With all this talk about how the federal government is about to ban non-compete agreements, many might think they no longer need to worry about non-compete restraints in their contracts, but that is not the case. At least, not in Texas.
While legal scholars and companies are debating whether the Federal Trade Commission (FTC) even has the power to ban non-compete agreements, which is highly doubted by some, companies in Texas are continuing to sue employees for breaches of their non-compete and non-solicitation clauses. The most recent example is a lawsuit that The Ticket’s parent company (we’ll call it the Ticket here) filed against two of its former hosts of a popular sports talk show called the Hang Zone.
The Ticket Sues Immediately When It Learns That the Hosts Began a New Similar Talk Show
Just two weeks after Dan McDowell and Jake Kemp announced on YouTube that they were leaving The Hang Zone due to failed negotiations of their contracts with the company and that they were starting their own talk show called The Dumb Zone, the Ticket filed a federal lawsuit against them alleging that they (1) violated their non-competition, non-solicitation, confidentiality, and non-disparagement restraints, (2) converted company’s property for their own use, (3) breached their fiduciary duties to the company, and (4) infringed the company’s trademarks.
The Company Seeks TRO but Fails to Obtain One on a Technicality
The company then attempted to obtain a temporary restraining order (TRO) against the two hosts, which would prohibit them from continuing their new talk show, soliciting the company’s vendors or customers, disparaging the company, or using the company’s intellectual property. However, the company’s lawyers made a mistake when it filed an application for a TRO. They failed to state in their document that they had provided notice of the TRO application to the defendants or their attorney. The federal judge denied the TRO on the basis that the defendants never got the notice required by the federal rules of civil procedure.
The Company Tries to Fix the Mistake and the Court Resets the Hearing on a TRO for August 21st at 10 am
The Company’s attorneys promptly submitted a declaration explaining to the Court that they had provided a copy of the TRO application to defendants and their attorneys and defendants admitted to receiving the lawsuit in their discussions on social media. (Notably, those posts no longer appear on their twitter accounts.
What is Going to Happen Next?
The federal judge sent the case to mediation, which is a process during which a neutral attorney will attempt to get parties to reach an agreement and settle the case. In this case, a mediation is likely to involve a discussion of an agreed injunction, in which the defendants may agree to some, but not all demands made by the Company in their TRO application. If the parties are able to reach an agreed injunction, the TRO hearing may be cancelled.
Does the Company Have a Good Case for a Non-Compete Breach?
The Company alleged multiple claims of variable strengths, but I am going to focus solely on the non-compete claim since if the courts finds in favor of the Ticket on that claim at the injunction stage, the Dumb Zone will have to shut down until the non-compete period runs out.
What is the basis for this claim?
Both defendants signed employment agreements that prohibited them for 6 months following the termination of their employment from engaging in “any activities the same or essentially the same as their job duties” for any “competing business.” The Ticket alleged that by creating a show called the Dumb Zone and continuing to do the sports talk show just as they did for the Hang Zone, the hosts violated their non-compete restraints.
How are McDowell and Kemp fighting it?
Defendants do not claim that their non-compete is unenforceable. Indeed, it is likely to be enforceable under Texas law, as the 6-month restriction, and the limited scope and geographic area restrictions are likely to be found reasonable and enforceable.
Instead, Defendants have taken the position that their new show does not compete with the Hang Zone because it is a different product since (1) it is not free, i.e., listeners must pay $6.90 per month for it, (2) unlike the Hang Zone, which is broadcasted at certain times, the Dumb Zone is pre-recorded and posted online whenever a new episode is ready, and (3) the hosts do not take calls from fans, break news, or provide a traffic or weather report.
Are McDowell and Kemp likely to succeed?
In my opinion, the distinctions they are drawing are without difference. The reality is that they seem to be doing at the Dumb Zone the same thing they were doing at the Ticket – hosting a sports talk show. The fact that they are charging a nominal monthly fee for it now and that their shows is advertisement free (for now) does not turn the show into a different product. The fact that they took hangzone.com diverted all the traffic coming to that website to their new website for the Dumb Zone, also does not help their case because it begs the question: “Why divert listeners from the old show to the new show if they are not competing products?”
When I started writing this blog posts yesterday, anyone googling the Hang Zone or HangZone.com would be redirected to this website: https://linktr.ee/thedumbzone. However, as of this morning, HangZone.com is back to showing old Hang Zone content and is no longer diverting listeners to the Dumb Zone.
Defendants also originally used a logo that is very similar to the Hang Zone’s logo (it has since been changed) and re-branded and continued to use the social media accounts for Hang Zone for their new show. These actions show that they did not just create a new show, but were also actively trying to direct the Hang Zone listeners to their new show.
While the hosts have said in their posts that they have done nothing wrong and that they have been working with certain “advisors,” it appears that at least their initial steps in transitioning from the Ticket to their new show could have been taken differently to create a cleaner break and minimize the chances of a costly federal litigation.
Overall, their chances of defeating their no-compete restrains do not look good.
What Can We Learn From This?
Firstly, non-compete agreements are still enforceable in Texas and are not going away any time soon.
Secondly, many employees who have non-compete agreements, and want to leave for a competitor or to start a competing business get tripped up when navigating the break without legal counsel.
The best thing to do in a situation like this is to engage an attorney who is familiar with this area as early as possible to review the employment restraints in place and strategize the exit. An attorney can advise regarding:
- whether the non-compete agreements at issue are enforceable
- what an employee can or cannot take when they leave
- what they can and cannot say when they leave to the company co-workers, or customers
- what they can and cannot do while still working for their current company in preparation for leaving
- Many other aspects that will get scrutinized by the company after the employee leaves
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 17+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at email@example.com or (214) 531-2403.