North Texas Legal News
Original Commentary on Non-Compete and Trade Secrets Law
What Employment Laws is Texas Legislature Going to Consider in 2019?
Exactly a week ago, the Texas Legislature began its bi-annual session during which it will consider and vote on hundreds of bills. Among those are 24 employment-related bills which, if passed, could affect wide swaths of employers in Texas.
While most of the bills will not make it past the committee stage, they are worth looking into for a number of reasons. First, they signal which of the myriad of issues that have been at the forefront of legislative efforts in other states in 2018 our legislators consider important enough to address in Texas. Second, the ultimate success or failure to these bills is going to indicate exactly how much difference the 12 additional House seats made for Democrats. Finally, some of the bills, while failing at the state-wide stage, may end up being adopted in some form or fashion by cities or counties within our state. So, let’s take a look:
What is NOT on the Menu?
Notably absent from the current list of bills (which may be supplemented during the session) are any proposals related to non-compete agreements, trade secrets misappropriation or the notorious Texas Anti-Slapp statute. While various groups are considering introducing some bills amending the Texas Anti-Slapp statute to curb its application, there is no indication that the Texas Covenants not to Compete Act or the Texas Uniform Trade Secrets Act are even on the legislative radar during this session.
What is on the Menu?
Bills Affecting Food and Retail Businesses
HB640 – Requires certain employers in food and retail business to provide advance notice of employee work schedules.
HB133 – Prohibits employer from receiving tips paid to “tipped employees” and declares such gratuities “property of employee”
Bills Related to #MeToo Movement and Sexual Harassment
SB159/HB618 – Prohibits adverse employment action by employers against employees who refuse to sign arbitration agreements that require employees to arbitrate sexual assault or sexual harassment clams or sign non-disclosure agreement prohibiting discussion of facts related to their sexual assault or sexual harassment claim.
HB572 – Allows unemployment compensation to employees who left work due to sexual harassment as long as certain conditions are met.
HB619 – Removes damages caps for employers in cases involving sexual harassment and sexual assaults.
SB46 – Prohibits sexual harassment by employers with one or more employees.
HB287/SB112 – Defines when discrimination in payment of compensation occurs.
Bills Expanding Employees’ Rights to Recover Unpaid Wages
HB106 – Prohibits employer retaliation against employees who seek recovery of unpaid wages and procedures in wage claim hearings conducted by the Texas Workforce Commission.
HB399 – Extending the deadline for employees to file a claim for unpaid wages with the Texas Workforce Commission from 180 days to 365 days.
SB162/HB48 – Creates a public database that lists all employers penalized for failure to pay wages or convicted of certain offenses involving wage theft.
Bills Related to Equal Pay
SB160 – Prohibits sex discrimination in employment compensation.
Bills Related to LGBT Employment Rights
SB151/HB254/HB244 – Prohibits, among others, employment discrimination based on sexual orientation or gender identity or expression.
Bills Setting Minimum Wage
HB194 – Setting a minimum wage as a greater of: $15.00 or the federal minimum wage.
SB113 – Setting a minimum wage as a greater of: $10.10 or the federal minimum wage.
SJR22 – Proposing a constitutional amendment increasing minimum wage to a greater of: $10.10 or the federal minimum wage.
Bills Providing Additional Protections for Job Applicants and Employees
HB393 – Prohibits employers from inquiring about wage history during employment application process or considering such information in making a hiring decision unless an employee voluntarily discloses such information.
HB495 – Prohibits employers from inquiring about or considering job applicants’ criminal history prior to making a conditional employment offer.
HB144 – Prohibits an adverse employment action against an employee or applicant that is based wholly or partly on the employee’s or applicant’s credit report unless certain conditions are met.
HB504 – Prohibits employers from terminating employees for serving on grand jury.
And there you have it. At the end of the legislative session – which will end in May unless a special session is called – I will take a look at which of these bills, if any, became the law in Texas.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.
Brace Yourself, Resignations Are Coming. Is Your Company Ready?
Anyone who has been running a business for a while knows that January is a high turnover month for employees. And while companies cannot prevent employee turnover, they can take four steps this month to prevent employees from walking out the door with confidential documents and company trade secrets.
1. Make Sure Key Employees Have Valid Non-Competition, Non-Solicitation and Confidentiality Agreements in Their Files.
Conduct an audit of your employees files to make sure that: (1) all key executives, employees with access to confidential databases or documents, and sales people have signed non-competition, non-solicitation and confidentiality agreements in their files; (2) such agreements meet the requirements of the Texas Covenants not to Compete Act; (3) the agreements are signed by a company representative; and (4) the company has an electronic version of the agreements so that if the hard copy gets lots, there is a back up.
2. Conduct Confidentiality Training.
Set aside an hour or two to talk to employees about the importance of maintaining confidentiality of certain company information, go over the confidentiality policy, and answer any questions employees may have. This way, if they leave, the policy will be fresh in thier minds and they will be more cautious in what they can and cannot share with their new employers.
3. Verify That Company’s Document Management Systems and Databases Have Security Features Turned On.
Task your IT person or department to look into what ERP, CRM, and document management systems the company is using and make sure all the security setting are turned on. Such settings often include the following: (1) alerts when a large amount of data is downloaded; (2) restrictions on what can be printed or downloaded; (3) access restrictions for different employees within the system based on the need-to-know basis; (4) back up features that allow the company to restore any emails or documents deleted by employees; (5) alerts when information is shared by employees outside the authorized company systems, and many others.
4. Remind Employees During the Exit Process of Their Continuing Obligations to the Company.
Finally, when you do get a resignation notice, as soon as possible, meet with the employee to remind him or her about any non-competition, non-solicitation and non-disclosure requirements in their employment agreement and make sure the employee returns all of the company equipment and documents prior to leaving the company. If you find out or suspect that the resigning employee might be going to a competitor, preserve their email accounts and devices issued by the company while you analyze whether their move may violate their restrictive covenants.
At Lewis Brisbois, we help companies design proper confidentiality procedures and policies, draft enforceable non-competition, non-solicitation and non-disclosure agreements, conduct confidentiality training with employees, and if trade secrets theft is suspected, help investigate it and prosecute it in courts around the country.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.
The Rise in Trade Secrets and Restrictive Covenants Litigation – Live Presentation
I will be presenting with Stanley Santire of Santire Law Firm on the The Rise in Trade Secrets and Restrictive Covenants Litigation on January 17th at 2:30 p.m. at the Texas Bar Advanced Employment Law Course in Dallas, Texas. You can get a copy of our paper by registering to attend the event (registration link here).
This is a fantastic course for employment lawyers in Texas, which offers 15 hours of CLE credit over two days.
Additional presentations will include:
- State Law Update
- Anti-Slapp Update
- Conducting Effective Investigations
- What Is it Worth? How We Value Employment Cases
- Proving Up Attorney’s Fees
- Structuring Settlement Agreements
- Practical Applications and Q&A
- Best Practices in Summary Judgment
- Defining Harassment: Has it Really Changed in the #metoo Era
- Effective Training: You Need More Than a Video
- The Evolving Landscape of LGBTQ Protections
- FMLA and FLSA Updates
- Social Media Evidence and Ethics
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.
A Broken Promise of Whoppers “For Life”: Why the Oregon Man’s Lawsuit Against Burger King Is Going Nowhere
A man wants free whoppers for life after getting locked in a Burger King bathroom and he has filed a lawsuit to get them. He claims that a local manager promised to provide him free hamburgers to compensate for a traumatic experience of being stuck in a bathroom for “well over an hour,” but the regional manager reneged the offer after the man began frequenting the location on the daily basis.
Mr. Brooner wants the court to force Burger King to keep providing him with one free whopper a week for the next 22 years (his projected life expectancy until he is 72) or, alternatively, award him close to $10,000 in damages, which is the price equivalent of the 22-years’ worth of weekly whoppers.
Normally, I would read something like this chuckle and move on, but this particular scenario raised many of the same questions that I get from my clients in some of the most complicated contractual disputes, so I thought I’d address some of them here:
Since the promise to provide burgers “for life” is not in writing, is it even enforceable?*
Probably yes. Certain contracts are enforceable even if they are not in writing. Typically, contracts that can be performed within one year are enforceable even if they are not in writing. Since Mr. Brooner’s life could end at any time, including within 12 months from the promise made by the manager, the contract to provide burgers “for life” could terminate within 12 months. Thus, an oral contract to provide burgers “for life” is probably enforceable.
Can Burger King be responsible for a promise made by an employee without authority to make such a promise?
Probably not. An employee of a company can bind the company only if a “reasonable” third party would understand that the employee had the authority to act the way s/he did on behalf of the company. It is unlikely that a “reasonable” person would believe that a manager of a fast food restaurant had the authority to offer free burgers “for life” to a customer on behalf of the company. While in this case it appears to be a clear-cut issue that is likely to cost Mr. Brooner his claim, an agent’s authority to enter into contracts on behalf of his or her employer is often a hotly-litigated issue in contractual disputes.
What if the manager did not mean to offer burgers “for life” but said something like “any time you come in, the burgers are on us”
This is a tough one. For a valid contract to exist, there must be “a meeting of the minds,” i.e., both people should be on the same page as to what the terms of the agreement are. As you can imagine, countless lawsuits arise out of the parties disagreeing over what the contract is supposed to accomplish. In such situations, a court will typically look at the words of the contract, first, to determine the meaning. If those are ambiguous, then the court will take in evidence from both parties to determine their intent in entering into the agreement. Here, if the court determines that the manager’s promise was ambiguous, the testimony of the manager about what he intended to offer to Brooner will be key.
Since Brooner did not promise anything in return for getting free whoppers, there was no valid contract, right?
Not really. There is an argument here that Brooner gave up his right to sue the restaurant or leave negative comments about it on social media in exchange for getting free whoppers, as giving up a right to do so something in exchange for money or other consideration can create a contract. Indeed, employees constantly give up their right to sue the employer in exchange for a severance payment.
Can Brooner really get the damages he wants on the assumption that he will live 22 more years?
Probably not. Generally speaking, a person seeking contract damages, must prove them with “reasonable certainty.” In a complicated contractual dispute, expert witnesses would testify about what is reasonably certain. In this case, Mr. Brooner’s health condition, average life expectancy, his lifestyle, how long this particular location of Burger King is expected to remain open, and many other factors can play a role in whether he can establish that he is reasonably certain to take advantage of free burgers for the next 22 years.
And there you have it. Next time you get locked in a bathroom of a restaurant, get an executive level person on the phone to authorize a life-time supply of meals, or better, call me to negotiate and paper the deal for you.
*This is a discussion of general legal principles and not a legal advice, as each state has somewhat different contract laws and exceptions and each contractual dispute involves its own set of facts that may affect claims and defenses available to the parties involved in such a dispute.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.
Top 5 Non-Compete Cases in Texas in 2018
Unlike many other states around the country, Texas did not see any drastic changes in its non-competition laws in 2018. However, out of a 100 + cases involving non-competition disputes, the following handful stand out:
- Thoroughbred Ventures, LLC v. Disman, Civil Action No. 4:18-CV-00318, 2018 U.S. Dist. LEXIS 133697, at *10 (E.D. Tex. 2018).*
Held: A non-disclosure agreement that prohibits employees from using, in competition with the former employer, the general knowledge, skill, and experience acquired in former employment is similar to a non-compete clause and must meet the requirements of the Texas Covenants not to Compete Act.
Why it made the top five list: This is the first case in Texas to hold that certain non-disclosure clauses may have to meet the same requirements as non-competition agreements.
Quote: “An agreement prohibiting a former employee in this field from disclosing his acquaintances would therefore be a non-competition agreement in disguise, and would be unenforceable as such. Some of the other categories of confidential information-for example, financial information-might present different problems, but the present motion does not accuse the Former Employees of disclosing anything other than information related to Clients and Contractors.’”
2. Fomine v. Barrett, No. 01-17-00401-CV, 2018 Tex. App. LEXIS 10024, at *8 (App.—Houston [1st Dist.] Dec. 6, 2018)
Held: A non-competition clause that covers a geographic area where an employer plans to extend its business in the future, without any concrete plans to do so (i.e. just the owner saying s/he is going to expand), is geographically overbroad.
Why it made the top five list: Employers will often include in their non-competition agreements areas of future business expansion. This case demonstrates that unless the plans for future expansion are definite, the employers should stick with the area where the business currently operates or where its employees currently work.
3. Ortega v. Abel, No. 01-16-00415-CV, 2018 Tex. App. LEXIS 6690, at *11 (App.—Houston [1st Dist.] Aug. 23, 2018).
Held: The right of first refusal in the asset purchase agreement, which prohibited a party from operating a business without first offering another party the right to be a partner in the business was a “restraint of trade,” subject to the Texas Covenants Not to Compete Act.
Why it made the top five list: This case demonstrates that Texas Covenants Not to Compete Act applies to any restraint of trade, not just the plain vanilla non-competition and non-solicitation agreements in the employment or sale of business context.
4. Accruent, LLC v. Short, No. 1:17-CV-858-RP, 2018 U.S. Dist. LEXIS 1441, at *12 (W.D. Tex. 2018).
Held: A non-competition clause that prohibits employees from competing with their employer anywhere where the employer does business (as opposed to where the employees worked) can be enforceable against those employees who had extensive access to the company’s confidential information.
Why it made the top five list: Generally speaking, an employer can only prohibit an employee from competing in the area where the employee worked. However, this case creates an exception to the rule where employees have extensive access to and “intimate knowledge” of highly confidential information of their employer.
Quote: “Because Short was Lucernex’s senior solution engineer, he now has an “intimate knowledge of all Lucernex product functionality.” Short knows about Lucernex’s unreleased software and its roadmap for future product development. He knows the product functionalities requested by Lucernex customers. He knows Lucernex’s business development plans, its market research, its sales goals, and its marketing strategy. . . Given everything Short knows about Lucernex and its products, customers, and prospects, Short can help a competitor take business from Accruent in any state or country where Lucernex did business. It is therefore reasonable for the noncompete provision to extend to every state or country in which Lucernex did business.”
5. D’Onofrio v. Vacation Publ’ns, Inc., 888 F.3d 197, 212 (5th Cir. 2018)
Held: A non-competition clause that prohibits an employee from working for competitors of the former employer “in any capacity,” without geographic or client-based boundaries, is unenforceable.
Why it made the top five list: The Fifth Circuit confirmed, yet again, that an industry-wide restraint on a departing employee, which is not limited to a certain geographic area or the clients that the employee dealt with, is unenforceable under the Texas Covenants Not to Compete Act.
*Keep in mind that any decisions mentioned in this post may be appealed and their holdings may be overruled. Therefore, employers should always consult with a qualified employment lawyer to determine the current status of the law applicable to their particular dispute.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.
Three Key Factors in Enforcing Non-Compete Agreements
What distinguishes those companies that are successful in enforcing their non-compete agreements from those that are not? Generally speaking, just three “no-brainer” factors:
1. They have good agreements. A non-compete enforcement lawsuit is a breach of contract case. Thus, those companies that have good agreements – the ones that set out reasonable restrictions, are clear and unambiguous, are signed by all the necessary parties, and are supported by proper consideration – have an advantage in court.
The courts around the country scrutinize the language of non-compete agreements before deciding whether to restrict employees’ activities based on that language. The more vague, incomprehensible, unreasonable the restraints in the agreements are, the less the likely the courts are to order employees to comply with them.
2. They have evidence of violations. Suspicions, rumors, or fear that an employee might be violating a non-compete agreement are not enough to support an injunction in court. Those companies that are successful in enforcing their non-compete agreements usually come to court with some evidence that an employee either has already violated the agreement or intends to imminently do so. The evidence does not have to be direct, i.e., employee admitting to someone that they are violating the agreement, and it may be circumstantial, but an application to enforce an agreement must be supported by some evidence and not just a fear or speculation.
3. They move quickly. Those companies that are successful in enforcing their non-compete agreements do not wait around to see how far an employee will go or what s/he employee might do. Once they have evidence of a violation, they file a lawsuit within days of obtaining such evidence. A swift action impresses upon a judge that the business is going to suffer irreparable harm unless the court steps in and enters an order preventing an employee from violating his or her non-compete agreement.
Keep in mind that all is not lost for those companies that do not have signed non-compete agreements with their employees as employees have certain duties to their employers even in the absence of an employment contract restricting their post-employment activities.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.
The Fifth Circuit Issues Its First Decision on the Defend Trade Secrets Act
Two and a half years after the Defend Trade Secrets Act (DTSA) became effective, the Fifth Circuit has issued its first opinion addressing the statute. Earlier this month, the Court ruled that: (1) a party must “prevail” before it can recover any attorney’s fees under the DTSA and (2) a plaintiff’s dismissal of its claims without prejudice does not confer the “prevailing party” status on defendants.
Dunster Live, LLC v. Lonestar Logos Management Company, LLC involved a situation where the plaintiff, Dunster, having lost an injunction hearing in a trade secrets case in federal court, wanted to dismiss the case without prejudice and refile it in a state court sans the DTSA claim. Under 41(a)(2) of the Federal Rules of Civil Procedure, if a defendant has already answered the lawsuit or filed a motion for summary judgment, plaintiff is required to file a motion with the court asking for a permission to dismiss its claims without prejudice. The district court granted Dunster’s motion to dismiss, and the plaintiff proceeded to file an almost identical trade secrets lawsuit but without the DTSA claim in a state court.
After the dismissal, Lonestar sought to recover its attorney’s fees of over $600,000 on the basis that Dunster had brought its federal lawsuit in “bad faith.” The district court denied Lonestar’s request for attorney’s fees holding that a dismissal without prejudice of Dunster’s claims did not make Lonestar a “prevailing party” under the DTSA.
Lonestar furter argued that Dunster sought to evade paying attorneys fees by strategically seeking a dismissal without prejudice once it realized that its lawsuit was doomed, and that the DTSA’s “bad faith” provision supported a fee award even when a defendant had not officially prevailed. The DTSA’s provision upon which Lonestar relied states the following:
[i]f a claim of the misappropriation is made in bad faith, which may be established by circumstantial evidence, a motion to terminate an injunction is made or opposed in bad faith, or the trade secret was willfully and maliciously misappropriated, [a court may] award reasonable attorney’s fees to the prevailing party. 18 U.S.C. 1836(b)(3)(D).
The district court rejected this argument as well denying Lonestar’s request for attorney’s fees.
The Fifth Circuit affirmed the district court’s ruling finding that a dismissal without prejudice under the DTSA did not confer the status of a “prevailing party” on Lonestar, similar to other federal statutes that allow prevailing parties to recover attorney’s fees, such as the Equal Access to Justice Act, Patent Act, Civil Rights Act, or Individuals with Disabilities Education Act.
The Court also rejected Lonestar’s argument that the DTSA only required a showing of “bad faith” by a plaintiff in filing a lawsuit and not a showing that a defendant was a “prevailing party.” It explained that “[a]llowing bad faith alone to support a fee award would improperly read the concluding language of Section 1836(b)(3)(D) – ‘the prevailing party’ – out of the statute.” Thus, a party seeking attorney’s fees under the DTSA must establish both: (1) that it is a prevailing party and (2) one of the three qualifying scenarios described in 1836(b)(3)(D).
TAKEAWAY: With the DTSA becoming effective on May 11, 2016, plaintiffs in Texas now have a choice of whether to seek redress for trade secrets misappropriation in state courts or federal courts. Dunster makes it clear that as long as plaintiff has brought its DTSA claim in good faith in federal court, it may have a chance to change the strategy down the road and explore its claims in state court without facing the penalty of having to pay defendant’s attorneys fees as the result of dismissing its federal lawsuit without prejudice.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108..
Non-Compete Agreements: Garbage In, Garbage Out
Last week, a Texas Court of Appeals ruled that a non-compete agreement between a transportation logistics broker and its freight carrier was unreasonable because it was not clear when the 24-month non-compete period would begin to run. This case serves as a reminder that a confusing, ambiguous, or imprecise non-compete agreement will yield poor results in court. In other words: garbage in, garbage out.
The covenant not to compete at issue was meant to ensure that the freight carrier would not take away the broker’s clients after the broker had revealed their identity to the carrier. Thus, there was a legitimate business reason for the non-compete agreement. However, the following language in the agreement created a problem:
For a period of twenty four (24) months following the Carrier’s last contact with any client or client[s] of Broker the Carrier agrees it shall not either directly or indirectly influence or attempt to influence customers or clients of Broker (or any of its present or future subsidiaries or affiliates) for whom the Carrier has rendered services pursuant to this Agreement to divert their business to the Carrier or any individual, partnership, firm, corporation or other entity then in competition or planning to be in competition in the future with the business of Broker or any subsidiary or affiliate of Broker.
The Court explained that there were two problems with this language that made it impossible to determine how long the restrictive covenant was going to last. First, under the terms of the covenant not to compete, the 24-month restraint period would start from the date of the carrier’s last contact with “any” client of the broker, not just the clients that the carrier had provided services to. Since the broker testified that its client list was a trade secret, the carrier would have no way of determining the date of its last contact with the clients whose identity it had no way of knowing. Second, the non-compete would begin to run from the date of the last contact, regardless of whether the contact took place during or after the broker-carrier agreement had terminated, which meant that it could begin at any time.
Consequently, the Court ruled that a covenant not to compete that extended for an indeterminable amount of time was not reasonable, and as a result, was not enforceable. It reversed the jury’s finding that the agreement had been breached and took away the damages the jury had awarded to the broker.
BOTTOM LINE: There are plenty of “sample” non-compete agreement “forms” online, but there is a difference between a non-compete clause and a non-compete clause that is enforceable. Unfortunately, many companies do not find that out until they are in court trying to enforce their agreements that may not be enforceable. Companies should avoid using “standard” non-compete clauses and make sure that their restraints are tightly drafted to address their specific industry, business model, and particular needs.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
The Two Steps All Small Businesses Can Take to Protect Their Trade Secrets
Does your business have a client list? A tested marketing strategy? A sales script? A proprietary business process? Those are just a few things that may give your company a competitive advantage over other similar businesses and may be considered your company’s “trade secrets.”
Now imagine one of your employees walking out the door and taking that information to a competitor because they offered him or her a slightly better compensation or using it to start their own copycat business. This happens on a daily basis. Yet, when it does, many business owners are not prepared to deal with it and have done nothing to address it ahead of time.
So, if your company does nothing else in 2019 to protect its trade secrets, it should do at least the following two things to prevent its competitive information from walking out the door with the next employee who leaves:
Have your employees sign confidentiality and non-competition/non-solicitation agreements. These agreements do not have to be complex, but they have to comply with the laws of the state where your company operates and possibly with the laws of the states where the employees work. So, for example, if your company is based in Texas, but you have employees in other states, your confidentiality and non-compete/non-solicit agreements must meet Texas-specific requirements for such agreements and may also need to comply with the laws of other states.
If you think these agreements are not enforceable, check our my prior post addressing the most common misconceptions about non-compete agreements.
Learn about the security features of the document management systems you use and implement them. Many small businesses use Google, Microsoft 360, Dropbox or some other similar systems to maintain and manage company records. All of those systems allow the administrator to: (1) set restrictions on which employees can access which information within the company; (2) track what the employees do with that information when they access it; (3) set restrictions on whether the employees can print, download, copy or share the information with other employees or people outside the company; (4) periodically change passwords to access the systems; and (5) many other features that can help business owners prevent their information being shared outside the company.
Additionally, many other programs, applications, CRM and ERP systems, sales databases, etc., have their own settings that restrict how the sensitive and proprietary information contained in them can be shared within and outside the company. Business owners should determine who within the company should have access to which parts of each system, limit such access on the “need-to-know” basis and set the systems to either prevent individuals from downloading, printing, emailing or otherwise exporting the information out of the system, or alerting the company when such actions are taken. Regardless of whether a business sets the alerts or restrictions, at a minimum, each company system should keep track or log what employees are doing with respect to the sensitive information they use in the course of their work.
Additionally, anytime you consider purchasing a new document management systems, or an ERP, CRM, sales system or databases, consider not only whether it matches your business needs, but also what security measures it offers in terms of tracking and limiting access to the system by the employees.
BOTTOM LINE: Large companies can dedicate a lot of resources to protecting their trade secrets – resources that are not available to small businesses. However, every small business has the resources to implement the two steps described above. If you, as the owner of the company, do not take the time to put the proper employee agreements in place and to educate yourself about the security measures available to you and use them, the employees will know the security gaps and will be in position to exploit them when presented with the right incentives.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
Is Credit Card Information Stored by a Restaurant a “Trade Secret”?
A federal district court in Colorado recently ruled that customer credit card information was not a “trade secret” under the federal Defend Trade Secrets Act (DTSA).
This case arose out of a 2017 data breach of Chipotle Mexican Grill, Inc.’s computer system and point of service (POS) terminals which resulted in the theft of customers’ credit card and debit card data. As the result of the breach, several financial institutions had to replace their members’ credit and debit cards and refund fraudulent payments. Consequently, they sued Chipotle for negligence, unfair competition, and a violation of the DTSA, on behalf of themselves and other financial institutions.
Plaintiffs argued that the credit card information of their members was a “trade secret” under the DTSA because: (1) it was plaintiffs’ financial data; (2) they had taken reasonable measure to keep it secret; and (3) the data had independent economic value, and that Chipotle misappropriated it in violation of the federal statute.
The district court noted that the question of whether the credit card information was a trade secret was a question of first impression as neither plaintiffs not Chipotle cited any authority clearly addressing this issue. However, it concluded that because the credit card information simply created an access mechanism for the members’ accounts, it had no independent value. In other words, the value of the credit card information derived from the thing that it was intended to protect – a bank account. See N. Star Media, LLC v. Winogradsky-Sobel, 2011 WL 13220157, at *10-11 (C.D. Cal. May 23, 2011); State Analysis, Inc. v. Am. Fin. Servs. Assoc., 621 F. Supp. 2d 309, 321 (E.D. Va. 2009); see also MicroStrategy Inc. v. Bus. Objects, S.A., 331 F. Supp. 2d 396, 429 (E.D. Va. 2004)(expressing skepticism that a CD key is a trade secret); Tryco, Inc. v. U.S. Med. Source, L.L.C., 80 Va. Cir. 619 (2010) (“Courts have repeatedly held that collections of numbers and/or letters, whose only value is to access other potentially valuable information, do not by themselves have independent economic value.”).
The court reasoned that the payment card data (including cardholder names, credit or debit card numbers, and corresponding CVVs) was similar to passwords and usernames that provided access to something of value, i.e. an individual’s line of credit with a financial institution or money in an account with a financial institution. Absent a connection to either a line of credit or a bank account, payment card data was simply a string of alpha or numeric (or indeed other typographical) symbols, and, thus, had no independent economic value.
Because the court concluded that the credit card information was not a trade secret, it did not address whether a misappropriation occurred during the breach or whether Chipotle could be liable under the DTSA.
Leiza litigates trade secrets and non-compete agreements disputes in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
How Enforceable is a Non-Compete? and Other Top Google Questions Answered
According to Google, the top four questions people want answered about non-compete agreements* are: (1) How enforceable is a non-compete? (2) Is a non compete valid if you are fired? (3) Do non-compete agreements hold up? and (4) How long does a non compete last? I hear a lot of the same questions in person, so here are the answers:
1. How enforceable is a non-compete? Generally speaking, non-compete agreements are enforceable. There are only three states in the country that outright ban non-compete agreements – California, Oklahoma, and North Dakota. Additionally, some states now prohibit non-compete agreements for certain professions or employees who earn less than a certain amount per year or per hour. The rest of the states will enforce some form of a non-compete agreement as long as it is reasonable.
Now, if the real question is “How enforceable is my non-compete agreement?”, the answer to that depends on several factors, including the following: (1) the state in which the employee works; (2) the industry in which s/he works; (3) the precise language of the non-compete clause; (4) the responsibilities and duties of the employee at the company; (4) how long the employee has worked for the employer; (5) where the employee is going to work and what will be his/her duties and responsibilities there; (6) what the employee received in exchange for signing the non-compete agreement; (7) whether the employer performed his/her obligations under the agreement; and several other factors.
2. Is a non-compete valid if you are fired? Usually, yes. However, some states have recently passed laws or have attempted to pass laws that would make non-compete agreements void if an employee was fired without cause or terminated as part of the reduction in force. Additionally, some employment contracts may specify when an employee may be fired, in which case, if the employee is fired in violation of their contract, that may make their non-compete clause unenforceable. The norm across the United States, however, remains that the reason for separation from employment does not affect the enforceability of a non-compete clause.
3. Do non-compete agreements hold up? When written correctly, yes. If a non-compete agreement is written to comply with the appropriate state laws, is reasonable, and the employer has given its employees the required consideration in exchange for their promise not to compete, the non-compete agreement is likely to hold up in court, which means the court will order an employee to comply with it.
However, similarly to the question one above, whether your particular non-compete agreement will hold up in court, depends on many factors, including where in the country and in which venue the employer will attempt to enforce it.
4. How long does a non-compete agreement last? As a general rule, non-compete agreements that last two years or less are considered reasonable. However, some states have specific provisions regarding the length of non-compete agreements that set a shorter period of time, and other states allow for much longer periods. Additionally, employee-specific circumstances may make even a 2-year non-compete agreement unreasonable and, therefore, not enforceable in certain cases.
*NOTE: Different rules may apply to non-compete agreements that are not employment-related, i.e. non-compete agreements that relate to the sale of business.
BOTTOM LINE: Different states have different rules about what non-compete agreements they will enforce. Additionally, whether a particular non-compete agreement is enforceable depends on the (1) language of the agreement and (2) the particular circumstances of the employee bound by that agreement.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
Lessons from the Mavericks Sexual Harassment Scandal: Specific Steps Your Company Can Take to Avoid a #MeToo Situation
On Wednesday, Mavericks released a 43-page report containing the results of a seven-month investigation into the allegations of a pervasive culture of sexual harassment that permeated the organization over the past 20 years. The allegations first came to light in an article published by Sports Illustrated in February of this year. The investigation report largely substantiates many of the facts described in the article and provides many recommendations for changes within the Mavericks organization.
If your company is worried about the #MeToo movement (hint, every company should be) and is attempting to make sure that it eliminates sexual harassment among its employees, the recommendations from the Mavericks’ investigation report provide a good road map for doing so.
Ask yourself, is your company doing the following:
- Increasing the number of women through the organization including in leadership and supervisory positions.
- Improving formal harassment reporting process and creating paths for victims to report misconduct
- Evaluating, and holding accountable, all executives, managers, and supervisors on their efforts to eliminate harassment and improve diversity of all kinds throughout the organization
- Conducting anonymous workplace culture and sexual harassment climate surveys on regular basis to understand the culture of the organization and whether problems exist
- Establishing clear hierarchies and lines of decision-making authority within the organization
- Strengthening and expanding Human Resources, and implementing clear protocols and processes for evaluating and adjudicating workplace misconduct issues. This should include providing clear communication to employees on the anti-harassment policy and how to report harassment.
- Providing “prompt and proportionate” and “consistent” discipline across the organization when harassment or misconduct has been substantiated.
- Providing regular training for all employees on sexual harassment (including bystander intervention training), and special training directed at managers and supervisors. Leaders across the Company should participate in the training and take an active leadership role in providing trust and safety in the workplace.
- Adopting clear, transparent, office-wide processes for hiring, on-boarding, promotions, lateral transfers, performance valuations, salary increases, and discipline within the organization. This should include centralizing key employment functions within the Human Resources department.
- Collecting and using data to add value to the company and to identify weaknesses.
- Requiring that all leaders, managers, and supervisors engage in efforts to improve workplace culture and to ensure a diverse inclusive workplace.
BOTTOM LINE: Eradicating sexual harassment in the workplace requires commitment from the upper echelons with the company, creation of clear anti-harassment policies, effective training, and consistent enforcement of such policies. If your company is committed to making a change, but not sure where to begin, the above recommendations provide a good starting check list for making such changes.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
