Top 5 Legal Mistakes by Startups

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Starting a startup company without creating basic legal protections for the product that it is going to sell is like opening a store and saying I’ll get the door lock installed later. Many a startup has failed because it ignored the legal realities of protecting the big idea from a disgruntled founder, a dissatisfied employee, or a shady competitor. Here are the top five legal mistakes that startups make that often cause them to fall apart or get bogged down in a legal dispute way before they start making money:

  1. Not defining the ownership structure (who owns how much).  Leaving this question for later, will inevitably cause a dispute among the founders and impede funding.  Look at it this way – if you can’t agree on the ownership structure, how will you be able to agree on any business-related decisions down the road? 
  2. Failing to create a legal entity (like corporation or LLC).  Formation of a legal entity will help protect the owners from liability, allow for business tax deductions, and help with obtaining funding down the road. 
  3. Failing to have everyone who works for the startup, including founders, assign their intellectual property to the startup entity.  The history is riddled with stories of falling outs between startup owners, where one of them leaves and takes his code/product/idea with him or her.  Having the right assignment agreement in place can prevent that from happening. 
  4. Failing to protect the idea or product with a rock-solid non-disclosure agreement. Any startup must have a non-disclosure agreement (NDA) to hand to anyone with whom it shares any confidential information.   Nothing illustrates the importance of an NDA like the recent ZeniMax v. Occulus/Facebook lawsuit where the court awarded ZeniMax $500,000,000 for breach of its NDA. 
  5. Failing to properly set up and document employment relationships.  The startups often cut costs by hiring independent contractors, when, in reality those individuals should be classified as employees.  While this might cut costs in the short term, in the long term, it can result in tax liability, fines and litigation from said employees.

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 LDolghih@GodwinLaw.com or (214) 939-4458.

The Truth Behind the Non-Disclosure Agreements

what-is-a-non-disclosure-agreementA lot of companies know they need to have non-disclosure agreements (NDAs) with their employees. So, they hand these agreements to their employees upon on-boarding, along with other hiring paperwork, then file them away in personnel files, and never look at them again until a problem arises.

While having a signed non-disclosure agreement checks off an important legal box, practically speaking it falls far short of educating employees about the importance of maintaining the confidentiality of the company’s proprietary information and trade secrets and the consequences of breaching their NDAs. 

So, the truth behind the non-disclosure agreements is that employees must be able to understand them and know the consequences of violating such agreements.  Therefore, in order to maximize the effectiveness of their NDAs, companies should do the following:

  1. Conduct training with employees, explaining what information the company considers confidential.
  2. Educate employees on what are possible ways in which they may violate their non-disclosure agreements, such as, for example, posting information on social media or discussing information with employees in an environment where non-employees may overhear confidential information.
  3. Have supervisors conduct one-on-one discussions with key employees about the type of confidential information they are working with and the appropriate security measures.
  4. Emphasize to the employees the importance of security measures such as not sharing computer passwords, locking sensitive files, and not sharing confidential information using insecure channels of communication.
  5. Institute a system where confidential documents are clearly marked as such.
  6. Educate employees about the consequences of violating their non-disclosure agreements.
  7. Finally, be prepared to punish the violations of the confidentiality agreements and make example out of those employees how knowingly or inadvertently disclosed confidential information, whether the punishment comes in the form of a termination or a lawsuit.

Bottom line is that if your employees do not know what the company considers confidential and are not afraid of the consequences of violating their non-disclosure agreements, they will not be deterred from violating their NDAs, whether intentionally or inadvertently.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation aLDolghih@GodwinLaw.com or (214) 939-4458. 

Special Rules for Non-Solicitation Agreements in the Financial Services Industry

2776The financial services industry has its own set of rules when it comes to enforcement of non-solicitation agreements.  In 2004, a handful of the largest financial firms signed a document called Protocol for Broker RecruitingSince then, over a 1,000 firms became signatories to the Protocol, agreeing to abide by the rules that are meant to curtail non-solicitation litigation among competing firms.  For those firms that are signatories (and many are not), as long as the departing broker follows the procedure laid out in the Protocol, s/he and the new employer are safe from being sued for violation of the broker’s non-solicitation agreement. However, the Protocol’s safe harbor only applies if the broker moves between two Protocol signatories. The first question is whether the companies involved are Protocol signatories.

Under the Protocol, a broker transitioning between signatory firms may take only the following information:  (1) client name, (2) address, (3) phone number, (4) email address, and (5) account title of the clients that they serviced while at the firm. Broker’s clients are only those companies and individuals to whom the broker provided services for which he would have received commission. A broker is prohibited from taking any other information or documents than the ones specifically listed in the Protocol. The second question is whether the broker took any information beyond what is allowed under the Protocol.

Furthermore, a broker must resign in writing, deliver the resignation to local branch management, and include with the resignation letter a copy of the client information that will be taken, including account numbers.  The broker’s compliance with the Protocol does not have to be perfect. S/he simply must show “substantial” and “good faith” compliance with the requirements.  The third question is whether the broker’s compliance was in good faith

To be in compliance with the Protocol, the broker may not start soliciting clients to move to the new firm while the broker is still engaged with the old firm while he is planning to move.  A broker also may not share client information at the new firm for solicitation by other brokers. The Protocol also does not protect corporate raiding, i.e. one firm poaching a group of employees or another firm’s entire branch.  The fourth question is whether the broker violated any of the express prohibitions of the Protocol

Finally, although a firm that is deciding whether to bring a suit against a former broker or a competitor firm must consider whether the Protocol applies, it should also analyze a variety of state and federal law claims that may be applicable in such a situation.  In particular, non-compete agreements and non-disclosure agreements may provide independent bases for enforcement even if the non-solicitation restraints are neutralized under the Protocol. Trade secrets misappropriation under the state or federal statutes as well as breaches of common law duties of loyalty may also be implicated. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation aLDolghih@GodwinLaw.com or (214) 939-4458.

Why Trade Secrets Protection is Even More Important in the Strong Economy

downloadIt is a well-known fact that when the economy improves, employee mobility rises as well. The most valuable employees – those with a specialized skill set and many years of experience in a particular industry – tend to stay within that industry while moving among competitors. Since such employees are usually given access to confidential information as part of their job duties, their move to a rival company often raises a concern of whether they will be sharing that information with their new employer. 

As 2016 was drawing to a close, a number of nationally known companies filed lawsuits to prevent their former employees from working for their competitors and/or sharing their confidential information. In December, Carolina Herrera sued Oscar De La Renta for hiring Herrera’s former Senior VP of Design despite her 6-month non-compete with Herrera. In January, Aria sued its Las Vegas rival, Cosmopolitan, and a former executive, alleging that she took confidential information about Aria’s high-roller clients in order to solicit them for Cosmopolitan. Earlier that month, Zynga, a mobile app gaming power house and creator of Farmville, sued two of its former employees for allegedly taking 14,000 files related to a new game Zynga was developing before going to work for its competitor. These are just a few examples that have received attention in the media.  In reality, similar situations develop all over the country on a daily basis.

In short, in the current market, any successful business, regardless of its size or industry, may be subject to trade secret theft not from foreign entities, but from its own departing employees. To prevent theft, or minimize the inherent damage that it carries with it, companies must have a process in place for protection of trade secrets and a plan of action for when theft is detected.

I have previously written about the simple steps any company can take to protect its trade secrets. In addition to these preventative steps, companies should be prepared to act quickly if a trade secrets theft is detected or suspected as time is of the essence, and not only from the practical standpoint of preventing dissemination of trade secrets, but from the legal standpoint as well. The more time passes between a company’s discovery of trade secret theft and any legal action, the less likely is the company to obtain an order from the court prohibiting the thief from using or disseminating the information.  Thus, being prepared to act quickly and having the resources to do so, can make e a difference in the company’s ability to stop the thief from sharing its confidential information with others.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at LDolghih@GodwinLaw.com or (214) 939-4458.

Non-Compete and Confidentiality Issues to Watch in 2017

Non-Compete Issues to WatchIn 2016, there have been some major developments involving confidentiality and non-compete agreements law, which are likely to have some repercussions in 2017. Here’s a summary of the most important issues that companies should be aware of going into the new year.

1. The Federal Defend Trade Secrets Act.  This statute, enacted in May 2016, creates a federal question jurisdiction for misappropriation of trade secrets, allows companies to seize their trade secrets out of the hands of competitors in some circumstances, and provides whistleblower protection to employees when certain conditions are met.  In 2017, as companies begin to take advantage of the statute, the courts will begin creating a new body of law interpreting its provisions.

2. SEC Enforcement. The SEC will continue to go after the companies whose confidentiality agreements and policies they may find to violate the SEC’s whistleblowing rules.  Making sure that confidentiality agreements include the language specified in the federal Defend Trade Secrets Act may help with SEC’s scrutiny.

3. Choice of Law Issues.  Choice of law issues in interstate non-compete and confidentiality disputes will continue to be of major concern to companies who have out-of-state employees. A number of states in 2016 passed statutes dramatically limiting non-competes and California passed a statute that prohibits application of other states’ laws to its employees’ non-compete agreements. Business owners should make sure that their non-competes are enforceable in the jurisdictions in which they intend to enforce them.

4. Disclosure of Trade Secrets During Litigation.  This will continue to be a major point of dispute in trade secrets and non-compete lawsuits. For example, earlier this year, the Texas Supreme Court addressed what a trial judge must consider before allowing a competitor’s corporate representative in the courtroom during the testimony that might reveal the adverse party’s trade secrets. Thus, in 2017, those companies that are engaged in trade secrets misappropriation litigation in Texas will need to consider how this balancing test will apply in their particular circumstances. Many other states’ courts faced a similar issue in 2016 and have fashioned their own rules regarding when the disclosure of trade secrets in litigation is appropriate. 

TexasBarToday_TopTen_Badge_VectorGraphicLeiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at LDolghih@GodwinLaw.com or (214) 939-4458.

Will Ban the Non-Competes Movement Lose Its Momentum During the Trump Administration?

donald_trump_rnc_h_2016It’s no secret that the Obama administration made a push, especially towards the end, towards limiting the use of non-compete agreements by employers around the country. The White House commissioned not one but two reports on this topic, both of which concluded that non-compete agreements stifle innovation, reduce job mobility, and negatively impact economic growth.  

Several states around the country seemed to join the White House’s view on non-compete agreements in passing statutes limiting their use. Illinois, for example, recently enacted the Illinois Freedom to Work Act, 5 ILCS § 140/1 et. seq., which prohibits private employers from entering into non-competition agreements with “low-wage employees.” Utah passed the Post-Employment Restrictions Act, Utah Code § 34-51-101 et seq., in March 2016, restricting non-competes’ length to 1 year.  Massachusetts tried to pass a similar legislation this year, but failed. And New York State Attorney General Eric Schneiderman announced that he will propose legislation in 2017 to limit the use of non-compete agreements in New York.  

Will this push to limit non-compete agreements continue during the Trump administration?  My prediction is that it won’t.  Of course, as with many other areas of the law, predicting what Trump will or will not do, is like reading tea leaves – nobody really knows. However, here are my top three reasons for thinking that the Trump Administration won’t pursue the same stance on non-compete agreements as the Obama Administration. 

First, Trump is a savvy businessmen and an employer. Therefore, he knows the value of non-compete agreements to employers and, without a doubt, has used them himself in his many businesses. 

Second, Trump has demonstrated that he is not above using such agreements in what some would view as overreaching situations.  For example, he did not shun from using non-compete agreements with the volunteers for his political campaign, even though the volunteers were not paid compensation for their services and probably performed tasks that did not involve any confidential information.

Third, Trump’s recent appointment of Andrew F. Puzder – the former CEO of a fast-food franchise – as the Secretary of Labor, suggests that his focus may not be on helping low-wage employees. Mr. Puzder had openly criticized the minimum wage increase that was supposed to go into effect this December and is commonly perceived as an ally for employers.  His position on ACA, minimum wage, and the joint-employer rule promulgated by the NRLB, is contrary to the position taken by the Obama administration. Thus, if he takes a 180-degree shift from the Obama administration’s stance on non-competes, such position won’t come as a surprise. 

Employers should stay tuned to see how the Trump’s policy on non-competes develops in 2017…

Leiza litigates unfair competition, non-compete and trade secrets lawsuits on behalf of companies and employees, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at LDolghih@GodwinLaw.com or (214) 939-4458.

Five Non-Compete Agreements Myths in Texas for Employees

share-knowledge-715x400The old saying “ignorance is bliss” may be true in many situations, but not when it comes to non-compete agreements in Texas.  Over the years, I have identified five most common misconceptions about such agreements from my discussions with clients, friends, and even other lawyers.  It’s time to dispel these common myths once and for all:

Myth #1: Non-compete agreements are not enforceable in Texas.  This is absolutely false. In Texas, non-compete agreements are enforceable if they meet certain requirements spelled out in the Texas Covenants Not to Compete Act.  Even if they do not meet those requirements, a lot of times, a judge can reform, i.e. rewrite, them to make them more “reasonable” and then enforce them.

Myth #2: Texas is a right to work state, so an employer cannot prevent employees from going to work for a competitor. This is also false. A “right to work state” simply means that employees in Texas cannot be fired for joining unions.   It has nothing to do with the enforceability of the non-compete agreements. So, while Texas is a right to work state, that doesn’t mean that the non-competes here are invalid. 

Myth #3: An employer threatening to fire an employee if s/he doesn’t sign a non-compete agreement makes such agreement invalid. This is false. Because Texas is an at-will employment state, an employer may change the terms of employment at any time, including adding non-compete restraints to an already-existing employment relationship. Thus, with rare exceptions, employers may force employees to sign non-competes under a threat of termination.

Myth #4: Since an employer never enforced its non-compete agreements, it won’t/can’t enforce it against a particular employee.  Again, this is false.  Employers typically consider many factors when deciding whether to enforce a non-compete agreement, so while they might decide not to enforce the agreement against one employee, they may be motivated to do so against another employee. 

Myth #5: If a non-compete agreement looks/sounds reasonable, there is no way to fight it. This is false. There are many defenses to non-compete agreements, and whether a particular non-compete agreement will hold up in court depends on the specific language of the agreement as well as employee’s job duties, length of employment, access to confidential information and a myriad of other factors.

The bottom line is that employees in Texas cannot afford to ignore non-compete restraints in their agreements and, when in doubt, should seek legal advice to understand the consequences of signing a non-compete agreement, or switching jobs or starting a competing business when subject to a non-compete.  Planning ahead is key when it comes to non-compete agreements in this state. 

Stay tuned for part II to find out common  non-compete agreements myths for employers. 

Leiza litigates unfair competition, non-compete and trade secrets lawsuits on behalf of companies and employees, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at LDolghih@GodwinLaw.com or (214) 939-4458.

 

A Texas Case Demonstrates Why Using Stock Non-Compete Agreements May Backfire

picLast month, a Texas Court of Appeals denied an insurance agency’s application for a temporary injunction against its former President because it held that the non-compete agreement, as written, did not restrict the President from competing. The agency tried to enforce the non-compete and non-solicitation agreement to prevent the President from soliciting the agency’s clients for the purpose of selling or marketing any products or services that would compete with the agency, and it was able to obtain a temporary restraining order (TRO).  However, the trial court refused to convert the TRO into a temporary injunction.

The reason the company lost at the temporary injunction hearing is because both the non-compete and non-solicitation clauses in the agreement stated that the President could not compete with or solicit the agency’s clients “during the term of CMC Account Development Sub Agent Agreement, and for a period of two (2) years after the termination of the Agreement.”  However, the agency’s representative and the President both testified that he was never a sub agent (i.e. sales person) for the agency and that he did not have a CMC Account Development Sub Agent Agreement.  

Basically, the non-compete and non-solicitation restraints were tied to the length of a non-existent agreement between the agency and the President. In most likelihood, the language was left over from the standard contract form that the agency used for its sales representatives, and was included in the President’s agreement due to oversight.  As the result, the company was unable to stop the President from competing. 

TexasBarToday_TopTen_Badge_VectorGraphicTakeaway:  This case demonstrates why the  companies should conduct an audit of their non-compete and non-solicitation agreements at least once a year to make sure that (1) the agreements are enforceable, (2) they have a legible copy of the agreements signed by both parties, and (3) the agreements will adequately protect the company if they have to be enforced. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete dispute, contact Leiza for a confidential consultation at LDolghih@GodwinLaw.com or (214) 939-4458.

DOL Overtime Rules Blocked Nationwide by a Federal Court in Texas

usdepartmentoflaborLast week, the United States District Court for the Eastern District of Texas issued a decision enjoining the Department of Labor (DOL) from enforcing its new overtime rules. State of Nevada et al. v. U.S. Department of Labor et al., case number 16-cv-00731.

The new overtime rules were set to go into effect on December 1, 2016, causing many companies to scramble to adjust their compensation systems in compliance with the new minimum salary threshold for administrative, executive, and professional exemptions, which was going to jump from $23,660 per year to $47,476 per year on December 1st. 

The court’s injunction requested in early October in two parallel cases filed by business organizations and 20 states, enjoins the Department of Labor from enforcing the new overtime rules.  

Takeaway:  In light of this injunction, businesses who are not in compliance with the DOL new overtime rules, are not going to be in trouble come December 1, 2016.  However, since this is a temporary injunction, employers are not 100% in the clear, as the court may still enforce the rules when the final hearing  in the cases takes place.  Thus, the injunction grants a temporary reprieve, but companies should continue to monitor the situation, which may last anywhere from several months to several years.  

Bottom line is that the injunction will remain in effect until a final resolution of the merits is reached or there is further order of the court, the Fifth Circuit, or the United States Supreme Court. 

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 LDolghih@GodwinLaw.com or (214) 939-4458.

Why the Appointment of Jeff Sessions as the New Attorney General May Lead to More Trade Secrets Litigation

jeff-sessions-827pngOn Friday, President-elect Donald Trump named Alabama Sen. Jeff Sessions as his pick for the next Attorney General. Sessions is a former U.S. attorney and current senator with lengthy experience with the Justice Department. He is also known as a pro-business conservative, who on numerous occasions has expressed a favorable view of corporate indictments of executives marred in white-collar crimes. 

Sessions co-sponsored the Federal Defend Trade Secrets Act, which became the law this year. The statute allows civil lawsuits to prevent or redress theft of trade secrets in addition to already-existing criminal penalties under 18 U.S.C. § 1832.  His previous publicly expressed views suggest that he will not shy away from indicting big companies and individuals for white-collar crimes, which include theft of trade secrets.  

For example, in 2010, during a confirmation hearing for the U.S. deputy general, Sessions questioned the candidate about the “dangerous” philosophy of not charging companies criminally because of concerns regarding the effect of such charges on employees and shareholders and stated that he “was taught that if they violate a law, you charge them.” 

Trade secret theft indictments have been on the rise over the past several years, prompting an almost unanimous passage of the Federal Defend Trade Secrets Act in the beginning of this year. The uptick in criminal litigation has been accompanied by a blooming civil litigation of trade secrets theft on state and federal level as well.  

Given Sessions’ prior remarks regarding his preference for corporate indictments in lieu of settlements or payment of penalties, as well as his expressed support towards protection of trade secrets, we can expect a rise in corporate indictments arising out of theft of sensitive information (especially when it is shared with foreign companies or states). This will put the spotlight on the rise of trade secrets theft in the country, will garner more publicity for such acts, and will in turn educate the US companies and business owners as to legal remedies available to them in the civil court to remedy trade secret theft.  

In short, Sessions’ expected tough stance on corporate crime, including trade secrets theft and the accompanying publicity will likely result in an increase in civil litigation in that arena as well. 

Leiza litigates unfair competition, non-compete and trade secrets lawsuits on behalf of companies and employees, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at LDolghih@GodwinLaw.com or (214) 939-4458.