Client Non-Solicitation Agreements for Hair Salons, Med Spas, and Others in the Beauty Industry: Writing and Enforcing Them (Part I)

GreenTangerineMayKeratineventpageimgLast week, a famous New York tattoo artist, who’s tattooed the likes of Rhianna, Katy Perry, Miley Cyrus, and Justin Bieber, filed a lawsuit against a former staffer, claiming she began stealing his prospects while working at his iconic NYC tattoo parlor “Bang Bang.” The owner claims he fired her after “she’d begun secretly cancelling customer’s appointments and referring them to another unspecified studio, where she’d covertly begun working.” The owner is seeking $153,859 in damages, which given that a single sleeve tattoo at his shop can cost $20,000, is really not a big sum.  

The defendant, who herself is a well-known tattoo artist with more than 600,000 followers on Instagram, said she left Bang Bang because she disagreed with the owner “about the path [her] career should take.” 

The disputes over client poaching between business owners in the beauty industry (med spas, massage salons, hair salons, tattoo parlors, etc.) and their employees are very common.  Most of the time, they do not escalate to the lawsuit level because of one of the three reasons: (1) a business owner does not know the departed employee poached clients; (2) a business owner cannot prove that the departed employee poached clients; or (3) the former employee’s poaching of a few clients is just not worth the cost of litigation. 

The salon owners often feel that their employees benefit from being associated with the salon’s name and brand as well as the marketing campaigns that such salons often implement to attract new customers.  The owners also often train employees either personally or by sending them to various classes. The employees, however, often feel that their clients keep coming back to their salons because of their skills; not because of the brand behind them.  Both are usually right to a degree. In the beginning, a salon’s reputation and marketing can help a fledgling professional get access to a customer base, which they would never be able to reach otherwise. As an employee matures professionally and builds customer relationships, his or her clients are more likely to come back because of that employee’s particular skills rather than the salon brand. 

When an employment relationship terminates between a salon and its employees, a good non-solicitation and confidentiality agreement, combined with other key provisions, and smart business practices, can deter client poaching and preserve the relationship between the salon and its clients even in the face of its employees’ departure.  Some of the contractual provisions that can deter client poaching include the following:

Confidentiality – a strict confidentiality clause that explains to salon employees that certain information about clients is considered confidential and cannot be disclosed or used by the employees for their own benefit and/or after they leave. 

Social Media Ownership – many salons in the beauty industry now use Instagram as ways to market their services and often include the “before” and “after” photos of their clients. An employee agreement should specify who owns such images and what happens to them if the employee who performed the work and/or posted the images, leaves. 

Non-Competition – a classic non-competition clause will prohibit a former employee from working for a competitor within a certain geographic area of the salon. This area should be “reasonable” in light of the salon’s geographic reach and its clientele, and the role of the employee at the salon. 

Non-Solicitation – in addition, or instead of, a non-competition clause, salons should also have an agreement that prohibits employees from soliciting their former clients for a certain period of time after they leave. It may also need to address the social media “indirect solicitation” by former employees.  See my prior post here

Repayment of Training Costs – such provision in a contract allows a salon that provides a lot of training to its new hires to recover the training costs if an employee leaves before working for the salon for a certain period of time. 

Buy-Out Agreement – a salon can always include a buy out clause in the employment agreement, which will allow an employee to buy their non-compete and non-solicitation restraints if they wish to leave and continue to work in the area close to the salon or service their former clients. 

They key to drafting the above provisions is to make sure that they are reasonable, not overbroad, and clear to employees. 

In Part II, I will address what salons can do when they find out that a former employees has poached or is attempting to poach clients. 

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

 

A Broken Promise of Whoppers “For Life”: Why the Oregon Man’s Lawsuit Against Burger King Is Going Nowhere

A man wants free whoppers for life after getting locked in a Burger King bathroom and he has filed a lawsuit to get them. He claims that a local manager promised to provide him free hamburgers to compensate for a traumatic experience of being stuck in a bathroom for “well over an hour,” but the regional manager reneged the offer after the man began frequenting the location on the daily basis.

Mr. Brooner wants the court to force Burger King to keep providing him with one free whopper a week for the next 22 years (his projected life expectancy until he is 72) or, alternatively, award him close to $10,000 in damages, which is the price equivalent of the 22-years’ worth of weekly whoppers.

Normally, I would read something like this chuckle and move on, but this particular scenario raised many of the same questions that I get from my clients in some of the most complicated contractual disputes, so I thought I’d address some of them here:

Since the promise to provide burgers “for life” is not in writing, is it even enforceable?*

Probably yes. Certain contracts are enforceable even if they are not in writing. Typically, contracts that can be performed within one year are enforceable even if they are not in writing. Since Mr. Brooner’s life could end at any time, including within 12 months from the promise made by the manager, the contract to provide burgers “for life” could terminate within 12 months.  Thus, an oral contract to provide burgers “for life” is probably enforceable.

Can Burger King be responsible for a promise made by an employee without authority to make such a promise?

Probably not.  An employee of a company can bind the company only if a “reasonable” third party would understand that the employee had the authority to act the way s/he did on behalf of the company.  It is unlikely that a “reasonable” person would believe that a manager of a fast food restaurant had the authority to offer free burgers “for life” to a customer on behalf of the company. While in this case it appears to be a clear-cut issue that is likely to cost Mr. Brooner his claim, an agent’s authority to enter into contracts on behalf of his or her employer is often a hotly-litigated issue in contractual disputes.

What if the manager did not mean to offer burgers “for life” but said something like “any time you come in, the burgers are on us”? 

This is a tough one. For a valid contract to exist, there must be “a  meeting  of the minds,” i.e., both people should be on the same page as to what the terms of the agreement are.  As you can imagine, countless lawsuits arise out of the parties disagreeing over what the contract is  supposed  to  accomplish.  In such situations, a court will  typically  look  at  the words  of  the  contract, first, to determine the meaning.  If  those  are  ambiguous,  then the court will  take  in  evidence  from  both  parties  to  determine  their  intent in entering into the agreement.  Here, if the court determines that the manager’s promise was ambiguous, the  testimony  of  the  manager  about  what  he intended to offer to Brooner will be key.

Since Brooner did not promise anything in return for getting free whoppers, there was no valid contract, right?

Not really. There is an argument here that Brooner gave up his right to sue the restaurant or leave  negative  comments about  it  on  social  media  in  exchange  for getting free whoppers, as giving up a right to do so something in exchange for money or  other  consideration  can  create  a  contract.  Indeed,  employees  constantly  give  up  their  right  to  sue  the  employer  in  exchange  for  a  severance payment.

Can Brooner really get  the  damages  he  wants  on  the  assumption  that  he  will live 22 more years?

Probably not.  Generally speaking, a person seeking contract damages, must prove them with “reasonable certainty.”  In a complicated contractual dispute, expert witnesses would testify about what is reasonably certain.  In this case, Mr. Brooner’s health condition, average life expectancy, his lifestyle, how long this particular location of Burger King is expected to remain open, and many other factors can play a role in whether he can establish that he is reasonably certain to take advantage of free burgers for the next 22 years.

And there you have it.  Next time you get locked in a bathroom of a restaurant, get an executive level person on the phone to authorize a life-time supply of meals, or better, call me to negotiate and paper the deal for you.

*This is a discussion of general legal principles and not a legal advice, as each state has  somewhat different contract laws and exceptions and each contractual dispute involves its own set of facts that may affect claims and defenses available to the parties involved in such a dispute. 

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

Non-Compete Agreements: Garbage In, Garbage Out

Enforcing Non-Compete Agreements in TexasLast week, a Texas Court of Appeals ruled that a non-compete agreement between a transportation logistics broker and its freight carrier was unreasonable because it was not clear when the 24-month non-compete period would begin to run. This case serves as a reminder that a confusing, ambiguous, or imprecise non-compete agreement will yield poor results in court.  In other words: garbage in, garbage out. 

The covenant not to compete at issue was meant to ensure that the freight carrier would not take away the broker’s clients after the broker had revealed their identity to the carrier.  Thus, there was a legitimate business reason for the non-compete agreement.  However, the following language in the agreement created a problem: 

For a period of twenty four (24) months following the Carrier’s last contact with any client or client[s] of Broker the Carrier agrees it shall not either directly or indirectly influence or attempt to influence customers or clients of Broker (or any of its present or future subsidiaries or affiliates) for whom the Carrier has rendered services pursuant to this Agreement to divert their business to the Carrier or any individual, partnership, firm, corporation or other entity then in competition or planning to be in competition in the future with the business of Broker or any subsidiary or affiliate of Broker. 

The Court explained that there were two problems with this language that made it impossible to determine how long the restrictive covenant was going to last.  First, under the terms of the covenant not to compete, the 24-month restraint period would start from the date of the carrier’s last contact with “any” client of the broker, not just the clients that the carrier had provided services to.  Since the broker testified that its client list was a trade secret, the carrier would have no way of determining the date of its last contact with the clients whose identity it had no way of knowing.  Second, the non-compete would begin to run from the date of the last contact, regardless of whether the contact took place during or after the broker-carrier agreement had terminated, which meant that it could begin at any time. 

Consequently, the Court ruled that a covenant not to compete that extended for an indeterminable amount of time was not reasonable, and as a result, was not enforceable. It reversed the jury’s finding that the agreement had been breached and took away the damages the jury had awarded to the broker.

Texas Bar Association Top TenBOTTOM LINE:  There are plenty of “sample” non-compete agreement “forms” online, but there is a difference between a non-compete clause and a non-compete clause that is enforceable. Unfortunately, many companies do not find that out until they are in court trying to enforce their agreements that may not be enforceable.  Companies should avoid using “standard” non-compete clauses and make sure that their restraints are tightly drafted to address their specific industry, business model, and particular needs. 

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly 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!

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.

Renewing Non-Disclosure Agreements with Employees? Consider this . . .

sale baIn my practice, I see this scenario all the time: an employee leaves to work for a competitor, the employer realizes that its non-disclosure (NDA) or non-compete agreement was inadequate to protect it from what just happened, so the company rolls out a new (and improved) non-disclosure or non-compete agreement and makes all employees sign it.   

The legal department now sighs with relief, the HR department gets a pat on the back, and the new NDAs and non-competes get filed away in employees’ personnel files to be whipped out when the next employee defects for greener pastures. What could possibly go wrong now that the company has a perfect non-compete / non-disclosure in place with all the employees, right?

A recent case out of the Fourteenth Court of Appeals demonstrates exactly how a perfectly drafted non-disclosure agreement can still end up being unenforceable when an employer fails to provide new consideration for the agreement. In Eurecat US Inc. v. Marklund, et al.,  Eurecat sued two of its former employees who started a competing business, alleging that they stole trade secrets and proprietary data, breached fiduciary duties and breached their NDAs with plaintiff.

Eurecat’s claims were based on the NDAs that the two employees signed in 2011. The Court of Appeals held that these agreements were not supported by consideration and were unenforceable because, prior to 2011, both employees were already required to maintain confidentiality of Eurecat’s trade secrets under the prior versions of the NDAs.  The only consideration stated in the 2011 NDAs was continued employment at-will.  Eurecat did not promise to provide new confidential information to the employees after they had executed the 2011 NDAs, but only stated that they “may” learn such information.  At trial, Eurecat failed to show that its claims for breach of the 2011 NDAs were based on disclosure of confidential information it provided to the employees after January 21, 2011 that differed from information they previously possessed.  In fact, Eurecat was unable to show that it provided any new confidential information that was different from what the employees had received from Eurecat prior to signing the NDAs.  The Court, therefore, affirmed the jury’s verdict that the employees did not breach their non-disclosure agreements with Eurecat.

BOTTOM LINE FOR EMPLOYERS: Periodic updates of employment agreements, including non-compete and non-disclosure restraints, are necessary to make sure that the agreements comply with the new legal developments.  However, companies should always make sure that the new agreements are supported by new consideration, whether it is new confidential information, a bonus, or some other type of consideration. (check your state laws to make sure that the type of consideration provided to an employee meets the state requirements to support restrictive covenants). 

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. 

 

Is a Non-Compete Agreement Without Geographical Restriction Enforceable in Texas?

imagesThis exact question is currently being decided by the Texas Supreme Court, which earlier this month held oral arguments in Horizon Health Corp. v. Acadia Healthcare Company, Inc. 

Under the Texas Noncompete Act, a noncompete agreement is enforceable in Texas only if it is:

Ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

The non-compete agreement in Horizon Corp. v. Acadia Healthcare did not contain an express geographical limitation, but barred employees from:

  • seeking work in, or independently establishing, a psychiatric contract management company;
  • being employed by “company clients, hospital affiliates or hospital joint venture partners,” or
  • engaging in any business relationship with those hospitals for 1 year after the end of employment. 

Horizon argued that the non-compete agreement is not enforceable because it does not contain an express geographical limitation.  Acadia argued that because the agreement is limited to certain identifiable set of companies or clients, it did not need to have a geographical limit to be enforceable under the Texas Covenants not to Compete Act.  The parties presented their oral arguments to the Texas Supreme Court on March 1, 2017. 

BOTTOM LINE:  Until there is a ruling from the Texas Supreme Court resolving the issue of whether noncompete agreements must contain an express geographical limitation, to be safe, companies should include such limitation in the agreements in additional to any limits on client solicitation.  Stay tuned to learn how the Texas Supreme Court rules on this issue. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108. 

Are Non-Compete Agreements Enforceable in Texas?

kkGenerally, Texas allows non-compete agreements between employers and employees as long as they are reasonable in scope, geographic area, and term, and meet a few other requirements. See my previous posts about those requirements here, here, and here

Practically speaking, however, whether a particular non-compete agreement is valid depends heavily on the exact language used in the agreement.  Just as with any other contract, Texas courts will usually look at the precise language of a particular employment agreement to determine what the parties had in mind when they entered into it. 

Last year, a hospitalist group in Houston learned the above principles the hard way when it attempted to enforce a non-compete covenant against a physician who went to work for a competitor and discovered that the non-compete did not prohibit the physician from doing so. 

In Tummalla et. al. v. Total Inpatient Services, P.A., the non-compete clause between the hospitalist group and the physician stated the following:

6.2 NonCompete. In consideration for the access to the Confidential Information provided by [TIPS] and in order to enforce the Physician’s Agreement regarding such Confidential Information, Physician agrees that he/she shall not, during the term of this Agreement and for a period of one (1) year from the date this Agreement expires pursuant to Section 8.3 or is terminated by Physician pursuant to Section 8.6 (the “Restriction Period”), without the prior written consent of [TIPS], except in the performance of duties for [TIPS] pursuant to this Agreement, directly or indirectly within any Hospital in the Service Area or any other hospital in which the Physician practiced on behalf of [TIPS], in excess of 40 hours, within his last year of employment with [TIPS]:
6.2.1 Provide services as a hospitalist physician to any entity that offers inpatient hospital and emergency department services.
In a separate provision in the same agreement, however, it stated that the physician’s first 12 months on the job were to be considered an “introductory period” during which either party could terminate the employment relationship for any reason. The specific paragraph stated that it applied notwithstanding any other provision in the agreement and it failed to included or mention any non-compete restrictions. 

The court of appeals analyzed these various clauses in the contract and concluded that because the physician terminated his employment with the hospitalist group within the first year, i.e. the “introductory period,” the post-employment non-compete clause did not apply to him. Thus, he was free to compete with his former employer. 

TAKEAWAY FOR EMPLOYERS: Employers should have a qualified attorney draft and/or review their non-compete agreements.  While there are many forms out there, because non-compete agreements in Texas have to be catered towards each employer’s business and because courts will scrutinize the language when determining whether to enforce the agreement or not, using a standard form may result in the employer not being able to enforce it due to gaps in the language or failure to address specific termination situations.

TAKEAWAY FOR EMPLOYEES:  Signing a non-compete agreement without reading it first can result in a major headache down the road and severely limit employee’s career options.  Therefore, employees should always: (1) read the agreement; (2) request a clarification if something is not clear; and (3) keep a copy of the signed agreement for their records.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

A Texas Court Enforces an 18-month, 50-mile non-compete against a Texas Veterinarian

noncompeteThe Fort Worth Court of Appeals recently upheld an injunction enforcing an 18-month, 50-mile non-compete against a veterinarian, who accepted a job with a competing veterinary clinic within the 50-mile radius of her former employer.

In Bellefuille v. Equine Sports Medicine & Surgery, Weatherford Division, PLLC (ESMS), the veterinary resident signed a non-compete and non-disclosure agreement with ESMS, which prohibited her from competing with the company within a 50-mile radius within 18 months after her residence ended. The agreement also prohibited her from using or disclosing ESMS’s confidential information.

When Bellefuille was told by ESMS that she would not get a job offer after her residency ended, she accepted a job offer with ESMS’s biggest competitor within the non-compete’s geographic area.  There, she proceeded to treat some of the same animals she had previously treated at ESMS.

After accepting the new job, the vet filed a lawsuit asking a court to declare her non-compete with ESMS unenforceable and/or that her new employment did not violate that non-compete. ESMS counterclaimed and applied for a temporary injunction order, which the trial court granted and ordered Bellefuille not to compete with ESMS or use its confidential information. The vet appealed, arguing that the injunction was overbroad, but the Fort Worth Court of Appeals found that the trial court’s injunction was proper after striking some language as being too overbroad and vague because it did not trace the language used in the non-compete agreement.

Takeaway:  There is no magic formula for enforcement of non-competes in Texas.   The statute simply says that the restraints must be “reasonable” and no greater than is necessary to protect a legitimate business interest.  However, what is a reasonable term or a geographic area for a non-compete varies from case to case and depends on many factors, including, but not limited to, the nature of the business, the industry in which the business operates, the type of job performed by the individual subject to the non-compete, whether other employees have non-compete agreements, and many other factors. In this case, the length of the vet’s employment and the specific language of the restrictions played an important role in the court’s decision to enforce the agreement.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

The Far-Reaching Claws of the Texas Non-Compete Statute

Wait-what-meme-rage-faceA recent case from a Texas Court of Appeals demonstrates that the Texas non-compete statute applies not only to the employment agreements or sale of business contracts, but to any contracts that contain provisions restraining trade.

In Wharton Physician Services, P.A. v. Signature Gulf Coast Hospital, L.P., the Corpus Christi Court of Appeals found that a liquidated damages clause in a recruiting contract was unenforceable under the Texas non-compete statute.

Gulf Coast hired Wharton to provide hospitalist services and to coordinate the hiring of individual physicians for Gulf Coast.  Their agreement contained the following clause that allowed Wharton to demand $100,000 in liquidated damages if Gulf Coast hired any of the physicians that Wharton had previously presented to Gulf Coast if the hiring took place within 6 months after Wharton’s contract’s termination:

If this Agreement is terminated by either party for any reason, then HOSPITAL [Gulf Coast] shall have the right to contract directly with all or some of the Hospitalist Physicians retained by GROUP [Wharton] to perform the services required by the terms of this Agreement . . . In the event that HOSPITAL, or any individual or entity otherwise affiliated with HOSPITAL, for work or services that would be provided at HOSPITAL, desires to contract directly with one or more of the HOSPITALIST physicians previously recruited retained, and presented to HOSPITAL by GROUP for hospitalist services at any time during the six (6) months period following the termination of this Agreement, HOSPTIAL shall pay to GROUP as liquidated damages in amount of $100,000 per physician.

The Court of Appeals applied the standard non-compete analysis to this liquidated damages clause finding that while the recruiting agreement itself was enforceable, the liquidated damages clause was not because it was a restraint on trade that was not supported by independent consideration.  The court explained its reasoning as follows:

“Gulf Coast promised to pay Wharton for services and Wharton promised to perform those services; however, none of those obligations amounted to additional consideration for Gulf Coast’s promise not to hire any physicians if the contract between Wharton and Gulf Coast was terminated.”

In sum, the court construed the liquidated damages clause “as a way to limit competition to Wharton from another company providing similar services.”  As such, it had to comply with the Texas Covenants Not to Compete Act’s requirements, which it failed to do.

Takeaway: When entering into a contract in Texas, the parties should consider whether any contract provisions may be viewed as a restraint on competition and an attempt to enhance or maintain prices.  If that’s the case, then such contractual provision might have to comply with the Texas non-compete requirements in order to be enforceable.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

 

A Former VP of Operations Ordered to Pay $1.9 Million for Taking Company’s Trade Secrets in Violation of a Separation Agreement

Toshiba_HDTD105XK3D1_BLACK_LAPTOPAccording to some studies, more than 60% of employees copy their employers’ documents or files before leaving their employment. They are even more likely to do so if they had been laid off, fired, or passed over for promotion. With senior executives who have access to top level confidential information, such actions can cause irreparable damage to their former companies.

In 2015, Cheasapeake Energy Corp. sued its former CEO and co-founder for emailing himself highly sensitive information and instructing his assistant to print confidential maps after he resigned due to a public falling out with the company.  The year before that, Lyft sued its former COO for transferring to himself thousands of Lyft’s files before joining its arch-rival Uber.  The former COO apparently left Lyft after unsuccessfully pursuing the CEO position. 

A similar drama played out last year in Texas and it involved a VP of Operations of a publicly traded Houston company.  According to Ginn v. NCI Building Systems, Inc., Ginn had been working for NCI for 20 years when he was told that his position of Executive VP of Operations was being eliminated.  The company offered him a separation agreement, which stated that he was resigning on his own accord and imposed a 5-year non-compete, non-solicitation and non-disclosure covenants. In return, NCI immediately vested all of his unvested stock that he had earned over the years – about $1.5 million – and retained him as a consultant for 1-year with a $300+K salary. 

According to the Court of Appeals, while consulting for NCI, the VP began to plan a competing company. Once his consulting gig with NCI expired, he began competing with it. NCI filed a lawsuit alleging violation of a non-compete and non-disclosure covenants, fraud, breach of fiduciary duties, and a few other claims. Two years into the suit, NCI discovered that the night before the VP signed the separation agreement representing that he had returned all of NCI confidential information, he had actually downloaded more than 18,000 files on his private hard drive. The jury found, and the Court of Appeals upheld, that the VP made knowing representations to NCI on which NCI relied in giving him $1.5 worth of stock, thus, committing fraud.

In its lawsuit, NCI asked for a legal remedy called “rescission,” which is meant to put the parties into a position they were in prior to entering into an agreement. Here, NCI asked that the VP return the consideration that the company paid to him in return for his promises, i.e. his salary and the vested stock.  Since he no longer owned the stock, NCI asked that he pay the value of such stock of $1.5+M.  The First Texas Court of Appeals found such compensation legally appropriate and upheld the trial court’s order requiring the VP to pay NCI the compensation he had received. 

Takeaways: There a certain behavioral triggers that cause high-level employees or employees with access to large swaths of confidential information to take or share that information with a competitor.  A company should have a red-flag alert system that notifies them of the increased risk and allows them to take preventative measures before a disgruntled employee downloads or shares the company’s trade secrets with the outside world.  Demotions, denial of a promotion, increased complaints to a supervisor, inadequate bonus, etc., may all serve as triggers for trade secret theft.  Having a system, a checklist, and a designated person who monitors the situation around the company can go a long way in protecting the company secrets. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.