Breaking News: Texas and 20 States Sue the Department of Labor Over the Overtime Rules


TexasBarToday_TopTen_Badge_VectorGraphicA group of 21 states, including Texas, filed a lawsuit today in the
Eastern District of Texas challenging the U.S. Department of Labor’s new overtime exemption rules that are supposed to go into effect on December 1, 2016, arguing the agency unconstitutionally overstepped its authority to establish a federal minimum salary level for white collar workers.

Back in May, the White House announced that the new overtime rules would go into effect on December 1, 2016.  As I have previously written, the new rules would raise the threshold salary requirements for administrative, professional and executive exemptions from $23,660 to $47,476 annually. They would also raise the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test from $100,000 to $134,004.  Needless to say, many businesses have opposed such a drastic change.  It appears that the states have a problem with it as well.

In the lawsuit, the States argued that they employ many employees who are currently classified as exempt and who would have to be reclassified under the new DOL rules because their salaries do not meet the new DOL salary threshold of $913 per week. Thus, the federal government “could deliberately exhaust State budgets [] through the enforcement of the overtime rules.” 

Raising the question of states rights under the U.S. Constitution, the States argue that the federal government cannot “dragoon and, ultimately, reduce the States to mere vassals of federal prerogative” and that the new overtime rules would do just that by forcing the States to shift resources from other important priorities to increased payroll for certain employees and “effectively impose the [federal government’s] policy wishes on State and local governments.” 

Specifically, the States seek: (1) a declaratory judgment declaring the new overtime rules unlawful and arbitrary and capricious; (2) a temporary injunction preventing the DOL from enforcing or implement the new overtime rules; and (2) a permanent injunction preventing the DOL from enforcing or implement the new overtime rules. 

If the District Court grants the states a temporary injunction prior to December 1, 2016, the DOL might not be allowed to start the enforcement of the new overtime rules on that date.  However, employers should continue to prepare for the new overtime rules as if they are still going into effect on December 1, 2016.  Stay tuned for updates regarding this case . . . 

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.

Trade Secrets Litigation is About to Change with the Passage of the Federal Defend Trade Secrets Act

trade secrets label on folder

The federal Defend Trade Secrets Act (DTSA), that has been subject of rigorous debate over the past few years, is just days away from becoming the law of the land. 

On April 4, 2016, the Senate passed the DTSA bill with a vote of 87-0 (S-1890). Yesterday, the House passed the bill by a vote of 410-2. The bill will now move to the White House, but given that the Obama Administration has already voiced strong support in its favor, it is expected that President Obama will sign the bill into law in the next several days. 

The DTSA amends the Economic Espionage Act of 1996 to create a federal civil remedy for stealing trade secrets.  Currently, trade secrets are governed by a patchwork of 50 state trade secrets statutes.  The DTSA will provide an additional uniform federal statute that trade secrets owners may use to protect themselves and fill the perceived gaps in the state statutes. 

One of the most salient features of the DTSA that has received a lot of attention is a provision that allows a plaintiff in a trade secrets lawsuit to obtain an ex parte seizure order “only in extraordinary circumstances” of the “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  I foresee many litigants in the future arguing over what constitutes “extraordinary circumstances” that justify seizure of somebody’s phone, computer, or other property, in order to prevent further dissemination of trade secrets. 

Stay tuned for a detailed analysis of the statute once it becomes the law…

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 issue. 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.

Is Donald Trump Crossing the Line with Non-Competes for Volunteers?

ddDonald Trump has been criticized for everything under the sun – from having small hands to being racist. However, the most recent critique surrounds Trump’s campaign volunteer agreements that contain strict non-compete, non-solicitation and non-disparagement clauses. Several media outlets have questioned whether such agreements would be enforceable in court.  

According to the Daily Dot, which claims to have obtained a copy of these six-page volunteer agreements, such documents  contain the following restraints:

No Disparagement.  During the term of your service and all times thereafter you hereby promise and agree not to demean or disparage publicly the Company, Mr. Trump, and Trump Company, any Family member, or any Family Member Company or any asset any of the foregoing own, or product or services any of the foregoing offer, in each case by or in any of the Restricted Means and Contexts and to prevent your employees from doing so.

No Competitive Services. Until the Non-Compete Cutoff Date you promise and agree not to assist or counsel, directly or indirectly, for compensation or as a volunteer, any person that is a candidate or exploring candidacy for President of the United States other than Mr. Trump and to prevent your employees from doing so.

No Competitive Solicitation.  Until the Non-Solicitation Cutoff Date you promise and agree not to hire or solicit or hiring, or assist any other person, entity or organization to have or solicit for hiring, any person that is an independent contractor of, employee of an independent contractor of, or employee of Company or any other Trump Person and who at any time provides services for the project or objective for which you or your employer, as applicable, are being hired.

So, could these restraints be enforceable? Without knowing which state’s law applies to the agreement, it’s impossible to say for sure.  However, under Texas law, these restraints could be enforceable.  You are probably wondering how is that even possible. Here’s how. 

First, under the Texas Covenants not to Compete Act, a non-compete clause must be ancillary to an “otherwise enforceable agreement.”  If Trump’s volunteer agreements contain a confidentiality clause and he shares confidential information with the campaign volunteers, then any non-compete and non-solicitation restraints are ancillary to the confidentiality agreement.  Thus – no different from a typical employer-employee agreement – if Trump’s volunteers get confidential information related to his campaign, he can demand that they may not compete with him.

Second, under Texas Covenants not to Compete Act, the non-compete restraints must have “reasonable” geographic area, time, and scope of activity limits. Since the presidential campaign spans the entire country, a nationwide non-compete area is arguably reasonable.  The time limit could be reasonable depending on what is the “Non-Compete Cutoff Date.” In this case, it would have to be tied to the current elections cycle.  Finally, the scope of activity restraint could be reasonable depending on what tasks a particular volunteer performed for Trump’s campaign.  If his tasks included bringing coffee and making copies, then a non-compete would that prohibits him from working in any capacity for another candidate would not  be enforceable.  However, if a particular volunteer organized rallies, participated in the campaign strategy or polling, or was engaged at a high-level within Trump’s campaign, then the non-compete’s scope could be upheld as “reasonable.”

Takeway: Many employees firmly believe that non-compete agreements are not enforceable. It doesn’t help that many internet sources use words like “right to work” or “right to compete” that mislead employees into believing that they have certain rights that their employment contracts cannot trump. That is not true.  Employers also often err in thinking that the broader their non-compete agreements are, the better off they’ll be when the time comes to enforce them.  This is also not true as this approach may backfire in those states like Texas where non-compete statutes have built-in mechanisms that punish employers for having overboard non-competes.  Thus, both employees and companies should have their non-compete agreements reviewed and/or drafted by lawyers familiar with non-compete law in their particular state before such agreements become a subject of a heated dispute.

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.

Fair v. Unfair Competition, or the Real Life Case of Globo Gym v. Average Joes

DodgeballWhile we patiently wait for a sequel to Dodgeball: A True Underdog Story to come out, a similar saga involving competing gym/spa establishments has been unfolding in Houston, Texas (minus the dodge ball tournament and shiny singlets) recently culminating in a lawsuit in the federal district court for the Southern District of Texas. 

In this lawsuit, Life Time Fitness sued its former regional vice president, his wife, who also worked for Life Time Fitness at various times, and their newly formed company – ReNew You LLC – alleging that the VP “pilfered” proprietary business information, duplicated Life Time’s business model, and used company personnel to open a competing business.  Life Time filed the complaint on January 16th and four days later obtained a temporary injunction order against the defendants ordering ReNew You to cease and desist all operations and barring it from offering or providing services provided by Life Time.  In sum, Life Time has succeeded in shutting down ReNew You for now. 

The complaint alleges that while working for Life Time, the VP used Life Time’s technology system, email and his personal assistant to:

(1) draft and revise detailed business plans, agendas and checklists for his new company;

(2) build proformas, budgets, forecast and financial models for his new company based on Life Time’s proformas, etc.;

(3) obtain quotes for or leasing equipment for ReNew You;

(4) develop logos for ReNew You;

(5) develop a website for ReNew You;

(6) negotiate a partnership agreement with his partner in ReNew You.

Life Time also alleged that the VP “egregiously and surreptitiously” breached the non-compete agreement by using Life Time’s time, resources, computers, proprietary information and employees to build the medi-spa and weight-loss business less than four miles away from one of Life Time’s facilities.

While the complaint doesn’t specify how Life Time eventually found out about the VP’s activities, it is clear that the VP was using Life Time’s email address to send much of communications related to establishing ReNew You.  Apparently, the VP was also using his Life Time computer to create and edit many of the ReNew You documents.  It is alleged that he also used his Life Time email address to email himself Life Time’s confidential information. 

The complaint contains nine (typical) counts: violation of the Computer Fraud and Abuse Act (CFAA), breach of contract, breach of fiduciary duties, misappropriation of trade secrets, violation of the Texas Uniform Trade Secrets Act (TUTSA), tortious interference with prospective contracts, tortious interference with existing contracts, conspiracy, and aiding and abetting breach of fiduciary duties.

The VP’s attorneys and the VP himself have denied any improper actions. 

TAKEAWAYS:  The allegations in this case (which remain to be proven) illustrate a typical former employee/employer dispute, which often arises when an employee decides to open a business that competes with his or her former employer.

The allegations raise an issue of when is the line between preparation to compete (generally allowed under Texas law) is crossed into competition with the employer while on employer’s payroll (not permitted).  In some situations, the answer to that question is clear, while in others, it requires a rigorous legal and factual analysis.

The line between fair competition and unfair competition is often in the eye of the beholder, frequently pushing the parties towards litigation as a forum for resolving what is fair.  While some disputes may not be resolved outside the courtroom, many may be avoided if employees planning to compete with their former employer follow two simple steps: (1) review their employment agreements to determine what obstacles, if any, they present to opening a competing business; and (2) avoid actually competing with the employer or using employer’s resources to plan the new business while on employer’s payroll. 

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.

Two More Texas Courts of Appeals Find An Arbitration Waiver In Light of Litigation Conduct

Last November, the Dallas Court of Appeals upheld a trial court’s ruling that a party who substantially participated in litigation had waived its arbitration rights under an otherwise valid and enforceable arbitration clause. Yesterday, both the First Court of Appeals and the Fourteenth Court of Appeals in Houston reached a similar conclusion.

Like Ideal Roofing, decided last November, the lawsuit in Tuscan Builders, L.P. v. 1437 SH6 L.L.C, et al., involved a construction contract. The First Court of Appeals applied the same five-factor test used by the Dallas Court of Appeals, with the addition of one more criterion – whether the movant for arbitration was the plaintiff (who chose to file in court) or the defendant (who merely responded). The Court of Appeals affirmed the trial court’s order finding that the defendant had substantially invoked the litigation process and his actions were inconsistent with the intent to arbitrate, as demonstrated by the following:

  • Tuscan, while being a defendant in the lawsuit, proceeded to file a third-party lawsuit against other parties.
  • Tuscan moved for arbitration after the parties had completed written discovery, including expert designations and information, and had conducted a property inspection.
  • Tuscan had joined in the motions prolonging discovery and postponed the trial date and mediation deadline to allow the parties to pursue additional discovery on the merits.
  • It was Tuscan’s construction contract that referenced an industry form that contained an arbitration clause, indicating that Tuscan probably knew that such clauses existed prior to filing the lawsuit.
  • Other parties to the lawsuit were not aware of the arbitration clause because they did not receive a copy of the industry referenced in the contract.
  • Tuscan moved to compel arbitration more than a year after the suit was filed and when the trial setting was less than a month away.

When determining whether a party has waived its arbitration rights, a court must look at “the totality of circumstances.” In addition to the individual factors described above, the Court of Appeals found that Tuscan’s overall litigation strategy, such as bringing its subcontractors into the lawsuit in order to have access to discovery responses obtained by them as aligned parties, and obtaining a building inspection, allowed Tuscan to take advantage of litigation strategies that would not have been available in arbitration. Therefore, such a deliberate tactical approach was inconsistent with any intent to arbitrate.

The Court of Appeals also found that Tuscan’s invocation of the litigation process prejudiced the plaintiff who, not knowing that an arbitration clause existed, spent a significant amount of time and money litigating the case in what it considered to be a proper forum.

The same day that the First Court of Appeals found that the defendant in Tuscan Builder  waived its arbitration rights, the Fourteenth Court of Appeals reached a similar result in RSL Funding LLC v. Chaveze D. Pippins, et al., which involved an assignment of annuity contracts.

In this case, three individual defendants bought annuity from MetLife and subsequently executed contracts assigning their rights to RSL. The original annuity contracts between the individuals and MetLife did not contain an arbitration clause, but the assignment agreements with RSL did. When MetLife refused to pay RSL under the annuity contracts, RSL filed a lawsuit against both MetLife and the individuals.

Initially, RSL’s and the individuals’ interests seemed to be aligned since both wanted MetLife to pay RSL on the annuity contracts. However, once MetLife deposited the funds due under the annuity contracts in the court’s registry, the RSL and the individual defendants seemed to disagree as to who should receive such money and the individuals moved to withdraw the funds.  RSL promptly filed an arbitration demand against the individuals based on the arbitration clause in their assignment contract and moved to stay the litigation.

The Fourteenth Court of Appeals upheld the trial court’s denial of the stay of litigation on the grounds that RSL substantially invoked the litigation process and the individual defendants were prejudiced by such invocation, thus resulting in a waiver of RSL’s arbitration rights under the assignment contract. Justice Kem Thompson Frost dissented.

The Courts of Appeals added three more criteria for determining whether a waiver has occurred, in addition to those already enumerated in Ideal Roofing and Tuscan Builders:

  • whether the party who pursued arbitration sought or opposed arbitration earlier in the case
  • whether the party who pursued arbitration filed affirmative claims or dispositive motions
  • what discovery would be unavailable in arbitration

The Court noted that all of the waiver factors are rarely present in a single case, thus a waiver could be established based only on a few or even a single factor.  Instead of addressing each of the criteria, it concluded in broad strokes that RSL had invoked the litigation process because of the following actions:

  • it filed the lawsuit not only against MetLife, but also against the individuals with whom it had an arbitration agreement
  • when the individuals filed a counterclaim against RSL, the plaintiff did not move to compel arbitration, although it would have been appropriate to do so at that time
  • when the individual defendants non-suited their counterclaims and refiled them in another court, RSL waited 2 ½ months before filing a motion to stay litigation pending resolution of the arbitration
  • RSL filed a partial motion for summary judgment against both MetLife and the individual defendants on the same issue it sought to arbitrate

Furthermore, RSL’s invocation of the litigation process substantially prejudiced the individual defendants because they were forced to file numerous pleadings and motions in the trial court that they would not have needed to do had the case proceeded to arbitration. Furthermore, RSL’s failure to pay the individual defendants the amount that it owed under the assignment contracts while the litigation was proceeding put a significant financial constraint on them.

What makes this case different from Ideal Roofing and Tuscan Builders, however, is that in both of those lawsuits, the parties’ pattern of litigation activities established rather clearly that they took full advantage of discovery and other litigation procedures before seeking arbitration in the eleventh hour before trial.  In RSL Funding, however, as pointed out in the dissenting opinion, RSL’s litigation tactics were directed at MetLife, with whom it did not have an arbitration agreement, and not at the individual co-defendants.  Moreover, at the time RSL filed the lawsuit there were no disputes between itself and the individuals under any of the assignment agreements, and RSL added them as defendants only to obtain a full resolution of the rights under the Declaratory Judgment Act.  The arbitrable claims between RSL and the individual defendants did not arise until after the defendants had filed a motion to withdraw funds from the court registry, at which point RSL promptly filed an arbitration demand. 

CONCLUSION: While Ideal Roofing and Tuscan Builders suggest that a party has to conduct extensive discovery, participate in motion practice, and delay an arbitration demand until the eve of trial in order to cause a waiver of its arbitration rights, RSL Funding  indicates that a waiver can occur far earlier in the litigation process and be caused by far less rigorous participation in a lawsuit.

Thus, anytime a party finds itself pursuing or defending a lawsuit involving claims that might be covered by an arbitration clause, the party should plan its litigation strategy very carefully so as to avoid a waiver of its arbitration rights.

For more information regarding enforcement of arbitration agreements in Texas, contact Leiza Dolghih.

Practical Guide to Enforcing Non-Compete Agreements in Texas (Part II)

If you have followed the steps in Part I, you might now be in possession of evidence confirming that your ex-employee is violating his or her non-compete agreement. Such evidence will do you no good, however, if the non-compete agreement that you are relying upon is not enforceable. So, before you race to the courthouse asking for a temporary injunction, an assessment of enforceability is in order. This analysis needs to be done quickly, if not simultaneously, with the steps described in Part I.

Over the years, Texas courts have steadily moved toward making the enforceability of non-compete agreements easier. This post addresses the most current general requirements as spelled out by the Texas Supreme Court over the last decade, but beware of the old cases that used to impose additional requirements, but are no longer good law.

In Texas, non-competition agreements are governed by Section 15.50(a) of the Texas Business & Commerce Code, which states that “a covenant not to compete is enforceable 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.”

Thus, Texas courts require two factors to enforce a non-compete agreement that is ancillary to an otherwise enforceable agreement:

1. There must be consideration.

2. The limitations on time, geographical area, and scope of activity to be restrained must be reasonable.

Question 1: Did the Employee Receive Adequate Consideration for His/Her Promise Not to Compete?

Because Texas is an at will employment state, an employer’s offer of employment can be terminated at any time, is illusory, and does not by itself constitute sufficient consideration for an employee’s promise not to compete. Therefore, an employer must promise its employees something other than an offer of employment in exchange for their signature on the non-compete, which includes confidential information, trade secrets or specialized training provided by the employer. Consideration can also include stock options or other financial incentives that are “reasonably related” to the employer’s interest that is worthy of protection.

Question 2: Are the Limitations on Time, Geography and Scope Imposed by the Non-Competition Agreement Reasonable?

Non-competition agreement must restrain no more activity than is necessary to protect the legitimate business interest of the employer. Texas courts have consistently refused to enforce agreements that prohibit all competitive activity or prohibit employment in any capacity for a competitive entity. The courts have also refused to enforce agreements that prohibit activity unrelated to the work the employee preformed for the former employer.

Similarly, Texas courts have also determined that non-competition agreements that contain no geographical limitations or fail to limit the scope of activity to be restrained are unreasonable and unenforceable. Generally, a reasonable area of restraint consists of only the territory in which the employee worked for the former employer.  Thus, courts in the past have refused to enforce non-competition agreements with nationwide applicability when the employee did not have nationwide responsibilities for the former employer.

While the court in Texas have authority to reform a non-competition agreement to narrow the scope or the geographical area of the agreement so as to make it enforceable, they will not always do so.

So, hopefully, you had legal advice regarding the non-compete agreements when they were drafted and the above issues are not going to prevent you from enforcing them. If not, you need to revise your current non-compete agreements and the employment policies that affect the exchange of consideration to ensure that the above-described requirements are met.

If, after conducting the above enforceability analysis, you believe that your non-compete agreements contain reasonable limitations and the former employee was given some sort of consideration in exchange for signing the non-compete agreement, you might have an enforceable agreement on your hands. I will discuss the next steps of enforcing a non-compete agreement in Part III.

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.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

The ADA Does Not Require a Nexus Between a Requested Accommodation and an Essential Job Function – Says the Fifth Circuit

The Fifth Circuit Court of Appeals recently ruled in Feist v. State of Louisiana, that a “reasonable accommodation” under the Americans with Disabilities Act (ADA), does not need to “relate to the performance of essential job functions.” In reversing the district court, the Court of Appeals held that an accommodation could be reasonable even if it does not relate to the essential job functions as long as it makes the workplace “readily accessible to and usable” by a disabled employee, or, alternatively, it allows an employee with a disability to “enjoy equal benefits and privileges of employment as are enjoyed by [the employer’s] other similarly situated employees without disabilities.” Thus, the district court erred by requiring a nexus between the employee’s requested accommodation, a reserved parking space, and her job functions as an assistant attorney general.

The ADA prohibits covered employers from “discriminat[ing] against a qualified individual on the basis of disability.” 42 U.S.C. § 12112(a). Discrimination includes failure to make “reasonable accommodations to the known physical or mental limitations of an otherwise qualified individual with a disability . . . unless such covered entity can demonstrate that the accommodation would impose an undue hardship.” 42 U.S.C. § 12112(b)(5)(A). According to the Fifth Circuit Court of Appeals, a plaintiff asserting a discrimination claim under the ADA, must show the following:

  • s/he is a “qualified individual with a disability;”
  • the disability and its consequential limitations were “known” by the covered employer; and
  • the employer failed to make “reasonable accommodations” for such known limitations.

The district court in Feist held that the plaintiff established the first two elements, but failed to show that the requested accommodation was “reasonable” because she had failed to demonstrate that not having a reserved parking spot limited her ability to perform “the essential functions of her job” as an assistant attorney general. The Court of Appeals, however, ruled that “the ADA, and all available interpretive authority” indicated that “reasonable accommodations” were not restricted to modifications that enabled performance of essential job functions.

Under the ADA, a reasonable accommodation may include:

(A) making existing facilities used by employees readily accessible to and usable by individuals with disabilities; and

(B) job restructuring, part-time or modified work schedules, reassignment to a vacant position, acquisition or modification of equipment or devices, appropriate adjustment or modifications of examinations, training materials or policies, the provision of qualified readers or interpreters, and other similar accommodations for individuals with disabilities. 42 U.S.C. § 12111(9)(A).

Moreover, the ADA implementing regulations define “reasonable accommodation” as follows:

(i) Modifications or adjustments to a job application process that enable a qualified applicant with a disability to be considered for the position such qualified applicant desires; or

(ii) Modifications or adjustments to the work environment . . . that enable an individual with a disability who is qualified to perform the essential functions of that position; or

(iii) Modifications or adjustments that enable a covered entity’s employee with a disability to enjoy equal benefits and privileges of employment as are enjoyed by its other similarly situated employees without disabilities. 29 C.F.R. § 1630.2(o)(1) (emphasis added).

Thus, the Court of Appeals concluded that a modification that enables an individual to perform the essential function of a position is only one of three categories of reasonable accommodation.

What does this mean for Texas business owners? When addressing an accommodation request by an employee with a disability, the employer should not deny the request simply because the accommodation does not relate to the employee’s essential job functions.  The employer should further consider whether the accommodation will allow the employee to enjoy the same benefits and privileges that other similarly situated employees without disabilities enjoy.  If the answer to that question is “yes,” then the employer will have to provide the accommodation, unless it creates an undue hardship.

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.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

Defamatory Statements Made In Another State: Can You Sue In Texas?

These days, virtually anybody can write something online and have it go viral in a matter of hours. A person’s or a business’s reputation can be ruined in a matter of days by somebody’s thoughtless or malicious remarks. So, what is a person to do? Sometime, a lawsuit for defamation might be an answer. However, when a defamatory and damaging statement is made online, one question arises with frequency – where can the defamed party file the lawsuit? Obviously, it is more convenient to file it in the state where the defamed party lives or conducts business, but is that always possible?

The Fifth Circuit Court of Appeals recently considered whether Louisiana plaintiffs could file a lawsuit in their home state against California defendants who made allegedly defamatory statements about the plaintiffs online. Because the Louisiana long-arm statute is coextensive with the Due Process Clause limits, just like the Texas long-arm statute, the Court of Appeals’s analysis, applies to Texas as well.

In Herman v. Cataphora, the plaintiffs’ steering committee in In Re: Chinese-Manufactured Drywall Products Liability Litigation in the Eastern District of Louisiana hired Cataphora for litigation support. When their relationship soured, Cataphora filed and won a breach of contract lawsuit against the steering committee in the Northern District of California. Afterwards, a technology counsel for Cataphora gave an interview to Above the Law about the lawsuit and stated (presumably referring to the plaintiffs’ steering committee) that “[t]hese guys are the worst of hypocrites you can possibly find. They claim to be trying to help the little guy, but what they are doing is trying to put more money in their own pockets.” The interview took place in California and was quoted on the Above the Law website, which is published by Breaking Media, Inc., headquartered in new York.

Two of the steering committee members sued Cataphora and the technology counsel in the Eastern District of Louisiana for defamation and interference with prospective advantage. The defendants moved to dismiss for lack of personal jurisdiction or to transfer to a proper venue. Without holding an evidentiary hearing, the district court dismissed the case due to lack of personal jurisdiction and ordered a transfer under 28 U.S.C. § 1406(a) to the Northern District of California. The plaintiffs appealed the dismissal order.

The Fifth Circuit held that Louisiana lacked personal jurisdiction over the defendants and explained that when it comes to defamatory statements, the main question is whether the statements are directed at the forum state. Even when a plaintiff feels the harm from the defamatory statements in his home state, it is not enough to gain personal jurisdiction over the defendants in another state, if the statements focus on activities and events outside the forum state.  Thus, even if the plaintiffs in Herman made a prima facie showing that the harm caused by the defendants’ statements would be felt in Louisiana where they practiced law, this was not enough, and “[w]ithout a showing that the statements’ focal point was Louisiana . . . the district court lacked personal jurisdiction over the defendants.” Specifically, the following factors were lacking to establish specific personal jurisdiction over the defendants in Louisiana:

  • Louisiana was not the “focal point” of both the article itself and the harm suffered
  • There was nothing in the comments that explicitly or implicitly connected the parties’ dispute to Louisiana
  • There was no evidence that the statements or the article itself were directed at Louisiana residents
  • There was no evidence that Above the Law had a disproportionately high Louisiana readership

Due to these factors, the Court of Appeals proceeded to remand the case back to the trial court and order it to transfer the controversy to the Northern District of California.

BOTTOM LINE: Unless a defendant who makes defamatory statements about a business or person located in Texas also happens to have “continuous and systematic contacts” with Texas, i.e., general personal jurisdiction, a plaintiff in this state will have to show that the defamatory remarks were directed at Texas, or Texas activities were the “focal point” of such remarks, in order to be able to sue the defendant in Texas.  Plaintiffs, of course, always have an option of suing defendants in their home states.

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.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

Defamation in Texas: Being Called a “Liar” Will Not Get You Presumed Damages

Texas law recognizes two types of defamation: defamation and defamation per se. While a plaintiff has to prove actual damages in a defamation claim, such damages are presumed in a defamation per se lawsuit, making it a much easier claim for the plaintiff to prove. Whether a particular statement constitutes a defamation or a defamation per se depends on the nature of the statement. Texas law presumes that the following statements are defamatory per se: (1) statements that unambiguously charge a crime, dishonesty, fraud, rascality, or general depravity or (2) statements that are falsehoods that injure one in his office, business, profession, or occupation. See Main v. Royall, 348 S.W.3d 318, 390 (Tex. App.—Dallas 2011, no pet.).

Recently, in the case of Hancock v. Variyam, the Texas Supreme Court found that the statements that a doctor “lacked veracity” and “dealt in half truths” and circulated to his colleagues were not defamatory per se because they did not injure him in his profession as a physician. The Supreme Court proceeded to reverse $181,000 award of damages ($90,000 in actual damages and $85,000 in exemplary damages) because the doctor had failed to provide any proof of them at trial.

The Supreme Court explained that “because the [defamatory] statements did not ascribe the lack of a necessary skill that is peculiar or unique to the profession of being a physician” they were not defamatory per se. Furthermore, because “the specific trait of truthfulness is not peculiar or unique to being a physician,” but is a trait that is necessary in every profession, the defendant’s statement that the plaintiff “lacked veracity” was not defamatory per se. Thus, the plaintiff had to provide evidence of actual damages he had suffered due to the plaintiff’s statements – either evidence that he had lost patients or suffered mental anguish – in order to recover under this claim.

The Supreme Court rejected the Court of Appeals’ reasoning that accusing somebody of being a liar is so obviously hurtful to the person that the damages should be presumed. It also rejected the plaintiff’s argument that the statements by the defendant that the plaintiff “lacked veracity” would so clearly impact his patient care, teaching, research, and publication, that the damages had to be presumed.

Providing an example of what statements would be considered defamatory per se, the Supreme Court relied on the Restatement (Second) of Torts § 573, explaining that statements that a physician is a drunkard or a quack or that he is incompetent or negligent in the practice of his profession or that he is dishonest in his fees, would constitute defamation per se, and the damages would be presumed.

THE PRACTICAL EFFECT: Defamation is a great tool for protecting one’s professional reputation or reputation as a business owner. However, before diving into a defamation lawsuit, it is important to assess what evidence a party will need to prove a claim of defamation and what evidence it has. If the purported defamatory statements fall under the defamation per se category, then the damages will be presumed. However, if the statements are of general nature and do not specifically relate to the party’s profession or occupation, the injured party will have to put on evidence of actual damages incurred as the result of such statements.

According to Hancock, unless being truthful is a specific trait of a profession or a business, being called or labeled a “liar” is not enough to allow a presumption of actual damages.

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.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

To Protect Trade Secrets, Make Sure the Temporary Injunction Explains What They Are

When a company learns that its former employees are releasing or using the company’s trade secrets, it needs to act fast. No company, therefore, wants to spend precious time and money trying to obtain a temporary injunction preventing the release of the confidential information, only to have it overturned by a Court of Appeals because it was not detailed enough. Yet, that’s exactly what happened in Ramirez, et al. v. Ignite Holdings Ltd., et al.where the Texas Fifth Court of Appeals reversed a temporary injunction because it failed to describe specifically what trade secrets and proprietary information the company’s former employees were prohibited from releasing.

In RamirezStream Energy, a provider of electricity and natural gas, and its marketing subsidiary, Ignite Holdings, employed independent sales associates, who had signed non-compete and non-solicitation agreements. When Stream Energy and Ignite found out that Ramirez and several other sales associates were working for their competitors, they fired them and, shortly thereafter, filed a lawsuit. The companies had no trouble obtaining a temporary injunction because of plentiful evidence of violations, but the sales associates appealed the injunction under Texas Civil Practice and Remedies Code Ann. § 51.014(a)(4), arguing that it was not detailed enough.

Most of the restrains in the temporary injunction had expired by the time the appellate court considered them, but the following provision remained in force, prohibiting defendants from: “possessing, disclosing to any third party, or using for their own benefit or to the detriment of Ignite and Stream Energy any of Ignite’s or Stream Energy’s Proprietary Information/Trade Secrets (including but not limited to proprietary information, confidential information, training materials, templates, or sales or customer lists.)”  The injunction defined “Proprietary Information/Trade Secrets” as “valuable business, training, and sales techniques, methods, forms, materials, guides, lists, downline associate and customer lists, including personal identifying information, and other confidential and proprietary information as discussed above.”

The Court of Appeals found that this prohibition failed to pass the muster under the Texas Rule of Civil Procedure 683, which requires an injunction to “describe in reasonable detail and not by reference to the complaint or other document, the act or acts sought to be restrained,” and reversed and remanded the injunction to the trial court.  The ruling explained that “techniques,” “materials,” “proprietary information,” and “confidential information” were too broad and general to give the sales associates adequate notice of the type of information they were restrained from releasing or using.  In contrast, the categories of information such as “downline associate and customer lists” and “organizational reports” were detailed enough to meet the requirements of Rule 683.  The Court of Appeals explained that the broad description of the types of the information that the sales associates were prohibited from releasing required them to infer whether any particular information or item in their possession was “proprietary information” or “confidential information” covered by the injunction, and this was “impermissible.”

Since this ruling, the Texas Uniform Trade Secrets Act (TUTSA) has become effective.  It now provides a definition of “trade secrets” as “information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.”  It appears that under Ramirez, simply including the TUTSA definition of a trade secret in an injunction will most likely not meet the requirements of Rule 683.

CONCLUSION: If you do not want your injunction reversed on appeal, make sure to specify in detail the categories of trade secrets you want to be protected.  Broad phrases such as “confidential information,” “proprietary information,” or “trade secrets” will most likely result in a reversal of the injunction, and even if they do not, they will be useless when it comes to determining whether a party is complying with the injunction. The Texas Courts of Appeals have found that attaching a customer list or an example of protected trade secret to an injunction meets the requirements of Rule 683. Any confidentiality concerns associated with such practice, may be assuaged by using the TUTSA‘s new “preservation of secrecy” procedures under Section Sec. 134A.006, which authorizes courts do what is necessary to preserve the secrecy of trade secrets. 

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.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.