Fox Goes to War with Netflix Over Two Programming Executives Who Jumped Ship

160916165507-netflix-fox-logos-780x439In a move that suggests that Fox might be feeling the burn of Netflix competition, the network Goliath has recently sued the king of online streaming over hiring of its two programming executives.  In the lawsuit, Fox claims that Netflix induced these employees to breach their employment agreements with Fox and thus tortiously interfered with their contracts causing it irreparable harm. It alleges that the conduct was illegal since Neftlix knew about the employment agreements – in fact was warned by Fox about them –  but decided to poach the executives anyways.

Coming out swinging, Fox described Netflix’s actions in the complaint as follows:

Netflix is engaged in a brazen campaign to unlawfully target, recruit, and poach valuable Fox executives by illegally inducing them to break their employment contracts with Fox to work at Netflix.  This action is necessary to enforce Fox’s rights, to hold Netflix liable for its wrongful conduct, and to prevent Netflix from continuing such illegal conduct.

Fox did not sue the two executives, who are now working on drama programming development for Neftlix. However, it seeks injunctive relief against Netflix to restrain it from interfering with the executives’ employment agreements claiming that Netflix’s conduct caused it “great and irreparable harm, including loss of Fox’s ability to contract for a stable workforce, the disruption to Fox’s corporate planning, and the injury to Fox’s business reputation and goodwill.”  Thus, while the executives are not named as defendants in the lawsuit, should the court grant Fox’s injunction, the order will necessarily affect the executives’ employment with Netflix. 

Takeaway:  2016 has been the year of high-profile non-compete battles in several industries. Nike, Fitbit, Lyft, and now Fox, have all been involved in lawsuits arising out of departure of key employees who ended up working for a competitor. Given the uptick in such litigation, companies should approach the process of hiring from competitors with caution and conduct their factual and legal homework before extending offers to such hires.  

TexasBarToday_TopTen_Badge_VectorGraphic

Leiza litigates non-compete and trade secrets lawsuits 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.

5 Common Mistakes That Companies Make With Non Disclosure Agreements

imagesWhether you are talking to a potential buyer of your company, an interested investor, or a joint venture partner, before any confidential information is shared with that person, they should execute a Non Disclosure Agreement, often referred to as “NDA.”  The NDAs are very popular and come in a variety of shapes and length. Their main purpose is to protect the confidentiality of information shared with a company outsider. Not having a signed enforceable NDA may result in a major headache down the road when the information that was meant to be confidential falls into the wrong hands. In my experience, here are the most common mistakes that companies make when it comes to non disclosure agreements:

Mistake No. 1: Not specifying what information will be covered and for how long. 

A non disclosure agreement should describe: (1) what type of information is being disclosed; (2) whether the NDA covers only written disclosures or also oral disclosures; (3) how will this information be disclosed; (4) how may this disclosed information be used by the recipient; and (5) how long will the recipient have to maintain the confidentiality of the information.  A NDA missing one or more of these terms may cause problems between the parties  when they actually begin to disclose confidential information to each other.

Mistake No. 2: Not specifying when or how disputes related to the NDA will be determined. 

A good NDA will have a clause that will specify where and how any disputes related to the NDA will be resolved – whether it’s through mediation, arbitration or litigation.  It should also specify what law will govern the agreement.

Mistake No. 3: Not keeping an electronic copy of a signed NDA.

It’s 2016 so this advice might seem painfully obvious.  However, it happens more often than you would think – a hard copy of a signed NDA somehow disappears or “walks away” and nobody can find an electronic copy with all the signatures. To prevent this from happening, a company should always designate one person to be in charge of collecting all the necessary signatures and saving the NDA somewhere where it can be easily found should a problem arise.

Mistake No. 4: Not designating the disclosed information as “Confidential.” 

Any information shared under the NDA should be marked as “Confidential” or “Highly Confidential.” Many companies mistakenly believe that once a party signed a non disclosure agreement, they are automatically protected. That is not the case.  Failing to designate all shared information as confidential may lead to future disputes as to whether certain data or information was meant to be confidential.   Moreover, should a problem arise with the NDA agreement, such as a missing signature, the confidentiality stamp will provide a back-up protection.

Mistake No. 5:  Not limiting the scope of what you are disclosing to the party who signed the NDA.

A party should always limit the scope of what it is disclosing to only that which is absolutely necessary for the other party to know related to the purpose of the NDA. The costs of enforcing or attempting to enforce an NDA may be significant, so limiting the disclosure of information may help a party avoid the risk and expense of litigation.

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.

Embezzlement or a Reward for Sexual Favors? – A Dallas Case Demonstrates There Are Two Sides to Each Story

kkClients often want to know whether they have a winning case or a bullet-proof defense. Much of that, of course, depends on the law. But sometimes, an entire case may rise or fall on a credibility of a particular witness. A recent decision by the Dallas Court of Appeals is a great example of where the entire case came down to the credibility of two witnesses who gave different explanations for the same set of events.

In this case, a company sued the president’s personal assistant and bookkeeper for theft, breach of fiduciary duties, fraud, conversion, breach of contract, and unjust enrichment, alleging she forged checks and issued fraudulent vendor invoices to pay off her personal credit card bills with company funds to the tune of $377,000.

Her Story: The bookkeeper admitted that she issued checks to fictitious vendors, but testified that she did this at the direction of the company president, who promised her extra compensation if she became his mistress. The fictitious vendor invoices were necessary to hide the payments from his wife. She testified that he told her to “charge everything to her credit card,” and use particular vendor accounts and cancelled company checks to pay off the credit card bills, he signed the checks himself or authorized her to do it, and he received a copy of all cancelled checks every month. 

His Story: The president of the company denied having an affair with the bookkeeper or authorizing her to issue checks with company funds to pay her own credit card.  He admitted receiving monthly bank account statements that included images of cancelled company checks but said he never looked at them.

There were no other witnesses who testified about the affair or the payment scheme. Thus, it was the president’s word against the word of his former personal assistant and bookkeeper.

The Court’s Ruling: After hearing all the testimony, the trial judge concluded that: (1) the president of the company and the bookkeeper had an affair, (2) at some point he began giving her additional compensation i.e. payment of her credit bills; and (3) in an effort to conceal this additional compensation from his wife, he transferred funds to the bookkeeper from the company’s account through a scheme using checks paid to fictitious contract employees. Thus, all of company’s claims against the bookkeeper failed. The Court of Appeals agreed with the trial judge, stating that “the outcome of this case turned on which one of the two main witnesses was more credible, and, apparently, the trial judge found that the bookkeeper was a more credible witness.

Takeaway:  In a lawsuit – whether it involves a contract claim, a clash between partners, an employment matter, or any other dispute – a plaintiff must be ready to do both: tell his or her side of the story and anticipate what the opponent is going to say. In those cases where the only evidence is witness testimony (as opposed to documents), the credibility of such witnesses may be the deciding factor between a victory and a loss.  

Leiza represents COMPANIES and INDIVIDUALS in business and employment litigation. If you need assistance with a business or employment dispute contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Four Ways to Protect Your Business Ideas: Patents, Trademarks, Copyright, and Trade Secrets

pictureWhether you are an owner of an established business or a budding entrepreneur working on a start-up, understanding how you can protect your business ideas is key to making your company attractive to investors, securing funding, growing the company and ensuring the longevity of your business.

Depending on the type of idea that you have, the state of the idea, and the amount of money at your disposal, you have the following four ways to protect your intellectual property:

1. PATENTS.   There are three types of patents in the U.S.: utility patents (90% of all patents); design patents, and plant patents. Having a patent for an invention or a design allows the owner to exclude others from making, using, or selling the invention or design for a certain period of time.  To obtain a patent, a person must file an application with the U.S. Patent and Trademark Office (USPTO).

Utility patent may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof.  Approximately 90% of the patent documents issued by the USPTO in recent years have been utility patents, also referred to as “patents for invention.”  Utility patents last up to 20 years from the date of patent application.

Design patent may be granted to anyone who invents a new, original, and ornamental design for an article of manufacture.  In general, a design patent is obtained for the aesthetically appealing features of a product. It gives the owner the right to prevent others from making, using, or selling a product that so resembles the patented product that an “ordinary observer” might purchase the infringing article, thinking it was the patented product.  An example of a famous design patent is Coca-Cola’s unique bottle shape. Also, many clothing companies often patent a unique design to prevent other companies from imitating it.  Design patents last for up to 14 years from the date of the grant.

In many circumstances, one may obtain a design patent in addition to a utility patent for the same invention. Also, to the extent that the subject qualifies as a work of art, there may be an opportunity to obtain a copyright for the same, and if the design is embodied in a physical article, and also functions as a trademark, a trademark registration may be obtained.

Plant patent may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant.

The patent application process is complicated and can cost thousands of dollars as most applications require help from a qualified patent attorney or agent.  To maintain the force of the patent, you must pay fees due at 3.5, 7.5 and 11.5 years after the patent grant.  The total amount of maintenance fees for a small entity (such as an independent inventor) is $4,430, while bigger entities must pay $8,860.

2. COPYRIGHT. Copyright protects original works of authorship including literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. Copyright does not protect facts, ideas, systems, or methods of operation, although it may protect the way these things are expressed.  You do not have to register your work to have copyright protection.  However, only registered works may be eligible for statutory damages and attorney’s fees in a copyright infringement suit. Thus, you should register your work with the U.S. Copyright Office, which can be done online for just $35 – $55 fee.

The term of copyright for a particular work depends on several factors, including whether it has been published, and, if so, the date of first publication. As a general rule, for works created after January 1, 1978, copyright protection lasts for the life of the author plus an additional 70 years. For an anonymous work, a pseudonymous work, or a work made for hire, the copyright endures for a term of 95 years from the year of its first publication or a term of 120 years from the year of its creation, whichever expires first.

3. TRADEMARKS. A trademark is a word, phrase, or design that distinguishes the source of the goods of one business from its competitors.  A right in a trademark is acquired by use, but registration with U.S. Patent and Trademark Office (USPTO) makes it easier to enforce such right.

To apply, you must have a clear representation of the mark, as well as an identification of the class of goods or services to which the mark will apply.  You can submit an online application, and filing fees vary according to the type and the number of classes of goods or services, among other factors. Filing an application for trademark is complicated, so, as with patents, most people hire attorneys who specialize in trademarks to handle the process.

4. TRADE SECRETS. Trade secrets in Texas are protected by the Texas Uniform Trade Secrets Act (TUTSA).  A Texas business or a person may claim as a trade secret any information that (1) has economic value because it is not generally known and (2) is subject to efforts to maintain its secrecy that are reasonable under circumstances. Trade secrets may include, but are not limited to the following: formula, pattern, compilation, program, device, method, technique, process, financial data or list of actual or potential customers or suppliers.

Thus, even those ideas and business processes that do not qualify for patents, copyright or trademark protection, can be protected by the owner as trade secrets, as long as they have economic value and the owner’s efforts to keep the ideas secret are reasonable under circumstances.

Under TUTSA, Texas business owners may also seek a temporary injunction to prevent misappropriation or threatened misappropriation of their trade secrets. A temporary injunction is a court order, which, if granted, prevents a person or a company from using the information claimed to be a trade secret.  Sometime, injunctive relief is the only way to protect valuable information from being stolen or misused by a competitor, but the owner must act fast after discovering misappropriation or a court might decide that the misappropriated information is not as valuable as the owner claims.

For more information about Texas trade secrets law, please click here.  If you suspect that your business’s trade secrets have been misappropriated or you are looking to implement measures within your organization that will prevent or minimize the chances of trade secrets being misappropriated, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

 

A Few Lessons From the Morgan Stanley Trade Secrets Debacle

bitcoin-data-mining-online-currency-theftEarlier this month, a financial advisor at Morgan Stanley copied information of 350,000 of the company’s wealth management clients. A few days later, a sample data from 900 clients was posted on Pastebin, with the poster offering more in exchange for the payment in SpeedCoin, a type of virtual currency similar to BitCoin.

As it happens, earlier that year, Morgan Stanley hosted a bitcoin event at its headquarters, which all employees were invited to attend. And while Morgan Stanley CEO was busy announcing to the world that he does not understand what Bitcoin is, some lower level employees were apparently taking notes.

As you can imagine, the stolen data had a wealth, pun intended, of information about each client.  A six-year advisor was able to get the information by simply running reports within the company’s database. Although he was quickly fired after the breach was discovered, and is now subject to a FBI investigation, the damage to the company’s reputation in terms of clients’ trust has been done.  My guess is that the damage is quite significant, whether the company will admit it or not.

Unfortunately for business owners, trade secret theft is a daily occurrence. With the proliferation of personal electronic devices and the increasing connection of office devices, such as printers, faxes, etc. to the internet, confidential information can be stolen and shared with third parties in a matter of minutes.  The Morgan Stanley debacle shows that even the international powerhouses who have almost unlimited budgets and resources to protect their confidential information and the information of their clients can suffer from blind spots in their security systems that are meant to protect sensitive data. My guess is that Morgan Stanley relied a little too much on the criminal penalties bestowed upon those who misuse client data in the banking world and did not implement as strong of a security system as it should have.

As a business owner, manager, or a person in charge of the confidential information within your organization, it is your responsibility to make sure that that data is protected.  While it is impossible to keep up with every technological advantage, it is relatively easy to set up a protection system within the company that will prevent most, if not all, data theft. How, you say? Here’s how:

1.  Take a few hours and write down a list of every type of information that your company considers proprietary or confidential, even if it’s an obvious one.  This can include customer list and information, vendors list, source code for your software program, design plans for your product, your marketing plans, your financial data, etc.  Any successful business will probably have more than one type of confidential information.

2.  Consider who within your company or business has access to each type of confidential information.  Then, consider whether they need to have access to it.  For example, does your marketing department need to have access to your manufacturing schemes? Does your manufacturing department need to have access to your financials or customer list? It might seem silly, but I guarantee that after taking stock, you will find that some people or departments incidentally have access to the data that they don’t need or use in their jobs. Eliminate such access.  Of course, be careful not to deprive people of the information that they need to do their jobs.

3.  Consider whether each person with access to confidential information has signed proper agreements. Do your employees have non-compete agreements, non-solicitation agreements, and non-disclosure agreements? If they do, are the agreements consistent? Do they have all the necessary bells and whistles to make them enforceable? How long ago were they updated?  Having thorough yet clear agreements will discourage most employees from attempting to steal trade secrets.

4. Take stock of all electronic devices issued to employees.  Do you consistently keep track of what electronic devices are issued to employees by the company? Do you have a policy governing how such devices are used? Do you have security measures on such devices? Do you have a way to determine whether a device has been used to transfer confidential information? This is particularly important for the employees who work from home.

5. Do you have appropriate agreements with vendors, suppliers, business partners, and other parties who receive confidential information from you? If not, you need to add such agreements into your relationship with such parties to make sure that your confidential information is not used to replace or cut you out.

LESSON:  What happened at Morgan Stanley, can happen anywhere. But, it is less likely to happen in a company where employees get a sense that the company is serious about protecting its trade secrets and confidential information of its customers.  The serious attitude is conveyed to the employees by having an organized framework – from legal agreements, to passwords, to restricted access to non-essential employees – within the company. When employees see that a company’s efforts to protect its information are disorganized or haphazard, they are more likely to attempt theft of such information because they believe that they will not be caught. In Morgan Stanley’s example, it appears, that the company did not even know that the employee obtained its client data until weeks after it was posted for sale on the internet, which means that its internal database did not alert the company when large amounts of reports were being generated.

Make 2015 the year that you insulate your business from trade secret theft.

If you are facing a trade secret misappropriation claim or are suspecting that a theft of trade secrets occurred at your company, contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com for a consultation.

What is a Trade Secret?

downloadWhat are trade secrets and how they are regulated depends largely on what state your business is operating in.  Currently, each state has it own statute and/or body of law that defines what is a “trade secret” and what legal remedies the owner of a trade secret may pursue if such trade secrets are taken or misappropriated from him or her.

In Texas, trade secrets are governed by the Texas Uniform Trade Secrets Act (TUTSA), which came into effect on September 1, 2013.

TUTSA defines “trade secrets” as “information,” that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use” AND “is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Thus, any information that has economic value – either actual or potential – and that the owner has reasonably attempted to keep secret, could constitute a “trade secret” under TUTSA.

Furthermore, TUTSA specifically provides that “trade secrets” may include the following types of information:

  1. formula
  2. pattern
  3. compilation
  4. program
  5. device
  6. method
  7. technique
  8. process
  9. financial data
  10. list of actual or potential customers or suppliers

Moreover, as defined by the statute, “trade secrets” may include information that its owner has not yet had an opportunity to use or information that the owner is no longer using (as long as it still has actual or potential economic value).

“Trade secrets” also include information that has commercial value from a negative viewpoint, such as the results of lengthy and expensive research which proves that a certain process will not work. See UTSA § 1 cmt.

Whether the information is considered “secret” is determined by whether a party undertook “reasonable efforts to maintain the secrecy of such information,” rather than the difficulty with which such information could be acquired.  The standard allows a fact finder to consider the nature of the trade secret and the facts and circumstances surrounding the efforts to maintain its secrecy in order to determine whether these efforts were reasonable under the circumstances.

To learn more about other provisions of TUTSA, see my previous post here.

If you are facing a trade secret misappropriation claim or are suspecting that a theft of trade secrets occurred at your company, contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com.

Common Misconceptions About Non-Competition Agreements in Texas 

A big part of my practice consists of enforcing non-competition, non-solicitation and non-disclosure agreements against the departing employees on behalf of their employers. Conversely, I also advise employees regarding what they can and cannot do in light of the non-competition or non-solicitation restrains imposed on them by their former employers.  Here is a quick list of misconceptions that I have encountered among employers and employees about non-competition agreements in Texas.

1.         Non-competition agreements are not enforceable in Texas.  This is false.  For some reason, a lot of employees still believe that non-competition agreements are not enforceable under Texas law. While this used to be the case roughly a decade ago, all through mid- and late-2000s, Texas courts have been slowly relaxing the requirements that an employer must meet in order to enforce a non-compete agreement. It used to be virtually impossible for an employer to enforce a non-competition agreement, but now as long as the restraints are “reasonable” and a few other requirements are met, a non-compete agreement will be upheld in court. A detailed explanation of the requirements can be found here.

Keep in mind that not all agreements for Texas employees are governed by Texas law. Each state has its own rules about the enforceability of non-competition agreements and, for example, an agreement that would be enforceable under Texas law, would not be enforceable under California law.  Typically, non-compete agreements will state which law governs. If they do not, a more detailed analysis will have to be performed to determine which state’s law applies and how it affects the restraints imposed on the employee.

2.         I never signed a “non-competition agreement,” therefore I can compete with the employer. Employees rarely sign an actual contract titled “non-competition agreement.” Instead, non-competition clauses are often included in any number of documents, including employment agreements, arbitration agreements, benefits plans, stock option agreements, or employment handbooks and manuals. Thus, employees should carefully read every employment document they sign and keep the most current copy in their files.  When the time comes to leave the employer or start their own company, it helps to know exactly what the non-competition provisions state.

3.         A non-competition clause that is good for one employee is good for all employees.  This is false.  While simply including a non-competition or non-solicitation clause in an agreement often deters employees from competing against their former employers, when push comes to shove and an employer is forced to sue its former employee for violating his or her non-compete agreement, Texas courts will look at whether the restraints imposed by such agreements are “reasonable.”  As part of this analysis, they will consider what duties the employee performed, which customers he or she worked with, what geographic area his or her work covered, and many other factors.  Since this is a very factually intensive analysis, non-compete restraints that might be reasonable for one employee might be completely unreasonable for another employee. Thus, including a cookie-cutter non-compete clause in all of your employees’ contracts might not adequately protect the company’s interests. This does not mean, of course, that an employer must draft a different non-compete clause for each employee, but it does mean that certain positions or certain levels of employees within the company might need different clauses than other types of employees.

4.        Texas courts can always rewrite or “fix” a non-competition clause that is too broad. While technically this is true, practically speaking this kind of thinking can cost an employer a lot of money down the line.  First, employees are much more likely to challenge or violate a non-competition agreement that contains broad or unreasonable restraints because they think it is unenforceable or because they feel that it leaves them no choice by to violate it.  Second, an employer who knowingly attempts to enforce an unreasonable non-competition agreement may end up paying the restrained employee’s attorney’s fees if a court finds that the agreement was unreasonable. See a prior detailed discussion here.

BOTTOM LINE: Employers should attempt to craft non-competition clauses that take into consideration their industry, employees’ duties, the geographic area where employees will be working, and the time limitation that can be justified in court as necessary to protect the business of the company. While it might be tempting to draft a non-compete or non-solicitation clause that is broader than is necessary such approach can backfire if the employee decides to challenge the agreement in court.

Employees should carefully read and make sure they understand and agree with the non-competition or non-solicitation clauses contained in their employment documents.  They should assess the effect of the clause on their employment opportunities after they leave their current employer. If the clause is not clear, they should seek clarification in writing from the employer explaining the geographic scope, time limitations and the scope of restrained activities covered by the non-competition or non-solicitation clause.

Leiza litigates non-compete and trade secrets lawsuits on behalf of EMPLOYERS and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete agreement, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

An Employer Cannot Prohibit Its Employees From Discussing “Personnel Issues”

In the last few years, the National Labor Relations Board (NLRB) has been declaring unenforceable one confidentiality policy after another, forcing employers to balance their need to protect their confidential information and trade secrets against the right of employees to freely discuss the terms of their employment.  So, how should a business draft its confidentiality policy so that it serves its purpose, but does not land the company in hot water with the NLRB?  Last week’s Fifth Circuit Court of Appeals‘ decision in Flex Frac Logistics, L.L.C., et al. v. National Labor Relations Board provides some useful guidance.

In this case, the confidentiality provision in question prohibited Flex Frac’s employees from sharing “confidential information” outside the organization. Such “confidential information” included, but was not limited to, the company’s marketing processes, plans and ideas, financial information, costs, prices, business plans, and “personnel information and documents.”

When Kathy Lopez, Flex Frac’s employee was fired, she filed a charge with the NLRB, prompting the Acting General Counsel for the Board to file a complaint, alleging, inter alia, that Flex Frac promulgated and maintained a rule prohibiting employees from discussing employee wages in violation of Section 8(a)(1) of the National Labor Relations Act (NLRA).  The administrative law judge found that the confidentiality clause violated Section 8(a)(1) because it was overly broad and contained language employees could reasonably interpret as restricting their exercise of their Section 7 rights. In a split decision, the NLRB affirmed.  Flex Frac appealed, and the Fifth Circuit affirmed as well.

The Court of Appeals explained that under Section 8(a)(1) of the NLRA, it is an “unfair labor practice for an employer . . . to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 157 of this title.”  Such rights include self-organization;  forming, joining, and assisting labor organizations; collective bargaining; and engaging “in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 28 U.S.C. § 157. Thus, a “workplace rule that forbids the discussion of confidential wage information between employees . . . patently violates Section 8(a)(1).”

Even if the workplace rule or policy does not expressly prohibit discussion of such information, it may still violate Section 8(a)(1) if the employees would reasonably construe the language of the policy to prohibit Section 7 activity.  Because the confidentiality clause at question in Flex Frac prohibited discussion of all “personnel information” and did not create an exception for discussion of wages, according to the Fifth Circuit, employees could reasonably construe its language as prohibition against discussion of wages or other terms and conditions of employment.

Importantly, the Fifth Circuit differentiated the Flex Frac policy from the confidentiality clauses upheld in the following cases:

  • Policy prohibited disclosure of “hotel-private information to employees or other individuals or  entities that are not authorized to receive that information,” but did not define “hotel-private information.” Held not to violate the NLRA because employees would reasonably interpret it to protect customers’ information and not interfere with discussion of their wages. Lafayette Park Hotel, K-Mart, 330 N.L.R.B. 263 (1999).
  • Policy stated that “Company business and documents are confidential. Disclosure of such information is prohibited.” Held not to violate the NLRA for the same reason. Lafayette Park Hotel, K-Mart, 330 N.L.R.B. 263 (1999).
  • Policy prohibited employees from disclosing “proprietary information . . . includ[ing] . . . customer and employee information, includ[ing] organizational charts and databases [and] financial information.” Held not to violate the NLRA because “employee information” was listed as an example of “intellectual property,” and would be reasonably interpreted by employees not to include information related to the terms and conditions of their employment or their wages since those are not considered “intellectual property.”  In re Mediaone of Greater Fla., Inc., 340 N.L.R.B. 277 (2003).

Unlike the confidentiality policies in these cases, the Flex Frac policy prohibited disclosure of specifically “personnel information” and failed to clarify that such information did not include “wages.” Thus, the company employees could reasonably interpret “personnel information” to include the terms and conditions of the their employment. The Fifth Circuit noted in a footnote, however, that the NLRB‘s order did not impair the majority of the company’s confidentiality policy and nothing prevented Flex Frac from redrafting its policy to require confidentiality for employee-specific information such as social security numbers, medical records, background criminal checks, drugs test, or other similar information.

The Flex Frac opinion was issued a little over a month after NLRB struck down another employer’s confidentiality policy that prohibited disclosure of “personal or financial information.” The NLRB in MCPc, Inc. v. Jason Galanter, 360 NLRB 39 (2014) found that the employer violated Section 8(a)(1) by maintaining an overly broad confidentiality rule in its employee handbook stating that “dissemination of confidential information within [the company], such as personal or financial information, etc., will subject the responsible employee to disciplinary action or possible termination.”  The Board found that employees would reasonably construe this rule to prohibit discussion of wages or other terms and conditions of employment with their coworkers—activity protected by Section 7.

BOTTOM LINE: In light of the above NLRB decisions and the Flex Frac opinion, employers should review their confidentiality policies to ensure that they are drafted to encompass only trade secrets and other confidential and proprietary information rather than information that could relate to wages and other terms and conditions of employment.

For assistance in drafting or auditing your company’s confidentiality policy, contact Leiza Dolghih.

The Fifth Circuit Addresses the Texas Anti-SLAPP Statute and the Commercial Speech Exemption for the First Time

Three years ago, Texas enacted its own anti-SLAPP statute, appropriately titled the Texas Citizens Participation Act (TCPA). Since then, many defendants have taken advantage of the TCPA‘s quick dismissal procedure when confronted with suits for defamation, business disparagement, or other claims arising out of the defendants’ exercise of their right of free speech, right to petition, and right to association. Because the statute is so new, however, many of the issues surrounding its application in Texas have not yet percolated through the appellate level, which makes the Fifth Circuit Court of Appeals‘ analysis of the “commercial speech” exemption under the TCPA last week in NCDR, L.L.C., et al. v. Mauze & Bagby, P.L.L.C. particularly important.[1]

Factual Background

NCDR, LLC d/b/a Kool Smiles is a national chain of dental clinics. Mauze & Bagby is a personal injury law firm in San Antonio, Texas. In 2012, the law firm began an advertising campaign seeking to represent former Kool Smiles patients in a lawsuit against the chain. As part of this campaign, M&B ran television, radio, and internet advertisements, and developed a website that strongly implied, or even accused, Kool Smiles of performing unnecessary and/or harmful dental work on children to obtain government reimbursements.

Kool Smiles sued M&B, asserting, among other claims, business disparagement, defamation, and injury to business reputation. The law firm moved to dismiss the suit under the TCPA arguing that its campaign was a protected expression of free speech. However, both the trial court and the Fifth Circuit Court of Appeals found that M&B was not entitled to the protection afforded by the TCPA because its advertisements were commercial speech.

The TCPA and the Commercial Speech Exemption

The purpose of the TCPA is to protect the right of people “to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of a person to file meritorious lawsuits for demonstrable injury.” Tex. Civ. Prac. & Rem. Code Ann. § 27.002. To achieve this, the TCPA provides that if a legal action is based on, relates to, or is in response to a party’s exercise of the right of free speech, right to petition, or right of association, the defendant may file a motion to dismiss the lawsuit within sixty days of being served with the complaint. Id. § 27.003(a). Only very limited discovery is allowed until the court rules on the motion to dismiss. Id.

The TCPA requires the court to dismiss the lawsuit if the defendant shows by a preponderance of the evidence that the legal action is based on, relates to, or is in response to the party’s exercise of the right of free speech, right to petition, or right of association. Id. § 27.005(a)–(b). In order to avoid the dismissal, the plaintiff must establish by clear and specific evidence a prima facie case for each essential element of each claim. Id. § 27.005(c).

The “commercial speech” exemption to the TCPA disallows this quick dismissal procedure when:

. . . a legal action [was] brought against a person primarily engaged in the business of selling or leasing goods or services, [and] the statement or conduct arises out of the sale or lease of goods, services, or an insurance product or a commercial transaction in which the intended audience is an actual or potential buyer or customer. Tex. Civ. Prac. & Rem. Code Ann. § 27.010(b).

The Fifth Circuit’s Analysis

The Fifth Circuit looked at four cases decided by the Texas Courts of Appeals that addressed the commercial speech exemption. Two addressed whether a defendant’s action “arises out of the sale or lease of goods, services, or an insurance product.” The other two address whether the intended audience is “an actual or potential buyer or customer.” In all four cases, the courts of appeals found that the commercial speech exemption did not apply.

  • In Newspaper Holdings, Inc. v. Crazy Hotel Assisted Living, Ltd., the First Court of Appeals held that the newspaper articles exposing compliance problems at Crazy Hotel and published by Newspaper Holdings did not “arise out of the sale of the goods and services” that the newspaper sold – newspapers. The commercial speech exemption, therefore, did not apply and the Court granted the newspaper’s motion to dismiss under the TCPA.
  • In Pena v. Parel, the Eighth Court of Appeals held that a letter to a parole board from a client’s attorney did not arise from “the sale of goods, services or insurance product.”

After analyzing the above-listed cases, the Fifth Circuit Court of Appeals ruled that this case was different and that M&B’s statements made in the advertising materials constituted commercial speech because they: (1) arose out of the sale of M&B’s legal services, and (2) were intended for M&B’s potential customers – people who had used Kool Smiles’ services and who wanted to file a lawsuit against them.

Takeaway

The Texas Citizens Participation Act is still very new and the case law interpreting the statute is still developing. However, the NCDR decision strongly suggests that any business advertisements directed at the current or potential clients are not protected by the TCPA.  Thus, a business whose advertisements contains negative statements about another business or individual should consider the possibility that it will not be able to use the TCPA to quickly dismiss a defamation or a business disparagement lawsuit arising out of such statements if one is filed.

For more information regarding defamation and business disparagement claims in Texas, contact Leiza Dolghih.


[1] While the Fifth Circuit Court of Appeals‘ analysis of the TCPA is not binding on the Texas state courts per se, it is instructive since the Court must “interpret[] the state statute the way the state supreme court would, based on prior precedent, legislation, and relevant commentary.” Since the Texas Supreme Court has not yet interpreted the TCPA, the Fifth Circuit‘s analysis of the “commercial speech” exemption is the next best thing.

Employers Should Take Care Not to Waive Non-Compete or Non-Solicitation Clauses Through Post-Employment Actions

It is not uncommon for employers to include a non-compete/non-solicitation (NCNS) covenant in their benefit plans or stock option agreements. Either agreement can then make the payments due to the employee conditional upon his or her compliance with the NCNS. In those cases where the payments are scheduled to be made after the employee leaves, such arrangement provides an extra incentive for the employee to comply with the NCNS covenant.

The employers that chose to follow this route, however, need to be aware that a payment made to an employee pursuant to a benefit plan or a stock option agreement after the employer discovers that the employee is violating his or her NCNS, can waive employer’s rights to later enforce the NCNS in court.

In Ally Financial, Inc. v. Gutierrez, et al., Ally’s employee, Gutierrez, signed a “Long-Term Equity Compensation Incentive Plan” (CIP) under which she would receive award payments based on Ally’s common stock value. The CIP included the following non-solicitation clause:

While the Participant is employed by the Company or a Subsidiary, and during the 2-year period immediately following the date of any termination of the Participant’s employment with the Company or a Subsidiary, such Participant shall not at any time, directly or indirectly, whether on behalf of . . . herself or any other person or entity (i) solicit any client and/or customer of the Company or any Subsidiary with respect to a Competitive Activity or (ii) solicit or employ any employee of the Company or any Subsidiary, or any person who was an employee of the Company or any subsidiary during the 60-day period immediately prior to the Participant’s termination, for the purpose of causing such employee to terminate his or her employment with the Company or such Subsidiary.

While at Ally, Guttierez received several CIP award letters that described a deferred payment schedule spanning from 2009 until 2015. In 2011, she left to work for Ally’s competitor, Homeward. Soon after her departure, eight of Ally’s employees went to work for Homeward as well, prompting Ally to send Gutierrez a letter accusing her of soliciting at least four of its employees and warning her that Ally was prepared to take a necessary “enforcement action.” The letter also stated that any violation of any contractual restrictive covenants would result in the forfeiture of “any Award that has not yet been paid” and require Guiterrez to “repay any Award Payments made within 24-months of an enforcement action.”

After sending the letter and after four more Ally’s employees went to work for Homeward, Ally paid Gutierrez her next payment due under the CIP.  When even more employees left, Ally filed a lawsuit against Gutierrez and Homeward and alleged claims for unfair competition, tortious interference with contractual relations, tortious interference with employment relations, conspiracy, and misappropriation of trade secrets.

Gutierrez and Homeward argued that the covenant was unenforceable as overly broad and unrelated to Ally’s business and, in the alternative, that Ally waived its right to seek its enforcement.  The trial court granted defendants’ motion for summary judgment on the grounds of waiver and the Second Court of Appeals affirmed.[1]

The Court of Appeals explained that under Texas law, waiver is an affirmative defense requiring a defendant to proffer evidence conclusively establishing the following: (1) an existing right, benefit, or advantage held by a party, (2) the party’s actual  knowledge of its existence, and (3) the party’s actual intent to relinquish, or intentional conduct inconsistent with, the right. Gutierrez and Homeward argued that the payment under the 2009 award letter was an intentional relinquishment of, or intentional conduct inconsistent with, Ally’s intent to enforce the non-solicitation covenant.  Ally responded that a payment to Gutierrez was “nothing more than a ministerial act,” but the Court of Appeals rejected that argument as “unpersuasive.”

According to the Court of Appeals‘ reasoning, the warning letter from Ally demonstrated that Ally was aware at the time it made the payment to Gutierrez that she was allegedly violating the non-solicitation covenant contained in the CIP.  By making the payment, Ally “represented to Gutierrez that although it believed she had violated the CIP and had forfeited her rights to all unvested payments by voluntarily resigning, it was awarding her incentive compensation as provided by the CIP.”  Making such payment, therefore, was inconsistent with Ally’s previously stated intention to enforce the non-solicitation covenant and with the terms of the CIP and was more than a ministerial act.

CONCLUSION:  There are two practical lessons that employers can derive from this case. First, when dealing with departing employees who are due any sort of payments after their employment is terminated, the companies should make sure that the department responsible for payments and the legal department coordinate with each other.  It is entirely possible that in Ally’s case the department making the payment was not aware of the warning letter sent to Gutierrez.

Second, while sending a cease and desist letter to a departed employee does not necessarily require involvement of a law firm or an in-house attorney (although it certainly gives it more clout), any actions that a business takes after sending a cease and desist letter should involve legal counsel to make sure that such actions will not negatively impact the employer’s case should she or he decide to sue the departing employee.

For more information regarding protection of trade secrets and enforcement of non-compete agreements in Texas, contact Leiza Dolghih.


[1] Although the CIP was governed by Michigan law, the Court of Appeals held that Texas and Michigan law were “functionally the same” on the issue of non-compete covenants and waivers, therefore, it did not need to decide which law applied to this dispute.