North Texas Legal News
Original Commentary on Texas Business and Employment Law
Is a Non-Compete Agreement Without Geographical Restriction Enforceable in Texas?
This exact question is currently being decided by the Texas Supreme Court, which earlier this month held oral arguments in Horizon Health Corp. v. Acadia Healthcare Company, Inc.
Under the Texas Noncompete Act, a noncompete agreement is enforceable in Texas only if it is:
Ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.
The non-compete agreement in Horizon Corp. v. Acadia Healthcare did not contain an express geographical limitation, but barred employees from:
- seeking work in, or independently establishing, a psychiatric contract management company;
- being employed by “company clients, hospital affiliates or hospital joint venture partners,” or
- engaging in any business relationship with those hospitals for 1 year after the end of employment.
Horizon argued that the non-compete agreement is not enforceable because it does not contain an express geographical limitation. Acadia argued that because the agreement is limited to certain identifiable set of companies or clients, it did not need to have a geographical limit to be enforceable under the Texas Covenants not to Compete Act. The parties presented their oral arguments to the Texas Supreme Court on March 1, 2017.
BOTTOM LINE: Until there is a ruling from the Texas Supreme Court resolving the issue of whether noncompete agreements must contain an express geographical limitation, to be safe, companies should include such limitation in the agreements in additional to any limits on client solicitation. Stay tuned to learn how the Texas Supreme Court rules on this issue.
Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
5th Cir. Update: Employee Lies, Resists During Investigation; Employer Still on the Hook for Retaliation
In a second pro-employee opinion this February, the Fifth Circuit ruled that an employee’s “mild resistance” during an internal investigation does not provide an independent reason for termination when the investigation is spurred by a retaliatory motive.
The facts were pretty simple. An African-American machinist complained of his supervisor racially harassing him. The company investigated but found nothing. A month later, a co-worker and another supervisor decided to conduct a “sting operation” and catch the employee selling pornographic materials on the company premises. When confronted, the employee denied selling the materials, claimed the envelope in his locker had been planted, and refused to allow the search of his car. The next day, he was terminated “for a serious violation of company policy.”
The district court determined that the internal investigation was motivated by the desire to retaliate against the employee for his racial discrimination complaint because: (1) other employees had apparently sold pornography on the premises without punishment; (2) there was no clear rule prohibiting the sale of pornography that would require termination rather than a warning; and (3) several witnesses were unsure about the nature of the employee’s violation and changed their position a number of times. However, the judge concluded that the employee’s termination was justified independent of any other reason because he “resisted the investigation by leaving before [his] car could be properly searched and by lying to his supervisor about his activities.”
The Fifth Court, however, overturned the lower court’s ruling finding that the employee was terminated as the result of his supervisor’s retaliatory actions and the fact that he “mildly” resisted the investigation was not a superseding cause of his termination. The following statement provides a clear look into the Court’s reasoning:
“We decline to … provide an incentive to supervisors motivated by retaliatory animus to initiate groundless investigations with the purpose of causing the targeted employees to resist them, thereby leading to the employer’s adverse actions.”
BOTTOM LINE FOR EMPLOYERS: According to the Fifth Circuit, a supervisor cannot start a groundless internal investigation as a retaliation for employee’s previous discrimination complaint and then, when employee resists investigation, fire him. Thus, a company should always make sure that the person who reports a violation of a company policy by another employee, does not have a self-serving retaliatory motive and that such a person is not in charge of or leading the internal investigation process.
Leiza is a business and employment litigation attorney in Dallas, Texas. 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.
What Employment-Related Bills are on the Texas Legislature’s Plate in 2017?
T
he 85th general session of the Texas Legislature started in January and will end in May 2017. Numerous employment-related bills have been filed during the general session, and while many of them will not become the law of the land, they provide a good insight into what’s on the legislators’ mind. A lot of times, even though a bill won’t pass on the first try, it will be reintroduced and passed during the second or even a third attempt. Here’s a summary of current 2017 employment-related bills filed in the house or senate:*
Discrimination
- HB 192 – Relating to the prohibition of housing discrimination on the basis of sexual orientation or gender identity or expression and to the enforcement of that prohibition.
- HB 225 / SB 165 J – Relating to the prohibition of employment discrimination based on sexual orientation or gender identity or expression.
- HB 228 / SB 223 – Relating to unlawful employment practices regarding discrimination in payment of compensation.
- HB 258 – Relating to a prohibition on the award of a state agency contract to a person in a state with laws allowing or requiring discrimination based on sexual orientation or gender identity or expression.
- HB 290 – Relating to a prohibition on sex discrimination in compensation.
- SB 92 – Relating to prohibition of certain regulations by a county, municipality, or other political subdivision.
- SB 165 – Relating to the prohibition of certain discrimination based on sexual orientation or gender identity or expression.
- SB 296 – Relating to the liability of the state for a violation of the federal Americans with Disabilities Act
Employee / Family Leave
- HB 88 – Relating to an unlawful employment practice by an employer whose leave policy does not permit an employee to use leave to care for the employee’s foster child.
- HB 629 – Relating to leave for certain veterans obtaining medical and mental health care.
- HB 656 – Relating to employment leave for certain family or medical obligations.
- HB 718 – Relating to family care leave for certain employees.
- SB 73 – Relating to leave policy and procedures for state employees.
- SB 191 – Relating to the ability of a nonexempt employee to participate in certain academic, disciplinary, college and career readiness, and developmental activities of the employee’s child or grandchild.
- SB 285 – Relating to the right of an employee to time off from work to obtain an election identification certificate.
Human Resources – General
- HB 252 – Relating to the requirement that certain employers provide advance notice of employee work schedules.
- HB 317 / HB 334- Relating to the consideration by certain employers of the consumer credit reports of certain employees and applicants for employment.
- HB 329 – Relating to breast-feeding policies of state agency worksites.
- HB 334 / HB 317 – Relating to the consideration by employers of the consumer credit reports or other credit information of employees and applicants for employment.
- HB 548 – Relating to the consideration of criminal history record information regarding applicants for employment.
- HB 568 – Relating to authority for certain state employees to work flexible hours and to work from home or other authorized alternative work sites.
- HB 577 – Relating to the authority of a political subdivision to adopt or enforce certain regulations regarding whether a private employer may obtain or consider an employment applicant’s or employee’s criminal history record information.
- SB 75 – Relating to the requirement for parental consent for a minor to join a labor union.
- SB 279 – Relating to expression of breast milk in the Capitol and other public buildings.
Immigration / E-Verify
- SB 23 / SB 254 – Relating to requiring state contractors to participate in the federal electronic verification of employment authorization program, or E-verify.
- SB 85 – Relating to the verification of employment authorization by state contractors and state grant recipients, including the use of the federal E-verify program, and to authorization for the suspension of certain licenses held by private employers for the knowing employment of persons not lawfully present in this state; authorizing a fee.
Pay / Benefits / Wages and Hours
- HB 202 – Relating to a database of employers penalized for failure to pay wages or convicted of certain offenses involving wage theft.
- HB 253 – Relating to the period during which an employee may file a claim for unpaid wages with the Texas Workforce Commission.
- HB 285 / HB 475 Relating to the minimum wage. ($15/hour or federal minimum wage, whichever is higher)
- HB 326 – Relating to the payment of gratuities to certain employees.
- HB 373 – Relating to administrative penalties assessed by the Texas Workforce Commission against certain employers for failure to pay wages.
- HB 510 / SB 13 – Relating to payroll deductions for state and local government employee organizations.
- SB 70 – Relating to the required earnings statement provided by employers.
- SB 229 – Relating to the minimum wage. ($10.10/hour or federal minimum wage, whichever is higher)
Employment – Miscellaneous
- HB 92 – Relating to the entitlement of spouses of certain veterans with disabilities to a veteran’s employment preference.
- HB 108 – Relating to the creation of the Recruit Texas Program to facilitate the relocation to or expansion in this state of employers offering complex or high-skilled employment opportunities.
- HB 148 – Relating to electronic benefits transfer cards used for recipients of benefits under certain assistance programs.
- HB 436 / SB 268 – Relating to the drug testing of certain persons seeking benefits under the Temporary Assistance for Needy Families (TANF) program.
- HB 595 – Relating to a franchise tax credit for entities that employ certain students in certain paid internship or similar programs
- HB 230 – Relating to the eligibility of school bus drivers for unemployment compensation benefits.
- HB 463 – Relating to the disqualification from receiving unemployment benefits of certain individuals who are terminated from employment after giving notice of resignation.
- HB 563 – Relating to whom certain violations of the law by a state or local governmental entity may be reported.
- HB 665 – Relating to the requirement that contractors verify compliance with wage payment laws in contracts with public bodies.
- SB 283 – Relating to the offense of unlawfully prohibiting an employee from voting.
* The information was originally compiled by the Texas Workforce Commission and all bills have an effective date of September 1, 2017 unless otherwise noted.
Leiza is a business and employment litigation attorney in Dallas, Texas. 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.
5th Cir. Rules No Pain & Suffering, Punitive Damages For ADEA Retaliation Claims
The Fifth Circuit has previously ruled that employees suing for age discrimination under the Age Discrimination in Employment Act (ADEA) may not recover damages for “pain and suffering” or punitive damages.
Last week, the Fifth Circuit ruled in Vaughan v. Anderson Regional Medical Center that ADEA retaliation claims also do not allow for recovery of pain and suffering damages or punitive damages.
The Fifth Circuit specifically pointed out that it is aware that the Equal Employment Opportunity Commission (EEOC) believes that the ADEA permits pain and suffering and punitive damages recoveries, but stated that it found such position unpersuasive.
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Leiza is a business and employment litigation attorney in Dallas, Texas. 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.
Top 5 Legal Mistakes by Startups
Starting a startup company without creating basic legal protections for the product that it is going to sell is like opening a store and saying I’ll get the door lock installed later. Many a startup has failed because it ignored the legal realities of protecting the big idea from a disgruntled founder, a dissatisfied employee, or a shady competitor. Here are the top five legal mistakes that startups make that often cause them to fall apart or get bogged down in a legal dispute way before they start making money:
- Not defining the ownership structure (who owns how much). Leaving this question for later, will inevitably cause a dispute among the founders and impede funding. Look at it this way – if you can’t agree on the ownership structure, how will you be able to agree on any business-related decisions down the road?
- Failing to create a legal entity (like corporation or LLC). Formation of a legal entity will help protect the owners from liability, allow for business tax deductions, and help with obtaining funding down the road.
- Failing to have everyone who works for the startup, including founders, assign their intellectual property to the startup entity. The history is riddled with stories of falling outs between startup owners, where one of them leaves and takes his code/product/idea with him or her. Having the right assignment agreement in place can prevent that from happening.
- Failing to protect the idea or product with a rock-solid non-disclosure agreement. Any startup must have a non-disclosure agreement (NDA) to hand to anyone with whom it shares any confidential information. Nothing illustrates the importance of an NDA like the recent ZeniMax v. Occulus/Facebook lawsuit where the court awarded ZeniMax $500,000,000 for breach of its NDA.
- Failing to properly set up and document employment relationships. The startups often cut costs by hiring independent contractors, when, in reality those individuals should be classified as employees. While this might cut costs in the short term, in the long term, it can result in tax liability, fines and litigation from said employees.
Leiza is a business and employment litigation attorney in Dallas, Texas. 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.
The Truth Behind the Non-Disclosure Agreements
A lot of companies know they need to have non-disclosure agreements (NDAs) with their employees. So, they hand these agreements to their employees upon on-boarding, along with other hiring paperwork, then file them away in personnel files, and never look at them again until a problem arises.
While having a signed non-disclosure agreement checks off an important legal box, practically speaking it falls far short of educating employees about the importance of maintaining the confidentiality of the company’s proprietary information and trade secrets and the consequences of breaching their NDAs.
So, the truth behind the non-disclosure agreements is that employees must be able to understand them and know the consequences of violating such agreements. Therefore, in order to maximize the effectiveness of their NDAs, companies should do the following:
- Conduct training with employees, explaining what information the company considers confidential.
- Educate employees on what are possible ways in which they may violate their non-disclosure agreements, such as, for example, posting information on social media or discussing information with employees in an environment where non-employees may overhear confidential information.
- Have supervisors conduct one-on-one discussions with key employees about the type of confidential information they are working with and the appropriate security measures.
- Emphasize to the employees the importance of security measures such as not sharing computer passwords, locking sensitive files, and not sharing confidential information using insecure channels of communication.
- Institute a system where confidential documents are clearly marked as such.
- Educate employees about the consequences of violating their non-disclosure agreements.
- Finally, be prepared to punish the violations of the confidentiality agreements and make example out of those employees how knowingly or inadvertently disclosed confidential information, whether the punishment comes in the form of a termination or a lawsuit.
Bottom line is that if your employees do not know what the company considers confidential and are not afraid of the consequences of violating their non-disclosure agreements, they will not be deterred from violating their NDAs, whether intentionally or inadvertently.
Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Special Rules for Non-Solicitation Agreements in the Financial Services Industry
The financial services industry has its own set of rules when it comes to enforcement of non-solicitation agreements. In 2004, a handful of the largest financial firms signed a document called Protocol for Broker Recruiting. Since then, over a 1,000 firms became signatories to the Protocol, agreeing to abide by the rules that are meant to curtail non-solicitation litigation among competing firms. For those firms that are signatories (and many are not), as long as the departing broker follows the procedure laid out in the Protocol, s/he and the new employer are safe from being sued for violation of the broker’s non-solicitation agreement. However, the Protocol’s safe harbor only applies if the broker moves between two Protocol signatories. The first question is whether the companies involved are Protocol signatories.
Under the Protocol, a broker transitioning between signatory firms may take only the following information: (1) client name, (2) address, (3) phone number, (4) email address, and (5) account title of the clients that they serviced while at the firm. Broker’s clients are only those companies and individuals to whom the broker provided services for which he would have received commission. A broker is prohibited from taking any other information or documents than the ones specifically listed in the Protocol. The second question is whether the broker took any information beyond what is allowed under the Protocol.
Furthermore, a broker must resign in writing, deliver the resignation to local branch management, and include with the resignation letter a copy of the client information that will be taken, including account numbers. The broker’s compliance with the Protocol does not have to be perfect. S/he simply must show “substantial” and “good faith” compliance with the requirements. The third question is whether the broker’s compliance was in good faith.
To be in compliance with the Protocol, the broker may not start soliciting clients to move to the new firm while the broker is still engaged with the old firm while he is planning to move. A broker also may not share client information at the new firm for solicitation by other brokers. The Protocol also does not protect corporate raiding, i.e. one firm poaching a group of employees or another firm’s entire branch. The fourth question is whether the broker violated any of the express prohibitions of the Protocol.
Finally, although a firm that is deciding whether to bring a suit against a former broker or a competitor firm must consider whether the Protocol applies, it should also analyze a variety of state and federal law claims that may be applicable in such a situation. In particular, non-compete agreements and non-disclosure agreements may provide independent bases for enforcement even if the non-solicitation restraints are neutralized under the Protocol. Trade secrets misappropriation under the state or federal statutes as well as breaches of common law duties of loyalty may also be implicated.
Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Why Trade Secrets Protection is Even More Important in the Strong Economy
It is a well-known fact that when the economy improves, employee mobility rises as well. The most valuable employees – those with a specialized skill set and many years of experience in a particular industry – tend to stay within that industry while moving among competitors. Since such employees are usually given access to confidential information as part of their job duties, their move to a rival company often raises a concern of whether they will be sharing that information with their new employer.
As 2016 was drawing to a close, a number of nationally known companies filed lawsuits to prevent their former employees from working for their competitors and/or sharing their confidential information. In December, Carolina Herrera sued Oscar De La Renta for hiring Herrera’s former Senior VP of Design despite her 6-month non-compete with Herrera. In January, Aria sued its Las Vegas rival, Cosmopolitan, and a former executive, alleging that she took confidential information about Aria’s high-roller clients in order to solicit them for Cosmopolitan. Earlier that month, Zynga, a mobile app gaming power house and creator of Farmville, sued two of its former employees for allegedly taking 14,000 files related to a new game Zynga was developing before going to work for its competitor. These are just a few examples that have received attention in the media. In reality, similar situations develop all over the country on a daily basis.
In short, in the current market, any successful business, regardless of its size or industry, may be subject to trade secret theft not from foreign entities, but from its own departing employees. To prevent theft, or minimize the inherent damage that it carries with it, companies must have a process in place for protection of trade secrets and a plan of action for when theft is detected.
I have previously written about the simple steps any company can take to protect its trade secrets. In addition to these preventative steps, companies should be prepared to act quickly if a trade secrets theft is detected or suspected as time is of the essence, and not only from the practical standpoint of preventing dissemination of trade secrets, but from the legal standpoint as well. The more time passes between a company’s discovery of trade secret theft and any legal action, the less likely is the company to obtain an order from the court prohibiting the thief from using or disseminating the information. Thus, being prepared to act quickly and having the resources to do so, can make e a difference in the company’s ability to stop the thief from sharing its confidential information with others.
Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Non-Compete and Confidentiality Issues to Watch in 2017
In 2016, there have been some major developments involving confidentiality and non-compete agreements law, which are likely to have some repercussions in 2017. Here’s a summary of the most important issues that companies should be aware of going into the new year.
1. The Federal Defend Trade Secrets Act. This statute, enacted in May 2016, creates a federal question jurisdiction for misappropriation of trade secrets, allows companies to seize their trade secrets out of the hands of competitors in some circumstances, and provides whistleblower protection to employees when certain conditions are met. In 2017, as companies begin to take advantage of the statute, the courts will begin creating a new body of law interpreting its provisions.
2. SEC Enforcement. The SEC will continue to go after the companies whose confidentiality agreements and policies they may find to violate the SEC’s whistleblowing rules. Making sure that confidentiality agreements include the language specified in the federal Defend Trade Secrets Act may help with SEC’s scrutiny.
3. Choice of Law Issues. Choice of law issues in interstate non-compete and confidentiality disputes will continue to be of major concern to companies who have out-of-state employees. A number of states in 2016 passed statutes dramatically limiting non-competes and California passed a statute that prohibits application of other states’ laws to its employees’ non-compete agreements. Business owners should make sure that their non-competes are enforceable in the jurisdictions in which they intend to enforce them.
4. Disclosure of Trade Secrets During Litigation. This will continue to be a major point of dispute in trade secrets and non-compete lawsuits. For example, earlier this year, the Texas Supreme Court addressed what a trial judge must consider before allowing a competitor’s corporate representative in the courtroom during the testimony that might reveal the adverse party’s trade secrets. Thus, in 2017, those companies that are engaged in trade secrets misappropriation litigation in Texas will need to consider how this balancing test will apply in their particular circumstances. Many other states’ courts faced a similar issue in 2016 and have fashioned their own rules regarding when the disclosure of trade secrets in litigation is appropriate.
Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
Will Ban the Non-Competes Movement Lose Its Momentum During the Trump Administration?
It’s no secret that the Obama administration made a push, especially towards the end, towards limiting the use of non-compete agreements by employers around the country. The White House commissioned not one but two reports on this topic, both of which concluded that non-compete agreements stifle innovation, reduce job mobility, and negatively impact economic growth.
Several states around the country seemed to join the White House’s view on non-compete agreements in passing statutes limiting their use. Illinois, for example, recently enacted the Illinois Freedom to Work Act, 5 ILCS § 140/1 et. seq., which prohibits private employers from entering into non-competition agreements with “low-wage employees.” Utah passed the Post-Employment Restrictions Act, Utah Code § 34-51-101 et seq., in March 2016, restricting non-competes’ length to 1 year. Massachusetts tried to pass a similar legislation this year, but failed. And New York State Attorney General Eric Schneiderman announced that he will propose legislation in 2017 to limit the use of non-compete agreements in New York.
Will this push to limit non-compete agreements continue during the Trump administration? My prediction is that it won’t. Of course, as with many other areas of the law, predicting what Trump will or will not do, is like reading tea leaves – nobody really knows. However, here are my top three reasons for thinking that the Trump Administration won’t pursue the same stance on non-compete agreements as the Obama Administration.
First, Trump is a savvy businessmen and an employer. Therefore, he knows the value of non-compete agreements to employers and, without a doubt, has used them himself in his many businesses.
Second, Trump has demonstrated that he is not above using such agreements in what some would view as overreaching situations. For example, he did not shun from using non-compete agreements with the volunteers for his political campaign, even though the volunteers were not paid compensation for their services and probably performed tasks that did not involve any confidential information.
Third, Trump’s recent appointment of Andrew F. Puzder – the former CEO of a fast-food franchise – as the Secretary of Labor, suggests that his focus may not be on helping low-wage employees. Mr. Puzder had openly criticized the minimum wage increase that was supposed to go into effect this December and is commonly perceived as an ally for employers. His position on ACA, minimum wage, and the joint-employer rule promulgated by the NRLB, is contrary to the position taken by the Obama administration. Thus, if he takes a 180-degree shift from the Obama administration’s stance on non-competes, such position won’t come as a surprise.
Employers should stay tuned to see how the Trump’s policy on non-competes develops in 2017…
Leiza litigates unfair competition, non-compete and trade secrets lawsuits on behalf of companies and employees, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
