Wednesday, I will be speaking on various placement professional legal issues with the Executive Search Owners Association in Dallas.
Wednesday, I will be speaking on various placement professional legal issues with the Executive Search Owners Association in Dallas.
Frequently when I counsel a minority shareholder about their rights I tell them what they already know – “they are along for the ride”. What does that mean? That as long as the other (controlling) shareholders don’t violate the law or their shareholder agreements, there is little a minority shareholder can do about it. Over the years various theories developed in Texas and other jursidictions that a minority shareholder could try to employ to challenge other shareholders’ conduct. This included the “freeze-out” and “oppression” theories and the claim for an “equitable buyout.”
The buyout claim basically went like this – the conduct of other sharholders was so oppresive that the court should order those shareholders to buyout the minority shareholder. This is serious relief. Basically the court is asked to ignore the tenants of the shareholders’ agreement and step in to correct a wrong. The claim sprung from a case in Houston, was never found in a statute, and was rarely used. Within the last few months the Texas Supreme Court rejected the claim entirely. First, the Court regined in the elements necessary to prove oppression holding that such a claim exists only when:
The Court then went on to hold that a buy out claim does not exist under Texas law. Though such a claim was infrequently successful, the there was at least the threat of such a remedy. With that gone, and an opinion that trends against minoirty shareholder rights, the minority owner has to recognize that they are truly “along for the ride”. This is a reality that has to be understood from the outset of the relationship and should also make shareholders think seriously about what law will control the business? If you are a majority shareholder Texas is a pretty good place to be, but the same cannot be said for the minority owner. We’ll talk about the remaining claims minority shareholders have in the weeks to come.
A few yew months ago we discussed agreements by tech giants not to poach one another’s employees. Basically the DOJ was looking into whether employers were stifiling the move of employees as well as salary increases through tacit agreements. There have been other investigations and lawsuits as well including a long-running class action lawsuit against Google, Apple, and others. In that case, which dates back to the 1980s, the trial Court rejected a $324 million settlement proposed by the parties.
Supposedly, a trial will expose unflaterring emails from Steve Jobs and agreements between various Silicon Valley firms not to hire each others employees. One expert believes that settlement number should approach a billion dollars:
A settlement that is more in the billion-dollar ballpark would likely be viewed by the court as within the zone of reasonableness, said Orly Lobel, a professor of employment and labor law at the University of San Diego. Such a figure would be closer to one-third of the potential win in trial.
Regardless of the outcome, agreements between employers not to poach employees may be good for them but undermine the ability of employees to change jobs and make more money. There has been significant discussion over this summer over the negatives involved with non-competes and legislation banning them in some states. There is a significant distinction between a non-compete (that the employee knowingly agrees to) versus an agreement between employers that the employee has no idea about. ”Fixing” the high-tech employment market has been well publicized. The question is what other industries is this going on in?
Remember when the US employed “shawk and awe” to start the war against Iraq? Do the same type tactics work in non-compete cases? One issue that typically arises in non-compete enforcement actions is who to sue. Of course the lawsuit will name the former employee who is violating their post-employment covenant but what about the new employer?
There are a couple of things to consider here. First, the objective of the litigation. In some cases that may be for the former employee to quit working for the new employer. That is not always the case. Sometimes the objective may be to keep the former employee from contacting certain customers etc. How much the employer wants to “ratchet up” the litigation may be based on this.
What are the pros and cons of filing suit against the employer:
These are just a few things to consider. Many times a company looking to enforce a non-compete will opt for the “shawk and awe” approach – file a lawsuit seeking a termporary restraining order and get to the courthouse as quickly as possible. This may be the right approach depending on the circumstances. There is no one size fits all solution. In some instances a pre-suit dialogue will make sense to see exactly what is in play. In Dallas, a party seeking a TRO has to give the other side two hours notice. In most cases you have to talk to the other side. I see this as an opportunity to begin setting the framework and expectations for resolutions of the dispute.
In Seattle, former Amazon Web Services Strategic Partnership Manager Zoltan Szabadi was sued by Amazon for violation of his non-compete agreement. Szabadi is now with Google in their cloud platform business. The lawsuit alleges:
Szabadi was directly and integrally involved with the marketing of Amazon’s cloud computing business to its partners and resellers, and played a significant role in developing Amazon’s business strategy and direction in this area . . . Szabadi was involved in developing, implementing and managing Amazon Web Services’ strategy for many of its partners, and was the first point of contact for most partners who were considering working with Amazon.
Cloud services is big business and the case confirms the rivalry between these two tech giants. It also is another example of Amazon prosecuting its non-competes. Previously, Amazon went downt his road with another employee named Dan Powers and essentially lost. Szabadi has the same lawyer as Powers, Keith Petrak, and he claims the agreement is overlybroad and chills the basic right of an employee to work. Here is a link to the lawsuit. In review of the docket it appears that Amazon chose not to seek a temproary restraining order and that Szabadi has filed counterclaim. It is also interesting to note that Amazon did not sue Google but instead focused its efforts entirely on Szabadi.
We’ll continue to monitor this lawsuit. It looks like it won’t be going away anytime soon.
I recently wrote an article for the Texas Lawyer that can be downloaded here. The focus of the article is post-employment covenant enforcement based on some of the things I’ve learned over the years. While the article is certainly from the employer perspective, the lessons learned also has application from the employee perspective.
Recently I was writing an article of the state of non-competes in Texas that I’ll post a link to once it’s published. One of the issues I discussed were forum selection provisions, which got me thinking about venue and choice of law in all employment disputes. In Texas, parties can contract for venue (where any lawsuit has to be filed) and choice-of-law (what law applies). This is important in situations where the parties to the contract live in different places – not so much when the parties are in the same place. Here’s an example:
Choice of Law; Venue. This Contract will be governed by and construed in accordance with the laws of the State of Texas, without giving effect to its conflict of laws provisions or your actual state or country of residence. Any claims, legal proceeding or litigation arising in connection with the Contract will be brought solely in a state court in Dallas County, Texas, and you consent to the jurisdiction of such courts.
Most employers like to have venue where its headquarters are located and choice-of-law in the state where the company is based. In non-compete and non-solicit disputes it doesn’t always make sense to require venue where the employer is headquartered. In many instances the employer enforcing a non-compete is going to seek a temporary restraining order or temporary injunction. Part and parcel to these types of proceedings is expedited discovery where the parties exchange documents and conduct depositions. It is much easier to enforce an injunction in the place where the former employee lives. That court likely has jurisdiction over the employee, can enforce its orders with contempt proceedings, and it is logistically easier to serve and enforce any rulings from the court.
Outside of these types of disputes the employer needs to think about a few things when deciding venue. How likely is it there is going to be a dispute? Will forcing the employee to file suit in the employer’s hometown dissuade them from filing suit because of costs etc.? Does the company well known and have a good reputation within their home jurisdiction? Usually the company will default to home venue.
In terms of choice of law, make sure the contract terms are enforceable under the state chosen because state can differ. For example, Texas recognizes non-competes, California does not in most instances. Also, and a more of a common sense point, judges are more familiar with the laws of the state where they live.
These are just a few things to think about when preparing an employment agreement, but they can be some of the most important. The first thing I look at when reviewing an agreement is the forum and choice of law selection. These are key in both defending and prosecuting claims.
A recent article in the New York Times highlights the use of non-competes in a wide variety of occupations including a summer camp counselor and a hair stylist. The article seems to casts non-competes as used in too many situations and that there is a rise in non-compete enforcement. I’m not sure I agree with the conclusion that non-compete enforcement is on the rise. It’s a hard conclusion to reach because there really aren’t statistics maintained on these types of things and your left to looking at appellate opinions (which don’t cover every lawsuit that is filed) or anecdotal evidence. I do agree that these types of agreements seems to be popping up in more and more occupations – especially in service industries.
The article sums up non-compete laws across the US:
The United States has a patchwork of rules on noncompetes. Only California and North Dakota ban them, while states like Texas and Florida place few limits on them. When these cases wind up in court, judges often cut back the time restraints if they’re viewed as unreasonable, such as lasting five years or longer.
“’In most states there has to be a legitimate business interest, and it has to be narrowly tailored and reasonable in scope and duration,” said Samuel Estreicher, a professor at New York University School of Law.
The reason behind non-competes appearing in more industries and occupations is because there is no downside for an employer to insist on such a covenant. First off, a Texas employer can include and insist on a non-compete or non-solicit and then choose not to enforce it. So the employer gets the benefit of intimidating or at least making an employee think twice about moving to a competitor but then never sue. The employer could also send the former employee and their new employer some type of demand letter letter and force some type of dialogue or resolution. Basically, the employer can us the threat of enforcing the non-compete without having a court every construe its terms or determine whether it is actually enforceable.
Why don’t more employees challenge non-compete in court? The reason is simple – $$$$$. Most employees don’t want to and can’t fund litigation to find out if there non-compete is enforceable. There are limited circumstances where an employee files a declaratory judgment action and request that the court find the non-compete is enforceable. Of course there are risks to this. The court could find it is enforceable or tailor the non-compete to make it enforceable. Ninety-nine percent of all non-compete cases involve an employer suing a former employee and usually seeking a TRO. In response the employee claims the non-compete is unenforceable. The problem here is the employee is back on his or her heels having to defend the non-compete claims and at the same time assert the agreement is unenforceable.
So the proposal from other states is just to outright ban the agreements. I don’t think that’s a likely solution in Texas but certainly the employer has the upper hand with these types of agreements. Ultimately the best defense to a post-employment covenant is not to sign one, but that is not always an option.
If you follow the ups and downs of non-competes across the country you’ll note that there is a populist fervor in favor of banning non-competes in some states including Massachusetts. The argument generally goes that non-competes stifle innovation and of course prohibit an employees’ ability to move elsewhere (which is true). California has essentially eliminated employment non-competes and as a tech leader other states argue they should follow California’s lead. The Massachusetts approach has been to propose beefed up trade secret laws, specifically adoption of the uniform trade secrets acts, to keep departing employees from using trade secrets with their new employer. The problem with this approach is what if the employer has an interest worthy of protection (training or something that doesn’t quite rise to the level of a trades secrets -proprietary information).
Texas has not seen the populist fervor against non-competes, yet. It’s just not the hot button issue it may be in other places or something for politicians to focus on – of course that can always change in the next legislative session. The Texas Non-Compete Statue has been in place for many years without any significant changes. I expect that to remain the same. As we have discussed here previously, an enforceable Texas non-compete must be ancillary to an otherwise enforceable agreement and reasonable in time and scope. The same holds true for non-solicitation agreements and anti-raid provisions. In theory it is a very high standard to satisfy the non-compete statute. Of course most non-compete disputes are resolved by a district or county court judge in Texas and never reach the scrutiny of the appellate court. That means we’re talking “rough justice” where the trial judge will attempt to do what is fair.
For now Texas remains pro-employer and this holds true for post-employment covenants as well. There just simply isn’t an anti-non-compete consensus in Texas nor does there to be one on the horizon. So continue to draft away – in compliance with the statute.
In late May a Houston jury issued a $3 million dollar plaintiff’s verdict against National Oilwell Varco. The jury awarded Plaintiff Manasseh Simmons $775,000 in back pay and $2.5 million dollars in punitive damages based on violations of various anti-discrimination laws. A few days later, the case settled for an undisclosed amount.
I don’t know anything about the allegations in the case or the defenses of National Oilwell. For whatever reason the jury was not happy with the actions of the employer. The result confirms a truth that all employer/defendants must factor into the claims they are defending – juries tend to identify with employees not employers. The reason is pretty simple – most people have been employees at some point in their lives. Most people have not been business owners or in an HR decision making position for an employer. Anytime an employer is considering a claim this relative position must be considered.
When I was a a younger lawyer we were defending a breach of contract case filed by an ex-executive. The executive claimed he was owed additional compensation. The company claimed he was not because part of the additional compensation was based on him relocating to the Dallas area. We were convinced there was no way the jury would find he had relocated and was entitled to more money. The executive didn’t move his family, didn’t change his address, didn’t sell his house. didn’t buy a house in Texas, and didn’t change his driver’s license to Texas. There was nothing that indicated he had relocated other than he would fly down on Monday, live out of a hotel during the workweek, and then fly back home on Friday.
The jury didn’t care. It found the company breached his contract and awarded him the additional compensation. I talked to some of the jurors after the result. They were decent people with no animus against my client or anything along those lines. They simply concluded that he relocated and deserved his money. I struggled with that result for a long time. Ultimately my boss at the time reminded me that we were representing “the man”, and that in a tie between “the man” and the employee, the tie goes to to the employee. (Just like in baseball when the tie goes to the runner.) Why? Because we’ve all been employees and can identify with them.
Never loose sight of this fundamental reality of defending employment claims whether they are contractual or discrimination based claims. The employee always has a little bit of a head start in proving their case. It’s just a reality of employment litigation.