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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A recent survey by Boston-based Alite Group found the following:

• 11,000 wirehouse reps may be on the move;
• 15% are satisfied with their employer;
• 20% are ready to move and would like to do so in the next 2 years;
• 2/3's of those with retention plans in place say there is a chance they'll leave;
• most advisors think they can take half of their existing book of business; and
• only 23% would go independent. 

Brokers with retention plans in place will have to consider the economic impact walking on a retention plan would have in addition to the amount of business they could potentially lose.  Also, making the move from a large wirehouse, which in most instances is a member of the Protocol, to go independent could result in a non-compete or non-solicit lawsuit that could tie up the departing broker in Court or Arbitration and be a financial drain. 

With more and more advisors unhappy with their current wirehouse employer it will be interesting to see if there is actually a significant migration to become independent and what the wirehouse reaction is.  As it stands, wirehouse to wirehouse migration is down but whether advisors are that "unhappy" remains to be seen.

(h/t Howard Stock of the Bank Investment Consultant)

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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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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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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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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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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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As discussed previously, in some situations Texas courts will afford customer lists trade secret protection.  In most non-solicit/non-compete cases, the departing employee doesn't walk out with the company customer list.  In some cases that list doesn't exist.  In other cases the former employee will simply reconstruct the customer list from memory, contact information they maintain, or even the phone book - the "phone book defense".

Texas courts have held that "A customer list of readily ascertainable names and addresses will not be protected as a trade secret."  So if a departing employee sells construction equipment there is a limited number of potential customers like contractors and sub-contractors.  Those trades advertise in the phone book on the internet and in trade publications.  As a result the customer list can be reconstructed quite easily and will little effort.

In most circumstances the employer simply can't rely on protecting their business by identifying their customer lists as a trade secret.  They will also need a robust and enforceable non-compete and non-solicit. 

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Judge William C. Griesbach, of the Eastern District of Wisconsin, recently denied a request for a temporary restraining order filed by Smith Barney against several departing brokers and their new employer, Robert W. Baird & Co.  Smith Barney sought a TRO in conjunction with Rule 13804 of the FINRA Code of Arbitration Procedure, meaning entry of a TRO by the district court would have triggered an arbitration within 15 days. 

 

The non-solicitation provision provided that the departing brokers would not:

solicit by mail, by phone, by personal meeting or by any other means, either directly or indirectly, any Account whom I served or whose name became known to me during my employment at Smith Barney in any office and in any capacity.  My agreement "not to solicit" means that I will not "during my employment and for a period of one year thereafter, initiate any contact or communication, of any kind whatsoever, for the purpose of inviting, encouraging or requesting any Account:

a) to transfer from Smith Barney to me or to my new employer, or b) to open a new account with me or with my new employer, or c) to otherwise discontinue its patronage and business relationship with Smith Barney

The Court ruled that the provision was overly broad and invalid under Wisconsin law because, among other things,  "it would prevent the financial advisor from contacting even individuals with whom he'd had no prior contact". 

Smith Barney stated it was considering its options following the ruling.

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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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