long as they have economic value and the owner’s efforts to keep the ideas secret are reasonable under circumstances.

Under TUTSA, Texas business owners may also seek a temporary injunction to prevent misappropriation or threatened misappropriation of their trade secrets. A temporary injunction is a court order, which, if granted, prevents a person or a company from using the information claimed to be a trade secret.  Sometime, injunctive relief is the only way to protect valuable information from being stolen or misused by a competitor, but the owner must act fast after discovering misappropriation or a court might decide that the misappropriated information is not as valuable as the owner claims.

For more information about Texas trade secrets law, please click here.  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.


Responding to an EEOC Discrimination Charge: A Guide for Texas Employers (Part III)

imagesIn Part I, I outlined the EEOC process of investigating a charge of discrimination, and in Part II, I described the steps that an employer should take in responding to an EEOC’s charge of discrimination or retaliation. Finally, in Part III, I address what business owners should consider specifically in drafting a position statement.

1. Remember that a position statement can be later used in litigation. What employer states in a position statement can be used in litigation, thus the employer should be able to back up its statements with documents and/or witness testimony and verify everything that is described in that statement.  A lot of times, an employer will provide one reason for taking an employment action in the position statement, and then provide another or additional reason or reasons during litigation.  Such discrepancies can be damaging to employer’s credibility and can make it impossible to obtain a summary judgment and an early dismissal of the suit.

2. A detailed position statement is better than a short response. While the charge form will often contain only a paragraph or two describing a discrimination or retaliation claim, the position statement should be much longer and address the nature of the employer’s business, past consistent employment decisions, and attach appropriate documents that support the employer’s positions (such as, for example, written warnings or discipline notes regarding the employee who was terminated; important emails or attendance records). You should also use the position statement to teach the agency about the nature of your business and how the employment decision that is discussed in the charge is consistent with your business goals. 

3. Keep the position statement confidential.  Information related to the EEOC investigation, the charge, and the employer’s position statement should be shared on a need-to-know basis. If possible, it should be kept within the HR department and not shared outside of it.  

4. Work with legal counsel. The charge can be a first step in the employee’s decision to bring a lawsuit against your business.  Any discrepancies in the position statement or failure to address allegations in a complete and open manner, can increase the chances of employee filing a lawsuit and prevailing on his or her claim.  If you decide to conduct an investigation on your own, at the very least you should have an attorney review the position statement before it is sent to the EEOC.

5. Respond in a timely matter and cooperate with the agency.  Providing a timely response and cooperating with the EEOC’s investigator regarding any addition requests for information is key in making sure the the investigation is completed as soon as possible.  Failure to respond or cooperate may result in an adverse decision.

The common mistakes that employers commit when responding an EEOC charge is ignoring the charge completely; not responding to the charge in a timely manner; providing a response that fails to address the allegations in the charge; or providing a response that relies on one person’s account of what happened, without conducting a proper investigation or verifying that person’s statements. What business owners should understand is that a charge can be the first step in a future lawsuit. Thus, failing to investigate the situation at the charge phase and verify all statements submitted to the EEOC, can end up costing the business a lot more time and money down the road, once the EEOC or the charging employee file a lawsuit arising out of the charge.

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, e-mail Leiza.Dolghih@GodwinLewis.com.

Responding to an EEOC Discrimination Charge: A Guide for Texas Employers (Part II)

imagesIn Part I, I outlined the EEOC process of investigating a charge of discrimination. In this part, I describe the steps that an employer should take in responding to an EEOC’s charge of discrimination or retaliation.

1.  Calendar the Deadlines.  Don’t think that because the employee’s complaint to the EEOC is “ridiculous” or “silly” in our eyes, that you don’t need to respond. You should always respond, no matter how trivial or ludicrous the complaint is in your opinion. So, don’t put the letter in a “I’ll-deal with-this-later” stack, but calendar the response date and other deadlines as soon as you receive the charge from the EEOC. Then, contact your HR department if you have one, and if not, consider consulting with an attorney who deals with labor and employment issues.

2.  Determine if the Charge Involves an EEOC “Hot” Issue.  Employers should take special note when a charge involves any of the six enforcement priorities highlighted in the EEOC’s Strategic Enforcement Plan (SEP), as that could mean that the case will get special scrutiny from the agency.  If the charge alleges a violation related to the areas identified in the SEP, the employer should be extra-careful in responding to it.

3.  Collect and Preserve Relevant Evidence.  Determine which people and departments within your company will have information relevant to the charge and then contact them and ask them to collect the relevant evidence. Independently, your IT department should also help you collect and preserve the relevant evidence behind the scenes.

4.  Schedule Interviews and Interview Relevant Witnesses. You will want to interview all the people mentioned in the charge, but also others who might have knowledge of relevant facts.  Depending on the size of the organization and allegations, you might have to start scheduling interviews right away.  You will have to decide whether you’d like your HR department, an independent third-party investigator, or an attorney to conduct such interviews.  You will also need to determine in which order to line up the relevant witnesses.

5.  Warn Against Retaliation.  In matters involving current employees, the employer should remind everybody interviewed or involved in the investigation, that they may not retaliate against the employee in any manner for having filed a charge.  Likewise, retaliation against anybody who testifies on behalf of the employee or assists the EEOC with its investigation is also prohibited.

6.  Establish a Point of Contact with the EEOC.  Designate one person within the organization who will be responsible for contact with the EEOC’s agent assigned to the charge.  This person should be professional, courteous, and somebody who is capable of and has the time to keep the EEOC agent apprised of any delays in the investigation. Cooperation and courteous working relationship with the EEOC is key!

7. Consider Mediation.  Mediation affords employers an opportunity to resolve the issues addressed in a charge without incurring the cost of a time-consuming investigation.  During this time, the agency investigation is placed on hold. In the event the matter does not settle, employer may be able to obtain additional information from the employee which may enable it to more effectively respond to the allegations in the charge.

8.  Draft the Position Statement.  See Part III for guidance on drafting a position statement.

9.  Respond to Requests for Information. EEOC’s requests for information (RIFs) will most likely be over broad, and it is up to the employer to negotiate the scope of production.  Negotiating to limit the time period or the geographic scope can help keep the costs down and limit the investigation to issues immediately at hand.  The deadline for production of documents is also often negotiable.

10.  Arrange for Employee Interviews.  The investigator will usually notify you of the names of the employees that he or she will want to interview.  You may be present during interviews with management personnel, but an investigator is allowed to conduct interviews of non-management level employees without your presence or permission. If the investigator asks the employer to arrange for such interviews, cooperation is the best approach.

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, e-mail Leiza.Dolghih@GodwinLewis.com.



Responding to an EEOC Discrimination Charge: A Guide for Texas Employers (Part I)

imagesOpening mail and finding out that an employee has filed a charge with the Equal Employment Opportunity Commission (EEOC) against your business is as far from a pleasant surprise as it gets. However, it happens to quite a few businesses each year.  In 2014, there were 88,778 charges filed with the EEOC, with Texas, Florida and California being the top three states. Overall, the most common claims were retaliation (42.8%), followed by race discrimination (35%) and sex discrimination (29.3%). Thirty percent of all charges included some sort of harassment allegations.

The EEOC Investigation Process

Typically, when an employee files a charge with the EEOC, the agency will notify the employer within 10 days that a charge of discrimination has been filed and will provide the employer with the name and contact information for the investigator assigned to the case.

During the investigation, the assigned EEOC agent will ask the employer and the employee who filed the claim to provide information, which the investigator will evaluate to determine whether unlawful discrimination has taken place. The agent may ask the employer to provide any or all of the following:

  • submit a statement of position;
  • respond to a Request for Information (RFI);
  • request an on-site visit; and/or
  • provide contact information for or have employees available for witness interviews

If the charge was not dismissed by the EEOC when it was received, that means there was some basis for proceeding with further investigation. There are many cases where it is unclear whether discrimination may have occurred and an investigation is necessary. Such investigation, thus, presents an opportunity for an employer to state any facts that the employer believes will show the allegations are incorrect or do not amount to a violation of the law.

The Employer’s Role in the Investigation

According to the EEOC, employers should do all of the following to help with the investigation:

  • Work with the investigator to identify the most efficient and least burdensome way to gather relevant evidence.
  • You should submit a prompt response to the EEOC and provide the information requested, even if you believe the charge is frivolous. If there are extenuating circumstances preventing a timely response from you, contact your investigator to work out a new due date for the information.
  • Provide complete and accurate information in response to requests from your investigator.
  • The average time it takes to process an EEOC investigation is about 182 days.  An undue delay in responding to requests for information extends the time it takes to complete an investigation.
  • If you have concerns regarding the scope of the information being sought, advise the investigator. Although EEOC is entitled to all information relevant to the allegations contained in the charge, and has the authority to subpoena such information, in some instances, the information request may be modified.
  • Keep relevant documents. If you are unsure whether a document is needed, ask your investigator. By law, you are required to keep certain documents for a set period of time.

The Results of the Investigation

Once the investigator has completed the investigation, the EEOC will make a determination on the merits of the charge.

  • If the EEOC determines that there is no reasonable cause to believe that discrimination occurred, it will send the employee a letter called a Dismissal and Notice of Rights that tells the employee that s/he has the right to file a lawsuit in federal court within 90 days from the date of receipt of the letter. The employer will receive a copy of the letter as well.
  • If the EEOC determines there is reasonable cause to believe discrimination has occurred, both employer and employee will be issued a Letter of Determination stating that there is reason to believe that discrimination occurred and inviting the parties to join the agency in seeking to resolve the charge, through an informal process known as conciliation.
  • Where conciliation fails, the EEOC has the authority to enforce violations of its statutes by filing a lawsuit in federal court. If the EEOC decides not to litigate, the employee will receive a Notice of Right to Sue and may file a lawsuit against the employer in federal court within 90 days.

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, e-mail Leiza.Dolghih@GodwinLewis.com.

Houston, We Have a Problem. Where’s That Non-Compete Agreement?

disorganizedA Houston Court of Appeals last week found an employer’s non-compete agreement unenforceable and awarded a former employee his attorney’s fees in defending the lawsuit brought by the former employer. Yes, this can happen in Texas where a company attempts to enforce an agreement that is clearly unenforceable. In this case, the original non-compete was superseded by several employment agreements culminating in one that cancelled the original non-compete provision. Yet, the employer sued the former employee for breaching the original non-compete. The employee asked the court to declare the agreement unenforceable and for his attorney’s fees, and the trial court’s grant of both requests was affirmed by the Court of Appeals. Although a subsequent agreement does not always replace the original one (see my previous post here), the multiple agreements in this case clearly did, as evidenced by the following timeline:

2001 – employee signed an “Employment, Confidentiality and Non-Compete Agreement and Employee Assignment of Intellectual Property.” (every company should have key employees execute agreements like this)

2001 – 2004 – employee returned to work for the company several times, but did not sign any new employment agreements.  (the company should have had the employee execute a non-compete each time he came back).

2006 – employee signed “Sales Representation Agreement,” which stated that it superseded all prior contracts and understandings between the employee and the company. The agreement also stated that the employee would execute a separate Confidentiality and Non-Competition Agreement and Assignment of Intellectual Property, but the employee never signed such agreement,  and the company never insisted. He later left to work for another company.  (the company should have made sure he signed the non-compete).

2010 – employee was hired in market development, but was not asked to sign a non-compete. (the company should have asked him to sign a non-compete if his job involved handling clients and/or confidential information).

2010, 5 months later – the company was sold and the buyer was given a copy of the employee’s 2001 agreement.

2011 – employee signed an employment agreement with the new company, which did not have a non-compete, but stated that it was “supplemental contract to any previous employment agreement in place.”  (it is never a good idea to sign an agreement that references prior agreements unless you have a copy of them. In this case, the company should have not referenced prior agreements but should have made sure that the new agreement contained all the necessary terms)

2011, a few months later – the new company changed the nature of the employee’s compensation and the Pay Change Form provided that the “Employment Agreement previously negotiated is nullified and replaced with a . . . bonus . . . .”  (somebody at the company should have considered how this nullification clause affected non-compete obligations of the employee).

2012 – employee resigned and was sued by the new company for breach of the 2001 (yes, original) employment agreement, breach of fiduciary duty, and claims under Texas Theft Liability Act, arguing that the employee “reaffirmed” the original agreement each time he came to work for the company and that he was estopped from denying that he was bound by the non-compete.  The employee counterclaimed seeking a declaration that there was no enforceable non-compete agreement between the parties, and his attorney’s fees.

The trial court dismissed the employer’s claim for breach of contract on summary judgment and the employer non-suited the rest of the claims. The employee proceeded to try his counterclaim and won – obtaining a declaration from the court that there was no valid non-compete.  Such declaration entitled him to obtain his reasonable and necessary attorney’s fees from the employer.

Conclusion: When buying a company or a business, the buyer should always make sure that it has all the employment agreements of all the key employees. If such agreements are missing or are outdated, the buyer should make sure that the key employees sign new employment agreements that contain all the terms necessary to protect the buyer. Finally, all employment agreements must be reconciled with the compensation documents, any arbitration agreements in place, and any employment policies, to ensure that the non-compete and other restraints are the same across all documents signed by the employee.

Having represented both employers 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 are looking for an advice or help navigating this area of law, contact Leiza at Leiza.Dolghih@GodwinLewis.com.

Non Compete Law in Texas: 2014 in Review

downloadThere is a lot of confusion out there about whether non compete agreements are enforceable in Texas. Some believe that they are never enforceable, others think that they always are.  The truth is, whether a non compete agreement in Texas is enforceable depends on a variety of factors, including: (1) the specific language of the non compete clause in question and (2) the facts surrounding the relationship that the non compete addresses.  Slightly different standards and approaches apply when it is a non competition clause in a business v. business transaction or a similar clause in an employer v. employee situation. The summary of the appellate courts’ decisions involving non compete issues in 2014 shows just how differently the chips fall depending on the particular facts of each case.

And the award for the most active court in the non compete arena goes to…

In 2014, Texas Courts of Appeals addressed various non-compete clauses 22 times.  One case involving a non-compete dispute even made it all the way to the Texas Supreme Court. Out of the fourteen appellate courts in Texas, the most active court on the issue of non compete agreements was the First Court of Appeals in Houston, which lead the way with 8 opinions involving non-compete clause issues, followed by the Fifth Court of Appeals (Dallas) and the Fourteenth Court of Appeals (also in Houston) with 4 cases each.

Temporary injunctions …when dotting the “I”s and crossing the “T”s really counts…

Out of 22 cases involving non-compete issues, nine were interlocutory appeals from either a grant or denial of a temporary injunction by lower courts. In four cases, the Courts of Appeals reversed the injunction order for failure to comply with Rule 683 of the Texas Rules of Civil Procedure. I have previously written about Rule 683 mandates here, here and here. Twice they uhpeld temporary injunctions and twice they reversed the trial courts’ denial of temporary injunctions. Only once did a Court of Appeals uphold a denial of a temporary injunction.

Thus, almost half of the appeals heard by the Texas appellate courts involved defendants arguing that the injunction order was not specific enough for them to know what they were prohibited from doing, and the courts of appeals agreeing with them, which is why knowing what to ask for when seeking an injunction is as important as having a well-drafted non-compete to begin with.

Non competes …so who has them?

The non-compete agreements challenged on appeal in 2014 spanned a wide variety of industries and involved all levels of employees – from high-level directors and CEOs to lower level blue collar employees.  In this limited pool of cases, the non-competes were most often enforced against those in a sales position, but included the following types of employees: insurance brokers; surgical assistants; CEO of a company that manufactured, sold, and rented frac valves; sales associates for an electricity provider; oil & gas refinery equipment inspector; CFO of an energy corporation; a doctor; directors of a solar power products company; an IT department supervisor; tax and research consultants; VP of an apparel company; VPs of a building manufacturer; sales manager for a manufacturer of heat exchangers; sales agent for a company that sold lumber products; mortgage loan officers; marketing director for a court reporting company; a pathologist; a sales agent for a company that sold stucco and masonry materials; insurance sales agent; geologist; a sales agent for a manufacturer of specialty components used in offshore oil and gas drilling and production; and a sales agent for a company that sold oilfield service equipment.  This shows that non compete agreements are not limited to particular industries in Texas.

So, what’s going to happen in 2015? 

This is one area of law that will continue to be hotly disputed in 2015 as economy picks up and more employees make lateral moves or decide to open their own business.  The challenge for business owners in 2015 will be to find the balance between protecting their confidential information and the resources invested in employees and allowing such employees to earn a living after their departure.  The variety of the outcomes on the appellate level indicates that the courts’ analysis of non compete agreements  in Texas is very fact specific and often hinges upon the specific language of the agreement.  The employers should review their non competes, update them, and institute hiring and termination polices that are meant to maximize the effectiveness of such agreements.   And remember that while not every business employee should be subject to a non compete agreement, the key level personnel’s employment contracts should definitely include non compete and non disclosure clauses.

Having represented both employers 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 are looking for an advice or help navigating this area of law, contact Leiza at Leiza.Dolghih@GodwinLewis.com.

A Few Lessons From the Morgan Stanley Trade Secrets Debacle

bitcoin-data-mining-online-currency-theftEarlier this month, a financial advisor at Morgan Stanley copied information of 350,000 of the company’s wealth management clients. A few days later, a sample data from 900 clients was posted on Pastebin, with the poster offering more in exchange for the payment in SpeedCoin, a type of virtual currency similar to BitCoin.

As it happens, earlier that year, Morgan Stanley hosted a bitcoin event at its headquarters, which all employees were invited to attend. And while Morgan Stanley CEO was busy announcing to the world that he does not understand what Bitcoin is, some lower level employees were apparently taking notes.

As you can imagine, the stolen data had a wealth, pun intended, of information about each client.  A six-year advisor was able to get the information by simply running reports within the company’s database. Although he was quickly fired after the breach was discovered, and is now subject to a FBI investigation, the damage to the company’s reputation in terms of clients’ trust has been done.  My guess is that the damage is quite significant, whether the company will admit it or not.

Unfortunately for business owners, trade secret theft is a daily occurrence. With the proliferation of personal electronic devices and the increasing connection of office devices, such as printers, faxes, etc. to the internet, confidential information can be stolen and shared with third parties in a matter of minutes.  The Morgan Stanley debacle shows that even the international powerhouses who have almost unlimited budgets and resources to protect their confidential information and the information of their clients can suffer from blind spots in their security systems that are meant to protect sensitive data. My guess is that Morgan Stanley relied a little too much on the criminal penalties bestowed upon those who misuse client data in the banking world and did not implement as strong of a security system as it should have.

As a business owner, manager, or a person in charge of the confidential information within your organization, it is your responsibility to make sure that that data is protected.  While it is impossible to keep up with every technological advantage, it is relatively easy to set up a protection system within the company that will prevent most, if not all, data theft. How, you say? Here’s how:

1.  Take a few hours and write down a list of every type of information that your company considers proprietary or confidential, even if it’s an obvious one.  This can include customer list and information, vendors list, source code for your software program, design plans for your product, your marketing plans, your financial data, etc.  Any successful business will probably have more than one type of confidential information.

2.  Consider who within your company or business has access to each type of confidential information.  Then, consider whether they need to have access to it.  For example, does your marketing department need to have access to your manufacturing schemes? Does your manufacturing department need to have access to your financials or customer list? It might seem silly, but I guarantee that after taking stock, you will find that some people or departments incidentally have access to the data that they don’t need or use in their jobs. Eliminate such access.  Of course, be careful not to deprive people of the information that they need to do their jobs.

3.  Consider whether each person with access to confidential information has signed proper agreements. Do your employees have non-compete agreements, non-solicitation agreements, and non-disclosure agreements? If they do, are the agreements consistent? Do they have all the necessary bells and whistles to make them enforceable? How long ago were they updated?  Having thorough yet clear agreements will discourage most employees from attempting to steal trade secrets.

4. Take stock of all electronic devices issued to employees.  Do you consistently keep track of what electronic devices are issued to employees by the company? Do you have a policy governing how such devices are used? Do you have security measures on such devices? Do you have a way to determine whether a device has been used to transfer confidential information? This is particularly important for the employees who work from home.

5. Do you have appropriate agreements with vendors, suppliers, business partners, and other parties who receive confidential information from you? If not, you need to add such agreements into your relationship with such parties to make sure that your confidential information is not used to replace or cut you out.

LESSON:  What happened at Morgan Stanley, can happen anywhere. But, it is less likely to happen in a company where employees get a sense that the company is serious about protecting its trade secrets and confidential information of its customers.  The serious attitude is conveyed to the employees by having an organized framework – from legal agreements, to passwords, to restricted access to non-essential employees – within the company. When employees see that a company’s efforts to protect its information are disorganized or haphazard, they are more likely to attempt theft of such information because they believe that they will not be caught. In Morgan Stanley’s example, it appears, that the company did not even know that the employee obtained its client data until weeks after it was posted for sale on the internet, which means that its internal database did not alert the company when large amounts of reports were being generated.

Make 2015 the year that you insulate your business from trade secret theft.

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

Not Reading a Contract Costs a Party Half a Million Dollars

200567130-001The Texas Supreme Court just confirmed what most of us already know – that you should read your contracts before signing them. In National Property Holdings, L.P., et al. v. WestergrenWestergren sold a piece of real estate to National Property Holdings (NPH) pursuant to a written agreement. Additionally, NPH orally promised to Westergren that once it develops the property, it will pay Westergren $1,000,000.

Once NPH developed the property, Westergren demanded his $1,000,000. Instead of paying the full amount, NPH gave him $500,000 and asked him to sign a release agreement, which was titled in bold and underlined AGREEMENT AND RELEASE and stated that Westergren agreed to relinquish any and all interest in the property and all claims against NPH in exchange for the total payment of $500,000. Westergren signed it without reading.

He later sued NPH for breach of their agreement to pay him $1,000,000 and claimed that he was fraudulently induced to sign the release.  Westergren argued that at the time of the signing, NPH representatives told him that they will be making the second payment as soon as the building is built, that the release agreement was just a “receipt” and that he will be getting the other half of the $1 million as soon as their development of the land starts.  Westergren admitted that he did not read the release because he “was in a hurry” and “forgot his reading glasses ” and that he relied on the NPH’s representations about the second payment instead.

The jury found that NPH fraudulently induced Westergren to sign the release and the Court of Appeals agreed. The Texas Supreme Court, however, was less forgiving.  It found that Westergren had an ample opportunity to read the document and that had he done so, he would have discovered that the language of the agreement directly contradicted the representation made by NPH. The Court, therefore, found that NPH did not fraudulently induce Westergren to sign the release, reinforcing the old rule that “instead of excusing a party’s failure to read a contract when the party has an opportunity to do so, the law presumes that the party knows and accepts the contract terms.”  The Court even cited the 19th century U.S. Supreme Court’s opinion that best describes this point of contract law as follows:

It will not do for a man to enter into a contract, and, when called upon to respond
to its obligations, to say that he did not read it when he signed it, or did not know
what it contained. If this were permitted, contracts would not be worth the paper on
which they are written. But such is not the law. A contractor must stand by the
words of his contract; and, if he will not read what he signs, he alone is responsible
for his omission.

Thus, while a party may have a claim for fraudulent inducement where it as induced to enter into a contract by false promises, where the written agreement’s terms directly contradict the false promises, the claim for fraudulent inducement will most likely fail.

CONCLUSION: As the old saying goes, “trust, but verify.” When it comes to signing a legal agreement, do not rely on the other party’s explanation of what the agreement does or means.  Read it, and where appropriate, have an attorney review it on your behalf so that you know and understand what you are signing.  Remember, that in Texas, if somebody tells you one thing, and the written agreement actually says something else, barring a rare exception, you will be held to what the written agreement says, not the oral representations.

If you have been sued in Texas for a breach of contract or are thinking of pursing a breach of contract claim, contact Leiza Dolghih for a consultation at Leiza.Dolghih@GodwinLewis.com.


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