A Texas Court Refuses to Enforce a Non-Compete Agreement In a Case Involving Every Employer’s Worst Nightmare

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Last week, a federal court in Texas refused to enforce a company’s non-compete agreement against four key employees who started a competing business because the agreement was missing a key term – the end date.  The company argued that the court could rewrite the non-compete to add a reasonable end date (a procedure sometimes allowed in Texas) but the court refused to do it holding that it could not fix an unenforceable agreement. Thus, the four employees who started a competing business remain free to compete and solicit the company’s clients. 

The company argued that while the employees worked there, they, collectively, were exposed to all kinds of confidential information, including company-wide strategic plans, OEM relationships and pricing levels, details of written and oral contracts with customers, manuals, forms, techniques, methods and procedures at the company,  the Salesforce database that contained a list of all company customer contacts and point persons within the customer, as well as specific notes from customer visits and discussion points, cost of materials, and the company’s product margins.   The company also told the court that it allowed the departed employees to entertain customers and reimbursed them for expenses, and paid for their cell phones used to communicate with such customers.  

Nevertheless, because there was no evidence that the employees took any confidential information with them when they left and because the company admitted that its product manufacturers and customer information were not confidential, the company could not stop the employees from competing once the court declared the non-compete agreement not enforceable. 

BOTTOM LINE: The above situation can be avoided through simple practice of: (1) knowing what is in the company non-compete agreements; (2) making sure all the key provisions required by the relevant statutes are included; and (3) periodically updating non-compete agreements so that they are compliant with the relevant state law.   

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.

 

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 employee 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.

 

 

Can a “Friend Request,” a “Like,” or a New Job Announcement on LinkedIn Violate A Non-Solicitation Agreement?

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The growth of social media has been raising complex new issues for employers seeking to enforce their non-compete and non-solicitation agreements. For example, if a former employee connects with a company client or a former coworker on LinkedIn, can such connection result in a breach of the employee’s non-solicitation agreement? What if an employee announces on his LinkedIn profile that s/he has a joined a competitor and invites all the followers – many of whom are the former employer’s customers – to check out the new employer’s website? Could that be a violation of that employee’s customer non-solicitation agreement? 

The courts around the country have been grappling with these issues in the recent years and are yet to come up with a bright line rule.  However, they all seem to agree that the more “passive” the social media activity is, the less likely it is to constitute a prohibited solicitation of customers or employees, and the more “active” the posts are or the more akin they are to oral solicitations, the more likely they are to violate non-solicitation restrictions. In this post, I take a closer look at the various decisions from across the country and synthesize common themes. 

1. Employees’ posts about starting a competing business or advertising job openings at their new place of employment on public social media pages. 

In H&R Block Tax Servs., LLC v. Frias, a former H&R Block franchisee promoted his tax services business on a publicly available Facebook page.  No. 4:18-00053-CV-RK, 2018 U.S. Dist. LEXIS 25667 (W.D. Mo. Feb. 16, 2018). 

H&R Block argued that the Facebook posts were made with the intent of soliciting and influencing former H&R Block customers to visit Defendant’s new tax business. The vast majority of Defendant’s Facebook friends were his former H&R Block clients.  Many of the people who “liked” the post and commented on it were H&R block clients from the Defendant’s client list. Thus, H&R Block argued that posting to friends, who were former clients, was akin to sending them a direct message about Defendant’s new business. Moreover, Defendant actively engaged with H&R clients who commented on his post by telling them to call him.

Defendant argued that his posts on Facebook were just an electronic version of an actual physical sign stating “tax preparation,” which H&R Block had admitted would not be a breach of the non-solicitation agreement. 

The court did not buy H&R’s argument and denied the portion of the preliminary injunction application that sought to prohibit Defendant from posting on social media, requiring additional briefing from the parties on whether Facebook posts were “solicitations” under the Franchise Lease Agreement with H&R Block.  The case was subsequently resolved without the briefing. 

Similarly, in Enhanced Network Solutions Group, Inc. v. Hypersonic Technologies Corp., a subcontractor posted an open position for an outside sales representative on LinkedIn, which could be viewed by the members of a certain group, which included employees of a general contractor. 951 N.E.2d 265 (Ind. Ct. App. 2011).  The general contractor argued that the subcontractor’s post of an open position in a public group within LinkedIn violated the sub’s non-solicitation clause with the general contractor.  The court ruled that the post itself was not a solicitation even though it resulted in a particular employee contacting the subcontractor about the position: 

“The record clearly supports that Dobson made the initial contact with Hypersonic after reading the job posting on a publicly available portal of LinkedIn. In other words, Dobson solicited Hypersonic . . . . Pursuant to the terms of the Agreement, Hypersonic cannot solicit applications but the language does not prohibit Hypersonic from receiving applications from [general contractor’s] employees.”

2. Employees’ announcements of open job positions or advertising of their competing services in private groups where customers or employees are likely to see them. 

In Pre-Paid Legal Services, Inc. v. Cahill, the employer argued that a former employee’s posts providing general information about his new employer in several private Facebook groups that some of his former colleagues visited and posts about events related to his new employer on his personal Facebook page violated his non-solicitation agreement. 924 F. Supp. 2d 1281 (E.D. Okla. 2013).   Specifically, the plaintiff argued that the defendant’s posts about his new employer were meant to solicit his former co-workers to work at the defendant’s new place of employment because the defendant knew that his Facebook “friends” would see his posts. 

The court ruled in favor of the employee, finding that the posts on his publicly available page touting the benefits of his new employer’s products and his professional satisfaction with his new employer and postings in private groups which could be seen his former co-workers did not violate the employee non-solicitation agreement.   The court noted that: “[t]here was no evidence presented that Defendant’s Facebook posts have resulted in the departure of a single PPLSI associate, nor was there any evidence indicating that Defendant is targeting PPLSI sales associates by posting directly on their walls or through private messaging.”

3. Employees’ announcements of open job positions or advertising of their competing services on their own social media pages which their former customers and co-workers are likely to see. 

In Banker’s Life & Cas. Co. v. Am. Senior Benefits LLC, a former employee posted on his own profile a job opening at his new company and then sent connection requests to several employees at his former company, who would be able to see the job posting on his profile page after they had accepted his connection request. 83 N.E.3d 1085 (Ill App. (1st) (2017).  The court found that his activities did not violate the non-solicitation clause and explained it as follows: 

The generic e-mails [inviting connection from co-workers] did not contain any discussion of Bankers Life, no mention of ASB, no suggestion that the recipient view a job description on Gelineau’s profile page, and no solicitation to leave their place of employment and join ASB. Instead, the e-mails contained the request to form a professional networking connection. Upon receiving the e-mails, the Bankers Life employees had the option of responding to the LinkedIn requests to connect. If they did connect with Gelineau, the next steps, whether to click on Gelineau’s profile or to access a job posting on Gelineau’s LinkedIn page, were all actions for which Gelineau could not be held responsible. Furthermore, Gelineau’s post of a job opening with ASB on his public LinkedIn portal did not constitute an inducement or solicitation in violation of his noncompetition agreement.”

Similarly, in Eva Scrivo Fifth Ave., Inc. v. Rush, a hairstylist announced on her own Instagram page that she had joined a competing business.  No. 656723/2016, 2017 N.Y. Misc. LEXIS 3075, 2017 NY Slip Op 31699(U), ¶ 12 (Sup. Ct., NY County Aug. 9, 2017) (Slip. Op.).  The former employer argued that her post violated the customer non-solicitation clause because the hair stylist had 94 clients as her Instagram followers, and, therefore, her Instagram posts announcing her new salon were solicitations of such clients.

The hair stylist argued that her Instagram announcement was the “industry standard,” her profile was public so anyone could see or “like” her posts, and she did not solicit salon clients to follow or like her Instagram account.  In her post, she made the following announcement: 

HI ALL MY BEAUTIFUL PEOPLE! I’m proud to announce that I am officially opening my book at Marie Robinson this Tuesday NOV 1st! I’m so excited to be joining such a wonderful team and couldn’t be happier.  I hope you will all join me at the new spot for a step up in luxury and al [sic] around cooler vibes! Thank you for the support! Inbox me or email … or call and book apt today with info in bio! CAN’T WAIT!

The court denied a preliminary injunction against the hair stylist and noted that “questions remain[ed] about whether [the hair stylist] engaged in any active solicitation” when she made the two Instagram posts in question and that this issue would have to be resolved at trial. In reaching that decision, the Court pointed to two factors: (1) that the hair stylist “advertised” her new job without referencing her old employer and (2) the only persons who received the information on Instagram were those who pro-actively and voluntarily followed the stylist’s personal Instagram site, only some of whom may have been her former clients.

However,  a district court in Minnesota in Mobile Mini, Inc. v. Vevea reached a different conclusions when it reviewed similar posts by an employee announcing on his page that he had moved to a competitor and encouraging customers to contact him about the new products.  No. 17-1684 (JRT/KMM), 2017 U.S. Dist. LEXIS 116235, at *13-14 (D. Minn. July 25, 2017). 

In this case, a former employee – a sales representation for a portable storage company violated – posted the following messages on LinkedIn six months after she had left Plaintiff’s employment:

I’m excited to have joined the City-Cargo Sales Team! We lease and sell clean, safe, and solid storage containers and offices.  We are locally owned and operated, with local live voice answer.  We offer same day delivery to the Metro, and have consistent rental rates with true monthly billing. Give me a call today for a quote. 651-295-2982, and 

Call me today for a storage container quote from the cleanest, newest, safest and best container fleet in the State of Minnesota.  Let’s connect! 651-295-2982.

The former employer argued that the defendant’s LinkedIn posts were visible to her 500-plus connections, including one or more of the employer’s customers, and at least some, if not all, of these connections may have received an email notification about the new posts. The employer also pointed out to the court that when the defendant worked for the plaintiff, her branch manager specifically discussed using LinkedIn to advertise the company’s products and services. 

The Court granted the plaintiff’s request for a preliminary injunction against the defendant explaining it decision as follows: “Instead of merely announcing a job change, the language of the posts here demonstrates that Vevea’s purpose was to entice members of Vevea’s network to call her for the purpose of making sales in her new position at Citi-Cargo.”

4. “Friending” of customers after leaving employment. 

In Invidia, LLC v. DiFonzo,  a hair salon owner argued that a hair stylist violated non-competition and customer non-solicitation covenants in her employment agreement when she made a “public announcement” on her Facebook page, noting her new employment and “friended” at least eight clients of Plaintiff after she began working at the new hair salon. No. MICV20123798H, 2012 Mass. Super. LEXIS 273, 2012 WL 5576406 (Mass. Super. Ct. Oct. 22, 2012).  The defendant argued that being Facebook friends with customers did not qualify as a solicitation of such customers.  The plaintiff argued that Facebook was a significant channel of communication between plaintiff and its customers and the defendant’s posts meant to reach those customers.

The court ruled in favor of the hairstylist and explained its reasoning as follows: “[O]ne can be Facebook friends with other without soliciting those friends to change hair salons, and Invidia presented no evidence of any communications, through Facebook or otherwise, through which Ms. DiFonzo has suggested to these Facebook friends that they should take their business to her [new place of employment].”

5. Social media posts inviting the readers to check out the new employer’s website. 

In BTS USA, Inc. v. Executive Perspectives, LLC, a webpage designer, updated his LinkedIn account to reflect his new job after he had joined a competitor and authored a post  encouraging his contacts to “check out” his new employer’s website.  No. X10CV116010685, 2014 Conn. Super. LEXIS 2644, 2014 WL 6804545 (Conn. Super. Ct. Oct. 16, 2014) (unpublished order). His former employer filed a lawsuit alleging that the defendant’s LinkedIn activities violated the non-solicitation clause in his employment agreement.

The court rejected the employer’s argument nothing in the employee’s employment agreement with his former employer prohibited him from using social media and that “[i]t would be difficult indeed to find liability for such incidental contacts, when the parties to whom they are directed can choose to receive them or not.”  The court further emphasized the importance of addressing social-media solicitation prohibitions in employment agreements:

The court notes that the use of social media, whether it is Facebook, LinkedIn, Twitter, or some other forum, has become embedded in our social fabric.  Absent an explicit provision in an employment contract which governs, restricts or addresses an ex-employee’s use of such media, the court would be hard pressed to read the types of restrictions urged here, under these circumstances, into the agreement. Indeed, such an expansive interpretation of the employment contract would likely render it unenforceable as overly broad.

6. Announcements by sellers of their companies about their new competing businesses. 

As a general rule, the courts are more inclined to enforce non-compete and non-solicitation restraints that accompany a sale of a business (as opposed to an employment agreement).  In Coface Collections N. Am. Inc. v. Newton,the court entered a preliminary injunction enforcing non-compete and non-solicitation clauses in the asset purchase agreement and prohibiting the seller of the business from posting on LinkedIn about a competing business he formed subsequent to the sale. 430 F. App’x 162, 164-5 (3d Cir. 2011)

In this case, the seller of the company agreed to a non-compete and non-solicit covenants with the buyer, but formed and began operating a new company prior to the covenants’ expiration. He updated his LinkedIn profile with his position at a newly-formed competing business, and posted on Facebook to announce that his “non-compete ends on 12/31/2010″ and “I have decided that the USA needs another excellent, employee oriented Commercial Collection Agency,” and invited “experienced professionals” to apply for a job.  He also sent friend requests on Facebook to current employees of the new owner of the company, asking to view the posted notice of job openings at his competing business.  The court found that such activities violated his restrictive covenants with the buyer of his previous company. 

Similarly, in Joseph v. O’Laughlin, after defendant sold his veterinary clinic to plaintiff and agreed to a non-competition and non-solicitation covenants, he formed a limited liability company with named “O’Laughlin Veterinary Services,” created a Facebook page, and posted a link that advised followers that the clinic was “coming soon” and, when activated, directed users to the business’s location on a map. 175 A.3d 1105, 2017 Pa. Super. Unpub. LEXIS 3191 (Pa. Super. Ct. 2017).  Although the defendant argued that his Facebook post about the clinic “coming soon” and announcement of its location was merely “preparatory,” the court entered a permanent injunction prohibiting him from operating a veterinary clinic within the non-compete radius and engaging in any activity that would violate the asset purchase agreement.  Notably, the Court explained its ruling as follows: 

“Upon review of the [fifty-six page exhibit that memorialized the three-month of entries on the Facebook page], it is obvious that, collectively, the posts, “coming soon” announcement, and map directions, are tantamount to a solicitation of [] clients in contravention of the non-compete clause. . . . There is but one reason for O’Laughlin to create the O’Laughlin Veterinary Services Facebook page and maintain contact with former clients: to solicit their business.”3

BOTTOM LINE:   Employers who are concerned about their employees’ ability to solicit customers or employees on social media after they leave should write express prohibitions on such activities into their non-compete and non-solicitation agreements and explain and define how and when the restraints will apply.  Absent such express language, the courts are not likely to enforce non-solicit or non-compete clauses absent aggravating circumstances such as repeated and aggressive client solicitation, social media posts aimed solely at the customers of the business, or a combination of social media posts with other evidence of direct and in-person customer or employee solicitation. 

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.

What Employers Need to Know About Non-Compete Agreements in Texas (Part I)

imagesIn Texas, non-compete agreements are generally enforceable if they meet certain requirements. Specifically, they must be: (1) part of an otherwise enforceable agreement, (2) reasonable, and (3) not greater than is necessary to protect a legitimate business interest. 

Part of an Otherwise Enforceable Agreement

This simply means that a stand-alone non-competition agreement is not enforceable in Texas.  Instead, a promise not to compete with an employer must be part of another valid agreement. Most of the time, non-compete clauses are included in employment agreements, but they can also be used in confidentiality or restricted stock units (RSU) award agreements. 

Reasonable

Non-competition agreements in Texas must be reasonable as to the geographic area, duration, and scope of activity restricted. In court, employers have the burden of explaining why certain restrictions are reasonable, so they should be prepared to explain why the restrictions included in their non-compete agreements are reasonable for their industry, their business, and with respect to a particular employee against whom they seek to enforce the agreement. Not surprisingly, the reasonableness of the restrictions is one of the most hotly litigated issues in non-compete lawsuits and its resolution often depends on the industry, the type of the business involved, the duties of the employee, and several other factors.

Typically, geographic restrictions should be limited to the geographic area where the employee worked.  However, a larger restriction may be permissible in certain situations where the employee’s duties justify it.

As a general rule, two- to five-year duration is considered a reasonable non-compete term in an employment relationship (the rules are different for non-compete agreements related to a sale of business).

Finally, the scope of restricted activity must be reasonable in that an employee who goes to a competitor to work in a different capacity from what he or she did at the former company, should be able to do so.  Thus, the restraints should be related to the employee’s duties at his or her current place of employment.

Related to Legitimate Business Interest

Since Texas law places the burden on employers to show that their employment non-compete agreements are enforceable, employers must be able to explain why and how the restraints are related to their business interest. If the only explanation for a non-competition clause is that the employer wants to prevent competition from a former employee for a certain time period, such a “naked restraint” without business justification will not hold up in court.

Non-Ambiguous 

Non-compete agreements should be clear as to what they prohibit, when they end, and what territory they cover. If the language of the agreement can be subject to several interpretations, does not make sense, or is not clear as to the precise restraint parameters, an employer may have a hard time enforcing it in court.  Indeed, some courts refuse to order employees not to violate their noncompete agreements where the terms are not clear (an injunction order).  This is why a hastily written non-competition agreement, or one that is not well thought-through, may not be effective when the time comes to enforce it. 

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.

 

Brace Yourself, Resignations Are Coming. Is Your Company Ready?

resignationAnyone who has been running a business for a while knows that January is a high turnover month for employees. And while companies cannot prevent employee turnover, they can take four steps this month to prevent employees from walking out the door with confidential documents and company trade secrets. 

1. Make Sure Key Employees Have Valid Non-Competition, Non-Solicitation and Confidentiality Agreements in Their Files. 

Conduct an audit of your employees files to make sure that: (1) all key executives, employees with access to confidential databases or documents, and sales people have signed non-competition, non-solicitation and confidentiality agreements in their files; (2) such agreements meet the requirements of the Texas Covenants not to Compete Act; (3) the agreements are signed by a company representative; and (4) the company has an electronic version of the agreements so that if the hard copy gets lots, there is a back up.

2. Conduct Confidentiality Training. 

Set aside an hour or two to talk to employees about the importance of maintaining confidentiality of certain company information, go over the confidentiality policy, and answer any questions employees may have.  This way, if they leave, the policy will be fresh in thier minds and they will be more cautious in what they can and cannot share with their new employers. 

3. Verify That Company’s Document Management Systems and Databases Have Security Features Turned On. 

Task your IT person or department to look into what ERP, CRM, and document management systems the company is using and make sure all the security setting are turned on.  Such settings often include the following: (1) alerts when a large amount of data is downloaded; (2) restrictions on what can be printed or downloaded; (3) access restrictions for different employees within the system based on the need-to-know basis; (4)  back up features that allow the company to restore any emails or documents deleted by employees; (5) alerts when information is shared by employees outside the authorized company systems, and many others. 

4. Remind Employees During the Exit Process of Their Continuing Obligations to the Company.

Finally, when you do get a resignation notice, as soon as possible, meet with the employee to remind him or her about any non-competition, non-solicitation and non-disclosure requirements in their employment agreement and make sure the employee returns all of the company equipment and documents prior to leaving the company.  If you find out or suspect that the resigning employee might be going to a competitor, preserve their email accounts and devices issued by the company while you analyze whether their move may violate their restrictive covenants. 

Texas Bar Association Top Ten Legal Blogs in TexasAt Lewis Brisbois, we help companies design proper confidentiality procedures and policies, draft enforceable non-competition, non-solicitation and non-disclosure agreements, conduct confidentiality training with employees, and if trade secrets theft is suspected, help investigate it and prosecute it in courts around the country. 

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.

 

Top 5 Non-Compete Cases in Texas in 2018

Top5Unlike many other states around the country, Texas did not see any drastic changes in its non-competition laws in 2018.  However, out of a 100 + cases involving non-competition disputes, the following handful stand out: 

  1. Thoroughbred Ventures, LLC v. Disman, Civil Action No. 4:18-CV-00318, 2018 U.S. Dist. LEXIS 133697, at *10 (E.D. Tex. 2018).*

HeldA non-disclosure agreement that prohibits employees from using, in competition with the former employer, the general knowledge, skill, and experience acquired in former employment is similar to a non-compete clause and must meet the requirements of the Texas Covenants not to Compete Act. 

Why it made the top five list: This is the first case in Texas to hold that certain non-disclosure clauses may have to meet the same requirements as non-competition agreements.  

Quote: “An agreement prohibiting a former employee in this field from disclosing his acquaintances would therefore be a non-competition agreement in disguise, and would be unenforceable as such. Some of the other categories of confidential information-for example, financial information-might present different problems, but the present motion does not accuse the Former Employees of disclosing anything other than information related to Clients and Contractors.’”

2. Fomine v. Barrett, No. 01-17-00401-CV, 2018 Tex. App. LEXIS 10024, at *8 (App.—Houston [1st Dist.] Dec. 6, 2018)

Held:  A non-competition clause that covers a geographic area where an employer plans to extend its business in the future, without any concrete plans to do so (i.e. just the owner saying s/he is going to expand), is geographically overbroad.

Why it made the top five list: Employers will often include in their non-competition agreements areas of future business expansion.  This case demonstrates that unless the plans for future expansion are definite,  the employers should stick with the area where the business currently operates or where its employees currently work. 

3. Ortega v. Abel, No. 01-16-00415-CV, 2018 Tex. App. LEXIS 6690, at *11 (App.—Houston [1st Dist.] Aug. 23, 2018).

Held: The right of first refusal in the asset purchase agreement, which prohibited a party from operating a business without first offering another party the right to be a partner in the business was a “restraint of trade,” subject to the Texas Covenants Not to Compete Act. 

Why it made the top five list:  This case demonstrates that Texas Covenants Not to Compete Act applies to any restraint of trade, not just the plain vanilla non-competition and non-solicitation agreements in the employment or sale of business context. 

4. Accruent, LLC v. Short, No. 1:17-CV-858-RP, 2018 U.S. Dist. LEXIS 1441, at *12 (W.D. Tex. 2018).

Held: A non-competition clause that prohibits employees from competing with their employer anywhere where the employer does business (as opposed to where the employees worked) can be enforceable against those employees who had extensive access to the company’s confidential information.

Why it made the top five list:  Generally speaking, an employer can only prohibit an employee from competing in the area where the employee worked. However, this case creates an exception to the rule where employees have extensive access to and “intimate knowledge” of highly confidential information of their employer. 

Quote: “Because Short was Lucernex’s senior solution engineer, he now has an “intimate knowledge of all Lucernex product functionality.” Short knows about Lucernex’s unreleased software and its roadmap for future product development. He knows the product functionalities requested by Lucernex customers. He knows Lucernex’s business development plans, its market research, its sales goals, and its marketing strategy. . . Given everything Short knows about Lucernex and its products, customers, and prospects, Short can help a competitor take business from Accruent in any state or country where Lucernex did business. It is therefore reasonable for the noncompete provision to extend to every state or country in which Lucernex did business.”

5. D’Onofrio v. Vacation Publ’ns, Inc., 888 F.3d 197, 212 (5th Cir. 2018)

Held: A non-competition clause that prohibits an employee from working for competitors of the former employer “in any capacity,” without geographic or client-based boundaries, is unenforceable. 

Why it made the top five list:  The Fifth Circuit confirmed, yet again, that an industry-wide restraint on a departing employee, which is not limited to a certain geographic area or the clients that the employee dealt with, is unenforceable under the Texas Covenants Not to Compete Act.     

*Keep in mind that any decisions mentioned in this post may be appealed and their holdings may be overruled.  Therefore, employers should always consult with a qualified employment lawyer to determine the current status of the law applicable to their particular 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. 

 

 

What Are Acceptable Non-Solicitation Restraints for Sales Employees?

maguire_primIn Texas, it is common for sales employees in many industries to have a non-solicitation clause in their employment agreements, which prohibits them from soliciting company clients for a certain period of time after they leave the company’s employment.  Such non-solicitation clauses are enforceable under the Texas Covenants Not to Compete Act as long as they are reasonable and supported by proper consideration.  What is “reasonable,” however, is often a major point of contention between the company and the sales employees or such employees’ new employers.  

A recent opinion from the Thirteenth Texas Court of Appeals provides a good illustration of what is not a reasonable non-solicitation restraint.  In Cochrum v. National Bugmobiles, Inc., a trial court entered an injunction against a pest control technician who left one pest control company to work for another. The injunction prohibited Cochrum from soliciting business from any of National Bugmobiles’ 19,700 customers on its client list compiled over the course of eight or nine years during which Cochrum worked there, even though the employee testified that he only serviced approximately 300 customers during his tenure with National Bugmobiles.

Cochrum argued that he cannot in good faith comply with the injunction because he has no idea who the 19,700 customers are.  The company argued that in order to comply with the injunction, he should ask any prospective customer whether they received services from National Bugmobiles, and if they had, refrain from soliciting their business.  While the trial court was satisfied with this approach, the Court of Appeals rejected it calling it “simplistic” and “fatally vague” in that the injunction order failed to identify the customers that Cochrum was prohibited from soliciting, as required under Texas law.

Thus, as far as the non-solicitation requirements were concerned, the Court of Appeals modified the temporary injunction by striking down the following language for being too vague:

  • Diverting any business whatsoever from Bugmobiles by influencing or attempting to influence any of the customers of Bugmobiles whom Cochrum may have dealt with at any time or who were customers of Bugmobiles on February 13, 2017 or had been customers of Bugmobiles thereto;
  • Servicing any client that was under contract with or was being serviced by Bugmobiles as of February 132017 by directly or indirectly owning, controlling or participating in the ownership or control of, or being employed by or on behalf of, or engaging in any business which is similar to and is competitive with the business of Bugmobiles.

Instead, the Court of Appeals left the following much more specific language in the injunction order prohibits the technician from:

  • Diverting any business by soliciting or attempting to solicit any of approximately 300 customers of Bugmobiles whom Cochrum dealt with at the time of his resignation from Bugmobiles on February 13, 2017.

TexasBarToday_TopTen_Badge_VectorGraphicCONCLUSION: While a non-solicitation clause that prohibits a sales employee from soliciting all company customers may sometimes be justified, most of the time it is much more reasonable to limit the non-solicitation restraint only to the customers and prospective customers with whom the sales employee directly interacted rather than every customer in the company’s database.  This is true, especially when the entire customer list is much larger than the subset of customers with whom the sales person dealt.  

When enforcing a non-solicitation clause, a company should always consult with an attorney to determine the scope of the enforcement given a particular sales employee’s area, the circumstances surrounding a his/her departure, and the size of the company customer list.

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.

Texas Supreme Court Clarifies When Employers are Responsible for Employees’ Negligence

U5drUHKezGhrZZC7zuRZG27Dz7miJyK_1680x8400When are employers liable for negligence of their employees? For example, when an employee is driving a company vehicle and gets in a car accident, when can his/her employer be held liable for the injuries caused by the employee? The legal standard – vicarious liability – has been around for a long time, but last week the Texas Supreme Court added a much-needed clarity to it. 

In Texas, before an employer can be held liable for its employees’ negligence, the following two questions must be answered:

  1. At the time of the negligent act, was the worker an employee (as opposed to an independent contractor) of the employer?
  2. At the time of the negligent act, was the worker acting in the course and scope of his or her employment?

If the answer to both of these questions is “yes,” then the employer can be held liable for that employee’s negligent conduct.   

The “Control” QuestionThe answer to the first question depends on whether an employer has the right to control the details and progress of the worker’s job. The Supreme Court clarified that the “control” question is not evaluated on a task-by-task basis, but is a question of general control over the worker.  If an employer does not dispute that a particular worker is its employee, then the question of control becomes irrelevant and the party seeking vicarious liability can skip to the second question in the analysis. 

In Painter, et al. v. Amerimex Drilling, I., Ltd., the employer conceded that the driller that got into a car accident injuring several people was an employee.  Nevertheless, it argued that because it exercised no control over the details of the driller’s driving at the time of the accident, i.e., the particular task during which the incident occurred, it could not be vicariously liable.  The Texas Supreme Court rejected this argument and stated that once the employer-employee relationship was established, the only remaining question was whether at the at the time of the accident the driller was acting in the scope and course of his employment. 

The “Scope and Course of Employment” Question This question seeks to determine whether an employee committed a negligent act while performing his duties for the employer or while he was doing something unrelated.  A classic law school example would be a driver, who is still “on the clock” taking a detour to run a personal errand and getting into an accident while doing so.  In that situation, his employer would not be vicariously liable because the employee was acting outside the course and scope of the employment. 

In Painter, et al., the driller got into a car accident while he was driving the drilling crew from the drilling site to the campsite provided by the employer. Normally, driving to and from work would not be considered to be within the course and scope of employment.  However, in this case, the driller received $50 bonus from his employer for driving the crew between the drilling site and the campsite, the employer was contractually required to pay such a bonus, and there was evidence that the driller was providing the driving services as part of his assigned job duties.  Therefore, when the driller got into an accident while driving the drilling crew from the drill site to their campsite, the Court concluded that he could have been acting within the course and scope of his employment and the employer was not entitled to a summary judgment on this issue.* 

BOTTOM LINE: Texas employers can be held liable for their employees’ negligence as long as the negligent act occurred when the employee was performing his or her duties for the employer.  Where the employer-employee relationship is not disputed, the only question that stands between the employer and the vicarious liability for employee’s actions is whether, at the time of the accident, the employee acted within the course and scope of his employment or whether he deviated from his/her duties.  

Therefore, Texas employers must carefully consider how they structure employment relationships, contractual obligations and risk-shifting provisions, and how they describe and define employees’ duties.  In facing the question of vicarious liability in litigation, employers should carefully analyze the situation using the Painter framework. 

*Justices Green and Brown penned a dissenting opinion arguing that the proper standard for “control” analysis in vicarious liability cases should be on a task-by-task basis. 

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.

 

A Texas Court of Appeals Explains Employees’ Fiduciary Duties in Texas

Employees Duty of LoyaltyThe Eighth Court of Appeals recently analyzed the question of whether regular non-executive level employees in Texas owe fiduciary duties to their employers and answered that question with a resounding “yes.” While the scope of the rank-and-file employees’ fiduciary duties may not be as broad as those of a CEO or CFO of a company, they still owe a duty of loyalty to their employer and may not:

  1. appropriate company trade secrets
  2. solicit away the employer’s customers while working for the employer
  3. solicit the departure of other employees while still working for the employer
  4. carry away confidential information.

Employees can, however, plan to go into competition with their employers and may take active steps to do so while still employed, but cannot cross the line of preparation into actual competition until after they leave (assuming no post-employment restrictive covenants).

In Heriberto Salas, et al. v. Total Air Services, LLC, Salas opened and operated a company that directly and actively competed with his employer – Total Air Services – while still working for the employer.  He submitted bids on the same jobs as his employer through his own company, distributed his company’s business cards while giving out flyers for Total Air Services, and solicited Total Air Services’s customers to do business with his own company.   

Bottom Line:  Even those employees who do not have non-compete or non-solicitation agreements with the employer still owe a duty to the company not to divert business or use the company’s confidential information to benefit themselves while drawing a paycheck there.  

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.