Defending Non-Compete Agreements in Court – What Evidence Does an Employer Need?

Last week, the Fourteenth Court of Appeals issued a ruling in a case involving a non-compete agreement between a legal services company in Texas and its former marketing director. While the facts and arguments made by the parties were pretty ordinary, the Court’s opinion was instructive regarding what evidence employers and employees might need in these types of cases to sway the court in their favor.

Rodriguez worked as a marketing director for Republic Services– a court reporting, process services, and record retrieval services firm – for six years before she went to work for a competitor. While at Republic Services, her duties included making calls to existing and prospective customers, assisting in the pricing of jobs, and assisting other employees in providing customer service.

Rodriguez’s employment agreement with Republic Services contained the following rather standard non-solicitation and non-competitions clauses:

For a period of twelve (12) months after termination of her employment under and pursuant to this Agreement, whether with or without cause, the Employee will not . . . (ii) approach, contact, cause to be contacted, or communicate with any customer or account, for whom Company performed services at any office where Employee performed any duties during the two years immediately preceding Employee’s termination of employment with Company.

* * *

For a period of twelve (12) months after termination of her employment, under and pursuant to this Agreement, whether with or without cause, the Employee will not (i) solicit, divert, or accept orders for record retrieval, court reporting, and other related services for or on behalf of any individual or firm, from any customer for whom Company performed services at any office where Employee performed any duties for two years immediately preceding Employee’s termination of employment with Company or (ii) own any interest in, be an employee of, be an officer or director of, be a consultant to, or be associated in any way with a competitor of the Company within the county, or counties, where Employee worked while employed hereunder. . . .

After Rodriguez went to work for Cornerstone Reporting, Republic Services sued her and her new employer for breach of employment agreement, tortious interference with prospective business relationships, civil conspiracy, and tortious interference with Rodriguez’s employment relationship (against Cornerstone only).

Rodriguez and Cornerstone filed a partial summary judgment motion and argued that the non-compete covenant was unenforceable as a matter of law for two reasons: (1) it contained an industry-wide restriction, which imposed a greater restraint than necessary to protect the business interests and goodwill of Republic Services; and (2) Republic Services failed to provide adequate consideration to make the non-compete enforceable. The trial court agreed with Rodriguez that the non-compete covenant was unenforceable and dismissed all the claims, but the Court of Appeals reversed.

First, the Court of Appeals reasoned that although Rodriguez claimed that the covenant imposed an industry-wide restriction on her, she “offered no evidence about the industry at issue.” In contrast, Republic Services provided evidence regarding specific companies in Harris County that were not its competitors within the “legal services” or “legal support services” industry and for whom, presumably, Rodriguez could have worked despite the covenant not to compete. Thus, Rodriguez failed to conclusively establish that the covenant was an industry-wide prohibition.

Second, the Court of Appeals found that Republic Services provided evidence of adequate consideration to make the non-compete enforceable. It showed that it gave Rodriguez customer and pricing information, trained her on how to use RB8 software, and gave her access to Republic Services’ goodwill. Interestingly, even though RB8 software is not proprietary to Republic Services and can be bought by any company, the fact that Republic Services trained Rodriguez on such software via webinars was sufficient to support the non-compete covenant. This poses an interesting question of whether providing training on Microsoft Suite, for example, or any number of software programs that are not proprietary to the employer who provided the training, is sufficient in itself to establish an adequate consideration for an enforceable non-compete.

Also interesting is the fact that the Court specifically emphasized that Rodriguez often invited her contacts at various law firms to lunches with her boss at Republic Services, which, according to the Court of Appeals, showed that she was provided and took advantage of the company’s goodwill. The natural question here is whether allowing an employee to use the company’s suite or an expense account to entertain potential clients creates sufficient consideration to support a non-compete restriction.

CONCLUSION: An employer should always be able to explain why and how its geographic restrictions, time restrictions and restrictions on the scope of activity of its former employees are necessary to protect its business interests and goodwill. It should also be able to show why such restrictions are reasonable. Documenting what sort of confidential information, training or goodwill has been shared with a particular employee is key to enforcing non-compete agreements. Also, being able to provide evidence about the industry in which the employer operates, its competitors, and companies that are not in competition, can be crucial to defending non-compete restraints.

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.

How Not to Draft a Non-Competition Agreement – A Lesson for Employers from a Texas Court of Appeals

Dallas Business Litigation Attorney
Leiza Dolghih
Attorney, Godwin Lewis PC

Earlier this month, the First Texas Court of Appeals found on a summary judgment that a non-competition agreement that covered all of Texas was unenforceable when a company failed to provide evidence that it conducted business in all of Texas or that the employee in question worked in the entire state. Morrell Masonry Supply, Inc. v. Coddou is a good example of how an overly-aggressive non-compete agreement can backfire on an employer.

In this case, MMS, a Houston-based masonry and exterior insulation finishing system (EIFS) supplier, sued Coddou, its former plaster salesman, for breach of the following covenant not to compete, which was included in Caddou’s profit sharing plan:

Employee recognizes and acknowledges that as a participant in employer’s profit sharing program employee will have access to all of employer’s corporate records. . . Employee further recognizes and acknowledges that the information contained in employer[’]s corporate records could be used to its competitive disadvantage. Therefore, employee specifically agrees that for a period of one year following the termination of employment, however caused, the employee will not within he geographical limits of the State of Texas directly or indirectly for himself, or on behalf of, or as an employee of any other merchant, firm, association, corporation, or other entity engaged in or be employed by any stucco and/or EIFS supplier business or any other business that is competitive with employer.

MMS subsequently fired Coddou, and when he went to work for a competitor, sued him for breach of the non-compete covenant.  Coddou filed a motion for summary judgment, arguing that the geographic restriction on the entire State of Texas was unreasonable and, therefore, unenforceable, as a matter of law.  Both the trial court and the Court of Appeals agreed.

The Court of Appeals explained that under the Texas Covenant Not to Compete Act, the burden was on the employer to show than the non-compete covenant was reasonable and did not “impose a greater restraint that is necessary to protect [its] goodwill or other business interest.” Typically, the territory in which an employee worked for an employer is considered to be the benchmark of a reasonable geographic restriction.

Following that same logic, Coddou provided a sworn affidavit in trial court stating that he “had a specific sales territory that encompassed Houston, Beaumont, and the surrounding areas,” and that he never did any sales outside of Houston or Beaumont.

Instead of providing evidence that showed otherwise, such as records of specific sales transactions outside of Houston or Beaumont, MMS’ president and CEO made only conclusory statements that the company did “significant business throughout the entire State of Texas” and Coddou “was responsible for sales throughout the State of Texas.”  The Court of Appeals found that such general assertions were conclusory, self-serving, and not proper summary-judgment evidence.

The Court of Appeals concluded that the “statewide restriction in the covenant not to compete in that instant case [was] too broad to be enforceable because it far exceede[d] the two cities in which Coddou worked on behalf of [MMS], even if MMS’ business extended beyond the area assigned to Coddou.” Furthermore, MMS failed to introduce any evidence to show that its business extended beyond Houston, San Antonio, and Beaumont – far short of the entire state.  Thus, the covenant not to compete restricting activity throughout the entire state was broader than necessary to protect MMS’ business interests.

CONCLUSION:  When determining how far the geographic scope of a non-compete covenant should extend, employers should consider what territory will the employee work in.  A clause that covers the entire state could be reasonable if the employee makes sales calls around the state. At the same time, a clause that covers just one city might not be reasonable if the employee’s territory is much smaller.

While it is easier and, certainly, more tempting, to set restraints on the entire state, entire County, or even entire country, such approach can backfire in Texas courts.  Thus, employers should set reasonable restraints that they could defend in court as being related to their business and employees’ duties.

For more information regarding non-competition agreements in Texas, contact Leiza Dolghih.

Update (8/5/14): Interestingly, in 2011, Morrell sued another of its employees, Juan Perez, for violating his covenant non to compete, claiming that Perez went to work for a competing business and asking for $100 a day in liquidated damages for each day he had worked for a competitor. See Morrell Masonry Supply, Inc. v. Juan Perez.  The trial court granted Perez’ motion for summary judgment, in which he argued that Morrell was collaterally estopped from asserting a claim for a breach of covenant not to compete based on Morrell Masonry Supply, Inc. v. Coddouthe covenant was overbroad, and his new employer was not a competitor of Morrell’s.

In an attempt to salvage its case against Perez after Coddou decision, Morrell dropped its breach of covenant not to compete claim and instead argued that the trial court committed an error when it failed to address the breach of confidentiality clause in Perez’s contract.  The Court of Appeals, however, rejected this argument after finding that Morrell had never alleged a breach of the confidentiality clause in any of its pleadings.

The takeaway for employers is that once a court finds that a non-competition agreement unenforceable as a matter of law in one case, the employer is usually prevented from enforcing the agreement against other employees.

A 10-Step Guide to Protecting Your Company’s Trade Secrets

Under the Texas Uniform Trade Secrets Act (TUTSA), information is not considered a trade secret unless its owner took “reasonable efforts under circumstances to maintain its secrecy.”  So, what efforts should a business be taking to protect its proprietary and confidential information and trade secrets? Here’s a quick step by step checklist.

1. Identify Your Trade Secrets and Proprietary Information.  Before you start implementing any security measures, you need to identify what information you are trying to protect. Ask yourself two questions:  (1) what information do I have that gives my business a competitive advantage? and (2) is this information publicly available? By way of example, under TUTSA, a trade secret can include: “formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.”  This information, however, is not likely to qualify as proprietary if it is “commonly known” or if it is available in the public domain.

2. Implement Access System on the “Need to Know Basis.” If the information you are seeking to protect is stored on paper, make sure your documents are stored in a secure cabinet or a room, which only few key employees can access. If the information is stored electronically, make sure that each employee has a separate log in account and that you keep track of who accessed the information, when, for how long, and what changes were made to such information. If possible, a company should consider having a pop-up window or a reminder that notifies its employees each time they access the program or the database that contains confidential information that such information is proprietary and may not be shared with third parties.

3. Require Key Employees to Sign Non-Disclosure Agreements (NDAs). Employees with access to confidential and proprietary information should be required to execute NDAs prior to receiving access to such information. A typical NDA will require an employee (a) not to disclosure the company’s confidential information to third parties; and (b) to assign all “rights, title, and interest” in the employee’s inventions to the company if they are developed in the scope of his or her employment. The NDA can be part of an offer letter or employment agreement or it can be a free-standing NDA contract.  Make sure that the NDAs are filled out correctly, are current, are consistently being executed by each key employee, and are stored in safe location.

4. Require Third Parties to Sign Non-Disclosure Agreements.  If you are sharing your business’s proprietary information with another party, such as your supplier, marketing agent, insurance company, etc., make sure that they execute a NDA as well.  Ideally, you should not be sharing your proprietary information with anybody who has not executed a NDA.

5. Have a Written Confidentiality Policy. Your employee handbook and/or company policy should contain a statement regarding what information the company considers to be confidential, prohibition of disclosure of such information, description of the consequences of such disclosure, such as disciplinary action, and a requirement that all key employees execute a NDA.

6. Provide Training Regarding the Confidentiality Policy. Among other things, such training can serve to remind employees not to discuss the confidential information in public, not to access such information from public computers, and alert them regarding various ways of inadvertent disclosure that they can encounter in their day-to-day lives.

7. Enforce the Confidentiality Policy.  It is not enough to have NDAs and confidentiality policies, but the employer should monitor employees’ compliance and conduct periodic audits. The rules and contracts are worthless unless the employer consistently enforces them.

8. When Key Employees Leave, Have Them Sign A Non-Disclosure Confirmation Form, Obtain Information About Their New Company, and Conduct Forensic Imaging of Their Computers.  When key employees leave, during the exit interview have them sign a statement in which they acknowledge that they have not taken any of your confidential information.  You should also ask them about where they are going, what duties they will be performing there and other information that will help you assess the likelihood of them using the company’s confidential information at their new company.  Finally, it is worth paying a few hundred dollars to have their computers, iPads, etc., forensically examined to make sure that they have not printed, emailed themselves or otherwise took any of the company’s proprietary information.

9. If You Suspect That an Employee Is Stealing or Has Stolen Your Trade Secrets, Act Quickly. The more time passes between you discovering that your employee has taken or is using your confidential information and your actions, the less likely a court is to find that the information was a “trade secret.” In other words, if you are not trying to prevent other parties from using your information, then why should the court do so?  I have previously written about the typical enforcement actions for violation of non-competition agreements by departing employees here.  A similar analysis will apply to trade secret misappropriations.

10. Be Proactive, Not Reactive in Protecting The Information That Is at The Heart of Your Business.  Many businesses make sure that they protect their tangible assets such as office furniture, equipment, computers, etc., but they often fail to put security measures in place to protect the intangible assets – the information, knowledge, and skills that make their business successful.  Do not wait until an unscrupulous employee, a subcontractor, or a business associate decides to take your proprietary information – protect yourself by implementing the above-described measures.

CONCLUSION:  While following the above steps does not guarantee that your trade secrets will remain confidential, it does provide two advantages. First, from a business stand point, implementing the measures on this list will make it less likely that your employees or third-parties will be successful in stealing your business’s trade secrets. Second, from the legal standpoint, if you end up in court, proving that misappropriated information was a “trade secret” under the TUTSA will be easier.

This list is general guide.  Consider consulting with an attorney to come up with a specific security framework that adequately protects your particular business.  For more information regarding trade secret misappropriation claims in Texas and protection against such misappropriation, contact Leiza Dolghih.

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.