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.
Sunday night was the midseason finale of Mad Men. It’s always hard to stick with a television series for more then a few seasons, at least for me. Mad Men has been no different but I still follow along into season 7. The trials and tribulations of Don Draper have been fascinating coupled with the backdrop of the 1950s and 1960s the show has been quite entertaining. In addition to filling up Sunday evenings, the show has provided some wonderful examples of business partnerships and employer/employee relations. This season has been no different.
At the end of season six Don Draper had an epoch failure where he revealed his childhood secrets during an advertising pitch to Hershey’s:
That leads us to our top “legal” moments from this season:
1. Working from home.
After the Hershey’s meltdown, the firm concluded season six by sending him home. Season 7 begins with a very interesting arrangement Don has worked out. He gives off all appearances that he is working. His secretary answers his phone (though he has no office) and he returns calls and even has some limited meetings. He is also using Freddy, a former employee, to take some of his ideas to work. Problem is he is not allowed to work. He does not actively participate in anything and the powers that be wont’ let him near any accounts. Don continues to receive his paycheck but is not allowed to work. Not a bad deal, but he is in a downward spiral of booze and lethargy. The takeaway – Paid leave should be used in very limited circumstances and most often times will fall with within some sort of disability plan offered by an employer. Don’s situation is unique. As a partner in the firm, the other partners don’t want to buy him out but they don’t want him in the office. They don’t know what to do with him.
2. What to do in the face of a non-compete?
As the partners at Sterling Cooper & Partners struggle with what to do with Don, they realize the no-win situation that has been created. When Roger Sterling and Jim Cutler discuss Don’s non-compete agreement they reach the conclusion that if they fire Don the non-compete will not hold up in court and Don will go work somewhere else and might be entitled to damages from the firm. The takeaway – Make sure your partnership agreement has a clearly defined departure plan. Both the partners and the business need to know how they will depart if necessary.
3. A very specific contract.
The other partners eventually figure out a way to return Don to work. They draw up a very specific contract that forbids him from being involved in any business pitches and drinking, among other things. He basically goes back to being a low level ad guy under Peggy’s (his former worker bee) tutelage. Surprisingly, Don agrees and is back with the firm. The takeaway – draw up specific terms for any return to work plan. Set goals and requirements for the return of the employee that must be met. To often there is a meeting with a troubled employee with no real plan of action – just a memo to the file. Those don’t help if you really want someone to stay. Don’s partners did a good job in setting specific expectations here.
4. The attempt to force Don out.
So Don happened to show up for a business pitch with a cigarette company. Cutler uses this as an opportunity to force down out as a violation of his contract but the partners vote (right in the middle of the office in front of everyone) and Don stays. The takeaway – if a partnership is going to force someone out make sure there is legal basis to do so and that all conditions in the partnership agreement are satisfied/followed. A partnership needs to follow its rules.
5. A new purchase.
On the night of the moon landing, Betram Cooper, the senior partner of the firm, passes away. That same night Cutler tells Roger and Joan that he wants Don out. Roger finds a way out and arranges for the purchase of the firm by a rival. But, the firm remains a subsidiary with Roger at the helm and Don in place. A rather contentious meeting takes place amongst the partners but the deal passes through. The takeaway - Don’t underestimate Roger Sterling.
The remainder of the final season picks up sometime in 2015. It will be interesting to see how Don Draper and the rest of the firm deals with regime change. We’ll see how Roger Sterling does at the helm.
As a follow up to my post last week, here are some things to think about including as part of an arbitration clause:
A requirement that the case be disposed of within a certain time period. (i.e. 6 months from filing);
A limitation on the number of witnesses that can be called, the amount of time each side has to put on their case, basically anything that would set parameters on how long the hearing will take;
Statute of Limitations – is a provision necessary that spells out how long a party has to bring a claim;
A provision that either adopts and references the Texas arbitration statute or Federal Arbitration Act;
A provision that specifically states there is no appeal;
Can witnesses appear by phone or some form of video, or can affidavits be submitted in lieu of live testimony?:
A provision that requires some form of mediation before an arbitration can be filed (another way to try and short circuit the process); and
If the provision dispenses with using AAA or some other group, specific details about arbitrator selection and the process of the hearing.
These are just a few additional thoughts. Obviously you can overlawyer any provision with too much information but in Texas parties are free to contract as they see fit and that goes for arbitration provisions too.
We’ve discussed the ins and outs of arbitration at length previously. I’ve spent the last few years in a number of arbitration proceedings so in no particular order here are my recent thoughts on the process:
1. Speed. From start to finish there is no faster means to an end than arbitration. I always tell folks it is hard to go to trial, everything is stacked against it. In most cases you go once you are the oldest case meaning you are looking at 2 years before a trial. That means lots of starts and stops and fees. In the case of an arbitration, the arbitrator sets the hearing date and you go. Under AAA rules the arbitrator has to provide their ruling within 30 days from the close of evidence.
2. No Appeal. Well, that’s not exactly true. There is an appeal but it is next to impossible to flip an arbitration ruling these days. AAA is creating an appeal process but at this point you are stuck with the ruling of the arbitrator or arbitrators.
3. Cost? It can be cheaper but it also can be expensive. Remember, the parties bear the cost of paying the arbitrator. Along with that there are attorneys’ fees and other costs parties have to deal with.
4. Motions to Dismiss/Summary Judgments. Depending on your perspective this can be good and bad. In most cases you won’t get to use these devices to attack the claims of a plaintiff meaning it is very difficult to get rid of claims that don’t have merit.
Regardless on where you stand on the arbitration debate, it is critical that at the time of negotiation, both sides need think long and hard about how they want their arbitrations to proceed. More often than not that type of consideration doesn’t take place until after your in an arbitration wondering why the clause doesn’t address certain items. So what should folks be considering? A few thoughts:
How many arbitrators and how are they selected? I’ve seen 1 or 3 picked from a roster of neutrals provided by the agency putting on the arbitration. It’s always a little risky to have just one decision maker but it’s also cheaper.
How much discovery? If you limit depositions or discovery requests it will save money, but the chance of being ambushed at the hearing also increases.
Do you want to limit the length of the hearing?
What law applies (Texas or some other state?) and where will the hearing take place?
Is there a loser pay provision? Can you get attorneys’ fees?
What agency (if you want to use an agency) do you want to use to administer the process – JAMS or AAA?
A clause can be as specific or general as the circumstances dictate, but there are a lot of things to think about. If the company is frequently in these types of dispute spend some time on these issues.
When instant messaging first came out, employment lawyers warned employers about the perils of such products and the good advice that they should have some policy on their use. Back then, IM software was typically downloaded and then used by the employee to talk to their friend outside of the workplace and sometimes in the workplace. My how times change. Many business from law firms to consulting firms now have IM platforms in place and encourage their use by employees. They are less formal than emails (good and bad) and the way in which the messages themselves is stored or retained varies. Messages can be used amongst employees but there are certain platforms that allow for dialogue with folks offsite like customers and even friends. I’m not going to address whether such an IM platform makes sense for your business, only some suggestions on what to do if it is in place.
Have a written policy in place. (Just like social media make sure there is something that addresses its use. A current social media or email policy may be a start for a policy.)
Communications amongst employees should be for business purposes. (Is this always going to happen no – the exact same thing with email. But the ultimate purpose of IMing and even email is for the business.)
If there are going to be communications with customers or clients make sure there is an appropriate policy. (No confidential information in messages. Some industries will restrict communications such as FINRA.)
Retention policy. (Have one that is in place and enforced.)
When one of my clients tells me they have an IM platform I immediately start thinking about discovery (I know that’s sad). I think about the opposing lawyer asking a witness about whether he or she talked with the Plaintiff about [insert issue of dispute from discrimination to breach of contract etc. etc] via IM. Then I anticipate receiving a request for production for that information and finding out that it is or is not maintained. From there it goes to reviewing IMs that may or may not be problematic.
Regardless of my angst, make sure there is policy in place. Make sure that policy meets your business needs and is enforced.