Can a “Friend Request,” a “Like,” or a New Job Announcement on LinkedIn Violate A Non-Solicitation Agreement?

linkedin-new-job-announcement

The growth of social media has been raising complex new issues for employers seeking to enforce their non-compete and non-solicitation agreements. For example, if a former employee connects with a company client or a former coworker on LinkedIn, can such connection result in a breach of the employee’s non-solicitation agreement? What if an employee announces on his LinkedIn profile that s/he has a joined a competitor and invites all the followers – many of whom are the former employer’s customers – to check out the new employer’s website? Could that be a violation of that employee’s customer non-solicitation agreement? 

The courts around the country have been grappling with these issues in the recent years and are yet to come up with a bright line rule.  However, they all seem to agree that the more “passive” the social media activity is, the less likely it is to constitute a prohibited solicitation of customers or employees, and the more “active” the posts are or the more akin they are to oral solicitations, the more likely they are to violate non-solicitation restrictions. In this post, I take a closer look at the various decisions from across the country and synthesize common themes. 

1. Employees’ posts about starting a competing business or advertising job openings at their new place of employment on public social media pages. 

In H&R Block Tax Servs., LLC v. Frias, a former H&R Block franchisee promoted his tax services business on a publicly available Facebook page.  No. 4:18-00053-CV-RK, 2018 U.S. Dist. LEXIS 25667 (W.D. Mo. Feb. 16, 2018). 

H&R Block argued that the Facebook posts were made with the intent of soliciting and influencing former H&R Block customers to visit Defendant’s new tax business. The vast majority of Defendant’s Facebook friends were his former H&R Block clients.  Many of the people who “liked” the post and commented on it were H&R block clients from the Defendant’s client list. Thus, H&R Block argued that posting to friends, who were former clients, was akin to sending them a direct message about Defendant’s new business. Moreover, Defendant actively engaged with H&R clients who commented on his post by telling them to call him.

Defendant argued that his posts on Facebook were just an electronic version of an actual physical sign stating “tax preparation,” which H&R Block had admitted would not be a breach of the non-solicitation agreement. 

The court did not buy H&R’s argument and denied the portion of the preliminary injunction application that sought to prohibit Defendant from posting on social media, requiring additional briefing from the parties on whether Facebook posts were “solicitations” under the Franchise Lease Agreement with H&R Block.  The case was subsequently resolved without the briefing. 

Similarly, in Enhanced Network Solutions Group, Inc. v. Hypersonic Technologies Corp., a subcontractor posted an open position for an outside sales representative on LinkedIn, which could be viewed by the members of a certain group, which included employees of a general contractor. 951 N.E.2d 265 (Ind. Ct. App. 2011).  The general contractor argued that the subcontractor’s post of an open position in a public group within LinkedIn violated the sub’s non-solicitation clause with the general contractor.  The court ruled that the post itself was not a solicitation even though it resulted in a particular employee contacting the subcontractor about the position: 

“The record clearly supports that Dobson made the initial contact with Hypersonic after reading the job posting on a publicly available portal of LinkedIn. In other words, Dobson solicited Hypersonic . . . . Pursuant to the terms of the Agreement, Hypersonic cannot solicit applications but the language does not prohibit Hypersonic from receiving applications from [general contractor’s] employees.”

2. Employees’ announcements of open job positions or advertising of their competing services in private groups where customers or employees are likely to see them. 

In Pre-Paid Legal Services, Inc. v. Cahill, the employer argued that a former employee’s posts providing general information about his new employer in several private Facebook groups that some of his former colleagues visited and posts about events related to his new employer on his personal Facebook page violated his non-solicitation agreement. 924 F. Supp. 2d 1281 (E.D. Okla. 2013).   Specifically, the plaintiff argued that the defendant’s posts about his new employer were meant to solicit his former co-workers to work at the defendant’s new place of employment because the defendant knew that his Facebook “friends” would see his posts. 

The court ruled in favor of the employee, finding that the posts on his publicly available page touting the benefits of his new employer’s products and his professional satisfaction with his new employer and postings in private groups which could be seen his former co-workers did not violate the employee non-solicitation agreement.   The court noted that: “[t]here was no evidence presented that Defendant’s Facebook posts have resulted in the departure of a single PPLSI associate, nor was there any evidence indicating that Defendant is targeting PPLSI sales associates by posting directly on their walls or through private messaging.”

3. Employees’ announcements of open job positions or advertising of their competing services on their own social media pages which their former customers and co-workers are likely to see. 

In Banker’s Life & Cas. Co. v. Am. Senior Benefits LLC, a former employee posted on his own profile a job opening at his new company and then sent connection requests to several employees at his former company, who would be able to see the job posting on his profile page after they had accepted his connection request. 83 N.E.3d 1085 (Ill App. (1st) (2017).  The court found that his activities did not violate the non-solicitation clause and explained it as follows: 

The generic e-mails [inviting connection from co-workers] did not contain any discussion of Bankers Life, no mention of ASB, no suggestion that the recipient view a job description on Gelineau’s profile page, and no solicitation to leave their place of employment and join ASB. Instead, the e-mails contained the request to form a professional networking connection. Upon receiving the e-mails, the Bankers Life employees had the option of responding to the LinkedIn requests to connect. If they did connect with Gelineau, the next steps, whether to click on Gelineau’s profile or to access a job posting on Gelineau’s LinkedIn page, were all actions for which Gelineau could not be held responsible. Furthermore, Gelineau’s post of a job opening with ASB on his public LinkedIn portal did not constitute an inducement or solicitation in violation of his noncompetition agreement.”

Similarly, in Eva Scrivo Fifth Ave., Inc. v. Rush, a hairstylist announced on her own Instagram page that she had joined a competing business.  No. 656723/2016, 2017 N.Y. Misc. LEXIS 3075, 2017 NY Slip Op 31699(U), ¶ 12 (Sup. Ct., NY County Aug. 9, 2017) (Slip. Op.).  The former employer argued that her post violated the customer non-solicitation clause because the hair stylist had 94 clients as her Instagram followers, and, therefore, her Instagram posts announcing her new salon were solicitations of such clients.

The hair stylist argued that her Instagram announcement was the “industry standard,” her profile was public so anyone could see or “like” her posts, and she did not solicit salon clients to follow or like her Instagram account.  In her post, she made the following announcement: 

HI ALL MY BEAUTIFUL PEOPLE! I’m proud to announce that I am officially opening my book at Marie Robinson this Tuesday NOV 1st! I’m so excited to be joining such a wonderful team and couldn’t be happier.  I hope you will all join me at the new spot for a step up in luxury and al [sic] around cooler vibes! Thank you for the support! Inbox me or email … or call and book apt today with info in bio! CAN’T WAIT!

The court denied a preliminary injunction against the hair stylist and noted that “questions remain[ed] about whether [the hair stylist] engaged in any active solicitation” when she made the two Instagram posts in question and that this issue would have to be resolved at trial. In reaching that decision, the Court pointed to two factors: (1) that the hair stylist “advertised” her new job without referencing her old employer and (2) the only persons who received the information on Instagram were those who pro-actively and voluntarily followed the stylist’s personal Instagram site, only some of whom may have been her former clients.

However,  a district court in Minnesota in Mobile Mini, Inc. v. Vevea reached a different conclusions when it reviewed similar posts by an employee announcing on his page that he had moved to a competitor and encouraging customers to contact him about the new products.  No. 17-1684 (JRT/KMM), 2017 U.S. Dist. LEXIS 116235, at *13-14 (D. Minn. July 25, 2017). 

In this case, a former employee – a sales representation for a portable storage company violated – posted the following messages on LinkedIn six months after she had left Plaintiff’s employment:

I’m excited to have joined the City-Cargo Sales Team! We lease and sell clean, safe, and solid storage containers and offices.  We are locally owned and operated, with local live voice answer.  We offer same day delivery to the Metro, and have consistent rental rates with true monthly billing. Give me a call today for a quote. 651-295-2982, and 

Call me today for a storage container quote from the cleanest, newest, safest and best container fleet in the State of Minnesota.  Let’s connect! 651-295-2982.

The former employer argued that the defendant’s LinkedIn posts were visible to her 500-plus connections, including one or more of the employer’s customers, and at least some, if not all, of these connections may have received an email notification about the new posts. The employer also pointed out to the court that when the defendant worked for the plaintiff, her branch manager specifically discussed using LinkedIn to advertise the company’s products and services. 

The Court granted the plaintiff’s request for a preliminary injunction against the defendant explaining it decision as follows: “Instead of merely announcing a job change, the language of the posts here demonstrates that Vevea’s purpose was to entice members of Vevea’s network to call her for the purpose of making sales in her new position at Citi-Cargo.”

4. “Friending” of customers after leaving employment. 

In Invidia, LLC v. DiFonzo,  a hair salon owner argued that a hair stylist violated non-competition and customer non-solicitation covenants in her employment agreement when she made a “public announcement” on her Facebook page, noting her new employment and “friended” at least eight clients of Plaintiff after she began working at the new hair salon. No. MICV20123798H, 2012 Mass. Super. LEXIS 273, 2012 WL 5576406 (Mass. Super. Ct. Oct. 22, 2012).  The defendant argued that being Facebook friends with customers did not qualify as a solicitation of such customers.  The plaintiff argued that Facebook was a significant channel of communication between plaintiff and its customers and the defendant’s posts meant to reach those customers.

The court ruled in favor of the hairstylist and explained its reasoning as follows: “[O]ne can be Facebook friends with other without soliciting those friends to change hair salons, and Invidia presented no evidence of any communications, through Facebook or otherwise, through which Ms. DiFonzo has suggested to these Facebook friends that they should take their business to her [new place of employment].”

5. Social media posts inviting the readers to check out the new employer’s website. 

In BTS USA, Inc. v. Executive Perspectives, LLC, a webpage designer, updated his LinkedIn account to reflect his new job after he had joined a competitor and authored a post  encouraging his contacts to “check out” his new employer’s website.  No. X10CV116010685, 2014 Conn. Super. LEXIS 2644, 2014 WL 6804545 (Conn. Super. Ct. Oct. 16, 2014) (unpublished order). His former employer filed a lawsuit alleging that the defendant’s LinkedIn activities violated the non-solicitation clause in his employment agreement.

The court rejected the employer’s argument nothing in the employee’s employment agreement with his former employer prohibited him from using social media and that “[i]t would be difficult indeed to find liability for such incidental contacts, when the parties to whom they are directed can choose to receive them or not.”  The court further emphasized the importance of addressing social-media solicitation prohibitions in employment agreements:

The court notes that the use of social media, whether it is Facebook, LinkedIn, Twitter, or some other forum, has become embedded in our social fabric.  Absent an explicit provision in an employment contract which governs, restricts or addresses an ex-employee’s use of such media, the court would be hard pressed to read the types of restrictions urged here, under these circumstances, into the agreement. Indeed, such an expansive interpretation of the employment contract would likely render it unenforceable as overly broad.

6. Announcements by sellers of their companies about their new competing businesses. 

As a general rule, the courts are more inclined to enforce non-compete and non-solicitation restraints that accompany a sale of a business (as opposed to an employment agreement).  In Coface Collections N. Am. Inc. v. Newton,the court entered a preliminary injunction enforcing non-compete and non-solicitation clauses in the asset purchase agreement and prohibiting the seller of the business from posting on LinkedIn about a competing business he formed subsequent to the sale. 430 F. App’x 162, 164-5 (3d Cir. 2011)

In this case, the seller of the company agreed to a non-compete and non-solicit covenants with the buyer, but formed and began operating a new company prior to the covenants’ expiration. He updated his LinkedIn profile with his position at a newly-formed competing business, and posted on Facebook to announce that his “non-compete ends on 12/31/2010″ and “I have decided that the USA needs another excellent, employee oriented Commercial Collection Agency,” and invited “experienced professionals” to apply for a job.  He also sent friend requests on Facebook to current employees of the new owner of the company, asking to view the posted notice of job openings at his competing business.  The court found that such activities violated his restrictive covenants with the buyer of his previous company. 

Similarly, in Joseph v. O’Laughlin, after defendant sold his veterinary clinic to plaintiff and agreed to a non-competition and non-solicitation covenants, he formed a limited liability company with named “O’Laughlin Veterinary Services,” created a Facebook page, and posted a link that advised followers that the clinic was “coming soon” and, when activated, directed users to the business’s location on a map. 175 A.3d 1105, 2017 Pa. Super. Unpub. LEXIS 3191 (Pa. Super. Ct. 2017).  Although the defendant argued that his Facebook post about the clinic “coming soon” and announcement of its location was merely “preparatory,” the court entered a permanent injunction prohibiting him from operating a veterinary clinic within the non-compete radius and engaging in any activity that would violate the asset purchase agreement.  Notably, the Court explained its ruling as follows: 

“Upon review of the [fifty-six page exhibit that memorialized the three-month of entries on the Facebook page], it is obvious that, collectively, the posts, “coming soon” announcement, and map directions, are tantamount to a solicitation of [] clients in contravention of the non-compete clause. . . . 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.”3

BOTTOM LINE:   Employers who are concerned about their employees’ ability to solicit customers or employees on social media after they leave should write express prohibitions on such activities into their non-compete and non-solicitation agreements and explain and define how and when the restraints will apply.  Absent such express language, the courts are not likely to enforce non-solicit or non-compete clauses absent aggravating circumstances such as repeated and aggressive client solicitation, social media posts aimed solely at the customers of the business, or a combination of social media posts with other evidence of direct and in-person customer or employee solicitation. 

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.

The Rise in Trade Secrets and Restrictive Covenants Litigation – Live Presentation

screenshot_20190107-093330_instagram-01I will be presenting with Stanley Santire of Santire Law Firm on the The Rise in Trade Secrets and Restrictive Covenants Litigation on January 17th at 2:30 p.m. at the Texas Bar Advanced Employment Law Course in Dallas, Texas.  You can get a copy of our paper by registering to attend the event (registration link here).

This is a fantastic course for employment lawyers in Texas, which offers 15 hours of CLE credit over two days.

Additional presentations will include:

  • State Law Update
  • Anti-Slapp Update
  • Conducting Effective Investigations
  • What Is it Worth? How We Value Employment Cases 
  • Proving Up Attorney’s Fees
  • Structuring Settlement Agreements
  • Practical Applications and Q&A
  • Best Practices in Summary Judgment
  • Defining Harassment: Has it Really Changed in the #metoo Era
  • Effective Training: You Need More Than a Video
  • The Evolving Landscape of LGBTQ Protections
  • FMLA and FLSA Updates 
  • Social Media Evidence and Ethics 

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.

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.

A Texas Court Enforces an 18-month, 50-mile non-compete against a Texas Veterinarian

noncompeteThe Fort Worth Court of Appeals recently upheld an injunction enforcing an 18-month, 50-mile non-compete against a veterinarian, who accepted a job with a competing veterinary clinic within the 50-mile radius of her former employer.

In Bellefuille v. Equine Sports Medicine & Surgery, Weatherford Division, PLLC (ESMS), the veterinary resident signed a non-compete and non-disclosure agreement with ESMS, which prohibited her from competing with the company within a 50-mile radius within 18 months after her residence ended. The agreement also prohibited her from using or disclosing ESMS’s confidential information.

When Bellefuille was told by ESMS that she would not get a job offer after her residency ended, she accepted a job offer with ESMS’s biggest competitor within the non-compete’s geographic area.  There, she proceeded to treat some of the same animals she had previously treated at ESMS.

After accepting the new job, the vet filed a lawsuit asking a court to declare her non-compete with ESMS unenforceable and/or that her new employment did not violate that non-compete. ESMS counterclaimed and applied for a temporary injunction order, which the trial court granted and ordered Bellefuille not to compete with ESMS or use its confidential information. The vet appealed, arguing that the injunction was overbroad, but the Fort Worth Court of Appeals found that the trial court’s injunction was proper after striking some language as being too overbroad and vague because it did not trace the language used in the non-compete agreement.

Takeaway:  There is no magic formula for enforcement of non-competes in Texas.   The statute simply says that the restraints must be “reasonable” and no greater than is necessary to protect a legitimate business interest.  However, what is a reasonable term or a geographic area for a non-compete varies from case to case and depends on many factors, including, but not limited to, the nature of the business, the industry in which the business operates, the type of job performed by the individual subject to the non-compete, whether other employees have non-compete agreements, and many other factors. In this case, the length of the vet’s employment and the specific language of the restrictions played an important role in the court’s decision to enforce the agreement.

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.

You Got a Non-Compete Injunction, But Can You Make it Stick in Texas?

imagesLast month, the Dallas Court of Appeals ruled on two temporary injunction orders – one was affirmed (i.e. it continued to be enforce) and the other one was dissolved (i.e. it was declared void). What was the key difference? The first injunction, in HMS Holdings Corp., et al. v. Public Consulting Group, Inc., complied with all the requirements set out in the Texas Rules of Civil Procedure, but the second injunction, in Medi-Lynx Monitoring, Inc., et al. v. AMI Monitoring, Inc., did not, so it was dissolved. This means that all the hard work, time and money that went into getting ready for the temporary injunction hearing and obtaining the order from the district court judge, was all for naught. 

Businesses often seek injunctions against former employees and competitors who have violated their non-disclosure agreements or non-competition and non-solicitation agreements. In such circumstances, a temporary injunction order from a court is ideal because, if granted, it prohibits a former employee or a competitor from engaging in competitive activities or using confidential information that was shared under the non-disclosure agreement while the lawsuit between the parties goes on. Thus, a temporary injunction, provides the wronged company with immediate relief and helps prevent further damage to its business by stopping the hemorrhaging of clients, employees, or confidential information. Needless to say, when a business is loosing money due to wrongful activities of a former employee or a competitor, such an injunction order can be of paramount importance. 

In Medi-Lynx Monitoring, the injunction order was declared void by the Court of Appeals because it did not set the case for trial on the merits – an express requirement under the Texas Rules of Civil Procedure. The defendant against whom the order was entered, moved to dissolve it, and the Dallas Court of Appeals granted its motion finding that the trial court abused its discretion in granting a temporary injunction that did not set the cause for trial on the merits.  

In contrast, in Holdings Corp., the temporary injunction met all the requirements specified in the Texas Rules of Civil Procedure, and, therefore, was upheld by the Dallas Court of Appeals, event though it was challenged on other grounds.  

Takeway: A party seeking a temporary injunction from a Texas court in a non-compete or a trade secrets misappropriation case should make sure that the order contains all the bells and whistles required by the Texas Rules of Civil Procedure. 

Leiza has handled multiple temporary restraining order and temporary injunction hearings and has assisted clients in all aspects of trade secret protection, from audits to litigation. 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.

Small Business Corner: Limiting Competition Through Contract Provisions

download (1)Whether you are hiring a new employee or entering in a contract with your vendor or supplier, if you are planning on giving these persons access to your business’ confidential information, such as customer lists, financial information, proprietary training materials, etc., you should make sure that the person you are sharing it with is not going to take that information and use it to compete against your business. There are several tools available to business owners to make sure that this does not happen.

When properly drafted, the following contractual provisions will serve to protect a business owner from unfair competition by a former employee or business partner:

  • Non-compete clause.  This clause prevents current employees or business partners from joining or forming a competing business after the end of their employment or business relationship with your company.  It is enforceable in Texas when certain conditions are met.
  • Non-solicitation of clients clause.  This clause prevents current employees or business partners from taking the company’s clients with them after their employment or business relationship with that company ends.
  • Non-solicitation of employees a.k.a anti-raiding clause.  This clause prevents current employees or business partners from poaching their former employer’s or business partner’s employees after the end of their employment or business relationship.
  • Non-disclosure clause.  This clause prohibits employees or business partners from using or disclosing confidential information that a company shared with them during their employment or business relationship.

To be enforceable, each clause has to be drafted specifically for your business.  There are some contract clauses that stay the same no matter what the substance of the contract or the business is – these are not those clauses.

A lot of business owners will adopt a friend’s or a former employer’s non-compete and non-solicitation agreements for their own use, or copy an agreement they found online.  However, those agreements usually work only until a company attempts to enforce them, leaving a business owner exposed to unfair competition at the precise moment when it needs the protection the most.

These copycat restrictive covenants often fail because a company that attempts to enforce them in court must show why a particular geographic area or a specified time period is reasonable for a particular employee, and explain exactly what is included in the definition of “confidential information” included in the non-disclosure clause.  This is virtually impossible to do if the agreement that the company is seeking to enforce was catered to a different company’s business, with different types of confidential information, and different employee structure.

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.

Anti-Raiding Provisions with Clients, Vendors and Subcontractors – Why It’s a Good Idea

imagesMany companies have basic non-compete provisions that prevent employees from working for a competitor for a certain period of time, but they often fail to address a situation where an employee goes to work in-house for a client of the company or jumps ship to work for a vendor, supplier, or a subcontractor of the company. While, technically, such move by an employee may not constitute “competition” with his/her former employer, a lot of times it eliminates a client’s need for the company’s services in the area that is now being covered by the new employee or it otherwise affects the company’s relationship with a vendor or a sub resulting in a reduction of revenue to the company.

One solution to this problem is including an anti-raiding provision in the vendor and client agreements, which states that the vendor/client/sub will not recruit, hire, or solicit the company’s employees.  Of course, a company is always free to waive such restraint for a particularly large client or after it receives assurances that there will be no reduction in business from the employee’s departure, but it will protect the company in all the other situations.

However, just as with other employment covenants, the anti-raiding clause must be clear and reasonable. Just last week, the Fourteenth Court of Appeals in Houston held that a sub-contractor’s anti-raiding clause did not prevent it’s contractor from indirectly employing sub-contractor’s employees.[1]

In this case, LyondellBasell hired Modis (contractor) to provide technical personnel for computer-related projects. Modis, in its turn, hired NetMatrix as a subcontractor. The sub agreement, among other provisions, stated that Modis “shall not recruit, hire or otherwise solicit” NetMatrix’s personnel assigned to the project.

Two years into the sub agreement, one of NetMatrix’s technicians quit and went to work for Millenium – another subcontractor employed by Modis. The technician proceeded to work on the same project for LyondellBassell to which he was assigned while at NetMatrix.

NetMatrix argued that Modis breached the sub agreement’s anti-raiding clause because it allowed NetMatrix’s employee to work for Modis’ other subcontractor and, therefore, it “indirectly hired” the technician in violation of the above clause.

The Court of Appeals disagreed, finding that other employment covenants in the sub agreement prohibited both “direct” and “indirect” activities, but the anti-raiding clause did not address “indirect” hiring. Therefore, it was clear that the parties meant to prohibit only direct hiring, and, consequently, Modis did not violate that clause when it allowed its sub to employ NetMatrix’s employee.

TAKEAWAYS: First, make sure that your vendor, sub, and client agreements have anti-raiding clauses. Second, make sure that the clauses are precise, reasonable, and are consistent with other restraints contained in such agreements. Finally, if you are considering waiving such a clause for a particular employee, make sure that you don’t create a permanent waiver that would render the anti-raiding clause unenforceable in the future.

[1] Although the Court applied Florida law per the parties’ agreement, similar analysis would follow under Texas law as well.

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@lewisbrisbois.com or (214) 722-7108.

Common Misconceptions About Non-Competition Agreements in Texas 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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