What is a “Reasonable” Non-Competition Agreement?

Most states will enforce reasonable non-competition agreements, but what is “reasonable” and how the courts reach that conclusion varies.  In Texas, there are some rules of thumb as to what is generally considered reasonable.  A recent opinion from a federal court in Austin illustrates these rules as well as what happens when an employer attempts to enforce an overbroad, i.e., “unreasonable” non-competition agreement. 

In this case, a company that provides management services to amenity facilities, spas, and health clubs, sued its former employees for breaching their non-compete agreements after they went to work for a competitor.  Among many claims that the company brought in the lawsuit, it specifically asked the Court to enforce the non-compete agreements and enjoin (i.e. prevent) the former employees from competing with it for 12 months. 

The employees’ non-compete agreements prohibited them from being “employed in a business substantially similar to or competitive with” the company for a year after leaving its employment.  The agreements were not limited in their geographic scope or in the scope of activities to which they applied.  The court stated that the company prohibited its former employees from working for its competitors anywhere in the country, even if a competitor was based outside the geographic area where the employees worked.  It also barred the employees from working for a competitor “in any capacity” and, therefore, was not related to the employees’ duties while they worked for the company. 

The court explained that in Texas, “the hallmark of enforcement [of non-compete agreement] is whether or not the covenant is reasonable.”  Generally, a reasonable area for purposes of a covenant not to compete is considered to be the territory in which the employee worked. Furthermore, noncompete agreements barring an employee from working for a competitor in any capacity are invalid.  To be valid, the restrictions on the scope of the employee’s activities at a new company have to bear some relation to the activities of the employee at the old company.  In the case above, the court specifically noted that the company failed to “articulate how [its] broad non-compete agreements [were] necessary to protect its business interests,” which is another requirement for an enforceable non-compete agreement in Texas. 

The company in this case will get another chance to address the above issues and produce some evidence supporting the reasonableness of its restraints at the temporary injunction hearing in a few weeks. However, the court’s denial of the company’s request for a temporary restraining order means that the employees in question remain free to continue to work for the company’s competitor until the hearing. 

BOTTOM LINE:  When it comes to non-compete agreements, “reasonableness” is the name of the game, and while employers often want to err on the side of safety and put in longer and larger restrictions thatn what might be necessary, doing so can backfire when an employer has to enforce its agreement in court. Setting non-compete restrictions should not be done off-the-cuff, but should be a strategic and well-thought-out decision supported by legitimate business reasons. 

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. 

 

 

Non-Compete Agreements: Garbage In, Garbage Out

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

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

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

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

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

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

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

 

 

A Famous Dallas Chef Defeats an Injunction Based on “Unclean Hands” Defense, Can Now Use His Name

Foodie or not, if you live in Dallas, you have probably been to one of Kent Rathbun’s restaurants.  And if you read Dallas Observer, you have probably read about Rathbun’s ongoing legal battle with a former business partner, which involves the right to use Rathbun’s name and likeness in the restaurant industry.  If not, this D Magazine article can you fill you in on why Rathbun’s name is a big deal, and this Dallas Observer article can catch you up on the acrimonious relationship and the arising legal woes. 

While the case is ongoing, this past Friday, the Dallas Court of Appeals issued a ruling in Rathbun’s favor on the basis of the “unclean hands” defense, which is often alleged, but rarely supported, in non-competition disputes.  

By way of background, back in 2009, Rathbun assigned the rights to his name and likeness to an entity he co-owned with his then-business partner. After they parted ways, Rathubun filed a lawsuit seeking a declaration from the Court that the assignment was a “covenant not to compete” and was unenforceable because it failed to comply with the requirements of the Texas Covenants Not to Compete Act (see my previous post on the requirements here). 

In response, the former partner sought an injunction from the Court prohibiting Rathbun from using his name or likeness while the parties litigated their dispute based on the assignment agreement. During the temporary injunction hearing, Rathbun introduced (1) deposition testimony of his former business partner regarding his knowledge of Rathbun’s lack of business sophistication and his fiduciary duties owed to Rathbun and (2) deposition testimony that the company to which Rathbun assigned the rights to his name might have assumed some liabilities without full disclosure to Rathbun, even though he was a part-owner at that time.

The trial court denied the injunction, allowing Rathbun to keep using his name as long as he did not disparage his former partner, and the Dallas Court of Appeals upheld the denial. While it refused to consider whether the assignment agreement was a “covenant not to compete” covered by the Texas Covenants Not to Compete Act, it did find that the deposition testimony described above presented sufficient evidence to support the “unclean hands” defense asserted by Rathbun. 

The unclean hands defense “allows a court to decline to grant equitable relief, such as an injunction, to a party whose conduct in connection with the same matter or transaction has been unconscientious, unjust, or marked by a want of good faith, or one who has violated the principles of equity and righteous dealing.”  Here, the Court found that there was some evidence that the company that was now trying to enforce the assignment acted inequitably when it failed to fully disclose to Rathbun that it had assumed certain liabilities, which burdened him as a part-owner of the company.  Consequently, its unclean hands prevented it from obtaining an injunction against Rathbun.

BOTTOM LINE: While the Court of Appeals’ ruling in this case is not a final decision on the merits of this defense and can still be appealed to the Texas Supreme Court, it does provide a glimpse into what type of behavior by a party who seeks an injunction may rise to the level of “unclean hands” such that the party is prevented from getting injunctive relief. 

Companies should be aware that when they seeks to enforce a non-compete agreement, their own behavior can often be scrutinized for any signs of unfair or bad faith conduct that may be used to deny the injunctive relief.

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

Enforcing Non-Compete Agreements in Arbitration in Texas

non-compete-agreement-lawyer-philadelphia

When it comes to enforcing non-compete agreements, companies usually want to stop the bleeding right away.  This is usually done by obtaining a temporary injunction in court, which preserves the status quo and prevents the departed employee from competing with the former employer while the parties sort out whether the agreement is enforceable against that employee, whether its restraints are reasonable, and what damage has been caused by the employee’s competition in violation of the non-compete agreement.

For those companies that have arbitration agreements with their employees, a noncompete violation will usually have to be arbitrated.  And while an arbitration may generally provide a faster, cheaper, and more confidential route for resolving a noncompete dispute than litigation, it can be an inferior process when it comes to obtaining a temporary injunction in a situation where time is of the essence.

While the relevant arbitration rules usually allow an arbitrator to grant a temporary injunction or enter some sort of preliminary relief, a company that wishes to obtain such relief must first select an arbitrator and then schedule a hearing.  These steps can result in a loss of precious time – days or weeks during which the departed employee has the time to ramp up the competition, destroy relevant evidence and cover his tracks.  In contrast, the same company may obtain a temporary restraining order in court the same day it files a suit to enforce the non-compete agreement.

For that reason, every arbitration agreement should have a carve out for injunctive relief – the clause that allows a company to obtain a temporary restraining order as soon as it learns of a violation of the non-compete agreement.  Once the company has the court order in hand, it may safely proceed with an arbitration and take its time to investigate the violation and lay out its case. 

In deciding whether to arbitrate a non-compete dispute, seek a temporary restraining order from a court, or both, companies should consider the following  issues:

  1. Does the company arbitration agreement have the necessary language to allow the company to obtain a temporary relief in court?
  2. Will the company be waiving the arbitration clause by obtaining emergency relief in court? Hint: A recent case from the Houston Court of Appeals held that seeking injunctive relief in court does not waive an arbitration clause if its purpose is to simply preserve the status quo.  See Fisher v. Carlile, et al.
  3. Should the company file a claim of arbitration first and then seek an injunction in court or vice versa?

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. 

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


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

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

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

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

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

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

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

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

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

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

What Should a Company do When it Suspects That an Employee Stole Its Trade Secrets?

preciousEmployees take their employers’ trade secrets all the time. It’s a fact of life.  No matter what systems an employer has in place, sooner or later a key employee will depart and take some trade secret information, data, or documents with them. Most employees take trade secrets because that information will help them land a better job or open a competing business. Some take it because they believe that the information belongs to them since they worked on it or created it. Whatever their reasons may be, the loss of competitive advantage resulting from the disclosure of trade secrets to competitors or release of that information in the open market may cause significant, and often irreparable, damage to the former employer.

So, what should a company do if it suspects trade secrets theft by a former employee?

First, the company should identify and collect all of the employee’s electronic devices in its possession – desktop computers, laptops, tablets, company-issued phones, and any other devices that the employee used during his work and that may contain company information.

Second, the company should have a qualified forensic examiner image the devices to preserve the relevant electronic evidence that may show whether the employee used any of these devices to copy or transfer the trade secret information and then search such devices for relevant evidence.  This should be done pursuant to a protocol devised by the examiner and a legal counsel to ensure that the evidence will later hold up in court.

Third, the company should search the employee’s emails for any evidence of trade secrets transfer.

Fourth, the company should interview its employees and/or third parties who may have relevant information.

** The company must move quickly and have an attorney supervise and coordinate the above efforts to make sure the collected evidence can later be used in court (i.e. is admissible) and to make sure the relevant communications are protected by the attorney-client privilege.

Fifth, if the company discovers evidence of trade secrets theft, it should file a lawsuit and seek a temporary injunction – a court order – prohibiting the former employee and anybody else acting on his/her behalf from using or disclosing the company’s trade secrets.  While this may be costly, this is the only effective way to stop the employee before he or she uses or discloses the trade secrets or does significant damage to the company.

Here is a real-life example where the above steps worked and helped a company stop a former employee from opening a competing business using the company’s trade secrets. 

Earlier this year, I wrote about a case that involved a Texas employer who followed the above steps and was able to obtain a temporary injunction and then a permanent injunction shutting down a competing business that a former employee opened using the gym’s trade secrets.  In that case, a Houston gym filed a lawsuit against its former regional vice president and his wife claiming that they took the gym’s confidential information and opened their own competing gym and medspa.  The gym obtained a temporary injunction against the former employee and his new company within four days of filing the lawsuit because it had emails and other electronic evidence establishing the trade secrets copying and transfer by the VP.

Just recently, the court in that case issued a permanent injunction prohibiting the former VP from opening or operating any new locations of his gym and medspa through September 2017 and from opening any gyms within a seven-mile radius of any of Life Time’s 123 existing locations, as well as employing or attempting to employ any current or former Life Time employees.

Additionally, within 20 days of the court order, the VP and his wife were required to return or destroy all of the gym’s documents and information still in their possession. After no more than 25 days, they had to provide the court with a declaration confirming that all sensitive data has been secured. Finally, between 20 and 90 days after the ruling, a forensic computer specialist “[had] the right to inspect and audit any computer systems” belonging to the VP, his wife, his business associate, and their gym to ensure that they had destroyed or permanently deleted the gym’s trade secrets.  This outcome would not have been possible, had the company  not followed the steps outlined above.

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

A Texas 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.

The Far-Reaching Claws of the Texas Non-Compete Statute

Wait-what-meme-rage-faceA recent case from a Texas Court of Appeals demonstrates that the Texas non-compete statute applies not only to the employment agreements or sale of business contracts, but to any contracts that contain provisions restraining trade.

In Wharton Physician Services, P.A. v. Signature Gulf Coast Hospital, L.P., the Corpus Christi Court of Appeals found that a liquidated damages clause in a recruiting contract was unenforceable under the Texas non-compete statute.

Gulf Coast hired Wharton to provide hospitalist services and to coordinate the hiring of individual physicians for Gulf Coast.  Their agreement contained the following clause that allowed Wharton to demand $100,000 in liquidated damages if Gulf Coast hired any of the physicians that Wharton had previously presented to Gulf Coast if the hiring took place within 6 months after Wharton’s contract’s termination:

If this Agreement is terminated by either party for any reason, then HOSPITAL [Gulf Coast] shall have the right to contract directly with all or some of the Hospitalist Physicians retained by GROUP [Wharton] to perform the services required by the terms of this Agreement . . . In the event that HOSPITAL, or any individual or entity otherwise affiliated with HOSPITAL, for work or services that would be provided at HOSPITAL, desires to contract directly with one or more of the HOSPITALIST physicians previously recruited retained, and presented to HOSPITAL by GROUP for hospitalist services at any time during the six (6) months period following the termination of this Agreement, HOSPTIAL shall pay to GROUP as liquidated damages in amount of $100,000 per physician.

The Court of Appeals applied the standard non-compete analysis to this liquidated damages clause finding that while the recruiting agreement itself was enforceable, the liquidated damages clause was not because it was a restraint on trade that was not supported by independent consideration.  The court explained its reasoning as follows:

“Gulf Coast promised to pay Wharton for services and Wharton promised to perform those services; however, none of those obligations amounted to additional consideration for Gulf Coast’s promise not to hire any physicians if the contract between Wharton and Gulf Coast was terminated.”

In sum, the court construed the liquidated damages clause “as a way to limit competition to Wharton from another company providing similar services.”  As such, it had to comply with the Texas Covenants Not to Compete Act’s requirements, which it failed to do.

Takeaway: When entering into a contract in Texas, the parties should consider whether any contract provisions may be viewed as a restraint on competition and an attempt to enhance or maintain prices.  If that’s the case, then such contractual provision might have to comply with the Texas non-compete requirements in order to be enforceable.

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.