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.

An Injunction in a Theft-of-Trade-Secrets Case Cannot Prohibit a Party From Using Publicly Available Information

downloadCompanies suing for trade secrets theft often want not just the monetary compensation for the stolen trade secrets, but also a court order – an injunction – prohibiting the other side from using the stolen information.  

In order to be enforceable, however, under the Texas Rules of Civil Procedure, an injunction must be “in clear, specific and unambiguous terms” so that the party enjoined can understand the duties and obligations imposed by the injunction and so that the court can determine whether the injunction has been violated.  Additionally, an injunction cannot prohibit a defendant from doing something he has a legal right to do, e.g., use publicly available information along with the trade secret information. Thus, a court order prohibiting a defendant from using trade secrets must be broad enough to cover all possible circumstances while narrow enough to include only the illegal activities.   This is easier said than done.

In a recent case, the Houston Court of Appeals reversed a permanent injunction order which could be read to cover both – the trade secret data and publicly available information.  In TMRJ Holdings, Inc. v. Inhance Techs., LLC, the injunction at issue prohibited defendant from:

(1) “using, disclosing, transferring, or possessing, in whole or in part, [plaintiff’s] trade secret information,” which was defined as “compilation of specified data” for various plaintiff’s processes; and

(2) “operating, manufacturing, designing, transferring, selling, or offering for sale” certain processes that “contain, are based on, or utilize, in whole or in part, [plaintiff’s] trade secrets.” 

The Court concluded that the injunction was not specific enough because failure to define “specified data” and the general description of “trade secrets” did not give adequate notice of the prohibited conduct to defendant.  Specifically, the injunction did not distinguish between the unique, protected elements of plaintiff’s data compilations, processes, or equipment from that which plaintiff’s competitors use throughout the industry.  As the result, the Court reversed the permanent injunction in this case and remanded it to the trial court to consider in light of its opinion. 

TexasBarToday_TopTen_Badge_VectorGraphicCONCLUSION:  In trade secrets theft cases, in addition to proving the elements of an injunction, plaintiffs must also make sure the injunction order’s language is specific enough, without giving away the trade secrets information, to provide defendant with a clear notice of what it can and cannot do.

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.

Trump’s Tax Reform Affects Settlements of Sexual Harassment Claims, But Training Remains the Best Answer

sexual harassmentJust days before we rang in 2018, in the wake of the #MeToo movement, the Tax Cuts and Jobs Act became the law, including the special clause titled “Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection with Sexual Harassment or Sexual Abuse.”

Prior to this statute, the law allowed companies to claim tax deductions for settlements of sexual harassment and abuse claims and for attorney’s fees incurred in defense of such claims, even if the settlement agreements were confidential, which they usually were. 

Now, if a settlement agreement prevents a harassment or abuse victim from publicly sharing details about the claim, then the company paying the settlement cannot deduct from taxable income the amount of the settlement or the attorney’s fees incurred in reaching the settlement agreement. 

However, while the title of the section declares a lofty goal, its implementation and the practical effect remain less than clear.  In particularly, the following questions remain:

  1. Where the settlement agreement settles more than just a sexual harassment or sexual abuse claim, can the company still claim the deduction?
  2. Will this law encourage the companies to segregate attorney’s fees between sexual harassment allegations and other types of discrimination or claims alleged by the settling employee?
  3. Will this law incentivize employees to add a sexual harassment/sexual abuse claim to other claims simply to put additional pressure on the company?
  4. Will this law drive the companies to misclassify the types of claims that are being settled or seek a general release of all employment claims (without specific mention of sexual harassment/abuse claim) in order to get the deduction?
  5. Will a general release of all claims against the employer result in its inability to get a deduction because sexual harassment and abuse claims are included in such a release?
  6. Will this law result in more companies attempting to litigate the sexual harassment / sexual abuse claims rather than reach settlement agreements, especially on those claims that are weak and/or not supported by evidence – the so-called “nuisance claims”?

This law goes into effect on January 1, 2018 and will not affect the 2017 taxes.  Until the implications of this statute come into focus, companies should consult with their attorneys regarding whether to include a non-disclosure provision in a settlement agreement if any claim of sexual harassment or sexual abuse was made by the claimant.

While the uncertainty of the answers to the above questions remains, the best course of action for companies is to keep investing into quality anti-discrimination and anti-harassment training so as to avoid the sexual harassment claims in the first place. 

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 Companies Should Update Non-Compete Agreements with California Employees in Light of a New Statute

Texas California Noncompete AgreementsAny Texas companies that have employees who primarily work and reside in California should update their non-compete agreements with such employees to meet the requirements of the California Labor Code Section 925.  The statute, essentially, forces out-of-state employers to litigate any disputes with their California employees in California courts and apply California law, which prohibits non-compete agreements. Failure to comply with the statute allows employees to sue their company in California to declare their non-compete agreement unenforceable and get their attorney’s fees.  

1. To whom does Section 925 apply? It applies to all employers – regardless of where they are based (so, even Texas companies) – that employ individuals who “primarily reside and work in California.”  The word “primarily” suggests that the employees must both reside and work in California at least half the time.  It applies only to disputes between employers and employees that arise in California. 

2. What does the Section 925 say? It states: “An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: (1) Require the employee to adjudicate outside of California a claim arising in California; (2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.”

3. Is there anything a Texas company can do to avoid the restrictions of Section 925? The statute does not apply where an employee is represented by legal counsel in negotiating the forum selection clause (where any lawsuits will be litigated) or choice of law clause (what law will apply to such future disputes).  Section 925 does not apply to any voluntary agreements that are not a “condition of employment” such as, for example, a separation agreement.

4. How does this affect Texas companies’ ability to enforce non-compete agreements against California employees?  Prior to Section 925 becoming the law, many out of state employers used choice of law clauses to apply the law of those states that allow non-compete agreements in order to avoid California’s ban on non-compete agreements. Section 925 eliminates this option.  Therefore, Texas employers must rely on other protections such as air-tight non-disclosure agreements.  

BOTTOM LINE:  Texas companies with California employees who primarily reside and work in California should review their policies, handbooks, and employee agreements and make sure that any choice of law and forum selection clauses are compliant with Section 925. As far as negotiating individual employment agreements with key California employees, if Texas companies want for Texas law to govern those agreements (and enforce non-compete restraints) the companies should make sure that the individual employees are represented by counsel in the negotiation process in order to meet Section 925 requirements.

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.