North Texas Legal News
Original Commentary on Non-Compete and Trade Secrets Law
A Study Concludes Mentioning “Trade Secrets” in Form 10-K Leads to More Cyber Breaches
A recently-published study* concluded that companies that mention the existence of trade secrets in their publicly filed Form 10-K disclosures are 30% more likely to become victims of cyber attacks. Among those companies, the probability of a cyber attack is even higher for younger firms, firms with fewer employees, and firms operating in less concentrated industries.
Considering that trade secrets consist of all forms and types of “financial, business, scientific, technical, economic, or engineering information” and, along with other types of intellectual property, may constitute more than 80% of a company’s value, their theft can severely damage the company’s value or even bring its demise.
The study analyzed a total of 39,992 10-Ks from about 7,500 companies. Of those, 12,542 mentioned trade secrets, and 591 became victims of a cyber breach. The authors searched the companies’ Form 10-K disclosures for words such as “trade secrets” and “trade secrecy” and then analyzed the frequency of cyber breaches of such companies with those whose Form 10-K disclosures did not mention such words. Those who mentioned the key phrases often did so in the context of listing what types of intellectual property they had in their portfolio and what measures they were taking to protect their trade secrets.
According to the study, companies feel safe mentioning “trade secrets” in their public filings without revealing the nature of such trade secrets and, often, discuss the protection measures they take to protect this intellectual property, such as non-disclosure agreements with employees. However, according to the authors, even mentioning the existence of trade secrets increased the probability of a cyber attack by 30%.
BOTTOM LINE: Trade secrets only have value as long as they stay secret, so once they come into a competitor’s hands or become publicly available, their value is often destroyed. In light of the study, the companies may want to omit mentioning trade secrets in their public filings and press releases and reserve the discussion of their trade secrets protection measures for the confidential correspondence with their shareholders.
*The study was done by Michael Ettredge and Yijun Li of the University of Kansas School of Business, and Feng Guo of the Iowa State University College of Business.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
Employers Are Responsible for Stopping Sexual Harassment by Non-Employees
In the wake of the #MeToo movement, many employers remain unaware that they must investigate sexual harassment allegations and take appropriate measures if sexual harassment is perpetrated by non-employees, such as customers or vendors.
A recent opinion from the Fifth Circuit Court of Appeals addressed just this issue when the court considered whether a nurse at a nursing home facility who repeatedly complained of sexual harassment by a patient with dementia presented a strong enough claim to go to trial. The Fifth Circuit found that she did. And although Gardner v. CLC of Pascagoula, L.L.C. involved a rather common and pervasive problem of patient-nurse sexual harassment, the Court’s analysis is usefull for all companies where employees have interaction with customers or third parties on a regular basis.
The Court of Appeals reminded that pursuant to the Regulation issued by the Equal Employment Opportunity Commission (EEOC):
An employer may [] be responsible for the acts of non-employees, with respect to sexual harassment of employees in the workplace, where the employer (or its agents or supervisory employees) knows or should have known of the conduct and fails to take immediate and appropriate corrective action. In reviewing these cases the Commission will consider the extent of the employer’s control and any other legal responsibility which the employer may have with respect to the conduct of such non-employees. 29 C.F.R. 1604.11(e)
In Gardner, the patient who suffered from a host of mental disorders, had a documented history of grabbing the female nurses’ “breasts, butts, thighs, and trying to grab their private areas,” and asking them to engage in sexual activity with him as well as making lewd sexual comments. Several nurses routinely recorded this behavior on the patient’s chart and made complaints to their supervisors. Additionally, at least one of the supervisors observed the patient behaving in a sexually inappropriate manner.
When the plaintiff-nurse attempted to discuss her concerns about the patient’s behavior, her supervisor and the nursing facility administrators allegedly laughed and told her to “put [her] big girl patients on and go back to work.” Eventually, after the patient punched her in the breast while she was trying to assist him, she asked to be reassigned. Her request was denied. The patient was soon transferred to an all-male facility but only after he had punched a male resident.
The district court granted the employer’s summary judgment finding that a hostile work environment did not exist because it was “not clear to the court that the harassing comments and attempts to grope and hit [were] beyond what a person in the [nurse’s] position should [have] expect[ed] of patients in a nursing home.”
The Court of Appeals disagreed, however, ruling that while inappropriate comments from patients with reduced cognitive abilities may not rise to the level of legally-actionable sexual harassment, where a patient crosses the line into physical contact, which progresses from occasional inappropriate touching or minor slapping to persistent sexual harassment or violence with the risk of significant physical harm, the employer must take steps to try to protect an employee.
BOTTOM LINE: If a company becomes aware that its employees are being harassed by a third party, such a customer or vendor, the company has an obligation to take steps immediately to get the harassment to stop. This may include reassignment of the employee, adding security, conversations with a customer or a vendor, and a host of other measures. Ignoring the situation once the employer becomes aware of it may result in a liability under Title VII.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
Is it a Crime to Take Employers’ Trade Secrets?
Few employees realize that when they take their employers’ trade secrets with them when leaving their jobs they may be exposing themselves to criminal liability under the Economic Espionage Act, which makes it a crime to steal trade secrets when: (1) the information relates to a product in interstate or foreign commerce (which is virtually any product now days) or (2) the intended beneficiary is a foreign power.
Of course, the overwhelming majority of employees do not take trade secrets for the purpose of selling the information to a foreign government; however, they can still be guilty of trade secrets theft if they were aware that the misappropriation would injure their employer, as the owner of trade secrets, to the benefit of someone else.
When is Trade Secrets Theft a Crime?
Under the Economic Espionage Act, a criminal defendant is guilty of trade secrets theft and can be fined and imprisoned for up to 10 years if:
- The defendant stole, or without authorization of the owner, obtained, destroyed or conveyed information;
- The defendant knew this information was proprietary;
- The information was in fact a trade secret;
- The defendant intended to convert the trade secret to the economic benefit of anyone other than the owner;
- The defendant knew or intended that the owner of the trade secret would be injured; and
- The trade secret was related to or was included in a product that was produced or placed in interstate or foreign commerce.
What is a “Trade Secret” Under the Statute?
The definition of a “trade secret” under the statute is very broad. It means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.
A recent indictment of six former and current Fitbit employees, who used to work for its rival Jawbone, demonstrates what conduct may result in criminal charges under the Economic Espionage Act. These six individuals were indicted on the grounds that they “knowingly received and possessed the Jawbone trade secrets, knowing them to have been stolen and appropriated, obtained, and converted without authorization, with the intent to convert the trade secrets to the economic benefit of someone other than Jawbone, and intending and knowing that the offense would injure Jawbone.”
Specifically, the indictment states that after these employees had resigned from Jawbone and signed certifications stating that they had returned all of Jawbone property, they continued to possess the following trade secrets – while working for Jawbone’s direct competitor – Fitbit:
- Chinese user market study of Chinese consumers and their motivation, influences, preferred brands, reasons for buying fitness trackers and shopping methodologies.
- Vendor and pricing list for international suppliers, compounded over time through trial and error, including competitive negotiated pricing and their specialized skills or equipment.
- Schematics, design specification and detailed description of unreleased products.
- Quantitative and qualitative studies of Jawbone users’ characteristics, reasons of using such trackers and a multitude of other factors useful in product development.
BOTTOM LINE: Companies should educate themselves and their employees on what types of information such companies consider to be their trade secrets and educate employees on what consequences they will face if they take that information to the competitors. If a trade secrets theft is detected, companies should assess whether the theft is serious enough to pursue criminal charges against the thief.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
The Fifth Circuit Rules Industry-Wide Noncompete Agreements Are Not Enforceable
The Fifth Circuit Court of Appeals recently considered whether a travel agency’s noncompete agreement with its employee was enforceable under Texas law. It concluded that because the agreement did not have geographic limits, was not limited to the travel agency’s customers with whom the employee actually worked during her employment, and included the entire travel agency industry, the noncompete was unenforceable.
In analyzing the noncompete clause, the court in Karen D’Onofrio v. Vacation Publications, Inc., provided a useful refresher as to what types of noncompete agreements are legal in Texas and what types are illegal and, therefore, not enforceable. The court confirmed that noncompete restraints that preclude employees from working in any capacity in a particular industry are not enforceable. Thus, when it comes to noncompete agreements, bigger is not always better.
What covenants not to compete are legal in Texas?
First of all, Texas law recognizes that reasonable covenants not to compete serve the legitimate business interest of preventing departing employees from “using the business contacts and rapport established” during their employment to take the employer’s clients with them when they leave.
Thus, a covenant not to compete is enforceable under Texas law if it is “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that 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.” Tex. Bus. & Com. Code § 15.50(a).
In the case of personal services occupations, such as sales persons, the employer has the burden of showing the reasonableness of its noncompete agreement. Thus, for example, an employer who is asking a court to enforce a 20-mile covenant not to compete, will have to establish why the 20-mile – as opposed to a 10-mile – radius is reasonable.
What types of covenants not to compete are illegal in Texas?
As a general rule, under Texas law, covenants not to compete that extend to clients with whom the employee had no dealings during his or her employment or amount to industry-wide exclusions are overbroad and unreasonable and will not be enforced by the Texas courts. Similarly, the absence of a geographical restriction will generally render a covenant not to compete unreasonable and, therefore, unenforceable.
Was D’Onofrio’s covenant not to compete enforceable?
D’Onofrio’s noncompete agreement prohibited her — for a period of 18 months after her employment with the travel agency — from, among other things, working “in any capacity” for “any direct or indirect competitor of [the travel agency] in any job related to sales or marketing of cruises, escorted or independent tours, river cruises, safaris, or resort stays” or doing any business with “any person or entity” who had purchased a cruise or other travel product from the travel agency in the preceding 3 years.
According to the court of appeals, this covenant amounted to an industry-wide restriction, which prevented D’Onofrio from working in any job related to the sales or marketing of not just cruises, but also a host of other travel products—and was not limited as to either geography or clients with whom D’Onofrio actually worked during her employment. Therefore, the Fifth Circuit Court of Appeals concluded that D’Onofrio’s covenant not to compete with her travel agency was unreasonable as written.
When a Texas court finds a noncompete agreement unenforceable, what does that mean for the employer?
If a court determines that a covenant not to compete does not contain reasonable time, geography, and scope limitations, but is otherwise enforceable, then the court shall reform, i.e. rewrite, the noncompete agreement to make it reasonable. For example, a court can change a 50-mile radius in a non-compete agreement to a 20-mile radius or change an 18-month restriction to a 6-month restriction.
BOTTOM LINE: In the D’Onofrio case, the court of appeals sent the case back to the lower court directing it to rewrite the agreement. Texas employers should be aware that any time a court has to rewrite a noncompete because it is overbroad and unreasonable, there are negative consequences for the employer – more attorney’s fees, more time spent in litigation, and an inability to recover damages from the employee.
Therefore, it is important to make sure that noncompete agreements are written properly from the beginning rather than rely on the courts’ ability to rewrite them during litigation.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
2018 Mid-Year Non-Compete Laws Update
More and more states are amending their non-compete statutes to make them more employee-friendly. This trend, spurred by the White House report that highlighted the prevalence of non-compete agreements among low-skilled workers coupled with the revelation that some of the largest employers, like Jimmy John’s and Amazon, were requiring their sandwich-makers and warehouse employees to sign non-compete agreements, has continued into 2018.
Thus, on the heels of changes implemented in 2017 by California, Illinois and Nevada, which amended their non-compete laws to help protect employees’ right to change employers, in the first half of 2018, Utah, Idaho, and Colorado, enacted their own versions of employee-friendly laws.
UTAH – Now Restricts Use Of Non-Competes In Broadcasting Industry
In March 2018, Utah amended its non-compete statute to restrict the use of non-compete agreements in broadcast journalism. Specifically, employers may enforce non-compete agreements against employee in the broadcasting industry only if: (1) the employee receives a salary of at least $913 per week or $47,500 a year; (2) the non-compete clause is part of a written employment agreement with a term of less than four years; and (3) the employee was terminated “for cause” or he/she breached the employment agreement in a manner that resulted in his or her separation.
IDAHO – Has Modified Standard of Proof For Non-Compete Enforcement Actions
This March, Idaho repealed an 2-year old amendment to its non-compete law that was added back in 2016. The amendment created a rebuttable presumption of irreparable harm with respect to “key employees” and “key independent contractors,” thus putting the burden on these employees to prove that they had no ability to adversely affect the employer’s legitimate business interests as a result of their competitive employment.
The 2018 bill repealed this rebuttable presumption of irreparable harm. Therefore, Idaho has effectively placed the burden back on companies to establish a likelihood of irreparable harm before an injunction in a breach of non-compete case can be issued.
COLORADO – Now Prohibits Physician Non-Competes for Rare Disease Patients
Colorado generally allows non-compete agreements with physicians when certain conditions are met. The 2018 amendment to the non-compete statute added a paragraph to permit physicians to continue to treat patients with rare disorders without liability, even when providing such service would otherwise violate their non-compete agreements. Thus, the amendment protects physicians and their new employers from damages for providing care to patients with a rare disorder, as defined in accordance with the criteria developed by the National Organization For Rare Disorders, Inc., or any successor organization.
Many other states are considering amendments to their non-compete statutes and we are likely to see more changes in that area of the law in the second half of 2018. The days of one-size-fits-all non-compete agreements for multi-state employers are gone, and now companies need to make sure that their non-compete agreements are compliant in all the applicable jurisdictions.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
What Are Acceptable Non-Solicitation Restraints for Sales Employees?
In Texas, it is common for sales employees in many industries to have a non-solicitation clause in their employment agreements, which prohibits them from soliciting company clients for a certain period of time after they leave the company’s employment. Such non-solicitation clauses are enforceable under the Texas Covenants Not to Compete Act as long as they are reasonable and supported by proper consideration. What is “reasonable,” however, is often a major point of contention between the company and the sales employees or such employees’ new employers.
A recent opinion from the Thirteenth Texas Court of Appeals provides a good illustration of what is not a reasonable non-solicitation restraint. In Cochrum v. National Bugmobiles, Inc., a trial court entered an injunction against a pest control technician who left one pest control company to work for another. The injunction prohibited Cochrum from soliciting business from any of National Bugmobiles’ 19,700 customers on its client list compiled over the course of eight or nine years during which Cochrum worked there, even though the employee testified that he only serviced approximately 300 customers during his tenure with National Bugmobiles.
Cochrum argued that he cannot in good faith comply with the injunction because he has no idea who the 19,700 customers are. The company argued that in order to comply with the injunction, he should ask any prospective customer whether they received services from National Bugmobiles, and if they had, refrain from soliciting their business. While the trial court was satisfied with this approach, the Court of Appeals rejected it calling it “simplistic” and “fatally vague” in that the injunction order failed to identify the customers that Cochrum was prohibited from soliciting, as required under Texas law.
Thus, as far as the non-solicitation requirements were concerned, the Court of Appeals modified the temporary injunction by striking down the following language for being too vague:
- Diverting any business whatsoever from Bugmobiles by influencing or attempting to influence any of the customers of Bugmobiles whom Cochrum may have dealt with at any time or who were customers of Bugmobiles on February 13, 2017 or had been customers of Bugmobiles thereto;
- Servicing any client that was under contract with or was being serviced by Bugmobiles as of February 132017 by directly or indirectly owning, controlling or participating in the ownership or control of, or being employed by or on behalf of, or engaging in any business which is similar to and is competitive with the business of Bugmobiles.
Instead, the Court of Appeals left the following much more specific language in the injunction order prohibits the technician from:
- Diverting any business by soliciting or attempting to solicit any of approximately 300 customers of Bugmobiles whom Cochrum dealt with at the time of his resignation from Bugmobiles on February 13, 2017.
CONCLUSION: While a non-solicitation clause that prohibits a sales employee from soliciting all company customers may sometimes be justified, most of the time it is much more reasonable to limit the non-solicitation restraint only to the customers and prospective customers with whom the sales employee directly interacted rather than every customer in the company’s database. This is true, especially when the entire customer list is much larger than the subset of customers with whom the sales person dealt.
When enforcing a non-solicitation clause, a company should always consult with an attorney to determine the scope of the enforcement given a particular sales employee’s area, the circumstances surrounding a his/her departure, and the size of the company customer list.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
Texas Supreme Court Clarifies When Employers are Responsible for Employees’ Negligence
When are employers liable for negligence of their employees? For example, when an employee is driving a company vehicle and gets in a car accident, when can his/her employer be held liable for the injuries caused by the employee? The legal standard – vicarious liability – has been around for a long time, but last week the Texas Supreme Court added a much-needed clarity to it.
In Texas, before an employer can be held liable for its employees’ negligence, the following two questions must be answered:
- At the time of the negligent act, was the worker an employee (as opposed to an independent contractor) of the employer?
- At the time of the negligent act, was the worker acting in the course and scope of his or her employment?
If the answer to both of these questions is “yes,” then the employer can be held liable for that employee’s negligent conduct.
The “Control” Question. The answer to the first question depends on whether an employer has the right to control the details and progress of the worker’s job. The Supreme Court clarified that the “control” question is not evaluated on a task-by-task basis, but is a question of general control over the worker. If an employer does not dispute that a particular worker is its employee, then the question of control becomes irrelevant and the party seeking vicarious liability can skip to the second question in the analysis.
In Painter, et al. v. Amerimex Drilling, I., Ltd., the employer conceded that the driller that got into a car accident injuring several people was an employee. Nevertheless, it argued that because it exercised no control over the details of the driller’s driving at the time of the accident, i.e., the particular task during which the incident occurred, it could not be vicariously liable. The Texas Supreme Court rejected this argument and stated that once the employer-employee relationship was established, the only remaining question was whether at the at the time of the accident the driller was acting in the scope and course of his employment.
The “Scope and Course of Employment” Question. This question seeks to determine whether an employee committed a negligent act while performing his duties for the employer or while he was doing something unrelated. A classic law school example would be a driver, who is still “on the clock” taking a detour to run a personal errand and getting into an accident while doing so. In that situation, his employer would not be vicariously liable because the employee was acting outside the course and scope of the employment.
In Painter, et al., the driller got into a car accident while he was driving the drilling crew from the drilling site to the campsite provided by the employer. Normally, driving to and from work would not be considered to be within the course and scope of employment. However, in this case, the driller received $50 bonus from his employer for driving the crew between the drilling site and the campsite, the employer was contractually required to pay such a bonus, and there was evidence that the driller was providing the driving services as part of his assigned job duties. Therefore, when the driller got into an accident while driving the drilling crew from the drill site to their campsite, the Court concluded that he could have been acting within the course and scope of his employment and the employer was not entitled to a summary judgment on this issue.*
BOTTOM LINE: Texas employers can be held liable for their employees’ negligence as long as the negligent act occurred when the employee was performing his or her duties for the employer. Where the employer-employee relationship is not disputed, the only question that stands between the employer and the vicarious liability for employee’s actions is whether, at the time of the accident, the employee acted within the course and scope of his employment or whether he deviated from his/her duties.
Therefore, Texas employers must carefully consider how they structure employment relationships, contractual obligations and risk-shifting provisions, and how they describe and define employees’ duties. In facing the question of vicarious liability in litigation, employers should carefully analyze the situation using the Painter framework.
*Justices Green and Brown penned a dissenting opinion arguing that the proper standard for “control” analysis in vicarious liability cases should be on a task-by-task basis.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
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 Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly 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 Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly 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 Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly 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 Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly 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 is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.
