Out With the Old, In With the New: The Texas Uniform Trade Secrets Act (TUTSA) Explained

The Texas Uniform Trade Secrets Act (TUTSA) became effective on September 1, 2013, replacing the hodgepodge of common law, restatements and the Texas Theft Liability Act with a well-established statutory framework that 46 other states are already employing. TUTSA is a welcome change in our state because it modernizes and clarifies a lot of outdated rules, some of which have not been updated since 1930s. TUTSA does not apply to any misappropriation, including continuing misappropriation, occurring prior to September 1, 2013.

This post explains the major changes brought by TUTSA and their effect on trade secret litigation n Texas.

1.         TUTSA clarifies and expands the definition of “trade secret.

Under TUTSA § 134A.002(6), “trade secret” means information that derives independent economic value from not being generally known or readily ascertainable and for which reasonable efforts are made to maintain its secrecy.  Such “information” includes “a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.”

  • The new definition omits the “continuous use” language, thus allowing plaintiffs to claim as trade secret information that they have not yet had an opportunity to use.
  • Trade secrets now include not only positive information, but “negative knowhow,” which is information that has commercial value from a negative viewpoint, such as the results of lengthy and expensive research which proves that a certain process will not work could be of great value to a competitor.  See UTSA § 1 cmt.
  • Whether the information is considered “secret” is now determined by whether a party undertook “reasonable efforts to maintain the secrecy of such information,” rather than the difficulty with which such information could be acquired.  The new standard allows a fact finder to consider the nature of the trade secret and the facts and circumstances surrounding the efforts to maintain its secrecy in order to determine whether these efforts were reasonable under the circumstances.

2.         TUTSA requires “knowing” misappropriation.

Under TUTSA § 134A.002(3), “misappropriation” includes: (1) acquiring a trade secret by improper means or (2) disclosing a trade secret without consent.  Unlike the old common law, this new statutory definition makes clear that liability applies only to those who know or have reason to know that a trade secret was acquired by improper means, rather than accident or mistake.  Thus, for example, if an employee misappropriates a former employer’s trade secrets and uses them in his new job, the new employer is not liable for misappropriation of trade secrets unless the employer had actual or constructive knowledge that the material was improperly obtained. Needless to say, this provision is a great improvement for employers.

3.         Under TUTSA, “improper means” might include reverse engineering.

Under TUTSA § 134A.002(2), “improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, to limit use of, or to prohibit discovery of a trade secret, or espionage through electronic or other means.  When a license agreement prohibits reverse engineering, such activity would constitute a breach of the duty to limit the use of trade secret information and would constitute “improper means.”  In absence of any prohibition in a license agreement, however, reverse engineering would constitute “proper means” as defined in § 134A.002(4).

4.       TUTSA broadens injunctive relief

  • Texas courts have traditionally been reluctant to expressly recognize the idea of “threatened misappropriation,” which is often linked to the “inevitable disclosure” doctrine.  TUTSA § 134A.003 now includes a provision that allows injunctive relief for both actual and threatened misappropriation of trade secrets.  In some states that have adopted a version of the Uniform Trade Secrets Act,  “threatened misappropriation” does not equal “inevitable disclosure,” while in other states, the courts have found that as long as an employer can show that an employee will perform duties in his new employment that will inevitably cause the employee to use or disclose the former employer’s trade secrets, the old employer can establish “threatened misappropriation.”  Only time will tell, which way Texas will lean.
  • TUTSA § 134A.003 allows the continuation of an injunction for additional time to eliminate any commercial advantage derived from misappropriation, rather than termination of the injunction once the protected information is no longer secret.
  • The same section, “in exceptional circumstances,” allows an injunction that conditions future use of a trade secret upon payment of a reasonably royalty for no longer than the period of time for which use could have been prohibited.  “Exceptional circumstances” include a material and prejudicial change of position before acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.
  • Finally, TUTSA § 134A.003 gives courts the power to compel “affirmative acts to protect a trade secret” under appropriate circumstances.

5.        TUTSA creates a cap for exemplary damages

Under TUTSA § 134A.004, “if willful and malicious misappropriation is proven by clear and convincing evidence, the fact finder may award exemplary damages in an amount not exceeding twice any award” of actual damages.  Such cap did not exist under Texas common law.

6.        TUTSA allows recovery of attorneys fees

Prior to TUTSA, the only way a party could recover attorneys’ fees for misappropriation of trade secrets was by filing a claim under the Texas Theft Liability Act, which allows for the recovery of attorneys’ fees to the prevailing party.  Now, under TUTSA § 134A.005, a court may award reasonable attorney’s fees to the prevailing party if: (1) a claim of misappropriation is made in bad faith; (2) a motion to terminate an injunction is made or resisted in bad faith; or (3) willful and malicious misappropriation exists.

7.       TUTSA enhances protection of trade secrets in court

TUTSA provides “a presumption in favor of granting protective orders to preserve the secrecy of trade secrets” and under TUTSA § 134A.006, “protective orders may include provision limiting access to confidential information to only the attorneys and their experts, holding in camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval.”

8.        TUTSA has not changed the following rules:

  • Damages. Under TUTSA § 134A.004(a), “in addition to or in lieu of injunctive relief,” a claimant is entitled to recover damages for misappropriation, which can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.  A court may also impose reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.  These are the same type of damages allowed under Texas common law prior to TUTSA‘s enactment.

For more information regarding the Texas Uniform Trade Secrets Act, contact Leiza Dolghih.

When Are Online Terms Part of a Printed Agreement?

Many companies now use shorter contracts that incorporate the terms and conditions spelled out on a company’s website. It’s an efficient way to keep the terms of similar deals uniform and reduce paperwork. However, when business arrangements unravel, the parties often find themselves arguing in court regarding whether the online terms are part of the printed agreement that they signed.  The answer to that question often depends on whether the parties have sufficiently conveyed their intent to incorporate the online terms into the written agreement.

The Dallas Court of Appeals recently ruled in Montgomery Chevrolet v. Dent Zone Companies that unless the language of the contract shows a clear intent to incorporate online terms and conditions, such terms are not part of the contract.

In this case, Dent Zone, a Texas company, entered into an agreement with Montgomery Chevrolet, a Kentucky company, which contained the following provision, “Additional benefits, qualifications and details of the PDR LINX Service Program are available for your review at our website,” and provided a link to that website. The terms and conditions on the website included a forum selection clause. When the parties’ business relationship soured, Dent Zone sued Montgomery Chevrolet in Dallas, alleging that it had consented to a suit in Texas by the terms of the contract. Montgomery filed a special appearance and argued that the forum-selection clause was not incorporated by reference into the parties’ contract. The trial court denied Montgomery’s special appearance, but the Dallas Court of Appeals reversed, agreeing with the defendant.

The Court of Appeals explained that under Texas law, unsigned documents may be incorporated into the parties’ contract by referring in the signed document to an unsigned document. The language used to refer to the incorporated documents is not important as long as the signed document “plainly refers” and not just mentions the incorporated document.  According to the Court, the clause in Montgomery Chevrolet  simply indicated that the “internet document contained informative materials,” and fell short of actually incorporating the online terms because it did not “plainly refer” to them as becoming part of the parties’ agreement and did not otherwise suggest that the parties intended that the internet document be incorporated in the agreement.

Montgomery Chevrolet provides a good example of what not to do when attempting to incorporate online terms and conditions in a written agreement.  In contrast, a previous decision by the Fifth Circuit Court of Appeals in One Beacon v. Crowley Marine Serv’s, provides a good example of how to incorporate such terms properly.  The Court in Beacon found that the following clause was sufficient to incorporate the terms and conditions on a company’s website, including an indemnification clause: “THIS RSO IS ISSUED IN ACCORDANCE WITH THE PURCHASE ORDER TERMS & CONDITIONS ON WWW.CROWLEY.COM / DOCUMENTS & FORMS, UNLESS OTHERWISE AGREED TO IN WRITING.  The Court ruled that the parties’ intent to incorporate the online terms in their agreement was clear from the explicit language prominently place on the face of the RSO in all capital letters. Moreover, the location of the additional terms was clearly indicated, and any reasonable person would be able to find them.

CONCLUSION: Letting a party to a written agreement know that additional terms are available for review online is insufficient to incorporate such terms. Instead, the language in the written agreement incorporating online terms and conditions should meet the following requirements (to avoid future litigation regarding this issue):

(1) be clear and specific;

(2) be prominently placed on the face of the written document in all capital letters; and

(3) include a specific URL address where the online terms are located, so that the other party can easily find and review the terms.

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

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

You have just learned that one of your former employees might be violating the terms of his non-compete agreement with your company.  What should you do? Should you call him and ask him to stop? Should your general counsel send him a letter threatening with a legal action? Or should you immediately file for a temporary injunction? You might end up doing all of these things, but your first step should be gathering evidence that will support your claim of violation, and you should move as quickly as possible.

Thus, before you alert the employee that you are aware of his activities, and before you spend thousands of dollars in attorney’s fees in pursuing a temporary injunction, follow these steps that will help you assess the strength of your claim against the ex-employee and gather the necessary ammunition.

STEP 1:  Gather Relevant Evidence

You will need to know as much as you can about the employee in question and any agreements he might have signed with the company that might contain a post-employment restriction on his activities.  Look for the following documents in the employee’s file:

(1) employment applications;

(2) offers letters;

(3) employment contracts;

(4) stock option agreements;

(5) non-competition agreements;

(6) non-solicitation agreements;

(7) separation or severance agreements;

(8) any releases of claims executed as part of any settlement agreements;

(9) documents that an employee might have executed as part of the merger and acquisition; and

(10) any other agreements signed by the employee that might contain any post-employment restrictions.

When you look for these documents, keep in mind that a non-compete agreement in Texas might be a stand-alone document or it can be incorporated in one of the above documents.

Also, remember that in Texas, for a non-compete to be enforceable, an employer must give a separate consideration in exchange for the employee’s promise not to compete with the employer.  This consideration can come in a form of confidential information, stock options, or some other benefit.  See Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011). Therefore, make sure to review the employee’s benefit file for any compensation and benefit agreements that might contain a non-compete provision.

STEP 2:  Interview Relevant Witnesses (and obtain affidavits when possible)

Now that you have gathered the relevant documents, reviewed them, and have a reasonably good idea of which non-compete provision(s) govern the employee’s actions, you should contact potential witnesses of his activities that are in violation of the non-compete.

Start with interviewing your current employees who have worked with this individual.  If they work with the same customers or in the same geographic area as the offending ex-employee, they might have specific information about his post-employment actions.  Being the employees of the company, they have an added incentive to be helpful.

Then, consider interviewing your clients or customers, who might be able to confirm a suspected violation of a non-compete agreement.  Of course, you will want to consider what effect such communication will have on your client relationship.  Some customers might not think twice about sharing the information with you, while others might be extremely reluctant to get involved in a dispute between a company and its former employee.

Somebody from your general counsel’s office should be conducting the interviews, or at least be present at them.  First, they know exactly the type of information they need to obtain to establish a violation of a non-competition agreement.  Second, any customers or employees that know about the violations might become witnesses in a court proceeding later on, so it is important to establish a relationship between them and the company’s lawyers as early as possible.  Finally, if a customer or an employee is particularly helpful, you will want to obtain their affidavit, and an attorney who is familiar with the facts will be able to draft one quickly.  Such affidavits are crucial to obtaining injunctive relief, and after providing a sworn statement, the customers or clients are less likely to change their story later.

STEP 3: Issue Litigation Hold Preserving Electronic Evidence

After conducting the interviews, you should have a pretty good idea of whether your ex-employee is, indeed, violating his non-compete agreement.   At this point – and you must act quickly – you should issue a preservation hold within your company directing appropriate people to preserve any documents that might be relevant to your legal dispute with the ex-employee.

You will want to send an email to the appropriate departments directing them to preserve:

(1) former employee’s email – many companies automatically delete emails after a certain time, so make sure your IT department stops this process with regard to the relevant email;

(2) former employee’s desktop computer, laptop, IPad, and any phones that your company has provided to him;

(3) security footage or records showing when the former employee entered the building and/or his office prior to his departure from the company;

(4) former employee’s internet browsing history.

Most of this information, especially when it comes to the ex-employee’s laptop or desktop computers, might be long gone by the time you find out that the former employee is violating his non-compete agreement. Therefore, it is usually a good practice, to have your IT department or a forensic technology specialist take a snapshot of an employee’s computer before his or her departure if you know that the employee is subject to a non-compete restriction.  While it might be expensive to do so, such a preventative measure might save you a lot of money in the long term, especially if the employee is departing on bad terms.

So, now you have determined which non-compete agreement applies to the employee, you have talked to witnesses who have given you a first-hand account about the employee’s activities that seem to violate the non-compete agreement, and to top this off, you have found emails from the employee transferring company customer lists or confidential information to his personal email account.  What do you do now? I will discuss the next steps in Part II.

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@lewisbrisbois.com or (214) 722-7108.

Texas Allows Non-Signatories to Enforce Arbitration Agreements

Many companies prefer to resolve their business disputes through arbitration, rather than litigation, because in many cases the arbitration process is faster, cheaper, and more effective due to arbitrators’ familiarity with the industry.  A recent decision by the Fourteenth Texas Court of Appeals reassures business owners that even if they have not signed an arbitration agreement, they might be able to enforce it as long as it was signed by their agent or affiliate.

In Satya, Inc. et al. v. Mehtaplaintiff Mehta entered into a limited partnership agreement that contained an arbitration provision. The agreement was signed by Mehta, on his own behalf, and by Bahtija, on behalf of the general partner of the limited partnership.  When Mehta discovered what he thought was self-dealing by Bahtija, he filed a suit for breach of fiduciary duties and violations of the Texas Securities Act against Bahtija, the limited partnership, two owners of the general partner, and a corporation that the two individuals also owned. Mehta alleged that all the defendants were agents for one another and were acting within the scope of their agency when committing the alleged torts.

The defendants moved to dismiss the case and compel arbitration pursuant to the arbitration provision contained in the limited partnership agreement. Mehta argued that only the limited partnership should be dismissed, but that the rest of the defendants had to litigate the claims because they never signed the arbitration agreement.

After determining that Mehta’s claims fell within the scope of the arbitration agreement, the Court of Appeals ruled that the defendants could enforce the arbitration provision found in the limited partnership agreement even though they never signed the agreement, because they were agents of the general partner, which was a signatory to the agreement.

The Court of Appeals‘ decision is consistent with the Texas Supreme Court‘s ruling in In Re Kaplan Higher Education Corp., where plaintiffs tried to avoid arbitration by suing only the non-signatory agents of the signatory to the arbitration agreement.  The Supreme Court explained that while the arbitration clauses do not automatically cover all corporate agents or affiliates, where an agent or an affiliate of a signatory was acting on behalf of the affiliate, the agent could enforce the arbitration agreement signed by the party on whose behalf it was acting.

PRACTICAL ADVICE: When attempting to determine who can enforce a particular arbitration agreement, look beyond the names on the signature lines.  In Texas, a party to a legal dispute may enforce an arbitration agreement it did not sign, if its agent signed it.  Also, an agent who did not sign an arbitration agreement, might be able to compel arbitration if his/her employer signed such an agreement, as long as the legal dispute arises out of the agent’s actions on behalf of his/her employer.

A business using an arbitration agreement, should also consider defining the parties to the arbitration agreement broadly to include individual partners, affiliates, officers, directors, employees, agents, and/or representatives of any party to the arbitration agreement.  See In re Joseph Charles Rubiola, et al., where the Texas Supreme Court held that such a broad provision expressly allowed non-signatories that fell into the definition of the “parties” to enforce the arbitration agreement in question.

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

Using a Temporary Injunction to Stop Business Disparagement

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

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

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

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

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

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

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

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

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

For more information about obtaining a temporary injunction in a business dispute in Texas, contact Leiza Dolghih.

10 Major Employment Laws That Every Texas Business Owner Should Know

Building a successful business usually takes a lot of hard work and time.  An ill-timed lawsuit can cause significant damage to the business or even completely ruin it.  Many lawsuits brought by disgruntled employees or rejected job applicants can result in double or triple damages under federal and state employment laws, thousands in attorneys fees, and can cause an irreparable damage to the business’ reputation.  So why risk it?

In this post, I provide a quick reference list of the major Federal and Texas employment laws.  Most of these statutes apply to all private employers, no matter the size or type of business; but some statutes apply only to businesses with a certain number of employees or volume of business.

As a business owner, knowing which laws apply to your company and complying with them can save you a lot of money.

1. Fair Labor & Standard Act (FLSA) 

  • Applies to (1) private employers with at least $500,000 a year in business; (2) hospitals, businesses providing medical or nursing care for residents, schools, preschools and government agencies (federal, state, and local); (3) employees of companies with less than $500,000 a year in business if the employees engage in interstate commerce i.e. commerce between the states.
    • Basically, every business in the USA is covered by the FLSA unless it is a purely local business with less than $500,000  a year in business.
  • Establishes the minimum wage of $7.25 per hour and requires overtime pay at a rate of  not less than one and one-half times the regular rate of pay for any hours worked after 40 hours of work in a workweek by any covered non-exempt employees.
  • Enforced by the Department of Labor (DOL).

2. Texas Minimum Wage Act

  • Applies to all private employers, no matter the size.
  • Establishes a minimum wage for non-exempt employees that is tied to the FLSA’s minimum wage and requires the employers to provide each employee with a written earnings statement about the employee’s pay.
  • Enforced by the Texas Workforce Commission (TWC).

3. The Equal Pay Act (EPA)

4. Title VII of the Civil Rights Act of 1964 (Title 7)

  • Applies to any private businesses with 15 or more employees.
  • Prohibits discrimination based on race, color, religion, national origin, and sex, which includes pregnancy, childbirth, or related medical conditions (see a related post regarding pregnancy discrimination here). This is the law that typically gives rise to sexual harassment claims.
  • Enforced by the EEOC.

5. The Age Discrimination in Employment Act of 1967 (ADEA)

  • Applies to all private businesses with 20 or more employees.
  • Prohibits employment discrimination against persons 40 years of age or older.
  • Enforced by the EEOC.

6. Title I and V of the Americans With Disabilities Act of 1999 (ADA)

  • Applies to all private businesses with 15 or more employees.
  • Prohibits discrimination against qualified individuals with disabilities (physical or mental impairments that substantially limits one or more major life activities) or individuals regarded as having such disabilities.
  • Enforced by the the EEOC.

7. The Immigration Reform and Control Act of 1986 (IRCA)

8. The Family Medical Leave Act (FMLA)

  • Applies to private-sector employers, with at least 50 employees in 20 or more workweeks in the current or preceding calendar year.
  • Only the following employees will qualify: (1) has worked for the employer for at least 12 non-consecutive months; (2) has at least 1,250 hours of service for the employer during the 12 month period immediately preceding the leave; and (3) works at a location where the employer has at least 50 employees within 75 miles.
  • Allows eligible employees to take up to 12 workweeks of leave in a 12-month period for one or more of the following reasons: (1) the birth of a son or daughter or placement of a son or daughter with the employee for adoption or foster care; (3) for a serious health condition that makes the employee unable to perform the essential functions of his or her job; or (4) for any qualifying exigency arising out of the fact that a spouse, son, daughter, or parent is a military member on covered active duty or call to covered duty status.
  • Enforced by the DOL.

9. The Occupational Safety & Health Act (OSHA)

  • Applies to all private employers, no matter the size.
  • Requires that each employer “furnish … a place of employment which [is] free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees.”
  • Enforced by the Occupational Safety & Health Administration (OSHA).

10.  The Uniformed Services Employment and Reemployment Act (USERRA)

  • Applies to all private employers, no matter the size
  • Requires employers to reemploy returning service-members in the same position that they would have attained had they not been absent for military service, with the same seniority, status and pay, as well as other rights and benefits determined by seniority.
  • Enforced by the Veterans’ Employment and Training Service (VETS)

Virtually all of the laws on this list also prohibit retaliation against employees who have complained about the violation of these statutes, filed a charge of discrimination, or participated in an employment investigation or lawsuit arising out of the violations.

For more information, or if you have received a copy of the charge from the EEOC or a request for records from the DOL or the TWC and are not sure how to handle it, contact Leiza Dolghih.

Unpaid Internships Are Mainstream, But Are They Legal?

During the last few years of tough economy, many companies have been tempted to save a  penny by offering unpaid internships to the eager hoards of college graduates, who have often been forced to accept unpaid positions because of lack of paid work in their chosen field.  While some of these unpaid positions offered true training and educational experience, others consisted entirely of menial tasks – ranging from stuffing envelopes and picking up dry cleaning to sanitizing door handles and sweeping bathrooms.

A publicized lawsuit by unpaid interns against the company that produced Black Swan and 500 Days of Summer filed in New York in 2011, began a rush of class and collective actions brought by interns under state and federal wage and hour laws.  To avoid being part of this litigation trend, any company that offers unpaid internships in Texas needs to make sure that it complies with both federal and state wage and hour laws.

Federal Law 

The Fair Labor Standard Act (FLSA) requires that an employer pays a minimum wage and overtime wages to anybody classified as its employee.  The Department of Labor issued a Fact Sheet in 2010 describing six factors that are used to determine whether a worker should be qualified as an intern/trainee or an employee under the FLSA.  If an employer offers an unpaid internship, it must make sure that the internship position meets the following criteria:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern and, on occasion, its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Texas Law

Texas does not have separate regulations at the state level regarding unpaid internships. Instead, the Texas Workforce Commission advises employers to adhere to the six-prong test established by the DOL.  Additionally, the Commission has specifically clarified that the key fourth factor on the list – that an employer receive “no immediate advantage from the activities of the intern” – requires that an intern receive more benefits from the work then the employer.

Unpaid Internship Class Actions (examples of what has triggered litigation so far)

1.    Glatt v. Fox Searchlight Pictures  (NYSD, 2013) – interns “performed routine tasks that would otherwise have been performed by regular employees” such as obtaining documents for personnel files, picking up paychecks for coworkers, tracking and reconciling purchase orders and invoices, drafting cover letters, organizing filing cabinets, making photocopies, running errand, assembling office furniture, arranging travel plans, taking out trash, taking lunch orders, answering phones, watermarking scripts, and making deliveries.  (held: the unpaid internship violated the FLSA).

2. Rabenswaay v. Kamali et al. (NYSD, 2013) – interns did photo retouching, photographed products, edited brand books, created visuals, signage, and labels, and other tasks requested by supervisors. The job involved no training (ongoing).

3. Ballinger et al. v. Advance Magazine Publishers (NYSD, 2013) – interns packed and unpacked accessories and jewelry, sorted through and organized accessories and jewelry, ran errands, filled out insurance forms, reviewed submissions, responded to emails, proofread, line-edited and relayed pieces between writers and editors (ongoing).

4. Bickerton v. Charles Rose (NY S. Ct. 2012) – interns performed background research for the show, escorted guests for interviews, assembled press packets, broke down the interview sets, and performed other productive tasks (settled for $250,000).

5. Wang v. Hearst Corporation (SDNY 2012) – interns coordinated pickups and deliveries of samples, provided on-site assistance at magazine photo shoots, managed reimbursement reports, etc. (dismissed due to lack of commonality).

CONCLUSION: In light of the rise of litigation related to unpaid internships, employers should modify their internship programs to comply with the DOL’s requirements described above. Although the above cases deal with the fashion and publishing industries, where unpaid internships have historically been the norm, the FLSA requirements apply to all industries and all businesses need to ensure that they are compliant.

Update (7/19): After running a quick search for unpaid internships on the local Craigslist, I have found a great example of a Marketing & Events Intern position advertisement that appears to violate the DOL requirements.  In contrast, this unpaid internship for a Solutions Consultant seem to comply with the FLSA as long as they actually do offer the described training.

Update (7/25)And here is Dallas Observer advertising an unpaid Marketing Internship position with a description that on its face appears to violate the FLSA’s minimum wage requirements.

For more information, contact Leiza Dolghih.

Important Changes in Home Equity Lending Rules

On June 21, the Texas Supreme Court invalidated several state regulations related to home equity loans. The immediate effect of the Court’s ruling is that (1) the popular discount points offered by lenders will now be included in the calculation of the 3% cap on loan fees; and (2) borrowers will no longer be able to mail their consent to the place of closing or attend a closing through their attorney-in-fact. Both lenders and consumers need to be aware of the Court’s ruling in Finance Commission of Texas v. Norwood as it significantly changes the home equity lending rules.

The Background Regarding Home Equity Loans in Texas 

Texas did not allow home equity loans until 1997 due to a historically strong protection of homestead in this state. Section 50 of the Texas Constitution regulates home equity loans and imposes strict requirements on lenders. Even an unintentional failure to comply with Section 50 can cause a lender to lose the right of forced sale of the homestead and forfeit the entire principal and interest on the home equity loan.

The Texas Finance Commission and the Texas Credit Union Commission (collectively “the Commissions”) have been authorized by the Legislature to issue regulatory interpretations of Section 50, which they have done over the years. In Norwood, the Supreme Court struck down some of their interpretations and the resulting rules.

3% Cap on Fees in Home Equity Loans

Pursuant to Section 50(a)(6)(E), home equity loan fees are capped at 3%, excluding interest. The Commissions defined “interest” the same way that Section 301.002(a)(4) of the Texas Finance Code defines it.  The Supreme Court found that the definition was so broad that it would render the 3% cap meaningless and that Section 50(a)(6)(E) “interest” instead should be equal to “loan amount multiplied by the interest rate.”  The Court further explained that “this narrower definition of interest does not limit the amount a lender can charge for a loan; it limits only what part of the total charge can be paid in front-end fees rather than interest over time.”

Practical Effect: Prior to Norwood, many lenders in Texas allowed borrowers to pay a lower interest rate if they pre-paid some of the interest during the closing. This points (or discounts points) system allowed a borrower to pay anywhere from 1 to 4 points – 1% to 4% of the loan principal – during the closing in exchange for receiving a lower interest rate on the loan. The lenders excluded these pre-paid points from the calculation of the 3% fee cap. The Norwood decision has changed that. Under the Supreme Court’s definition, the discount points are considered fees and not “interest” and must be included in the calculation of the fee cap.  Moreover, some other charges that lenders have not been treating as interest might be now included in the 3% fee cap.

In the past two weeks, many lenders have increased their interest rates to account for the inclusion of discount points in the fee cap.

Closing the Loan Via a Power of Attorney

Section 50(a)(6)(N) provides that a loan may only be closed at the office of a lender, an attorney-at-law or a title company. The Commissions interpreted this provision to allow a borrower to mail a lender the required consent to having a lien placed on his homestead. The Supreme Court, however, held that “[e]xecuting the required consent or a power of attorney are part of the closing process and must occur only at one of the locations allowed by the constitutional provisions” – the office of the lender, an attorney, or a title company.

Practical Effect: Whereas prior to Norwood, a borrower could mail his consent and send his attorney-in-fact to the closing, now the borrower will have to appear at closing in person. Some title companies, however, have interpreted the Court’s ruling to allow them to accept a power of attorney or a mailed consent as long as a borrower provides additional evidence that the power of attorney was signed by the borrower at the office of the lender, an attorney, or a title company. Other title companies have refused to close home equity loans under a power of attorney at all. In light of the Court’s ruling, the title companies who continue to accept a power of attorney might be playing with fire since a finding that they have violated Section 50 by the Commissions might result in very harsh consequences.

Notice to the Borrower

Section 50(g) requires that a loan not be closed before the 12th day after the lender provides the borrower the prescribed home equity loan consumer disclosure notice.  The Commissions interpreted this provision with a rebuttable presumption that notice is received, and therefore provided, three days after it is mailed. The Supreme Court upheld the interpretation as a reasonable procedure because it does not prevent the homeowner from insisting that the lender establish actual receipt of notice in each case.

For more information, contact Leiza Dolghih.

The Supreme Court Strikes Down The Defense of Marriage Act – Has Little Effect On Texas

Earlier this week, in a rare move to strike down a federal law, the United States Supreme Court declared the Defense of Marriage Act (DOMA) invalid because it violated the Equal Protection and Due Process clauses of the United States Constitution. While the LGBT community has hailed the ruling in United States v. Windsor as a major victory, the Court’s decision will have very little, if any, effect on Texas (and 70% of the states that do not recognize same-sex marriages).

What is DOMA? 

Bill Clinton reluctantly signed DOMA into law in 1996.  The bill’s congressional sponsor – Don Nickles (R) – explained that DOMA’s purpose was to “to make explicit . . . that a marriage is the legal union of a man and a woman as husband and wife, and a spouse is a husband or wife of the opposite sex.”  Thus, while the states remained free to recognize same-sex marriages, the federal government was choosing not to do so by passing this bill. According to the U.S. General Accounting OfficeDOMA affected more than 1,138 federal statutes  “in which marital status is a factor in determining or receiving benefits, rights, and privileges.”

Why did the Supreme Court Strike Down DOMA

The Court found that DOMA was unconstitutional because it violated “basic due process” principles and inflicted an “injury and indignity” of a kind that denied “an essential part of the liberty protected by the Fifth Amendment.”  Justice Kennedy explained that the stated purpose of the law was to promote an “interest in protecting the traditional moral teachings reflected in heterosexual-only marriage laws” and its essence was to “interfer[e] with the equal dignity of same-sex marriages, a dignity conferred by the states in the exercise of their sovereign power.”  Thus, DOMA ensured that if any state decided to recognize same-sex marriages, those unions will be treated as second-class marriages for purposes of federal law.  In other words, DOMA wrote “inequality into the entire United States Code.”

Notably, the Court did not discuss what level of scrutiny should have applied to DOMA (rational vs. intermediate) under the Equal Protection Clause analysis, presumably, because it had already found a Due Process violation.

Justice Scalia’s dissent forewarns that this ruling paves the way to the Supreme Court striking down the states’ bans on same-sex marriages in the foreseeable future.

What Legal Impact Does the Court’s Decision Have in Texas?

The Supreme Court made it clear in Windsor that the federal government cannot deny benefits to those same-sex couples whom a state considers to be in a valid marriage.  Texas, however, along with 70% of the states, does not recognize same-sex marriages. In 2005, Texas voters approved a proposition that amended the State Constitution (Art. I, Sec. 32) to define marriage as consisting “only of the union of one man and one woman. Moreover, Texas Family Code sec. 6.204(c) prohibits the state or any agency or political subdivision of the state from giving effect to same-sex marriages or civil unions performed in other jurisdictions. Thus, Windsor created no new rights or privileges for same-sex married couples that live in this state.  They are still not entitled to any federal benefits under DOMA

Although over the past several years, cities of San AntonioAustinFort Worth, El Paso, and Dallas, Travis, and El Paso Counties, have independently passed their own rules providing health benefits for same-sex partners of their employees, Texas Attorney GeneralGreg Abbot, recently issued a legal opinion declaring such policies unconstitutional.  He explained that if the Texas courts were to consider the constitutionality of such benefits, in his opinion, they would find that “Article I, section 32 of the Texas Constitution prohibits political subdivisions from creating a legal status of domestic partnership and recognizing that status by offering public benefits based upon it.” The cities and counties have responded by stating that they will continue to provide benefits to domestic partners.

Without a doubt, the fight for equality between same-sex and opposite-sex married couples, will continue in Texas in the near future, fueled by the Court’s decision in Windsor.  Meanwhile, however, Texas will remain at status quo.

The Effect of DOMA in Those States That Recognize Same-Sex Marriages 

If you end up moving from Texas to a state that recognizes same-sex marriages (MassachusettsCaliforniaConnecticutIowa,VermontNew HampshireNew YorkMaineMarylandWashingtonRhode IslandDelawareMinnesota, and the District of Columbia), you can expect to receive a multitude of federal benefits that are not available in Texas, including:

1. Social Security Survivor Benefits – Partner widows and widowers will now be able to receive these benefits.

2. Immigration rights – U.S. citizens will now be able to sponsor United States residency for their partners.

3. Military Benefits – Military personnel will be able to obtain benefits for their partners, including health insurance, increased base and housing allowances, relocation assistance, and surviving spousal benefits. In fact, the Defense Department has already announced that it will immediately begin the process that will lead to providing benefits to spouses and children in same-sex marriages.

4. Federal Employees Benefits – Same sex married couples will now qualify for health insurance, pension protections, and dozens of other benefits the federal government provides to its employees and former employees and their families.  You can find the whole list of them here.  The Office of Personnel Management has already announced that it will be working closely with the Department of Justice to provide additional guidance to federal human resource officials and employees regarding the changes to come.

5.  Federal Estate Taxes – Same sex married couples can now (1) file join income tax filings; (2) receive exemptions from federal estate taxes in the future; and (3) receive refunds for federal estate taxes already paid. 26 U.S.C 2056(a).

6.  COBRA Spousal Health Benefits – employees’ partners will be eligible for the continued health insurance coverage under the employer’s group health plan.  COBRA requires private employers with 20 or more employees to offer continued group coverage for a defined period to employees and their covered dependents under certain circumstances, including termination of employment and divorce.

7. Employer-Provided Health Benefits – Until now, the value of health benefits provided by employers to employees’ partners was treated as income and subject to federal income tax.  This is no longer true.

8.  Gift Tax – Same-sex couples will now be exempt from gift tax when transferring assets to each other.  Under DOMA, any gift between same-sex spouses of more than $14,000 began adding up to a lifetime limit of $5.25 million — after which a 40% tax was assessed.  They will no longer be subjected to this tax.

9.   Hundreds of other benefits that until now have been available only to married couples of opposite sex and have been denied to same-sex married couples.

UPDATE (8/29/2013):  On August 29, 2013, the U.S. Department of the Treasury and the Internal Revenue Service issued Revenue Ruling 2013-17, which states that a same-sex couple legally married in any jurisdiction will be recognized as spouses by the IRS for federal tax purposes even if the couple resides in a jurisdiction that does not recognize the validity of their marriage.  This Ruling confirms, however, that unmarried domestic partners and civil union partners will not be recognized as married for federal tax purposes, whether the partners are the same or opposite sex.

UPDATE (9/27/2013)On September 18, 2013, the U.S. Department of Labor (DOL) issued a Technical Release No. 2013-04 that provides a guidance to employee benefit plans, plan sponsors, plan fiduciaries, and plan participants and beneficiaries on the definition of “spouse” and “marriage” under ERISA and the U.S. Supreme Court’s decision in United States v. Windsor. Consistent with the IRS Ruling, the Release defines “spouse” to include any individuals who are lawfully married under any state law, including individuals married to a person of the same sex who were legally married in a state that recognizes such marriages, but who are domiciled in a state that does not recognize such marriages. Similarly, the term “marriage” will be read to include a same-sex marriage that is legally recognized as a marriage under any state law.

For more information, contact Leiza Dolghih.

Human Genes Cannot be Patented, Says the U.S. Supreme Court

Last week, a unanimous U.S. Supreme Court held that human genes are not eligible for patenting and that patent claims to isolate genes from DNA are invalid.

WHY IS THIS A BIG DEAL?  Because it prevents any one company from monopolizing testing for a particular gene mutation once they have discovered the gene, which is exactly what the defendant in Association for Molecular Pathology, et al. v. Myriad Genetics, Inc., et altried to do. The Court’s decision allows for a healthy competition between companies offering testing for genetic diseases. It also allows patients to obtain a second opinion regarding any genetic test results.  If Myriad had prevailed, it would have been the only owner of the two genes it tried to patent and it would have paved the way for other companies to monopolize other genes that they had identified.  The Supreme Court’s decision, therefore, is a great victory for all the people affected by hereditary conditions that require genetic testing.

In this case, the defendant, Myriad, discovered the precise location and sequence of two genes related to breast and ovarian cancer – BRCA1 and BRCA2.  Using this discovery, it developed a battery of tests for detecting mutations in these genes in a particular patient and assessing the patient’s cancer risk.  Myriad then filed several patent applications, which, if valid, would allow it to have an exclusive right to (1) isolate the BRCA1 and BRCA2 genes and (2) test them for mutations.  Other laboratories offering genetic testing either had to abstain from testing for BRCA1 and BRCA2 because of Myriad’s patents or received cease and desist letters threatening litigation if they did not stop the testing of these two genes.   The above lawsuit was filed seeking a declaration that Myriad’s patents were invalid under 35 U.S.C. §101.   After percolating through the courts, the case ended up before the U.S. Supreme Court.

Section 101 of the U.S Patent Act provides: “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”  The U.S. Supreme Court has previously made it clear in Mayo Collaborative Services v. Medical Laboratories, et al., that “[l]aws of nature, natural phenomena, and abstract ideas are not patentable.”

Myriad admitted that it did not create or alter any genetic information encoded in BRCA1 and BRCA2. Nor did it create or alter the genetic structure of DNA.  It’s sole contribution was uncovering the precise location and genetic sequence of the BRCA1 and BRCA2.  The U.S. Supreme Court concluded that unaltered human DNA was a product of nature and could not be patented by Myriad.  Moreover, the genes and the information they encoded are not patent eligible under §101 simply because they have been isolated from the surrounding genetic material.

The Court, however, clarified, that DNA that has been scientifically altered or modified and that is not naturally occurring can be patented.  Specifically, Myriad’s patents for cDNA – a string of DNA where nucleotides that do not code for amino acids have been removed by a lab technician – were patent eligible because they were not a “product of nature.”   The Court’s decision does not affect the companies’ ability to seek patents for methods of use of isolated DNA, manipulation of DNA or testing for gene mutations, and ends up striking the important balance between “creating incentives that lead to creation, invention and discovery” and “impeding the flow of information that might permit or spur invention.”

For more information, contact Leiza Dolghih.