Top 5 Non-Compete Cases in Texas in 2017

yearendAlthough the weather outside suggests otherwise, it is, indeed, December – a time traditionally reserved for reflection upon the year’s achievements.  So, let’s take a look at the top five most important non-compete cases in Texas in 2017.

  1. BM Med. Mgmt. Serv., LLC v. Turner (Tex. App.–Dallas, Jan. 10, 2017)*

Held: The employer failed to show a probable, imminent, and irreparable injury in breach of a non-compete case, as the employee had returned his computer and testified that he did not possess any papers or electronic files related to the employer’s business.

Why it made the Top Five list:  Early in each non-compete breach / trade secrets theft case, an employer may have an opportunity to examine the departed employee’s devices and confirm that its confidential information is no longer there.  This case demonstrates that taking advantage of that opportunity may result in the denial of a temporary injunction as it eliminates the probability of imminent and irreparable injury since the employee no longer has the employer’s confidential information.

2. In re Pickrell (Tex. App.–Waco, April 19, 2017)

Held: The employer failed to produce evidence necessary to obtain a Rule 202 pre-suit deposition to investigate whether its former employee had  honored his non-compete obligations.

Why it made the Top Five list:  A party contemplating a lawsuit in Texas may sometimes depose the potential defendant to determine if it has a legal claim against him/her.  This procedure is called a pre-suit or Rule 202 deposition.  In re Pickrell shows that an employer cannot depose a departed employee for the purpose of investigating whether he/she honored his non-compete agreement based on the employer’s suspicion that the employee may be violating the agreement solely because he is now working for a competitor. 

3. Sanders v. Future Com., Ltd. (Tex. App.–Fort Worth, May 18, 2017)

Held: Requiring an employee to repay training costs is not a covenant not to compete and is not subject to the requirements of the Texas Covenants not to Compete Act.

Why it made the Top Five List: This case establishes that Texas employers can deduct reasonable training expenses out of employees’ salaries if they leave before the employer is able to recoup its training costs.  Any overreaching, however, by employers may result in a violation of the Texas Covenants not to Compete Act.  See, for example, Rieves v. Buc-ee’s Ltd. (below). Additionally, any deductions need to be structured to comply with other laws, such as the Fair Labor Standards Act, and must be verifiable and not speculative. For more information, look here.

4. Rieves v. Buc-ee’s Ltd., (Tex. App.–Houston, Oct. 12, 2017)

Held: Requiring an employee to repay a portion of her salary upon termination is a “restraint on trade” in violation of the Texas Covenants Not to Compete Act. 

Why it made the Top Five List:  The Court’s decision shows that any provision in the employment agreement that restricts employee’s mobility must be analyzed through the lens of the Texas Covenants Not to Compete Act, not just non-compete clauses. For more information, look here.

5. Horizon Health Corp. v. Acadia Healthcare Co. (Tex.  2017)

Held: The employer failed to establish that the departed employee’s actions caused it lost profits because it could not prove that the customer that went with the departed employee would have signed a contract with the employer. 

Why it made the Top Five List:  Texas courts require that a company seeking damages based on lost profits produce evidence establishing that prospective customers would have done business with the company absent the defendant’s misconduct.  In this case, the company failed to show that a customer that it claimed it lost due to the departed employee’s actions would have signed a contract with that company had it not signed with the departed employee’s new company.

*Keep in mind that any decisions by the Texas Courts of Appeals may be appealed to the Texas Supreme Court, which may ultimately disagree with their findings.  Therefore, employers should always consult with a qualified employment lawyer to determine the current status of the law applicable to their particular dispute.

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 or fill out the form below.

 

 

The Fifth Circuit Rules that Federal Law Preempts Unfair Competition Claim Under Texas Law

Preemption

The Fifth Circuit Court of Appeals recently considered whether the federal copyright and patent laws (rock!) preempt  Texas common law claim of unfair competition by misappropriation (scissors!). The question reared its head amidst a web of lawsuits involving a medical device company, ThermoTek, and its former distributor, in which the company accused the distributor of obtaining its trade secrets involving a medical device he sold for them and proceeding to use the information to manufacture his own line of competing devices.   

The Fifth Circuit explained that the federal Copyright Act preempts a state law claim where (1) the intellectual property rights at issue are within the subject matter of copyright and (2) the state law protects rights in that property that are equivalent to any of the exclusive rights within the general scope of copyright. Meanwhile, the federal patent statutes preempt a state claim where its aim is to protect “the functional aspects of a product” because such claim would likely obstruct Congress’s goals by offering patent-like protection to intellectual property that its owner chose not to protect with a patent.  

In applying the above tests, the Fifth Circuit Court of Appeals held that the various aspects of the unfair competition by misappropriation claim in ThermoTek’s case against its former distributor were preempted either by the federal copyright or patent laws. 

The Copyright Act preempted the claim to the extent that ThermoTek alleged that the distributor misappropriated its written materials related to the medical device – here, manuals, reports, billing information, and other written documents – because such materials fell within the subject matter of copyright and the unfair competition by misappropriation claim did not qualitatively differ from a copyright claim.  Meanwhile, the federal patent law preempted the unfair competition claim to the extent it sought to protect the medical devices themselves or their functional aspects because the claim substantially interfered with the public’s enjoyment of unpatented aspects of the devices that ThermoTek publicly disclosed. 

TexasBarToday_TopTen_Badge_VectorGraphicBOTTOM LINE:  On a very basic level, the doctrine of preemption allows federal claims to preempt state law claims if they concern the same subject matter. If not analyzed strategically and addressed in the pleadings, this doctrine can wreak havoc on a party’s litigation strategy in a trade secrets lawsuit.  For example, in the ThermoTek lawsuit, the jury found in the company’s favor awarding it $6,000,000.00 in damages on the unfair competition claim. However, after the trial, the court found that the unfair competition claim was preempted by federal law and dismissed it leaving ThermoTek with $0.  In conclusion, trade secrets claims do not exist in a vacuum, but should be analyzed in the context of the existing intellectual property framework along with other types of IP.

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 or fill out the form below.

 

A Famous Dallas Chef Defeats an Injunction Based on “Unclean Hands” Defense, Can Now Use His Name

Foodie or not, if you live in Dallas, you have probably been to one of Kent Rathbun’s restaurants.  And if you read Dallas Observer, you have probably read about Rathbun’s ongoing legal battle with a former business partner, which involves the right to use Rathbun’s name and likeness in the restaurant industry.  If not, this D Magazine article can you fill you in on why Rathbun’s name is a big deal, and this Dallas Observer article can catch you up on the acrimonious relationship and the arising legal woes. 

While the case is ongoing, this past Friday, the Dallas Court of Appeals issued a ruling in Rathbun’s favor on the basis of the “unclean hands” defense, which is often alleged, but rarely supported, in non-competition disputes.  

By way of background, back in 2009, Rathbun assigned the rights to his name and likeness to an entity he co-owned with his then-business partner. After they parted ways, Rathubun filed a lawsuit seeking a declaration from the Court that the assignment was a “covenant not to compete” and was unenforceable because it failed to comply with the requirements of the Texas Covenants Not to Compete Act (see my previous post on the requirements here). 

In response, the former partner sought an injunction from the Court prohibiting Rathbun from using his name or likeness while the parties litigated their dispute based on the assignment agreement. During the temporary injunction hearing, Rathbun introduced (1) deposition testimony of his former business partner regarding his knowledge of Rathbun’s lack of business sophistication and his fiduciary duties owed to Rathbun and (2) deposition testimony that the company to which Rathbun assigned the rights to his name might have assumed some liabilities without full disclosure to Rathbun, even though he was a part-owner at that time.

The trial court denied the injunction, allowing Rathbun to keep using his name as long as he did not disparage his former partner, and the Dallas Court of Appeals upheld the denial. While it refused to consider whether the assignment agreement was a “covenant not to compete” covered by the Texas Covenants Not to Compete Act, it did find that the deposition testimony described above presented sufficient evidence to support the “unclean hands” defense asserted by Rathbun. 

The unclean hands defense “allows a court to decline to grant equitable relief, such as an injunction, to a party whose conduct in connection with the same matter or transaction has been unconscientious, unjust, or marked by a want of good faith, or one who has violated the principles of equity and righteous dealing.”  Here, the Court found that there was some evidence that the company that was now trying to enforce the assignment acted inequitably when it failed to fully disclose to Rathbun that it had assumed certain liabilities, which burdened him as a part-owner of the company.  Consequently, its unclean hands prevented it from obtaining an injunction against Rathbun.

BOTTOM LINE: While the Court of Appeals’ ruling in this case is not a final decision on the merits of this defense and can still be appealed to the Texas Supreme Court, it does provide a glimpse into what type of behavior by a party who seeks an injunction may rise to the level of “unclean hands” such that the party is prevented from getting injunctive relief. 

Companies should be aware that when they seeks to enforce a non-compete agreement, their own behavior can often be scrutinized for any signs of unfair or bad faith conduct that may be used to deny the injunctive relief.

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 or fill out the form below.

Buc-ee’s Repayment Provision in the Employment Agreement Is Declared Unlawful, Likened to Indentured Servitude

Buc-ees 2Last month  I wrote about how Texas employers can require employees to repay the employers’ training expenses related to those employees, even if that means repaying an equivalent of 1/3 of an employee’s salary.   I culminated my article cautioning the companies to make sure that their repayment requirements in the employment agreements do not violate the Texas Free Enterprise and Antitrust Act of 1983. 

Later the same week, the Houston Court of Appeals found that Buc-ee’s did just that by requiring its assistant manager to repay more than $66,000 in salary for leaving her at-will job to go work for another company, which was not even a competitor of Buc-ee’s. 

Here’s a quick look at what Buc-ee’s did, what the Court of Appeals thought of it, and the lessons that Texas employers can take away from this case.

Buc-ee’s’ Employment Agreements

In 2009, Rieves came to work as an assistant manager for Buc-ee’s. The wages arrangement was such that 70% of her salary would be paid on hourly basis and 30% would be paid in flat fee, translating into $14 an hour and a fixed monthly bonus of $1,528.67 (the “Additional Compensation”).

This 2009 Employment Agreement specifically said that Rieves was an “at-will employee” but also stated that she was “required to work” for Buc-ee’s a minimum of five years and had to provide the employer with a 6-month written separation notice.  If she failed to meet these two requirements, regardless of the reason, she had to repay all of the Additional Compensation.

In 2010, Rieves entered into a new employment agreement with Buc-ee’s that contained similar requirements (4 year term and 6-month separation notice) and stated that if Rieves left before 2014, she had to repay a portion of her salary under the 2010 Employment Agreement and the Additional Compensation under the 2009 Employment Agreement. Thus, under the 2010 Employment Agreement, the longer Rieves worked for Buc-ee’s, the more of  her salary she would have had to pay back. 

The Court of Appeal’s Analysis

In looking at the employment agreements, the Court first and foremost noted that Rieves was an “at-will employee,” which, under the long-standing doctrine in Texas, meant that her employment could be terminated by her or Buc-ee’s for good cause, bad cause, or no cause at all. 

Furthermore, the repayment provisions in Rieves’s employment agreements imposed a severe economic penalty on her if she exercised her right as an at-will employee to leave Buc-ee’s.  Therefore, these provisions had to comply with the Texas Covenants not to Compete Act in order to be enforceable.  They did not.

The repayment provisions penalized Rieves even if Buc-ee’s fired her without a cause and they were not related to Buc-ee’s legitimate business interest because they penalized Rieves even if she went to work for a company that was not Buc-ee’s competitor.  Therefore, the repayment provisions were an unfair restraint of trade in violation of the Texas Free Enterprise and Antitrust Act and were not enforceable.

The Lessons for Texas Employers

TexasBarToday_TopTen_Badge_VectorGraphicWhile Texas recognizes the freedom of parties to contract, employers cannot enter into contracts that are illegal.  Under the Texas Free Enterprise and Antitrust Act, “every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.”  Non-competition agreements that are reasonable and are designed to protect a legitimate business interest are an exception to the rule.  Any other restraint in an employment agreement that prohibits an at-will employee from leaving his or her current employer or restricts such employee’s ability to sell his or her skills in the marketplace is likely to violate the Texas Free Enterprise and Antitrust Act.

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 or fill out the form below.

Can an employer require employees to repay training costs in Texas?

GiveBack-1000x360Earlier this year, the Second Court of Appeals ruled that an employee had to repay 1/3 of his salary to the employer as a reimbursement for training costs when he decided to leave.  The employee argued that the reimbursement agreement contained in his offer letter was unconscionable (legal term for “patently unfair”) and against public policy, but the Court of Appeals rejected both of these arguments in upholding the trial court’s award.

In Sanders v. Future com, Ltd., Sanders signed an offer letter from Future com that stated that he would be responsible for repaying the company for any training provided to him by Future com if he voluntarily left the company within one year after completing such training.  The repayment included travel expenses and “salary paid for study or course time.”  Sanders left Future com within twelve months of receiving certain training but refused to repay $4,003.39 in travel costs and expenses and $34,476.96 in salary that Future com paid Sanders while he was being trained.  The company sued him for breach of the employment agreement.

Sanders argued that the training reimbursement provision was not enforceable for a host of different reasons, but most notably, because it was unconscionable and against public policy.   The Court of Appeals rejected both of the reasons findings that:

  1. The repayment provision was meant to protect the company from the loss of Sanders’ employment before it had the opportunity to recoup its costs from training him.
  2. The company had a legitimate interest in making sure that it was not training employees for its competitors. 
  3. The company did not have to show that it actually suffered loss form Sanders’ departure. 
  4. The repayment provision was clear and understandable and was not hidden so as to create an “unfair surprise” for Sanders.
  5. Since training repayment provisions have been found to serve public good, this provision was not against public policy. 

TexasBarToday_TopTen_Badge_VectorGraphicTAKEAWAY FOR EMPLOYERS: Generally, training repayment provisions in employment agreements are enforceable in Texas.  Employers should make sure that such clauses are written in a clear and understandable manner and are not hidden within employment contracts.   

When determining the parameters of the reimbursement policies, companies should make sure that they comply with the Texas Texas Free Enterprise and Antitrust Act of 1983, which prohibits the restraint on trade.  In the case above, it appears that the company provided significant amount of training that took up to 1/3 of employee’s working time.  In such circumstances,  a reimbursement clause may be more enforceable than where a company provided minimal training.  Thus, when drafting a training reimbursement policy or agreement, it is best to consult with a qualified attorney to make sure that it is enforceable.

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 or fill out the form below.

Is Your Non-Compete Agreement Enforceable?

stevecarelEvery state has its own rules about the enforceability of non-compete agreements, with many technical requirements, carve outs for certain industries like medical and technology, and various presumptions or public policy-driven rules regarding employers’ ability to limit competition from former employees.

Recently, I’ve been receiving a lot of inquiries from Texas employers or companies that are moving to Texas regarding: (1) whether non-compete agreements are enforceable in Texas?  (2) what types of non-compete agreements are enforceable in this state?  and (3) when should I enforce my non-compete agreement against a departed employee? Many of these companies already have non-compete agreements with their employees, but are worried about their enforceability in Texas courts. 

I have previously written about how to enforce non-compete agreements in Texas, here, here, and hereSo, the answer to the first question is a resounding “Yes, non-compete agreements are enforceable in Texas.”

The answer to the second question is that, generally, only non-compete agreements with reasonable geographic, time and scope restrictions are enforceable in Texas. 

Assuming a positive answer to the first two questions, the answer to the third question depends on the circumstances of a particular departed employee and the answer to the following questions:

  • What position is the employee in at your company? C-Suite? Sales? Another position that gives him or her access to sensitive information within the company?
  • What special skills the employee has and what specialized training the employee has received in that position? 
  • Is the company where the employee is going a competitor of your company?
  • What position is the departed employee going to take at his or her new place of employment? Is it the same or similar position to what he or she was doing at your company?
  • How likely is it that the employee will use the confidential information he learned while working for you at his new job?
  • What activities does your non-compete prohibit the employee from doing?
  • For how long?  Remember, it must be reasonable.
  • What area does it cover? Reasonableness is key. 
  • Did you provide the right type of consideration for the employee’s promise not to compete?
  • Do you have a non-solicit agreement that will protect your company without having to enforce the non-compete agreement?

All of these factors will come into play if you decide to enforce a non-compete agreement in Texas. Additionally, you will need to consider where to file the lawsuit, the evidence that you will need in order to obtain a temporary restraining order against the employee, and a host of procedural and discovery issues that come along with litigating a non-compete case. 

Bottom Line: Enforcing non-compete agreements is as much of a business decision as it is a legal one.  Having a non-compete agreement that is legally enforceable, allows you to decide whether it makes business sense to enforce it against a particular employee.  Without a legally enforceable non-compete agreement, however, the business reasons may not even matter. 

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 or fill out the form below.

2017 Welcomes Changes in Non-Compete Laws

imagesThis year, California, Illinois and Nevada amended their non-compete statutes to help protect the employees’ right to change employers vis-à-vis the employers’ right to restrict unfair competition. Idaho, Maryland, Massachusetts, New York, and Washington considered various amendments, but were unsuccessful in signing them into law, which means they will probably try again in 2018.   

California

An amendment to the California Labor Code, which became effective on January 1, 2017, prohibits employers from requiring employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where an employee was individually represented by a lawyer in negotiating his employment contract.

Penalties apply to an employer who requires a California employee who primarily works and resides in California to sign “as a condition of employment,” an agreement with a provision that requires the employee to adjudicate disputes arising in California in a forum outside of California or under the law of another state.

Illinois

Illinois passed the Freedom to Work Act, effective January 1, 2017, which bars non-compete agreements for workers who earn less than the greater of the federal, state or local minimum wage, or $13.00 an hour.

Nevada

In June of this year, Nevada amended its non-compete statute to state that a non-competition covenant may not restrict a former employee from providing services to a former customer or client if: (1) the former employee did not solicit the former customer or client; (2) the customer or client voluntarily chose to leave and seek the services of the employee; and (3) the former employee is otherwise complying with the non-competition agreement.

The statute also now provides that if there is a reduction in force, reorganization, or similar restructuring, the laid-off employee’s non-competition agreement is only enforceable during the time in which the employer continues to pay the employee’s salary, benefits, or equivalent compensation to the employee.  

Finally, the statute now allows “blue-penciling” and gives the Nevada courts the ability to strike or modify unreasonable terms or provisions from a non-compete agreement and enforce the revised agreement.

More and more states are trying to strike a balance between the workers’ right to change employers and the companies’ right to protect their business interests and goodwill. The end result is a patchwork of non-compete statutes that impose different requirements on employers that operate in different states.  Companies that have employees in several states should consult with legal counsel to make sure that their post-employment covenants are enforceable with respect to all of their employees, regardless of the location.

Leiza represents companies in business and employment litigation.  If you need assistance with a business or employment dispute contact Leiza for a confidential consultation aLeiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

 

Can an Employee Prepare to Compete with His Employer While Still on the Employer’s Payroll?

non-compete-agreement-lawyer-philadelphiaIn Texas, employees have the right to resign from employment and go into business in competition with their employers (absent a non-compete agreement). There is nothing legally wrong in engaging in such competition or in preparing to compete before the employment terminates.

Thus, as a general rule, an employee can prepare to compete with the employer while still on the employer’s payroll.   There are several caveats to that, however:

  1. Employees cannot use their employers’ resources – such as company-provided computers – to engage in the preparatory activities.
  2. Employees cannot prepare to compete while on the clock.
  3. Employees cannot use their position within the company and their knowledge of the company’s trade secrets and confidential information to divert business to their new company or to create business opportunities for their new business.

Where an employee is discovered to have engaged in some activities in anticipation of his new endeavor while still working for his old employer, the question often arises whether he was preparing to compete or actually competing with the employer.

For example, registering a company with the Secretary of State is a clearly preparatory activity.  However,  advertising the formation of the company on social media or creating a website announcing that the company will be opening soon can be viewed as a competitive activity.  In illustration, the Pennsylvania Superior Court recently held that a company which set up a Facebook page announcing that it was going to open a veterinary clinic “soon” and provided a link to a map showing the location of the future clinic was not merely “preparing to compete” but was actually competing and soliciting customers.  The court explained that:

Upon review of that document, it is obvious that, collectively, the [Facebook] posts, “coming soon” announcement, and map directions, are tantamount to a solicitation of past or future clients in contravention of the non-compete clause. The resounding purpose of the Facebook page, and the attendant communications therein, was to inform the followers of the page, including former clients, that he intended to open a new clinic and to keep them apprised of his progress. There is but one reason for O’Laughlin to create the O’Laughlin Veterinary Services Facebook page and maintain contact with former clients: to solicit their business. 

TexasBarToday_TopTen_Badge_VectorGraphicBOTTOM LINE FOR EMPLOYERS: While employees have the right to prepare to compete before their employment is terminated, they cannot cross the line and actually compete with their employers.  If you learn that your employee is announcing on social media or online that he or she is getting ready to go into competition with your company, it might be a good time to call an employment lawyer.

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 or fill out the form below.

Texas Statute Prohibits Firing and Discrimination Against Employees Who Evacuate

2337592_630x354Texas employers may not discharge or otherwise discriminate against an employee who “leaves the employee’s place of employment to participate in a general public evacuation ordered under an emergency evacuation order.” Tex. Labor Code § 22.002.

An emergency evacuation order means an official statement issued by a governmental entity recommending the evacuation of all or part of the population of an area stricken or threatened with a disaster. Tex. Labor Code § 22.001(2). 

You can find a list of emergency evacuation orders related to Hurricane Harvey here.

An employer who violates the statute will be responsible for any lost wages or employer-provided benefits incurred by the employee and will have to reinstate the employee in the same or equivalent position of employment. Tex. Labor Code § 22.003.

There is an exemption for emergency services personnel (fire fighters, police officers and other peace officers, emergency medical technicians, and other individuals who are required, in the course and scope of their employment, to provide services for the benefit of the general public during emergency situations) if the employer provides adequate emergency shelter for such employees. Tex. Labor Code § 22.004.

Because the statute covers “recommended” evacuation, it is unclear whether it covers both “mandatory” and “voluntary” evacuations orders.  To be safe, employers should treat those the same.  The statute is also ambiguous as to whose evacuation orders are covered and simply states that it applies to orders issued by any “authority of this state.” 

BOTTOM LINE Before discharging, demoting, disciplining, or otherwise discriminating against an employee for participating in the evacuation related to Hurricane Harvey, employers should gather specific information related to that employee’s reasons for absence and determine whether the employee falls within the statute’s protections. Meanwhile, the evacuated employees’ pay should be determined in accordance with the Fair Labor Standards Act (FLSA) rules.

Leiza represents companies in business and employment litigation.  If you need assistance with a business or employment dispute contact Leiza for a confidential consultation aLeiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Failure to Define “Fee” in a Contract Results in a $5.5M Award Against Yahoo!

Bracket.jpgIn 2014, Yahoo! wanted to sponsor a perfect bracket contest in connection with the NCAA Men’s Basketball Tournament, with a $1 billion prize for any contestant who correctly predicted the winner of all 63 games. It entered into a contract with SCA Promotions, Inc., which provides risk management for marketing and prize promotions.  

The contract contained two invoices at the end, according to which the fee for the entire contract was $11 million.  It also contained a cancellation fee that Yahoo! would have to pay SCA if it cancelled the contract before a certain date. 

After signing the contract, Yahoo! decided to co-sponsor another $1 billion perfect bracket contest with Warren Buffett and Berkshire Hathaway and cancelled the contract with SCA.  

SCA sued claiming that Yahoo! owed it $5.5 million – a half of $11 million – as the cancellation fee.  Yahoo! argued that the cancellation “fee” meant half of the amount that Yahoo! had prepaid on the contract in the beginning, i.e. $550,000. The parties’ arguments came down to the interpretation of the following provision in the contract:

Cancellation fees: Upon notice to SCA to be provided no later than fifteen (15) minutes to Tip-Off of the initial game, Yahoo may cancel the contract. In the event the contract is cancelled, Yahoo will be entitled to a refund of all amounts paid to SCA subject to the cancellation fees set forth in this paragraph. … Should the signed contract be cancelled between January 16, 2014 and February 15, 2014, a cancellation penalty of 50% of the fee will be paid to SCA by Sponsor. . . 

The Fifth Circuit Court of Appeals ruled in favor of SCA finding that the cancellation “fee” referred to the entire fee for the contract, i.e. $11 million.  In reaching that conclusion, it looked at the entire contract, analyzed other provisions that mentioned “fee,” and reached the conclusion that Yahoo’s! argument rendered other provisions in the contract meaningless; therefore, it could not be the right interpretation. 

BOTTOM LINE:  When contractual language is not clear, a lot of times, courts will look at the intent of the parties in entering into the contract and analyze the entire contract to make sure that its interpretation of the disputed clause does not contradict or render other parts of the contract meaningless. Thus, the issue of contractual interpretation is rarely as straightforward as the parties think.

If you end up with a contract that is less than clear and you face potential litigation, you should consult with an attorney experienced in contract disputes to determine how likely is your interpretation to hold up in court. 

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 or fill out the form below.