Common Misconceptions About Non-Competition Agreements in Texas 

A big part of my practice consists of enforcing non-competition, non-solicitation and non-disclosure agreements against the departing employees on behalf of their employers. Conversely, I also advise employees regarding what they can and cannot do in light of the non-competition or non-solicitation restrains imposed on them by their former employers.  Here is a quick list of misconceptions that I have encountered among employers and employees about non-competition agreements in Texas.

1.         Non-competition agreements are not enforceable in Texas.  This is false.  For some reason, a lot of employees still believe that non-competition agreements are not enforceable under Texas law. While this used to be the case roughly a decade ago, all through mid- and late-2000s, Texas courts have been slowly relaxing the requirements that an employer must meet in order to enforce a non-compete agreement. It used to be virtually impossible for an employer to enforce a non-competition agreement, but now as long as the restraints are “reasonable” and a few other requirements are met, a non-compete agreement will be upheld in court. A detailed explanation of the requirements can be found here.

Keep in mind that not all agreements for Texas employees are governed by Texas law. Each state has its own rules about the enforceability of non-competition agreements and, for example, an agreement that would be enforceable under Texas law, would not be enforceable under California law.  Typically, non-compete agreements will state which law governs. If they do not, a more detailed analysis will have to be performed to determine which state’s law applies and how it affects the restraints imposed on the employee.

2.         I never signed a “non-competition agreement,” therefore I can compete with the employer. Employees rarely sign an actual contract titled “non-competition agreement.” Instead, non-competition clauses are often included in any number of documents, including employment agreements, arbitration agreements, benefits plans, stock option agreements, or employment handbooks and manuals. Thus, employees should carefully read every employment document they sign and keep the most current copy in their files.  When the time comes to leave the employer or start their own company, it helps to know exactly what the non-competition provisions state.

3.         A non-competition clause that is good for one employee is good for all employees.  This is false.  While simply including a non-competition or non-solicitation clause in an agreement often deters employees from competing against their former employers, when push comes to shove and an employer is forced to sue its former employee for violating his or her non-compete agreement, Texas courts will look at whether the restraints imposed by such agreements are “reasonable.”  As part of this analysis, they will consider what duties the employee performed, which customers he or she worked with, what geographic area his or her work covered, and many other factors.  Since this is a very factually intensive analysis, non-compete restraints that might be reasonable for one employee might be completely unreasonable for another employee. Thus, including a cookie-cutter non-compete clause in all of your employees’ contracts might not adequately protect the company’s interests. This does not mean, of course, that an employer must draft a different non-compete clause for each employee, but it does mean that certain positions or certain levels of employees within the company might need different clauses than other types of employees.

4.        Texas courts can always rewrite or “fix” a non-competition clause that is too broad. While technically this is true, practically speaking this kind of thinking can cost an employer a lot of money down the line.  First, employees are much more likely to challenge or violate a non-competition agreement that contains broad or unreasonable restraints because they think it is unenforceable or because they feel that it leaves them no choice by to violate it.  Second, an employer who knowingly attempts to enforce an unreasonable non-competition agreement may end up paying the restrained employee’s attorney’s fees if a court finds that the agreement was unreasonable. See a prior detailed discussion here.

BOTTOM LINE: Employers should attempt to craft non-competition clauses that take into consideration their industry, employees’ duties, the geographic area where employees will be working, and the time limitation that can be justified in court as necessary to protect the business of the company. While it might be tempting to draft a non-compete or non-solicitation clause that is broader than is necessary such approach can backfire if the employee decides to challenge the agreement in court.

Employees should carefully read and make sure they understand and agree with the non-competition or non-solicitation clauses contained in their employment documents.  They should assess the effect of the clause on their employment opportunities after they leave their current employer. If the clause is not clear, they should seek clarification in writing from the employer explaining the geographic scope, time limitations and the scope of restrained activities covered by the non-competition or non-solicitation clause.

Leiza litigates non-compete and trade secrets lawsuits on behalf of EMPLOYERS and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete agreement, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

An Employer Cannot Prohibit Its Employees From Discussing “Personnel Issues”

In the last few years, the National Labor Relations Board (NLRB) has been declaring unenforceable one confidentiality policy after another, forcing employers to balance their need to protect their confidential information and trade secrets against the right of employees to freely discuss the terms of their employment.  So, how should a business draft its confidentiality policy so that it serves its purpose, but does not land the company in hot water with the NLRB?  Last week’s Fifth Circuit Court of Appeals‘ decision in Flex Frac Logistics, L.L.C., et al. v. National Labor Relations Board provides some useful guidance.

In this case, the confidentiality provision in question prohibited Flex Frac’s employees from sharing “confidential information” outside the organization. Such “confidential information” included, but was not limited to, the company’s marketing processes, plans and ideas, financial information, costs, prices, business plans, and “personnel information and documents.”

When Kathy Lopez, Flex Frac’s employee was fired, she filed a charge with the NLRB, prompting the Acting General Counsel for the Board to file a complaint, alleging, inter alia, that Flex Frac promulgated and maintained a rule prohibiting employees from discussing employee wages in violation of Section 8(a)(1) of the National Labor Relations Act (NLRA).  The administrative law judge found that the confidentiality clause violated Section 8(a)(1) because it was overly broad and contained language employees could reasonably interpret as restricting their exercise of their Section 7 rights. In a split decision, the NLRB affirmed.  Flex Frac appealed, and the Fifth Circuit affirmed as well.

The Court of Appeals explained that under Section 8(a)(1) of the NLRA, it is an “unfair labor practice for an employer . . . to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 157 of this title.”  Such rights include self-organization;  forming, joining, and assisting labor organizations; collective bargaining; and engaging “in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 28 U.S.C. § 157. Thus, a “workplace rule that forbids the discussion of confidential wage information between employees . . . patently violates Section 8(a)(1).”

Even if the workplace rule or policy does not expressly prohibit discussion of such information, it may still violate Section 8(a)(1) if the employees would reasonably construe the language of the policy to prohibit Section 7 activity.  Because the confidentiality clause at question in Flex Frac prohibited discussion of all “personnel information” and did not create an exception for discussion of wages, according to the Fifth Circuit, employees could reasonably construe its language as prohibition against discussion of wages or other terms and conditions of employment.

Importantly, the Fifth Circuit differentiated the Flex Frac policy from the confidentiality clauses upheld in the following cases:

  • Policy prohibited disclosure of “hotel-private information to employees or other individuals or  entities that are not authorized to receive that information,” but did not define “hotel-private information.” Held not to violate the NLRA because employees would reasonably interpret it to protect customers’ information and not interfere with discussion of their wages. Lafayette Park Hotel, K-Mart, 330 N.L.R.B. 263 (1999).
  • Policy stated that “Company business and documents are confidential. Disclosure of such information is prohibited.” Held not to violate the NLRA for the same reason. Lafayette Park Hotel, K-Mart, 330 N.L.R.B. 263 (1999).
  • Policy prohibited employees from disclosing “proprietary information . . . includ[ing] . . . customer and employee information, includ[ing] organizational charts and databases [and] financial information.” Held not to violate the NLRA because “employee information” was listed as an example of “intellectual property,” and would be reasonably interpreted by employees not to include information related to the terms and conditions of their employment or their wages since those are not considered “intellectual property.”  In re Mediaone of Greater Fla., Inc., 340 N.L.R.B. 277 (2003).

Unlike the confidentiality policies in these cases, the Flex Frac policy prohibited disclosure of specifically “personnel information” and failed to clarify that such information did not include “wages.” Thus, the company employees could reasonably interpret “personnel information” to include the terms and conditions of the their employment. The Fifth Circuit noted in a footnote, however, that the NLRB‘s order did not impair the majority of the company’s confidentiality policy and nothing prevented Flex Frac from redrafting its policy to require confidentiality for employee-specific information such as social security numbers, medical records, background criminal checks, drugs test, or other similar information.

The Flex Frac opinion was issued a little over a month after NLRB struck down another employer’s confidentiality policy that prohibited disclosure of “personal or financial information.” The NLRB in MCPc, Inc. v. Jason Galanter, 360 NLRB 39 (2014) found that the employer violated Section 8(a)(1) by maintaining an overly broad confidentiality rule in its employee handbook stating that “dissemination of confidential information within [the company], such as personal or financial information, etc., will subject the responsible employee to disciplinary action or possible termination.”  The Board found that employees would reasonably construe this rule to prohibit discussion of wages or other terms and conditions of employment with their coworkers—activity protected by Section 7.

BOTTOM LINE: In light of the above NLRB decisions and the Flex Frac opinion, employers should review their confidentiality policies to ensure that they are drafted to encompass only trade secrets and other confidential and proprietary information rather than information that could relate to wages and other terms and conditions of employment.

For assistance in drafting or auditing your company’s confidentiality policy, contact Leiza Dolghih.

The Fifth Circuit Addresses the Texas Anti-SLAPP Statute and the Commercial Speech Exemption for the First Time

Three years ago, Texas enacted its own anti-SLAPP statute, appropriately titled the Texas Citizens Participation Act (TCPA). Since then, many defendants have taken advantage of the TCPA‘s quick dismissal procedure when confronted with suits for defamation, business disparagement, or other claims arising out of the defendants’ exercise of their right of free speech, right to petition, and right to association. Because the statute is so new, however, many of the issues surrounding its application in Texas have not yet percolated through the appellate level, which makes the Fifth Circuit Court of Appeals‘ analysis of the “commercial speech” exemption under the TCPA last week in NCDR, L.L.C., et al. v. Mauze & Bagby, P.L.L.C. particularly important.[1]

Factual Background

NCDR, LLC d/b/a Kool Smiles is a national chain of dental clinics. Mauze & Bagby is a personal injury law firm in San Antonio, Texas. In 2012, the law firm began an advertising campaign seeking to represent former Kool Smiles patients in a lawsuit against the chain. As part of this campaign, M&B ran television, radio, and internet advertisements, and developed a website that strongly implied, or even accused, Kool Smiles of performing unnecessary and/or harmful dental work on children to obtain government reimbursements.

Kool Smiles sued M&B, asserting, among other claims, business disparagement, defamation, and injury to business reputation. The law firm moved to dismiss the suit under the TCPA arguing that its campaign was a protected expression of free speech. However, both the trial court and the Fifth Circuit Court of Appeals found that M&B was not entitled to the protection afforded by the TCPA because its advertisements were commercial speech.

The TCPA and the Commercial Speech Exemption

The purpose of the TCPA is to protect the right of people “to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of a person to file meritorious lawsuits for demonstrable injury.” Tex. Civ. Prac. & Rem. Code Ann. § 27.002. To achieve this, the TCPA provides that if a legal action is based on, relates to, or is in response to a party’s exercise of the right of free speech, right to petition, or right of association, the defendant may file a motion to dismiss the lawsuit within sixty days of being served with the complaint. Id. § 27.003(a). Only very limited discovery is allowed until the court rules on the motion to dismiss. Id.

The TCPA requires the court to dismiss the lawsuit if the defendant shows by a preponderance of the evidence that the legal action is based on, relates to, or is in response to the party’s exercise of the right of free speech, right to petition, or right of association. Id. § 27.005(a)–(b). In order to avoid the dismissal, the plaintiff must establish by clear and specific evidence a prima facie case for each essential element of each claim. Id. § 27.005(c).

The “commercial speech” exemption to the TCPA disallows this quick dismissal procedure when:

. . . a legal action [was] brought against a person primarily engaged in the business of selling or leasing goods or services, [and] the statement or conduct arises out of the sale or lease of goods, services, or an insurance product or a commercial transaction in which the intended audience is an actual or potential buyer or customer. Tex. Civ. Prac. & Rem. Code Ann. § 27.010(b).

The Fifth Circuit’s Analysis

The Fifth Circuit looked at four cases decided by the Texas Courts of Appeals that addressed the commercial speech exemption. Two addressed whether a defendant’s action “arises out of the sale or lease of goods, services, or an insurance product.” The other two address whether the intended audience is “an actual or potential buyer or customer.” In all four cases, the courts of appeals found that the commercial speech exemption did not apply.

  • In Newspaper Holdings, Inc. v. Crazy Hotel Assisted Living, Ltd., the First Court of Appeals held that the newspaper articles exposing compliance problems at Crazy Hotel and published by Newspaper Holdings did not “arise out of the sale of the goods and services” that the newspaper sold – newspapers. The commercial speech exemption, therefore, did not apply and the Court granted the newspaper’s motion to dismiss under the TCPA.
  • In Pena v. Parel, the Eighth Court of Appeals held that a letter to a parole board from a client’s attorney did not arise from “the sale of goods, services or insurance product.”

After analyzing the above-listed cases, the Fifth Circuit Court of Appeals ruled that this case was different and that M&B’s statements made in the advertising materials constituted commercial speech because they: (1) arose out of the sale of M&B’s legal services, and (2) were intended for M&B’s potential customers – people who had used Kool Smiles’ services and who wanted to file a lawsuit against them.

Takeaway

The Texas Citizens Participation Act is still very new and the case law interpreting the statute is still developing. However, the NCDR decision strongly suggests that any business advertisements directed at the current or potential clients are not protected by the TCPA.  Thus, a business whose advertisements contains negative statements about another business or individual should consider the possibility that it will not be able to use the TCPA to quickly dismiss a defamation or a business disparagement lawsuit arising out of such statements if one is filed.

For more information regarding defamation and business disparagement claims in Texas, contact Leiza Dolghih.


[1] While the Fifth Circuit Court of Appeals‘ analysis of the TCPA is not binding on the Texas state courts per se, it is instructive since the Court must “interpret[] the state statute the way the state supreme court would, based on prior precedent, legislation, and relevant commentary.” Since the Texas Supreme Court has not yet interpreted the TCPA, the Fifth Circuit‘s analysis of the “commercial speech” exemption is the next best thing.

Employers Should Take Care Not to Waive Non-Compete or Non-Solicitation Clauses Through Post-Employment Actions

It is not uncommon for employers to include a non-compete/non-solicitation (NCNS) covenant in their benefit plans or stock option agreements. Either agreement can then make the payments due to the employee conditional upon his or her compliance with the NCNS. In those cases where the payments are scheduled to be made after the employee leaves, such arrangement provides an extra incentive for the employee to comply with the NCNS covenant.

The employers that chose to follow this route, however, need to be aware that a payment made to an employee pursuant to a benefit plan or a stock option agreement after the employer discovers that the employee is violating his or her NCNS, can waive employer’s rights to later enforce the NCNS in court.

In Ally Financial, Inc. v. Gutierrez, et al., Ally’s employee, Gutierrez, signed a “Long-Term Equity Compensation Incentive Plan” (CIP) under which she would receive award payments based on Ally’s common stock value. The CIP included the following non-solicitation clause:

While the Participant is employed by the Company or a Subsidiary, and during the 2-year period immediately following the date of any termination of the Participant’s employment with the Company or a Subsidiary, such Participant shall not at any time, directly or indirectly, whether on behalf of . . . herself or any other person or entity (i) solicit any client and/or customer of the Company or any Subsidiary with respect to a Competitive Activity or (ii) solicit or employ any employee of the Company or any Subsidiary, or any person who was an employee of the Company or any subsidiary during the 60-day period immediately prior to the Participant’s termination, for the purpose of causing such employee to terminate his or her employment with the Company or such Subsidiary.

While at Ally, Guttierez received several CIP award letters that described a deferred payment schedule spanning from 2009 until 2015. In 2011, she left to work for Ally’s competitor, Homeward. Soon after her departure, eight of Ally’s employees went to work for Homeward as well, prompting Ally to send Gutierrez a letter accusing her of soliciting at least four of its employees and warning her that Ally was prepared to take a necessary “enforcement action.” The letter also stated that any violation of any contractual restrictive covenants would result in the forfeiture of “any Award that has not yet been paid” and require Guiterrez to “repay any Award Payments made within 24-months of an enforcement action.”

After sending the letter and after four more Ally’s employees went to work for Homeward, Ally paid Gutierrez her next payment due under the CIP.  When even more employees left, Ally filed a lawsuit against Gutierrez and Homeward and alleged claims for unfair competition, tortious interference with contractual relations, tortious interference with employment relations, conspiracy, and misappropriation of trade secrets.

Gutierrez and Homeward argued that the covenant was unenforceable as overly broad and unrelated to Ally’s business and, in the alternative, that Ally waived its right to seek its enforcement.  The trial court granted defendants’ motion for summary judgment on the grounds of waiver and the Second Court of Appeals affirmed.[1]

The Court of Appeals explained that under Texas law, waiver is an affirmative defense requiring a defendant to proffer evidence conclusively establishing the following: (1) an existing right, benefit, or advantage held by a party, (2) the party’s actual  knowledge of its existence, and (3) the party’s actual intent to relinquish, or intentional conduct inconsistent with, the right. Gutierrez and Homeward argued that the payment under the 2009 award letter was an intentional relinquishment of, or intentional conduct inconsistent with, Ally’s intent to enforce the non-solicitation covenant.  Ally responded that a payment to Gutierrez was “nothing more than a ministerial act,” but the Court of Appeals rejected that argument as “unpersuasive.”

According to the Court of Appeals‘ reasoning, the warning letter from Ally demonstrated that Ally was aware at the time it made the payment to Gutierrez that she was allegedly violating the non-solicitation covenant contained in the CIP.  By making the payment, Ally “represented to Gutierrez that although it believed she had violated the CIP and had forfeited her rights to all unvested payments by voluntarily resigning, it was awarding her incentive compensation as provided by the CIP.”  Making such payment, therefore, was inconsistent with Ally’s previously stated intention to enforce the non-solicitation covenant and with the terms of the CIP and was more than a ministerial act.

CONCLUSION:  There are two practical lessons that employers can derive from this case. First, when dealing with departing employees who are due any sort of payments after their employment is terminated, the companies should make sure that the department responsible for payments and the legal department coordinate with each other.  It is entirely possible that in Ally’s case the department making the payment was not aware of the warning letter sent to Gutierrez.

Second, while sending a cease and desist letter to a departed employee does not necessarily require involvement of a law firm or an in-house attorney (although it certainly gives it more clout), any actions that a business takes after sending a cease and desist letter should involve legal counsel to make sure that such actions will not negatively impact the employer’s case should she or he decide to sue the departing employee.

For more information regarding protection of trade secrets and enforcement of non-compete agreements in Texas, contact Leiza Dolghih.


[1] Although the CIP was governed by Michigan law, the Court of Appeals held that Texas and Michigan law were “functionally the same” on the issue of non-compete covenants and waivers, therefore, it did not need to decide which law applied to this dispute.

A Temporary Injunction Order Enforcing a Non-Compete Agreement in Texas Must Pass the Muster of Rule 683 or Face Dissolution

All temporary injunctions in Texas must comply with Rule 683 of Texas Rules of Civil Procedure, which requires every injunctive order to “set forth the reasons for its issuance; [] be specific in terms; [and] describe in reasonable detail and not by reference to the complaint or other document, the act or acts sought to be restrained.” A temporary injunction order that fails to meet these requirements is subject to being dissolved.

Within the last four months, at least three Texas Courts of Appeals dissolved temporary injunctions seeking to enforce non-competition agreements because they failed to comply with Rule 683.  Most recently, the First Court of Appeals in Lasser v. Amistco Separation Products, Inc. dissolved a temporary injunction order that sought to enforce contractual non-compete and non-solicitation obligations because the order was both not specific enough and overbroad. This opinion, along with Ramirez, et al. v. Ignite Holdings Ltd., et al. (see my prior post here), provide a good example of what language falls short of meeting Rule 683 requirements.

In Lasser, ACS Industries, LP hired Robert Lasser to work in sales. His employment contract contained a confidentiality and non-solicitation clause, which prohibited Lasser from copying or using for his personal benefit ACS’s “confidential information,” as defined in the employment contract. It also forbade Lasser from “directly or indirectly, or by action in concert with others, engage in the solicitation of sales of competing goods to customers of ACS” for a period of two years from the contract’s termination. ACS later sold its assets, including Lasser’s employment contract, to plaintiff, Amistco Separation Products. Lasser worked for Amistco for a year before leaving to work for a competitor.

A month after Lasser resigned, Amistco sued him for conversion (of confidential information), civil theft, and misappropriation of trade secrets. The company requested the trial court to issue a temporary and permanent injunction against Lasser ordering him to return the confidential information that he had downloaded prior to his departure, enjoining him from disclosing and using such information, and preventing him from soliciting customers.

The trial court granted Amistco’s application for temporary injunction and issued the following order:

It is . . . ORDERED Defendant Robert Lasser desist and refrain from the following:

a) [Lasser] is ordered to return to [Amistco], and to cease and desist from using, any of [Amistco’s] confidential information and trade secrets within 14 days or as otherwise agreed by counsel.

b) [Lasser] is restrained from directly or indirectly disclosing, copying or otherwise reproducing, or giving others access to any of [Amistco] confidential information and trade secrets.

c) [Lasser] is restrained from deleting any emails, texts, voice messages, instant messaging communications (to include without limitation, instant messages using Google Talk, AOL Instant Messenger, Yahoo Messenger, or any other instant messaging platform), or any other electronic files or communications from his personal or work computers, laptops, phones, electronic storage devices and/or any other electronic device, or from, damaging, selling or otherwise discarding his personal or work computers, laptops, phones, electronic storage devices and/or any other electronic device in [Lasser]’s possession.

d) [Lasser] is restrained from directly or indirectly soliciting any of [Amistco’s] customers.

In analyzing the trial court’s order, the Court of Appeals reiterated that a temporary injunction order must do two things to comply with Rule 683‘s specificity requirements: (1) it should inform the defendant of the acts he is restrained from doing, without calling on him for inferences or conclusions about which persons might well differ and without leaving anything for further hearing; and (2) it may not prohibit lawful activities.  The injunctive order in question failed to meet both of these mandates.

First, parts (a) and (b) of the order failed to “identify, define, explain, or otherwise describe” what constituted “confidential information” that Lasser was prohibited from disclosing. Thus, these provisions did not provide adequate notice to Lasser as to what conduct he was restrained from performing and left him to speculate what conduct might satisfy or violate the order.  Therefore, the Court of Appeals declared Parts (a) and (b) void.

The Court also found that Part (c) was impermissibly ovebroad under Rule 683 because it enjoined activities that Lasser had a legal right to perform, such as deleting electronic records and files unrelated to the subject of the lawsuit. Therefore, it vacated this provision.

Finally, the Court of Appeals ruled that Part (d) of the order, which restrained Lasser “from directly or indirectly soliciting any of [Amistco’s] customers” was also overbroad.  Whereas the non-solicitation clause in Lassiter’s contract prohibited him from engaging in solicitation of sales of competing goods to Amistco’s customers, the temporary injunction order enjoined Lasser from soliciting any sales to Amistco’s customers. Thus, the order precluded Lasser from engaging in lawful business of selling non-competing goods to Amistco’s customers. The Court declared this provision void as well and ordered the entire temporary injunction dissolved.

CONCLUSION: When preparing for a temporary injunction hearing, the party seeking an injunction and its attorneys should make sure that the proposed order that they would like the judge to sign is specific enough to give the other side a clear notice of what they can and cannot do once the order is entered.  At the very least, the order should define what constitutes “confidential information” or “trade secrets” that the party is seeking to protect. Sloppy and generic language can result in the injunction being void.

Furthermore, a temporary injunction order cannot prohibit lawful activities. In that regard, it should trail the language of the non-competition and non-solicitation agreement closely. While it is tempting to overreach and ask for more restrictions that the original agreement allowed (especially if the judge is willing to grant it), including such language in the order can result in its dissolution on appeal.

For more information regarding protection of trade secrets and enforcement of non-compete agreements in Texas, contact Leiza Dolghih.

Two More Texas Courts of Appeals Find An Arbitration Waiver In Light of Litigation Conduct

Last November, the Dallas Court of Appeals upheld a trial court’s ruling that a party who substantially participated in litigation had waived its arbitration rights under an otherwise valid and enforceable arbitration clause. Yesterday, both the First Court of Appeals and the Fourteenth Court of Appeals in Houston reached a similar conclusion.

Like Ideal Roofing, decided last November, the lawsuit in Tuscan Builders, L.P. v. 1437 SH6 L.L.C, et al., involved a construction contract. The First Court of Appeals applied the same five-factor test used by the Dallas Court of Appeals, with the addition of one more criterion – whether the movant for arbitration was the plaintiff (who chose to file in court) or the defendant (who merely responded). The Court of Appeals affirmed the trial court’s order finding that the defendant had substantially invoked the litigation process and his actions were inconsistent with the intent to arbitrate, as demonstrated by the following:

  • Tuscan, while being a defendant in the lawsuit, proceeded to file a third-party lawsuit against other parties.
  • Tuscan moved for arbitration after the parties had completed written discovery, including expert designations and information, and had conducted a property inspection.
  • Tuscan had joined in the motions prolonging discovery and postponed the trial date and mediation deadline to allow the parties to pursue additional discovery on the merits.
  • It was Tuscan’s construction contract that referenced an industry form that contained an arbitration clause, indicating that Tuscan probably knew that such clauses existed prior to filing the lawsuit.
  • Other parties to the lawsuit were not aware of the arbitration clause because they did not receive a copy of the industry referenced in the contract.
  • Tuscan moved to compel arbitration more than a year after the suit was filed and when the trial setting was less than a month away.

When determining whether a party has waived its arbitration rights, a court must look at “the totality of circumstances.” In addition to the individual factors described above, the Court of Appeals found that Tuscan’s overall litigation strategy, such as bringing its subcontractors into the lawsuit in order to have access to discovery responses obtained by them as aligned parties, and obtaining a building inspection, allowed Tuscan to take advantage of litigation strategies that would not have been available in arbitration. Therefore, such a deliberate tactical approach was inconsistent with any intent to arbitrate.

The Court of Appeals also found that Tuscan’s invocation of the litigation process prejudiced the plaintiff who, not knowing that an arbitration clause existed, spent a significant amount of time and money litigating the case in what it considered to be a proper forum.

The same day that the First Court of Appeals found that the defendant in Tuscan Builder  waived its arbitration rights, the Fourteenth Court of Appeals reached a similar result in RSL Funding LLC v. Chaveze D. Pippins, et al., which involved an assignment of annuity contracts.

In this case, three individual defendants bought annuity from MetLife and subsequently executed contracts assigning their rights to RSL. The original annuity contracts between the individuals and MetLife did not contain an arbitration clause, but the assignment agreements with RSL did. When MetLife refused to pay RSL under the annuity contracts, RSL filed a lawsuit against both MetLife and the individuals.

Initially, RSL’s and the individuals’ interests seemed to be aligned since both wanted MetLife to pay RSL on the annuity contracts. However, once MetLife deposited the funds due under the annuity contracts in the court’s registry, the RSL and the individual defendants seemed to disagree as to who should receive such money and the individuals moved to withdraw the funds.  RSL promptly filed an arbitration demand against the individuals based on the arbitration clause in their assignment contract and moved to stay the litigation.

The Fourteenth Court of Appeals upheld the trial court’s denial of the stay of litigation on the grounds that RSL substantially invoked the litigation process and the individual defendants were prejudiced by such invocation, thus resulting in a waiver of RSL’s arbitration rights under the assignment contract. Justice Kem Thompson Frost dissented.

The Courts of Appeals added three more criteria for determining whether a waiver has occurred, in addition to those already enumerated in Ideal Roofing and Tuscan Builders:

  • whether the party who pursued arbitration sought or opposed arbitration earlier in the case
  • whether the party who pursued arbitration filed affirmative claims or dispositive motions
  • what discovery would be unavailable in arbitration

The Court noted that all of the waiver factors are rarely present in a single case, thus a waiver could be established based only on a few or even a single factor.  Instead of addressing each of the criteria, it concluded in broad strokes that RSL had invoked the litigation process because of the following actions:

  • it filed the lawsuit not only against MetLife, but also against the individuals with whom it had an arbitration agreement
  • when the individuals filed a counterclaim against RSL, the plaintiff did not move to compel arbitration, although it would have been appropriate to do so at that time
  • when the individual defendants non-suited their counterclaims and refiled them in another court, RSL waited 2 ½ months before filing a motion to stay litigation pending resolution of the arbitration
  • RSL filed a partial motion for summary judgment against both MetLife and the individual defendants on the same issue it sought to arbitrate

Furthermore, RSL’s invocation of the litigation process substantially prejudiced the individual defendants because they were forced to file numerous pleadings and motions in the trial court that they would not have needed to do had the case proceeded to arbitration. Furthermore, RSL’s failure to pay the individual defendants the amount that it owed under the assignment contracts while the litigation was proceeding put a significant financial constraint on them.

What makes this case different from Ideal Roofing and Tuscan Builders, however, is that in both of those lawsuits, the parties’ pattern of litigation activities established rather clearly that they took full advantage of discovery and other litigation procedures before seeking arbitration in the eleventh hour before trial.  In RSL Funding, however, as pointed out in the dissenting opinion, RSL’s litigation tactics were directed at MetLife, with whom it did not have an arbitration agreement, and not at the individual co-defendants.  Moreover, at the time RSL filed the lawsuit there were no disputes between itself and the individuals under any of the assignment agreements, and RSL added them as defendants only to obtain a full resolution of the rights under the Declaratory Judgment Act.  The arbitrable claims between RSL and the individual defendants did not arise until after the defendants had filed a motion to withdraw funds from the court registry, at which point RSL promptly filed an arbitration demand. 

CONCLUSION: While Ideal Roofing and Tuscan Builders suggest that a party has to conduct extensive discovery, participate in motion practice, and delay an arbitration demand until the eve of trial in order to cause a waiver of its arbitration rights, RSL Funding  indicates that a waiver can occur far earlier in the litigation process and be caused by far less rigorous participation in a lawsuit.

Thus, anytime a party finds itself pursuing or defending a lawsuit involving claims that might be covered by an arbitration clause, the party should plan its litigation strategy very carefully so as to avoid a waiver of its arbitration rights.

For more information regarding enforcement of arbitration agreements in Texas, contact Leiza Dolghih.

Practical Guide to Enforcing Non-Compete Agreements in Texas (Part III)

After a company has confirmed that its former employee has violated or is violating his or her non-compete agreement (see Part I) and determined that the basic prerequisites of an enforceable non-compete are present (see Part II), the next step is to decide upon the appropriate strategy for stopping the employee from further violating his contractual obligations. This can involve one or all three of the following steps.

Sending a Cease and Desist Letter to the Employee

Most of the time, an employer will begin the process of enforcement of the agreement by sending a cease and desist letter to the violating employee. Such letter will typically remind the employee of his contractual obligations to the employer, let the employee know that the employer is keeping track of his activities, and warn the employee that if he does not stop violating the agreement, the employer will take a legal action.  A lot of the letters also include a request for assurance from the employee that he understands his obligations and will abstain from violating the non-compete. A failure to receive such an assurance or a vague and evasive response from a former employee could be a sign that he or she has no intention of complying with the agreement.

Contacting the New Employer

If a cease and desist letter does not do the trick and the employee continues to violate the non-compete agreement, his former employer may choose to notify the new employer of the terms of the non-compete agreement.  Now days, most companies – especially in the industries where non-compete agreements are prevalent – ask any potential hires whether they have executed any non-compete or non-disclosure agreements with their former employers.  If they have, the new employer will usually review the agreement or have their legal department review it to make sure that the new hire will not be in violation of such contract when hired.

Sometimes, however, companies do not ask for such agreements or the potential hire fails to disclose the agreement’s existence, either intentionally or because he does not remember signing one.  In such a situation, sending a letter to the new company notifying them that the employee they have hired is violating his or her non-competition agreement could motivate the new company to let go the employee  in order to avoid getting involved in any litigation related to his agreement with the prior employer.

This approach, however, should be considered very carefully, since it could prompt the employee to file a suit for defamation, libel, or tortious interference with a contract or a business relationship against the former employer.  If a cease and desist letter can be handled by a manager or a department head, this step should involve a consultation with an attorney and consideration of all legal consequences.

Filing a Lawsuit Against the Employee (And Possibly the New Employer)

Sometimes, the violation is so egregious that the employer might need to skip the cease and desist letter or discussions with the new employer and seek protection from a court or an arbitration panel right away.  This is especially true if the departed employee had access to the old employer’s confidential or proprietary information or trade secrets and the employer has a reason to believe the the employee might use this information to compete.

Typically, this means filing a lawsuit or a petition for arbitration and immediately applying for injunctive relief – a court order that prohibits employee from engaging in certain activities while the parties litigate or arbitrate their dispute.  Before filing the lawsuit, however, it is important to consider whether the non-compete agreement contains the following provisions since they can affect where the lawsuit should be filed and what law will govern the dispute:

1. Arbitration Clause.  If the agreement contains an arbitration clause, then the employer-employee dispute will most likely be governed by such a clause.  It determines where the dispute must be arbitrated, how much discovery is allowed, and whether the arbitration entity of choice has the authority to grant injunctive relief.

2. Forum Selection Clause. Luckily for employers, the United States Supreme Court has recently ruled in Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas  that a forum selection clause found in a contract must be given deference in all but the most unusual circumstances.  Thus a non-compete agreement that contains such a clause will most likely have to be litigated in the state or a jurisdiction specified in the agreement.

3. Choice of Law Clause. This might be a non-issue for local Texas businesses, but for national or multi-national companies, the choice of law clause might incorporate a number of different states, some of which might be more favorable to employers (Texas) or less favorable to them (California). If there is no choice of law provision, courts will apply the law of the state that has the most significant relationship to the dispute. If the former employee traveled all over the country or the employer has several offices around the country, the analysis can become quite complicated.

Assuming that all of the above clauses point to Texas as the proper forum, the general standard for obtaining injunctive relief in this state is governed by Tex. R. Civ. P. 680 in state courts and by Fed. R. Civ. P. 65 in federal courts.  The injunctive relief under both set of rules includes a temporary restraining order (TRO) and a preliminary injunction (PI).

A TRO is an order that directs a party to do or not to do something for a limited period of time. It is the fastest form of relief and can be granted by the court without an appearance by the employee. In a lawsuit related to a violation of a non-compete agreement, the party applying for a TRO typically asks the court to prevent the employee from working for a new employer, soliciting customers or employees, or revealing confidential information.

PI is similar to a TRO but, if granted, will last until the case is tried or settled, and it requires an evidentiary hearing at which the former employer will have to show, among other things, that it is likely to prevail on the merits of the case.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Foreign Plaintiff v. Foreign Defendant Destroys Diversity even if the Plaintiff’s Principal Place of Business is in Texas

The Fifth Circuit Court of Appeals started the new year with a quick civil procedure lesson, ruling yesterday in Vantage Drilling Company v. Hsin-Chi Su that lawsuits of foreign corporations with a principal place of business in Texas against foreign defendants belong in state, not federal, courts. This ruling is in line with the Second, Sixth, and Ninth Circuit Courts of Appeals, all of whom have previously held that a plaintiff’s incorporation abroad destroys diversity jurisdiction in a lawsuit against a foreign defendant, even if the plaintiff’s principal place of business is in the United States.

Plaintiff Vantage Drilling Company is an offshore drilling contractor that provides drilling units, related equipment, and work crews to major oil and natural gas companies around the world. It is incorporated in the Cayman Islands, with a principal place of business in Houston, Texas. Defendant Su, who served on Vantage’s board of directors, is a Taiwanese citizen.

After Vantage sued Su in a Texas state court for breach of fiduciary duty, fraud, and number of other business torts, Su timely removed the case to federal district court on the basis of diversity jurisdiction pursuant to 28 U.S.C. §1332(a), which states that:

(a) The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between

(1) citizens of different States;

(2) citizens of a State and citizens or subjects of a foreign state, except that the district courts shall not have original jurisdiction under this subsection of an action between citizens of a State and citizens or subjects of a foreign state who are lawfully admitted for permanent residence in the United States and are domiciled in the same State;

(3) citizens of different States and in which citizens or subjects of a foreign state are additional parties; and

(4) a foreign state, defined in §1603(a) of this title, as plaintiff and citizens of a State or of different States.

Vantage moved for remand arguing that its Cayman Island’s incorporation and Su’s Taiwanese citizenship destroyed diversity jurisdiction because there were aliens present on both sides of the litigation. The district court denied the motion to remand and reasoned that although Vantage had dual citizenship in the United States and Cayman Islands, it was “fully Texan” because it had no employees or operations in the Cayman Islands and its headquarters and primary operations were in Texas, where it “hire[d]local workers, [bought]local supplies, rent[ed] local buildings, donate[d] to local charities, and serve[d] local customers.” Su, on the other hand, in the district court’s opinion, was a “fully foreign party.” Analogizing to human citizens for whom “[r]emoval is proper if the dual national’s dominant nationality is American irrespective of [his/her] other affiliations,” the district court held that Vantage could not “rely[] on its foreign charter to avoid a national court despite the predominant reality of its existence.” Vantage filed an interlocutory appeal, resulting in a reversal of the district court by the Fifth Circuit.

The Court of Appeals explained that pursuant to 28 U.S.C. §1332(c)(1), a corporation is deemed a citizen of “every State and foreign state” in which it is incorporated and the “State or foreign state” where it has its principal place of business. Thus, undeniably, Vantage is a citizen of the Cayman Islands, where it is incorporated. Since Su is also a foreign citizen, the complete diversity is lacking and “there can be no diversity jurisdiction.”

Importantly, the Fifth Circuit rejected Su’s argument that the presence of bias in a state forum against a fully foreign defendant is a factor to be considered in the diversity analysis. Thus, the fact that Vantage had substantial business dealings in Texas, while Su did not, did not justify a finding of a diversity jurisdiction where both parties were foreign.

PRACTICAL IMPLICATIONS: Sometimes, incorporating a company or a subsidiary in a foreign jurisdiction makes business sense from the standpoint of taxation or corporate governance. However, a company that follows that route should keep in mind that should a dispute arise with a foreign party, the company might be forced to give up federal forum and all the advantages that come with it and litigate the case in a state court, especially if the case involves  only state law claims. In this case, as a plaintiff, Vantage preferred to be in state court, but this might not always be the case.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Failure to Include a Trial Date In a Temporary Injunction Order to Enforce a Non-Competition Agreement Will Result in a Void Order

A while back I wrote a post regarding the Fifth Court of Appeals reversing a temporary injunction order because it had failed to describe specifically what trade secrets and proprietary information the company’s former employees were prohibited from releasing. Last week, the First Court of Appeals addressed another requirement for temporary injunction orders in Texas, which, if not met, renders such orders void.

The facts in Conlin, et al. v. Haun, et al., are quite prosaic.  Haun sued the Conlins for a violation of their non-compete agreements with the company in which Haun held a 51% interest. During the litigation, the parties reached an agreement regarding the temporary injunctive relief, and the Court signed an order titled “Agreed Temporary Injunction,” which enjoined the Conlins from competing with Haun’s company, and enjoined Haun from tampering with the company’s records and data. The order stated that it was effective “until the trial of this case, or further order of this Court.” The blank space, in which the trial setting date could be written, was not filled.

Several years later, the Conlins moved to dissolve the temporary injunction on several grounds, including an argument that it was void under the Texas Rule of Civil Procedure 683 because it failed to state the reasons for its issuance and set a date for trial. The trial court denied the Conlins’ motion, and they appealed.

On appeal, Haun conceded that the agreed temporary injunction order did not comply with the Rule 683, which, among other things, requires that “[e]very order granting a temporary injunction shall include an order setting the cause for trial on the merits with respect to the ultimate relief sought.”  However, he maintained that the Conlins were estopped from challenging the order because they had agreed to it.  The Court of Appeals rejected this argument and ordered that the Agreed Temporary Injunction be dissolved as void.

The Court explained that the procedural requirements of Rule 683 are “mandatory” and “an order granting a temporary injunction that does not meet them is subject to being declared void and dissolved.” Therefore, a party who agrees to a void order has agreed to nothing.

Both, the Fourth Court of Appeals in In Re Garza, 126 S.W.3d 268 (Tex. App.–San Antonio 2003, orig. proceeding) and the Fourteenth Court of Appeals in In re Corcoran,  343 S.W.3d 268, 269 (Tex. App.–Houston [14th Dist.] 2011, org. proceeding) have previously rendered similar decisions, finding that the failure of a temporary injunction order to include a specific trial setting resulted in such order being void.

CONCLUSION:  Even an agreed temporary injunction order must meet all of the requirements of Rule 683, or it will be void.  At the very least, as previously discussed, it must be specific as to what conduct or actions are prohibited, and must include a trial date. Any order that fails to meet these requirements can be reversed on appeal or dissolved by the trial court at any moment, leaving the party who applied for it, unprotected.

For more information regarding protection of trade secrets and enforcement of non-compete agreements in Texas, contact Leiza Dolghih.

The Fifth Circuit Allows Class Arbitration Waivers in Employment Agreements

Last week, the Fifth Circuit Court of Appeals joined the Ninth, Second and Eighth Circuits in holding that class arbitration waivers in employment agreements are enforceable, notwithstanding the right of employees to engage in concerted activities under the National Labor Relations Act (NLRA). The ruling has been lauded as an enormous victory for employers, even though the National Labor Relations Board (NLRB) remains free to ignore the opinion and continue to strike down class arbitration waivers.

Under the Mutual Arbitration Agreement (MAA) at issue in D.R. Horton, Inc. v. National Labor Relations Board: (1) employees waived their right to a trial in court; (2) all disputes between D.R. Horton and employees had to be resolved by final and binding arbitration; and (3) the arbitrator did “not have the authority to consolidate the claims of other employees” and did “not have the authority to fashion a proceeding as a class or collective action or to award relief to a group or class of employees in one arbitration proceeding.” The combined effect of these three provisions was that D.R.Horton’s employees could not pursue class or collective claims in an arbitral or judicial forum. Instead, their only recourse for any employment disputes was individual arbitration.

When a former D. R. Horton’s superintendent and a number of similarly situated employees attempted to initiate a nationwide class arbitration arising out of D.R.Horton’s alleged violations of overtime provisions of the Fair Labor Standards Act (FLSA), the company responded that the MAA prohibited a collective arbitration, but that the employees could proceed with individual proceedings. The superintendent then filed an unfair labor practice charge alleging that the class-action waiver violated the NLRA. The (NLRB) agreed and found that the MAA violated Section 8(a)(1) of the NLRA for two reasons. First, it required employees to waive their right to maintain joint, class, or collective employment related actions in any form. Second, the employees could reasonably interpret the language of the MAA as precluding or restricting their right to file charges with the NLRB. Last week, the Fifth Circuit rejected the Board‘s first reason, but agreed with the second.

It explained that while Section 7 of the NRLA creates a right on behalf of employees to “engage in [ ] concerted activities for the purpose of collective bargaining or other mutual aid or protection,” it does not create a substantive right to use class action procedures. In fact, the U.S. Supreme Court and several Circuit Courts of Appeals have previously recognized that there is no substantive right to class or collective procedures under the Age Discrimination and Employment Act or the FLSA. On the other hand, using Section 7 of the NRLA to invalidate an agreed waiver of a class arbitration would violate the Federal Arbitration Act (FAA), which requires that any arbitration agreement be enforced according to its terms. The Fifth Circuit found that neither NRLA’s legislative history nor its language authorized it to override the FAA. Absent an explicit language of a congressional intent to override the FAA in the NLRA, the Act’s mandate that an arbitration agreement must be enforced according to its terms – here, with a class arbitration waiver – must be followed.

Although the Fifth Circuit found that class arbitration waiver provisions do not violate the NLRA, the MAA in this case contained the following language, which did violate the statute: the employee “knowingly and voluntarily waives the right to file a lawsuit or other civil proceeding relating to Employee’s employment . . . .” (emphasis in original). Because this statement would lead employees to reasonably believe that they were prohibited from filing unfair labor practice charges with the NLRB, the Court of Appeals ordered that D.R. Horton should clarify in the agreement that employees retain access to the NLRB regardless of their agreement to arbitrate disputes.

CONCLUSION: While the Fifth Circuit’s rejection of the NLRB‘s ruling in D.R. Horton is lauded as a victory for employers, it does not guarantee that the NLRB will allow the use of class waivers in mandatory arbitration agreements. The Board regularly treats Circuit Court decisions with which it disagrees as non-binding in any other case. Thus, it may continue to reject such waivers despite the ruling.

Although the battle over class arbitration waivers in employment agreements is far from over, all employers need to review their arbitration agreements and make sure that the language used there does not convey the impression to employees that they are prohibited from filing administrative charges with the NLRB.

For more information regarding the enforcement or drafting of arbitration agreements in Texas, contact Leiza Dolghih.