It is not uncommon for employers to include a non-compete/non-solicitation (NCNS) covenant in their benefit plans or stock option agreements. Either agreement can then make the payments due to the employee conditional upon his or her compliance with the NCNS. In those cases where the payments are scheduled to be made after the employee leaves, such arrangement provides an extra incentive for the employee to comply with the NCNS covenant.
The employers that chose to follow this route, however, need to be aware that a payment made to an employee pursuant to a benefit plan or a stock option agreement after the employer discovers that the employee is violating his or her NCNS, can waive employer’s rights to later enforce the NCNS in court.
In Ally Financial, Inc. v. Gutierrez, et al., Ally’s employee, Gutierrez, signed a “Long-Term Equity Compensation Incentive Plan” (CIP) under which she would receive award payments based on Ally’s common stock value. The CIP included the following non-solicitation clause:
While the Participant is employed by the Company or a Subsidiary, and during the 2-year period immediately following the date of any termination of the Participant’s employment with the Company or a Subsidiary, such Participant shall not at any time, directly or indirectly, whether on behalf of . . . herself or any other person or entity (i) solicit any client and/or customer of the Company or any Subsidiary with respect to a Competitive Activity or (ii) solicit or employ any employee of the Company or any Subsidiary, or any person who was an employee of the Company or any subsidiary during the 60-day period immediately prior to the Participant’s termination, for the purpose of causing such employee to terminate his or her employment with the Company or such Subsidiary.
While at Ally, Guttierez received several CIP award letters that described a deferred payment schedule spanning from 2009 until 2015. In 2011, she left to work for Ally’s competitor, Homeward. Soon after her departure, eight of Ally’s employees went to work for Homeward as well, prompting Ally to send Gutierrez a letter accusing her of soliciting at least four of its employees and warning her that Ally was prepared to take a necessary “enforcement action.” The letter also stated that any violation of any contractual restrictive covenants would result in the forfeiture of “any Award that has not yet been paid” and require Guiterrez to “repay any Award Payments made within 24-months of an enforcement action.”
After sending the letter and after four more Ally’s employees went to work for Homeward, Ally paid Gutierrez her next payment due under the CIP. When even more employees left, Ally filed a lawsuit against Gutierrez and Homeward and alleged claims for unfair competition, tortious interference with contractual relations, tortious interference with employment relations, conspiracy, and misappropriation of trade secrets.
Gutierrez and Homeward argued that the covenant was unenforceable as overly broad and unrelated to Ally’s business and, in the alternative, that Ally waived its right to seek its enforcement. The trial court granted defendants’ motion for summary judgment on the grounds of waiver and the Second Court of Appeals affirmed.[1]
The Court of Appeals explained that under Texas law, waiver is an affirmative defense requiring a defendant to proffer evidence conclusively establishing the following: (1) an existing right, benefit, or advantage held by a party, (2) the party’s actual knowledge of its existence, and (3) the party’s actual intent to relinquish, or intentional conduct inconsistent with, the right. Gutierrez and Homeward argued that the payment under the 2009 award letter was an intentional relinquishment of, or intentional conduct inconsistent with, Ally’s intent to enforce the non-solicitation covenant. Ally responded that a payment to Gutierrez was “nothing more than a ministerial act,” but the Court of Appeals rejected that argument as “unpersuasive.”
According to the Court of Appeals‘ reasoning, the warning letter from Ally demonstrated that Ally was aware at the time it made the payment to Gutierrez that she was allegedly violating the non-solicitation covenant contained in the CIP. By making the payment, Ally “represented to Gutierrez that although it believed she had violated the CIP and had forfeited her rights to all unvested payments by voluntarily resigning, it was awarding her incentive compensation as provided by the CIP.” Making such payment, therefore, was inconsistent with Ally’s previously stated intention to enforce the non-solicitation covenant and with the terms of the CIP and was more than a ministerial act.
CONCLUSION: There are two practical lessons that employers can derive from this case. First, when dealing with departing employees who are due any sort of payments after their employment is terminated, the companies should make sure that the department responsible for payments and the legal department coordinate with each other. It is entirely possible that in Ally’s case the department making the payment was not aware of the warning letter sent to Gutierrez.
Second, while sending a cease and desist letter to a departed employee does not necessarily require involvement of a law firm or an in-house attorney (although it certainly gives it more clout), any actions that a business takes after sending a cease and desist letter should involve legal counsel to make sure that such actions will not negatively impact the employer’s case should she or he decide to sue the departing employee.
For more information regarding protection of trade secrets and enforcement of non-compete agreements in Texas, contact Leiza Dolghih.
[1] Although the CIP was governed by Michigan law, the Court of Appeals held that Texas and Michigan law were “functionally the same” on the issue of non-compete covenants and waivers, therefore, it did not need to decide which law applied to this dispute.