Last year, a well-known bank in North Texas merged with another bank. Following the merger, it experienced a mass exodus of employees to a competing bank. A lawsuit ensued, in which the bank claimed that the departed employees conspired to destroy it by taking customers, employees, and confidential information to the competing bank. Plaintiff brought a variety of legal claims, including a claim that many of the departed employees breached non-compete restraints contained in their stock option plans.*
*EMPLOYEE TIP no. 1: When employees are awarded options or stock, they almost always have to sign a “plan.” This is a legal document describing how and when the options or stocks are awarded. Quite often, those plans are presented to employees online and they accept the terms electronically by clicking a button or fixing their e-signature to the document. As these plans are typically voluminous and chock-full of legalese, many employees sign them without reading the documents. However, many of the plans that affect Texas employees contain non-compete and non-solicitation restraints. Thus, by accepting stock or stock options, employees are often unwittingly committing themself to post-employment restraints.
In the case at issue, employees had accepted such restraints in their plans, but argued that they expired upon a subsequent merger and, therefore, could not be enforced. Specifically, they pointed out that the stock plans said that the non-compete restraints would go away upon a “change of control.”*
*EMPLOYEE TIP no. 2: “Change of control” is a legal term for an event when there is a change in a company’s ownership or management that results in the decision-making capacity of that entity being exercised by a different group of shareholders and/or directors. This may include a purchase of one company by another, a merger between two companies, or other material transaction that results in a change of who controls the company.
The district court agreed with the defendants and found that their non-compete restraints, indeed, had expired when their employer underwent the merger. Thus, even though they continued to work for the bank after the merger, they were doing so without having any non-compete restraints in place.
EMPLOYEE TIP no. 3: While many stock or stock option award documents are take-it-or-leave-it and are non-negotiable, if an employee has an opportunity to negotiate the terms ahead of the grant, they should do so.
EMPLOYER TIP no. 1: Companies that are buying or merging with other companies should always consider what effect that will have on the existing employees’ post-employment restrictions and either secure an assignment of such restrictions or require employees to execute new non-compete agreements.
CONCLUSION: There are hundreds of different ways to draft and structure non-compete agreements. The ability to enforce or defeat a non-compete agreement often depends on the exact language of the particular agreement in question. Employees should read these agreements carefully before signing them and, negotiate the terms if possible, and if the language is not clear, consult with an attorney.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.