North Texas Legal News
Original Commentary on Texas Business and Employment Law
Renewing Non-Disclosure Agreements with Employees? Consider this . . .
In my practice, I see this scenario all the time: an employee leaves to work for a competitor, the employer realizes that its non-disclosure (NDA) or non-compete agreement was inadequate to protect it from what just happened, so the company rolls out a new (and improved) non-disclosure or non-compete agreement and makes all employees sign it.
The legal department now sighs with relief, the HR department gets a pat on the back, and the new NDAs and non-competes get filed away in employees’ personnel files to be whipped out when the next employee defects for greener pastures. What could possibly go wrong now that the company has a perfect non-compete / non-disclosure in place with all the employees, right?
A recent case out of the Fourteenth Court of Appeals demonstrates exactly how a perfectly drafted non-disclosure agreement can still end up being unenforceable when an employer fails to provide new consideration for the agreement. In Eurecat US Inc. v. Marklund, et al., Eurecat sued two of its former employees who started a competing business, alleging that they stole trade secrets and proprietary data, breached fiduciary duties and breached their NDAs with plaintiff.
Eurecat’s claims were based on the NDAs that the two employees signed in 2011. The Court of Appeals held that these agreements were not supported by consideration and were unenforceable because, prior to 2011, both employees were already required to maintain confidentiality of Eurecat’s trade secrets under the prior versions of the NDAs. The only consideration stated in the 2011 NDAs was continued employment at-will. Eurecat did not promise to provide new confidential information to the employees after they had executed the 2011 NDAs, but only stated that they “may” learn such information. At trial, Eurecat failed to show that its claims for breach of the 2011 NDAs were based on disclosure of confidential information it provided to the employees after January 21, 2011 that differed from information they previously possessed. In fact, Eurecat was unable to show that it provided any new confidential information that was different from what the employees had received from Eurecat prior to signing the NDAs. The Court, therefore, affirmed the jury’s verdict that the employees did not breach their non-disclosure agreements with Eurecat.
BOTTOM LINE FOR EMPLOYERS: Periodic updates of employment agreements, including non-compete and non-disclosure restraints, are necessary to make sure that the agreements comply with the new legal developments. However, companies should always make sure that the new agreements are supported by new consideration, whether it is new confidential information, a bonus, or some other type of consideration. (check your state laws to make sure that the type of consideration provided to an employee meets the state requirements to support restrictive covenants).
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. If you are a party to a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Texas Amends Its Trade Secrets Statute Effective September
Texas Governor recently signed House Bill 1995, which amends Texas Uniform Trade Secrets Act (“TUTSA”) and aligns is with the Defend Trade Secrets Act (“DTSA”).
HB 1995 will go into effect on September 1, 2017 and will eliminate the difference between the TUTSA’s and DTSA’s definitions of “trade secrets,” removing an incentive to forum shop. Additionally, the statute will emphasize that the owner must take reasonable “measures,” and not just “efforts,” to protect its trade secrets. HB 1995 also introduces the following new definitions:
• “Owner” means, with respect to a trade secret, the person or entity in whom or in which rightful, legal, or equitable title to, or the right to enforce rights in, the trade secret is reposed.
• “Willful and malicious misappropriation,” means intentional misappropriation resulting from the conscious disregard of the rights of the owner of the trade secret.
• “Clear and convincing evidence” required to establish willful and malicious misappropriation is defined as the “measure or degree of proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established.”
Additionally, come September, Texas courts will have to apply a balancing test first articulated in In re M-I, L.L.C., 505 S.W.3d 569 (Tex. 2016) when determining whether a party involved in a trade secrets lawsuit can be denied access to documents or testimony about its competitor’s trade secrets. TUTSA codified this test as follows:
a presumption exists that a party is allowed to participate and assist counsel in the presentation of the party’s case. At any stage of the action, the court may exclude a party and the party’s representative or limit a party’s access to the alleged trade secret of another party if other countervailing interests overcome the presumption. In making this determination, the court must conduct a balancing test that considers:
• the value of an owner’s alleged trade secret;
• the degree of competitive harm an owner would suffer from the dissemination of the owner’s alleged trade secret to the other party;
• whether the owner is alleging that the other party is already in possession of the alleged trade secret;
• whether a party’s representative acts as a competitive decision maker;
• the degree to which a party’s defense would be impaired by limiting that party’s access to the alleged trade secret;
• whether a party or a party’s representative possesses specialized expertise that would not be available to a party’s outside expert; and
• the stage of the action.
Bottom Line: In light of these new amendments, companies involved in trade secrets disputes in Texas will have to strategize early on – even pre-litigation – not only about proving their claims and defenses but also about protecting their trade secrets during the lawsuit and gathering evidence necessary to obtain attorney’s fees related to the trade secrets misappropriation claim.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. If you are a party to a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
The Biggest Myth About Non-Compete Agreements
Most of the time, when I tell people that I deal with non-compete agreements, their initial reaction is, “but those are not enforceable in Texas, right?”. Often, that statement is followed by, “but Texas is the right-to-work state, so a company cannot prohibit me from working for whoever I want, right?”. When I try to explain that non-competes in Texas are enforceable and that being a right-to-work to state has nothing to do with a company’s ability to put non-compete restrictions on key employees, I often get incredulous stares. So, for all the skeptical minds out there, here’s a map showing which states enforce non-compete agreements:
You will see from this map (created by Beck Reed Ridden) that only three states in the entire country – California, North Dakota, and Oklahoma – do not enforce non-compete agreements of any sort. The rest of the states, including Texas, enforce such agreement or are undecided on that issue, which means they could enforce them given the right circumstances.
BOTTOM LINE: In Texas, non-compete agreements are enforceable if they meet certain requirements and contain reasonable restrictions on the term, geographic scope and the scope of the restrained activities. Companies should take advantage of this legal tool available to them and make sure that their employment agreements with key employees have properly drafted non-compete clauses that protect their good will, confidential information, and trade secrets.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Texas Supreme Court Nixes Employee’s Defamation Claim, Reinforces At-Will Employment Doctrine
Historically, Texas employers have been able to avoid defamation claims from terminated employees by keeping mum about the cause of termination when asked to provide references. However, some employees were able to bring defamation claims anyway by alleging that because they had to disclose the reason for their termination to potential employers, they were compelled to defame themselves – a so-called theory of compelled self-defamation. Over the years, several Texas courts of appeals bought into this doctrine, creating a heartburn for many employers.
However, last week, the Texas Supreme Court closed the loophole created by the doctrine of compelled self-defamation and expressly and unequivocally ruled that such doctrine was not recognized under Texas law. In Exxon Mobil Corp, et al. v. Rincones, an employee terminated for alleged drug use, brought a defamation claim against Exxon and other parties and alleged the doctrine of compelled self-defamation on the grounds that each time he applied for a new job, he had to repeat his employer’s defamatory statements about himself, i.e. that he used drugs, to others. The Supreme Court ruled that:
“We expressly decline to recognize a theory of compelled self-defamation in Texas. In rejecting it, we join an emerging majority of state courts that have considered the issue, including those in Connecticut, Massachusetts, Hawaii, Tennessee, Iowa, Pennsylvania, and New York.”
The court explained that if it were to recognize compelled self-defamation, it would risk discouraging plaintiff employees from mitigating damages to their own reputations and encouraging them to publish defamatory statements just to increase the damages associated with their claim. Furthermore, allowing a claim based on compelled self-defamation would impinge on the at-will employment doctrine, which allows employers to terminate employees for any lawful reason, however unreasonable or careless that reason might be. Allowing these types of claims to proceed, would impose a burden on employers to conduct investigations and make accurate findings before taking any action against an employee or risk being sued for defamation.
BOTTOM LINE: The Rincones decision reinforces the at-will employment doctrine in Texas and serves as a reminder that employers in Texas may terminate at-will employees for any lawful reason. Employers, however, should continue to be cautious about disclosing the reasons for termination to third parties such as potential employers looking for references.
Leiza represents companies in business and employment litigation. If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Enforcing Non-Compete Agreements in Texas – The Issue of Consideration
For an employer to enforce its noncompete agreement in a Texas court, it must show that it gave something to an employee in return for that employee’s promise not to compete. That “something” may differ from state to state. Some states want the employer to pay an employee $$$ for the specific promise not to compete. Other states find that just a simple promise of a employment, even the kind that can be terminated at any time, is an even exchange for an employee’s promise not to compete.
Unlike many other states, Texas requires employers to give something more besides a job offer or money to an employee in order to extract a legally binding promise not to compete. In this state, the consideration must have a “reasonable relationship” to the employer’s interest in restraining the employee from competing. Simply restricting an employee from lawful competition for the sake of preventing competition will almost certainly fail.
BOTTOM LINE: Texas employers should make sure that their non-compete agreements are supported by proper consideration under Texas law in order to enforce such agreements in court.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
New Contact Information
Starting May 15, 2017, I will be joining Lewis Brisbois as a partner in their labor and employment law group and continue to focus on non-compete and trade secrets disputes.
As I am in the process of updating this blog to reflect the change, please note my new contact information will be:
Leiza.Dolghih@LewisBrisbois.com
tel: 214-722-1708 ext. 108
2100 Ross Ave., Suite 2000
Dallas, Texas 75201
Lewis Brisbois is a national law firm with over 1100 attorneys in 41 offices across 26 states. The firm is the 20th largest law firm in the country, the second largest law firm in the State of California, and the largest law firm in the City of Los Angeles.
In Texas, Lewis Brisbois has offices in Dallas and Houston.
Protect Your Trade Secrets or Lose Them
The first rule of the fight club is you don’t talk about the fight club. The same rule applies to trade secrets. If you talk about your trade secrets – pricing, customer names, vendor relationship, or other aspects of your business, with people who do not have non-disclosure agreements, you are going to lose the “trade secret” status that such information may carry, which means your employees will be able to take that information to your competitor or their new business.
Under the Texas Uniform Trade Secrets Act (TUTSA), an owner of a trade secret must use “reasonable efforts under circumstances” to protects its trade secrets. Depending on how large or sophisticated the business is, those methods may include anything from keeping key files in a locked cabinet to passwords for logging into a customer database, to issuing company computers that have no outside ports, to fingerprint and iris-scan access devices.
Obviously, a mom-and-pop shop is not going to install fingerprint access devices or buy an expensive software that will alert it when an employee downloads an unusually large amount of information, but it can implement simple measures like asking all of its employees to execute a non-disclosure agreement as part of their employment file, make sure that the financial and other sensitive information is accessible only to the owners, and make sure that any confidential information, such as customer lists, is clearly marked as “confidential.”
Larger businesses – those that wield a workforce comprised of dozens, hundreds, or thousands of employees – need to have more advanced trade secrets protection measures, as well as the periodic audits of the effectiveness of such measures.
At a bare minimum, all businesses should have a standard confidentiality (non-disclosure) agreement for its employees, vendors, investors, and anyone else who has access to the business’s trade secrets. They should also look at what protection methods are used by their competitors or are common in their industry and implement those that make sense most for the company.
A little time and expense invested in the trade secret protection on the front end can save thousands of dollars down the road. If you think that providing company computers to your employees is too expensive, imagine how much it will cost in legal fees to retrieve your company’s confidential information from the departed employees’ personal devices.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
How to Fire Employees Without Being Sued
Litigation can be expensive, disruptive to business and bad for employee morale. The good news is that there are certain things that an employer can do before, during, and after the termination of an employee that can minimize the chances of a lawsuit arising out of the termination. In the spirit of an old proverb that advises that “an ounce of prevention is worth a pound of cure,” this article provides a list of best practices that can help avoid wrongful-termination types of lawsuits and the business interruption that comes with such litigation.
Have a probation period. A probation period of 60 to 90 days for new employees allows a business to determine whether an employee is the right fit, and makes it clear to the employee that they do not have a guaranteed term of employment or any rights that may come with a longer tenure, such as medical or other fringe benefits. An employer should make sure that any problems with an employee during the probation period are documented. The employee’s file should also clearly show when the probation status changes to regular employment.
Have an employee policy. An employee handbook that clearly outlines the practice’s policies and procedures is key to avoiding disputes over whether the terminated employee is owed unpaid Paid Time Off (PTO) or other compensation upon termination, or whether such employee was terminated for cause or without cause (an important distinction when it comes to the payment of unemployment benefits). If the handbook contains a description of the company’s progressive discipline policy, consistent application of this policy to all employees can establish a defense to a claim that a particular employee was terminated based on a discrimination or retaliation. It should also contain an anti-harassment policy and explain to employees how to report incidents of harassment, discrimination or retaliation.
Follow the policy. If a business has a progressive discipline policy, it must make sure that such policy is applied fairly, neutrally, and consistently to all employees. In other words, if one employee is terminated after receiving three written warnings, then another employee cannot be allowed five such warning before being terminated. Making exceptions to the policy can result in a terminated employee arguing that they were treated differently based on one of the protected categories such as race, gender, religion, and others.
Document problems. Any problems with an employee, especially policy violations, should be documented in their personnel file. Ideally, the problem should be documented in writing, on a form that is signed by the employee, acknowledging that they received the warning. If this is not possible, then a written note should be made by the employee’s supervisor noting what the problem is and that it was discussed with the employee. Most termination lawsuits involve a situation where an employee had no documented problems or the problems were documented poorly.
Know which laws apply to your practice. Before dismissing an employee, an employer should become familiar with the laws that might apply. Often, but not always, that depends on how many employees the business has. Additionally, certain laws, such as the Family and Medical Leave Act, for example, apply only to employees who have worked for the employer for 12 months and a certain number of hours. Thus, such a statute does not protect all employees. Knowing which laws a company must comply with before terminating an employee can save it from an unpleasant surprise in the form of a lawsuit.
Prepare for the termination. Firing on the spot should only occur in extreme circumstances that justify such an action. Rather, a typical termination should be preceded by a few steps that tend to minimize the chances of a lawsuit. The person in charge of termination should know which laws apply. He or she should also review the company’s handbook describing unacceptable employee behavior and the discipline policy and make sure that the company has complied with the policy in documenting the employee’s violations of the rules. The performance appraisals and any disciplinary action records should be consistent with each other.
A pre-termination review of all the records related to the employee should establish that the termination is legal under all applicable laws, is justified by the facts, is consistent with the company’s policies and procedures and is consistent with how the business has handled such terminations in the past.
Be professional during the termination meeting. During the termination, the key is to treat the employee with respect, and to be polite but firm. The discussion should be brief and based on the facts. While an employee may get emotional, the person on the other end of the discussion should remain professional. If a volatile situation is expected, it may be necessary to have security personnel present. At the very least, one other person should be present on the employer’s side during the termination, who can later confirm that nothing improper was said during the termination conversation.
Comply with Texas Payday Law. Many times, employers will take certain deductions from the final check, or will hold the final paycheck until the employee returns company property. These actions may violate the Texas Payday Law statute, which requires employers to follow very specific rules in making the final payment to a terminated employee.
The Texas Payday Law covers all Texas businesses, regardless of size, and applies to all persons who perform a service for compensation, except for close relatives and independent contractors. It covers salary, commission, bonuses, and certain fringe benefits. This statute lays out the rules on how and when an employer must pay the final paycheck, depending on whether the employee resigned or was terminated. It also describes when an employer can take deductions from the final paycheck. Failure to comply with the final paycheck rules under the statute can result in penalties from the Texas Workforce Commission. Therefore, employers should become familiar with this statute and its requirements.
Follow up after the termination. The terminating manager should write down what was said at the meeting in the event of a lawsuit. She or he must also inform the remaining employees on a need-to-know basis about the termination. If a higher-level employee is terminated, have a staff meeting as soon as possible after the termination and tell them what happened and why, but do not provide the specifics. You want to stop the rumor mill, not feed it.
Leiza is a business and employment litigation attorney in Dallas, Texas. If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Proving Lost Profits in a Trade Secrets Case – An Expensive Lesson from a Texas Court of Appeals
What the jury giveth, the judge may taketh away. Memes aside, any company that is thinking of filing a trade secrets misappropriation case, must be ready to prove both: that its trade secrets were taken and the amount of damages that the taking caused.
A recent ruling from the Dallas Court of Appeals demonstrates how a company’s verdict can be taken away by the court due to the party not having sufficient evidence of damages.
In Radiant Financial v. Bagby, the company, which structures and sells fractional interests in life insurance policies referred to as life settlements, sued its former sales agent for breaching her non-disclosure agreement and trade secrets misappropriation. Radiant alleged that Bagby persuaded 19 investors who had previously placed money into escrow with Radiant, to take their money out and invest it with a Radiant’s competitor. In the process, she allegedly provided some of Radiant’s proprietary forms and the information filled out by the investors to Radian’t competitor.
The jury awarded Radiant $152,916 in damages, $150,000 in punitive damages, and $600,000 in attorneys fees in response to the question to “[c]onsider the profit that Radiant Financial lost” as a result of Bagby’s failure to comply with her non-disclosure agreement and misappropriation of Radiant’s trade secrets.
The trial court, however, refused to award these damages after concluding that Radiant did not prove that the 19 investors that left would have invested with it but for Bagby’s actions.
During the trial, Bagby introduced evidence that: (1) the 19 investors had specific investment requirements; and (2) at the time when they left Radiant, it offered no policies that met these investors’ requirements. Radiant argued that its track record showed that it “had always been able” to find appropriate policies for its investors. Thus, it would have been able to find appropriate policies had Bagby not taken the investors to a competitor. The trial court rejected Radiant’s lost profits damages model finding that it would require the court to “stack assumption upon assumption,” and took away the jury damages award. The Dallas Court of Appeals upheld the court’s decision.
Bottom Line: Before filing a trade secrets case, the company bringing the lawsuit should always consider the following questions: (1) what damages did it suffer? (2) how does it calculate such damages? (3) how can it prove such damages in court? While the answer might not be obvious in the beginning of the lawsuit, waiting to ask such questions until the lawsuit is well underway can result in the company spending thousands of dollars in attorney’s fees on a lawsuit where the monetary damages are speculative or non-existent.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
A Two Day Suspension is Not a Materially Adverse Action – Rules the Fifth Circuit
The Fifth Circuit recently addressed whether an employee who was placed on a two-day unpaid leave suffered a “materially adverse action” by the employer such as to allow him to defeat a summary judgment on a Title VII retaliation claim.
In Cabral v. Brennan, a Mexican-American employee in his mid-40s was placed on unpaid leave after he failed to produce a valid driving license requested by his supervisor. Cabral, who had a history of filing multiple discrimination, harassment and retaliation complaints, claimed that he was placed on leave in retaliation for filing such complaints. The US Post Office, his employer, claimed that he was placed on unpaid leave (and later reimbursed) because his supervisors believed that his license had been suspended for a DWI conviction.
The Fifth Circuit agreed with the US Post Office and explained that not every unpaid suspension qualified as a “materially adverse action” by an employer under Burlington N. & Santa Fe Ry. Co. v. White, 548 U.S. 53, 68 (2006). Unlike the plaintiff in White, whose 37-day probation caused her to fall into a deep depression, Cabral failed to show that his suspension exacted a physical, emotional, or economic toll on him. His conclusory statements attesting to the emotional or psychological harm he suffered because of the two-day suspension, without documentation of any alleged harm, did not provide sufficient evidence of a materially adverse action to defeat summary judgment.
CONCLUSION: Cabral decision clarifies that an unpaid suspension is not a per se materially adverse action. An employee must show that unpaid leave caused him or her physical, emotional, or economic harm via some documentation and not just conclusory statements in order to establish a “materially adverse action” by the employer.
Leiza is a business and employment litigation attorney in Dallas, Texas. If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
