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.

Embezzlement or a Reward for Sexual Favors? – A Dallas Case Demonstrates There Are Two Sides to Each Story

kkClients often want to know whether they have a winning case or a bullet-proof defense. Much of that, of course, depends on the law. But sometimes, an entire case may rise or fall on a credibility of a particular witness. A recent decision by the Dallas Court of Appeals is a great example of where the entire case came down to the credibility of two witnesses who gave different explanations for the same set of events.

In this case, a company sued the president’s personal assistant and bookkeeper for theft, breach of fiduciary duties, fraud, conversion, breach of contract, and unjust enrichment, alleging she forged checks and issued fraudulent vendor invoices to pay off her personal credit card bills with company funds to the tune of $377,000.

Her Story: The bookkeeper admitted that she issued checks to fictitious vendors, but testified that she did this at the direction of the company president, who promised her extra compensation if she became his mistress. The fictitious vendor invoices were necessary to hide the payments from his wife. She testified that he told her to “charge everything to her credit card,” and use particular vendor accounts and cancelled company checks to pay off the credit card bills, he signed the checks himself or authorized her to do it, and he received a copy of all cancelled checks every month. 

His Story: The president of the company denied having an affair with the bookkeeper or authorizing her to issue checks with company funds to pay her own credit card.  He admitted receiving monthly bank account statements that included images of cancelled company checks but said he never looked at them.

There were no other witnesses who testified about the affair or the payment scheme. Thus, it was the president’s word against the word of his former personal assistant and bookkeeper.

The Court’s Ruling: After hearing all the testimony, the trial judge concluded that: (1) the president of the company and the bookkeeper had an affair, (2) at some point he began giving her additional compensation i.e. payment of her credit bills; and (3) in an effort to conceal this additional compensation from his wife, he transferred funds to the bookkeeper from the company’s account through a scheme using checks paid to fictitious contract employees. Thus, all of company’s claims against the bookkeeper failed. The Court of Appeals agreed with the trial judge, stating that “the outcome of this case turned on which one of the two main witnesses was more credible, and, apparently, the trial judge found that the bookkeeper was a more credible witness.

Takeaway:  In a lawsuit – whether it involves a contract claim, a clash between partners, an employment matter, or any other dispute – a plaintiff must be ready to do both: tell his or her side of the story and anticipate what the opponent is going to say. In those cases where the only evidence is witness testimony (as opposed to documents), the credibility of such witnesses may be the deciding factor between a victory and a loss.  

Leiza represents COMPANIES and INDIVIDUALS 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.

Enforcing Texas Non-Compete Agreements Against Employees in Other States

noncompeteFor Texas companies, enforcing non-compete agreements in other states can be tricky since each state has its own rules about what makes a non-compete enforceable, and some states do not allow them at all. Therefore, any Texas company with out-of-state employees should ask two questions about its employees’ non-compete obligations: (1) are my remote employees’ non-compete agreements enforceable? and (2) will I be able to enforce them in a Texas court if necessary?  I have previously written regarding Question 1 here and here, and recently a Texas Court of Appeals addressed Question 2.

In that case, a Texas company sued its Louisiana employee for breach of his non-compete and non-solicitation clauses, breach of fiduciary duty by using the company’s confidential information to compete with it, and tortious interference with the company’s existing business relationships. The company sued the employee in Texas, and he alleged that Texas courts had no jurisdiction (power) over him because he worked entirely from Louisiana, solicited business in Louisiana, and used the company’s confidential information in Louisiana.  In short, other than being employed by a company based in Texas, he did not have any contacts with that state so he could not be dragged into a lawsuit in Texas.

The Court of Appeals found that Texas courts had jurisdiction over the employee to decide the breach of contract/non-compete claim because he originally called the company’s president in Texas to solicit employment with the company, thus purposefully availing himself of the Texas forum. This contact was enough to subject him to the jurisdiction of Texas courts. However, Texas courts did not have the power to decide other claims brought by the employer because those claims arose out of the employee’s conduct that took place entirely in Louisiana.  

TAKEAWAY:  Texas companies that have employees in other states need to make sure both – that their non-compete agreements are enforceable in those states and that they can enforce those agreements in Texas courts.  Some of this can be achieved via contractual provisions in employment agreements, and some can be done via hiring, training, and other corporate policies that affect remote employees.  

Any Texas business that is planning on expanding outside of Texas in 2016, should conduct an audit of its non-compete agreements and employment practices to ensure that they are properly set up so that the company can enforce the agreements in Texas courts.

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.

Using a Temporary Injunction to Stop Business Disparagement

The word on the street is that your competitor is contacting your customers or your industry relations and is telling them information that could potentially or is already hurting your business in Texas. What can you do? One of the solutions is to seek a temporary injunction from a court ordering the competitor to stop the harmful communication. The Dallas Court of Appeals has recently explained the hurdles that a business owner has to overcome to obtain such an injunction.

In Dibon Solutions v. Nanda, et al., the owner of Dibon found out that Nanda was sending communications to Dibon’s customers and its bank, accusing it of being subject to: (1) an IRS investigation; (2) an ICE and FBI investigation for money laundering, visa fraud, human trafficking, and harboring illegal aliens; (3) a DOL investigation for unpaid back wages; (4) multiple lawsuits; (5) making bankruptcy threats; (6) diversion of assets; (6) multiple liens; (7) non-performance on bank loans; and (8) forging documents.

Dibon sued Nanda for defamation, business disparagement, breach of fiduciary duty, and tortuous interference with existing contract, and sought a temporary injunction barring Nanda from contacting Dibon’s customers “for the purpose of communicating disparaging information regarding [Dibon] to such customers.”

The trial court issued a temporary restraining order (valid for a short period), but denied Dibon’s application for a temporary injunction that would extend the bar on Nanda’s communications until the lawsuit has been resolved. Dibon appealed and the Court of Appeals sided with the trial court finding that the issuance of a temporary injunction would violate Nanda’s First Amendment rights.

A party applying for a temporary injunction in Texas, must plead and prove: (1) a cause of action the opposing party; (2) a probable right on final trial to the relief sought; and (3) a probable, imminent, and irreparable injury in the interim. Additionally, when applying for an injunction that will curb somebody’s speech, the applicant must establish that the speech it is trying to stop is not protected by the First Amendment.

The United States and Texas Constitution prohibit prior restraint on free speech – i.e. judicial orders forbidding certain communication before such communication occurs.  A misleading commercial speech, however, is not protected by either Constitution and, therefore can be prohibited by a court.

Unfortunately for the plaintiff in Dibon, he failed to provide evidence showing that Nanda’s statements to Dibon’s customers were false or misleading.  In fact, both Dibon’s president and a vice president admitted during the temporary injunction hearing, that at least some of Nanda’s statements were true. Moreover, the plaintiff failed to introduce any witnesses that could refute the truthfulness of Nanda’s statements or any documents that demonstrated their falsity.  Because the plaintiff was unable to show that Nanda’s statements were false, they were protected by the First Amendment, and the court could not forbid Nanda from making them.

Dibon also argued that Nanda’s commercial speech was not protected by the First Amendment because it constituted tortuous interference.  However, the Court of Appeals rejected this argument as well, because the plaintiff failed to establish at the hearing an important element of tortuous interference – that Nanda’s statements actually persuaded Dibon’s customers to breach their contracts with Dibon.

BOTTOM LINE:   As a business owner, you can always file a lawsuit and attempt to recover monetary damages caused by your competitor’s disparaging statements.  However, if you want to prevent the competitor from making such statements while the lawsuit is pending, you will need evidence establishing that the statements are false or that they have caused your customers to breach their contracts with you.  Without such ammunition, the competitor’s statements are likely to be protected by the First Amendment.

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.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.