Smooth Transitions

Smooth Transitions

addressing the Legal issues arising from the departure of employees & Business breakups

When the employer goes too far: The Jimmy John’s Non-Compete

Posted in Non-Compete Agreements

findaJJLandingI like Jimmy John’s sandwiches.  Fast service and a decent sandwich.  Unfortunately it pains me to reflect on the non-compete that they are apparently using with their workers.  Yes, the gentleman or lady behind the counter is now subject to the following:

Employee covenants and agrees that, during his or her employment with the Employer and for a period of two (2) years after … he or she will not have any direct or indirect interest in or perform services for … any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches and which is located with three (3) miles of either [the Jimmy John's location in question] or any such other Jimmy John’s Sandwich Shop.

Seems a little over the top? Basically a court that actually enforced such an agreement would have to prevent a Jimmy John’s worker from working in the sandwich business anywhere within 3 miles of a Jimmy John’s store.  In Dallas that would mean you couldn’t work for any sandwhich shop in all of the Dallas Ft.Worth Metroplex.  You might be able to find something in a more rural area.

The Jimmy John’s non-compete is symbolic of something more troubling than a bad non-compete agreement.  It’s a bad non-compete agreement that I would suspect Jimmy John’s never intends to enforce.  Non-competes are desinged to protect interests worthy of protection.  This could include training, proprietary information, trade secrets, good will, and other financial considertation in Texas.  I find it hard to believe that a low level Jimmy John’s sandwhich maker ever received any of these things as part of his employment.  Maybe I’m wrong.

The power of the Jimmy John’s non-compete is that it might make a employee rethink moving to a competitor or from leaving Jimmy John’s in the first place.  It is highly unlikely that a lower level entry worker is every going to challenge the non-compete in court.  The same probably also holds true for Jimmy John’s.  Do they really envision a scenario where the individual sandwich maker is able to leave with the secrets of Jimmy John’s or takes customers with him?   I think not.  I doubt there are few documented cases of a Jimmy John’s employer went to a competitor in a lower level position.

I represent employers that enforce non-compete and other post-employment covenants.  They have interests that are worthy of protection.  When employers use non-competes in the wrong circumstances it undermines the employer who is trying to enforce a legitimate non-compete agreement.  Jimmy John’s has gotten a lot of bad press over its non-compete.  I suspect they might be reconsidering its use.

But I didn’t sign that non-compete.

Posted in Uncategorized

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In Cameron International Corp. v. Guillory, a case very similar to the Drennen opinion we discussed last week, the Houston Court of Appeals examined a trial court’s denial of a temporary injunction involving an oil field services employee.  Jeremy Guillory, like the Exxon employee in Drennen, was a participant in a restricted stock program that included a “detrimental activity” policy.  Detrimental activity was defined to mean:

  • engaging directly or indirectly in any business, which is or becomes competitive with [Cameron];
  • soliciting, interfering, inducing, or attempting to cause any employee of [Cameron] to leave his or her employment; and
  • directly or indirectly soliciting the trade or business of any customer of [Cameron].

So the language is very similar to a non-compete and the court of appeals characterized it as such.  Guillory went on to start a competing venture and Cameron sued to stop him. The trial court denied the injunction request.  The appeals court focused on two issues: (1) choice of law; and (2) the fact the employee did not physically sign the non-compete.  After determining that Delaware law controlled, the appeals court moved on to the siganture issue.

Guillory never physically signed the agreement.  Instead, he was presented with the agreements on his computer.  In order to move to each individual agreement Guillory had to click on an “accept” button that indicated he reviewed and understood the documents.  Guilory did not dispute that he clicked the accept button but asserted some type of claim that either didn’t understand the agreement or read it.  The appeals court rejected that argument.   The court then noted that both  Texas and Delaware have adopted the Uniform Electronic Transactions Act which contains a provision that prevents a party from claimining an agreement is not enforceable when the record of signature is in electronic form. Because of that, Guillory could not claim that the agreement was uneforceable.

The appeals court went on to examine the agreement under Delaware law and proceeded to reverse the trial court and enter an injunction.  The takeway is courts are going to enforce electronic agreements, which are seen more and more in both the employment and commercial contexts. Guillory signed the agreement and wasn’t going to get out of it simply because there was no physical signature.

 

A new tool for the Texas employer? The Exxon Incentive Plan

Posted in HR Issues, Non-Compete Agreements, Uncategorized

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From the employer’s perspective it’s always nice to have something new to use to prevent an employee from competing or using proprietary/confidential information once the employment relationship ends.  Of course we talk all the time here about the standard post-employment covenants like the non-compete and non-solicitation provision.

One item we haven’t addressed previously is an incentive plant that contains a forfeiture provision.  What is that? Basically, it’s a provision that ties continued benefits (usually cash or stock) to continued compliance with some type of post-employment condition.  It’s not quite a non-compete but arguably has the impact.  Which brings us to the Texas Supreme Court’s latest opinion in Exxon v. Drennen.

Basically, the employee was entitled to participate in an incentive program that provided for stock options.  The former employee agreed  among other things not to engage in detrimental activity. Detrimental activity was defined to mean:

acceptance . . . of duties to a third party under circumstances that create a material conflict of interest, where a ‘material conflict of interest’ includes when a grantee ‘becomes employed . . . by an entity that regulates, deals with, or competes with the Corporation or an affiliate’

That language is pretty close to a non-compete and the former employee went to work with a competitor and Exxon said he could no longer participate in the program and forefeited his stock.  The key question was would the Texas Supreme Court require athe agreement to comply with the non-compete statute and if so would this provision be enforceable?  (Meaning it would have to be reasonable in time and scope and ancillary to an otherwise enforceable agreement.)  The Texas Supreme Court answered the first question and held the incentive program was not a covenant not to compete.  It then held that whether the agreement was an unreasonable restratint of trade was an issue to consider for another day because the Court determined that it would consider the provision under New York law (there was a choice of law provision for New York.)

So, we never got an answer as to whether the provision passes under Texas law.  We only know that it does not rise to the level of the non-compete.

Bench Trial Lessons

Posted in Uncategorized

After a trial it’s always good to take inventory on the process.  My thoughts from my latest trial:

  1. When the Judge says she’ s heard enough – she’s heard enough (always take your cues from the judge – sometimes you won’t get any but when you do pay attention);
  2. You never get a second chance to make a first impression;
  3. Credibility of witnesses sometimes turns on issues that seem tangential to the case (it’s not always the key issue in the case that will lead to a credibility decision on a key witness);
  4. You can never prepare a witness enough (preparation – preparation – preparation);
  5. Some witnesses have it – some don’t (but see item 4 above);
  6. It is really hard to get called to trial (everything is stacked against you – the judge’s schedule, other cases, and fees);
  7. Trials will take longer and be more expensive than you think;
  8. Sometimes trials are necessary but usually not;
  9. Most cases go to trial because one side has misevaluated the case.

Texas Minority Shareholders – Along for the Ride.

Posted in Recent Cases, Trial and Pre-Trial Procedure

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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:

  1. the majority shareholders abuse their authority over the corporation with the intent to harm the interests of one or more the shareholders;
  2. in a manner that does not comport with the honest exercise of their busiess judgment; and
  3. by doing so creates a serious risk of harm to the corporation.

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.

 

 

 

 

 

Forget About Non-Competes – What are employers agreeing on?

Posted in Uncategorized

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?

 

Shawk & Awe In Non-Compete Enforcement?

Posted in Non-Compete Agreements

 

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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:

  1. Attorneys’ fees – Sometime the employer may agree to pay the employee’s legal fees – sometimes not.  When a former employer sues both, it is much more likely the new employer will simply have its attorney represent the new employee as well.  Make no mistake about it legal fees can drive a resolution.  An employee who is on his/her own paying for their own fees may be far more likely to resolve a case as opposed to the employee who has the financial backing of their new employer.
  2. Driving the Wedge – Believe it or not some employees don’t tell their new boss about the non-compete they signed.  Sometime the threat of a lawsuit against the new employer may lead to resolution.  Let me give you an example – A few years ago we took presuit depositions (didn’t file a lawsuit but went through the procedures where we could depose witnesses) of the former employee and new employer.  We sued the former employee and showed the evidence we had developed against the former employee to the new employer.  This included an email where he told the new employer that he intended to targer the former employer’s customers – that’s pretty good evidence!  The former employer folded and fired its new employee.  It did not want to get involved in a lawsuit.
  3.  Sometime the threat of a lawsuit is better leverage than the lawsuit.  Once the employer is sued that’s it, it has lost the option to let the new employee go.

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.

 

Amazon on the Prowl

Posted in Injunction, Non-Compete Agreements, Non-Solicitation Agreements
Original Complaint Filed by Amazon

Original Complaint Filed by Amazon

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.

Making Non-Compete Agreements Stick

Posted in Non-Compete Agreements, Non-Solicitation Agreements

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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.


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