North Texas Legal News
Original Commentary on Texas Business and Employment Law
Top 10 Mistakes Employers Make With Non-Compete Agreements
While helping hundreds of companies to enforce their non-compete agreements and advising many employees on how to get out of them, I noticed that most companies make the same mistakes when it comes to drafting and enforcing their non-compete agreements. In this post, I share the top ten mistakes that often end up costing Texas companies their clients, goodwill, and a ton of legal fees:
- Not signing non-competes with employees. It seems like a no-brainer, but there are still a lot of Texas companies out there that do not require their employees to sign any non-compete agreements. This is a mistake. A reasonable non-compete agreement can benefit both the company and the employees. A company is more likely to invest into training of an employee with a non-compete agreement, and employees can still work in their chosen field after leaving the employer, subject to a reasonable geographic limit.
- Having restrictions that are too overbroad. Overreaching in non-compete agreements can backfire in that employees feel like they have no choice but to violate them in order to make a living and courts are not likely to grant a temporary retraining order or a temporary injunction on a non-compete that is clearly overbroad.
- Not having a legitimate business interest to protect. A Texas employer must share its confidential information or goodwill with an employee in order to create an enforceable non-compete agreement. An hourly employee, such as a sandwich-maker or a mechanic, is not going to have access to any confidential information or specialized training. Thus, most of the time, there would be no legitimate business interest in having such employees subject to a non-compete. Therefore, before asking an employee to sign a non-compete agreement, employers should ask, “What specific business interest am I trying to protect?”
- Making all employees execute the same non-compete agreement. Requiring the same 2-year / 200-mile non-compete agreement for sales people, secretaries, and C-level executives raises a red flag that the company is simply trying to prevent competition and is not protecting a legitimate business interest. Employees that perform different tasks or serve different purpose should have different non-compete restraints depending on what they do for the company.
- Not providing proper consideration. Different states require a different type of consideration for non-compete agreements. In some states, just a promise of future employment is sufficient. In other states, an employer must pay money to an employee in exchange for the promise not to compete. Texas companies should make sure that their non-competes are supported by the right type of consideration in the state where they plan to enforce the non-compete agreements.
- Not having new consideration. When asking an already-existing employee to sign a non-compete agreement, employers must provide new consideration for such agreement. For more information, see my previous post here.
- Not enforcing non-competes. Once the proper non-compete agreements are in place, companies should make it a policy to enforce them. Otherwise, the agreements lose their effectiveness with employees, who quickly learn from co-workers that the company never enforces the agreements.
- Not enforcing a non-compete fast enough. This is one of the gravest mistakes for companies in terms of consequences. The longer a company waits to seek a temporary restraining order against an employee who is violating his or her non-compete agreement, the more likely the court is to deny the restraining order because the company cannot show an “imminent” and “irreparable” injury. In other words, if the company has not tried to stop the bleeding, how bad could th bleeding really be and does the court really need to enter an emergency order?
- Not providing confidential information. As mentioned above, the proper consideration for a non-compete agreement in Texas includes a company’s promise to provide confidential information to the employee. Companies, however, must deliver on that promise and actually provide such confidential information in order to make their non-compete agreements enforceable.
- Not saving an electronic version of the signed non-compete agreement. In this day and age, when there is an electronic version of virtually every document, I often encounter the situation where an employee took the only signed copy of the non-compete agreement before leaving his or her employment. Given how popular and basic this tactic is, employers must make sure that they save an electronic signed version of their non-compete agreements in a location where employees cannot access and delete them or take them.
BOTTOM LINE: Spending some money at the front end of an employment relationship to make sure that the company is protected with a valid non-compete under Texas law can save a company ten times that amount in legal fees when the times comes to enforce the non-compete agreement.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Employees’ Unauthorized Copying of Electronic Files is Not Theft in Texas
When a company learns that an employee took or copied confidential materials, it’s not unusual for the company to sue the employee for misappropriation of trade secrets and theft of trade secrets under the Texas’s civil theft statute. A recent federal court decision out of the Southern District, however, serves as a reminder that employers should carefully analyze what exactly the employee took and/or copied before tacking on a claim under the Texas Theft Liability Act (TTLA) to their lawsuit.
In BHL Boresight, Inc. v. Geo-Steering Sols. Inc., BHL accused the defendants of stealing: (1) software; (2) bitlocks; (3) data; and (4) user guides for BHL’s software program. It claimed that these items constituted “property” under Texas Penal Code §33.03 and that defendants committed civil theft of this property by unlawfully appropriating it without BHL’s effective consent.
Defendants argued that the civil theft claim must be dismissed because “general theft applies to unique documents and not copies of documents,” and the district court agreed finding that “consensus appears to be that if the plaintiff continues to possess and control originals of the subject property, he cannot show that the defendant possessed the requisite intent to deprive” the owner of its property. And without intent, there is no claim for theft.
The district court ruled that because BHL retained the originals of its user guides and the software program, its theft claim related to these two items failed. However, bitlocks and the data generated by the software were a different matter. Because bitlocks were physical USB devices that allowed users to access BHL’s software, they were neither “documents” nor “originals” and, therefore, when the defendants took them, they had the intent to deprive BHL of these devices. Similarly, the data generated by BHL’s software was unique because the software generated different data depending on which oil & gas well it was applied to. Therefore, the court did not dismiss BHL’s claim with respect to the theft of bitlocks and the software data.
BOTTOM LINE FOR COMPANIES: Before pleading a Texas Theft Liability Act claim against an employee for stealing the company’s data, information, documents, or other property, the company should make sure that there is at least some evidence of the employee’s intent to deprive the company of its property. While unauthorized copying of information or files may not be sufficient to bring a theft claim, the company may have other claims under Texas and federal law that it may use to remedy the harm from the employee’s actions.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Enforcing Non-Compete Agreements in Arbitration in Texas
When it comes to enforcing non-compete agreements, companies usually want to stop the bleeding right away. This is usually done by obtaining a temporary injunction in court, which preserves the status quo and prevents the departed employee from competing with the former employer while the parties sort out whether the agreement is enforceable against that employee, whether its restraints are reasonable, and what damage has been caused by the employee’s competition in violation of the non-compete agreement.
For those companies that have arbitration agreements with their employees, a noncompete violation will usually have to be arbitrated. And while an arbitration may generally provide a faster, cheaper, and more confidential route for resolving a noncompete dispute than litigation, it can be an inferior process when it comes to obtaining a temporary injunction in a situation where time is of the essence.
While the relevant arbitration rules usually allow an arbitrator to grant a temporary injunction or enter some sort of preliminary relief, a company that wishes to obtain such relief must first select an arbitrator and then schedule a hearing. These steps can result in a loss of precious time – days or weeks during which the departed employee has the time to ramp up the competition, destroy relevant evidence and cover his tracks. In contrast, the same company may obtain a temporary restraining order in court the same day it files a suit to enforce the non-compete agreement.
For that reason, every arbitration agreement should have a carve out for injunctive relief – the clause that allows a company to obtain a temporary restraining order as soon as it learns of a violation of the non-compete agreement. Once the company has the court order in hand, it may safely proceed with an arbitration and take its time to investigate the violation and lay out its case.
In deciding whether to arbitrate a non-compete dispute, seek a temporary restraining order from a court, or both, companies should consider the following issues:
- Does the company arbitration agreement have the necessary language to allow the company to obtain a temporary relief in court?
- Will the company be waiving the arbitration clause by obtaining emergency relief in court? Hint: A recent case from the Houston Court of Appeals held that seeking injunctive relief in court does not waive an arbitration clause if its purpose is to simply preserve the status quo. See Fisher v. Carlile, et al.
- Should the company file a claim of arbitration first and then seek an injunction in court or vice versa?
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.
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.
