Non-Compete Agreements: Garbage In, Garbage Out

Enforcing Non-Compete Agreements in TexasLast week, a Texas Court of Appeals ruled that a non-compete agreement between a transportation logistics broker and its freight carrier was unreasonable because it was not clear when the 24-month non-compete period would begin to run. This case serves as a reminder that a confusing, ambiguous, or imprecise non-compete agreement will yield poor results in court.  In other words: garbage in, garbage out. 

The covenant not to compete at issue was meant to ensure that the freight carrier would not take away the broker’s clients after the broker had revealed their identity to the carrier.  Thus, there was a legitimate business reason for the non-compete agreement.  However, the following language in the agreement created a problem: 

For a period of twenty four (24) months following the Carrier’s last contact with any client or client[s] of Broker the Carrier agrees it shall not either directly or indirectly influence or attempt to influence customers or clients of Broker (or any of its present or future subsidiaries or affiliates) for whom the Carrier has rendered services pursuant to this Agreement to divert their business to the Carrier or any individual, partnership, firm, corporation or other entity then in competition or planning to be in competition in the future with the business of Broker or any subsidiary or affiliate of Broker. 

The Court explained that there were two problems with this language that made it impossible to determine how long the restrictive covenant was going to last.  First, under the terms of the covenant not to compete, the 24-month restraint period would start from the date of the carrier’s last contact with “any” client of the broker, not just the clients that the carrier had provided services to.  Since the broker testified that its client list was a trade secret, the carrier would have no way of determining the date of its last contact with the clients whose identity it had no way of knowing.  Second, the non-compete would begin to run from the date of the last contact, regardless of whether the contact took place during or after the broker-carrier agreement had terminated, which meant that it could begin at any time. 

Consequently, the Court ruled that a covenant not to compete that extended for an indeterminable amount of time was not reasonable, and as a result, was not enforceable. It reversed the jury’s finding that the agreement had been breached and took away the damages the jury had awarded to the broker.

Texas Bar Association Top TenBOTTOM LINE:  There are plenty of “sample” non-compete agreement “forms” online, but there is a difference between a non-compete clause and a non-compete clause that is enforceable. Unfortunately, many companies do not find that out until they are in court trying to enforce their agreements that may not be enforceable.  Companies should avoid using “standard” non-compete clauses and make sure that their restraints are tightly drafted to address their specific industry, business model, and particular needs. 

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. 

 

 

Can an Employee Prepare to Compete with His Employer While Still on the Employer’s Payroll?

non-compete-agreement-lawyer-philadelphiaIn Texas, employees have the right to resign from employment and go into business in competition with their employers (absent a non-compete agreement). There is nothing legally wrong in engaging in such competition or in preparing to compete before the employment terminates.

Thus, as a general rule, an employee can prepare to compete with the employer while still on the employer’s payroll.   There are several caveats to that, however:

  1. Employees cannot use their employers’ resources – such as company-provided computers – to engage in the preparatory activities.
  2. Employees cannot prepare to compete while on the clock.
  3. Employees cannot use their position within the company and their knowledge of the company’s trade secrets and confidential information to divert business to their new company or to create business opportunities for their new business.

Where an employee is discovered to have engaged in some activities in anticipation of his new endeavor while still working for his old employer, the question often arises whether he was preparing to compete or actually competing with the employer.

For example, registering a company with the Secretary of State is a clearly preparatory activity.  However,  advertising the formation of the company on social media or creating a website announcing that the company will be opening soon can be viewed as a competitive activity.  In illustration, the Pennsylvania Superior Court recently held that a company which set up a Facebook page announcing that it was going to open a veterinary clinic “soon” and provided a link to a map showing the location of the future clinic was not merely “preparing to compete” but was actually competing and soliciting customers.  The court explained that:

Upon review of that document, it is obvious that, collectively, the [Facebook] posts, “coming soon” announcement, and map directions, are tantamount to a solicitation of past or future clients in contravention of the non-compete clause. The resounding purpose of the Facebook page, and the attendant communications therein, was to inform the followers of the page, including former clients, that he intended to open a new clinic and to keep them apprised of his progress. There is but one reason for O’Laughlin to create the O’Laughlin Veterinary Services Facebook page and maintain contact with former clients: to solicit their business. 

TexasBarToday_TopTen_Badge_VectorGraphicBOTTOM LINE FOR EMPLOYERS: While employees have the right to prepare to compete before their employment is terminated, they cannot cross the line and actually compete with their employers.  If you learn that your employee is announcing on social media or online that he or she is getting ready to go into competition with your company, it might be a good time to call an employment lawyer.

Leiza represents companies 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 or fill out the form below.

Will Ban the Non-Competes Movement Lose Its Momentum During the Trump Administration?

donald_trump_rnc_h_2016It’s no secret that the Obama administration made a push, especially towards the end, towards limiting the use of non-compete agreements by employers around the country. The White House commissioned not one but two reports on this topic, both of which concluded that non-compete agreements stifle innovation, reduce job mobility, and negatively impact economic growth.  

Several states around the country seemed to join the White House’s view on non-compete agreements in passing statutes limiting their use. Illinois, for example, recently enacted the Illinois Freedom to Work Act, 5 ILCS § 140/1 et. seq., which prohibits private employers from entering into non-competition agreements with “low-wage employees.” Utah passed the Post-Employment Restrictions Act, Utah Code § 34-51-101 et seq., in March 2016, restricting non-competes’ length to 1 year.  Massachusetts tried to pass a similar legislation this year, but failed. And New York State Attorney General Eric Schneiderman announced that he will propose legislation in 2017 to limit the use of non-compete agreements in New York.  

Will this push to limit non-compete agreements continue during the Trump administration?  My prediction is that it won’t.  Of course, as with many other areas of the law, predicting what Trump will or will not do, is like reading tea leaves – nobody really knows. However, here are my top three reasons for thinking that the Trump Administration won’t pursue the same stance on non-compete agreements as the Obama Administration. 

First, Trump is a savvy businessmen and an employer. Therefore, he knows the value of non-compete agreements to employers and, without a doubt, has used them himself in his many businesses. 

Second, Trump has demonstrated that he is not above using such agreements in what some would view as overreaching situations.  For example, he did not shun from using non-compete agreements with the volunteers for his political campaign, even though the volunteers were not paid compensation for their services and probably performed tasks that did not involve any confidential information.

Third, Trump’s recent appointment of Andrew F. Puzder – the former CEO of a fast-food franchise – as the Secretary of Labor, suggests that his focus may not be on helping low-wage employees. Mr. Puzder had openly criticized the minimum wage increase that was supposed to go into effect this December and is commonly perceived as an ally for employers.  His position on ACA, minimum wage, and the joint-employer rule promulgated by the NRLB, is contrary to the position taken by the Obama administration. Thus, if he takes a 180-degree shift from the Obama administration’s stance on non-competes, such position won’t come as a surprise. 

Employers should stay tuned to see how the Trump’s policy on non-competes develops in 2017…

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

White House Calls on States to Ban or Limit Non-Compete Agreements


us-whitehouse-logoOn Tuesday, the White House issued a call to action to state policymakers to do the following:

1.  Ban non-compete clauses for categories of workers, such as workers under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause.

2.  Improve transparency and fairness of non-compete agreements by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power); providing consideration over and above continued employment for workers who sign non-compete agreements; or 2 encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.

3.  Incentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promoting the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.

This “State Call to Action on Non-Compete Agreements” comes on the heels of the White House and Treasury reports issued earlier this year that highlighted the fact that non-compete agreements impact approximately 30 million – nearly one in five – US workers, including roughly one in six workers without a college degree. 

Some states have already passed legislation limiting the use of non-compete agreements. For example, Hawaii banned non-compete agreements for technology jobs last year; New Mexico passed a law prohibiting non-competes for health care workers; and Oregon and Utah have limited the duration of non-compete arrangements.  Other states, like Massachusetts, have tried to implement similar measures this year but were unable to do it (yet). 

Does this mean that non-compete agreements in Texas will soon go away? There is no indication of that happening in the near future, however, the 85th legislative session in Texas will begin on January 10, 2017, and we will monitor introduction of any bills that may curtail or ban non-compete agreements in light of the trend. 

TexasBarToday_TopTen_Badge_VectorGraphicOf course, since the above call of action comes from the current White House, the outcome  of the national elections will probably affect whether this call will carry over to the new administration.  Given Trump’s affinity for non-compete agreements, should he be elected, the current White House policy regarding such agreements may experience a 180-degree turn.  

Stay tuned for further developments in Texas in 2017 . . .

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

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.

Enforcing Texas Non-Compete Agreements Against Employees in Other States

noncompeteFor Texas companies, enforcing non-compete agreements in other states can be tricky since each state has its own rules about what makes a non-compete enforceable, and some states do not allow them at all. Therefore, any Texas company with out-of-state employees should ask two questions about its employees’ non-compete obligations: (1) are my remote employees’ non-compete agreements enforceable? and (2) will I be able to enforce them in a Texas court if necessary?  I have previously written regarding Question 1 here and here, and recently a Texas Court of Appeals addressed Question 2.

In that case, a Texas company sued its Louisiana employee for breach of his non-compete and non-solicitation clauses, breach of fiduciary duty by using the company’s confidential information to compete with it, and tortious interference with the company’s existing business relationships. The company sued the employee in Texas, and he alleged that Texas courts had no jurisdiction (power) over him because he worked entirely from Louisiana, solicited business in Louisiana, and used the company’s confidential information in Louisiana.  In short, other than being employed by a company based in Texas, he did not have any contacts with that state so he could not be dragged into a lawsuit in Texas.

The Court of Appeals found that Texas courts had jurisdiction over the employee to decide the breach of contract/non-compete claim because he originally called the company’s president in Texas to solicit employment with the company, thus purposefully availing himself of the Texas forum. This contact was enough to subject him to the jurisdiction of Texas courts. However, Texas courts did not have the power to decide other claims brought by the employer because those claims arose out of the employee’s conduct that took place entirely in Louisiana.  

TAKEAWAY:  Texas companies that have employees in other states need to make sure both – that their non-compete agreements are enforceable in those states and that they can enforce those agreements in Texas courts.  Some of this can be achieved via contractual provisions in employment agreements, and some can be done via hiring, training, and other corporate policies that affect remote employees.  

Any Texas business that is planning on expanding outside of Texas in 2016, should conduct an audit of its non-compete agreements and employment practices to ensure that they are properly set up so that the company can enforce the agreements in Texas courts.

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.

No Non-Compete Agreement? No Problem! – What Texas Companies Can Learn from Oculus Rift Lawsuits

kkI advise all my business clients in Texas to have non-compete and non-solicitation agreements with their key employees. Why? Well, first of all, because Texas courts enforce such agreements, so it only makes sense to take advantage of them. Second, because clear, specific, and reasonable non-compete and non-solicitation restrictions are usually a fair trade for providing key employees with access to customer lists, confidential information or expensive specialized training.

However, what happens if an employee does not have a non-compete? Does that mean that he or she can set up a competing shop across the street with no repercussions from the former employer? Well, not exactly. One only has to take a look at a few recent high-profile cases out of California courts to see that employers have many other ways to prevent employees from taking their confidential information and opening a competing business.  Since California does not allow non-competes, its employers have spent years perfecting other remedies to prevent unscrupulous employees from misappropriating their trade secrets. So, while Texas hates to look to California for, pretty much, anything, and while Texas and California law often diverge significantly, on this specific issue it pays to take note of what California companies have been cooking in their own courts.

Most recent example of an employer v. former employee battle waged in California-land that did not involve a non-compete agreement is a lawsuit by Total Recall Technologies (TRT) against Oculus Rift – a company that manufactures virtual 3D-reality headsets for gaming – and its founder, Palmer Luckey.  TRT filed a complaint in a federal court in California alleging a breach of non-disclosure agreement and “wrongful exploitation and conversion of plaintiff’s intellectual and personal property in connection with TRT’s development of affordable, immersive, virtual reality technology” by Luckey and Oculus Rift.  TRT alleged that Luckey was hired in 2011 to help develop a prototype head-mounted display, and as part of his job, he received information and feedback to modify the design.  According to TRT, Luckey used this confidential information to create Oculus Rift, his own version of the head-mounted display, which he launched via Kickstarter.  The lawsuit demands both punitive and compensatory damages in an unspecified amount. Given that Oculus Rift has recently been acquired by Facebook for $2 billion, the timing of this lawsuit could not be better for the plaintiff.

This is not the first time that Oculus Rift and its founder are being sued for alleged misappropriation of trade secrets. In 2014, ZeniMaxIP sued the same defendants in the U.S. District Court for the Northern District of Texas alleging that Occulus Rift breached its non-disclosure agreement with ZeniMax and, among other things, hired ZeniMax’s employees knowing that they would inevitably disclose ZeniMax’s trade secrets. Other claims included copyright infringement, unfair competition, trademark infringement, unjust enrichment, and false designation under the Lanham Act.

Notably absent from the suits were statutory claims for misappropriation of trade secrets.  The claim was not included in the ZeniMax v. Oculus lawsuit because Texas Uniform Trade Secrets Act (TUTSA), which governs such claims now, did not apply to misappropriations that occurred prior to September 1, 2013 – its effective date.  Why TRT did not plead a claim under the California Uniform Trade Secrets Act (CUTSA) is less clear, but just like TUTSA such claim is often plead in many employer v. former employee lawsuits in California.

Takeaway:  Just because a former employee never signed a non-compete or a non-solicitation agreement, does not mean that he or she can set up a competing business by using the trade secrets of its former employer. In Texas, TUTSA allows employers to go after employees who misappropriated their trade secrets (even in absence of non-compete or non-solicitation restraints) or where there is a threat of misappropriation. Moreover, a lot of times, a good non-disclosure agreement will give grounds to other claims. So, although having a non-compete or a non-solicitation clause in an employment agreement makes it easier for an employer to stop a departing employee from using its confidential information, all is not lost if no such restraints have been put in place.

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.