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

 

 

                         

 

In Texas a party seeking a temporary restraining order can do so ex parte - without the presence of the other side. In Dallas, most cases require that Plaintiff seeking the TRO provide the other side with the actual pleadings and a proposed Temporary Restraining Order two hours before any hearing.

 

When the notice for a TRO appears, do not ignore it. Call the company’s lawyer immediately, because once a TRO is entered, it sets the tone for the lawsuit and is difficult to undo. 

 

TROs are frequently used in non-compete cases. If the party ignores the notice of the TRO, it is essentially allowing the party seeking the TRO to have an unencumbered conversation with the Court where there is no defensive argument. Depending up on the Judge, there is a high likelihood by simply meeting the elements of the TRO, they will get the relief they are requesting. This could result in the shutdown of the business and end up costing the Defendant a substantial amount of money. The problem is, if the TRO is entered, the Defendant will either have to move to dissolve the TRO (which is costly) or appear for an injunction hearing in two weeks and have a mini-trial, also costly. 

 

More importantly, the Plaintiff has been permitted to set the tone for the lawsuit and can tell the Judge all the bad things the Defendant has done whether or not they are actually true. An application for a TRO must be treated seriously and addressed. It is very difficult to rewind the clock on the TRO process.

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Last year we profiled the TEKSystems v. Hammernik case that was filed in the United States District Court for the District of Minnesota.  The case was significant because it was one of the first where a Plaintiff seeking a temporary injunction used communications from social media (LinkedIn) as evidence of a non-solicit violation. 

Ultimately, the case was resolved through entry of a stipulated permanent injunction.  This required the Defendants to among other things: (1) search their computers for TEKSystems documents and information and return or destroy the information; (2) submit their computers to forensic inspection; and (3) not contact, solicit or accept business from any persons identified in an agreed to customer list.

Though the lawsuit was novel in terms of social media evidence it’s resolution was not.  Parties frequently agree to a set of customers that are essentially “hands off” in order to resolve these type of disputes.  

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A recent non-compete/injunction opinion was delivered by Judge Marcia Cooke who presides in the Southern District of Florida.  The opinion deals with the departure of a California wine executive to another competitor. It addresses many of the issues addressed in this blog under Florida law including choice of law issues, whether customer information is proprietary and protectable, and the elements necessary for an injunction.

The Court ultimately denied the injunction.  One factor the court commented upon was the fluidity of employees from one employer to another in the wine business:

Southern Wine points out that it has lost several employees following Simpkins departure. Deposition testimony shows that fourteen employees have since left after Simpkins. Still, other deposition testimony indicates that in the wholesale alcohol distribution industry that defection of employees from one competitor to another is quite common and that Southern Wine itself – the top competitor in California – has hired employees from Young’s Market as well. These facts are indicative of the fluidity of transfer within this industry and that major competitors remain
successful because they foresee the possibility of defection and thus plan for it.

So the Plaintiff had actually hired employees away from it's former employee's new employer Though it doesn't appear the injunction turned on this issue it certainly highlights the fact that the conduct of employers in the marketplace will be scrutinized when they are trying to enforce a non-compete. 

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#1: Employers can't enforce non-competes when they terminated the employee.

Wrong - Assuming the non-compete satisfies Texas law, it can survive termination or resignation.  Most agreements will spell this out in the agreement, some do not.  (Now of course this also assumes the firing was legal, i.e., not based on race, national origin, gender, etc.) 

This makes sense in most cases.  What if there is an employee who purposely gets fired so they can go out and compete - it happens.  Should the employer be penalized because they fired the employee - no.  Now, what about  a situation where the employer merely fires the employee to gain some tactical advantage in the marketplace and then enforces the non-compete?  A judge asked to enforce a non-compete on facts like that may have a different view on enforcing the non-compete in the context of a temporary restraining order and injunction.

The balance of non-compete cases are resolved early on, either through a TRO or injunction.  TROs and injunctions force the parties to: (1) spend significant fees early on in the process; (2) get in front of the judge; and (3) negotiate.  Parties looking to defend or enforce a non-compete should be considering what the optics will look like to the Court in the context of injunctive relief - usually a situation where the employer is attempting to keep the employee from working for a new employer. 

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It’s not every day that a Dallas district court spars with the High Court in London over the sale of the Liverpool Football Club.  But, that is exactly what happened last week.  For those who are not familiar with Tom Hicks, he is presently the owner of the NHL's Dallas Stars, formerly the owner of the Texas Rangers, and now former Liverpool co-owner.   

 

Last week, Hicks’ business entities instituted a law suit here in Dallas to essentially stop the sale of Liverpool FC.  (The petition and temporary restraining order are below for review.)   Liverpool was founded in 1892 and is worth approximately $822 million according to Forbes.  With significant debt owed to the Royal Bank of Scotland, Hicks made the decision to sell Liverpool.  The details and goings on of the proposed sale are set forth within the petition. 

 

Utimately, the board of directors of the company that owns Liverpool was set to approve the sale of the club to strangely enough, John Henry and the New England Sports Group - the owners of the Boston Red Sox.  

 

In response to the impending sale, Hicks filed the aforementioned lawsuit stating that “Plaintiffs bring this suit to save them from an epic swindle at the hands of rogue corporate directors and their co-conspirators.”  Hicks didn't think Henry was going to pay enough for the team.

 

On Wednesday of last week, Judge Jim Jordan of the 160^th Court here in Dallas entered a temporary restraining order that prevented the sale from going through.  In response, the following day, the British High Court entered an anti-suit injunction giving Hicks a deadline to end the Texas suit.  (Take a look at the Guardian newspaper's blog on the events for more detail.)   Ultimately, Hicks gave up on the TRO but has vowed to fight another day.  The sale to Henry went through.

 

 It is amazing that a Texas court would intervene in such a dispute.  It would be akin to a British court meddling with the sale of the Cowboys.  But, it highlights the nature of a temporary restraining order proceeding in Texas.  With verified affidavits, a Plaintiff can apply for a TRO without the other side being there - even when it comes to the sale of a British football club.  

Liverpool Petition & TRO

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Mike Leach's application for a temporary restraining order to permit him to coach Texas Tech in the Alamo Bowl on January 2 was mooted when Tech fired him on December 30.  Allegedly, the timing of the firing was based on Leach's contract that entitled him to $800,000 on December 31. Tech went on to beat Michigan State 41-31. Tech now begins the search for a new coach and Leach's lawyer has promised a lawsuit.

Even without the firing, Leach faced an uphill battle.  As discussed here previously, an applicant for a TRO must establish there is no adequate remedy at law and imminent harm, among other things.  Leach sought to prevent Tech from suspending him from coaching the football team because he essentially was deprived of due process.  The Petition provided:

8.  Mike Leach seeks that this Court enter an order restraining Texas Tech University from suspending Mike Leach from coaching the football team.

 

9.  It is probable Mike Leach will recover from Defendant after trial on the merits because Mike Leach has not committed any wrongdoing, he has not been informed of any rules or standards he violated, and his contract does not provide for suspension even if Defendant had shown a violation of a rule or standard, which it has not.

10.  If Mike Leach's application is not granted, harm is imminent because Mike Leach will be unable to coach his football team in practice prior to the Alamo Bowl and during the Alamo Bowl.

The claimed basis for the firing of Leach stems from his treatment of sophomore Wide Receiver Adam James following a concussion.  James' is the son of former SMU player and television analyst Craig James.  Leach reportedly had James confined to a shed as described in the affidavit of a Tech football trainer:

I walked Adam to the room, which was at least as big as a two-car garage . . .Inside the room there is an electrical closet. I looked in the closet and stated that there was 'no way that Adam would be placed in there.' I shut the door to the electrical closet, and it was never opened again. At no time during this practice was Adam ever placed in the electrical closet.

Regardless of what actually occurred, it seems unlikely a Texas court would have ordered Tech to permit Leach to coach in the Alamo Bowl.  Leach's claim that he would suffer imminent harm because he could not coach is unpersuasive.  An employer generally has the right to restrict or modify the duties of an employee, as Tech did with Leach.   In response to the TRO application, Tech took the decision away from the Court and fired Leach.

The Leach/Tech battle is a long way from over.  With a significant amount of money at stake, Leach, a lawyer himself, will continue his legal fight.  Stay tuned. 

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The difference between equitable claims and legal claims goes back hundreds of years when there were essentially 2 different courts depending upon the relief sought.  District courts and county courts in Texas can award both equitable and legal relief.  So what does that mean?

A claim for injunctive relief is equitable.  Also, a claim for quantum meruit (basically an action for work done or services provided) arises in equity.  In cases where injunctive relief is sought, like a non-compete case or business control case, the Courts may make equitable considerations.  Put another way, courts balance the equities. 

Typically individuals trying to get out of a non-compete identify numerous equitable facts in their favor: (1) they were fired; (2) the non-compete prevents them from carrying out their livelihood; (3) they didn't take any trade secrets; and (4) they aren't talking with their former client's customers or employees.  While these factors in and of their own right may not be sufficient to legally defeat a non-compete, the Court will certainly consider them in issuing an injunction or temporary restraining order.

Parties going into court need to be aware of whether they appear to be the good guy or the bad guy.  A person that takes the customer list with him as they walk out the door generally isn't a good guy.  Neither is the employer that has a 4 year non-compete that prevents an employee from working anywhere in the world.  Parties need to use common sense and think about how their respective side is going to appear to the judge. 

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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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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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Commentators have described inevitable disclosure as the following:

There are circumstances in which trade secrets inevitably will be used or disclosed, even if the defendant swears that he or she will keep the information confidential. Courts applying the doctrine have differed over its reach and the circumstances required for its application, but, generally speaking, the doctrine applies when a defendant has had access to trade secrets and then defects to the trade secret owner's competition to perform duties so similar that the court believes that those duties cannot be performed without making use of trade secrets relating to the previous affiliation.

Linda K. Stevens, Trade Secrets & Inevitable Disclosure, 36 TORT & INS. L. J. 917, 929 (Summer 2001).

Some form of an inevitable disclosure argument is usually made when a Plaintiff is attempting to obtain a temporary restraining order or injunction to enforce a non-compete. The Texas Supreme Court has never recognized the doctrine.

In 1999, the Dallas Court of Appeals in an unpublished opinion stated: "this Court has recognized that a former employee may be enjoined from using or disclosing the former employer's confidential or proprietary information if the employee is in a situation where use or disclosure is probable." Conley v. DSC Communs. Corp., No. 05-98-01051-CV, 1999 Tex. App. LEXIS 1321 (Tex. App. Dallas --- 1999, no pet.)(not published).

That opinion stated the Dallas court was not adopting the inevitable disclosure doctrine. Whether "probable disclosure" is actually a viable theory under Texas law remains unresolved by the the Texas Supreme Court.

Read David Knight's analysis of a recent Ohio inevitable disclosure case here.

Disclaimer

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The use of injunctive relief has been discussed at length in this blog. Last week a federal judge in Minnesota issued an injunction preventing the National Football League from suspending several players for violation of its anti-doping policy including New Orleans Saint Deuce McAllister (pictured right). Until further ruling from the Court, McAllister and the other players may continue to play on Sunday. McAllister carried the ball one time yesterday in the Saints' victory over the Atlanta Falcons.

Disclaimer

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