The Fifth Circuit Rules Industry-Wide Noncompete Agreements Are Not Enforceable

static1.squarespace.comThe Fifth Circuit Court of Appeals recently considered whether a travel agency’s noncompete agreement with its employee was enforceable under Texas law.  It concluded that because the agreement did not have geographic limits, was not limited to the travel agency’s customers with whom the employee actually worked during her employment, and included the entire travel agency industry, the noncompete was unenforceable.

In analyzing the noncompete clause, the court in Karen D’Onofrio v. Vacation Publications, Inc., provided a useful refresher as to what types of noncompete agreements are legal in Texas and what types are illegal and, therefore, not enforceable.   The court confirmed that noncompete restraints that preclude employees from working in any capacity in a particular industry are not enforceable. Thus, when it comes to noncompete agreements, bigger is not always better.

What covenants not to compete are legal in Texas?

First of all, Texas law recognizes that reasonable covenants not to compete serve the legitimate business interest of preventing departing employees from “using the business contacts and rapport established” during their employment to take the employer’s clients with them when they leave.

Thus, a covenant not to compete is enforceable under Texas law if it is “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.”  Tex. Bus. & Com. Code § 15.50(a).

In the case of personal services occupations, such as sales persons, the employer has the burden of showing the reasonableness of its noncompete agreement.  Thus, for example, an employer who is asking a court to enforce a 20-mile covenant not to compete, will have to establish why the 20-mile – as opposed to a 10-mile – radius is reasonable.

What types of covenants not to compete are illegal in Texas?

As a general rule, under Texas law, covenants not to compete that extend to clients with whom the employee had no dealings during his or her employment or amount to industry-wide exclusions are overbroad and unreasonable and will not be enforced by the Texas courts.  Similarly, the absence of a geographical restriction will generally render a covenant not to compete unreasonable and, therefore, unenforceable.

Was D’Onofrio’s covenant not to compete enforceable?

D’Onofrio’s noncompete agreement prohibited her — for a period of 18 months after her employment with the travel agency — from, among other things, working “in any capacity” for “any direct or indirect competitor of [the travel agency] in any job related to sales or marketing of cruises, escorted or independent tours, river cruises, safaris, or resort stays” or doing any business with “any person or entity” who had purchased a cruise or other travel product from the travel agency in the preceding 3 years.

According to the court of appeals, this covenant amounted to an industry-wide restriction, which prevented D’Onofrio from working in any job related to the sales or marketing of not just cruises, but also a host of other travel products—and was not limited as to either geography or clients with whom D’Onofrio actually worked during her employment.  Therefore, the Fifth Circuit Court of Appeals concluded that D’Onofrio’s covenant not to compete with her travel agency was unreasonable as written.

When a Texas court finds a noncompete agreement unenforceable, what does that mean for the employer?

If a court determines that a covenant not to compete does not contain reasonable time, geography, and scope limitations, but is otherwise enforceable, then the court shall reform, i.e. rewrite, the noncompete agreement to make it reasonable.  For example, a court can change a 50-mile radius in a non-compete agreement to a 20-mile radius or change an 18-month restriction to a 6-month restriction.  

Texas Bar Association Top TenBOTTOM LINE: In the D’Onofrio case, the court of appeals sent the case back to the lower court directing it to rewrite the agreement.   Texas employers should be aware that any time a court has to rewrite a noncompete because it is overbroad and unreasonable, there are negative consequences for the employer – more attorney’s fees, more time spent in litigation, and an inability to recover damages from the employee.  

Therefore, it is important to make sure that noncompete agreements are written properly from the beginning rather than rely on the courts’ ability to rewrite them during litigation.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.

When Stopping Competition with A Temporary Injunction, It Pays To Be Precise

ArcherEven the best non-disclosure and non-competition agreements are not worth anything if not enforced correctly. A lot of times a company rushes to court asking the judge to stop a former employee or his new employer from using the company’s confidential information or soliciting its customers based on the agreements that the former employee had signed with the company.    

However, in an attempt to obtain quick relief at the courthouse, companies often end up using formulaic and boiler-plate language that is supposed to cover every possible violation such as: 

  • Plaintiff asks the Court to prohibit Defendant from soliciting or conducting business with Plaintiff’s customers or
  • Plaintiff asks the Court to restrain Defendant from using the company’s confidential information or trade secrets 

Such requests, while appearing very reasonable at first blush, are often rejected by the courts as not being specific enough to let defendants know what they can and cannot do. For example, how is the defendant supposed to know who the company’s customers are, especially, if there are thousands of them? Or, if the order does not define trade secrets, how can the defendant know what is it that he is prohibited from using or disclosing? 

Defining the restrictions on competition in a precise manner while covering all possible violations is key to a successful injunction; however, the required degree of specificity may very from court to court. For example, recently, a court of appeals in Super Starr Int’l, LLC, et al v. Fresh Tex Produce, LLC, et al., dissolved an injunction issued by the trial court and remanded (sent) the case back to the trial court instructing it to reissue the temporary injunction order that defines “soliciting” not to include mass advertising, as well as redraft restrictions by defining “customers,” “accounts,” “trade secrets” and “confidential information.” 

BOTTOM LINE: When seeking a temporary injunction in a case involving unfair competition, non-compete or non-disclosure agreement breaches, shooting for the moon so you can land on the stars is not a good approach.  Rather, the party seeking an injunction should aim as closely as possible at the particular star on which it wants to land.   

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

The Biggest Myth About Non-Compete Agreements

Most of the time, when I tell people that I deal with non-compete agreements, their initial reaction is, “but those are not enforceable in Texas, right?”.  Often, that statement is followed by, “but Texas is the right-to-work state, so a company cannot prohibit me from working for whoever I want, right?”.  When I try to explain that non-competes in Texas are enforceable and that being a right-to-work to state has nothing to do with a company’s ability to put non-compete restrictions on key employees, I often get incredulous stares.  So, for all the skeptical minds out there, here’s a map showing which states enforce non-compete agreements:

NCJC-BRIEF-Non-compete-Agreements-KEEPING-SECRETS_Page_5-map-1000x520

You will see from this map (created by Beck Reed Ridden) that only three states in the entire country – California, North Dakota, and Oklahoma – do not enforce non-compete agreements of any sort.  The rest of the states, including Texas, enforce such agreement or are undecided on that issue, which means they could enforce them given the right circumstances.

BOTTOM LINE:  In Texas, non-compete agreements are enforceable if they meet certain requirements and contain reasonable restrictions on the term, geographic scope and the scope of the restrained activities. Companies should take advantage of this legal tool available to them and make sure that their employment agreements with key employees have properly drafted non-compete clauses that protect their good will, confidential information, and trade secrets.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108. 

Non-Compete and Confidentiality Issues to Watch in 2017

Non-Compete Issues to WatchIn 2016, there have been some major developments involving confidentiality and non-compete agreements law, which are likely to have some repercussions in 2017. Here’s a summary of the most important issues that companies should be aware of going into the new year.

1. The Federal Defend Trade Secrets Act.  This statute, enacted in May 2016, creates a federal question jurisdiction for misappropriation of trade secrets, allows companies to seize their trade secrets out of the hands of competitors in some circumstances, and provides whistleblower protection to employees when certain conditions are met.  In 2017, as companies begin to take advantage of the statute, the courts will begin creating a new body of law interpreting its provisions.

2. SEC Enforcement. The SEC will continue to go after the companies whose confidentiality agreements and policies they may find to violate the SEC’s whistleblowing rules.  Making sure that confidentiality agreements include the language specified in the federal Defend Trade Secrets Act may help with SEC’s scrutiny.

3. Choice of Law Issues.  Choice of law issues in interstate non-compete and confidentiality disputes will continue to be of major concern to companies who have out-of-state employees. A number of states in 2016 passed statutes dramatically limiting non-competes and California passed a statute that prohibits application of other states’ laws to its employees’ non-compete agreements. Business owners should make sure that their non-competes are enforceable in the jurisdictions in which they intend to enforce them.

4. Disclosure of Trade Secrets During Litigation.  This will continue to be a major point of dispute in trade secrets and non-compete lawsuits. For example, earlier this year, the Texas Supreme Court addressed what a trial judge must consider before allowing a competitor’s corporate representative in the courtroom during the testimony that might reveal the adverse party’s trade secrets. Thus, in 2017, those companies that are engaged in trade secrets misappropriation litigation in Texas will need to consider how this balancing test will apply in their particular circumstances. Many other states’ courts faced a similar issue in 2016 and have fashioned their own rules regarding when the disclosure of trade secrets in litigation is appropriate. 

TexasBarToday_TopTen_Badge_VectorGraphicLeiza 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.

Five Non-Compete Agreements Myths in Texas for Employees

share-knowledge-715x400The old saying “ignorance is bliss” may be true in many situations, but not when it comes to non-compete agreements in Texas.  Over the years, I have identified five most common misconceptions about such agreements from my discussions with clients, friends, and even other lawyers.  It’s time to dispel these common myths once and for all:

Myth #1: Non-compete agreements are not enforceable in Texas.  This is absolutely false. In Texas, non-compete agreements are enforceable if they meet certain requirements spelled out in the Texas Covenants Not to Compete Act.  Even if they do not meet those requirements, a lot of times, a judge can reform, i.e. rewrite, them to make them more “reasonable” and then enforce them.

Myth #2: Texas is a right to work state, so an employer cannot prevent employees from going to work for a competitor. This is also false. A “right to work state” simply means that employees in Texas cannot be fired for joining unions.   It has nothing to do with the enforceability of the non-compete agreements. So, while Texas is a right to work state, that doesn’t mean that the non-competes here are invalid. 

Myth #3: An employer threatening to fire an employee if s/he doesn’t sign a non-compete agreement makes such agreement invalid. This is false. Because Texas is an at-will employment state, an employer may change the terms of employment at any time, including adding non-compete restraints to an already-existing employment relationship. Thus, with rare exceptions, employers may force employees to sign non-competes under a threat of termination.

Myth #4: Since an employer never enforced its non-compete agreements, it won’t/can’t enforce it against a particular employee.  Again, this is false.  Employers typically consider many factors when deciding whether to enforce a non-compete agreement, so while they might decide not to enforce the agreement against one employee, they may be motivated to do so against another employee. 

Myth #5: If a non-compete agreement looks/sounds reasonable, there is no way to fight it. This is false. There are many defenses to non-compete agreements, and whether a particular non-compete agreement will hold up in court depends on the specific language of the agreement as well as employee’s job duties, length of employment, access to confidential information and a myriad of other factors.

The bottom line is that employees in Texas cannot afford to ignore non-compete restraints in their agreements and, when in doubt, should seek legal advice to understand the consequences of signing a non-compete agreement, or switching jobs or starting a competing business when subject to a non-compete.  Planning ahead is key when it comes to non-compete agreements in this state. 

Stay tuned for part II to find out common  non-compete agreements myths for employers. 

Leiza litigates unfair competition, non-compete and trade secrets lawsuits on behalf of companies and employees, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

 

A Texas Case Demonstrates Why Using Stock Non-Compete Agreements May Backfire

picLast month, a Texas Court of Appeals denied an insurance agency’s application for a temporary injunction against its former President because it held that the non-compete agreement, as written, did not restrict the President from competing. The agency tried to enforce the non-compete and non-solicitation agreement to prevent the President from soliciting the agency’s clients for the purpose of selling or marketing any products or services that would compete with the agency, and it was able to obtain a temporary restraining order (TRO).  However, the trial court refused to convert the TRO into a temporary injunction.

The reason the company lost at the temporary injunction hearing is because both the non-compete and non-solicitation clauses in the agreement stated that the President could not compete with or solicit the agency’s clients “during the term of CMC Account Development Sub Agent Agreement, and for a period of two (2) years after the termination of the Agreement.”  However, the agency’s representative and the President both testified that he was never a sub agent (i.e. sales person) for the agency and that he did not have a CMC Account Development Sub Agent Agreement.  

Basically, the non-compete and non-solicitation restraints were tied to the length of a non-existent agreement between the agency and the President. In most likelihood, the language was left over from the standard contract form that the agency used for its sales representatives, and was included in the President’s agreement due to oversight.  As the result, the company was unable to stop the President from competing. 

TexasBarToday_TopTen_Badge_VectorGraphicTakeaway:  This case demonstrates why the  companies should conduct an audit of their non-compete and non-solicitation agreements at least once a year to make sure that (1) the agreements are enforceable, (2) they have a legible copy of the agreements signed by both parties, and (3) the agreements will adequately protect the company if they have to be enforced. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete dispute, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Texas Non-Competes Soon Will Be Unenforceable in California

shutterstock_102117535With so many companies moving their headquarters from California to Texas in the recent years, non-compete disputes involving employees and employers who have ties to both states have multiplied.  

In these types of cases, one of the first questions the courts ask is which state’s law applies to the non-compete agreements in dispute – California’s or Texas’s?  You can find an example of such a case here.  Under California law, non-compete agreements are largely unenforceable.  To the contrary, Texas law recognizes reasonable non-compete agreements and will enforce them. 

Last month, California governor signed into law Senate Bill 1241, which, effective January 1, 2017, will restrain the ability of employers to require employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where the employee was individually represented by a lawyer in negotiating an employment contract.

This new Section 925 of the California Labor Code states the following:

(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

(1) Require the employee to adjudicate outside of California a claim arising in California.

(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

The only exception to the application of Section 925 appears in subdivision (e):

(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

Takeaway:  Texas employers with California employees need to recognize that an attempt to enforce Texas non-compete agreements against their employees who primarily reside and work in California may backfire after January 1, 2017, resulting in employer having to pay employees’ attorney’s fees related to the dispute.  

Additionally, for those employees who might have dual residences in both states and might regularly perform work in both states, the question of whether they “primarily reside and work” in California or Texas may become a pivotal issue to the enforceability of their Texas non-compete agreements. 

Most importantly, employers should take advantage of the exception in the statute as well as identify other legally allowed restrictions under California law that would serve to protect the company’s interests even against California employees. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

The Difference Between Non-Competition and Non-Solicitation Restrictions

noncompeteSome states prohibit these restraints in employment contracts completely. Others allow one but not the other. Texas allows both. These restrictions on employees are meant to protect employers’ investment in their employees and confidential information shared with them during their employment.  A prudent employer will use one or both of these covenants to protect its confidential information from ending up in the hands of a competitor.

A non-compete covenant restricts an employee’s right to engage in a business activity that is competitive with his employer.  Whereas a non-solicitation clause restricts an employee’s ability to solicit the customers or employees of his former employer.  Often, employers will also include a confidentiality clause, which will prohibit their employees from sharing with third parties or using any confidential information they learned while working for the employer.

Whether an employer should include all of the above clauses or only some of them in its employment agreements depends on what role a particular employee will play in its business, how much customer interaction she or he will have, whether she or he will have access to any of the employer’s confidential information, and several other factors. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Want to Switch Jobs, But Not Sure if You Can? Do Not Let A Non-Compete Hold You Down.

3d4bc84Many employees sign non-compete agreements without giving it a second thought, but then a time comes when the company starts slumping, they get a new boss that they do not particularly like, receive a better job offer from a competitor of their current employer, or they want to strike out on their own. All of a sudden, the non-compete restraints come out of the shadows looking rather menacing. Should the employee take a new job or open a competing company and risk a lawsuit from the former employer? Should she or he discuss the non-compete agreement with the current employer and see if they’ll agree not to enforce it? Should she or he forego the new job in order to avoid facing the wrath of the former employer and the legal costs associated with it?

Many employees will seek advice from former co-workers, friends, or family, or on the internet. However, seeking information about enforceability or validity of non-compete agreements in Texas on the web is like seeking information about a possible illness from WebMD.  There are many general statements, but no realistic explanation of how it applies to the employee’s particular situation.

This is, of course, because the area of non-compete law in Texas is a gray area. Rarely is an entire non-compete agreement invalid or iron-clad. Most of the time, the agreement’s force depends on the specific language of the agreement, the type of business the employer is involved in, what employee did for that employer, for how long, whether the employee received confidential information, goodwill, or stock options from the employer, whether employees’ duties changed at any time during the employment, whether the employer has “unclean hands,” and many other factors.

So, when you start wondering about whether your non-compete will hold you back in accepting a job offer or opening your own business, do yourself a favor, and after doing online research and talking to your friends or co-workers, consult with an attorney in your state regarding whether your non-compete agreement is enforceable as well as what is the likelihood of the employer enforcing the agreement.  A good attorney will help you structure your departure from the former employer in a way that will minimize the risk of a non-compete lawsuit, will help deflect any bullying attempts from the former employer, and will be able to provide you with a realistic risk assessment of any non-compete-related litigation. When facing a possible non-compete enforcement situation, an ounce of prevention is worth a pound of cure and being proactive about it can save major headaches down the road.

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.

Non-Compete Agreements are Not OK in Oklahoma

leoTurns out Oklahoma and California have much more in common than one would imagine – they both prohibit non-compete agreements.  The Fifth Circuit Court of Appeals recently confirmed in Cardoni, et al. v. Prosperity Bank what many Oklahoma businesses already know – non-compete restraints in Oklahoma do not hold up in court.  What makes this case interesting is that the Fifth Circuit refused to apply Texas law to bankers’ non-compete agreements even though they agreed that their agreements should be governed by Texas law, because Texas law was contrary to Oklahoma’s public policy, which prohibits such agreements under any circumstances. As the result, the Oklahoma bankers were allowed to compete despite the non-compete clauses in their employment contracts with a Texas bank.

Prosperity Bank highlights a situation, which has become more common in recent years, where a court will not apply the parties’ selected law because it is either (a) contrary to the fundamental policy of the state where the employee works, or (b) has no substantial relationship to the employment relationship, the employer or the employee.  So, how can companies ensure that they are protected from competition from employees located in other states?  The following basic rules can help companies draft effective post-employment restraints:

  1. Non-compete agreements are governed by different laws in each state.
  2. While the courts usually will defer to the parties’ choice of law to govern their employment contracts, that is not always the case.
  3. Where the law specified in an employment agreement contradicts a “fundamental public policy” of the state where the employee works, courts may refuse to apply the chosen law.
  4. If possible, a company should make sure that its non-competes are enforceable in both – the state specified in the contract and the state where the employee works.
  5. If that is not possible or an employee works in a state that prohibits non-compete agreements, the employer should look to see whether confidentiality or non-solicitations clauses may be used to achieve the same or similar results.
  6. The bottom line is that figuring out which law applies to non-compete agreements in different states and whether they will be enforced in court down the road involves a factually intensive and complicated legal analysis.  For higher-level employees, it pays to have the analysis done before non-compete agreements are signed and not after such employees have already opened a competing business or joined a competitor.

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.