North Texas Legal News
Original Commentary on Non-Compete and Trade Secrets Law
Can an Employee Prepare to Compete with His Employer While Still on the Employer’s Payroll?
In 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:
- Employees cannot use their employers’ resources – such as company-provided computers – to engage in the preparatory activities.
- Employees cannot prepare to compete while on the clock.
- 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.
BOTTOM 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
Texas 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 at Leiza.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!
In 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.
Can You Fire an Employee for Participating in Racist Behavior or Speech Off-the-Clock?
Following the events in Charlottesville, Virginia involving a “Unite the Right” rally organized by white nationalist groups protesting the removal of a statue of Robert E. Lee, several participants in the rally were fired by their employers.
Immediately, the media and internet went abuzz with discussions about employees’ freedom of speech and the right to express their opinions, however repulsive they might be to the society, contrasted with the employers’ right to fire employees who damage the company’s reputation and destroy its goodwill.
Business or moral dilemmas aside, as a general rule, employers can fire employees for off-the-clock conduct or speech. While employees have the right to express their opinions under the First Amendment, their employers have the right to fire them for expressing such opinions. In other words, the freedom of speech, when it comes to employment matters, is a myth!
As with any area of the law, there are several exceptions to this rule:
- California, Colorado, North Dakota and New York have off-duty conduct laws that protect employees from being fired for legal activities in which they engage on their own time;
- California also prohibits employers from firing employees for political activities;
- Some off-the-clock speech may be protected under the National Labor Relations Act, which protects employees’ right to discuss their employment conditions;
- Public employees may have more (but not much more) freedom of speech rights;
- Employment contracts that have “for cause” termination provisions may affect the employer’s right to fire an employee for off-the-clock statements or behavior.
BOTTOM LINE: The above exceptions are limited, so the general rule that employees have no free speech rights applies in most circumstances, including those where an employee participates in a pro-Nazi march or some other racist activity or speech that brings negative media attention to the company and damages its customer goodwill.
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 or fill out the form below.
When Stopping Competition with A Temporary Injunction, It Pays To Be Precise
Even the best non-disclosure and non-competition agreements are not worth anything if not enforced correctly. A lot of times a company rushes to court asking the judge to stop a former employee or his new employer from using the company’s confidential information or soliciting its customers based on the agreements that the former employee had signed with the company.
However, in an attempt to obtain quick relief at the courthouse, companies often end up using formulaic and boiler-plate language that is supposed to cover every possible violation such as:
- Plaintiff asks the Court to prohibit Defendant from soliciting or conducting business with Plaintiff’s customers or
- Plaintiff asks the Court to restrain Defendant from using the company’s confidential information or trade secrets
Such requests, while appearing very reasonable at first blush, are often rejected by the courts as not being specific enough to let defendants know what they can and cannot do. For example, how is the defendant supposed to know who company’s customers are, especially, if there area thousands of them? Or, if the order does not define trade secrets, how can the defendant know what is it that he is prohibited from using or disclosing?
Defining the restrictions on competition in a precise manner while covering all possible violations is key to a successful injunction; however, the required degree of specificity may very from court to court. For example, recently, a court of appeals in Super Starr Int’l, LLC, et al v. Fresh Tex Produce, LLC, et al., dissolved an injunction issued by the trial court and remanded (sent) the case back to the trial court instructing it to reissue the temporary injunction order that defines “soliciting” not to include mass advertising, as well as redraft restrictions by defining “customers,” “accounts,” “trade secrets” and “confidential information.”
BOTTOM LINE: When seeking a temporary injunction in a case involving unfair competition, non-compete or non-disclosure agreement breaches, shooting for the moon so you can land on the stars is not a good approach. Rather, the party seeking an injunction should aim as closely as possible to the particular star on which it wants to land.
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 or fill out the form below.
Top Five Posts In 2016
While most of my blog posts relate to non-compete and trade secrets issues, I do blog about general commercial and employment issues as well since I have a broad employment and business litigation practice. According to you, here’s the top five posts in 2016:
- Practical Guide to Enforcing Non-Compete Agreements in Texas (Part II)
- Common Defenses to a Breach of Contract Claim in Texas
- Foreign Plaintiff v. Foreign Defendant Destroys Diversity even if the Plaintiff’s Principal Place of Business is in Texas
- 5 Common Mistakes That Companies Make with Non-Disclosure Agreements
- Providing References for a Former Employee – What Can an Employer Say in Texas?
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 or fill out the form below.
Is a Client List a Trade Secret in Texas?
I’ve been contacted by many a business owner saying, “my employee left, he had a confidentiality agreement, and now he is contacting my customers on behalf of his new employer. Can I stop him?”. The answer to that question, of course, depends on several factors. One of them is whether the business owner’s client list qualifies as a “trade secret” in Texas.
Under the Texas Uniform Trade Secrets Act (“TUTSA”), a “list of actual or potential customers or suppliers” of a company qualifies as a trade secret as long as: (1) its owner, i.e. the company, took reasonable measures to keep it secret and (2) the list has an economic value because it is not generally known and cannot be easily determined by another person.
Thus, a client list is not automatically a trade secret. Instead, a company must establish certain things at the temporary injunction hearing in order to get a court order prohibiting a former employee from contacting its clients on the ground that its client list is a trade secret.
Recently, a Texas Court of Appeals in Cooper Valves, LLC, et al. v. Valvetechnologies, Inc., dissolved an injunction that prohibited a former employee from “possessing, copying, selling, disclosing, or using” any information about his former employer’s 1800 customers listed on the exhibit attached to the injunction order. The employer in that case, submitted under seal a list of all of its customers and asked the court to order the former employee not to use any information about those customers in his new job. The list, however, included only the names of the companies, and not the names and contact information for the key decision-makers. It also included many pre-existing customers of the former employee’s new employer.
The Court of Appeals voided the injunction finding that it was overboard and that the company did not prove that company names qualified for trade secret protection. Thus, the owner of the client list failed to prove that his particular client list, consisting of just the company names, was a trade secret.
BOTTOM LINE: Business owners in Texas should make sure that they take reasonable measures to protect the secrecy of their client lists and, when push comes to shove and they must seek a court order preventing a former employee from using such a list in their new job, must be ready to establish the necessary requirements under the Texas law proving that the information contained in their client lists qualifies for trade secret protection.
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 or fill out the form below.
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 or fill out the form below.
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 or fill out the form below.
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.
