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

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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Over the last few weeks we’ve discussed some key components in employment contracts including venue and jury trial waivers. Another key provision is choice of law. As was discussed in the Sam Adams case, choice of law  was critical because it permitted the employer to pursue an action against a former employee for breach of a non-compete agreement which would not be enforceable in the state of California. In that case, there is both a venue and choice of law provision for Massachusetts. 

As with venue and jury trial waiver provisions, the choice of law should be tailored to circumstances of the agreement at hand. Many employers like to default to the choice of law where their headquarters is located or many times the state of Delaware (shareholder disputes are very difficult to prosecute in that jurisdiction), but that will not always make sense in an employee/employer relationship. 

Additionally, courts do not always enforce choice of law provisions and employers should consult with their attorneys to put themselves in the best position contractually to enforce the provision. There is always a preference of the Court to enforce the contract based on laws of that jurisdiction because the judge is typically more familiar with those laws as opposed to some other jurisdiction. 

In the context of post-employment covenant litigation, there are certain jurisdictions state laws employers will want to avoid because they are not friendly to enforcement and vice versa. Employers need to be cognizant of the effect of a choice of law provision and also put some thought into its use because it will be an issue on down the road.

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Sam Adams Beer Company recently filed a lawsuit in Massachusetts against a salesman who it alleges went to work for a competitor in California.  The case illustrates the importance of a venue provision in an employment contract, which we recently discussed here. 

California is downright hostile when it comes to non-solicit and non-compete agreements for employees.  The defendant employee went to work for a California beer maker and lives in California, but his employment agreement with Sam Adams provides for venue in the state of Massachusetts, as well as a choice of law provision for Massachusetts law.  The Complaint alleges:

The Employment Agreement is governed by Massachusetts law. Paragraph 12, the governing law clause, provides that the “validity, interpretation and performance of this Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.

 

The Agreement further provides that “Any dispute between Employee and the Company shall be litigated exclusively in the state or federal courts of The Commonwealth of Massachusetts, to whose jurisdiction Employee hereby agrees to submit.

Of course, this puts the employer in the position of trying to enforce a non-compete against an out-of-state employee.  That said, Sam Adams also sued the new California employer as well which pragmatically will make enforcement easier. 

The complaint is interesting because it focuses upon the inevitable disclosure doctrine.  It alleges that former employees had been exposed to proprietary information , including business strategies, that he will inevitably disclose during his employment with his new employer.

This is another example of a post-employment covenant with a salesperson, this time in the adult beverage industry.  We will continue to monitor this case.

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