North Texas Legal News
Original Commentary on Texas Business and Employment Law
Five Non-Compete Agreements Myths in Texas for Employees
The old saying “ignorance is bliss” may be true in many situations, but not when it comes to non-compete agreements in Texas. Over the years, I have identified five most common misconceptions about such agreements from my discussions with clients, friends, and even other lawyers. It’s time to dispel these common myths once and for all:
Myth #1: Non-compete agreements are not enforceable in Texas. This is absolutely false. In Texas, non-compete agreements are enforceable if they meet certain requirements spelled out in the Texas Covenants Not to Compete Act. Even if they do not meet those requirements, a lot of times, a judge can reform, i.e. rewrite, them to make them more “reasonable” and then enforce them.
Myth #2: Texas is a right to work state, so an employer cannot prevent employees from going to work for a competitor. This is also false. A “right to work state” simply means that employees in Texas cannot be fired for joining unions. It has nothing to do with the enforceability of the non-compete agreements. So, while Texas is a right to work state, that doesn’t mean that the non-competes here are invalid.
Myth #3: An employer threatening to fire an employee if s/he doesn’t sign a non-compete agreement makes such agreement invalid. This is false. Because Texas is an at-will employment state, an employer may change the terms of employment at any time, including adding non-compete restraints to an already-existing employment relationship. Thus, with rare exceptions, employers may force employees to sign non-competes under a threat of termination.
Myth #4: Since an employer never enforced its non-compete agreements, it won’t/can’t enforce it against a particular employee. Again, this is false. Employers typically consider many factors when deciding whether to enforce a non-compete agreement, so while they might decide not to enforce the agreement against one employee, they may be motivated to do so against another employee.
Myth #5: If a non-compete agreement looks/sounds reasonable, there is no way to fight it. This is false. There are many defenses to non-compete agreements, and whether a particular non-compete agreement will hold up in court depends on the specific language of the agreement as well as employee’s job duties, length of employment, access to confidential information and a myriad of other factors.
The bottom line is that employees in Texas cannot afford to ignore non-compete restraints in their agreements and, when in doubt, should seek legal advice to understand the consequences of signing a non-compete agreement, or switching jobs or starting a competing business when subject to a non-compete. Planning ahead is key when it comes to non-compete agreements in this state.
Stay tuned for part II to find out common non-compete agreements myths for employers.
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.
A Texas Case Demonstrates Why Using Stock Non-Compete Agreements May Backfire
Last month, a Texas Court of Appeals denied an insurance agency’s application for a temporary injunction against its former President because it held that the non-compete agreement, as written, did not restrict the President from competing. The agency tried to enforce the non-compete and non-solicitation agreement to prevent the President from soliciting the agency’s clients for the purpose of selling or marketing any products or services that would compete with the agency, and it was able to obtain a temporary restraining order (TRO). However, the trial court refused to convert the TRO into a temporary injunction.
The reason the company lost at the temporary injunction hearing is because both the non-compete and non-solicitation clauses in the agreement stated that the President could not compete with or solicit the agency’s clients “during the term of CMC Account Development Sub Agent Agreement, and for a period of two (2) years after the termination of the Agreement.” However, the agency’s representative and the President both testified that he was never a sub agent (i.e. sales person) for the agency and that he did not have a CMC Account Development Sub Agent Agreement.
Basically, the non-compete and non-solicitation restraints were tied to the length of a non-existent agreement between the agency and the President. In most likelihood, the language was left over from the standard contract form that the agency used for its sales representatives, and was included in the President’s agreement due to oversight. As the result, the company was unable to stop the President from competing.
Takeaway: This case demonstrates why the companies should conduct an audit of their non-compete and non-solicitation agreements at least once a year to make sure that (1) the agreements are enforceable, (2) they have a legible copy of the agreements signed by both parties, and (3) the agreements will adequately protect the company if they have to be enforced.
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 dispute, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.
DOL Overtime Rules Blocked Nationwide by a Federal Court in Texas
Last week, the United States District Court for the Eastern District of Texas issued a decision enjoining the Department of Labor (DOL) from enforcing its new overtime rules. State of Nevada et al. v. U.S. Department of Labor et al., case number 16-cv-00731.
The new overtime rules were set to go into effect on December 1, 2016, causing many companies to scramble to adjust their compensation systems in compliance with the new minimum salary threshold for administrative, executive, and professional exemptions, which was going to jump from $23,660 per year to $47,476 per year on December 1st.
The court’s injunction requested in early October in two parallel cases filed by business organizations and 20 states, enjoins the Department of Labor from enforcing the new overtime rules.
Takeaway: In light of this injunction, businesses who are not in compliance with the DOL new overtime rules, are not going to be in trouble come December 1, 2016. However, since this is a temporary injunction, employers are not 100% in the clear, as the court may still enforce the rules when the final hearing in the cases takes place. Thus, the injunction grants a temporary reprieve, but companies should continue to monitor the situation, which may last anywhere from several months to several years.
Bottom line is that the injunction will remain in effect until a final resolution of the merits is reached or there is further order of the court, the Fifth Circuit, or the United States Supreme Court.
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.
Why the Appointment of Jeff Sessions as the New Attorney General May Lead to More Trade Secrets Litigation
On Friday, President-elect Donald Trump named Alabama Sen. Jeff Sessions as his pick for the next Attorney General. Sessions is a former U.S. attorney and current senator with lengthy experience with the Justice Department. He is also known as a pro-business conservative, who on numerous occasions has expressed a favorable view of corporate indictments of executives marred in white-collar crimes.
Sessions co-sponsored the Federal Defend Trade Secrets Act, which became the law this year. The statute allows civil lawsuits to prevent or redress theft of trade secrets in addition to already-existing criminal penalties under 18 U.S.C. § 1832. His previous publicly expressed views suggest that he will not shy away from indicting big companies and individuals for white-collar crimes, which include theft of trade secrets.
For example, in 2010, during a confirmation hearing for the U.S. deputy general, Sessions questioned the candidate about the “dangerous” philosophy of not charging companies criminally because of concerns regarding the effect of such charges on employees and shareholders and stated that he “was taught that if they violate a law, you charge them.”
Trade secret theft indictments have been on the rise over the past several years, prompting an almost unanimous passage of the Federal Defend Trade Secrets Act in the beginning of this year. The uptick in criminal litigation has been accompanied by a blooming civil litigation of trade secrets theft on state and federal level as well.
Given Sessions’ prior remarks regarding his preference for corporate indictments in lieu of settlements or payment of penalties, as well as his expressed support towards protection of trade secrets, we can expect a rise in corporate indictments arising out of theft of sensitive information (especially when it is shared with foreign companies or states). This will put the spotlight on the rise of trade secrets theft in the country, will garner more publicity for such acts, and will in turn educate the US companies and business owners as to legal remedies available to them in the civil court to remedy trade secret theft.
In short, Sessions’ expected tough stance on corporate crime, including trade secrets theft and the accompanying publicity will likely result in an increase in civil litigation in that arena as well.
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.
Federal Government Warns That Anti-Poaching and Wage-Fixing Agreements May Violate Antitrust Laws. What Does This Mean for Texas Companies?
The Department of Justice (DOJ) and Federal Trade Commission (FTC) recently issued Antitrust Guidance for HR Professionals (“Guidance”) intended to alert professionals involved in hiring and compensation decisions to potential violations of the antitrust laws.
This Guidance is the result of the infamous wage-fixing anti-poaching agreement among Ebay, Google, Apple, and other heavy-weights of the tech industry, which came to light in 2010 during the DOJ investigation and a civil class action involving 64,000 employees of such companies that settled in September of last year.
You can find the full text here, but the Guidance can be boiled down to the following simple rules for HR professionals:
- companies that compete for employees are competitors regardless of whether they sell the same products or provide the same services
- it is unlawful for competitors to agree not to compete with each other
- therefore, companies may not agree – expressly or implicitly, in writing or orally – not to poach each other’s employees or to cap salaries or benefits of their employees
- specifically, HR professionals are “likely” breaking the anti-trust laws if they:
- agree with individuals at another company about employee salary or other terms of compensation, either at a specific level or within a range (wage-fixing agreement), or
- agree with individuals at another company to refuse to solicit or hire that other company’s employees (“no poaching” agreements)
- HR professionals should avoid sharing sensitive information with competitors as it could serve as evidence of an implicit illegal agreement (especially where it causes companies to match each other’s arrangement)
What are the consequences of violating the anti-trust rules? The DOJ and/or FTC may bring a felony criminal prosecution against individuals involved in anti-poaching or wage-fixing agreements, the company, or both. Additionally, individual employees may bring a civil suit for three times the damages they suffered.
Takeaway for HR Professionals: We all know that price-fixing for goods is illegal, i.e., competing companies cannot get together and agree to charge consumers a certain price for certain goods in the market. The Guidance makes it clear that agreeing on wages for employees is just as illegal and will be prosecuted.
What does this mean for Texas companies in terms of non-compete agreements? The companies may still enter into such agreements with their employees (as long as they comply with the Texas Covenants not to Compete Act). However, they cannot agree with other competing companies on the terms of such non-compete agreements. For example, Companies A and B, which are competing for the same employees, cannot enter into an agreement that they both will tie up their employees with no less than a 2-year, 30-mile non-compete agreement, or that the non-compete specifically will prohibit employees from working for Company A (if they worked for Company B), and vice versa. When in doubt about the legality of your particular agreement, seek legal counsel.
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.
Staffing Agency Could be on the Hook for Termination of an 83-Year Old Receptionist at Client’s Request
The Fifth Circuit recently addressed an interesting issue – when a staffing agency’s client asks to replace an employee, does the staffing agency have a duty to investigate the reasons for the request? For example, if a staffing agency’s client calls and says we want you to replace Bob, who is African-American, does the agency have a duty to ask why the client wants to terminate Bob and make sure it is not because of his race? The Fifth Circuit ruled that a staffing agency must follow its usual practices in responding to a client’s desire to have an employee removed, and a deviation from such practices may serve as evidence that the staffing agency knew or should have known of the client’s discrimination. So, in the example above, if the staffing agency typically investigates a client’s complaint about an employee, but in Bob’s case it removes him without confirming that he was unable to do his job, such action may create an issue of fact (and prevent summary judgment in favor of the employer) as to whether the staffing agency knew or should have known that the client’s request to remove the employee was discriminatory.
In Nicholson v. Securitas Services USA, Securitas was asked by a client to replace an 83-year old receptionist due to her not being able to perform new technology-related tasks. Securitas removed Nicholson, without asking her for an explanation and without any investigation, and replaced her with a 29-year old employee. According to at least one of its employees, this failure to “check out” the complaint or investigate the reason for the client’s request, was not a normal procedure at Securitas. The Fifth Circuit, therefore, found that the trial court improperly granted Securitas’ summary judgment because there was a fact issue regarding whether the staffing agency knew or should have known that its client’s request to replace Nicholson was motivated by her age.
Takeway: A staffing agency is liable for discriminatory conduct of its joint-employer client if it (1) participates in the discrimination or (2) knows or should have known of client’s discrimination but fails to take corrective measures within its control. Moreover, a staffing agency’s deviation from standard evaluation or investigation practices is evidence of discriminatory intent.
Thus, staffing agencies should follow their policies and procedures in a consistent manner when faced with a client’s request to remove or replace an employee. If such request is later found to have been based on a prohibited discriminatory factor, a staffing agency who replaces an employee without investigating the client’s complaint may be liable for discrimination along with its client, if its failure to investigate constitutes deviation from its standard procedures.
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 Fifth Circuit Reminds that the Interactive Process Under ADA Is a Two-Way Street
The Fifth Circuit recently found in favor of the City of Austin for firing a disabled employee because he did not attempt to perform his new lighter-duty job in good faith. After the employee was injured on the job, the city offered him an administrative position as an accommodation because he could not perform manual labor required by his prior job.
The employee accepted the new job, but began missing work, played computer games and surfed internet, slept on the job, made personal phone calls and applied for other positions within the city while at work. He also refused to participate in any training that would have helped him perform his new job.
After he was fired, he sued the city alleging discrimination based on disability and failure to provide him with reasonable accommodation. The Fifth Circuit found no discrimination and emphasized that “terminating an employee whose performance is unsatisfactory according to management’s business judgment is legitimate and nondiscriminatory as a matter of law.” It further explained the boundaries of the interactive process between an employer and an employee who requests an accommodation for his disability.
Once an employee requests an accommodation based on a disability, the employer and employee must work together in good faith, back and forth, to find a reasonable accommodation. The process does not end with the first offer of accommodation but continues when the employee asks for a different accommodation or where the employer is aware that the initial accommodation is failing and further accommodation is needed. Thus, the process is a two-way street. In this case, once the employee accepted an administrative position, he had to make an honest effort to learn and carry out the duties of his new job with the help of the training that his employer had offered to him. He certainly had an obligation not to engage in misconduct at work. Once he had shown no desire to try to succeed in that position, the city had no duty to offer him another job. After all, the ADA provides a right to reasonable accommodation, not the employee’s preferred accommodation.
Takeaway: When an employee requests a reasonable accommodation due to disability, the employer must engage in an interactive process with that employee to determine what reasonable accommodation will help the employee perform his or her duties. Employers should always document the process so that they have proof of engaging in it in good faith. Employees should also engage in the process in good faith, which means that if an accommodation is granted to them, they should try to take advantage of it. At the end of the day, an employer is required to provide a reasonable accommodation, but not necessarily the accommodation requested by the employee.
Leiza is a business and employment 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.
White House Calls on States to Ban or Limit Non-Compete Agreements
On Tuesday, the White House issued a call to action to state policymakers to do the following:
1. Ban non-compete clauses for categories of workers, such as workers under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause.
2. Improve transparency and fairness of non-compete agreements by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power); providing consideration over and above continued employment for workers who sign non-compete agreements; or 2 encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.
3. Incentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promoting the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.
This “State Call to Action on Non-Compete Agreements” comes on the heels of the White House and Treasury reports issued earlier this year that highlighted the fact that non-compete agreements impact approximately 30 million – nearly one in five – US workers, including roughly one in six workers without a college degree.
Some states have already passed legislation limiting the use of non-compete agreements. For example, Hawaii banned non-compete agreements for technology jobs last year; New Mexico passed a law prohibiting non-competes for health care workers; and Oregon and Utah have limited the duration of non-compete arrangements. Other states, like Massachusetts, have tried to implement similar measures this year but were unable to do it (yet).
Does this mean that non-compete agreements in Texas will soon go away? There is no indication of that happening in the near future, however, the 85th legislative session in Texas will begin on January 10, 2017, and we will monitor introduction of any bills that may curtail or ban non-compete agreements in light of the trend.
Of course, since the above call of action comes from the current White House, the outcome of the national elections will probably affect whether this call will carry over to the new administration. Given Trump’s affinity for non-compete agreements, should he be elected, the current White House policy regarding such agreements may experience a 180-degree turn.
Stay tuned for further developments in Texas 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.
What Should a Company do When it Suspects That an Employee Stole Its Trade Secrets?
Employees take their employers’ trade secrets all the time. It’s a fact of life. No matter what systems an employer has in place, sooner or later a key employee will depart and take some trade secret information, data, or documents with them. Most employees take trade secrets because that information will help them land a better job or open a competing business. Some take it because they believe that the information belongs to them since they worked on it or created it. Whatever their reasons may be, the loss of competitive advantage resulting from the disclosure of trade secrets to competitors or release of that information in the open market may cause significant, and often irreparable, damage to the former employer.
So, what should a company do if it suspects trade secrets theft by a former employee?
First, the company should identify and collect all of the employee’s electronic devices in its possession – desktop computers, laptops, tablets, company-issued phones, and any other devices that the employee used during his work and that may contain company information.
Second, the company should have a qualified forensic examiner image the devices to preserve the relevant electronic evidence that may show whether the employee used any of these devices to copy or transfer the trade secret information and then search such devices for relevant evidence. This should be done pursuant to a protocol devised by the examiner and a legal counsel to ensure that the evidence will later hold up in court.
Third, the company should search the employee’s emails for any evidence of trade secrets transfer.
Fourth, the company should interview its employees and/or third parties who may have relevant information.
** The company must move quickly and have an attorney supervise and coordinate the above efforts to make sure the collected evidence can later be used in court (i.e. is admissible) and to make sure the relevant communications are protected by the attorney-client privilege.
Fifth, if the company discovers evidence of trade secrets theft, it should file a lawsuit and seek a temporary injunction – a court order – prohibiting the former employee and anybody else acting on his/her behalf from using or disclosing the company’s trade secrets. While this may be costly, this is the only effective way to stop the employee before he or she uses or discloses the trade secrets or does significant damage to the company.
Here is a real-life example where the above steps worked and helped a company stop a former employee from opening a competing business using the company’s trade secrets.
Earlier this year, I wrote about a case that involved a Texas employer who followed the above steps and was able to obtain a temporary injunction and then a permanent injunction shutting down a competing business that a former employee opened using the gym’s trade secrets. In that case, a Houston gym filed a lawsuit against its former regional vice president and his wife claiming that they took the gym’s confidential information and opened their own competing gym and medspa. The gym obtained a temporary injunction against the former employee and his new company within four days of filing the lawsuit because it had emails and other electronic evidence establishing the trade secrets copying and transfer by the VP.
Just recently, the court in that case issued a permanent injunction prohibiting the former VP from opening or operating any new locations of his gym and medspa through September 2017 and from opening any gyms within a seven-mile radius of any of Life Time’s 123 existing locations, as well as employing or attempting to employ any current or former Life Time employees.
Additionally, within 20 days of the court order, the VP and his wife were required to return or destroy all of the gym’s documents and information still in their possession. After no more than 25 days, they had to provide the court with a declaration confirming that all sensitive data has been secured. Finally, between 20 and 90 days after the ruling, a forensic computer specialist “[had] the right to inspect and audit any computer systems” belonging to the VP, his wife, his business associate, and their gym to ensure that they had destroyed or permanently deleted the gym’s trade secrets. This outcome would not have been possible, had the company not followed the steps outlined above.
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.
Texas Non-Competes Soon Will Be Unenforceable in California
With so many companies moving their headquarters from California to Texas in the recent years, non-compete disputes involving employees and employers who have ties to both states have multiplied.
In these types of cases, one of the first questions the courts ask is which state’s law applies to the non-compete agreements in dispute – California’s or Texas’s? You can find an example of such a case here. Under California law, non-compete agreements are largely unenforceable. To the contrary, Texas law recognizes reasonable non-compete agreements and will enforce them.
Last month, California governor signed into law Senate Bill 1241, which, effective January 1, 2017, will restrain the ability of employers to require employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where the employee was individually represented by a lawyer in negotiating an employment contract.
This new Section 925 of the California Labor Code states the following:
(a) 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.
The only exception to the application of Section 925 appears in subdivision (e):
(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.
Takeaway: Texas employers with California employees need to recognize that an attempt to enforce Texas non-compete agreements against their employees who primarily reside and work in California may backfire after January 1, 2017, resulting in employer having to pay employees’ attorney’s fees related to the dispute.
Additionally, for those employees who might have dual residences in both states and might regularly perform work in both states, the question of whether they “primarily reside and work” in California or Texas may become a pivotal issue to the enforceability of their Texas non-compete agreements.
Most importantly, employers should take advantage of the exception in the statute as well as identify other legally allowed restrictions under California law that would serve to protect the company’s interests even against California employees.
Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, 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.
