North Texas Legal News
Original Commentary on Non-Compete and Trade Secrets Law
Why Stormy Daniels May be on the Hook for $1,000,000 – A Look Beyond the Headlines
Last Tuesday, Stormy Daniels, a porn star, sued President Trump seeking to declare her 2016 confidentiality agreement with him unenforceable and void so that she could tell the world about her affair with the President back in 2006. She even offered to return $130,000 she received in exchange for signing the agreement in 2016.
Did the President’s legal team screw up the agreement? Will she win? Can they make her pay $1,000,000 if she decides to talk about the affair? What about the missing notary’s signature? As the headlines keep pouring in, let’s take a closer look at her lawsuit and the agreement she signed. #SpoilerAlert the headlines may be misleading.
- Why did she file a lawsuit to declare the settlement agreement void? Can anyone do that? Filing what’s called a “declaratory judgment” lawsuit is a common tactic when there is a dispute about what the agreement requires the parties to do, or, as here, whether the agreement is valid. In this case, Ms. Daniels knew that as soon as she started disclosing information covered by the agreement with Mr. Trump, she was likely to be sued in arbitration by the President’s legal team. By filing the suit first, she was able to control the narrative like labeling the contract a “Hush Agreement” – a term that has now stuck to it – and was able to discuss the information that would have never seen the light of day had she been sued in a confidential arbitration.
- Is the agreement really invalid because Mr. Trump never signed it? This argument has a superficial appeal; after all, we are all taught that unless the agreement is signed by both parties, there is no agreement. However, the fact that she had accepted a payment of $130,000 in return for signing the agreement makes the lack of Mr. Trump’s signature largely irrelevant. Generally speaking, if one party performs his or her side of the agreement, the other party must deliver theirs, even if the original party did not actually sign the contract. So, the lack of signature allowed Ms. Daniels to plausibly challenge the validity of the agreement in court, but it is not a slam-dunk winning argument by any means.
- She is ready to return the settlement payment. Will she be free to talk then? Her offer is really no different from offering to return a TV or a car a buyer had purchased because he/she changed their mind. Once a party makes an offer and the other party accepts, a contract is formed and both parties must fulfill their respective promises. A party cannot “undo” a contract because they changed their mind about the deal. Try “unbuying” a house after signing a contract and see what happens (hint: you won’t be able to barring some unusual circumstances).
- She claims the agreement is against public policy, and it seems unfair to force her to keep quiet. The enforcement of contracts in our country is based on the basic principle that two consenting adults should be able to enter into whatever contract they want without the government’s interference, i.e. the “freedom of contract.” Of course, both parties have to be capable of entering into contract, must do so without coercion, and the purpose of the contract cannot be something illegal, i.e. against public policy. Therefore, an agreement where one party willingly agrees to keep certain information confidential in exchange for payment of money is perfectly allowable under the US law (with some exceptions that do not apply here). So, contrary to Ms. Daniels’ claims, her acceptance of $130,000 for a promise not to disclose certain information about Mr. Trump is not against public policy as it exists currently.
- How was the President’s legal team able to “secretly” get an order against Ms. Daniels? It seems unfair and wrong. Actually, obtaining what’s called an “ex parte” restraining order without notice to the other party to the lawsuit is very common in non-disclosure (and non-compete) disputes and Ms. Daniels’ settlement agreement specifically authorizes this procedure if there is an immediate threat that she may breach it. The rationale is that if you give someone notice that you are trying to prevent the disclosure of the confidential information, they may hurry up and disclose it before you have a chance to get the court order preventing them from doing so. Thus, although the President’s legal team obtained the order without allowing Ms. Daniels to present her case or giving her advance notice, there is nothing improper about the procedure they used to do so.
- Did the White House really “win” an arbitration against Ms. Daniels? Yes and no. The White House obtained a temporary restraining order from a private arbitrator preventing Ms. Daniels from discussing the information covered by the settlement agreement. Since the order is temporary it is not a final decision regarding whether the settlement agreement is valid. However, it is an indication that the emergency arbitrator who granted it believed that the President is likely to win his case against Ms. Daniels, i.e. that the settlement agreement is probably enforceable despite the lack of Mr. Trump’s signature.
- Could she be really required to pay $1,000,000 to Mr. Trump for breaching the Settlement Agreement? The settlement agreement says that if Ms. Daniels breaches it by disclosing the information about her alleged affair with Mr. Trump, she will have to pay $1,000,000 for each breach. This is what’s called a “liquidated damages” clause and it is commonly used in contracts where it is hard to predict the amount of damages that a breach of the agreement can cause. The amount of liquidated damages cannot be used to penalize the person for breaching the agreement but must approximate the reasonable damages caused by the breach. If the President’s legal team can provide a reasonable explanation as to why $1,000,000 approximates the damages that the President can suffer from a breach of the settlement agreement, the arbitrator may order Ms. Daniels to pay that sum.
- What’s up with the missing notary’s signature? The most recent headlines discuss the fact that although a Texas notary stamped the settlement agreement, she never signed it. However, while the notary may get in trouble for not following the proper procedure required by her state license, the lack of her signature does not invalidate the agreement. It is a common misconception in Texas that a contract is not valid until notarized. In fact, the contract is legal even without a notary’s stamp and signature. Notaries are simply third-party witnesses whose stamp and signature confirm the identity of the person signing the agreement. Since Ms. Daniels does not argue that her signature on the settlement agreement was forged, the absence of the notary’s signature is irrelevant.
- What happens if the 60 Minutes Airs? It appears that Ms. Daniels may have already given an interview to Anderson Cooper, which 60 Minutes plans to air very soon. We do not know what she told Mr. Cooper, but if she told him details about her affair with Mr. Trump, she might have already violated her settlement agreement. This means that Mr. Trump’s legal team may seek $1,000,000 payment from her in the arbitration they filed. Luckily for Ms. Daniels, she claims that at least ten people have offered to pay that $1,000,000 on her behalf. If that is the case, then spilling the beans to Mr. Cooper may not result in any substantive consequences for Ms. Daniels.
BOTTOM LINE: If we ignore the fact that this dispute is between the President of the United States of America and an adult entertainer, the underlying issues surrounding her confidentiality agreement and the related lawsuit are very common in employer-employee lawsuits over breach of non-disclosure agreements. Arbitration clauses, ex parte orders, liquidated damages provisions and employees arguing that they were unfairly forced to enter into the agreement by their powerful employer – are very typical in these types of lawsuits.
However, whether a particular non-disclosure agreement is enforceable, fair, etc., depends on the actual language of that agreement. Therefore, relying on media coverage of legal disputes to figure out whether a particular NDA is valid is like relying on WebMD to diagnose a medical problem. One might find a lot of generally useful information, but it won’t help determine whether they have a particular condition or problem.
Leiza has litigated non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
A Texas Court of Appeals Explains Employees’ Fiduciary Duties in Texas
The Eighth Court of Appeals recently analyzed the question of whether regular non-executive level employees in Texas owe fiduciary duties to their employers and answered that question with a resounding “yes.” While the scope of the rank-and-file employees’ fiduciary duties may not be as broad as those of a CEO or CFO of a company, they still owe a duty of loyalty to their employer and may not:
- appropriate company trade secrets
- solicit away the employer’s customers while working for the employer
- solicit the departure of other employees while still working for the employer
- carry away confidential information.
Employees can, however, plan to go into competition with their employers and may take active steps to do so while still employed, but cannot cross the line of preparation into actual competition until after they leave (assuming no post-employment restrictive covenants).
In Heriberto Salas, et al. v. Total Air Services, LLC, Salas opened and operated a company that directly and actively competed with his employer – Total Air Services – while still working for the employer. He submitted bids on the same jobs as his employer through his own company, distributed his company’s business cards while giving out flyers for Total Air Services, and solicited Total Air Services’s customers to do business with his own company.
Bottom Line: Even those employees who do not have non-compete or non-solicitation agreements with the employer still owe a duty to the company not to divert business or use the company’s confidential information to benefit themselves while drawing a paycheck there.
Leiza has litigated non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
An Injunction in a Theft-of-Trade-Secrets Case Cannot Prohibit a Party From Using Publicly Available Information
Companies suing for trade secrets theft often want not just the monetary compensation for the stolen trade secrets, but also a court order – an injunction – prohibiting the other side from using the stolen information.
In order to be enforceable, however, under the Texas Rules of Civil Procedure, an injunction must be “in clear, specific and unambiguous terms” so that the party enjoined can understand the duties and obligations imposed by the injunction and so that the court can determine whether the injunction has been violated. Additionally, an injunction cannot prohibit a defendant from doing something he has a legal right to do, e.g., use publicly available information along with the trade secret information. Thus, a court order prohibiting a defendant from using trade secrets must be broad enough to cover all possible circumstances while narrow enough to include only the illegal activities. This is easier said than done.
In a recent case, the Houston Court of Appeals reversed a permanent injunction order which could be read to cover both – the trade secret data and publicly available information. In TMRJ Holdings, Inc. v. Inhance Techs., LLC, the injunction at issue prohibited defendant from:
(1) “using, disclosing, transferring, or possessing, in whole or in part, [plaintiff’s] trade secret information,” which was defined as “compilation of specified data” for various plaintiff’s processes; and
(2) “operating, manufacturing, designing, transferring, selling, or offering for sale” certain processes that “contain, are based on, or utilize, in whole or in part, [plaintiff’s] trade secrets.”
The Court concluded that the injunction was not specific enough because failure to define “specified data” and the general description of “trade secrets” did not give adequate notice of the prohibited conduct to defendant. Specifically, the injunction did not distinguish between the unique, protected elements of plaintiff’s data compilations, processes, or equipment from that which plaintiff’s competitors use throughout the industry. As the result, the Court reversed the permanent injunction in this case and remanded it to the trial court to consider in light of its opinion.
CONCLUSION: In trade secrets theft cases, in addition to proving the elements of an injunction, plaintiffs must also make sure the injunction order’s language is specific enough, without giving away the trade secrets information, to provide defendant with a clear notice of what it can and cannot do.
Leiza has litigated non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
Enforcing Non-Compete Agreements in Texas with an Injunction Requires Proper Timing
Companies often contact me wanting to know what they can do to stop a former employee from competing in violation of his/her non-compete agreement. One of the available remedies that can provide an immediate relief to the company is a temporary injunction (state court) or a preliminary injunction (federal court).
An injunction is a court order that can require an employee to comply with his or her non-compete restraints while the parties litigate their case. Its purpose is to provide an immediate and temporary relief and prevent any irreparable harm that a company may suffer if its employee is allowed to compete.
What a lot of companies do not realize, however, is that if they wait too long to ask for an injunction after finding out about their employee’s competitive activities, a court may deny their request simply because they waited too long.
A recent opinion from the U.S. District Court in the Western District, where the judge denied the company’s request for a preliminary injunction, provides a perfect explanation of why waiting too long to seek an injunction in a non-compete lawsuit can backfire:
“The company waited almost six months after it found out that its former employee was working for a competitor to file a lawsuit. They waited another month to file a brief in support of the injunction and another month after that to set a hearing on the injunction. When the Court set the hearing, they requested a delay of the hearing for another two months.
[The company’s] delay in seeking injunctive relief is fatal to their request for a preliminary injunction. To the extent they have suffered any harm as a result of the events underlying their claims, much of that harm will have already occurred due to the delay; the appropriate remedy is therefore damages. The delay exhibited by [the company] in seeking a preliminary injunction also casts doubt upon the supposed irreparability of the harm alleged.”
Thus, while the company could proceed with the case and attempt to recover damages caused by the employee’s competition in violation of his breach of the non-compete agreement, the company’s ability to obtain an order prohibiting the employee from competing while the case was being litigated had evaporated due to the company’s delay in asking for it.
Embarcadero Techs., Inc. v. Redgate Software, Inc., No. 1:17-cv-444-RP, 2017 U.S. Dist. LEXIS 191317, at *1 (W.D. Tex. 2017).
BOTTOM LINE: A company should act as soon as possible after finding out that a former employee may be violating his or her non-compete agreement if the company wants to prevent the employee from competing. The wait-and-see approach to obtaining an injunction can result in the forfeiture of that legal remedy.
Leiza has litigated non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
Is Staring at a Coworker / Former Lover During Work Meetings Sexual Harassment? Texas Court says “No”
Just in time for the Valentine’s Day, a recent case involving a workplace romance turning sour provides a good refresher on what constitutes sexual harassment in the eyes of the law (in Texas) and demonstrates how an employer should handle sexual harassment complaints properly.
In Vanderhurst v. Statoil, a senior employee had a six-month extra-marital affair with a co-worker whom he was supposed to mentor. He claimed that after he ended the affair, the woman threatened to physically harm him and his wife and to accuse him of sexual misconduct, so he reported her to the HR. The HR department: (1) told him and the female to act professionally and stay away from each other; and (2) moved the woman to the other side of the floor about 200 feet away and placed her on a different team. From that point on, the two employees never worked with each other again, and the woman never threatened, touched, or spoke to the male employee.
Nevertheless, the male employee perceived that he was continued to be harassed because (1) the female employee walked past his work station multiple times a day and (2) stared at him during group work meetings. He complained to the HR again, but shortly thereafter left the company for a competitor. He then sued his former employer under the Texas Commission on Human Rights Act for retaliation, hostile work environment and constructive discharge.
Hostile Work Environment Due to Sexual Harassment – What is the Standard?
Under Texas law, a hostile work environment claim entails ongoing harassment, based on the plaintiff’s protected characteristic (e.g., in this case, gender), so sufficiently severe or pervasive that it has altered the conditions of employment and created an abusive working environment. Thus, the elements of a prima facie case of hostile work environment are:
(1) the employee belongs to a protected group
(2) the employee was subjected to unwelcome harassment
(3) the harassment complained of was based on the protected characteristic
(4) the harassment complained of affected a term, condition, or privilege of employment; and
(5) the employer knew or should have known of the harassment in question and failed to take prompt remedial action.
To satisfy the fourth element of a hostile environment claim, a plaintiff must show that the workplace was permeated with discriminatory intimidation, ridicule, and insult sufficiently severe or pervasive to create a hostile or abusive working environment. The plaintiff’s “work environment must be both objectively and subjectively offensive . . ..” That is, it must be “one that a reasonable person would find hostile or abusive AND one that the victim perceived to be so.”
In Vanderhurst, the Court of Appeals clarified that when courts consider hostile-work-environment claims, they look at “the totality of the circumstances,” including:
(1) the frequency of the discriminatory conduct;
(2) its severity;
(3) whether the conduct was physically threatening or humiliating, or a mere offensive utterance; and
(4) whether it unreasonably interfered with the employee’s work performance.
What did the Court of Appeals Rule in this Case?
“Considering the totality of the circumstances, we hold that there is no evidence that plaintiff’s work environment was objectively offensive—one that a reasonable person would find hostile or abusive.” Basically, it agreed with the trial court that “the conduct described by Vanderhurst may have been annoying, but it [did] not constitute an objectively offensive work environment sufficient to support a hostile-work-environment claim.”
BOTTOM LINE: There is a difference between workplace behavior that a reasonable person would find annoying or awkward and the behavior that crosses into sexual harassment. Sometimes, the line is rather clear – as it was in this case – and a lot of times, it is not. For companies to avoid lawsuits related to sexual harassment it is important to: (1) provide quality sexual harassment training; (2) make sure employees know how and where to report any complaints; (3) investigate all complaints of sexual harassment; (4) take an appropriate action when necessary and not ignore the situation.
Leiza Dolghih represents companies in business and employment litigation. She also frequently advises companies on all aspects of employment law from hiring to firing to internal and government investigations. She can be reached at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or via the form below.
5 Tips for Minimizing Trade Secrets Theft by Clients, Contractors and Vendors
The business world is littered with the carcasses of companies which, after they shared their confidential information and trade secrets with a non-competitor, such as their client, supplier, or vendor, were undercut by that party, who all of a sudden realized that they could profit from the information by cutting out the middle-man.
How can companies prevent this from happening? Here are the five basic tips on avoiding being blindsided by your own business partners:
- Never share your entire confidential information or trade secrets with anyone, no matter how sure you are that they won’t compete with you in the future. This is a no-brainer, but limiting the access to the confidential information on a “need-to-know” basis is the easiest, yet the most underutilized, protection measure.
- Only disclose the information once the vendor/supplier/client signed a non-disclosure agreement. Simply put, do not share any sensitive information under you have a signed NDA in hand. The NDA should state, among other things, that the vendor/supplier/client will make sure its employees are bound/will obey the NDA.
- Only share the information through a virtual data room, which allows you to track who accessed the information, when they did so, and what they did with it. Some virtual data rooms allow you to set alerts for when a large amount of data is downloaded or printed. Such virtual data rooms also allow you to control the various permission settings to prohibit or limit the download or copying of the information and to limit access to certain individuals, rather than the entire companies or departments.
- Consider using software that allows you to track the information once it leaves the virtual data room. Some programs on the market allow you to track who has access to your information and what they do with it even after it leaves the virtual data room. For extremely sensitive information, such measures may be worth the extra cost.
- Use data encryption when sharing confidential information outside the virtual data room. The encryption can now be done automatically and it prevents anyone who does not have an encryption key from reading the message – all they will see is a random collection of characters.
BOTTOM LINE: In Texas, to claim trade secret protection, the owner of trade secrets must show that he/she took “reasonable measures” under the circumstances to keep the information secret. What constitutes “reasonable measures” is often a point of contention in lawsuits involving trade secrets misappropriation. As the owner of trade secrets, you never want to be in a position where you cannot point to at least some measures you took to protect the confidential information. Thus, the above steps are not only a great business practice, but they can also help in court if a company ends up suing its vendor/supplier/client for misappropriation of its trade secrets.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a non-compete agreement or theft of confidential information, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
Trump’s Tax Reform Affects Settlements of Sexual Harassment Claims, But Training Remains the Best Answer
Just days before we rang in 2018, in the wake of the #MeToo movement, the Tax Cuts and Jobs Act became the law, including the special clause titled “Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection with Sexual Harassment or Sexual Abuse.”
Prior to this statute, the law allowed companies to claim tax deductions for settlements of sexual harassment and abuse claims and for attorney’s fees incurred in defense of such claims, even if the settlement agreements were confidential, which they usually were.
Now, if a settlement agreement prevents a harassment or abuse victim from publicly sharing details about the claim, then the company paying the settlement cannot deduct from taxable income the amount of the settlement or the attorney’s fees incurred in reaching the settlement agreement.
However, while the title of the section declares a lofty goal, its implementation and the practical effect remain less than clear. In particularly, the following questions remain:
- Where the settlement agreement settles more than just a sexual harassment or sexual abuse claim, can the company still claim the deduction?
- Will this law encourage the companies to segregate attorney’s fees between sexual harassment allegations and other types of discrimination or claims alleged by the settling employee?
- Will this law incentivize employees to add a sexual harassment/sexual abuse claim to other claims simply to put additional pressure on the company?
- Will this law drive the companies to misclassify the types of claims that are being settled or seek a general release of all employment claims (without specific mention of sexual harassment/abuse claim) in order to get the deduction?
- Will a general release of all claims against the employer result in its inability to get a deduction because sexual harassment and abuse claims are included in such a release?
- Will this law result in more companies attempting to litigate the sexual harassment / sexual abuse claims rather than reach settlement agreements, especially on those claims that are weak and/or not supported by evidence – the so-called “nuisance claims”?
This law goes into effect on January 1, 2018 and will not affect the 2017 taxes. Until the implications of this statute come into focus, companies should consult with their attorneys regarding whether to include a non-disclosure provision in a settlement agreement if any claim of sexual harassment or sexual abuse was made by the claimant.
While the uncertainty of the answers to the above questions remains, the best course of action for companies is to keep investing into quality anti-discrimination and anti-harassment training so as to avoid the sexual harassment claims in the first place.
Leiza Dolghih represents companies in business and employment litigation. If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
Texas Companies Should Update Non-Compete Agreements with California Employees in Light of a New Statute
Any Texas companies that have employees who primarily work and reside in California should update their non-compete agreements with such employees to meet the requirements of the California Labor Code Section 925. The statute, essentially, forces out-of-state employers to litigate any disputes with their California employees in California courts and apply California law, which prohibits non-compete agreements. Failure to comply with the statute allows employees to sue their company in California to declare their non-compete agreement unenforceable and get their attorney’s fees.
1. To whom does Section 925 apply? It applies to all employers – regardless of where they are based (so, even Texas companies) – that employ individuals who “primarily reside and work in California.” The word “primarily” suggests that the employees must both reside and work in California at least half the time. It applies only to disputes between employers and employees that arise in California.
2. What does the Section 925 say? It states: “An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: (1) Require the employee to adjudicate outside of California a claim arising in California; (2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.”
3. Is there anything a Texas company can do to avoid the restrictions of Section 925? The statute does not apply where an employee is represented by legal counsel in negotiating the forum selection clause (where any lawsuits will be litigated) or choice of law clause (what law will apply to such future disputes). Section 925 does not apply to any voluntary agreements that are not a “condition of employment” such as, for example, a separation agreement.
4. How does this affect Texas companies’ ability to enforce non-compete agreements against California employees? Prior to Section 925 becoming the law, many out of state employers used choice of law clauses to apply the law of those states that allow non-compete agreements in order to avoid California’s ban on non-compete agreements. Section 925 eliminates this option. Therefore, Texas employers must rely on other protections such as air-tight non-disclosure agreements.
BOTTOM LINE: Texas companies with California employees who primarily reside and work in California should review their policies, handbooks, and employee agreements and make sure that any choice of law and forum selection clauses are compliant with Section 925. As far as negotiating individual employment agreements with key California employees, if Texas companies want for Texas law to govern those agreements (and enforce non-compete restraints) the companies should make sure that the individual employees are represented by counsel in the negotiation process in order to meet Section 925 requirements.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
Top 5 Non-Compete Cases in Texas in 2017
Although the weather outside suggests otherwise, it is, indeed, December – a time traditionally reserved for reflection upon the year’s achievements. So, let’s take a look at the top five most important non-compete cases in Texas in 2017.
- BM Med. Mgmt. Serv., LLC v. Turner (Tex. App.–Dallas, Jan. 10, 2017)*
Held: The employer failed to show a probable, imminent, and irreparable injury in breach of a non-compete case, as the employee had returned his computer and testified that he did not possess any papers or electronic files related to the employer’s business.
Why it made the Top Five list: Early in each non-compete breach / trade secrets theft case, an employer may have an opportunity to examine the departed employee’s devices and confirm that its confidential information is no longer there. This case demonstrates that taking advantage of that opportunity may result in the denial of a temporary injunction as it eliminates the probability of imminent and irreparable injury since the employee no longer has the employer’s confidential information.
2. In re Pickrell (Tex. App.–Waco, April 19, 2017)
Held: The employer failed to produce evidence necessary to obtain a Rule 202 pre-suit deposition to investigate whether its former employee had honored his non-compete obligations.
Why it made the Top Five list: A party contemplating a lawsuit in Texas may sometimes depose the potential defendant to determine if it has a legal claim against him/her. This procedure is called a pre-suit or Rule 202 deposition. In re Pickrell shows that an employer cannot depose a departed employee for the purpose of investigating whether he/she honored his non-compete agreement based on the employer’s suspicion that the employee may be violating the agreement solely because he is now working for a competitor.
3. Sanders v. Future Com., Ltd. (Tex. App.–Fort Worth, May 18, 2017)
Held: Requiring an employee to repay training costs is not a covenant not to compete and is not subject to the requirements of the Texas Covenants not to Compete Act.
Why it made the Top Five List: This case establishes that Texas employers can deduct reasonable training expenses out of employees’ salaries if they leave before the employer is able to recoup its training costs. Any overreaching, however, by employers may result in a violation of the Texas Covenants not to Compete Act. See, for example, Rieves v. Buc-ee’s Ltd. (below). Additionally, any deductions need to be structured to comply with other laws, such as the Fair Labor Standards Act, and must be verifiable and not speculative. For more information, look here.
4. Rieves v. Buc-ee’s Ltd., (Tex. App.–Houston, Oct. 12, 2017)
Held: Requiring an employee to repay a portion of her salary upon termination is a “restraint on trade” in violation of the Texas Covenants Not to Compete Act.
Why it made the Top Five List: The Court’s decision shows that any provision in the employment agreement that restricts employee’s mobility must be analyzed through the lens of the Texas Covenants Not to Compete Act, not just non-compete clauses. For more information, look here.
5. Horizon Health Corp. v. Acadia Healthcare Co. (Tex. 2017)
Held: The employer failed to establish that the departed employee’s actions caused it lost profits because it could not prove that the customer that went with the departed employee would have signed a contract with the employer.
Why it made the Top Five List: Texas courts require that a company seeking damages based on lost profits produce evidence establishing that prospective customers would have done business with the company absent the defendant’s misconduct. In this case, the company failed to show that a customer that it claimed it lost due to the departed employee’s actions would have signed a contract with that company had it not signed with the departed employee’s new company.
*Keep in mind that any decisions by the Texas Courts of Appeals may be appealed to the Texas Supreme Court, which may ultimately disagree with their findings. Therefore, employers should always consult with a qualified employment lawyer to determine the current status of the law applicable to their particular dispute.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
The Fifth Circuit Rules that Federal Law Preempts Unfair Competition Claim Under Texas Law
The Fifth Circuit Court of Appeals recently considered whether the federal copyright and patent laws (rock!) preempt Texas common law claim of unfair competition by misappropriation (scissors!). The question reared its head amidst a web of lawsuits involving a medical device company, ThermoTek, and its former distributor, in which the company accused the distributor of obtaining its trade secrets involving a medical device he sold for them and proceeding to use the information to manufacture his own line of competing devices.
The Fifth Circuit explained that the federal Copyright Act preempts a state law claim where (1) the intellectual property rights at issue are within the subject matter of copyright and (2) the state law protects rights in that property that are equivalent to any of the exclusive rights within the general scope of copyright. Meanwhile, the federal patent statutes preempt a state claim where its aim is to protect “the functional aspects of a product” because such claim would likely obstruct Congress’s goals by offering patent-like protection to intellectual property that its owner chose not to protect with a patent.
In applying the above tests, the Fifth Circuit Court of Appeals held that the various aspects of the unfair competition by misappropriation claim in ThermoTek’s case against its former distributor were preempted either by the federal copyright or patent laws.
The Copyright Act preempted the claim to the extent that ThermoTek alleged that the distributor misappropriated its written materials related to the medical device – here, manuals, reports, billing information, and other written documents – because such materials fell within the subject matter of copyright and the unfair competition by misappropriation claim did not qualitatively differ from a copyright claim. Meanwhile, the federal patent law preempted the unfair competition claim to the extent it sought to protect the medical devices themselves or their functional aspects because the claim substantially interfered with the public’s enjoyment of unpatented aspects of the devices that ThermoTek publicly disclosed.
BOTTOM LINE: On a very basic level, the doctrine of preemption allows federal claims to preempt state law claims if they concern the same subject matter. If not analyzed strategically and addressed in the pleadings, this doctrine can wreak havoc on a party’s litigation strategy in a trade secrets lawsuit. For example, in the ThermoTek lawsuit, the jury found in the company’s favor awarding it $6,000,000.00 in damages on the unfair competition claim. However, after the trial, the court found that the unfair competition claim was preempted by federal law and dismissed it leaving ThermoTek with $0. In conclusion, trade secrets claims do not exist in a vacuum, but should be analyzed in the context of the existing intellectual property framework along with other types of IP.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
A Famous Dallas Chef Defeats an Injunction Based on “Unclean Hands” Defense, Can Now Use His Name
Foodie or not, if you live in Dallas, you have probably been to one of Kent Rathbun’s restaurants. And if you read Dallas Observer, you have probably read about Rathbun’s ongoing legal battle with a former business partner, which involves the right to use Rathbun’s name and likeness in the restaurant industry. If not, this D Magazine article can you fill you in on why Rathbun’s name is a big deal, and this Dallas Observer article can catch you up on the acrimonious relationship and the arising legal woes.
While the case is ongoing, this past Friday, the Dallas Court of Appeals issued a ruling in Rathbun’s favor on the basis of the “unclean hands” defense, which is often alleged, but rarely supported, in non-competition disputes.
By way of background, back in 2009, Rathbun assigned the rights to his name and likeness to an entity he co-owned with his then-business partner. After they parted ways, Rathubun filed a lawsuit seeking a declaration from the Court that the assignment was a “covenant not to compete” and was unenforceable because it failed to comply with the requirements of the Texas Covenants Not to Compete Act (see my previous post on the requirements here).
In response, the former partner sought an injunction from the Court prohibiting Rathbun from using his name or likeness while the parties litigated their dispute based on the assignment agreement. During the temporary injunction hearing, Rathbun introduced (1) deposition testimony of his former business partner regarding his knowledge of Rathbun’s lack of business sophistication and his fiduciary duties owed to Rathbun and (2) deposition testimony that the company to which Rathbun assigned the rights to his name might have assumed some liabilities without full disclosure to Rathbun, even though he was a part-owner at that time.
The trial court denied the injunction, allowing Rathbun to keep using his name as long as he did not disparage his former partner, and the Dallas Court of Appeals upheld the denial. While it refused to consider whether the assignment agreement was a “covenant not to compete” covered by the Texas Covenants Not to Compete Act, it did find that the deposition testimony described above presented sufficient evidence to support the “unclean hands” defense asserted by Rathbun.
The unclean hands defense “allows a court to decline to grant equitable relief, such as an injunction, to a party whose conduct in connection with the same matter or transaction has been unconscientious, unjust, or marked by a want of good faith, or one who has violated the principles of equity and righteous dealing.” Here, the Court found that there was some evidence that the company that was now trying to enforce the assignment acted inequitably when it failed to fully disclose to Rathbun that it had assumed certain liabilities, which burdened him as a part-owner of the company. Consequently, its unclean hands prevented it from obtaining an injunction against Rathbun.
BOTTOM LINE: While the Court of Appeals’ ruling in this case is not a final decision on the merits of this defense and can still be appealed to the Texas Supreme Court, it does provide a glimpse into what type of behavior by a party who seeks an injunction may rise to the level of “unclean hands” such that the party is prevented from getting injunctive relief.
Companies should be aware that when they seeks to enforce a non-compete agreement, their own behavior can often be scrutinized for any signs of unfair or bad faith conduct that may be used to deny the injunctive relief.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
Buc-ee’s Repayment Provision in the Employment Agreement Is Declared Unlawful, Likened to Indentured Servitude
Last month I wrote about how Texas employers can require employees to repay the employers’ training expenses related to those employees, even if that means repaying an equivalent of 1/3 of an employee’s salary. I culminated my article cautioning the companies to make sure that their repayment requirements in the employment agreements do not violate the Texas Free Enterprise and Antitrust Act of 1983.
Later the same week, the Houston Court of Appeals found that Buc-ee’s did just that by requiring its assistant manager to repay more than $66,000 in salary for leaving her at-will job to go work for another company, which was not even a competitor of Buc-ee’s.
Here’s a quick look at what Buc-ee’s did, what the Court of Appeals thought of it, and the lessons that Texas employers can take away from this case.
Buc-ee’s’ Employment Agreements
In 2009, Rieves came to work as an assistant manager for Buc-ee’s. The wages arrangement was such that 70% of her salary would be paid on hourly basis and 30% would be paid in flat fee, translating into $14 an hour and a fixed monthly bonus of $1,528.67 (the “Additional Compensation”).
This 2009 Employment Agreement specifically said that Rieves was an “at-will employee” but also stated that she was “required to work” for Buc-ee’s a minimum of five years and had to provide the employer with a 6-month written separation notice. If she failed to meet these two requirements, regardless of the reason, she had to repay all of the Additional Compensation.
In 2010, Rieves entered into a new employment agreement with Buc-ee’s that contained similar requirements (4 year term and 6-month separation notice) and stated that if Rieves left before 2014, she had to repay a portion of her salary under the 2010 Employment Agreement and the Additional Compensation under the 2009 Employment Agreement. Thus, under the 2010 Employment Agreement, the longer Rieves worked for Buc-ee’s, the more of her salary she would have had to pay back.
The Court of Appeals’ Analysis
In looking at the employment agreements, the Court first and foremost noted that Rieves was an “at-will employee,” which, under the long-standing doctrine in Texas, meant that her employment could be terminated by her or Buc-ee’s for good cause, bad cause, or no cause at all.
Furthermore, the repayment provisions in Rieves’s employment agreements imposed a severe economic penalty on her if she exercised her right as an at-will employee to leave Buc-ee’s. Therefore, these provisions had to comply with the Texas Covenants not to Compete Act in order to be enforceable. They did not.
The repayment provisions penalized Rieves even if Buc-ee’s fired her without a cause and they were not related to Buc-ee’s legitimate business interest because they penalized Rieves even if she went to work for a company that was not Buc-ee’s competitor. Therefore, the repayment provisions were an unfair restraint of trade in violation of the Texas Free Enterprise and Antitrust Act and were not enforceable.
The Lessons for Texas Employers
While Texas recognizes the freedom of parties to contract, employers cannot enter into contracts that are illegal. Under the Texas Free Enterprise and Antitrust Act, “every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.” Non-competition agreements that are reasonable and are designed to protect a legitimate business interest are an exception to the rule. Any other restraint in an employment agreement that prohibits an at-will employee from leaving his or her current employer or restricts such employee’s ability to sell his or her skills in the marketplace is likely to violate the Texas Free Enterprise and Antitrust Act.
Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.
