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

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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Earlier in the week we discussed policies and procedures that should be in place to deal with end of year employee departures. Companies should also consider a number of other HR related issues as the year draws to a close. Here are my thoughts:

1. Evaluation of all employment policies, including the employee handbook;
2. A review of all federal and state law changes that may impact employment practices - talk to your lawyer;
3.  A review of all employment contracts;  
4. A review of all employment files - are they up to snuff?; and
5. An evaluation as to whether the company should adopt post-employment covenants including non-competes, non-solicitations, and garden leave policies.

Now is the time to make any necessary changes before the New Year begins. Let me know if you have any additions to the list.

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Generally, many employees will wait to move to another employer until after they have received any year end bonuses or commissions they are due.  We are all familiar with stories where a top producer bolts after they get their end of year check. 

For these reasons, it is important the employers be prepared to review company policies for employment transitions. This would include post-employment covenants such as non-competes.

Critical to the employment transition practice is ensuring that the employer has protected any proprietary or trade secret information that departing employees can access. Departing employees should immediately lose access to any type of proprietary or trade secret information. This should include locking the employee out of their email account or limiting access.  That employee is now a competitor.

Employers who are vigilant about having these types of policies in place will ultimately protect their business and their product from an inevitable employee departure.

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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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Over the last few weeks we’ve discussed some key components in employment contracts including venue and jury trial waivers. Another key provision is choice of law. As was discussed in the Sam Adams case, choice of law  was critical because it permitted the employer to pursue an action against a former employee for breach of a non-compete agreement which would not be enforceable in the state of California. In that case, there is both a venue and choice of law provision for Massachusetts. 

As with venue and jury trial waiver provisions, the choice of law should be tailored to circumstances of the agreement at hand. Many employers like to default to the choice of law where their headquarters is located or many times the state of Delaware (shareholder disputes are very difficult to prosecute in that jurisdiction), but that will not always make sense in an employee/employer relationship. 

Additionally, courts do not always enforce choice of law provisions and employers should consult with their attorneys to put themselves in the best position contractually to enforce the provision. There is always a preference of the Court to enforce the contract based on laws of that jurisdiction because the judge is typically more familiar with those laws as opposed to some other jurisdiction. 

In the context of post-employment covenant litigation, there are certain jurisdictions state laws employers will want to avoid because they are not friendly to enforcement and vice versa. Employers need to be cognizant of the effect of a choice of law provision and also put some thought into its use because it will be an issue on down the road.

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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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Employers should always be careful and cognizant of venue provisions in their employment agreements. Many employers will simply include a venue provision making venue mandatory where the home office or headquarters is located, but this doesn’t always make sense in the context of an employment dispute. 

Recently, I reviewed a contract which required mandatory venue in the federal court where the company headquarters was located. Employees who would actually sign the agreement were located in a state a thousand miles away. While it’s nice to have venue in your own backyard, that doesn’t always work for enforcement of the agreement. 

In the context of most post-employment covenants, like non-competes or non-solicitation agreements, it is much easier to enforce these agreements in a venue where the actual defendant/former employee resides. In many of these cases, the employer will want to obtain equitable relief in the form of a temporary restraining order or injunction preventing the former employee from working or soliciting. 

It is much easier to institute and enforce these types of claims in the state or federal court where the actual employee lives, as opposed to one that is many thousands of miles away. In preparing employment agreements, employers should be cognizant of what makes sense in terms of enforcement, if enforcement is a key consideration. 

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A recent non-solicit case out of the Fifth District Court of Appeals in Dallas addressed the trial court’s denial of an injunction. 

The Facts

The Defendants were both employed by Jon Scott Salon as hairstylists. They signed Employment Agreements that contained several covenants addressing confidential information and the non-solicitation of clients after termination.

After resigning from Jon Scott, the Defendants opened a new salon ten miles down the road and there was evidence that they were soliciting  Jon Scott customers.

The Lawsuit

Jon Scott filed a lawsuit and obtained a temporary restraining order. The trial court denied the request for the injunction because the “non-solicitation clause in [appellant’s] employment agreement with [Defendants] was unenforceable as a matter of law because [the] employment agreement with [Defendants] were ‘at will.’  Jon Scott took the issue up on appeal.

The Appeal

The Fifth District Court of Appeals reversed and remanded, holding that the trial court was in error when it ruled that Jon Scott was not entitled to an injunction solely because the employment agreements at issue were “at will.” 

The basis for the trial court's ruling is unclear.  Texas courts have found non-solicitation agreements enforceable in the context of “at will” employment for many years. Unfortunately it doesn’t help Jon Scott Salon because they are still going to have to put on evidence and attempt to secure a temporary injunction from the trial court. The take away for the Defendants is not to specify in the Order denying the injunction why it is being denied. 

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According to a recent survey, brokers and wealth managers will be on the move during the remainder of 2011 and in 2012. The survey,  entitled “Wealth Management on the Move: The Moment of Truth” notes that there was a significant "buying" of advisors and wealth managers in 2008 and 2009 through retention packages.  These usually took the form of forgivable loans with 3 - 4 year retention periods.  This means  the loans are now forgiven or close to it. 

As a result, a lot of brokers are weighing new offers from new firms that include large signing bonuses: 

A lot of top brokers will look at the signing bonus being offered, and at how little is left on the retention contract, and they’ll decide it looks like jumping ship is a good deal

Brokers need to be sensitive to the risk/reward calculus involved in any employment move.  Things to consider include:  

1. The effect of any non-compete or non-solicitation agreement may have on their move to a new employer;
2. The effect of any “garden leave policy” may have on their transition;
3. Whether their new employer is in a position to aggressively help them move their business;
4. The tax implication any bonus or promissory note may have on them individually;
5. How much business might be lost; and
6. The general hassles of moving to a new employer.

The grass is always greener on the other side of the fence.  Any employee should critically evaluate the pro's and con's of a move and consult with counsel if necessary.

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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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Daniel Schwartz's latest entry on social media discovery illustrates how easy it is for parties in a lawsuit to obtain someone's Facebook records:

No longer are companies required to spent countless hours subpoenaing Facebook for the records of the terminated employee who is suing you. Just ask for the Plaintiff to download all of his or her information and then move to compel if he or she doesn't.

Facebook now includes a feature that allows a user to obtain and print out all of their historical Facebook activity.  The reason this is important is because discovery in many instances is limited by cost and a court's hesitancy to allow parties in a lawsuit to conduct fishing expeditions.  Now both the cost and burden of obtaining this information is minimal.  Of course, whether the requesting party is on a fishing expedition will remain an issue.

Other social networking sites allow for some historical information.  For instance, Twitter allows individuals in most instances to see a person's previous entries.  The point of this is most of these sites may follow the lead of Facebook and make this type of information easily obtainable.

In the context of non-compete and trade secret cases, Plaintiffs are always trying to reconstruct the departure of the employee.  Did the employee print out customer information or trade secrets at midnight the night before they resigned?  Or did they simply dump the information onto a zip drive for future use?  Any circumstantial evidence that an employer can develop is helpful in reconstructing the time line - social media may have that information or evidence.

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

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

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

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

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In Texas there are other options to prevent departing employers from competing with your business:

A Non-Solicitation: Instead of tying down your employee with a non-compete consider a non-solicitation. The non-solicit will still have to meet non-compete standards, but it can be used for specific customers as opposed to geographic areas. The rub, there will always be a debate about the right of a customer to do business with a departing employee and whether the former employee actually solicited the business or was contacted.

A Non-Disclosure: An employer can always attempt to lock down an employee by preventing them from using proprietary information they were exposed to through a non-disclosure. Basically the argument is the former employee cannot work for the company’s customer because they are using the company’s propriety information. This is very close to the inevitable disclosure doctrine, which is not recognized in Texas, but a non-disclosure should certainly be considered.

Compensation: Can the employer somehow tie future compensation into not competing? Basically, the company will agree to make payments to the departing employee for a period of time after they depart, but payment is dependent on non-competition. The rub, the company probably cannot enforce this agreement in Court, but if the employee decides to compete they don’t get any money.

The Anti-Raid Provision: The anti-raid provision prevents a departing employee from hiring your employees. The rationale is to keep the departing employee from setting up shop down the street.

There are other options as well, but these should be considered as part of any employment agreement. The more hurdles that can be put in the way of a departing employee, the better.

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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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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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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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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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