Trump’s Tax Reform Affects Settlements of Sexual Harassment Claims, But Training Remains the Best Answer

sexual harassmentJust days before we rang in 2018, in the wake of the #MeToo movement, the Tax Cuts and Jobs Act became the law, including the special clause titled “Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection with Sexual Harassment or Sexual Abuse.”

Prior to this statute, the law allowed companies to claim tax deductions for settlements of sexual harassment and abuse claims and for attorney’s fees incurred in defense of such claims, even if the settlement agreements were confidential, which they usually were. 

Now, if a settlement agreement prevents a harassment or abuse victim from publicly sharing details about the claim, then the company paying the settlement cannot deduct from taxable income the amount of the settlement or the attorney’s fees incurred in reaching the settlement agreement. 

However, while the title of the section declares a lofty goal, its implementation and the practical effect remain less than clear.  In particularly, the following questions remain:

  1. Where the settlement agreement settles more than just a sexual harassment or sexual abuse claim, can the company still claim the deduction?
  2. Will this law encourage the companies to segregate attorney’s fees between sexual harassment allegations and other types of discrimination or claims alleged by the settling employee?
  3. Will this law incentivize employees to add a sexual harassment/sexual abuse claim to other claims simply to put additional pressure on the company?
  4. Will this law drive the companies to misclassify the types of claims that are being settled or seek a general release of all employment claims (without specific mention of sexual harassment/abuse claim) in order to get the deduction?
  5. Will a general release of all claims against the employer result in its inability to get a deduction because sexual harassment and abuse claims are included in such a release?
  6. Will this law result in more companies attempting to litigate the sexual harassment / sexual abuse claims rather than reach settlement agreements, especially on those claims that are weak and/or not supported by evidence – the so-called “nuisance claims”?

This law goes into effect on January 1, 2018 and will not affect the 2017 taxes.  Until the implications of this statute come into focus, companies should consult with their attorneys regarding whether to include a non-disclosure provision in a settlement agreement if any claim of sexual harassment or sexual abuse was made by the claimant.

While the uncertainty of the answers to the above questions remains, the best course of action for companies is to keep investing into quality anti-discrimination and anti-harassment training so as to avoid the sexual harassment claims in the first place. 

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.

 

 

Renewing Non-Disclosure Agreements with Employees? Consider this . . .

sale baIn my practice, I see this scenario all the time: an employee leaves to work for a competitor, the employer realizes that its non-disclosure (NDA) or non-compete agreement was inadequate to protect it from what just happened, so the company rolls out a new (and improved) non-disclosure or non-compete agreement and makes all employees sign it.   

The legal department now sighs with relief, the HR department gets a pat on the back, and the new NDAs and non-competes get filed away in employees’ personnel files to be whipped out when the next employee defects for greener pastures. What could possibly go wrong now that the company has a perfect non-compete / non-disclosure in place with all the employees, right?

A recent case out of the Fourteenth Court of Appeals demonstrates exactly how a perfectly drafted non-disclosure agreement can still end up being unenforceable when an employer fails to provide new consideration for the agreement. In Eurecat US Inc. v. Marklund, et al.,  Eurecat sued two of its former employees who started a competing business, alleging that they stole trade secrets and proprietary data, breached fiduciary duties and breached their NDAs with plaintiff.

Eurecat’s claims were based on the NDAs that the two employees signed in 2011. The Court of Appeals held that these agreements were not supported by consideration and were unenforceable because, prior to 2011, both employees were already required to maintain confidentiality of Eurecat’s trade secrets under the prior versions of the NDAs.  The only consideration stated in the 2011 NDAs was continued employment at-will.  Eurecat did not promise to provide new confidential information to the employees after they had executed the 2011 NDAs, but only stated that they “may” learn such information.  At trial, Eurecat failed to show that its claims for breach of the 2011 NDAs were based on disclosure of confidential information it provided to the employees after January 21, 2011 that differed from information they previously possessed.  In fact, Eurecat was unable to show that it provided any new confidential information that was different from what the employees had received from Eurecat prior to signing the NDAs.  The Court, therefore, affirmed the jury’s verdict that the employees did not breach their non-disclosure agreements with Eurecat.

BOTTOM LINE FOR EMPLOYERS: Periodic updates of employment agreements, including non-compete and non-disclosure restraints, are necessary to make sure that the agreements comply with the new legal developments.  However, companies should always make sure that the new agreements are supported by new consideration, whether it is new confidential information, a bonus, or some other type of consideration. (check your state laws to make sure that the type of consideration provided to an employee meets the state requirements to support restrictive covenants). 

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. 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. 

 

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

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

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

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

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

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

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

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

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

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

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

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.

10 Tips on Preventing Trade Secrets Theft by Employees Who Work from Home

workfrom homeIn 2013, Marissa Mayer’s memo to Yahoo employees cancelling Yahoo’s work-from-home policy sparked a debate on whether working from home hurts or benefits companies, and whether any cost-savings associated with such an arrangement are outweighed by a decrease in productivity of remote employees. Very few critics, however, discussed the added risks of trade secrets theft by remote employees.  It seems that many companies put a lot of emphasis on in-the-office security measures, but apply a much laxer set of rules to those who work from home. Because of that approach, the work-from-home arrangements often become the Achilles heel of the companies’ security measures.

Here are 10 tips on how to eliminate, or at least reduce, the risk of trade secrets theft by remote employees:

1. Do Not Allow Employees with Access to Highly Sensitive Information to Work from Home. While almost every employee would prefer to work from the comfort of their home, when a high-level employee has access to a highly sensitive information, working from home should not be an option.  The risk of somebody duplicating or downloading the company’s proprietary information at their “home office” is much higher than in the regular workplace. So, have your key employees come in the office if they are going to handle your top-level proprietary information.

2. Have Remote Employees Sign Confidentiality and Non-Disclosure Policies.  If a company allows its employees with access to less sensitive but still confidential information to work from home, it should require employees to execute a non-disclosure and confidentiality policy that describes what types of information the company considers confidential and what repercussions the employees will face if they violate the policy.

3. Have Log-In Reminders Emphasizing Confidentiality.  If employees are required to log into a proprietary software or a program that contains the company’s proprietary data, have the software vendor create a pop-window that reminds the employees when they log in that they are accessing confidential information.  This acts as a constant reminder to the employees that the data they are accessing does not belong to them.

4. Allow Remote Employees to Work Only on Company-Issued Computers.  There is no question that allowing employees to do work from home on their own laptops, saves companies on the costs of purchasing, maintaining, and upgrading the equipment. However, those savings can be easily dwarfed by legal costs should an employer want to examine an employee’s personal computer for evidence of trade secrets theft. When an employee uses a company-owned laptop, the company can easily retrieve it from the employee upon request.  However, when an employee uses his or her personal device, the company’s road to retrieval of its data from that device becomes much thornier (and much more expensive).

5. Have A Remote-Wipe or Lock-Out Measures. This is a no-brainer and is a must for every company that allows employees to work remotely. A company’s IT department should be able to quickly terminate any remote employee’s access to proprietary information. It should also be able to wipe the company’s confidential information from the employees’ devices, when appropriate.

6. Control Access to Confidential Information. Not every remote employee needs to access every software program or every database that a company has.  Determine which employees need access to what types of programs or data, and keep track of that information as part of their personnel file.  When such employees are terminated, the company should have a clear idea of what they had access to and what they could have potentially taken with them. This is especially important for employees who have non-compete or non-solicitation agreements.

7. Monitor What Accounts, Programs, or Devices Are Used by Remote Employees. Whether a company is using a cloud-based sharing system, VPN, or is allowing its employees to log into particular databases online, somebody at the company should monitor the use and flag any suspicious activity. The level and frequency of monitoring will depend on the size of the business, the type of the confidential data, and the manner in which such data is kept.

8. Set Up Red Flag Alerts, if Possible.  A company should work with its IT department and software vendors to determine if they can set up alerts that would notify the company when somebody downloads or copies an unusually large amount of data, prints an unusually large number of documents, or deletes a large amount of information from the company’s system.

9.  Have A System in Place for When You Need to Recover Company-Issued Computers. Figure out ahead of time whether, upon a remote employee’s termination, the company will be sending somebody to their house to collect company equipment or will be requiring them to return the equipment themselves. Whatever the system is, getting company equipment quickly after an employee’s termination, should be a priority.

10.  Plan Ahead Before Terminating a Remote Employee. There is a reason why a fired employee is usually walked out of the office right away. Being upset about getting fired may cause some employees to destroy company property or take it with them as a way of payback to the employer.  This is even a bigger concern for remote employees, as there is a time gap between them receiving a termination notice and a company being able to get its equipment back. Therefore, it is crucial for a company to be able to terminate remote employees’ access to sensitive information swiftly, instruct them clearly on how to return the company’s equipment, and follow-up with enforcement if an employee fails to follow the instructions.

Some of the above measures are cheap and easy to implement (e.g., written policies).  Others, require assistance of an IT person or a department or a purchase of a costly monitoring software.  It is up to each company to determine whether the confidential information that their remote employees work with justifies the cost of implementing the above measures.  However, every company that has employees that work from home, should at least analyze its weak spots with respect to its proprietary information, and determine how it can reduce the potential of data and trade secrets theft by remote workers.

If you suspect that your business’s trade secrets have been misappropriated or you are looking to implement measures within your organization that will prevent or minimize the chances of trade secrets being misappropriated, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.