Smooth Transitions : Rob Radcliff : Texas Non-Compete Lawyer & Attorney : Langley Weinstein LLP Law Firm : Dallas Employment & Employee Departures : Smooth Transitions Law Blog

Medical device manufacture, Synthes Medical Company, has filed a number of lawsuits against former employees alleged to have violated non-compete and non-solicitation agreements.  The lawsuits illustrate the rise of litigation within the medical world over non-competes. 

Synthes, with whom I have firsthand experience, is very aggressive in prosecuting former employees who have violated non-compete agreements and non-solicitation agreements, against its former salespersons. A lot of this litigation has to deal with spinal implants, which are not surprisingly, very lucrative.

The medical industry is growing, and will continue to grow as our baby boomer generation ages. The projections are staggering:

By 2035, in the absence of change, spending for Medicare alone (which is more likely to be impacted by aging Boomers) will have more than doubled to 8 percent [of GDP], and by 2080 it will have grown to 15 percent.

The forecast for medical industry litigation includes more non-compete disputes between doctors and their medical groups as well as on the sales side of medical devices such as the Synthes lawsuits. As with any non-compete agreement, employers need to make sure that if they are using these agreements they will stick.  Meaning employers need to have a strategy in place to enforce them and not simply put them in an employment contract as an afterthought.  This is specifically an issue when you have sales persons in different state jurisdictions with different laws.

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Happy New Year!

Last year the Texas Supreme Court altered the non-compete landscape in Marsh v. Cook.  As lower courts construe the opinion we will see what its impact is on employers and employees.  The takeaway from the opinion should be that employers will attempt to offer other forms of consideration, like stock options, signing bonuses, etc., in exchange for post-employment agreements like non-competes and non-solicits.  The days of limited non-competes/non-solicits based only upon the exchange of propriety information, trade secrets, or training appears to be over.  This means industries that typically do not use non-competes could.  That said, employers should be skeptical of the ramifications of the Marsh opinion until there is guidance from other courts.

Employers should be doing all they can to protect their business in 2012 from the departing employee.  The cold reality is in an economy short on jobs, potential employees will be more willing to sign non-compete agreements.  In addition to the run-of-the-mill non-compete, employers should also consider non-solicitation agreements, anti-raid provisions, and even a garden leave policy (all discussed here previously).

Besides post-employment covenants there are general day to day business practices that are a necessity.  True trade secrets need to be protected through restricted access that incorporates some type of password as well as protections that prevent the employee from emailing such information or putting it on a jump drive and walking out the door.  It routinely happens and employers need to be vigilant in protecting proprietary information.

Finally, have termination/transition policies in place.  Once an employee is fired or determines they are going to leave, cut off their email and end their access to the computer network or other sensitive information.  It also makes sense to audit any of their recent activity to determine if they have taken proprietary information through jump drives, email, or other storage devices.  It pays to be paranoid.

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Earlier in the week we discussed policies and procedures that should be in place to deal with end of year employee departures. Companies should also consider a number of other HR related issues as the year draws to a close. Here are my thoughts:

1. Evaluation of all employment policies, including the employee handbook;
2. A review of all federal and state law changes that may impact employment practices - talk to your lawyer;
3.  A review of all employment contracts;  
4. A review of all employment files - are they up to snuff?; and
5. An evaluation as to whether the company should adopt post-employment covenants including non-competes, non-solicitations, and garden leave policies.

Now is the time to make any necessary changes before the New Year begins. Let me know if you have any additions to the list.

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Generally, many employees will wait to move to another employer until after they have received any year end bonuses or commissions they are due.  We are all familiar with stories where a top producer bolts after they get their end of year check. 

For these reasons, it is important the employers be prepared to review company policies for employment transitions. This would include post-employment covenants such as non-competes.

Critical to the employment transition practice is ensuring that the employer has protected any proprietary or trade secret information that departing employees can access. Departing employees should immediately lose access to any type of proprietary or trade secret information. This should include locking the employee out of their email account or limiting access.  That employee is now a competitor.

Employers who are vigilant about having these types of policies in place will ultimately protect their business and their product from an inevitable employee departure.

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Keeping with the NFL's Thanksgiving tradition, the Dallas Cowboys played the Miami Dolphins in Dallas last Thursday afternoon.  The Cowboys came out on top and now lead the NFC East.  That, however, was not grabbed my attention about the game.

In the fourth quarter, Cowboys tight-end Jason Witten caught a pass on the sideline.  His momentum carried him out of bounds where he ended up running over Cowboys Cheerleader Melissa Kellerman.  She wasn't injured and received a lot of camera time.

It is being reported that the Cowboys pulled the plug on Rae's twitter account.  This was after the following tweets:

I'm not the best at Jason Witten trust falls. ;)

Not hurtin' today, like some of y'all thought I would be!  Our TE isn't as tough as he looks...That or I'm way tougher than I look.;)

The Cowboys deny that there was any such instruction to Kellerman and that she personally made the decision to stop posting.  What actually occurred will probably never be known, but could the Cowboys or any Texas employer tell an employee to stop tweeting? 

First off, do the Cowboys have a social media policy for their cheerleaders?  Assuming there is a policy, does it prohibit them from discussing "company business".  In this case the company business would be the Witten sideline encounter.  Assuming there is such a policy the Cowboys could at least instruct Kellerman to stop tweeting about the company.  Now whether they would be entitled to actually instruct her to stay off social media all together is another issue.  That implicates free speech rights and other issues an employer does not want to implicate. According to the Cowboys there was no such instruction.

Bottom line, this is a great example of why a social media policy is a must have for most companies.  An employee can never foresee when an employee's social media activities may address goings on in the workplace, but they need to be prepared to address them with a robust policy.

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Many businesses have workplace dating policies in order to address potential conflicts of interest situations or sexual harassment claims. Another reason to consider having a policy is in the event of a relationship where one or both of the participants is married.

Many employers will run into a situation where this is an office affair. This could be between subordinates or a superior/subordinate relationship. Unfortunately, as long as people are people, these types of situations are going to arise. 

These types of relationships are distracting, generate all sorts of rumors within the workplace, and ultimately impact productivity. Employers need to be out in front by having a clear policy that is appropriately tailored for their business and circumstances.  Companies generally don't have anti-affair policies so in most circumstances the relationship will be governed by the dating policy.

There are a number of different policies that can be employed that range from outright prohibitions (which can be problematic) to a modified policy that requires a consent/disclosure. There is no one size fits all solution but some type of policy is recommended. 

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Some interesting stories in the world of non-compete agreement enforcement from around the United States:

 Non-Competes and Arbitration Provisions - An interesting case out of the Tenth Court of Appeals where the Court ruled reformation of a non-compete agreement could not be used to avoid an arbitration clause.

Updating Non-Competes - A nice discussion by the lawyers of Jackson Lewis about the importance of keeping non-competes up to date after a change in ownership.

Non-Competes for Salons - A case from Connecticut arising from the enforcement of a non-compete in the salon industry.

$52 Million Verdict - Breakdown of a big verdict in a non-compete case from Idaho.

Non-Competes in Arizona Medical Practices - A detailed analysis of the use of non-competes in healthcare.  

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A society fails when it cannot protect its own children.  To me that is the bottom line from the tragedy at Penn State.  What occurred could have been prevented at so many different levels from the prosecutor to the assistant coach to the coach, there is plenty of blame to spread around.  The criminal justice system, civil justice system, and other investigations will sort through those facts and conclusions will be reached.

Joe Paterno apparently complied with "policy" by reporting what his assistant coach saw.  Employment lawyers are in the business of creating policy through employee handbooks and contracts that attempt to address all sorts of situations and legal issues.  The reality is that there is no handbook that can possibly address every scenario out there and we must rely upon the discretion and judgment of the individual executive or entry level employee to do the right thing.

We expected more from a man/coach/leader like Joe Paterno and he failed to live up to our expectations.  But we also must maintain high expectations for ourselves, co-workers, superiors, and subordinates as we navigate through our day to day lives.  It is incumbent upon employers to create an environment where employees can report wrongful conduct and it is incumbent upon employees to act when necessary.  It's a sad day for us all when complying with policy is all that is expected. 

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Fulbright & Jaworski’s 2011 Litigation Trend survey provides a number of interesting tidbits on all things litigation, including some insight into social media practices by employers. There were a couple of items raised in the survey that have serious implications for employers: 

•        One-fifth of all respondents reported in a previous year their companies had to preserve or collect data from an employee’s personal social media account;

•        19% of all respondents produced, as part of discovery, electronic information stored in a social media site in the past 12 months;

•        90% of U.S. respondents reported that they allowed their employees to conduct business on mobile devices; and

•        Only 30% of respondents had to preserve or collect data for them from mobile devices for litigation or investigation.

Archiving social media communications by employees is a big deal. In the context of broker dealers, FINRA requires that some social media communications be archived. Obviously, with FINRA, there is a large regulatory body governing broker dealers. But in the context of other businesses there is usually not that type of regulatory oversight. That said, should employers be protecting themselves by archiving this type of information? That will depend on the industry and costs involved.

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A related blog post was inevitable with the World Series here in North Texas.  Right now the Rangers are up 3-2 with a game tonight in St. Louis if the weather holds.   Now to the "related" post. 

The power of social media continues to grow, and Major League Baseball’s debacle with Dirk Nowitzki’s first pitch provides an excellent backdrop of the ease of which a grass roots movement can grow in a few hours or even days. 

On October 19, 2011, ESPN reported that Dallas Mavericks star Dirk Nowitzki was nominated by the Texas Rangers to throw out the first pitch at Game 3 of the World Series in Arlington. The MLB denied the request. It remains unclear what the basis for the “nixing” was, but many speculated that it related to the ongoing labor strife between in professional basketball

Twitter then went into full effect with the #letdirkpitch:

That generated more uproar amongst local media and criticism from all. Ultimately, someone made the decision that Dirk could pitch:

Once again, another example of social media and its ability to mobilize public opinion and criticism quickly and lead to change.  

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 I’ve seen a few employee handbooks in my time, but nothing quite like the 1943 Disney handbook, which is filled with a number of illustrations as one might expect and some blatant sexism along the way.  It’s kind of like watching an episode of “Mad Men” where you can’t believe what was acceptable or the norm.

Some of the highlights: 

• Charges of outgoing calls - “At the risk of interfering with the even tenor of your social life, we must ask that you limit personal phone calls to emergencies.  You know, of course, that you will be charged for all outgoing personal calls.”
• Holidays are the same - “You will be provided holidays for New Years’ Day and Memorial Day, Fourth of July, Labor Day, Thanksgiving and Christmas.
•  Not sure if there are any all male penthouse clubs any more - “Penthouse Club – For all particulars, membership, and like that, check with Walt Pfeiffer  - Men only!  Sorry, gals. . .”

There are a number of other interesting tidbits from the manual.  The running theme throughout the manual is that the exemplar male employee is obsessed with his co-female employee and restaurant waitress. (see below) By the way Walt Pfeiffer was a writer for Disney according to IMDB but apparently also ran the penthouse club.

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The Case

FINRA recently fined Merrill Lynch $1 million over a Texas Ponzi scheme.  The case, which involved a San Antonio broker who was sentenced to prison was covered in a recent blog post in the Stockbroker Fraud blog. 

The Merrill broker persuaded investors to put money into a partnership and used at one point $1.4 million of those funds for personal spending and to support his house-flipping business.  FINRA alleged that Merrill failed to properly supervise the broker and failed to monitor the accounts that were used to operate the Ponzi scheme. 

The Cause of Action

Texas employers will always have to be aware of a potential cause of action against them for the wrongful or negligent acts of their employees.  The negligent hiring/negligent supervision is a catch-all claim where the Plaintiff alleges that the employer either (1) improperly screened the potential employee during the hiring process; or (2) failed to properly supervise the actions of the employee. 

The latter is very difficult to defend in terms of obtaining a summary judgment because there is always the argument that the employer could have done something a little bit more to prevent some type of damage to the plaintiff.  That said, strong pre-employment screening policies and supervision policies mitigate against these type of claims. 

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As we referenced earlier in the week, two Merrill Lynch executives received several million dollars in exchange for executing a release and one year non-compete with Merrill following their departure. Merrill was effectively able to take them off the market in exchange for a multimillion dollar payment. 

A post-employment non-compete is generally signed at the outset of the employment relationship, not at the time that the employee is walking out the door. Would a non-compete, signed at the end of the employment relationship be enforceable in Texas? The answer is that it is unlikely. 

In the state of Texas, generally the non-compete or non-solicitation agreement signed at the point of employee departure generally is not enforceable because there is no consideration. Certainly, there is an open question in light of the Marsh case where the consideration of some money or stock option paid at the time of departure. 

Another alternative is to tie payments to continued non-competition or non-solicitation. Put another way, Employee X will continue to receive their monthly, or bi-weekly payments as long as they don’t compete. The agreement may not be enforceable, but the former employee won't compete because they want to get paid.   

The better practice remains to have the employee execute the non-compete or non-solicit at the time employment begins. There remains too much uncertainty as to whether a non-compete signed at the end of the employment relationship is enforceable under Texas law. 

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It recently came to light that two Merrill Lynch executives were fired and paid approximately $11 million in exchange for signing a non-compete and release agreements.  Some were outraged about the payment considering the current plight of BofA and Merrill. But for most employers, a severance payment in exchange for a release makes good sense.

In many situations it makes sense for an employer to seek a release from an employee at the time that their employment term ends. The conclusion of the employment relationship presents the opportunity for the employee to obtain a release in exchange for some type of severance payment. There is no hard and fast rule as to what that amount should be. Severance is not required in the state of Texas.

Under the Texas Payday Act and other statutes, the employer must pay the employee whatever he or she is owed at the time of termination. Put another way, the employee cannot be forced to sign a release in exchange for receiving money that they are already owed. 

The release should be designed to have the employee give up any potential claims that he or she may have against the employer. Please consult with a lawyer to ensure that the release is drafted broadly enough to cover the claims and that any statutory requirements are met for the release. The last thing you want to do is prepare a release that is ineffective. 

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