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

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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Last week we considered the implications of the Supreme Court’s recent non-compete opinion.  A few additional thoughts on the pros/cons of arbitrating non-competes:

• The majority of non-compete or non-solicit cases will resolve themselves at the temporary restraining order or temporary injunction level – meaning these disputes are often going to be resolved by the first tribunal that considers them whether it is an arbitration panel or judge;
•  The odds are that if an employer is successful with a judge on a temporary injunction, they will not compel arbitration and vice-versa;
• Because of this it is useful to try to craft some type of non-compete that will preserve the right of the employer to either stay with the judge or move to arbitration if they are unsuccessful – this is not easy;
•  From an employee’s perspective you always need to consider the fact that an arbitration is usually going to be more expensive for them as they pay some portion of the arbitration fee; 

Every employer needs to consider what a likely non-compete dispute is going to look like in their industry.  If it is going to be a situation where they need immediate relief, which is the case most often seen, they are probably going to be dealing with a state or federal judge on a temporary restraining order or temporary injunction to stop the conduct immediately.  The question then becomes after this period of the case is over, do they want to stay with that judge or move to arbitration?  There is no one size fits all to this question.  The challenge is to craft the proper arbitration provision to address the company's situation or go without.  There are alternatives to arbitration, such as jury trial waivers, that may accomplish the same goals.  

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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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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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To Jury or Not to Jury

It is always interesting to hear people talk about the runaway jury and risks of letting a jury determine the fate of a business/employer.  Most jury members, like most people, are not employers but are employees.  It's a fair statement that they are likely to have some bias against the employer whether they admit it during jury questioning or not.  That natural bias can be overcome, but it is not easy.  For all intents and purposes, employers are the "Man".

In the context of employment agreements two popular alternatives to juries have developed - the arbitration and the jury trial waiver.  Though arbitrations are a good alternative, they can be expensive and impractical for the typical employment agreement.  Opting for a judge as opposed to a jury can be a good alternative.

The Typical Waiver

Waiver of Trial by Jury. Seller and buyer knowingly and conclusively waive all rights to trial by jury, in any action or proceeding relating to this Contract.

The Texas Supreme Court ruled that the provision above was enforceable.  Though this provision was in a business transaction, it can be amended for use in the employment context. 

Yes or No.

First, the waiver eliminates any potential jury bias (of course Judges have their own biases).  Second, in most cases a trial date for a non-jury trial will be earlier than a jury trial setting because the cases take less time.  Finally, a non-jury trial is typically shorter and as a result less costly.

Waivers make sense.  They are  easy to use, enforceable, and probably a better alternative to arbitration these days. 

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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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Back in April I addressed the Supreme Court's review of City of Ontario, California v. Quon et al and the implications it might have on employer access and review of employee electronic communications.  A few weeks ago the Court's opinion was delivered and did little to shed light on the Court's view of privacy rights in text messages for private employees.

As you may recall, the opinion dealt with a police department that decided to review the personal text messages of one of its officers that were made with a police owned phone.  Justice Stevens upheld the search of the phone noting that Quon:

should have understood that all of his work-related actions–including all of his communications on his official pager — were likely to be subject to public and legal scrutiny

He also wrote:

The Court must proceed with care when considering the whole concept of privacy expectations in communications made on electronic equipment owned by a government employer.  Moreover, agencies and officers should explore whether state privacy laws might create a different standard. Some states have statutes that require an employer to notify an employee when electronic communications are being monitored.

So the Court was unwilling to go beyond the public employee domain, not surprising.  So questions remain:  Is the employee that uses a company owned phone subject to having his text messages reviewed?  What if there are personal emails on the company owned phone through a yahoo or gmail account?  What if the phone is owned by the employee but the service is paid for by the company?  These questions remain unanswered but employers should have policies in place that address these situations. 

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You've probably seen friends, coworkers, family members, and strangers glued to their "smart phone" of choice as if it is somehow an appendage.  The use/addiction to these items is increasing as we become more and more mobile.  A couple of interesting stats courtesy of CNN:

A Pew study found in January that 80 percent of American adults have cell phones and 30 percent of them access the internet on their phones. In 2000, 50 percent of American adults used cell phones, according to a Gallup Poll, and phones rarely supported access to the web.

More than 28 percent of employers fired a worker for e-mail misuse in 2007, compared to 14 percent in 2001, according to the American Management Association.

We can text, email (from both work and hotmail accounts), tweet, and post on Facebook from these devices.  Some of the devices may actually be provided by our employer or the employer may pay for data/wireless service.  So does an employer have the right to see those texts, posts, or emails? 

The United States Supreme Court is considering a California case where the Ontario, California Police Department reviewed sexually explicit text messages that a police officer sent from a police owned electronic device.  The Ninth Circuit previously held the police department's actions violated the officer's privacy rights because its actions constituted an illegal search and seizure.  The case was argued before the Supreme Court on Monday. As usual, SCOTUSBLOG has an excellent analysis of the case and play-by-play from the oral argument.   

Many think the Court will limit its opinion and any ruling will have limited implications.  Nevertheless, employers and employees should be cautious.  Employers have the right to look at company email in most circumstances, that seems to be accepted.  As previously discussed here, whether employers can review gmail or hotmail emails that emanate from a company computer or mobile device is unclear.  The same is probably true for texting or social media posting.  Now, the line becomes blurrier if the mobile device is owned by the employee but the service is paid for by the employer. 

Employers must proceed with caution and on a case by case basis before accessing these types of communications.  Of course, they could be very important in situations where an employee may be taking trade secrets or preparing to violate a non-compete agreement.  As is a recurring theme on this this blog, employees should assume that any electronic communication may ultimately be published to the world.  Though emails and texts are more convenient, phone calls and face to face meetings are still an option.

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In a previous entry I addressed the Fifth Circuit Court of Appeals'  recent ruling making arbitration awards virtually impossible to appeal in Citigroup Global Markets Inc. v. Bacon. 

A few weeks later, the U.S. Supreme Court upheld an arbitration agreement that required employees who were parties to a collective bargaining agreement to arbitrate their age discrimination claims.  Michael Moore's discussion of the opinion in the Pennsylvania Labor and Employment Blog is worth a look on this decision.

So, it's a no brainer, arbitration is the way to go for all employment claims, right?  Not so fast.  Jon Hyman of the Ohio Employer's Law Blog offers a dissent.  Jon cites the escalating costs associated with arbitration as a reason to reconsider the process:

In my experience, however, arbitration can prove just as costly as court. More and more arbitrators are allowing plaintiffs to engage in discovery that is nearly as expansive (and expensive) as what is permitted by trial courts. Additionally, employers have to add into the equation the cost to file the claim, which the employer usually shares. With the American Arbitration Association, these fees can run anywhere from $950 to a cap of $65,000. These fees do not include the arbitrators’ time, which often exceeds $500 per hour, and includes all pre-hearing conferences, discovery and motion practice, the actual hearing time, and the drafting of the opinion. It is not hard to see how in many cases the defense costs associated with arbitration outweigh defense costs in a traditional court proceeding.

He goes on to suggest considering using  jury trial waivers in employment agreements.  Though waivers won't keep pre-trial and discovery costs down, they will make trial cheaper and avoid a runaway jury.  Having a judge as the finder-of-fact usually makes things more predictable.  Of course, make sure the jury trial waiver is enforceable in the jurisdiction where it is going to be used.

 I recently spoke with an employment arbitrator who told me he gives the parties wide latitude on the amount of discovery in arbitrations as long at there is agreement.  His ultimate concern is not so much the amount of discovery, but the length of the case.  He aims to resolve all cases within 6 - 9 months.  The less time lawyers have to work on the case, the less fees incurred.

As an aside, the Texas Legislature is considering legislation to limit arbitration in certain consumer transactions.

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Recording phone conversations.

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

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

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

Polygraph testing your employees.

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

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

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

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

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