Texas Introduces 3 Bills To Curb Application of Anti-Slapp Statute in Non-Compete and Trade Secrets Litigation

The Texas Citizens Participation Act (TCPA), enacted by the legislature in 2011, has been wrecking havoc in business and employment disputes due to the statute’s overbroad language, confusing and conflicting interpretation by the various courts of appeals and federal courts, and defendants’ persistence in invoking the statute’s dismissal process in trade secrets and non-compete lawsuits. 

In late 2018 and early 2019, at least two Texas Courts of Appeals issued scathing opinions criticizing the statute’s dismissal mechanism being used by defendants in the run-of-the-mill trade secrets and non-compete disputes.  It appears that the legislature heard the complaints from the bench and the business community, which is why in the past week, we have seen three new bills that seek to exempt trade secrets and non-compete disputes from the grasp of the TCPA.  

HB 3547  introduced by Rep. Joe Moody (D) on March 6, 2019:

SECTION 1. Sections 27.001(2) and (6), Civil Practice and Remedies Code, are amended to read as follows: 

(2) “Exercise of the right of association” means a communication between individuals who join together to collectively express, promote, pursue, or defend common interests.  The term does not include a communication that is the basis of a claim asserting a misappropriation of a trade secret or a breach of a covenant not to compete.

SB 2162 introduced by Sen. Angela Paxton (R) on March 8, 2019 and HB2730 introduced by Rep. Jeff Leach (R) seek to amend the TCPA as follows: 

SECTION 8. Section 27.010, Civil Practice and Remedies Code, is amended to read as follows:

Sec. 27.010. EXEMPTIONS. [(a)] This chapter does not apply to:  …

(7) a legal action to enforce:
(A) a noncompete agreement;
(B) a nondisclosure agreement; or
(C) a non-disparagement agreement.

The bills contain many other amendments to the statute that are unrelated to trade secrets and non-compete litigation and they face tremendous opposition from the press. For example, the Reporters Committee for Freedom of the Press issued a press release stating its concern that “HB 2730 and SB 2162  would, if enacted, significantly undermine key parts of TCPA and, therefore, speech protections in Texas.”  Therefore, their passage remains an open question. 

We will continue to monitor their progress through the legislature and will provide an update if they pass. 

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.

My Employer Defamed Me to the Government! Not So Fast, Says the Texas Supreme Court.

dojIn Texas, a person cannot be sued for defamation for statements made in judicial or legislative proceedings. However, the rule has not been so clear with respect to statements made before such proceedings begin, such as those made during an internal investigation of employee misconduct by employer. Last week, the Texas Supreme Court in Shell Oil Co., et al. v. Writt held that a company’s statements made during an internal investigation while a company itself is under investigation are absolutely privileged against defamation, i.e. what a company says about an employee in that situation cannot serve as grounds for defamation.

In this case, the Department of Justice (DOJ) approached Shell about their investigation of one of the company’s subcontractors for violation of the Foreign Corrupt Practices Act (FCPA).  The DOJ suspected that the subcontractor was paying bribes to local officials in violation of the FCPA.

Understanding that Shell could face similar charges if its employees knew about the subcontractor’s violations, Shell cooperated with the DOJ and conducted an 18-month long internal investigation into its employees. As a result, it provided the DOJ with a report that stated that one employee was aware of “several red flags” concerning the subcontractor’s activities. In addition to providing the report to the DOJ, Shell terminated the employee, stating in the termination letter that the employee’s conduct was a “significant, substantial and unacceptable” violation of the company’s General Business Principles and Code of Conduct.

The employee sued Shell for defamation and wrongful termination based on the statements in the company’s report provided to the DOJ, claiming that the company falsely accused him of approving bribery payments and participating in illegal conduct. Shell sought a summary judgment on the grounds of absolute privilege, and while the motion was pending, the DOJ charged Shell with violations of the FCPA. It then entered into a deferred prosecution agreement because of the company’s cooperation in the investigation. The trial court granted Shell’s summary judgment motion, but was reversed by the court of appeals, to be later reversed by the Texas Supreme Court.

As the Supreme Court explained – in Texas, any statements made during judicial or legislative proceedings are protected from a claim of defamation. Additionally, statements that are made preliminary to a proposed judicial proceeding or as part of a judicial proceeding in which a person is testifying, are also immune from defamation claims if they have some relation to the proceeding.

Thus, statements made before a judicial proceeding has been initiated will still be privileged from defamation as long as: (1) the statements relate to the contemplated proceeding and (2) the party making the statements in good faith believes that it will be a party to the proceeding once it is initiated.

In this case, because the DOJ told Shell that it was investigating its employee and Shell, Shell’s report was given to the DOJ as part of the ongoing DOJ investigation, Shell compiled and provided the report under serious and good faith contemplation of a judicial proceeding – the statements in the report were privileged from defamation, and the employee’s claim against the company arising out of such statements failed.  The result would have been different if Shell had provided the report voluntarily, without the threat of prosecution from the DOJ.

TAKEAWAYS:  Under Shell Coruling, if a company’s internal investigation is conducted under a threat of being involved in litigation, any statements about third parties that are related to such potential litigation and are made during the investigation are likely to be protected from defamation claims. However, a company that voluntarily provides information to a government agency without a threat of prosecution might not have that protection.

This case is a great example of how complicated defamation law can be in Texas. Contrary to the media’s portrayal of defamation lawsuits, very few of those cases are straightforward, as that area of law is full of nuances, privileges, and defenses. When in doubt, an employer should consult with an attorney before making any statements about a former (or current) employee to third parties, including government agencies.

Leiza Dolghih practices business and employment litigation and often advises employers on how to prevent or minimize the risk of litigation before it occurs.  For more information, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Providing Reference for a Former Employee – What Can an Employer Say in Texas?

SteveCarellOffice.BMost employers at some point get a call asking for a reference for one of their former employees. For good employees such call is not a problem, but for those who were fired or let go due to performance issues, violations of a company policy, or commission of a crime – the employer often faces a choice of not saying anything so as to avoid a defamation claim by the former employee or warning the potential employer of the former employee’s prior history. So, how much exactly can a former employer disclose to a potential employer without facing a defamation lawsuit from the employee?

From a legal stand point, in Texas, truth is an absolute defense to defamation.  Thus, if what you are telling the new employer is true, then it cannot be defamation. From a practical standpoint, however, you should consider how easily could you prove that what you were saying about the employee was true. For example, if you decide to tell the new employer that you fired John Doe because he stole company property – if John Doe filed a suit against you, could you prove it in court that he did so?  The answer is rarely a resounding “yes.” More likely, if push came to shove, it would be the former employer’s word against the employee’s. Thus, even telling the truth about a former employee, may result in a lawsuit (and thousands in attorney’s fees) unless the employer has some proof that its statements were true.

Texas also recognizes that statements by a former employer to a prospective employer are “privileged” (or protected from a defamation claim), unless an employer made such statements with “actual malice.”  Actual malice has nothing to do with bad motive or ill will, but requires proof that the former employer made the statement either knowing that it was false or with reckless disregard of the truth of falsity of the statement. Some courts have labeled it as “calculated falsehood.”  Failure to investigate facts before speaking is not proof of actual malice.  However, making a statement  while entertaining “serious doubt” as to its truth could constitute actual malice.

Conclusion: Employers should be careful when they provide references to their former employees. While a former employer’s statements to a prospective employer are generally privileged (i.e. protected from defamation), if the former employer made false statements that caused an employee to lose his job or offer of a job, s/he might face some serious liability.

On the employee side, unless the employee has at least some proof that his or her former employer made false statements about the employee or had serious doubts about the truth of such statement, the employee bringing a defamation claim might have to pay the former employer’s attorney’s fees in defending against the lawsuit under the Texas Citizens Participation Act (TCPA), as I have previously explained here and here.

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

The Fifth Circuit Addresses the Texas Anti-SLAPP Statute and the Commercial Speech Exemption for the First Time

Three years ago, Texas enacted its own anti-SLAPP statute, appropriately titled the Texas Citizens Participation Act (TCPA). Since then, many defendants have taken advantage of the TCPA‘s quick dismissal procedure when confronted with suits for defamation, business disparagement, or other claims arising out of the defendants’ exercise of their right of free speech, right to petition, and right to association. Because the statute is so new, however, many of the issues surrounding its application in Texas have not yet percolated through the appellate level, which makes the Fifth Circuit Court of Appeals‘ analysis of the “commercial speech” exemption under the TCPA last week in NCDR, L.L.C., et al. v. Mauze & Bagby, P.L.L.C. particularly important.[1]

Factual Background

NCDR, LLC d/b/a Kool Smiles is a national chain of dental clinics. Mauze & Bagby is a personal injury law firm in San Antonio, Texas. In 2012, the law firm began an advertising campaign seeking to represent former Kool Smiles patients in a lawsuit against the chain. As part of this campaign, M&B ran television, radio, and internet advertisements, and developed a website that strongly implied, or even accused, Kool Smiles of performing unnecessary and/or harmful dental work on children to obtain government reimbursements.

Kool Smiles sued M&B, asserting, among other claims, business disparagement, defamation, and injury to business reputation. The law firm moved to dismiss the suit under the TCPA arguing that its campaign was a protected expression of free speech. However, both the trial court and the Fifth Circuit Court of Appeals found that M&B was not entitled to the protection afforded by the TCPA because its advertisements were commercial speech.

The TCPA and the Commercial Speech Exemption

The purpose of the TCPA is to protect the right of people “to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of a person to file meritorious lawsuits for demonstrable injury.” Tex. Civ. Prac. & Rem. Code Ann. § 27.002. To achieve this, the TCPA provides that if a legal action is based on, relates to, or is in response to a party’s exercise of the right of free speech, right to petition, or right of association, the defendant may file a motion to dismiss the lawsuit within sixty days of being served with the complaint. Id. § 27.003(a). Only very limited discovery is allowed until the court rules on the motion to dismiss. Id.

The TCPA requires the court to dismiss the lawsuit if the defendant shows by a preponderance of the evidence that the legal action is based on, relates to, or is in response to the party’s exercise of the right of free speech, right to petition, or right of association. Id. § 27.005(a)–(b). In order to avoid the dismissal, the plaintiff must establish by clear and specific evidence a prima facie case for each essential element of each claim. Id. § 27.005(c).

The “commercial speech” exemption to the TCPA disallows this quick dismissal procedure when:

. . . a legal action [was] brought against a person primarily engaged in the business of selling or leasing goods or services, [and] the statement or conduct arises out of the sale or lease of goods, services, or an insurance product or a commercial transaction in which the intended audience is an actual or potential buyer or customer. Tex. Civ. Prac. & Rem. Code Ann. § 27.010(b).

The Fifth Circuit’s Analysis

The Fifth Circuit looked at four cases decided by the Texas Courts of Appeals that addressed the commercial speech exemption. Two addressed whether a defendant’s action “arises out of the sale or lease of goods, services, or an insurance product.” The other two address whether the intended audience is “an actual or potential buyer or customer.” In all four cases, the courts of appeals found that the commercial speech exemption did not apply.

  • In Newspaper Holdings, Inc. v. Crazy Hotel Assisted Living, Ltd., the First Court of Appeals held that the newspaper articles exposing compliance problems at Crazy Hotel and published by Newspaper Holdings did not “arise out of the sale of the goods and services” that the newspaper sold – newspapers. The commercial speech exemption, therefore, did not apply and the Court granted the newspaper’s motion to dismiss under the TCPA.
  • In Pena v. Parel, the Eighth Court of Appeals held that a letter to a parole board from a client’s attorney did not arise from “the sale of goods, services or insurance product.”

After analyzing the above-listed cases, the Fifth Circuit Court of Appeals ruled that this case was different and that M&B’s statements made in the advertising materials constituted commercial speech because they: (1) arose out of the sale of M&B’s legal services, and (2) were intended for M&B’s potential customers – people who had used Kool Smiles’ services and who wanted to file a lawsuit against them.

Takeaway

The Texas Citizens Participation Act is still very new and the case law interpreting the statute is still developing. However, the NCDR decision strongly suggests that any business advertisements directed at the current or potential clients are not protected by the TCPA.  Thus, a business whose advertisements contains negative statements about another business or individual should consider the possibility that it will not be able to use the TCPA to quickly dismiss a defamation or a business disparagement lawsuit arising out of such statements if one is filed.

For more information regarding defamation and business disparagement claims in Texas, contact Leiza Dolghih.


[1] While the Fifth Circuit Court of Appeals‘ analysis of the TCPA is not binding on the Texas state courts per se, it is instructive since the Court must “interpret[] the state statute the way the state supreme court would, based on prior precedent, legislation, and relevant commentary.” Since the Texas Supreme Court has not yet interpreted the TCPA, the Fifth Circuit‘s analysis of the “commercial speech” exemption is the next best thing.

Freedom of Speech v. Defamation: The Texas Citizens Participation Act

In 2011, the Texas legislature passed the Texas Citizens Participation Act (TCPA), meant to curtail the Strategic Lawsuits Against Public Participation (SLAPP) often filed by businesses or other moneyed interests in retaliation for negative comments or complaints made by regular citizens.  The goal of SLAPP lawsuits is not necessarily to win, but to force the defendants to withdraw their statements and to silence them under the threat of costly litigation.

The TCPA protects Texans’ right to free speech by allowing defendants sued for defamation, business disparagement, or other speech-related torts to quickly dismiss lawsuits before the costly discovery begins and automatically recover legal fees if they succeed. By passing the TCPA, Texas joined 27 other states that have similar statutes.

Last week, the First Court of Appeals applied the TCPA to dismiss a lawsuit brought by an assisted living facility against a newspaper that published a number of articles discussing regulatory compliance problems and government investigations into the facility.  Newspaper Holdings, Inc. et al.  v. Crazy Hotel Assisted Living, Ltd., et al.provides a great example of when and how the TCPA applies.  See also Better Business Bureau of Metropolitan Dallas, Inc. v. Ward and Better Business Bureau of Metropolitan Dallas, Inc. v. BH DFW, Inc. discussing how negative ratings of businesses are protected by the TCPA.

In this case, the defendant newspaper published a number of articles about problems encountered at Crazy Hotel assisted living facility and the ensuing government investigations of such problems. Crazy Hotel filed a lawsuit for defamation, business disparagement and tortious interference against the newspaper and its source.  The defendants filed a motion to dismiss the lawsuit, invoking their free speech rights under the TCPA.   The trial court denied the motion to dismiss, but the First Court of Appeals reversed and remanded the case for dismissal.

The Court of Appeals explained that the purpose of the TCPA is to “encourage and safeguard the constitutional rights of persons to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of persons to file meritorious lawsuits for demonstrable injury” and the TCPA was to be construed liberally to effectuate its purpose and intent fully.  §§27.002, 011(b).

Motion to Dismiss Standard under the TCPA

In order to dismiss the lawsuit under the TCPA,  the court must find that (1) the defendant has established by preponderance of evidence that the legal action is based on, related to, or is in response to the defendant’s exercise of the right of free speech, the right to petition, or the right of association; AND (2) the plaintiff has failed to show by clear and specific evidence a prima facie case for each essential element of its cause of action(s).  TCPA §27.005(b), (c).

The TCPA defines “the exercise of the right of free speech” as “a communication made in connection with a matter of public concern,” which includes, among other things, issues related to “health and safety,” and “environmental, economic, or community well-being.” TCPA §27.001(7) (A), (B).  Here, because the newspaper articles that gave grounds to the lawsuit related directly to Crazy Hotel’s obligations to fulfill the licensing requirements and standards applicable to the assisted living facilities under the Texas Health & Safety Code, the Court of Appeals found that they related to a matter of public concern.

The Court of Appeals also found that Crazy Hotel failed to introduce clear and specific evidence that any of the statements made in the newspaper articles were false or that the newspaper was negligent in making such statements, thus failing to show prima facie evidence in support of its claims.

Commercial Speech Exemption from the TCPA

Crazy Hotel argued that the TCPA did not apply to the statement made by the newspaper because it was a commercial and not non-profit organization and because the statements constituted commercial speech not protected by the TCPA.  TCPA §27.001(b).  The Court of Appeals, however, found that because the articles did not “arise out of the sale of lease” of newspapers, the commercial speech exemption did not apply, and to interpret the statute otherwise would defeat the purpose of the TCPA.

PRACTICAL IMPLICATIONS:

If you are facing a defamation, business disparagement, or tortious interference lawsuit, or if you are considering filing one,  make sure  you consider how the TCPA will affect the claims.  As a general rule, any statements regarding matters of public concern are likely to be protected under the TCPA.  On the other hand, statements made in connection with the sale or lease of goods, services, or an insurance product or a commercial transaction intended for potential buyers or customers are not protected.  A claim that the TCPA applies will necessarily lead to compliance with strict procedural requirements set out by the statute.

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