Enforcing Non-Compete Agreements in Texas with an Injunction Requires Proper Timing

Enforcing Non-Compete Agreements in TexasCompanies often contact me wanting to know what they can do to stop a former employee from competing in violation of his/her non-compete agreement. One of the available remedies that can provide an immediate relief to the company is a temporary injunction (state court) or a preliminary injunction (federal court).

An injunction is a court order that can require an employee to comply with his or her non-compete restraints while the parties litigate their case.  Its purpose is to provide an immediate and temporary relief and prevent any irreparable harm that a company may suffer if its employee is allowed to compete.

What a lot of companies do not realize, however, is that if they wait too long to ask for an injunction after finding out about their employee’s competitive activities, a court may deny their request simply because they waited too long. 

A recent opinion from the U.S. District Court in the Western District, where the judge denied the company’s request for a preliminary injunction, provides a perfect explanation of why waiting too long to seek an injunction in a non-compete lawsuit can backfire:

“The company waited almost six months after it found out that its former employee was working for a competitor to file a lawsuit.  They waited another month to file a brief in support of the injunction and another month after that to set a hearing on the injunction. When the Court set the hearing, they requested a delay of the hearing for another two months.

[The company’s] delay in seeking injunctive relief is fatal to their request for a preliminary injunction. To the extent they have suffered any harm as a result of the events underlying their claims, much of that harm will have already occurred due to the delay; the appropriate remedy is therefore damages. The delay exhibited by [the company] in seeking a preliminary injunction also casts doubt upon the supposed irreparability of the harm alleged.”

Thus, while the company could proceed with the case and attempt to recover damages caused by the employee’s competition in violation of his breach of the non-compete agreement, the company’s ability to obtain an order prohibiting the employee from competing while the case was being litigated had evaporated due to the company’s delay in asking for it.

Embarcadero Techs., Inc. v. Redgate Software, Inc., No. 1:17-cv-444-RP, 2017 U.S. Dist. LEXIS 191317, at *1 (W.D. Tex. 2017).

TexasBarToday_TopTen_Badge_VectorGraphicBOTTOM LINE: A company should act as soon as possible after finding out that a former employee may be violating his or her non-compete agreement if the company wants to prevent the employee from competing. The wait-and-see approach to obtaining an injunction can result in the forfeiture of that legal remedy. 

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.

 

The Fifth Circuit Rules that Federal Law Preempts Unfair Competition Claim Under Texas Law

Preemption

The Fifth Circuit Court of Appeals recently considered whether the federal copyright and patent laws (rock!) preempt  Texas common law claim of unfair competition by misappropriation (scissors!). The question reared its head amidst a web of lawsuits involving a medical device company, ThermoTek, and its former distributor, in which the company accused the distributor of obtaining its trade secrets involving a medical device he sold for them and proceeding to use the information to manufacture his own line of competing devices.   

The Fifth Circuit explained that the federal Copyright Act preempts a state law claim where (1) the intellectual property rights at issue are within the subject matter of copyright and (2) the state law protects rights in that property that are equivalent to any of the exclusive rights within the general scope of copyright. Meanwhile, the federal patent statutes preempt a state claim where its aim is to protect “the functional aspects of a product” because such claim would likely obstruct Congress’s goals by offering patent-like protection to intellectual property that its owner chose not to protect with a patent.  

In applying the above tests, the Fifth Circuit Court of Appeals held that the various aspects of the unfair competition by misappropriation claim in ThermoTek’s case against its former distributor were preempted either by the federal copyright or patent laws. 

The Copyright Act preempted the claim to the extent that ThermoTek alleged that the distributor misappropriated its written materials related to the medical device – here, manuals, reports, billing information, and other written documents – because such materials fell within the subject matter of copyright and the unfair competition by misappropriation claim did not qualitatively differ from a copyright claim.  Meanwhile, the federal patent law preempted the unfair competition claim to the extent it sought to protect the medical devices themselves or their functional aspects because the claim substantially interfered with the public’s enjoyment of unpatented aspects of the devices that ThermoTek publicly disclosed. 

TexasBarToday_TopTen_Badge_VectorGraphicBOTTOM LINE:  On a very basic level, the doctrine of preemption allows federal claims to preempt state law claims if they concern the same subject matter. If not analyzed strategically and addressed in the pleadings, this doctrine can wreak havoc on a party’s litigation strategy in a trade secrets lawsuit.  For example, in the ThermoTek lawsuit, the jury found in the company’s favor awarding it $6,000,000.00 in damages on the unfair competition claim. However, after the trial, the court found that the unfair competition claim was preempted by federal law and dismissed it leaving ThermoTek with $0.  In conclusion, trade secrets claims do not exist in a vacuum, but should be analyzed in the context of the existing intellectual property framework along with other types of IP.

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.

 

Why the Appointment of Jeff Sessions as the New Attorney General May Lead to More Trade Secrets Litigation

jeff-sessions-827pngOn Friday, President-elect Donald Trump named Alabama Sen. Jeff Sessions as his pick for the next Attorney General. Sessions is a former U.S. attorney and current senator with lengthy experience with the Justice Department. He is also known as a pro-business conservative, who on numerous occasions has expressed a favorable view of corporate indictments of executives marred in white-collar crimes. 

Sessions co-sponsored the Federal Defend Trade Secrets Act, which became the law this year. The statute allows civil lawsuits to prevent or redress theft of trade secrets in addition to already-existing criminal penalties under 18 U.S.C. § 1832.  His previous publicly expressed views suggest that he will not shy away from indicting big companies and individuals for white-collar crimes, which include theft of trade secrets.  

For example, in 2010, during a confirmation hearing for the U.S. deputy general, Sessions questioned the candidate about the “dangerous” philosophy of not charging companies criminally because of concerns regarding the effect of such charges on employees and shareholders and stated that he “was taught that if they violate a law, you charge them.” 

Trade secret theft indictments have been on the rise over the past several years, prompting an almost unanimous passage of the Federal Defend Trade Secrets Act in the beginning of this year. The uptick in criminal litigation has been accompanied by a blooming civil litigation of trade secrets theft on state and federal level as well.  

Given Sessions’ prior remarks regarding his preference for corporate indictments in lieu of settlements or payment of penalties, as well as his expressed support towards protection of trade secrets, we can expect a rise in corporate indictments arising out of theft of sensitive information (especially when it is shared with foreign companies or states). This will put the spotlight on the rise of trade secrets theft in the country, will garner more publicity for such acts, and will in turn educate the US companies and business owners as to legal remedies available to them in the civil court to remedy trade secret theft.  

In short, Sessions’ expected tough stance on corporate crime, including trade secrets theft and the accompanying publicity will likely result in an increase in civil litigation in that arena as well. 

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.

Fox Goes to War with Netflix Over Two Programming Executives Who Jumped Ship

160916165507-netflix-fox-logos-780x439In a move that suggests that Fox might be feeling the burn of Netflix competition, the network Goliath has recently sued the king of online streaming over hiring of its two programming executives.  In the lawsuit, Fox claims that Netflix induced these employees to breach their employment agreements with Fox and thus tortiously interfered with their contracts causing it irreparable harm. It alleges that the conduct was illegal since Neftlix knew about the employment agreements – in fact was warned by Fox about them –  but decided to poach the executives anyways.

Coming out swinging, Fox described Netflix’s actions in the complaint as follows:

Netflix is engaged in a brazen campaign to unlawfully target, recruit, and poach valuable Fox executives by illegally inducing them to break their employment contracts with Fox to work at Netflix.  This action is necessary to enforce Fox’s rights, to hold Netflix liable for its wrongful conduct, and to prevent Netflix from continuing such illegal conduct.

Fox did not sue the two executives, who are now working on drama programming development for Neftlix. However, it seeks injunctive relief against Netflix to restrain it from interfering with the executives’ employment agreements claiming that Netflix’s conduct caused it “great and irreparable harm, including loss of Fox’s ability to contract for a stable workforce, the disruption to Fox’s corporate planning, and the injury to Fox’s business reputation and goodwill.”  Thus, while the executives are not named as defendants in the lawsuit, should the court grant Fox’s injunction, the order will necessarily affect the executives’ employment with Netflix. 

Takeaway:  2016 has been the year of high-profile non-compete battles in several industries. Nike, Fitbit, Lyft, and now Fox, have all been involved in lawsuits arising out of departure of key employees who ended up working for a competitor. Given the uptick in such litigation, companies should approach the process of hiring from competitors with caution and conduct their factual and legal homework before extending offers to such hires.  

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Leiza litigates non-compete and trade secrets lawsuits 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.

Breaking News: President Obama Signs Trade Secrets Bill Into Law

Today, President Obama signed into law S. 1890, which will allow companies to sue entities in federal court over allegations of trade secrets theft. Previously, the Senate passed the bill 87-0 on April 4, and the House cleared it by 410-2 on April 27.

“Enacting the Defend Trade Secrets Act is the most significant intellectual property development in years, and it demonstrates that Republicans and Democrats can work across the aisle in seeking to advance important public policies that will benefit the American people and boost our nation’s economy,” Utah Sen. Orrin Hatch (R), the bill’s sponsor, said today in a statement. 

The federal trade secrets statute imposes certain new requirements on  all employers who use non-disclosure agreements with their employees. To make sure that your business is compliant, contact an attorney knowledgeable in this area. 

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.

9 Basic Steps For Minizing Trade Secrets Theft From Your Company

ArtCaption_DataExplosionLawsuits involving trade secrets theft have become an almost weekly occurrence. In 2015, Fitbit, Nike, Angie’s List, and Oculus Rift became entangled in high-profile legal battles arising out of former employees and competitors allegedly stealing the companies’ trade secrets such as customer lists, software codes, and design patterns. 

Considering the technological progress, with each passing year, more confidential information is stored, shared, and transmitted electronically.  At the same time, the number of devices that employees can use to easily and quickly copy and transmit such information is also increasing every year.  Given these parallel trends, those companies who have not taken stock of their trade secrets and implemented measures to protect them, are extremely vulnerable to having such secrets stolen by disgruntled employees or aggressive competitors, resulting in an irreversible loss of competitive advantage. 

There are simple steps that any business – small or large – can take to minimize the risk of trade secret theft. Here is short list of basic precautions that any company should be undertaking. 

  1. Figure out what trade secrets your business has. What gives you a competitive advantage? Is it a list of repeat customers? Pricing formula? Design patterns? Procedures that your company follows? Business plans? Product development plans? If this information is not publicly available, it most likely qualifies as a trade secret. 
  2. Who has access to your trade secrets? Can all of your employees access the information or is access limited only to key employees or on a “need to know” basis? The less people have access to your trade secrets, the better. 
  3. What systems do you have in place to limit access to trade secrets? Is the information password-protected? Do you have a way of keeping track of who accessed it, when, and for what purpose? Can you lock people out if you discover a security breach? Do you have alarms set for when somebody downloads a large amount of information or uses a personal device to access it?  Do you limit physical access via locked doors, thumb-print access or other security measures? 
  4. Do you have a confidentiality policy? Does your employment handbook include a confidentiality policy? Do all of your employees sign the policy? 
  5. Do you provide confidentiality training? If you have a large company, make confidentiality training part of your on-boarding process. If you run a smaller business, explain to employees what you consider confidential business information and how your expect them to treat it. 
  6. Do your employees sign non-disclosure agreements? If not, 2016 should be the year when all of your employees who work with confidential information sign enforceable Non-Disclosure Agreements (NDA).
  7. Do your vendors, suppliers, joint venture partners, etc., sign non-disclosure agreements?  Anybody – and I mean anybody – with whom your company either does business or plans on doing business – who gets access to your company’s confidential information, should  be signing a NDA before such information is shared with them. 
  8. When employees leave, do they sign a document stating they’ve complied with the NDA? All key employees should have an exit interview, during which they should reaffirm that they are aware of the NDA obligations and they have complied and intend to comply with them.  If an employee refuses to sign such a document, a forensic analysis of his or her devices might be necessary. 
  9. Do you back up devices of the key employees after they leave?  For key employees, before recycling their laptops, blackberries, etc. to be used by others, image those devices so that any evidence of confidential information being copied, transmitted or emailed outside the company is preserved for future investigation and, if necessary, litigation. 

Make 2016 the year that you proof your business against trade secret theft and ensure that it doesn’t fall victim to unscrupulous employees or unfair competition practices from business rivals.

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.