Three Key Factors in Enforcing Non-Compete Agreements

What distinguishes those companies that are successful in enforcing their non-compete agreements from those that are not?  Generally speaking, just three “no-brainer” factors:

1. They have good agreements.  A non-compete enforcement lawsuit is a breach of contract case.  Thus, those companies that have good agreements – the ones that set out reasonable restrictions, are clear and unambiguous, are signed by all the necessary parties, and are supported by proper consideration – have an advantage in court.  

The courts around the country scrutinize the language of non-compete agreements before deciding whether to restrict employees’ activities based on that language.  The more vague, incomprehensible, unreasonable the restraints in the agreements are, the less the likely the courts are to order employees to comply with them. 

2. They have evidence of violations.  Suspicions, rumors, or fear that an employee might be violating a non-compete agreement are not enough to support an injunction in court.  Those companies that are successful in enforcing their non-compete agreements usually come to court with some evidence that an employee either has already violated the agreement or intends to imminently do so.  The evidence does not have to be direct, i.e., employee admitting to someone that they are violating the agreement, and it may be circumstantial, but an application to enforce  an agreement must be supported by some evidence and not just a fear or speculation.

3. They move quickly.  Those companies that are successful in enforcing their non-compete agreements do not wait around to see how far an employee will go or what s/he employee might do.  Once they have evidence of a violation, they file a lawsuit within days of obtaining such evidence.  A swift action impresses upon a judge that the business is going to suffer irreparable harm unless the court steps in and enters an order preventing an employee from violating his or her non-compete agreement.

Keep in mind that all is not lost for those companies that do not have signed non-compete agreements with their employees as employees have certain duties to their employers even in the absence of an employment contract restricting their post-employment activities. 

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.

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. 

Is a Non-Compete Agreement Without Geographical Restriction Enforceable in Texas?

imagesThis exact question is currently being decided by the Texas Supreme Court, which earlier this month held oral arguments in Horizon Health Corp. v. Acadia Healthcare Company, Inc. 

Under the Texas Noncompete Act, a noncompete agreement is enforceable in Texas only if it is:

Ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

The non-compete agreement in Horizon Corp. v. Acadia Healthcare did not contain an express geographical limitation, but barred employees from:

  • seeking work in, or independently establishing, a psychiatric contract management company;
  • being employed by “company clients, hospital affiliates or hospital joint venture partners,” or
  • engaging in any business relationship with those hospitals for 1 year after the end of employment. 

Horizon argued that the non-compete agreement is not enforceable because it does not contain an express geographical limitation.  Acadia argued that because the agreement is limited to certain identifiable set of companies or clients, it did not need to have a geographical limit to be enforceable under the Texas Covenants not to Compete Act.  The parties presented their oral arguments to the Texas Supreme Court on March 1, 2017. 

BOTTOM LINE:  Until there is a ruling from the Texas Supreme Court resolving the issue of whether noncompete agreements must contain an express geographical limitation, to be safe, companies should include such limitation in the agreements in additional to any limits on client solicitation.  Stay tuned to learn how the Texas Supreme Court rules on this issue. 

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. 

Non-Compete and Confidentiality Issues to Watch in 2017

Non-Compete Issues to WatchIn 2016, there have been some major developments involving confidentiality and non-compete agreements law, which are likely to have some repercussions in 2017. Here’s a summary of the most important issues that companies should be aware of going into the new year.

1. The Federal Defend Trade Secrets Act.  This statute, enacted in May 2016, creates a federal question jurisdiction for misappropriation of trade secrets, allows companies to seize their trade secrets out of the hands of competitors in some circumstances, and provides whistleblower protection to employees when certain conditions are met.  In 2017, as companies begin to take advantage of the statute, the courts will begin creating a new body of law interpreting its provisions.

2. SEC Enforcement. The SEC will continue to go after the companies whose confidentiality agreements and policies they may find to violate the SEC’s whistleblowing rules.  Making sure that confidentiality agreements include the language specified in the federal Defend Trade Secrets Act may help with SEC’s scrutiny.

3. Choice of Law Issues.  Choice of law issues in interstate non-compete and confidentiality disputes will continue to be of major concern to companies who have out-of-state employees. A number of states in 2016 passed statutes dramatically limiting non-competes and California passed a statute that prohibits application of other states’ laws to its employees’ non-compete agreements. Business owners should make sure that their non-competes are enforceable in the jurisdictions in which they intend to enforce them.

4. Disclosure of Trade Secrets During Litigation.  This will continue to be a major point of dispute in trade secrets and non-compete lawsuits. For example, earlier this year, the Texas Supreme Court addressed what a trial judge must consider before allowing a competitor’s corporate representative in the courtroom during the testimony that might reveal the adverse party’s trade secrets. Thus, in 2017, those companies that are engaged in trade secrets misappropriation litigation in Texas will need to consider how this balancing test will apply in their particular circumstances. Many other states’ courts faced a similar issue in 2016 and have fashioned their own rules regarding when the disclosure of trade secrets in litigation is appropriate. 

TexasBarToday_TopTen_Badge_VectorGraphicLeiza 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.

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

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

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

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

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

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

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

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

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

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.