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

Talking about the standard an appellate court uses to review a temporary injunction in a non-compete case isn't very exciting and we can get lost in the legalese. But it is critical to have some appreciation of what wide discretion a trial court has in Texas in addressing enforcement of a non-compete by virtue of the abuse of discretion standard.

Let's assume your lawyer has obtained a temporary injunction restricting a former employee from competing or soliciting customers for a period of one year. The former employee appeals the ruling of the trial judge to court of appeals on an expedited basis. After all the briefs have been filed the appellate court then considers the injunction.

Under Texas law that review is limited to two issues - (1) did the trial court abuse its discretion in finding the employer showed a probable right of recovery; and (2) did the trial judge abuse its discretion in finding the employer showed immediate irreparable harm? That's it. The law instructs the appellate court that it must affirm the trial court's ruling if there is evidence to support its finding - it cannot substitute its judgment for the trial court even if it would make a different decision. The rationale behind this is an appellate court is not on the scene. It is not in a position to weigh the credibility of the witnesses or consider the facts of the case as a whole on an expedited basis - that is the role of the trial judge.

Whether the trial court granted or denied the temporary injunction it is very difficult to reverse its ruling. This is another reason why most non-compete disputes are resolved early on - even before the temporary injunction hearing. Once the trial court grants the temporary restraining order it is an uphill battle of the party on the other side of the ruling. What's the takeaway for employers? The reality is the trial court judge's ruling will be upheld and the proceedings in the trial court, not the appellate court will most likely resolve the dispute.
 

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One of my favorite new things to listen to is the Fairly Competing podcast put on by Ken Vanko, Russell Beck, and John Marsh. The podcast addresses a number of issues related to non-competes and trade secrets and recently discussed a court's preference to enforce a non-solicit over a non-compete. The basic premise is that courts and for that matter juries are more likely to enforce a non-solicit because it prevents the former employee from targeting customers as opposed to putting the employee out of work.

Under Texas law there is no real legal distinction in terms of enforceability. Both a non-compete an non-solicit must satisfy the Texas non-compete statute meaning the agreement has to be reasonable and ancillary to an otherwise enforceable agreement, among other things. That said, there is a real psychological value to being able to tell the judge that you want the former employee to stay away from company customers as opposed to putting he or she out of work.

It is always a very effective argument for the employee to say that they are just trying to make a living and depending upon their circumstances may have been in the same line of work for many years with multiple employers. Of course these are not always the facts and there are many instances where a non-compete makes sense.

Arguing simply for a non-solicit removes the “out of work" defense and restricts the covenant to keeping the former employee from taking current customers. Just from a psychological perspective, courts are more likely to embrace these because they seem fair and equitable.  Most folks can identify with wanting to restrict access to company customers after the employee leaves the company.

One of the recommendations made in the podcast is to seek injunctive relief based both on the non-compete and non-solicit. If the lawyer is unsuccessful with the non-compete arguments he or she can fall back to the non-solicit agreement.

As with any case, your mileage will vary based upon the facts and circumstances. If there is a blatant violation of both agreements the court should enforce both, but this is not always the case. Employers should consider using both types of post-employment covenants but seriously consider whether they ask the judge to enforce both.  A judge considering a temporary restraining order or injunction has wide latitude and the employer who appears to be fair and not overreaching has a better chance of success.  
 

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There is an interesting case that recently came out of the Dallas Court of Appeals regarding an attorney's obligation to disclose the existence of a non-compete when he was preparing an independent contract agreement. If you would like to read the full opinion take a look here.

Timothy Brown was a former golf professional who specialized in managing charity golf tournaments. Brown left an employer for Miracle Golf and engaged an attorney to help him with his independent contractor agreement. Brown never disclosed to Miracle Golf  the existence of his non-compete. As soon as Miracle Golf found out about the non-compete it terminated its agreement with Brown and sued Brown and his lawyer.  The facts didn't support a claim against the lawyer, because Miracle Golf was already working with Brown well before the formal agreement was signed.  There was no reliance, which you have to have for a fraud claim.

The case raises the issue of whether a lawyer has to disclose the existence of a non-compete to the other side when negotiating an agreement? There are all sorts of ethical issues that this raises including the attorney-client privilege and the duties that a lawyer owes to his or her client.  There is no one size fits all answer to this question.

As a matter of course, it makes sense for an employee to disclose the existence of such an agreement for a number of reasons including:

1. Potential employees should be honest with their potential employer;
2. An employer who finds out that an employee has a non-compete and lied about it could very well fire the employee;
3. The new employer may have their own legal counsel evaluate the agreement; and
4. The new employer may still be willing to hire the employee and defend them if a dispute arises.

Bottom line - be up front with your new employer about the agreement.  Only bad things can happen if you don't.  Employers - make sure your new hire checklist includes a question about post-employment covenants.  You do not want to hire a lawsuit.

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I really liked Steve Boese’s article on non-competes in the fistful of talent recruiting blog.  Steve considers the non-compete as HR's equivalent to a prenuptial agreement.  Steve also hit on what is most effective about a non-compete whether it is enforceable or not:

Just the threat of potential legal action and the leverage a non-compete appears to give the employer often causes employees to think twice about jumping ship to one of their organizations competitors - or at least for making the jump in one step.

The most critical time period for a non-compete, like a prenup, is when the employee is considering whether to sign it or not.  Yes, there may be attack on it enforceability on down the line but the employer like the spouse has an agreement that employee signed an agreed to follow.  I can not overstate how important this concept is in non-compete litigation.  The employee always had the right not to sign though in most cases this means they won't get the job or could be fired for not signing it in certain circumstances.

Judges and juries deal with cases all the time where one party or another is not complying with an an agreement they signed.   Almost everyone can identify with this circumstance, whether it was a bad paint job, a lemon for an automobile, or the DVD player that didn't work.  Judges and juries like to make people and companies comply with the agreements they signed.  The same holds true for the non-compete or other post-employment covenant.  The most critical point in non-compete litigation is when the employee signed it.  That cannot be undone.

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Recently, the Swiss drug maker Novartis announced a $70,000,000 severance package, which included a non-compete, for its departing CEO Daniel Vasella.  In exchange for the package Vasella was going to sit on the sidelines and not share any of his knowledge about the industry with competitors.  

Novartis shareholders and politicians expressed outrage over the terms of the deal and Novartis scrapped it. Outrage over executive compensation was at an all-time high during the great recession,but public and shareholders are certainly still very sensitive to these types of issues. This type of an agreement is an outlier in terms of its scope and money involved but there are certain situations where they make sense.  This is especially true in the case of the purchase of a business.

A Texas company still needs to ensure that the agreement satisfies the Texas Non-Compete Statute.  It is questionable whether the Novartis deal would have been enforceable in Texas.  In many instances the employer will simply keep the x-executive employed and pay her out over time - this can be easier to enforce and administer.  No word on what Vasella stands to receive now. Interestingly enough, Swiss voters adopted a measure that will require shareholders to approve executive pay.  Can't imagine seeing that in the US.

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Recently, the Tyler Court of Appeals invalidated a non-compete agreement among cardiologists in Nacogdoches, Texas. A breakdown of the opinion can be found here by Jonathan Pollard in his non-compete blog.  His sum up of the ruling:

In what may stand as an opinion for the ages, the Texas Court of Appeals affirmed the trial court’s ruling, holding that the non-compete agreement was over broad, contrary to the public interest and therefore unenforceable. First, the agreement prohibited [one doctor] from practicing medicine of any sort – not just cardiology – within ten miles of the city limit. The appellate court found that such a restriction was over broad in scope and was greater than necessary to protect NHC’s legitimate interests. Second, and more significantly, the court held that the public interest in physician choice and access to medical care trumped the freedom of contract.

Physician related non-compete agreements are legal in the State of Texas assuming they satisfy the Texas non-compete statute which includes a buyout provision. Here, the court focused on the ramifications of enforcing such a non-compete agreement on the Nacogdoches community. As it is a smaller area, there are a lot less cardiologists and the court determined that public health considerations outweighed enforcing the non-compete.

This is particularly troubling if you have complied with the statute and then a court comes in and invalidates the agreement for essentially a public interest exception.  Should Courts consider whether the public has easy access to a cosmetic surgeon or cosmetic dentist?  What about non-health related services?  The exception could go a long way.  

That said, I doubt Texas courts would go that far. Deciding not to enforce a cardiologist's agreement in a small town is quite different than a cosmetic surgeon's agreement.  Employers entering into non-compete agreements might also consider these types of issues and whether the enforcement of the non-compete agreement would have some adverse effect upon the public at large. Clearly the medical realm is an easy example of this though there might be others.
 

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A few weeks ago, we discussed realities of recovery of attorney’s fees in litigation. This post attempts to narrow that focus on post employment covenants.  Under Texas Law, a party can recover its reasonable and necessary attorney’s fees for a breach of contract under Texas Civil Practice and Remedies section 38.001. A non-compete agreement or non-solicitation agreement is a contract. So, prevailing wisdom is that like any other contract, an employer seeking to enforce post employment covenant can recovery its attorney’s fees, especially when the contract calls for fees.

There is however a line of cases emerging from some courts of appeals that says otherwise. The rationale behind these cases is that since the legislature did not provide for recovery of attorney’s fees in the non-competes statute, they are not recoverable.

The courts of appeals are not in unison and the Texas Supreme Court has not addressed the issue.   So, what to do?  Make sure to specify for the recovery of attorneys' fees in non-compete/employment agreements. Eventually the Texas Supreme Court will address the issue. Be prepared to confront this argument from both employers and employees.
 

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At the end of each year I try to address and take inventory of what has occurred in post-employment covenant litigation in the State of Texas.  After several years of dramatic Texas Supreme Court opinions on the subject of non-competes, 2012 was a quiet year.  We heard nothing from the Texas Supreme Court on the issue and very little from the lower courts construing the 2011 Marsh opinion.  This is not surprising.  It will take some additional time for cases to wind themselves through our lower courts to get some clarity on Marsh and give us a better flavor for where Texas jurors prudence on non-competes stands. Regardless, those who are attempting to enforce non-competes are in a better position in 2012 than they were in 2010.

What have I seen from the trenches? The extensive use of non-solicitation and non-compete agreements in a wide range of industries.  This includes recruiters, bakers, furniture sales persons, doctors, and about any other industry that comes to mind.  The reality is business owners will use non-competes even if they are not enforceable simply to make employees rethink leaving or going out on their own. As a result, the mere threat of a non-compete is very effective even if the non-compete or the non-solicitous is ultimately unenforceable. 

It is the rare circumstance where a lawyer should tell their client employee that a court will not enforce a non-compete. Because enforcement is usually done through an injunction, the court is proceeding in equity and can usually fashion whatever relief it deems fair.  For this reason, mere inclusion of a non-compete should give any former employee or potential new employer pause. This type of litigation can be very expensive and very quick.  Employers should continue to enforce non-competes uniformly and design an agreement that will be enforced by courts.

So what do I expect for 2013?  More of the same.  Employers are going to continue to use these kind of covenants and former employees will try to get out of them.  Hopefully some lower Texas courts of appeal will provided further guidance on non-compete enforcement.

An issue that employers should be considering is how they want to enforce their agreements.  Consideration of jury trial waivers and arbitration is appropriate.  To often, employers spend more time thinking about terms and less time thinking about enforcement.  If you are going to spend the time and money to draft these types of agreement be ready to enforce them.

Best of luck in 2013.

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Employers generally like to include arbitration agreements in their employment agreements because it keeps them out of court and away from juries.  There are pluses and minuses when it comes to arbitration that we have discussed previously.  Some arbitration agreements also apply to enforcement of non-compete, non-solicit, and other post-employment covenants.  The United States Supreme Court recently ruled that an Oklahoma court could not address the merits of a non-compete agreement when the contract containing the non-compete contained a valid arbitration clause.  I will leave that analysis to some other folks who have already addressed the ramifications of the Supreme Court’s holding.  Needless to say, the Supreme Court’s ruling further enforces the concept that arbitration clauses contained in employment contracts will be enforced. 

What struck me about the opinion is the inter-play between injunctive relief (temporary restraining orders, injunctions, and permanent injunctions) and arbitration.  In most non-compete cases, the employer is dealing with an employee that is actively competing or soliciting customers in violation of their contract.  The employer needs immediate relief.  In most cases, a court as opposed to an arbitration panel, is in a better position to provide that immediate relief.  The reasons for this are pretty simple.  Arbitration panels generally are not set up to provide quick injunctive relief.  In fact, it will usually take several weeks and sometimes months to actually compose an arbitration panel.  Courts, on the other hand, are set up to deal with injunctive relief and do so regularly.    

So what should an employer do to make sure they can preserve their rights?  To begin with, there are some cases both in Texas and federal courts that permit a party to seek injunctive relief even though they have an arbitration agreement.  Basically, the employer would file a lawsuit, obtain injunctive relief, and then proceed to arbitration.  Instead of relying on this case law, I would suggest that it makes more sense to craft an arbitration agreement that permits and specifically states that the employer may seek injunctive relief in court and litigate the underlying claims that give rise to the injunctive relief.  That means the employer would deal with non-compete claims in court as opposed to arbitration, but still force all other employment disputes to arbitration.

Please consult with a lawyer before you attempt to draft this type of an agreement.  It is somewhat complicated because the employer is trying to have its cake and eat it too.  

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I have been off in the world of expedited discovery and temporary injunctions for the last two months. Below is my take on the state of Texas non-competes that appeared in the Langely Weinstein LLP Employment Law Update for July.  

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We are coming up upon the one year anniversary of the Marsh v. Cook decision where the Texas Supreme Court altered the non-compete playing field in favor of Texas employers, again.  In Marsh, the Court held that stock options could serve as the basis for a non-compete agreement and that the traditional trade secretes/training/proprietary information giving rise to the non-compete was no longer the exclusive method for forming enforceable non-competes.

In response to the opinion, many commentators questioned what additional items, such as signing bonuses, stock, etc. could form the basis for a non-compete in Texas.  Surprisingly, we have not seen much in the way of new opinions from Texas' lower courts discussing this issue.  Our appellate courts are slow moving animals and the ramifications of an opinion like Marsh will take several years to arise.  In sum, we have no further guidance from the courts and the questions that we raised after the opinion still remains.

That said, employers that have something worthy of protection or simply want to prevent employees from competing should aggressively consider the use of non-competes in light of the Marsh opinion.  Obviously, consult with your lawyer when drafting or considering using post-employment covenants, but design them so that they will be enforceable and enforce them.

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Texas is a blue line state when it comes to the enforcement of non-compete agreements.  What does this mean?  It means that courts can perform or rewrite non-compete agreements so that they are enforceable under Texas law.  What this really means is, the judge can rewrite the contract to a form that he or she thinks is palatable and fair.

In some states, the blue line does not apply.  This means that if the court finds a non-compete is overly broad or unenforceable, there is no way to enforce the agreement and the parties can operate as if it never existed.  In Texas, employers who may be concerned about the enforceability of a non-compete should always remember that they will be in a position in litigation to request that the court re-form the agreement to make it enforceable.  This usually takes the form of the declaratory judgment action and could potentially give rise to attorneys' fees.

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At the beginning of the year, we predicted that health care related litigation would continue to rise through 2012 as that industry continues to grow, in large part because of our aging population.  Mentioned in the post were some lawsuits filed by Synthes,  a European-based medical device manufacturer.  Synthes has historically enforced its non-compete and non-solicitation agreements against former sales persons around the United States.  The medical device industry is big business and in many cases, based on strong relationships with doctors.

Synthes continues to enforce those agreements.  In a recent case, Synthes filed suit against a former salesperson in the Denver, Colorado area, who left Synthes and went off to start his own competing medical device venture.  Synthes sued and the employee counterclaimed.  The counterclaim is interesting.  Whether it has any merit, is another question.  Basically, he asserts that Synthes tactics violate antitrust laws.

Whether you love or hate Synthes, you have to respect their tenacity and the seriousness with which they approach their post-employment covenants.  As we have discussed here previously, employers with these type of agreements should uniformly enforce them, and not make exceptions or ignore violations of them.  This both supports the actual claim in court and also acts as a deterrent when an employee is considered breaching a post-employment covenant.  Bottom line, if you're going to draft these agreements, enforce them and take them seriously.  Post-employment covenants make sense in certain situations depending upon your venue and law. 

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Here is a link to my appearance on Stephanie Thompson's Proactive Employer Employer Podcast.  I hope you find it informative.

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I’ve been riding bikes and racing triathlons for several years and been able to ride in some amazing places. Below is a picture of my brother, my Dad, and me during a trip to France in 2010.

Specialized is a premier American bicycle manufacturing company that has had significant success in the European peleton and in the triathlon world.  They are also very aggressive about defending their technology.

Specialized sued two former employees in California who were starting a competing bike company.  The lawsuit claimed the employees were using proprietary information and violating their non-compete agreements. 

The case went to trial and the jury awarded Specialized $1.00. The jury seems to have agreed that there was a breach of contract, but no real damage.  Regardless, Specialized was able to slow down the progress of the fledgling company through litigation.  As one of the former employees noted:

The bike industry is all about the small amount of innovation that brings new people in. We should all celebrate that. Between them and us, we spent 2.5 million dollars on this. It’s just so silly. Think of what we could have done with all of that (to improve bicycles).

No one really won in the lawsuit except the lawyers.  Specialized has a $1 verdict and both companies have incurred significant legal fees.  Now they can get on with the real competition - who can build the better bike. 

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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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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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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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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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We've talked about the Texas Supreme Court's opinion in Marsh USA v. Cook and what employers should be doing in light of the ruling.  What about employees?  Here are a few thoughts:

1. Non-competes are getting easier and easier to enforce in Texas - Employees should take them seriously and assume they are enforceable when negotiating;
2. Have a lawyer review any proposed non-compete or non-solicitation agreement to get an idea as to its enforceability;
3. Negotiate - Negotiate - Negotiate;
4. With respect to 3: (a) get an agreement that any non-solicitation does not apply to previous customers/clients; (b) limit the geography and length of any agreement; and (c) negotiate a buy out of the agreement;
5. Be wary of any non-compete that is based upon money or compensation - it may be enforceable now;
6. Keep copies of anything that is signed.

Any other suggestions?

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We've talked about the Texas Supreme Court's opinion in Marsh USA v. Cook and its legal niceties, but what does it mean for employers and what should they be doing in light of the ruling?  The fact of the matter is we won't know until lower courts address the opinions, but here are a couple of suggestions for employers:

1. Non-competes are getting easier and easier to enforce in Texas - All employers should consider including post-employment covenants in their employment agreements if warranted;
2. Employers should consider using financial consideration to form the basis for a non-compete or non-solicit;
3. Financial consideration could include stock options (the consideration in the Marsh case) and other items such as signing bonuses or agreed to severance - frankly these options may be limitless;
4. It will take some time for lower courts to determine what Marsh means but include financial consideration in some form in the agreement; and
5. Even if a non-compete is unenforceable it may still make an employee think twice before leaving.

Next time we'll address what employees should be considering.

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Analysis from last Friday’s Texas Supreme Court opinion in Marsh USA v. Cook will continue this week as lawyers, employers, and employees struggle with what the non-compete playing field is today. Quite simply put, Marsh USA is a game changer.

The ramifications of the case are best set forth Justice Green’s dissent, which was joined by Chief Justice Jefferson and Justice Lehrmann.  Some highlights from his opinion:

The Court today abandons our previous application of the “ancillary to or part of” requirement codified in Texas Business and Commerce Code § 15.50(a) and instead defines the phrase as “reasonably related to.”  Under the Court’s reasoning, a raise, a bonus, or even a salary could support an enforceable covenant.  The true issue is that Texas courts have stated time and again that an employer cannot buy a covenant not to compete, and the Court’s decision allows Marsh and other employers to do exactly that.

Justice Green hits the nail squarely on the head. The effect of the Court’s ruling is to abandon the “ancillary to an otherwise enforceable agreement” standard in favor of what appears to be a reasonably related standard. Granted, the ancillary to language is confusing and the reasonably related standard is what numerous other states have adopted. The problem for the Court is that the Texas legislature drafted the non-compete statute and included the ancillary to language.  We will have two wait until 2013 to see if the Texas legislature will react to the ruling.  Of course time will tell what the effect of the opinion will be as lower appellate courts address the standard.

In our next entry we’ll address the practical effect of the ruling on employer and employees, but for now we’ll give Justice Green the last word:

Allowing employers to obtain covenants not to compete by providing such financial incentives without actually giving the employee anything that gives rise to an interest in restraining trade is bad policy for Texas, and will make covenants not to compete much more commonplace in instances where there is little risk of unfair competition.

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Today the Texas Supreme Court again made non-compete agreements easier to enforce in the state of Texas.  In Marsh USA v. Cook, the Texas Supreme Court ruled that a stock option agreement could serve as the basis for a non-compete:

The stock options are reasonably related to the protection of this business goodwill. Thus, this covenant not to compete is ancillary to an otherwise enforceable agreement.  And, in the Legislature’s apparent judgment, reasonable noncompetes encourage greater investment in the development of goodwill and employee training.

More details to follow and analysis of the case.  The questions now becomes can other forms of consideration form the basis for non-competes, like a signing bonus?  We previously considered this issue, but the answer seems to be yes.  The bottom line is that the Texas Supreme Court continues to make non-competes easier to enforce in a trilogy of opinions culminating in Marsh. 

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In a recent article about employee poaching Mark Hendricks profiled the common practice of poaching a competitor's talent.  In the article he noted:

1. Employers like to hire people who are employed, not unemployed; 
2. Reaching potential hires through social networking tools like LinkedIn has made poaching easier; and
3. Potential employers need to worry about non-solicitation agreements, non-compete agreements and other confidentiality provisions a poached employee may have signed. 

My thoughts:

1. Do your due diligence in determining what post-employment covenants a potential hire may have -this may impact whether you want to make the hire;
2. Make the employee certify in writing that there are no post-employment covenants that would affect their future employment;
3. Make it clear that if the case turns out that there are post-employment covenants, the employer may terminate the employee and not necessarily defend them in any type of lawsuit;
4. Make  new employees certify that they have not taken any confidential or proprietary information that belongs to their former employer; and
5. Remember – what goes around, comes around.

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Another strategy employers use to prevent employees from walking away with customers, proprietary information, and trade secrets, is the use of a “garden leave” provision in the  employment agreement. Basically, the provision works like this: the employee agrees that they have to provide three weeks notice of their intent to go and work for a new employer. Most clauses then allow for the employee to essentially quit working, but remain on the payroll of the employer during this “transition period.”

The effect of this provision is to prevent the overnight departure of business and proprietary information.  If followed by the employee, the employer can contact clients and address the situation.  Breach of such a provision could in some instances serve as an additional basis for a temporary restraining order.

Garden Leave provisions coupled with non-solicitation agreements, non-compete agreements and anti-raid provisions can be effective. These types of  provisions are appearing more often in the broker/securities business and trace their origins to Europe where they are commonly used. Employers should confirm that any provision is enforceable under applicable state law. Similarly, employees should be very careful before they sign any type of agreement along these lines.
 

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This is the second edition  of the world of non-competes. As usual, a number of new industries appear to be using non-competes:

Roofers

Lauren Ellerman has an interesting discussion on her blog about roofers and whether non-competes in the roofing industry are enforceable. Her point that lawsuits aren’t easily squashed is well taken.

The Massachusetts Hairdresser

A Superior Court judge in Massachusetts ruled that a hair salon was entitled to a preliminary injunction that prevents a former employee/hairdresser from competing in the same area for one year and using client name and contact information. 

Business Supply Salesperson

You know the individual that comes around the office to stock up with all the necessary office supplies? In this case in Harris County, Texas (Houston) a company similar to that sued its former employee over a non-compete. 

The Detroit Radiator Salesman

This salesman was employed for 10 months and was fired because things were not working out.  He signed a two year non-compete.  Below is the employee's take on the situation:

That's what they're telling me, that I have like trade secrets in my head or something.  I don't understand how though.

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#3: The Judge Can't Amend the Non-Compete.

Employers and employees always need to keep in the back of their mind that even if a non-compete is overly broad in terms of scope or duration a Texas court can amend the agreement to make it enforceable.  Texas is a "blue-line state" meaning a court can amend the non-compete if necessary.  Put another way it can make the non-compete fair and reasonable. 

So, even if the agreement is over the top, too broad or too long, the court can fix it.  In some states an overly broad non-compete can render the agreement unenforceable and there is no recourse for the employer. Employers should always consider asking the court to amend the non-compete if there is the chance it is unenforceable.   

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We've written about non-competes involving firework choreographers, dog groomers, dance instructors, recruiters, executives, and salespeople.  The point is they run the gamut.  Periodically we will cover some of the more interesting cases out there.  Here's what's happening:

 The Florida Tatoo Artist

In a case  from last year, a Florida court enforced a non-compete agreement against a tattoo artists who was alleged to have a violated a non-compete agreement that included a 15 mile radius. The artist was alleged to have taken the customer list of his former employee and set up shop down the road.  Would there have been a different outcome if the artist hadn't taken the list?  It's a lot easier for judges to rule in favor of the ex-employee when they don't take things with them.

 Microsoft Strikes Again

A Washington state court judge issued a temporary injunction barring a former Microsoft employee from working for a competitor in the cloud computing business. The employee argued the scope of his work for Microsoft was international as opposed to his domestic oriented new job. The judge did not agree and the employee is barred from working for his new employer at lease through trial.  Microsoft is aggressive when it comes to enforcing their non-competes and appears to have a lot of success.  It also helps to enforce them in your backyard, King County, Washington.

IBM Non-Compete No Good

In this case a New York judge refused to enforce a non-compete agreement against a former IBM employee who was going to work for Hewlett Packard. The court held that IBM didn’t provide any trade secrets to the employee, other employees were not subject to similar type agreements, and there was testimony that the non-compete was merely a retention tool to keep employees from leaving. 

If you've run across any cases of note please let us know.

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#2: Non-Compete Agreements Are Unenforceable in Texas.

Texas courts have been enforcing non-compete agreements for many years and they are specifically authorized by Texas law - Texas Business and Commerce Code Section 15.50.  The highlights from that statute:

a covenant not to compete is enforceable if it is ancillary to or part of an
otherwise enforceable agreement at the time the agreement is made
to the extent that it contains limitations as to time, geographical
area, and scope of activity to be restrained that are reasonable and
do not impose a greater restraint than is necessary to protect the
goodwill or other business interest of the promisee
 

The Texas Supreme Court has made non-compete agreements easier to enforce over the years and that trend is likely to continue.  If proper, employers should be using non-competes as a legitimate business tool to protect themselves from unfair competition.  

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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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Texas businesses routinely use non-compete agreements to protect proprietary information in a variety of industries and occupations.  Assuming an employee has executed an enforceable non-compete agreement, what else should Texas employers be doing to enforce these agreements?

To begin with assume a situation where the employee is or has departed.  As part of any exit interview they should be reminded of, provided with, or even asked to acknowledge that they previously signed a non-compete agreement.  This sets the tone from day one of the departure - the company is poised and will likely enforce the agreement.

In the event the employee quits and there is no exit interview, immediately provide them with a reminder letter and provide the agreement.  Use mail, email, delivery or whatever means is appropriate.  The point is to re-notice them.

Make sure the employee has returned all proprietary information (that should be in an employment agreement) and can no longer access company files or email.

Now the hard part - uniformly enforce the non-compete.  If the employee is violating a non-compete, enforce the non-compete. Why?  First of all an ex-employee that is considering competing might reconsider if they know they are going to be sued.  Second, it is very effective for a lawyer to be able to represent to a Judge that the company uniformly enforces the non-compete agreement and takes it seriously.

Yest it can be expensive.  But, if the company has something worth protecting enforcement is an easy decision.

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Illinois lawyer Ken Vanko does a great job on his blog, "Legal Developments in Non-Competition Agreements".  His latest entry addresses the reasons a job candidate should negotiate or at least attempt to negotiate their proposed non-compete.  A few of the reasons:

1. The candidate will have a better understanding of the non-compete once they have scrutinized the agreement;
2. They may get a better idea of the employer's previous issues with departing employees and enforcement of the non-compete; and
3. The employer might actually make some concessions.

These are all great thoughts.  I can't tell you how often an employee will testify they never saw the non-compete or just assumed it was unenforceable. 

From an employer's side, discussion regarding the non-compete will show the employee was fully apprised of the agreement and it wasn't one of 10 forms they signed when employment began.  From an employee's side, there may come a time when they are considering changing jobs and need to evaluate how or if the employer's non-competes have been enforced in the past.

The large company may be unwilling to negotiate.  A smaller company might.  Either way you don't know until you ask. 

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In Texas a non-compete agreement has to be reasonable in time and scope and ancillary to an otherwise enforceable agreement.  The latter is difficult to decipher but basically there must be an agreement where the non-compete enforcer has agreed to give something to the enforcee and the non-compete protects what was provided.  In most cases this would include trade secrets or some type of other proprietary information.

What have Texas courts concluded does not give rise to a non-compete?  A few examples:

• financial benefits;
• a promise to compensate an employee in the event of economic hardship;
• a deferred compensation agreement;
• stock option; and
• the payment of money.

We are waiting on an opinion from the Texas Supreme Court dealing with whether stock options can serve the basis for a non-compete.  Likely not considering the dearth of law stating that compensation cannot, but we shall see.

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• a non-compete agreement;
• a non-solicitation agreement;
• a non-disclosure agreement; and
• an anti-raid provision.

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Last night I was at dinner with some friends and the subject came up of the enforceability of non-competes in Texas. The first statement/question I always here is that they are not enforceable. I’m not sure where that “common knowledge” comes from. Maybe it’s just some core American/Texas value that someone cannot restrict your right to make a living, which a non-compete/non-solicit agreement can do for some period of time. It also is troubling that such an agreement can effectively put an employee out of their profession to some extent – even doctors (but not lawyers).

The Texas Supreme Court was silent on non-competes this year, though it is considering a new non-compete case from the Dallas Court of Appeals, Marsh USA Inc., v. Cook, previously discussed here. That said the court beginning with the Sheshunoff case in 2006 and followed by Mann has made non-competes easier to enforce by eliminating some technicalities that prevented enforcement.

The basic requirements for non-competes remain the same. They must be reasonable in scope and ancillary to an otherwise enforceable agreement. Employers will continue to use them in appropriate and inappropriate situations. Employees will attempt to find ways to circumvent them or even have courts declare the provision unenforceable.   Each party should obtain legal counsel before they draft or sign a non-compete. An ounce of prevention is well worth the expense.

Happy New Year.

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Happy holidays to you and your family.  No legal analysis this week but here is a link to a non-compete/non-solicit case involving Adobe.   

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A few weeks ago we analyzed the enforceability of a college football coach's non-compete agreement.  The example we cited was Texas assistant Will Muschamp.  Make that former assistant Will Muschamp.  Muschamp left Texas over the weekend to take the Florida job.  No claim of a non-compete from Texas and as we discussed unlikely it could have been enforced even if there was such a provision.

 Bobby Petrino signed a new 7 year multimillion dollar deal with Arkansas late last week.  Included in the agreement was a non-compete provision that reportedly prevents Petrino from moving to another SEC school.  Whether that agreement is enforceable under Arkansas law is an issue for the Arkansas lawyers. 

If it were in Texas, the agreement would appear to be reasonable in that excludes Petrino from working for any of Arkansas' competitors.  It is unknown what the duration of the non-compete is under the new deal.  As pointed out previously, how a non-compete with a coach is ancillary to an otherwise enforceable agreement, a Texas requirement, is unclear.  What Arkansas is providing to Petrino that gives rise to the non-compete is the issue.  What would that be?  A lawyer will probably be able to come up with something but it will be difficult for that argument to survive appellate scrutiny.   

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Illinois lawyer Kenneth Vanko provides the most comprehensive analysis of U.S. non-compete cases that I've seen in the legal blog world.  His latest case analysis addresses a non-compete in the context of the sale of a veterinary practice. 

In Texas, even in the sale of a business, a non-compete agreement must satisfy the requirements of Texas Business and Commerce Code Section 15.50: 

a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or business interests of the promisee.

Make sure any buy/sell agreement complies with 15.50.

Happy Thanksgiving!

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 Imagine a scenario where Company A hires Company B's former employee.  A few months go by and Company A receives a demand letter from Company B informing it that: (1) the former employee has a 2 year non-compete with Company B; (2) if Company A does not end its relationship with the employee it will be sued.  (Assume the non-compete is enforceable.) 

Being both pragmatic and litigation gun shy, Company A terminates the employee.  The employee sues Company A claiming the termination violates public policy and seeks money damages.  Ludicrous?  No, it happened in California.  California lawyer Laurie Rust had the following take on the case:

When confronted with a request or demand from a former employer to honor a non-compete agreement, California employers should not respond by terminating the subject employee unless they are confident that the non-compete agreement is actually enforceable under California law.

California law disfavors non-compete agreements whereas Texas permits them as long as they comply with certain conditions discussed here previously.  I am not aware of any Texas precedent that would somehow subject an employer to liability for honoring a non-compete agreement.  That being said, it will depend on the circumstances.  Is the employee an at-will employee or does the employee have an employment agreement that would address the termination?  What is the likelihood of the enforceability of the non-compete? 

The California case certainly raises interesting issues.  Texas employers should always determine whether a prospective employee has any agreements with his or her former or current employer (non-competes, non-solicits, confidentiality agreements etc.) that could impact future employment.  If there is such an agreement try to determine whether it is enforceable.  A little analysis up front can save time and money down the line. 

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Almost two years ago we profiled the lawsuit between IBM and Apple over IBM's former employee Mark Papermaster.  The two giants reached a compromise over Papermaster's non-compete agreement and he continued work for Apple on its Iphone.

Turns out Mr. Papermaster is on the move again.  This time to Cisco.  There have been no reports regarding an Apple/Papermaster non-compete agreement - hopefully Mr. Papermaster wouldn't sign one during this go around. 

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Non-compete agreements run the gamut of industries.  Here we've discussed non-compete agreements involving pet care providers and rocket pack producers.  In many cases, it would seem that business owners just include them to dissuade an employee from leaving with the realization it is not enforceable.  The reality is non-compete agreements in Texas should apply in only very limited circumstances when used properly - that however is not always the case.

A recent case in Pennsylvania pitted two rival fireworks companies against each other in a non-compete dispute. These companies handle big events like firework displays at college football games and at Times Square during New Years.  Matthew Wood is a talented fireworks choreographer who had a non-compete agreement with his former employer Zambelli Fireworks.  In 2008 he left Zambelli for Pyrotecnico, a rival fireworks company.  Zambelli apparently lost business to Pyrotecnico and sued over Wood's non-compete agreement.  The Court dismissed the suit holding:

Zambelli has failed to introduce sufficient admissible evidence to enable a reasonable factfinder to determine that its loss of business was due to wrongful conduct by Wood, as opposed to the mere loss of his services or other competitive factors.

It's hard to see how a non-compete agreement with a fireworks choreographer would be enforceable under Texas law.  The agreement would have to be ancillary to an otherwise enforceable agreement meaning the non-compete would have to protect something provided to the employee like a trade-secret.  Employers in many instances have difficulties identifying the protectable interest and courts tend to focus on this component of any claim.  Zambelli, according to the Court could not identify how Wood's conduct caused a loss of business and he is free to continue his work with Pyrotecnico.

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College football is big money.  Not surprisingly, football programs that pay millions of dollars to their coaches would like to keep them  from moving to other schools.  For instance, Arkansas coach Bobby Petrino has a contract that prevents him from going to another school within the Southeastern Conference's western division.  But, programs also want to tie down assistant coaches.

Programs on the rise or established programs generally have a bevy of up and coming assistant coaches.  Texas defensive coordinator Will Muschamp is a star coordinator.  Head Coach Mack Brown anointed Muschamp his eventual successor.  Of course Mack has not told anyone when he plans to step down.

Muschamp is a University of Georgia graduate and former player.  Georgia coach Mark Richt has had a terrible season.  Rumors are abound that Georgia may target Muschamp as a replacement. 

Could Texas craft a non-compete agreement that would prevent Muschamp from leaving?  Probably not.  To begin with, Texas would have to draft a clause that prevents Muschamp from going to Georgia.  Would that be reasonable in scope?  Keeping a coach from going to work for a conference competitor is one thing, but preventing him going to a school Texas rarely plays is another.   

The bigger question is could a non-compete be crafted under Texas law for a football coach that is ancillary to an otherwise enforceable agreement?  Non-competes are typically used to protect trade secrets and other proprietary information.  There aren't really any secrets when it comes to coaching.  As a result, it would seem unlikely that a court would find an interest worth protecting vis-à-vis a non-compete.

So it seems unlikely that Texas could enforce a non-compete against Muschamp.  But, other states have more relaxed non-compete laws that might permit the enforcement of such a provision.  Especially, if the Judge happens to be an alum from that particular school - just kidding.

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It is always nice to get a different perspective on non-compete agreements, especially from the employee's side.  Florida employment lawyer Donna Hallman provides her top five ways to get out of a non-compete agreement in a recent article.  They include:

1.    The employer breaches the contract;

2.    There is no legitimate interest to enforce;

3.    Your agreement is for too long of a time period;

4.    The so called “confidential information” is readily available to the public; and

5.    Public health and safety would not be served. 

It’s interesting how employers and lawyers attempt to carve out non-compete agreements that address many of the defenses alleged set forth by Donna.  With respect to number 1, "an employer breaches the contract", clauses are frequently drafted where a breach by the employer is  identified as a basis not to disallow the non-compete provision. Whether such a clause works depends on the breach.

As to number 3, "the agreement is for too long a time period", Texas courts are permitted to shorten the non-compete term and make the agreement enforceable. 

Numbers 2 and 4 seem to always be the best defenses now.  Basically the claim is that what gives rise to the non-compete is not protectable.  To put it another way, I didn’t give you any information, training, or other propriety information that would give rise to the necessity for a non-compete in the first place.  The agreements have become easier to enforce in Texas, and this has become one of the last remaining defenses to non-compete agreements

Here are a few more for the list:

6.    Don’t sign the non-compete in the first place (Duh);

7.    If you are going to sign a non-compete, make sure it’s in a jurisdiction where it’s very difficult to enforce like California; and

8.    Include a buy-out provision in your non-compete so you can get buy your way out of enforcement.

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As discussed here previously, Texas non-compete and non-solicitation agreements are alive and well and the Texas Supreme Court has made them easier to enforce. Doctors are frequently the targets of non-competes and they are legal in the state of Texas. 

The Texas Legislature has gone out of its way to set forth provisions necessary to make a non-compete enforceable against a doctor in  Section 15.50 of the Texas Business & Commerce Code. The highlights:

Patient Records/Care:  The non-compete must: (1) not deny the physician access to a list of his/her patients upon departure;  (2) provide the physician access to their patients' medical records when authorized by the patient; and (3) the physician must not be prevented from providing treatment to an acutely ill patient.

Buy-Out Provision: The statute also requires that the non-compete provide for a buy-out of the non-compete at a reasonable price or as determined by a mutually agreed arbitrator or one chosen by the court. 

In sum - read the statute to make sure your non-compete complies with the statute, don't play games with patient records or care, and provide a buy-out provision.

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Mark Hurd and HP settled their lawsuit yesterday. Hurd will return restricted stock to HP (worth approximately $13.6 million) and continue to work for Oracle. What can we learn from the Hurd/HP affair?

• HP’s suit against Hurd was fraught with legal questions.  Chiefly, was the Hurd non-compete enforceable under California law?  Nevertheless HP could not wait to file suit and needed some type of resolution. Was this perhaps a message for future employees or executives? Bottom line, it could not sit on its hands and do nothing.
• Mark Hurd bought his way out of his non-compete. As we have discussed here before, employees considering a move can always negotiate with their employer to provide some type of consideration – $13 million in stock options - to get out of the non-compete. Hurd’s compensation package from Oracle probably makes up for this loss so don't' feel too sorry for him.
• The fact that HP did not immediately seek a temporary restraining order to prevent Hurd from working for Oracle probably indicated that HP was concerned about the strength of its case. If I had to guess, I would assume the lawyers were concerned that they could not meet their burden under California law, which does not look favorably upon non-competes.
• Hurd could have sued first and sought to declare the non-compete unenforceable. Instead he chose to wait. It appears he played it right. There was no TRO that prevented him from working. Yes, Hurd had to give up restricted stock but some payment was probably in his calculus to make the move to Oracle.  It would be interesting to know if Oracle indemnified Hurd for the lawsuit brought by HP and will end up paying him for the stock he gave up anyway. 

Well played Mr. Hurd.  From HP's perspective, at least it got its stock back.

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As discusssed here before, a former employee with an non-compete agreement usually has two choices in terms of challenging a non-compete.  The first is to "compete" and then see what the former employer does.  This could mean a lawsuit with an application for a temporary restraining order that puts the former employee out of work.  The wait-and-see approach essentially removes the employee from any control until the former employer decides to act.  This is the most common and cheapest approach.

The second approach is to sue the employer and challenge the validity of the non-compete.  The reality is most former employees simply don't have the money to fund such an endeavor.  In a recent lawsuit in the Houston area, a group of doctors filed suit against the Sadler Clinic.  Those doctors are challenging the enforceability of a non-compete agreement that prohibits them from practicing medicine within a 22-mile radius of Sadler's Conroe, Texas location.  Interestingly, the employment agreements contain a buyout provision that would relieve the doctors of their non-compete allegations.

This is not the first suit involving a Sadler non-compete.  Sadler filed a lawsuit against a departing physician in August 2009.  Apparently, the doctors are seeking to intervene or join in this lawsuit since the same non-compete is at issue.

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A few months ago I profiled a non-compete/non-solicit lawsuit where the Plaintiff employer used LinkedIn communications as evidence to support their claims against several former employee recruiters.  The case was covered in a number of media outlets and blogs.

In the interim the Defendants answered the lawsuit and filed a counterclaim.  Here's what the counterclaim alleged:

• Representatives of the employer told one employee that he could continue to work in the recruiting industry as long as he didn't call on the Plaintiff's customers;
• The non-compete agreements are unenforceable; and
• The Plaintiff is tortiously interfering with their new employment agreements.

In their answer, the Defendants allege that what the Plaintiff claims is confidential customer information was publicly disclosed through social media and is no longer protected:

Plaintiff’s claims that relate in anyway to customer and/or client information fail to the extent that Plaintiff, or its employees, have thrust said information into the public domain through the use of sites such as, LinkedIn and Facebook, and/or to
the extent Plaintiff encouraged its employees to place said information into the public domain.

The case is set for trial in August 2011.  We'll keep you posted on any further developments.

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 As has been widely commented on, the Texas Supreme Court will determine whether stock options can serve as the basis for an employee's non-compete agreement.  The Dallas Court of Appeals, in Marsh USA v. Cook, ruled that options could not. 

A ruling that reverses the Dallas court could  have much wider ramifications:  What would the employment landscape look like if an employer could pay an employee to enter into a non-compete? Would employers like to require their sales force to enter into non-competes that would either: (1) guarantee continued employment; or (2) put a departing salesperson out of the market for a year?  Would an employee agree to an extra $10,000 signing bonus in exchange for signing a non-compete?

Texas courts do not like to analyze whether the "consideration" that forms the basis of a contract is sufficient, meaning the Court won't review whether a business or person paid too much or too little for something.  Employers will always confront potential employees with different bargaining power.  A salesperson with a significant client base and track record of success may be able to demand a year of salary for a non-compete or not agree to enter into such an agreement.  The first year salesperson right out of college is in a little different position usually unable to demand anything. 

I'm not convinced the Texas Supreme Court will make the sweeping ruling some suggest, but if it does it could significantly alter employment relationships and the ability of employees to freely move from employer to employer.   How that would play out remains to be seen, but employers will certainly look to lock down employees with non-compete or non-solicitation agreements.

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Last year there was discussion about the DOJ's investigation of alleged improper hiring practices by companies like Google, Intel, IBM, and Apple.  Apparently, the DOJ has stepped up the investigation according to a Wall Street Journal article.  According to the article, the inquiry focuses on a pact amongst technology giants not to hire each other's employees:

The inquiry is focused on whether companies, particularly in the technology sector, have agreed not to recruit each others' employees in ways that violate antitrust law. Specifically, the probe is looking into whether the companies' hiring practices are costing skilled computer engineers and other workers opportunities to change jobs for higher pay or better benefits.

Apparently, the DOJ is struggling with how to challenge the practice because it has antitrust ramifications and results in keeping wages down. 

What a great deal for the employer:  Prevent your employees from leaving and keep their salary down at the same time without having to worry about the enforceability of a non-compete agreement.  Most employers constantly have to worry about the departure of talented employees to their competitors for more money.  If the allegations are true, that concern has been eliminated in portions of tech world.

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Minnesota based TEKsystems Inc. sued three former employees for violating non-compete and non-solicit agreements.  TEKSystems is in the technical recruiting business and it claims one of the former employees was contacting its contract employees.  The complaint alleges Defendant Brelyn Hammernik used LinkedIn to solicit these employees:

For example, Hammernik has communicated with at least 20 of TEKsystems’ Contract Employees using such electronic networking systems as “Linkedin.”  Hammernik has, at a minimum, “connected” with the following TEKsystems’ employees through “Linkedin" . . . In her contacts with Tom Peterson, Hammernick asked Peterson if he was “still looking for opportunities.” She then stated that she “would love to have [you] come visit my new office and hear about some of the stuff we are working on.”

Evidence doesn't get much better then this LinkedIn email:

Linkedln

Tom Peterson has sent you a message.

Date: 12/08/2009

Subject: RE: Brelyn

 

Hi Brelyn,

Indeed I am still looking. I have time, though!

Lets get together. Where are you working these days? Your profile still has you working at TEK Systems. BTW - my email address is lipidfish@gmail.com if you would prefer the non-Linkedln route.

Tom

 

On 12/08/09 8:47 AM, Brelyn Hammernik wrote:

Tom—

Hey! Let me know if you are still looking for opportunities! I would love to have come visit my new office and hear about some of the stuff we are working on!

Let me know your thoughts!

Brelyn

Needless to say it will be very difficult for Hammernik to defend this type of conduct.  I've used emails in non-compete/non-solicit cases but never LinkedIn evidence.  As individuals migrate from company to company they routinely use LinkedIn and other social networking sites to update contacts on their whereabouts.  Usually, most updates don't contain an outright solicitation like this. The moral of this story:  Employees - be smart about communications that are blatant solicitations.  Employers - watch former employees social networking activities once they have departed.

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Jay Shepherd's recent post on "Rethinking non-competes" in his Gruntled Employee Blog got me thinking.  His take was this:

But if [the employee] decide[s] eventually that it's time to leave the nest, then they should be free to do so. Even if it means that they're going to compete.

With one exception. They can't take our stuff. And by stuff I mean two things: our secrets and our client relationships. If their old jobs required them to work with our secrets — our legitimate, protectable secrets, not stupid things like prospect lists — then they should not be allowed to take them to their new jobs. And if in their old jobs we paid them to develop and maintain customer relationships to the extent that they became the face of our company, then they should have to stay away from those relationships for a reasonable period of time. A year, say. 

Seems like a pragmatic approach and employers get to protect their trade secrets and customer relationships.  Courts don't like enforcing non-competes that are simply punitive in nature, there has to be something real to protect and the law in Texas has evolved that way.

The optimal solution however is not one size fits all.  Instead, it should be industry specific. Non-compete agreements are not appropriate for every industry.  The industry need to take the initiative to work out employee transition agreements. I know, wishful thinking.  But it can be done. Broker Dealers have done so with The Protocol.  The industry knows what their  "special sauce" is and what truly needs protection.  The Protocol allows employees to move within the industry and take their clients.  This may not be appropriate in every industry.  But the point is the industry and the market, not lawyers or legislators, are in a better position to make the determination.  

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In Texas a non-compete has to be ancillary to an otherwise enforceable agreement. What does this mean?  The consideration (or value) in the separate agreement must give rise to the employer's interest in keeping the employee from working and the non-compete must be designed to prevent the employee from breaching the promise she gave as consideration (value) in the other agreement. Examples are the best way to understand what this means.

Say I go to work as a programmer for a  company that makes a state of the art mp3 player with a highly advanced new technology.   In order to carry out my job I will be provided access to the source code for the technology and my job will include manipulating and altering the  code.  The company states in my employment agreement that it will provide me with the source code and that because I am being provided with the source code I cannot work in the mp3 player industry for 1 year after I quit or am fired from the company.  (Yes there is a nondisclosure agreement and common law duty not to disclose an employer's trade secrets but ignore that.) So, there is an otherwise enforceable agreement (the agreement to provide me with the source code) and providing me with the code gives rise to the non-compete.

The alternative is an agreement that has nothing to do with a non-compete.  Say a company agrees to pay me $100 in the event I quit or am fired.  There is also a one year non-compete.  Yes, there is an ancillary agreement - the promise to pay $100- but it has nothing to do with keeping me out of the industry for a year.  This doesn't work.

The trick is to tie what the company is trying to protect to the non-compete.  Court's are far more likely to enforce a non-compete when the employer has provided something of value that is worth protecting.

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The Conan O'Brien/Jay Leno imbroglio of the last couple weeks appears to be winding to an end.  According to reports from TMZ, Conan will receive a $32.5 million dollar payout but sit on the bench and not start a new show until September.  The rumor is he will start a new show with Fox.

There has been speculation that Conan had a non-compete agreement with NBC.  Jay Shepherd points out in his blog that it is unlikely the non-compete was governed by California law because it would be unenforceable:

And California, as many of you know, prohibits noncompetes. Section 16600 of the California Business and Professions Code makes employment-related noncompetes — like the one Conan reportedly has — void.

Unfortunately, his contract with NBC is not available on line, but let's assume Conan had an enforceable non-compete under Texas law.  (There are a whole bunch of reasons why it's not, but give me some latitude.)  What can Conan teach us?  Bottom line, negotiations never end.  Conan's failure at NBC actually created leverage for him in negotiations.  NBC wants Leno back in hopes that he will drive up ratings but is tied to Conan who waited for years for Leno's departure.  Conan isn't going to go back to the later time spot, who knows what his contract says about that.  So NBC elects to pay him off.  Much of the money is salary he would have earned in the interim anyway, and he agrees to stay on the sidelines for a few month.  Win win, or so it seems.

The typical employee is not Conan and the typical employer is not NBC.  But, when an employer is facing a departing employee with a non-compete that may be unenforceable it's time to think outside the box to see if some other type of resolution can be reached.  Maybe an agreement to stay away from certain customers or stay out of the industry for a shorter time - be creative.  The same goes for the employee.  This won't always be appropriate but it beats significant legal fees, expedited discovery, and  temporary injunction hearings. 

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Non-compete agreements cover a range of businesses/industries from financial services, to food and beverage, dance studios, and even pet care.  It should come as no surprise that a lawsuit was filed by Surgical, Cosmetic, and Weight Loss Centers of America against a former employee that started work with the University of Texas Medical Branch - Center of Weight Loss Management.  The lawsuit was filed in Jefferson County, Texas.

The Defendant signed a three year noncompete that restricted her from working for a competing business that was within a 25 mile radius of her former employer.  Three years is a long time for a non-compete but Texas courts evaluate non-compete terms on a case by case basis - there is no bright line rule on the term of a non-compete.   The employer alleges in the lawsuit:

Defendant, while working for plaintiff, was provided material, substantive benefits which made defendant as a medical professional more marketable in the field of her expertise. . .

As previously discussed, a Texas non-compete agreement must be ancillary to an otherwise enforceable agreement.  Employers usually claim that some type of trade secret was provided to the employee.  It will be interesting to see what benefits were provided to the Defendant in this case that give rise to the non-compete.  Typically, employers fail in enforcing non-competes when they cannot establish that they provided the employer with the consideration promised, such as specialized training, access to trade secrets, etc.  Assuming the scope and duration of the non-compete are acceptable, an attack on consideration is one of the last lines of attack in Texas after recent rulings from the Texas Supreme Court.

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Whenever I talk with an employee or employer about a noncompete or nonsolicitation agreement the number 1 question is "Can you provide me with the agreement you (or the employee) signed?"  Usually, the employer has a nice neat employment file that contains all agreements.  Employees on the other hand are usually a different story. 

In the last week I've talked to two highly paid employees who were contemplating making a move to a new company.  One thought they had a noncompete, the other couldn't remember.  Neither had the actual agreement but was going to request one from their employer. 

An employee requesting their employment agreements at the end of the year sends out a red flag - "I am looking for a new job."  There is a lot of employment transition at the end of the year as the employee has presumably received their bonus and there is less financial incentive to stay.  Yes, your employer will provide you with your agreements, but if they're smart you will be under the microscope.

Point is, keep anything you sign with your employer.  Ask for a copy at the time you execute any agreement, including any amendments or supplements you sign through the years.  It just makes good sense for a variety of reasons.  Remember, the agreement your coworker signed isn't necessarily the same agreement you signed. 

(H/T Virgina Non-Compete Law Blog)

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Petsmart recently sued a St. Louis petshop over a former employee's alleged violation of a noncompete.  The agreement prevents Chris Lee, a co-owner of A Walk in the Park, from working at a petshop within a five-mile radius of any Petsmart location in St. Louis.  There are 12 Petsmart locations in St. Louis.  Lee, a dog groomer, claims the noncompete prevents him from working.

A Walk in the Park has tried to foster some grassroots opposition to the lawsuit. The following briefly appeared on the company's website:

WE NEED YOUR HELP!

A Walk in the Park is currently under attack. We hosted our Grand Opening Party on Sunday, November 8th from 2-6pm and posted that information on our website (awalkintheparkgrooming.com). At 2pm on that Sunday, in front of our guests, we were served by Petsmart’s attorneys. Petsmart, Inc. is suing us under a “non-compete” clause and threatens to shut our doors.

The entire posting goes into much greater detail.  We'll continue to monitor the suit.

Happy Thanksgiving to you and your family.

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Over the last few weeks I've been involved in defending and applying for temporary restraining orders in non-compete/trade secret cases in Houston and Dallas County District Courts.  A few observations on those proceedings:

• It is much easier to get injunctive relief in Texas since after the Texas Supreme Court's rulings in  Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006) and Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding.  Courts are well aware that the Texas Supreme Court has eliminated many of the technical arguments that were previously used to defeat non-competes on their face.   That being said, you still have to satisfy the statute.
• Companies have become much smarter about drafting non-competes and non-disclosure agreements.  The majority of agreements I see satisfy Texas law.  They generally have a one year duration, have a reasonable geographic limitation, and in most instances are ancillary to a promise to provide some type of trade secret.
• Courts want  to see "blood".  Not literally, but Courts need to see inequitable conduct from the alleged non-compete violator.  Did they take trade secrets out the door with them? Are they calling on former customers within days of leaving?  Are they trying to take employees with them?  A mere suspicion is not enough to support a temporary injunction and the Texas Supreme Court has not recognized inevitable disclosure. 

Depending upon your perspective, the good news is non-competes are easier to enforce from a legal standpoint.  That notwithstanding, a party seeking a temporary injunction to enforce a non-compete needs to have its facts lined up to justify this type of relief.

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In July we discussed IBM's non-compete case against former director David Johnson.  The trial court denied IBM's injunction and IBM appealed to the Second Circuit.  The Second Circuit denied IBM's appeal. 

The summary order addressed IBM's failure to show a likelihood of success on the merits:

We do not reach the question because IBM failed to make sufficient showings that it had a likelihood of success on the merits or that a balance of the hardships tipped decidedly in its favor.  The district court's conclusions on these issues were well-supported by the court's findings that Johnson was extremely credible, and that IBM's designated witness was much less credible chiefly because IBM's designated witness lacked familiarity with documents bearing on the controversy.

So, Johnson will continue to work with Dell which recently announced plans to purchase Perot Systems Corp. for $3.9 billion.  Johnson was the former director of mergers and acquisitions at IBM and started at Dell 4 months before the Perot acquisition was announced. 

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The Texas non-compete statute reverses the burden of proof in certain limited situations:

If the primary purpose of the agreement to which the
covenant is ancillary is to obligate the promisor to render
personal services, for a term or at will, the promisee has the
burden of establishing that the covenant meets the criteria
specified by Section 15.50 of this code. If the agreement has a
different primary purpose, the promisor has the burden of
establishing that the covenant does not meet those criteria. For
the purposes of this subsection, the "burden of establishing" a
fact means the burden of persuading the triers of fact that the
existence of the fact is more probable than its nonexistence.
 

An example is a franchise agreement that prevents a franchisee from competing with a franchiser during the term of agreement or a non-compete that is included within a buy/sell agreement of a business.  In those circumstances the party subject to the non-compete will have to establish that the non-compete at issue is not enforceable.  (For purposes of an injunctive relief, the party seeking to enforce the non-compete will still have to meet its injunction burden.)  In the typical non-compete case this will not be an issue, but always be on the lookout for an opportunity to reverse the burden.

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On October 3rd, Starbucks determined through an Internet search that former senior vice-president Paul Twohig had accepted a position with rival Dunkin Donuts.  In response Starbucks filed a lawsuit in Seattle seeking to enforce the18 month non-compete agreement Twohig signed.  He left Starbucks in March.

Twohig was responsible for developing the Starbucks brand and according to the complaint was involved in formulating business plans to counter competitors like Dunkin Donuts.   His non-compete prevents him from participating in management operation or control of any business that competes with Starbucks. Apparently, Twohig contacted Starbucks in August and asked to be released from the non-compete. Starbucks refused the request.  Starbucks has asserted claims for breach of contract, unjust enrichment, and a request for injunctive relief.

Surely Dunkin and Twohig discussed his non-compete prior to his hiring?  Dunkin would have to assume that Starbucks would sue to enforce the non-compete.  The law and facts seems to be on Starbucks' side but there are two sides to every story.  We'll keep you posted.

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An update on Robert McCann's lawsuit challenging a non-compete agreement he entered into with Merrill Lynch.  McCann wants to work for UBS, but BofA won't let him.  BofA lawyer Steven M. Kayman's take on the lawsuit:

This man signed a contract.  He got paid a substantial amount of money for it. Now he wants the court’s permission to break it.

The Judge has reserved ruling and encouraged the parties to settle.  Turns out McCann left Merrill when he did not receive a bonus in 2007.  This was after a $6.85 M bonus in 2005 and $8.85 million in 2006.  Not so sure a jury would be very sympathetic.

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It's been a few weeks since I've discussed BofA but once again the company is involved in litigation, this time over a non-compete.  This time, BofA is on the receiving end of a lawsuit filed by Robert McCann, former head of Merrill Lynch's wealth management unit.  McCann's lawsuit challenges  the enforceability of a non-compete he entered into with Merrill.  The parties are currently in settlement negotiations.  McCann is reportedly going to work for UBS.

McCann's strategy of attacking the non-compete with a lawsuit  is often recommended but rarely used by departing employees.  Generally, most employees don't have the war chest necessary to take on their former employer and institute costly litigation.  Most employees would rather wait to see if the former employer is going to take legal action.  McCann most likely and rightfully assumed BofA would sue if he went to work for UBS.  Instead of defending a lawsuit he initiated it and now looks to be close to a settlement.  This can be a solid strategy in the right situation.

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Mark Garmaise, an Associate Professor at UCLA's Anderson School of Management, recently published "Ties that Truly Bind: Non-Competition Agreements, Executive Compensation and Firm Investment." 

Garmaise concludes that enforcement of non-competes promotes executive stability, results in reduced executive compensation, shifts compensation towards a greater use of salary, and reduces research and development spending.  The paper also scores each state in a "Non-competition Enforceability Index" based on 12 components.  Louisiana scored zero during the sample time period, meaning non-competes were almost impossible to enforce. Texas scored a 3 during 1995-2004, while the high scorer was Florida with a score of 9 between 1997-2004.  In light of several rulings from the Texas Supreme Court that are favorable to non-compete enforcement I would imagine Texas' score will rise over the next few years.

The article is a fascinating read on the effects of non-competes and well worth your consideration.

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My last post addressed BofA's failure to join The Broker Protocol.  Entering into the Protocol would severely limit BofA's ability to sue departing financial advisors for violations of non-compete and non-solicitation agreements. 

A few days later, BofA sued several departing financial advisors who left for Kansas City based UMB Financial Services, Inc.   The lawsuit claims the advisors are improperly soliciting former clients and attempting to hire other BofA employees.  BofA alleges:

In essence, UMB has attempted to cripple BOA's Kansas City trust and investment services through its unfair, anti-competitive and tortious actions.

BofA has been losing employees in the Kansas City area since it announced it was cutting its salesforce after its acquisition of Merrill Lynch.  It doesn't appear BofA will be joining the Protocol any time soon when it can use litigation to attempt to mitigate losses it sustains from the departure of financial advisors.

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In late April Hewlett Packard hired EMC storage division president David Donatelli.  Donatelli  worked  22 years for EMC and made $17 million over the last three.  The hire reportedly stunned the industry.  As part of his new employment Donatelli was going to relocate to California.

Donatelli was first to the Courthouse and filed a lawsuit in California challenging the 12 month non-compete in his employment agreement.  It reads:

For the twelve-month period following the effective date of your termination, for any reason, from the Company, you agree not to directly or indirectly compete with the Company ... including any services ... as an employee ... to any entity that is developing, producing, marketing, soliciting or selling products or services competitive with products or services being developed, produced, marketed or sold by the Company as of the effective day of your termination.

California is generally considered an unfavorable venue for the enforcement of non-competes as previously discussed.  In particular, California does not recognize the doctrine of inevitable disclosure.  (Basically, the doctrine assumes that when an employee moves from one company to another she will inevitably disclose trade secrets obtained from the prior company.) 

EMC filed its own lawsuit in Massachusetts and was initially successful in obtaining an injunction restricting Donatelli from taking the HP job.  In it's opinion, the Court rejected Donatelli's argument that California law applies and gave no defference to the fact that his lawsuit was filed first in California.  Donatelli's argument that California law applies is undermined by the fact that there is a Massachusetts forum selection clause and choice of law provision in his employment agreement. Additionally, he is a resident of Massachusetts.  A hearing is set for later in the month in the California case.  How the California court will reconcile the Massachusetts ruling and Massachusetts law remains to be seen. 

(H/T Brad Reese)

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In Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, the Texas Supreme Court reversed the Houston Court of Appeals holding that an accountant's non-compete agreement was enforceable. The Court stated in part:

We hold that if the nature of the employment for which the employee is hired will reasonably require the employer to provide confidential information to the employee for the employee to accomplish the contemplated job duties, then the employer impliedly promises to provide confidential information and the covenant is enforceable so long as the other requirements of the Covenant Not to Compete Act are satisfied.

In other words, the employer does not have to state in the non-compete agreement that it is going to provide confidential information, that can be implied based on the context and circumstances surrounding the job.

Justice Hecht concurred in the opinion.

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Two weeks ago on the Office, Michael Scott gave Dunder Mifflin notice of his  resignation. Upon return to Scranton, Michael hatched a plan to start Michael Scott Paper Company and started with some due diligence (I apologize for the advertisement but NBC has to pay the bills):

Michael then asked most of the Scranton staff to come to his new company and started working on putting together  paper order forms.  Eventually the higher-ups got wind of Michael's new venture:

Unfortunately, for Michael there is no two week "immunity" period. Employees in Texas can set the stages for starting a competing venture (assuming there is no non-compete or other restrictive agreement) on their own time, but not while at work.  The good news for Michael is that Pam the receptionist left Dunder Mifflin to join Michael.

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With employers aggressively protecting customers and trade-secrets with non-compete agreements,  placement and human resource professionals will continue to encounter potential candidates/employees that have non-compete agreements and other restrictive covenants.   

Every employment interview should include exploration into these issues. 

Below are some suggested questions/considerations:

• Has the candidate signed a non-compete, non-solicitation, or non-disclosure agreement?  If so, request a copy.
• Does the scope of the non-compete conflict with the proposed employment? Is the candidate working in the same industry? Does the scope of the non-compete include the proposed geographic location?  What is the duration of the non-compete?
• Is there a choice of law or venue provision in the non-compete?   The enforceability of a non-compete will vary from state to state.
• Is the non-compete enforceable?  It may not be, but the best bet is to talk to a lawyer.  
• Gather intelligence: has the former employer sued to enforce its non-compete previously? 
• Is there any potential that the candidate could resolve the non-compete with a buy-out or some other agreement? 
• Is litigation an acceptable risk for the new employer?
• If there is a non-solicit, can the employee work within the parameters of the non-solicit?  Many times non-solicits are simply non-competes with a different name.  Some non-solicits only prevent the former employee from contacting former customers.  In that case, there is nothing that prevents the customer from contacting the employee. 
• Remember, that any communications you have with a prospective employee might be subject to production in a lawsuit.  Be smart about email.

Going through the time and expense of hiring or placing someone to find out their ex-employer has filed a non-compete lawsuit would be devastating.  The questions above are a good starting point for screening, but a lawyer should always be consulted.

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The Cuomo investigation.

New York AG Andrew Cuomo's investigation of bonuses paid to Merrill Lynch executives continues.  The latest round centers on the testimony of former Merrill President turned Yale Law School Professor Gregory Flemming.  Flemming testified that BofA threatened to sue him if he disclosed any information regarding the Merrill bonuses.  Today, Cuomo and Congressman Barney Frank sent a letter directly to BofA CEO Ken Lewis requesting bonus information.

BofA lawyers are likely trying to avoid disclosure of any such testimony in light of the numerous class action lawsuits challenging the BofA/Merrill merger.   They have asked the New York Court handling the Cuomo investigation to expand the gag order in place to Flemming's testimony. 

Is there a scenario where the Merrill execs would have to pay their bonuses back?  Yes.

Disgorgement of salaries is difficult, but bonuses are another matter.  Specifically, Section 304 of the Sarbanes Oxley Act permits claw back of excess compensation.  Cuomo has previously used New York's fraudulent conveyance laws to attack improper compensation.  Kevin LaCroix provides an excellent analysis of various claw back/disgorgement theories in The D&O Diary. It would appear that Cuomo's ultimate endgame is to claw back the bonuses.  Time will tell if he is successful, but his efforts will continue to receive media attention as the economy sputters. 

BofA non-compete lawsuit.

Merrill/BofA cannot stay out of the news.  Last week, BofA filed suit in New York State againt Deutsche Bank for taking 12 senior bankers.  The suit also names former Merrill Treasurer Eric Heaton as a Defendant asserting he is violating a non-compete agreement that is in place until 2010.   It would appear that BofA wants Merrill employees to think twice about jumping ship when they have a non-compete in place.

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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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California lawyer Scott Pearce provides an analysis of Edwards v. Arthur Anderson, a 2008 California Supreme Court Case addressing non-compete agreements.

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An injunction hearing in Texas state court is similar to a bench trial. Depending on the Court's preferences, both parties may offer opening and closing remarks. The party with the burden of proof on the injunction, in this case Company A, will offer its evidence and then Jordan James has the opportunity to offer any evidence she would like the court to consider. This may consist of deposition testimony, live testimony in the courtroom, and the offering of documents into evidence.

After presentation of the evidence, the Judge determines whether Company A is entitled to a temporary injunction. In the Company A/Jordan James dispute three individuals testified: James, her supervisor at Company A, and a law firm client of Company A's. The Court after considering the evidence, denied the injunction.

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Picking up on the Company A/Jordan James dispute, Company A successfully obtained a temporary restraining order against James. The Court ordered James not to engage in any placement work and return all Company A documents in her possession. Furthermore, the Court ordered Company A to post a $5000 bond and set the preliminary injunction for hearing in ten days. Company A requested that the Court allow for limited discovery before the injunction hearing. The Court will allow Company A to take 1 deposition and permit the service of 10 requests for production. James is also permitted the same. So what are these type of discovery devices?

(1) The Deposition: Permits a party to ask an individual questions under oath. In cases where a party is a company, the opposing party can ask the company to designate a representative or representatives to testify on certain topics. A Court reporter transcribes the testimony under oath and in some instances, the deposition is videotaped. In Texas, a party is generally limited to 6 hours of deposition time for each deponent.

(2) Request for Production: Permits a party to request production of categories of documents. This also includes electronic discovery and could include the inspection of hard drives and other sources where electronic data may be maintained.

(3) Interrogatories: A party can force the other side to answer written questions under oath.

Parties may also conduct discovery on non-party witnesses. This may take the form of a deposition, document requests, and depositions on written questions.

Disclaimer

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Picking up on last week's entry, Company A has decided it will file a lawsuit against Jordan James in Dallas district court and seek a temporary restraining order ("TRO"). A TRO typically precedes a temporary injunction, but the grounds for relief are largely the same. Most TROs or injunctions are prohibitory in nature, meaning they prohibit a party from certain conduct. In some cases a TRO or injunction can request mandatory or affirmative conduct, such as the return of a customer list or other company documents.

In order to obtain a TRO, Company A must show:
1. A request for permanent relief;
2. A probable right to relief; and
3. A probable injury.

Within the allegations contained in the lawsuit, Company A must set forth why a TRO is necessary. Those allegations must be verified; meaning someone from Company A must swear that the factual matters set forth are true. Company A should be prepared to file a bond assuming that the TRO is granted. Also, in Dallas County, unless there are extenuating circumstances, James must be provided with two hours notice of Company A's intent to obtain the TRO.

In Dallas County, the lawyer will file the lawsuit and the clerk will put the newly filed lawsuit in a red jacket. The lawyer will take the red jacket to the judge who has been assigned the case. If the judge is not around, the lawyer will have to find another judge to consider the matter. There is no "live" evidence presented at a temporary restraining order hearing. The judge considers the lawsuit papers and the arguments of counsel.

Assuming the court finds in Company A's favor, it will enter the TRO, set a bond amount, and set the injunction hearing for within 14 days. After the bond is posted, the clerk will then issue a citation for the original petition, notice of the TRO, and the TRO. At that point, Company A must serve James with the actual lawsuit and TRO. Once service has been completed, any violation of the TRO is treated like a contempt of court. In our next analysis, we will discuss the temporary injunction hearing.


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In Powerhouse Productions, Inc. v. Scott, the Dallas Court of Appeals affirmed a take-nothing judgment entered in favor of Defendant Eric Scott. Powerhouse builds rocket packs. (A rocket pack was piloted by 007 in Thunderball.) Scott began piloting the packs in the early 1990s, making over 400 flights throughout the world. Powerhouse charged clients between $15,000 to $25,000 per flight.

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