Smooth Transitions : Rob Radcliff : Texas Non-Compete Lawyer & Attorney : Gruber Hurst Johansen & Hail LLP Law Firm : Dallas Employment & Employee Departures : Smooth Transitions Law Blog

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.


Disclaimer

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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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