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

                     

I liked Jay Shepherds' remarks in Eight Ways to Lose a Non-Compete Case blog entry.    Here they are with my thoughts in italics:

• Putting too much faith in the belief that the court will enforce the language of the non-compete agreement as written.
• Trying to enforce a non-compete against employees who really don't possess any confidential information or customer relationships.   Does the employee really have trade secrets?
• Drafting the non-compete too broadly.
• Focusing only on geography, duration, and scope of the non-compete rather than on the existence of protectable interests. 
• Waiting too long to file.
• Asking for an injunction before you've developed enough evidence. Texas permits TROs and a party can secure limited discovery for the injunction hearing.
• Filing in the wrong jurisdiction. If you want to enforce a non-compete file in the jurisdiction where the former employee is based or working.
• Focusing on the law instead of on the story of the case.

I agree with most of the eight but here is what I would add:

1. Know the law from state to state, the enforceability of a non-compete in Texas is quite different from California;
2. Make sure the state law you want will control.  Along the same lines, if your non-compete specifies Texas law and the employee is in California, make sure the choice-of-law provision will stick;
3. Don't wait to file.  Sometimes you may have to file a lawsuit and seek an injunction before you have all the evidence - but filing early can protect your business and possibly make your former employee think twice about violating the non-compete.
4. Contact your clients.  Just because your company's contact person with the client has departed doesn't mean the business will go.  Call your clients and be up front with what has occurred and how valuable their business is to your company.
5. Marshall your evidence.  Odds are your departing employee began preparing to compete before they left your company.  See if they left a papertrail.  (email, phone calls, accessing company databases, and printing out company information)
6. Remember your targets.  Not only the employee who left, but the company they left for or formed.

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Recording phone conversations.

One issue that I frequently receive questions about is whether it's permissible to record phone conversations that you are a party to?  The answer varies from state to state.  In the absence of more restrictive state law, federal law permits an individual who is a party to the telephone conversation to record it. 

Some states require both parties to consent to the recording (two-party consent).  Texas does not (one-party consent).  The rub arises when there is an interstate call between a one-party state and two-party state. The California Supreme Court (.pdf) has held that in such a situation, two-party consent is necessary.

Recording a phone call can be a useful tool for avoiding misunderstandings and I have even used them in breach of contract cases where an oral agreement is disputed.  If you are going to record, the best practice is to get the consent of the other party.  If you're not going to do that make sure you know the law of your state and the state you are calling. 

 

Polygraph testing your employees.

                                       

Jon Hyman provided a primer on employee polygraph testing in the Ohio Employer's Law Blog this past week.  Frankly, I had never heard of the Employee Polygraph Protection Act of 1988 but it prohibits with limited exceptions:

• Requiring, requesting, suggesting, or causing an employee or prospective employee to take or submit to any lie detector test;

• Using, accepting, referring to, or inquiring about the results of any lie detector test of an employee or prospective employee; and

• Discharging, disciplining, discriminating against, denying employment or promotion, or threatening to take any such action against an employee or prospective employee for refusing to take a test, on the basis of the results of a test, for filing a complaint, for testifying in any proceeding, or for exercising any rights afforded by the EPPA.

 

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During today's Dallas Bar Association Trial Skills Section meeting Lisa Blue gave a great presentation on picking a jury.  Here is the questionnaire (.pdf) she provided for potential jurors. 

Picking a jury is challenging for any lawyer.  Being armed with more information about your prospective jury could make voire dire (jury questioning) more focused.

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Since my entry two weeks ago, New York Attorney General Andrew Cuomo chimed in again on Merrill Lynch 2008 bonuses in a letter (.pdf) to Congressman Barney Frank, Chairman of the House Committee on Financial Services.  The letter does not name names, but outlines numerous multi-million dollar payments to Merrill executives with the top 149 receiving approximately $858 million.  Stunning to say the least. 

 

 Cuomo attacks the timing and amount of the bonuses:

Rather, in a surprising fit of corporate irresponsibility, it appears that, instead of disclosing their bonus plans in a transparent way as requested by my Office, Merrill Lynch secretly moved up the planned date to allocate bonuses and then richly rewarded their failed executives. Merrill Lynch had never before awarded bonuses at such an early date and this timetable allowed Merrill to dole out huge bonuses ahead of their awful fourth quarter earnings announcement and before the planned takeover of Merrill by Bank of America.

Merrill Lynch's decision to secretly and prematurely award approximately $3.6 billion in bonuses, and Bank of America's apparent complicity in it, raise serious and disturbing questions.  By December 8, 2008, Merrill and presumably Bank of America must have been aware that the fourth quarter and yearly earnings results were disastrous.

 

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Joe Torre's recent memoir concerning his stint with the Bronx Bombers has prompted some in Yankee circles to suggest the need for non-disparagement clauses for players and managers.  Typically, non-disparagement clauses appear in settlement and severance agreements.  The idea is that in exchange for money a former employee will not bad mouth his or her former company. 

Here is an example from a settlement agreement:

Non-disparagement. The Parties agree not to make any statements, written or verbal, or cause or encourage others to make any statements, written or verbal, that defame, disparage or in any way criticize the personal or business reputation, practices, or conduct of Defendant, its employees, directors, and officers. The Parties acknowledge and agree that this prohibition extends to statements, written or verbal, made to anyone, including but not limited to, the news media, investors, potential investors, any board of directors or advisory board or directors, industry analysts, competitors, strategic partners, vendors, employees (past and present), and clients.

The Parties understand and agree that this Paragraph is a material provision of this Agreement and that any breach of this Paragraph shall be a material breach of this Agreement, and that each Party would be irreparably harmed by violation of this provision.

The above is couched to support the application for an injunction, hence the "irreparably harmed" language.  While wonderful in theory, (who wouldn't want to prevent an ex-employee from belittling the company) actually enforcing such an agreement is another matter.  As with any breach of contract claim, the plaintiff will have to prove breach and damages.  Proving damages in a non-disparagement case is akin to proving damages in a defamation case, both are difficult.   

Quantifying a damage number based upon a written or oral communication is cumbersome.  For that reason, some clauses attempt to tie a liquidated damage into any breach.  In order to enforce a liquidated damage clause in Texas, the court must find: (1) that the harm caused by the breach is incapable or difficult of estimation, and (2) that the amount of liquidated damages called for is reasonable forecast of just compensation (not punitive). 

Including a non-disparagement clause in a severance or settlement agreement is good practice, but enforcement of the clause is an entirely different matter.  Every effort should be made to ensure that the language defining "disparagement" is specific enough to remove all doubt as to whether the statements are actionable.  Whether an aggrieved party can quantify the the damage caused by the disparagement will be an uphill battle in most cases.

 

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Executive compensation is under attack. It's an easy target for politicians when $20 billion in bonuses were handed out while the economy was in free fall. New York AG Andrew Cuomo has indicated he may attempt to claw back bonuses paid to Merrill Lynch executives in late 2008 that came to light during John Thain's (pictured above) recent ouster from BofA. Some execs are even foregoing their 2008 bonus. If you're an executive in the US right now there are 2 things you should avoid, bonuses and private jet travel. This is especially true if your company has received federal bailout money.

So what can Cuomo do? Apparently the strategy is to attack the Merrill Lynch payments as untimely (they were paid in December as opposed to the normal January) and explore whether shareholders were misled concerning the payments, i.e. securities fraud. A class action has already been filed in the Southern District of New York regarding the BofA/Merrill merger where the 2008 bonuses will likely be scrutinized.

Obviously, publicly traded companies are under heightened scrutiny and standards, but what about private companies? In Texas, companies can choose from a number of business forms, the typical corporation, a partnership, a limited partnership, or even a limited liability company. Often times a limited partnership will have a corporation as its general partner. There are pros and cons for each choice, usually tax considerations drive the decision of what entity to use.

The officers of those entities will owe fiduciary duties to the entity and in some cases, like a general partnership, to their partners. Thus, unreasonable bonuses or compensation are actionable, like a publicly traded company, through a derivative lawsuit or in some cases through a direct lawsuit against the offender usually based on a breach of fiduciary duty claim. The typical defense is the assertion of the business judgment rule, a topic for another day, but what is sound business judgment in these economic times differs from what was acceptable during upswings in the economy.

Does the payment pass the smell test? Payments should not be out of the ordinary. They should be consistent with historical payments tied to personal and company performance criteria. In many cases payments will be contractually mandated. In the case of a private company it would be wise to make sure other owners are informed of any bonuses paid out and the basis for such payments. In other words, avoid any claims of surprise. No matter what, it smells when a company hemorrhaging cash pays big bonuses.

Disclaimer

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