Noncompete Blog

Thinking of a non-compete? Think Location, Location, Location

M. Cheryl Kirby — Mon, 22 Apr 2013 00:00:00 -0500

So your business is in Texas and your Texas lawyer drafted a non-compete agreement that all employees with access to confidential information are required to sign. You are pleased with this agreement because the few who attempted to jump ship and compete were stopped in their tracks when your lawyer took them to court. The word is out – you mean business and will go to court to enforce your non-compete agreements.

But now your business has grown and you have employees working in other states, all of whom are required to sign your "airtight" non-compete. That raises an issue you may not have considered - will your non-compete agreement stop these out of state employees from leaving, competing and taking your customers with them? Maybe - maybe not.

One of the biggest concerns is figuring out which law applies to the enforcement of your non-compete agreement. Of course your non-compete agreement has a choice of law provision which states that the agreement will be interpreted and enforced pursuant to Texas law. However, that provision may not hold up in another state since some states will only enforce non-compete agreements under their own laws, regardless of your agreement's choice of law provision. In other words, the enforceability of your non-compete agreement may hinge on where the employee works rather than the employer’s headquarters or the choice of law provision.

A good example of why this matters is in the situation in which you terminate an employee without cause. While your non-compete will likely be enforceable in Texas, other states will not enforce non-compete provisions against an employee who was terminated by the employer. Still other states may require an examination of whether the termination was conducted arbitrarily or in bad faith. Then there are a few states that have legislation prohibiting non-compete agreements altogether.

The bottom line is that a "one size fits all" non-compete agreement is ill advised in a national and/or global market. While the law varies from jurisdiction to jurisdiction, a separate non-compete agreement for each state is not necessary, but it is extremely important to know the jurisdictional differences and to customize your non-compete to address those differences both in the contractual language and how and when it is presented to the employee. Therefore, getting sound legal advice on the enforceability of your non-compete agreement – before you present it to the employee – will likely save you time and money in the end.

McDoctors

Francine W. Breckenridge — Thu, 18 Apr 2013 00:00:00 -0500

A bunch of doctors were limited partners in a surgery center with the general partner being – let’s say – Cut ‘Em Corporation. The partnership agreement stated that the limited partnership doctors could not own an interest in a competing facility as long as they were limited partners. Well, be that as it may, nine docs decided to form a new surgery center and bought land to accomplish this goal. Since it would take over a year to build, they figured they would stay with the partnership during that time. Cut ‘Em Corporation asked to be part of the new facility and the nine doctors said “no way.” Cut ‘Em Corporation threatened a lawsuit and the doctors filed a Declaratory Judgment asking the Court to declare the non-compete unenforceable.

The doctors won because the partnership agreement did not have a buy-out provision. The Corporation appealed arguing that the statute did not apply as the covenant did not affect the physicians’ practice of medicine.

Section 15.50(b) of the Texas Bus. & Comm. Code provides the specific language that must be used to enforce a non-compete against physicians. Section 15.50(b)(2) states: “the covenant must provide for a buy-out of the covenant by the physician at a reasonable price or, at the option of either party,….” The Appeals Court held Cut ‘Em Corporation’s non-compete violated the plain language of the statute since it did not include a buy-out provision. So, the doctors won and got paid while they built their new facility!

The moral here is, if you are a medical facility, make sure you know the rules for non-compete for physicians as they are much different than non-competes for non-medical companies.

It's Better to Have Loved and Lost….but not with your non-compete

Monica Velazquez — Thu, 14 Feb 2013 00:00:00 -0500

Ahh, Valentine’s Day; romance is in the air, even in the workplace (which makes any employment lawyer cringe). But what happens when love is lost at work? A non-compete clause in the various types of agreements you keep with employees can be the basis for a love-hate relationship that can last for years. Here’s four pieces of advice to ensure you are protected when a relationship sours with an employee under a non-compete:

1. Words Matter. Many business owners mistakenly believe that a simple confidentiality or non-disclosure agreement with an employee is sufficient to protect their business. It’s not. In Texas, employees already have a common-law duty not to disclose your company’s confidential information and trade secrets. An agreement that simply does that is not sufficient. Words matter, especially in a contract. Therefore, you need to ensure that your ex-employee will not solicit your other employees, misappropriate your trade secrets, engage your customers, work for a competitor, perform competitive services, disparage you and your company, or interfere with your business. Hope for the best, but plan for the worst, and make sure your non-compete reflects exactly what you need to protect.

2. What’s Mine is Yours. A carefully drafted non-compete can bind an employee for years after they leave you. What do they get from you in return? If only the job or money would do; but Texas courts have not allowed those items to serve as consideration for the non-compete. You have to give them the heart of your business: the confidential information, trade secrets, highly-specialized training, or stock options that make your business valuable. It’s the soulful intricacies of your business that have taken you years to perfect that an employee cannot take away from you to compete. An iron-clad non-compete will not do you any good if you did not actually provide the consideration for the non-compete. Beyoncé warned us all: “If you want it…put a [BIG] ring on it.”

3. Consider the Other Man/Woman. Generally, only signatories to a non-compete can be bound by the restrictions. That is why if other parties are involved in a transaction (i.e. in the sale of a family business), non-competes are executed with those related parties, including spouses. Often, however, it is your employee’s spouse who plays a key role when an employee leaves to work for a competitor. An employee may use his/her spouse’s name to set up a competing business. An employee may download your confidential information or trade secrets onto the computer or smart phone of a spouse in an effort to conceal his/her wrongdoing. An employee may use a spouse’s e-mail address to solicit your clients or vendors. In some cases, the entrepreneurial relationship between husband and wife is so strong, that courts become involved to ensure the protections of a non-compete are in place. [In a first case of its kind, a Massachusetts court ruled last year that a probate court had the authority to order a spouse to enter into a non-compete when the family business was awarded to one spouse as part of a divorce. Cesar v. Sundelin, 81 Mass. App. Ct. 721 (2012)]. In the employment context, however, you may have to be more creative to tackle this issue. For example, when an employee leaves, you may have her sign a verification that she has not taken any company information and property, including that she does not possess any of your confidential information and trade secrets on any personal/home computer, on devices owned by a spouse or family member, or that she has not copied such information or disclosed it to family members and any other third parties. Later, if you find any evidence of any potential involvement by a spouse, consider whether you should also include the spouse in your lawsuit against your ex-employee for interfering with your business. A little marital discord can serve as a good incentive to get a case resolved quickly.

4. All’s Fair in Love and War. After a break-up, the temptation to check up on a former love is too strong (especially if you can do it anonymously on social media). In the employment context, it is well worth giving in to temptation. When an employee leaves and you suspect he now works for a competitor, keep a close watch. Track their public activity on LinkedIn, Facebook, Twitter, or other social media. Set up a Google alert to see what they are up to and whom they are courting. While this form of stalking is risky when they are a current employee, as a former employee/current competitor, they are fair game. Many unfair competition lawsuits are now based on evidence gathered on social and electronic media. Also, remember that non-compete cases involve decisions based on equity – what’s fair. As long as you resist the temptation to bad-mouth or disparage your ex-employees in minor battles, you can use social media to your advantage to win the war. After all, love – even with ex-employees – is a battlefield.

Reality Bites - Part I

Tiffany G. Hildreth — Mon, 28 Jan 2013 00:00:00 -0500

Lawyers routinely write about the legalities of noncompetes. Thus, everyone is well aware that, legally, a Texas employer can preclude a former employee from soliciting customers or working in the industry for years after termination so long as the employee was privy to confidential information and the noncompete’s scope isn’t too over the top. Employers spend lots of time and money focused on these legalities which, while necessary, are actually pretty simple.

Not so much is written about the realities of noncompetes, meaning the day-to-day actions of the parties that can support or negate actual enforcement of the noncompete’s restrictions. This is unfortunate because locally-elected district court judges decide the fate of noncompetes and – here’s reality check #1 - these judges usually spend about 5.2 seconds glancing at the noncompete document and the rest of the time focused on, well, the realities of the situation.

Reality check #2 - judges don’t necessarily care what the document says the employer can legally do; instead, they care about the real life consequences of doing what the employer is asking them to do. They want really good reasons – both legal and non-legal - for signing an order that keeps a recently-fired employee from working to support a family, or talking to a colleague that he’s known for twenty years, or giving her long-held entrepreneurial dreams a shot. So, the reality is, employers must be able to explain how and why they deserve to impose the restrictions they seek, and why the former employee deserves to be restricted, regardless of the noncompete document.

Reality check #3 - Employers often fail to get injunctive relief not because of what they say or do in court, but because of what they said or did days, months or even years ago. The prime example is how noncompetes always say that certain information is new and confidential. But, if the employer routinely allows any and all employees to access this so-called “confidential” information without any security controls, is it really necessary to keep someone out of a job for the next two years to “protect” its confidentiality when any current employee can pull it up any send it to a competitor in a matter of minutes?

Any lawyer can spend hours drafting a noncompete document. Good noncompete counsel, however, scrutinize whether the realities of the employer’s situation actually supports enforcement of the noncompete. If not, they spend more time figuring out how their client can create a reality that does.

Part II of “Reality Bites” will discuss some common employer “realities” that keep employers from enforcing noncompetes.

KEEP YOUR HANDS OFF OUR CLIENTS

Francine W. Breckenridge — Thu, 24 Jan 2013 00:00:00 -0500

Stopco’s President is adamant that a departing Stopco employee doesn’t take any of Stopco’s clients. So Stopco’s President came up with a nice, broad non-compete which he made all employees sign upon employment with Stopco. Stopco’s non-compete provides:

Employee shall not … directly or indirectly solicit, accept business from, perform services for or disclose Stopco’s confidential information to any individual or entity that Stopco provided products/services for during the period of Employee’s employment with Stopco … regardless of whether Employee dealt with or performed any function for the individual or entity during Employee’s employment with Stopco.

Stopco’s President figured his non-compete would do the trick, but he figured wrong. A recent Texas Court of Appeals panel held that a non-compete clause similar to Stopco’s clause was overbroad and constituted an unreasonable restraint of trade. The Court held a business’s non-compete must not only be limited to the performance of work involving products/services substantially similar to that particular business, it must also be limited to customers or individuals with whom the former employee dealt while said employee was employed with said business.

Moral of the story – Stopco’s President should not have relied on his own drafting skills. He should have sought legal advice to ensure his non-compete would hold up in court! Based on this opinion, the italicized portion in Stopco’s non-compete would be overbroad and unreasonably restrain trade. Consequently, it would not be enforceable.

When using former employer's trade secrets is a criminal offense.

Francine W. Breckenridge — Thu, 06 Dec 2012 00:00:00 -0500

Worried that the non-compete provision in your employment agreements won’t stop your ex-employees from competing? Well, make sure that you back up that provision with a solid clause restricting the taking or dissemination of your company’s trade secrets and you may have an even bigger stick to swing at an ex-employee violating such a clause. Last month, the U.S. Senate unanimously passed a bill expanding the Economic Espionage Act (“EEA”); making it a crime for former employees to use their ex-company’s trade secrets even if the trade secret isn’t used in commerce. The bill provides that trade secrets relating to a “product or service used in or intended for use in commerce” will be covered by the EEA. The bill is in response to a court ruling earlier this year that held the EEA did not apply to trade secrets relating to internal products used by a company that are not sold in commerce. The new proposed broad language will cover most, if not all, of a company’s trade secrets, subjecting violators to criminal prosecution. Ex-employees violating non-compete provisions are subject to civil (money) violations, not criminal (jail) prosecution. While the threat of paying money in a civil suit may not stop former employees from competing, getting branded with a federal criminal conviction AND paying money might certainly give them pause for thought before using a former employer’s trade secret.

John Hancock’s Lingering Importance

Allison Reddoch — Fri, 19 Oct 2012 00:00:00 -0500

When drafting a non-compete agreement, every lawyer repeatedly asks himself, “Are the limitations as to time, geography, and scope reasonable?” This thought becomes all-consuming because no attorney wants his agreement reformed by the courts, much to the – ahem – “disappointment” of his client. However, regardless of how reasonable the agreement may be, if the parties fail to sign the agreement, it may be just as unenforceable as if the employee was forever prohibited from working in the United States at any profession that earns an income.

In Holloway v. Dekkers, the Dallas Court of Appeals held that an employment agreement negotiated through in-person, phone and e-mail conversations was unenforceable because only the employee signed the formal, written contract.

Initially, the parties had verbally agreed on a three-year term of employment, as well as compensation and benefits. Negotiations continued via e-mail and telephone, which led to a revised agreement that the employee would work for one year, with an option for a three year extension based on his performance. Ultimately, the terms were written into a one-page agreement, but only the employee signed it.

When he was fired after only two months of employment, the employee sued for breach of contract and fraudulent inducement, alleging the employer had either lied to him about employing him for at least a year, or broken its promise.

On appeal, the Dallas Court held that a writing was required pursuant to the statute of frauds because the employee and employer had verbally agreed on at least a one-year employment term. The statute of frauds provides that a promise or agreement that cannot be completed within one year is not enforceable unless it is in writing and signed by the person required to act on the agreement. While the employee had a “signed” agreement, it was not enforceable because it was not signed by the person to be charged, which, in this case, was the employer. As there was no writing to back up the employee’s oral understanding, he had no contract to enforce.

Though the contract in this case did not contain a non-compete, the importance of getting such an agreement signed still applies because non-competes fall within the statute of frauds if they cannot be performed within one year from the date the agreement is made. Thus, the agreement must be in writing and signed by the party to be charged. Ensuring both parties sign the agreement may seem like a small and obvious detail, but these small details are overlooked more often than you would think, and they can come back to haunt us years later. Bottom line – no “reasonable” agreement is enforceable unless it is signed. Without your John Hancocks, it may not be worth the paper it’s written on.

Dangers of Waiving Non Compete Restrictions

M. Cheryl Kirby — Thu, 30 Aug 2012 00:00:00 -0500

In tough economic times a business downturn often leads to a workforce reduction. In these difficult situations, employers may try to ease employees’ pain by waiving enforcement of their non-compete agreements. Such waivers can also benefit employers by serving as part of the consideration for employees’ release of claims, thereby reducing the cost of severance payments.

But is this really a win/win situation or is it just another potential problem lying-in-wait down the road? Let’s imagine that three months after you waive noncompetes for laid off employees, a valuable employee jumps ship and goes to work for a competitor. You now want to enforce the non-compete agreement you just waived.

Well, your rock solid non-compete agreement could be blind-sided with a "selective enforcement" defense. It goes like this - your failure to enforce non-compete agreements with multiple former employees, who were given the same consideration (confidential information) as the valuable employee who just left, undermines your contention that the information is truly confidential. The opposing attorney tells the judge, "If this employer is not concerned about competition from former employees who know the same secrets as my client, then these secrets can’t be worth much - meaning there is no consideration for my client’s agreement not to compete. This non-compete agreement is nothing more than an illegal attempt to stop ordinary competition."

So here you are - your agreement is well written and you've scrupulously maintained the confidentiality of your confidential information, but its confidential nature is nonetheless being attacked after-the-fact because you waived enforcement of non compete agreements with former employees. Could this have been avoided?

It is probably unrealistic for most employers to seek enforcement of all non-compete agreements. That having been said, the risks associated with inconsistent enforcement can be minimized by contemporaneous documentation explaining sound reasons why a particular agreement will not be enforced. If waiver of a non-compete agreement is a component of a severance agreement, the agreement should state the reasons for the waiver while reiterating that the employee is bound to his/her agreement not to use or disclose the employer’s confidential information, regardless of the circumstance of his/her future employment.

How to Tie Up the Competition After Buying a Business

Francine W. Breckenridge — Fri, 17 Aug 2012 00:00:00 -0500

Buying a business? Be sure your sales contract ties up the seller from competing against you. And get a lot of rope, because you can tie up the seller for a long period of time!

A recent case held that non-competes signed in connection with the sale of a business can be broader than normal employment non-competes. “Rich E. Richer” sold his company to Newco and Newco asked Richer to sign a 10-year non-compete. Newco paid Richer $500,000 (separately from the cost to buy the company) over five years for that non-compete. Well, Richer decided to compete, arguing that the 10-year term was unreasonable and that it should be reduced to five years. The trial court agreed with Richer, and reduced the term to five years. Hold on there, said the appeals court – a non-compete signed by an owner selling a business is very different than one signed by an employee. The court explained that, since Richer received seven million dollars for the business AND he half a million dollars for the non-compete, a 10-year non-compete was more than reasonable to protect Newco’s $7.5 million investment. The court’s legalese opinion was “. . . a 10-year non-compete was not unreasonable as a matter of law when ancillary to a contract for the sale of a business.”

So, the moral of this story is: If you are buying a company, you can hold the seller to a longer non-compete, BUT make sure the sales contract designates the money being paid for the non-compete from the money being paid for the business. Then you can tie up the competition in your sales contract so the seller won’t bind up your new business venture.

Employers – Do You Want Your Non-Compete to be Enforced? Have You Reviewed it Lately?

Kimberly S. Moore — Tue, 14 Aug 2012 00:00:00 -0500

The opening question may sound a bit ridiculous. Of course employers want non-competes to be enforced. Why would virtually every employer in healthcare, high tech, sales and transportation insist on their employees signing a non-compete if it did not intend for the non-compete to be enforced? The reason I ask is because while Texas law currently favors employers, the agreement often gives judges - who are reluctant to deny someone an opportunity to work - a way to limit enforcement.

So, consider important details which could enchance enforcement.

Does the non-compete have an assignment clause? In other words can the employer unilaterally assign the contract without the employee’s consent to an acquiring entity? This can be, and has been, a deal breaker.
Does the agreement have jurisdiction/choice of law and a choice of venue provision? Recently, California found personal jurisdiction over an Irish company. Although states like Texas may declare that their law applies, the forum selection clause may still require another state to apply Texas law in the company’s home state giving the employer potential advantages.
Don’t be a hog. You have heard the saying pigs get fat and hogs get slaughtered. If the non-compete tries to go too far with its restrictions and is immeasurable in terms of time, scope and geography, it can be declared unenforceable. An enforceable but overly broad non-compete should be reformed by a court to be reasonable. Check the agreement for the relationship of its restraints to the work performed.
Act quickly. If you want extraordinary relief to enforce a non-compete, delay must be explained. Unreasonable delay may be fatal.

Overall, a little review can greatly enhance the likelihood of enforceability before your star employee leaves.

From The Resume to User Name and Password: Be Careful What You Ask For

W. Mark Bennett — Mon, 13 Aug 2012 00:00:00 -0500

It used to be the biggest concern an applicant might have during an interview was a gap in employment, a neutral reference, or the less than applicable major that sounded great when the counselor said, “well, you have to choose something!” Today, an applicant’s Timeline could be the difference between getting a job as well as continued unemployment.

Our society has grown obsessed with “checking in” to inform the world of where they are, what they are doing, who they are doing it with, posting pictures of them doing it, and insisting on a permanent digital record of these events. The nightstand diary under lock and key is now a digital billboard of who, what, when, where, how, and why. But without getting into the social aspects of this shift, the impact it is having on employment opportunities and “background” checks can’t be understated.

Prior to technological shift, an applicant would never be asked about the frat party photo with the bong in the background from twelve years ago, or to explain why they “like” a certain group or organization. Yet, with an ever increasing number of employers, both government and private, making access to the candidate’s social media profiles an application prerequisite, these, and a litany of other similar questions, are becoming routine in job interviews.

ILLINOIS JOINS MARYLAND

Last week Illinois became the second state to enact a law banning employers from requesting passwords for Facebook and other social media accounts from employees and job applicants. In April, Maryland became the first state to pass such a law, and as of late July, at least a dozen other states were considering similar legislation according to the National Conference of State Legislatures.

Interestingly, giving someone your Facebook login information is a violation of the site’s terms of service, and according to the Associated Press (AP), the Department of Justice considers it a federal crime to enter social media sites in violation of their terms of service; although the AP also noted that recent congressional testimony indicates that such violations would not be prosecuted.

FEDERAL LEGISLATION

The federal government attempted to address the issue, but the House of Representatives rejected an effort to give the Federal Communications Commission the power to stop employers from asking job applicants for their password to Facebook and other social networking sites. The amendment would have added the following paragraph to the Federal Communications Commission Process Reform Act of 2012:

“Nothing in this Act or any amendment made by this Act shall be construed to limit or restrict the ability of the Federal Communications Commission to adopt a rule or to amend an existing rule to protect online privacy, including requirements in such rule that prohibit licensees or regulated entities from mandating that job applicants or employees disclose confidential passwords to social networking websites.”

So, while the federal government continues to contemplate, negotiate, and ponder national legislation to address the issue, employers, especially national employers, are burdened with complying with an ever increasing number of state laws that are addressing the issue.

BEST PRACTICES

The best advice we can give to employers is don’t ask for the information. Why you may ask? Viewing workers' profiles could give employers access to all kinds of information about characteristics that are protected by federal law, such as disability, national origin, marital or family status, or religion. The problem for most employers that view this as a new tool for screening is you don’t know what you’ll find until you look, and once you’ve looked you can’t unlearn what you now know. Whether the information is ever considered by the employer is of little consequence, because the knowledge of the information is enough to cause trouble for the employer.

Even having access to social media information but not actually looking at it could create issues for an employer. If an employer does not consistently apply its policy of accessing social media profiles it could be opening itself up to additional potential liabilities related to workplace harassment, discrimination, workplace violence, dissemination of confidential information, or other “preventable” claims.

In short, the risks far outweigh the benefits, and the easiest, safest, and best approach is for employers considering a new hiring intake practice of requesting social media login information from applicants is to adopt the same policy 99.99% of employers already have for drugs, “Just Say No!”

Noncompete Choice of Law - Don't Forget to Consider DeSantis

Tiffany G. Hildreth — Tue, 24 Jul 2012 00:00:00 -0500

Many large employers with Texas operations insert choice of law provisions in their company-wide noncompetes assuming that parties and courts will meekly abide by the written word. Such assumptions are naïve, as we pointed out a few months ago. (See “Can you really determine the Who and the What of Noncompete Enforcement? Friday, May 4, 2012). For over twenty years, the Texas Supreme Court’s DeSantis decision has haunted parties trying to nail down what law will govern their noncompete. The upshot is, things like “relationship to the jurisdiction,” “state interest” and “public policy concerns” simply matter more than whatever the contract may say. When evaluating the risks and benefits of noncompete litigation, savvy in-house counsel will keep DeSantis in mind. A June 2012 decision of the Fort Worth Court of Appeals provides a perfect example of how courts may use the DeSantis checklist to override what the parties thought they had agreed upon.

In Heritage Operating, L.P. v. Rhine Bros., LLC, the parties were litigating a 10-year noncompete in conjunction with the sale of a business. On appeal from a Tarrant County jury verdict, the seller argued that the trial court erroneously applied Texas law because the noncompete’s choice of law provision stated "The laws of the State of Delaware shall govern this Agreement.”

Citing to DeSantis, the Fort Worth Court of Appeals explained that it had to consider:

1. Whether a state has a more significant relationship with the parties and their transaction than the state they chose;

2. Whether that state has a materially greater interest than the chosen state in deciding whether this noncompetition agreement should be enforced; and

3. Whether that state's fundamental policy would be contravened by the application of the law of the chosen state in this case.

The Court acknowledged that Delaware had a substantial relationship to the parties because the buyer’s corporate offices were located there. Nonetheless, Texas had a more significant relationship to the parties and the transaction because, of the ten locations from which the buyer was restricted from competing, two were in Texas and none were in Delaware. Texas also had a materially greater interest than Delaware in "protecting the justifiable expectations of entities doing business" in the state. The Court concluded the analysis by again pointing to DeSantis and its admonition that "the law governing enforcement of noncompetition agreements is fundamental policy in Texas." Consequently, the Court declined to apply Delaware law.

Yes, jail time is possible in a noncompete lawsuit

Katie Anderson — Mon, 23 Jul 2012 00:00:00 -0500

Everyone knows that stealing company secrets and using them against the company - or employing someone who’s done it - can lead to lengthy and expensive lawsuits and awards of injunctive and monetary relief. But, what many don’t know is that, if certain unfortunate events unfold, the court may order additional fines and jail time.

A fairly recent federal lawsuit in Houston Texas illustrates how things went from really bad to “I can’t believe this is happening” horrendous for one former employee who may not have adequately appreciated how his actions would be discovered and punished.

How things went bad ….

Plaintiff M-I LLC – an oil/gas drilling equipment producer - sued two of its former employees and their new employer, competitor Argus Green, for misappropriation of trade secrets, noncompete violations and diversion of potential business opportunities.

Plaintiff won a unanimous jury verdict. A few weeks later, the judge entered final judgment against Argus Green and the two former M-I employees for multiple millions in compensatory and punitive damages, as well as a two-year injunction prohibiting all defendants from using or selling certain equipment, a permanent injunction on the use of any of Plaintiff’s trade secrets and a directive for defendants to assign their pending patent applications to Plaintiff. Additionally, the final judgment required the defendants to “immediately turn over to M-I LLC all information taken from M-I LLC.”

At this point in the story, things are really bad for all defendants.

If the story stopped here, one could possibly sympathize with defendants who just suffered a horrible jury verdict and must now decide whether to stand on principle and continue the fight or try to settle it out. But, alas, the story continues ….

How things got worse ….
All the defendants timely appealed and Argus Green, along with defendant former employee John Ostermaier, settled the case. The other defendant former employee, Lewis Dutel, did NOT settle the case. Dutel also chose NOT to do several other things. He didn’t file a motion to stay the injunctive provisions and he didn’t post a bond as required by the federal appellate rules. If he had, he could have postponed compliance with the final judgment pending the appeal. Dutel also had several defense attorneys withdraw as his counsel over time.

Having not received either a settlement payment or their company information from Dutel, Plaintiff filed a motion for contempt. A civil contempt finding requires three elements:

that a court order was in effect,
that the order required certain conduct by the respondent, and
that the respondent failed to comply with the court’s order.

Since Plaintiff easily established the three elements, the court ordered Dutel into the custody of the U.S. Marshal for one day and for continuously thereafter until he fully and completely complies with the court’s orders. The court also ordered Dutel to pay $12,000 within 30 days as a reasonable expenses and attorneys’ fees incurred by Plaintiff for the preparation and filing of the motion for contempt.

What everyone can learn from this story.
The obvious take away from this case is: (1) do NOT to take away company material when leaving employment; (2) do NOT employ someone who has; and (3) do NOT treat court judgments lightly. While the facts of the M-I case are egregious, they illustrate what can actually happen in any given noncompete lawsuit. So, the obvious and best advice for employers is to do what you have to do to avoid falling into a lawsuit where such disasters are waiting to happen. Doing what you have to do includes these steps:

remember that while most potential employees are honest, there are some who are willing to break the law and breach any and all ethical and legal obligations. This stuff does not just happen in the movies;
require job applicants to state in writing that they have not previously entered into a non-compete agreement, a trade secret agreement, or an agreement regarding confidential information (or if they have, to provide a copy to you);
draft fair and appropriate agreements for employees to sign before receiving trade secret information to protect the company from the employees’ future inappropriate use of the information; and
be vigilant in enforcing those agreements and track employees in their new employment in similar industries for the length of the agreement.

Employers can avoid this potential liability by asking the right questions during the hiring process and staying vigilant in enforcing its own agreements. While all liability cannot be completely avoided, jail time almost certainly can by following a court’s orders and involving legal counsel at every turn.

“I did not solicit her, she solicited me:” Taking a closer look at Non-Solicitation Agreements in Texas

Monica Velazquez — Fri, 20 Jul 2012 00:00:00 -0500

Solicitation. The mere word evokes a sense of seediness and underhandedness. When an employee leaves your company, particularly if he is disgruntled, thoughts of payback abound. How can he get even with your company? At times, it is a cathartic posting on Facebook, a ranting voicemail, filing for unemployment benefits, or initiating a claim or lawsuit. However, to inflict real damage, your employee may solicit and take your company’s customers or other employees to work for a competitor. To prevent this, employers arm themselves with confidentiality, non-solicitation, and non-competition agreements that are aimed at restricting the conduct of employees after separation. While we extensively examine issues involving non-competition and confidentiality provisions for you in our weekly blog, two issues with non-solicitation agreements are often overlooked.

First, how precise is the term “solicitation” defined in your agreement? Generally, agreements only contain a broad prohibition against “soliciting or attempting to solicit” your customers, prospective customers, vendors, referral sources, or employees. Since solicitation is defined, in part, as “to appeal, to apply for, to ask for the purpose of receiving, to try to obtain,” many courts – like Justice Potter Stewart writing about pornography 48 years ago– will know it when they see it. In one case, a Texas court used the definition of “solicit” found in Black’s Law Dictionary to determine that an employee’s disclosure of his customers’ names violated the non-solicitation clause of his agreement, although the customers names themselves were not confidential information protected by the confidentiality / non-disclosure clause in the agreement. [1]

Further, employees frequently claim that they did not initiate the contact, and, instead, it was the customers or employees who solicited or called on the employee. Will your non-solicitation agreement protect you in that situation? Generally, no, unless the non-solicitation clause covers additional conduct such as direct or indirect, “contact, aid, acceptance of work, consultation, placement with, providing services for, hiring of, inducing or causing the termination of the relationships with” the customers with whom the employee worked or your other employees. For example, such broad non-solicitation clause was upheld in a Texas case where the court held that a non-solicitation clause not only prohibited an insurance broker from soliciting clients, but also from actually working with them for two years after her termination, regardless of where the clients were located.[2] Thus, regardless whether the clients initiated the contact with the insurance broker, she could not perform any of her job functions for them. Essentially, the non-solicitation clause was a non-compete prohibiting that employee from working with former clients.

Second, does your non-solicitation agreement meet all of the requirements of the Texas Covenants Not to Compete Act? [3] For several years now, Texas courts have treated customer non-solicitation agreements as restraints on trade governed by the Act. However, last year, the Texas Supreme Court conclusively indicated that non-solicitation agreements must meet all of the requirements of the Act [4], including that they must be ancillary to an otherwise enforceable agreement and, importantly, contain reasonable limitations concerning time, geography, and scope of activity to be restrained. [5] You should no longer rely on a standard non-solicitation clause that does not tell your former employee exactly what he is prohibited from doing. As a result, it is worth examining your non-solicitation clauses to ensure that they contain reasonable limitations concerning time (i.e. 2, 5, 10 years), scope of activity (i.e. solicit, provide services for, or work for former customers), and geography (i.e. particular location or those specific customers with whom the employee worked for 18-24 months prior to termination). Most of these limitations are already contained in your non-competition clauses, but if they are missing from your non-solicitation clauses, you could be vulnerable to an attack by that disgruntled employee plotting to get even with your company.

[1] York v. Hair Club For Men, L.L.C., 2009 Tex. App. Lexis 4866 (Tex. App. – Houston [1st Dist.] June 25, 2009).
[2] Gallagher Healthcare Ins. Servs. v. Vogelsang, 312 S.W.3d 640, 654 (Tex. App.—Houston [1st Dist.] 2009, pet. denied)
[3] Tex. Bus. & Com. Code §15.50.
[4] DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 681-82 (Tex. 1990); Guy Carpenter & Co. v. Provenzale, 334 F.3d 459, 464-65 (5th Cir. 2003) (applying Texas law and stating that non-solicitation covenants restrain trade and competition and are governed by the Act).
[5] Marsh USA, Inc. v. Cook, 354 S.W.3d 764, 777 (Tex. 2011).

You Can’t Cure Stupid, and Unfortunately, You Can’t Sue for It Either

Jana H. Woelfel — Fri, 13 Jul 2012 00:00:00 -0500

On one hand, the Northern District of Texas’ CDx Holdings, Inc. and Caris Diagnostics, Inc. v. Heddon is simply a recent federal court case applying the Texas Supreme Court’s landmark Marsh USA. Inc. v. Cook decision and determining injunctive relief standards. On the other hand, it’s a tale of both employer and employee acting with cluelessness worthy of any vintage John Hughes 1980s movie where the teenager ultimately triumphs because the principal 100% knows, but can’t prove, the teenager’s deception. If you like to read noncompete and confidentiality legal opinions awash with such antics, this one’s for you.

The story starts as most noncompete sagas do, with confidential information and agreements. Caris Diagnostics, a "national anatomic pathology provider," employed David Heddon to oversee sales of pathology services to dermatologists and dermatology centers. Caris provided Heddon with access to the SalesLogix database containing details about Caris' customers, accounts, client contact information, client preferences, etc. Caris password-protected the information and it was undisputed that a competitor would require substantial time to assemble this information.

Similar to Marsh, Caris’ holding company – CDx - granted Heddon stock options subject to execution of a noncompete, nonsolicitation and nondisclosure agreement which he naturally signed. As is often the case in the idyllic preteen years, everything seemed to proceed without a blemish.

Then things started to get crazy. Like any “tween,” “preteen” or “teen” who hasn’t really gotten the message about incriminating texts and emails (God love them), Heddon emailed a coworker, Karen Goldenson, to advise that he had been "hunting." Confirming that she had no illusions about what he was “hunting,” Ms. Goldenson asked if he had "an offer." Within one week of the email exchange, Miraca Holdings purchased CDx, then cashed out Heddon's stock options as part of the transaction. At roughly the same time, D-Path, a competitor to CDx and Caris, offered Heddon a job that would start on January 1, 2012. With a $20,000 stock option check in hand, Heddon and friends began preparing to exit Caris/CDx.

On December 15, 2011, knowing that Heddon was "hunting," Ms. Goldenson forwarded to Heddon records of what some might consider to be confidential information about Caris' growth ideas in Michigan and a spreadsheet of Arizona physicians who were potential client targets for Caris. Not to be outdone on the dumb and dumber scale, in late December 2011, Heddon contacted Caris' IT department to request repair of his malfunctioning laptop, thereby insuring scrutiny of the device. On December 28, 2008, a Caris IT staffer informed Heddon that the laptop’s hard drive was shot and couldn't be replaced until January 3, 2012 when the SalesLogix (confidential customer database, remember) administrator returned from vacation because, wait for it, the SalesLogix administrator would need to put a new local SalesLogix database on the hard drive. Although Heddon was due to begin work for D-Path on January 1, 2012, he apparently was super conscientious and didn't want to miss a day of work between December 28 and January 1, and asked the IT staff member to ship the new laptop overnight express delivery to him anyway. I am sure work was crazy for Heddon at this time of year, as many dermatologist offices were bustling the Wednesday through Saturday before New Year’s.

On Monday, January 2, 2012, Heddon, feeling oh so clever, emailed Goldenson that his regional VP and direct supervisor were going to have a bad day on January 3, 2012. Apparently he used the company email system to send the missive. Brilliant. On January 3, 2012, Heddon tendered his two-week notice of intent to resign from Caris. (Of course, the careful reader might recall that his effective date of hire with D-Path was January 1, 2012...but really, after Christmas expenses, who doesn't need a couple of extra paychecks to help cover all the holiday shopping...) Again, Heddon felt compelled to use the company email system to document exactly how much smarter he believed he was than Caris. After tendering the resignation email, Heddon then emailed Caris’ IT asking them to ship the new laptop with the new copy of SalesLogix on the hard drive to his home address. Naturally, the Caris IT department complied and express shipped the newly outfitted PC to Heddon's home address.

Crazily enough, when Caris learned on January 10, 2012, that Heddon wanted the laptop containing a recent copy of the company's proprietary information to be sent to his home address, after he had tendered his resignation, they cried foul and ended his notice period prematurely, effective January 5, 2012. Like an outraged parent caught napping at curfew, Caris then demanded the return of the brand new laptop, plus two client computers Heddon also had in his possession.

After retrieving the laptop, Caris discovered that Heddon had created a list of Caris client names on January 9, 2012. Shocking, I know. Shortly thereafter, they observed that D-Path was apparently providing services to Caris' clients, and seemed to have made headway with Caris’ biggest clients. Try to look stunned here. For those who've been down this path before, you know what happened next. Caris sued Heddon for breach of noncompete, nonsolicitation and misappropriation of trade secrets. Like the parent of a rebellious teenager caught crawling out through the bedroom window well after curfew, Caris felt like they had Heddon "red-handed."

But, such was not the case. Although the court found the noncompete and nonsolicitation agreement valid, it was overbroad in restricting Heddon from competing in all 50 states, even though he only worked in southwestern Florida. The court found it was only reasonable to restrict him from competing in the area where he had worked, and held that Caris had not presented any evidence that Heddon was in fact working in that specific portion of Florida for D-Path or that he contacted the customers he had a relationship with while a Caris employee. Thus, while there was an enforceable noncompete, the court denied injunctive relief because Caris had no evidence that Heddon violated the agreement in southwestern Florida.

The court also denied injunctive relief regarding disclosure of confidential information, although Heddon clearly had access to data for all 50 states and clearly had compiled a list of Caris customers, even receiving the list of Arizona customers from Ms. Goldenson. Caris had failed to produce any evidence that Heddon used any confidential information, thereby breaching the nondisclosure covenant.

The case is a timely lesson in the school of noncompetes. While the facts may invoke our sympathies by confirming that Heddon was a doofus who played fast and loose with Caris' information, they weren’t legally sufficient to support injunctive relief. An employer must show that the former employee actually took confidential information and actually used or disclosed it. This isn't always easy -- just as it’s not always easy to know exactly what a teenager is really doing online. Cursory review of a teen’s smartphone may create suspicion of illicit activity (why did she look at THAT Instagram photo?), but proving any illicit activity actually occurred usually requires a lot more work, like getting the teen to actually speak a complete sentence in your presence. Not necessarily impossible, but certainly not easy or fun for either party.

The Inevitable Disclosure Doctrine

M. Cheryl Kirby — Fri, 29 Jun 2012 00:00:00 -0500

So you’ve got an opportunity to hire a top salesman away from your biggest competitor. You’ve done your homework and learned that this new prospect never signed a non-compete agreement. In fact, he signed nothing restricting him from disclosing your competitor’s confidential information – which would be of great value to you. You also know that this prospect worked for your competitor for many years and has plenty of valuable information about your competitor's pricing and customers in his head. So there’s no reason for him to take any documents, electronic or otherwise, when he leaves, and you caution him to return everything before he comes on board with you.

Are you home free now? Can you hire this prospect and use his knowledge of your competitor’s confidential information to take its customers?

Not so fast – there may still be road blocks ahead, including the "doctrine of inevitable disclosure." Inevitable disclosure occurs when an employee has confidential information and will not be able to avoid using that knowledge to compete against the employer from whom he got that information. It is based on the assumption that an employee in a given situation, typically working for a direct competitor of a former employer, will inevitably use or disclose this confidential information in his new job.

Texas courts have been hesitant to definitively adopt the doctrine of inevitable disclosure and have taken a more conservative position between "probable" and "inevitable" disclosure. Regardless, however, of whether inevitable or probable, these doctrines open the door to the courthouse for your competitor to obtain injunctive relief to stop its former employee from working for you even though he did not sign a non-compete agreement. You also may face exposure to claims of tortious interference with contracts and/or prospective business relations if your competitor’s existing or prospective customers jump ship and follow your new employee to you.

So what can you do to keep a valuable new hire from your competitor on board without falling victim to the inevitable or probable disclosure doctrine? First, require the new employee to sign an agreement promising that he will not use or disclose any confidential information of your competitor. Next, ensure that he understands that information about your competitor’s customers belongs to your competitor, regardless of whether he still has it in his head, and that any contact he may have with such customers should not be initiated by him. Also remind him that his "electronic tracks" of communications with former customers will be out there to be found later should litigation ensue. Finally, require the new hire to sign a non-compete agreement with you, and you will give him an incentive to scrupulously follow the rules about not disclosing your competitor’s confidential information.

Three Pitfalls of Joint Representation in Non-Compete Cases

W. Mark Bennett — Tue, 19 Jun 2012 00:00:00 -0500

Growing up with two grandparents who survived the Great Depression, I often heard “a dollar saved is a dollar earned.” While sage advice, too many companies adhere to the principal when they find themselves a party to a lawsuit involving a non-competition agreement. Companies hire a lawyer to represent the company, and frequently because the lawyer is already familiar with the case, the company asks that same lawyer to also represent the employee. While economical, this joint representation poses unique problems and issues for the attorney which are rarely, if ever, realized until it’s too late:

1. Knowledge of the Employer

When the former employer sues the departing employee and their new employer on a noncompetition agreement, it inevitably claims tortious interference with contract or some similar claim. The basic idea behind the allegation is that the new employer intentionally interfered with the existing employment relationship between the employee and former employer. Common defenses include a lack of knowledge of the non-compete agreement by the employer and a certification by the employee that nothing prohibited her from working for the new employer, neither of which are available in a joint representation relationship.

Ethical rules prohibit an attorney from representing two parties in a single case where there exists a conflict of interest, or the likelihood of developing a conflict between the parties’ respective positions in the case. If the attorney argued either of the common defenses, it could create a conflict where the employer would be arguing conflicting positions. Specifically, that it should not be held responsible for the breach of the non-compete agreement because it was either unaware of the agreement or the employee lied in her attestation that nothing prohibited her from working for the new employer. Put another way, a joint representation creates the presumption for the former employer’s case that the new employer was made aware of the non-compete agreement, reviewed the agreement, made its own assessment about its validity, and hired the employee anyway.

2. Employee’s Bad Acts

Worse yet is the scenario where the employee took trade secrets and confidential information, began calling customer’s to entice them to move their business, or sent the helpful e-mails to the new shop to get them started in the right direction. While typically easy to defend against, in a joint representation arrangement the employer gets imputed with not only knowledge of the acts, but adoption of the behavior. A lawyer representing the employee and new employer would be dancing on the proverbial tight rope. The jury argument would have to be that the employee did nothing wrong, alternatively, even if the employee acted inappropriately, the new employer, his other client, is not responsible for such bad acts because the employer was unaware of the behavior.

3. A Conflict Is A Conflict Is A Conflict

While a well drafted engagement agreement, clearly identifying the possibility of the conflict and explaining the limitation on the representation as a result, might save the lawyer if executed by both clients with informed consent. Failure to identify the issue until after the representation has commenced can result in a disastrous result for the lawyer, the clients, and possibly the lawyer’s E&O carrier. Texas Legal Ethics Rule 1.06, comment 3, states that "[a]n impermissible conflict may exist or develop by reason of substantial discrepancy in the parties' testimony, incompatibility in positions in relation to an opposing party or the fact that there are substantially different possibilities of settlement of the claims or liabilities in question." Moreover, comment 7, indicates that there is an objective standard of review about whether the consent in this scenario would even be advisable for the lawyer to request: “when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved should not ask for such agreement or provide representation on the basis of the client's consent.”

Though seemingly a cautionary tale for lawyers, the pitfalls of joint representation in non-compete cases has more of an impact on businesses than most appreciate.

Mind Your Business

Francine W. Breckenridge — Mon, 11 Jun 2012 00:00:00 -0500

That’s right, it is time for employers to mind the word “business” in their non-compete agreements. Do you know what “business” your company is attempting to restrict ex-employees from competing in? Well, you better make sure that term is thoroughly defined in your non-compete language. A recent case, EXFO America, Inc. v. Dan Herman, instructs employers that the term “business” must be defined in order for the non-compete to be enforced.[1] Mr. Dan Herman left EXFO and, of course, went to work for one of its competitors. EXFO, relying on its non-compete agreement, sought injunctive relief against Dan. The non-compete at issue defined “business” as “information relating to the manufacture, marketing, and distribution of” and then left a blank for the company to describe the products or attach a list as an exhibit. You guessed it—unfortunately, there was no description of products and no attached list of products. Consequently, Dan argued that the agreement was unenforceable because the term “business” was left undefined.

Interestingly, the Court found that the rest of the language in the agreement made it clear that the term “business” encompassed the manufacture, marketing, and distribution of EXFO products, but did not specify which products. EXFO had several “platforms” of products and it argued that Dan could not compete with EXFO by selling all of these platforms for the competitor employer. However, the evidence at the temporary injunction hearing showed that the only relevant products that were in existence at the time Dan signed the employment agreement were contained in EXPO’s “EAST” platform. Therefore, the Court enforced the restriction only as to the products in the “EAST” platform, but not as to the hundreds of other products in the other platforms because “business” was not defined in the agreement.

So what does this mean for you? First, make sure that prior to an employee signing any employment agreement, the document is complete. Second, review your non-competes to make sure that the term “business” is thoroughly and specifically defined so it will be enforceable. Minding your business is essential if companies intend to take legal action to enforce non-competes they draft.

[1] EXFO America, Inc. v. Dan Herman, 2012 U.S. Dist. LEXIS 65706 (May 10, 2012).

Noncompete Lessons Learned from Late Night TV: Does Geography Matter?

Monica Velazquez — Mon, 04 Jun 2012 00:00:00 -0500

Sofia Petrillo from The Golden Girls would say, “Picture this, Sicily, 1926….” For her, the story always began in a specific location, an actual place one could picture. When drafting Texas noncompetes, I have always followed Sofia’s rule and included a specific geographic scope or location. To avoid ambiguity, or in anticipation of a trial court’s possible reformation of the noncompete, I advise clients to use a particular geographic scope that reasonably protects their legitimate business interests and makes sense. Usually, it is a 50-100 mile radius from office location(s); particular county(ies); the DFW Metroplex; cities in Texas or across states, including parishes in Louisiana; or, in unique cases, the entire United States. However, a global economy and e-commerce has made it harder to define a reasonable geographic scope. Surprisingly, Texas courts are providing recent guidance on this issue.

Historically, a noncompete with a broad or no geographical scope was unenforceable as a matter of law.[1] In those rare cases, courts would reform the noncompete, regardless of whether a party requested reformation.[2] In other cases, courts held that listing specific existing customers or a particular client base was an acceptable substitute for a geographic scope in a noncompete.[3] That practice was recently affirmed in what was literally a dogfight of a case – Salas v. Chris Christensen Systems.[4]

Chris Christensen Systems, a renowned manufacturer and distributor of “high quality dog grooming products that are used by dog show enthusiasts around the world,” hired Eric Salas as VP of Sales and Education Director. Mr. Salas signed a 5-year noncompete and confidentiality agreement prohibited him from using and disclosing CCS’s confidential information, from soliciting CCS’s suppliers, and from interfering with, or enticing away from CCS, any clients or accounts with whom he had direct contact with at any time while employed at CCS. Throughout his employment, Mr. Salas received training about CCS’s unique dog grooming products, systems and other trade secrets, including its confidential customer and distributor list and ingredients and manufacturing methods for its products. After fifteen months, Mr. Salas resigned and, allegedly, was soon using CCS’s confidential information to promote the products of CCS’s main competitor, Pure Paws. Further, he induced two of CCS’s main distributors to discontinue selling CCS products and to begin promoting and selling the competitor's products. According to CCS, these acts resulted in the company losing over $100,000 in profits.

Of course, the million dollar question was, would the appellate court enforce the CCS noncompete without any geographic scope? The resounding response was, yes. The parties fought over numerous procedural matters, but when the appellate court analyzed the noncompete, it did not think twice about enforcing it. The 5-year duration and scope were reasonable as a matter of law. Significantly, in the absence of a geographic scope, the client base (those businesses engaged in providing and manufacturing pet supplies and related products manufactured and distributed by CCS) was an acceptable substitute. The Court also observed that even if the noncompete’s geographic scope was non-existent, the employee was also prohibited from using his former employer’s confidential information and trade secrets. No contract was necessary to prohibit the employee from such conduct. The lower court’s judgment and CCS’s damages were affirmed, including $175,000 in punitive damages.

As with any of Sofia Petrillo’s parables, there is always a moral lesson to be learned. In this case, geography may no longer matter, but noncompetes must contain specific customer or client-based restrictions reasonably tied to the employee. “Picture this, you sell high quality dog grooming products used by dog show enthusiasts around the world….”

[1] Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 793-94 (Tex. App.—Houston [1st Dist.] 2001, no pet.); Zep Mfg. Co. v Harthcock, 824 S.W.2d 654, 661 (Tex. App. – Dallas 1992, no writ).
[2] Leath v. Tracer Constr. Co., Civil Action No. 1:08-CV-358, 2009 U.S. Dist. LEXIS 126167, at *18 (E.D. Tex. Aug. 18, 2009)(lack of geographic limit is not fatal); Courtroom Sciences, Inc. v. Andrews, No. 3:09-CV-251-O, 2009 U.S. Dist. LEXIS 39917, at *30 (N.D. Tex. May 11, 2009)(reformation is particularly necessary "when no territory has been clearly identified and defined.").
[3] Gallagher Healthcare Ins. Servs. v. Vogelsang, 312 S.W.3d 640, 654-55 (Tex. App.—Houston [1st Dist.] 2009, pet. denied); Totino v. Alexander & Assocs., No. 01-97-01204-CV, 1998 Tex. App. LEXIS 5295, at *9-16 (Tex. App. – Houston [1st Dist.] Aug. 20, 1998, no pet.).
[4]Salas v. Chris Christensen Sys., No. 10-11-00107-CV, 2011 Tex. App. LEXIS 7530 (Tex. App.—Waco Sept. 14, 2011).

You gotta keep the secrets secret.

M. Cheryl Kirby — Fri, 18 May 2012 00:00:00 -0500

Everyone knows that, to have an enforceable noncompete, the general rule is that an employer can exchange its confidential information for the employee's promise to keep it confidential. Thus, employers routinely have new hires sign a noncompete acknowledging that the company will give him/her confidential information and requiring the employee to keep this information confidential. Good agreements specifically designate the confidential information as "consideration" for the employee’s agreement not to compete. Even better agreements keep the description of the confidential information narrowly tailored to fit the actual employment circumstances of the employee who signs it because an overly broad description can undermine the whole agreement.

While all of this may give you an enforceable noncompete, you won't be able to enforce your enforceable noncompete if the "confidential" information wasn't so confidential after all. Employers must do what they can to make sure the confidentiality of the information they provide is never in dispute, therefore increasing their ability to enforce the noncompete.

The starting point is determining what information is confidential and keeping it confidential. For information to be truly "confidential" and of value to the company, it should have commercial value because it is not generally known by people outside the company who normally deal with that type of information. In this age of advanced technology that allows one person to disseminate information to potentially millions of people with just a few keystrokes, keeping information from becoming "generally known" becomes more difficult every year. How to maintain confidentiality of information should be determined by the type of business being conducted and should include procedures to ensure that only employees with a "need to know" have access to any given piece of confidential information. This can be as simple marking documents "confidential" or more complex like password-protecting specific information.

Smart employers recognize that there are other confidentiality issues that may present roadblocks to the enforcement of non-competes. For example, the use of independent contractors who have access to the company’s confidential information can destroy its confidential nature. Since independent contractors are, by definition, free to compete during the term of the contract , it is particularly important to require them to sign non-disclosure agreements and to restrict their access to company information. Restricting a contractors' access to company information serves as another arrow in the quiver of evidence to show that the company guards its confidential information and is able to enforce its non compete agreements.

The bottom line - haphazard handling of confidential information can destroy its confidential nature and, under Texas law, keep a tightly written noncompete agreement from being enforced. Do what you have to do to keep your information secret, or you'll end up with a perfectly-worded noncompete that is perfectly useless.

Can you really determine the Who and the What of Noncompete Enforcement?

Tiffany G. Hildreth — Fri, 04 May 2012 00:00:00 -0500

Anyone who has been to court on a noncompete knows that WHO is interpreting the noncompete under WHAT law can be crucial to whether (or how much) the noncompete will be enforced. Many employers, therefore, add choice of venue and law provisions into their noncompetes which require the noncompete to be determined by a particular court under the noncompete laws of a particular state.

Does Texas law countenance this type of “strategery?” As in all things legal, the best answer is “it depends.” Two Texas Supreme Court cases offer guidance - In re AutoNation, Inc., 228 S.W.3d 663 (Tex. 2007) and DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Tex. 1990). Under AutoNation, Texas courts will likely honor the parties’ agreement to litigate the noncompete in a specific venue but, under DeSantis, they may not interpret a noncompete under another state’s laws, even if the parties so agreed.

In DeSantis, a Texas-based employee worked for a Florida-based company and was subject to a noncompete limiting his post-employment activities in Texas and requiring Florida law to govern the noncompete’s interpretation. The Court acknowledged the “party autonomy” rule which defers to parties’ agreement for governing laws, but cautioned that parties cannot require governance by the law of a jurisdiction that has no relation whatever to them or their agreement. And they cannot agree to thwart or offend the public policy of the state whose law would otherwise apply. The Court found that: Texas had the more significant relationship to the parties than Florida, Texas had a materially greater interest than Florida in deciding the enforceability of the noncompetition agreement in this case, and that enforcement of the particular noncompete could be contrary to Texas fundamental policy.

Several years later, in AutoNation, the Court considered whether to enforce a Florida venue clause upon a Texas resident who sought to declare his noncompete unenforceable under Texas law. The Court “declined … to superimpose the DeSantis choice-of-law analysis onto the law governing forum-selection clauses.” Affirming “the principle that parties generally have the freedom to negotiate agreements as they see fit,” the Court found that “fraud, over reaching, or undue hardship” had not been shown to support an exception to the rule that forum-selection clauses are generally honored. While DeSantis may require Texas courts to apply Texas law to certain employment disputes, it does not require suit to be filed in Texas when a forum-selection clause mandates venue elsewhere.

All of this means that, in Texas, parties can probably plan on WHO will determine the noncompete, but shouldn’t hold their breath as to WHAT law will govern, regardless of what their noncompete says. Well, some certainty is better than none.

At Least Half a Million Reasons Why a Ten-Year Noncompete Was Reasonable

Jana H. Woelfel — Thu, 26 Apr 2012 00:00:00 -0500

Clients often want noncompetes to last as long as possible, especially when they are buying a business and paying a premium for the business’ goodwill. They DO NOT want the seller to cash the check and promptly open up shop down the street, thereby diminishing the client’s likelihood of future success with the newly purchased business.

But, just how long can a business-purchase noncompete reasonably last under Texas law?

Last month the Fort Worth Court of Appeals held that a 10-year noncompete given in connection with the sale of propane cylinder exchange business was not per se unreasonable. Heritage Operating, LP v. Rhine Bros., LLC, 2012 Tex. App. LEXIS 2065 (March 15, 2012). The Court recognized that a noncompete signed by an owner selling a business is quite different than a noncompete signed by an employee, in part because goodwill is a protectable, valuable asset and the parties may agree upon its value and the length of a noncompete necessary to protect it. Heritage’s chief legal officer testified that the parties attributed $7 million of the purchase price to good will and other intangibles. Clearly the goodwill had material, substantial value. The seller tried to reduce the noncompete term by arguing that 5 years longest reasonable length of time for the noncompete because the value of any confidential information sold to the buyer would substantially diminish after that time. But, there was no evidence that the goodwill’s value would cease after 5 years.

Although not explicitly stated in the opinion, we believe the Court may have been also been swayed by the seller’s own testimony. When asked if he thought it was fair for him to have signed the noncompete, he replied, “Yeah, I got money for it.” In fact, he got paid half a million dollars solely to agree to the 10 year noncompete. Under the circumstances, I can think of seven and a half million reasons why the court would enforce the 10-year noncompete.

Social Media and Nonsolicitation Agreements – The Questions yet to be Answered

M. Cheryl Kirby — Tue, 10 Apr 2012 00:00:00 -0500

Let me pose a “hypothetical” that may, in fact, be more common than employers want to admit. Assume an enforceable one-year noncompete agreement in which Employee promised not to compete with Employer in the state of Texas and would not solicit any Employer customers with whom he had contact during his employment. Let’s also assume that, during his employment with Employer, Employee routinely posted to social media sites on which he had “connections,” some of which just happened to be Employer’s customers.

As all good things must end, Employee quits his job and moves out of state to work for a competing company. Because he is of the generation that discloses everything, Employee promptly posts these facts on his usual social media sites. Due to the instantaneous and viral dispersal of such posts, they are seen by personal friends, family and, of course, the Employer customers who are his cyberspace “friends.”

Shortly after posting his good news, his screen lights up with messages from Employer customers who plan to contact him and send him their business at his new employer.

Has Employee legally violated his non solicitation agreement? No Texas appellate courts have specifically addressed this issue. Regardless, would a Texas trial court do anything about this, especially when there was arguably no intent to violate the agreement? Finally, what are the practical implications for the Employer, now that its customers have already indicated their preference for Employee? Given all of these unanswered questions, employers would be well advised to consider addressing this issue in their nonsolicitation agreements up front.

Alanis Morisette, The Rolling Stones and Texas Noncompetes

Kimberly S. Moore — Wed, 15 Feb 2012 00:00:00 -0500

Alanis Morisette would have to say “Isn’t it ironic, don’t ya think?” The Texas Supreme Court has spent the last six years doing everything possible to make it abundantly clear that Texas noncompetes are enforceable. Yet, according to their district court brethren, only twenty five percent of noncompetes are enforced. Where is the disconnect?

The Court has decreed that noncompetes are enforceable and trial courts should set aside their heightened scrutiny of the timing and type of noncompete consideration. Instead, they should evaluate time, scope and geography of the actual noncompete provision to fashion the most appropriate relief. Of course, time, scope and geography have always been important parts of the noncompete statute, it's just that hyper-technical consideration issues so often resulted in the noncompete being unenforceable.

Despite these directives, many trial courts instead focus almost exclusively on the arguably non-legal aspects of noncompetes--how long will the employee be out of work, for what type of work and where? Consideration of these questions allows the courts to avoid enforcing noncompetes which would keep people from working. Since trial courts exercise broad discretion at the temporary injunction stage where most noncompetes are enforced, it seems likely that noncompete enforceability will continue to be determined on these more “human” considerations instead of the legal inquiries promulgated by the Texas Supreme Court and the statute itself.

Thus, although the law has shifted and noncompetes are “technically” enforceable, the outcomes remain largely the same. Perhaps the situation is more Rolling Stones than Alanis Morisette--You Can’t Always Get What You Want.

On your way out the door, keep your hands in your pockets.

Martin Thornthwaite — Thu, 27 Oct 2011 00:00:00 -0500

Time and again, employees find themselves in litigation over their former employers' confidential information or trade secrets. New employers are also at risk of being brought in as parties to the lawsuits on tortious interference or similar claims. Most companies nowadays understand they can determine whether an employee has downloaded and transferred company information onto a portable electronic storage device or e-mailed information to a non-work e-mail account. In fact, many companies monitor such behavior as a matter of course or can easily retrieve it if they suspect something is amiss.

Employees should not keep any documents or electronic files containing their employer's confidential information or trade secrets upon leaving and should be aware that subsequent employment with a competitor will likely result in heightened scrutiny on the part of their former employer. For example, in a lawsuit filed on October 21, 2011, Groupon Inc. has accused two former sales managers of taking confidential trade secrets with them in order to aid Google's competing Google Offers service. So far, Google has not been named in the lawsuit. As an initial matter, Groupon is seeking a court order to prevent the former employees from disclosing and/or using customer lists and sales and marketing plans for Google's benefit. Whether discovery will ultimately support the allegations in the lawsuit remains to be seen, but you can bet these former managers' e-mail and computers will be thoroughly inspected.

Although a theft of trade secrets case is often expensive to prosecute because it generally involves extensive discovery on an expedited basis and hearings for a temporary restraining order and injunction long before a trial date has even been set, companies are often willing to do whatever it takes because of the critical information and competitive advantages at stake. The causes of action that will likely be asserted also provide for favorable remedies. Specifically, if the employee is subject to an employment agreement, Texas allows for the recovery of attorneys' fees in breach of contract actions. Further, in addition to the laundry list of claims that can be made (e.g., breach of the common law duty of loyalty, breach of fiduciary duty, misappropriation of trade secrets, unfair competition, and conversion), the Texas Theft Liability Act provides for attorneys' fees as well. Even more concerning is the companion Texas Penal Code provision that classifies theft of trade secrets as a third degree felony.

Depending on the facts of the matter, the possibility of criminal liability is real. If the intent to convert a trade secret is related to or included in a product that is produced for or placed in interstate commerce, the federal theft of trade secrets statute is also in play. This statute allows for imprisonment of up to ten years and the imposition of hefty fines. For example, on October 11, 2011, a former employee of the hedge fund, Citadel, LLC, had a criminal complaint filed against him by the United States Attorney's Office in federal court in addition to a restraining order imposed on him by a civil court in Illinois six weeks earlier. The federal docket sheet shows he was arrested on October 12 and had bond set at $25,000.

In the federal criminal case, the United States has accused the former employee of taking Citadel's trade secrets related to its trading systems and attempting to hide the information. Specifically, the engineer is accused of illegally uploading trade secrets about Citadel's computer-driven trading strategies to personal devices before attempting to destroy the evidence. The former employee is alleged to have solicited friends to help him hide and destroy his storage devices, and according to the complaint, Citadel was able to recover some of the devices after engaging a diver to retrieve them from a canal where they had been dumped. Regardless of what the evidence ultimately shows, the former employee has to defend against not just claims seeking monetary damages but his freedom being taken away in an open and public forum.

Noncompete Enforceability Trend Continues

Kimberly S. Moore — Mon, 15 Mar 2010 00:00:00 -0500

One of the statutory requirements for enforcing noncompetes in Texas without the need for reformation is that the agreement be reasonable in terms of time, scope, geographical limitation and that it not impose a greater restraint than is necessary to protect the business interest or goodwill. Historically, courts have frequently found that reasonable noncompete or nonsolicitation provisions should be limited to the customers with whom the employee worked or the area in which the employee worked. The Houston Court Of Appeals held last week, in EMS USA, Inc. v. Shary; No. 2009-29767, 2010 WL 724179 (Tex.App.- Houston) that “a prohibition against contacting existing customers does not necessarily equate to a prohibition against contacting customers with whom former employees had no dealings.” Specifically, a restraint on client solicitation in a personal services contract limited to current customers is not necessarily unreasonable on its face. Therefore, the court refused to say that the employer must limit the noncompete and/or nonsolicitation of clients provision to the customers with whom the employee worked or to her sales area. Instead, the broader provision of “current clients” was not necessarily overlybroad. Further, because the court had not made specific findings at a temporary injunction hearing through testimony on the reasonableness of the restraint, the appellate court found the trial court abused its discretion in denying a temporary injunction. Thus, the apparent trend in enforcing Texas noncompetes continues.