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.

Is Your Non-Compete Enforceable in Texas?

stevecarelMany a business owner has been tempted to save a few hundred dollars by using a non-compete agreement found somewhere on the web or bought from Legalzoom or the like.  The problem with such an approach is, of course, that every state has different rules about what makes a non-compete agreement enforceable. What might be enforceable in one state, might be a worthless piece of paper in another. This is why obtaining a form non-compete agreement, without verifying its enforceability in Texas, is dangerous. It is also dangerous not to update employees’ non-compete agreements, as the law on this issue is always evolving.

I do not know if either of those factors were present in Hunn v. Dan Wilson Homes, but the non-compete in that case was clearly missing the language necessary to make it enforceable in Texas.  It could have been because the owner copied an agreement from another state, or did not update the agreement, or because the necessary language was omitted from the agreement by mistake.  In the end, it did not matter, as the court refused to enforce the non-compete against an employee who, after leaving his employer, continued to work directly for his employer’s client.

In Texas, for a non-compete to be enforceable it must “be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.”  The Fifth Circuit in Hunn v. Dan Wilson Homes recently re-affirmed that in Texas, a non-compete agreement must be accompanied by either a promise from employer to provide an employee with confidential information or an employee’s promise to keep confidential information provided by the employer confidential.  Without such promises, a non-compete agreement that is based simply on an employer’s promise of continued employment in an at-will contract is unenforceable.  In other states, simply promising to provide an employee with employment is enough to make a non-compete agreement valid.  However, Texas courts require more.

Takeway for Employers: Determination of the sufficiency of consideration for a non-compete executed by an at-will employee often turns on which state’s law applies.  If the relevant facts and circumstances permit, an employer should include a choice-of-law provision designating the law of a state where at-will employment is adequate consideration. However, where an agreement is governed by Texas law, a simple promise to continue to employ an at-will employee is not enough to support a binding non-compete.

Takeway for EmployeesNot every non-compete agreement is enforceable in Texas.  If your employment agreement contains a non-compete clause, you should consult with an attorney before signing your agreement to determine what consequences you will be facing if your employer decides to enforce it against you in the future. Likewise, if you have already signed one but are trying to figure out what your options are once you leave your employment, consult with an employment attorney to determine whether it enforceable and what course of action to take.

You can read the entire case here.

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

It’s All Fun And Games Until An “Old Fart” Files An Age Discrimination Lawsuit: A Lesson for Employers from the Fifth Circuit

oejidOkay, so George Clooney was not involved in this case, but he has one thing in common with the employee who filed the age discrimination claim in Goudeau v. National Oilwell Varco, L.P. – they are almost the same age.

When Maurice Goudeau was terminated by National Oilwell Varco (NOV) in 2011, he was 57 years old and had been working for the company and its predecessors for 18 years. Approximately 12 months before his termination, he began working with a new supervisor, who told him that “there sure [were] a lot of old farts around here,” asked Goudeau about the age of two older employees also assigned to this supervisor, and told Goudeau that he planned to fire both of them. Later, he also told Goudeau that he wore “old man clothes,” called him an “old fart,” and said that a smoking area was “where the old people met.”

Over the course of the next twelve months, Goudeau – who in the prior 17 years had an exemplary work record – received four write-ups and a poor annual performance review, and was terminated for insubordination and poor job performance.  The evidence showed that although he had complained about his supervisor’s “old fart” comment to the human resources department, they did nothing to investigate his complaint. Two months after his termination, the two older employees previously mentioned by his supervisor were also terminated for various reasons.

Goudeau brought an age discrimination lawsuit against NOV, arguing that he was written up for not doing tasks that were not in his job description, that he never saw the write ups prior to his termination or given an opportunity to take any corrective steps (as required per NOV’s own policy), and that NOV used the write-ups as a pretext for firing him, but that he was really fired because of his age.

The trial court dismissed his age discrimination and retaliation claims, but the Fifth Circuit reversed, holding that the “old fart” comments, combined with NOV’s failure to follow its own write-up and discipline procedures with respect to Goudeau, and the termination of two older employees, presented enough evidence to allow the case to go in front of the jury (as opposed to dismissing it outright like NOV argued). The Fifth Circuit, therefore, send the case back to the trial court so that the jury could decide whether NOV fired Goudeau based on his age, and whether the write-ups and a poor performance review were just a pretext for his termination.

TAKEAWAY: Normally, “stray comments” about age, race/color, sex, religion, national origin, physical disability or age, are not sufficient to give rise to an employment discrimination claim.  However, where such comments are later followed by an adverse employment action, such as termination or demotion, a risk of a discrimination lawsuit is very high.

Of course, while an employer can provide employment discrimination training to its employees, it cannot guarantee that all employees will follow it.  However, employers can do two things, which NOV did not do, to minimize litigation.  First, employers should never ignore discrimination complaints, however, small or petty they might seem at the time they are made.  Had the HR conducted the investigation and reprimanded or warned the supervisor about the inappropriate age comments, NOV might have avoided going to court. Second, if a company has a progressive discipline policy (by the way, not required under Texas law), it should apply such policy in a consistent and uniform manner.  When it comes to discrimination claims, not having a progressive discipline policy is almost better than having one that is applied arbitrarily.

You can read the entire court opinion in Goudeau v. National Oilwell Varco, L.P. here.

Leiza Dolghih represents both employers 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.

A Placed Employee Embezzles $15 Million. Is the Staffing Agency Responsible?

businesswoman holding a wad of cashThe answer, of course, is “maybe.” In this case, a staffing agency placed a receptionist with a company, who, after being promoted to the head of accounting, proceeded to embezzle $15 million in the course of eight years. When the company discovered the theft, it sued the staffing agency arguing that it should have conducted a criminal background check on the woman (she had a prior theft record) before placing her with the company and that the staffing agency failed to notify the company of the woman’s criminal record when it discovered it at some point after she had been placed.

The trial court held the staffing agency did nothing wrong and dismissed all of the company’s claims finding that:

  • the staffing agency’s contract with the company did not require it to conduct criminal background checks;
  • the agency did not owe the company a fiduciary duty in placing employees because their contract specifically stated that the staffing agency was an “independent contractor;”
  • the agency was not negligent in supervising the employee because the staffing contract excluded the accounting department from the list of departments to be supervised by the agency;
  • the agency was not negligent in hiring or retaining the employee without a background check because it was not foreseeable that the employee would engage in embezzlement as a receptionist – the position in which she was originally placed.

The Court of Appeals agreed with the trial court on all except one claim.  It found that the staffing agency could be liable for negligent retention  i.e. for continuing to employ the employee after it found out about her criminal record and after it found out that the company had placed the employee in its accounting department, and failing to notify the company about the employee’s criminal background. Thus, a jury will have to decide whether it was foreseeable that an employee with a theft record would embezzle money when placed in an accounting department.

TAKEAWAY FOR COMPANIES: If your company uses a staffing agency, make sure your contract accurately and fully describes every responsibility and duty that you want the staffing agency to undertake. e.g., criminal background checks.  If a placed employee does something that creates potential liability, the language of the staffing agreement will be key in determining who is held responsible for that employee’s actions.

TAKEAWAY FOR STAFFING AGENCIES: Sharing suspicions, concerns, or red flags about placed employees with the company with which they are placed can help avoid a later argument by the company that it had no knowledge of these concerns and blaming the agency. Also, when contracting with a company, consider limiting the staffing agency’s indemnification obligations only to those situation where the agency itself is negligent. If a company transfers or assigns a borrowed employee to a task or department that is not covered by the staffing agreement, consider getting a written release from the company confirming that the agency is not responsible for monitoring such employee after the transfer.

To read the entire Court of Appeals’ opinion, see Davis-Lynch, Inc. v. Asgard Technologies, Inc. (Tex. App.–Houston [14th Dist.] June 30, 2015.

Leiza Dolghih litigates employment and business disputes. She advises employers and employees on how to minimize the risk of litigation before it occurs and pursues and defends their rights in courts and arbitration once litigation arises. For more information, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

Is Sales Commission Part of an Employment Agreement? Make it Clear and Put it in Writing. This Goes for Employers and Employees.

moneyA recent case from the Houston Court of Appeals demonstrates how failing to document the exact terms of a sales commission arrangement can result in a loss of such commission for an employee and a costly legal dispute for an employer.

In Colter v. Amkin Technologies, the company hired Colter as a sales director to sell portable drilling rigs. His offer letter stated that he would get $4,000 a month salary and a commission, the structure of which would be determined at a later time.  The parties never drafted or executed a written agreement detailing the terms of the commission structure.

After Amkin terminated Colter’s employment citing his lack of productivity, Colter sued the company for breach of contract claiming that after he was hired, Amkin’s president orally agreed to pay Colter 3% commission on each sale he made.   Not surprisingly, the president denied making such a promise and testified that based on the commission arrangements made with other sales directors, he would have never offered Colter a guaranteed 3% commission.  Furthermore, the history of commission payments to Colter showed that he got 3% on some sales, but less than 3% or nothing on others.

At trial, the jury was presented with employer’s president’s testimony, employee’s testimony, and documents showing that the employee did not consistently receive 3% commission on each sale he made at Amkin. Based on this evidence, and lack of a written agreement, the jury found that Amkin never agreed to pay Colter 3% commission on each sale.

Colter appealed, claiming that the jury got it wrong and that their finding was not supported by the evidence, but the Court of Appeals affirmed the original judgment stating that the jury was fully within its rights to find Amkin’s president’s testimony more credible than Colter’s testimony that the parties had an oral agreement regarding the commission structure.

TAKEAWAY FOR EMPLOYEES: When entering into an employment agreement, make sure that all parts of your compensation are clearly spelled out in the agreement. Otherwise, you might end up in a situation where it’s your word against the word of your employer, and a jury of your peers will be deciding on who they believe more.  Furthermore, if you believe that you have an agreement, insist on employer complying with its terms.  Failure to insist that the employer pays you what you believe you are owed, can result in a waiver of your rights and significantly hurt your case down the road if you decide to take it to court.

TAKEAWAY FOR EMPLOYERS: Employers also have a direct interest in writing down the precise terms of the compensation. If Amkin here had a written agreement that stated that Colter’s commission was discretionary, Amkin could have probably avoided the lawsuit.  While it might be tempting to rely on an oral agreement when a working relationship is new and going well, remember that when things go sour between an employer and an employee, their memory of what the terms of the oral agreement are, may diverge significantly.

Leiza Dolghih litigates employment and business disputes. She advises employers and employees on how to minimize the risk of litigation before it occurs and pursues and defends their rights in courts and arbitration.  For more information, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patent Ownership

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

Copyright Ownership

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

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

Trade Secrets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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