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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

#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.  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

                                           

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Typically, employers use non-compete clauses to prevent former employees from competing with them after they've provided them with trade secrets, customer information, or other proprietary information. Non-solicits can essentially have the same effect - by restricting or preventing a former employee from calling on or contacting former customers. Here is an example:

You hereby agree and covenant that during your employment with XYZ Company, and for a period of one year thereafter, you shall not . . . : (1) encourage the customers of XYZ company to refrain from doing business with XYZ Company; (2) solicit the business or accounts of the XYZ Company’s customers; and (3) introduce by telephone, email, or any other method: (i) any sales representative that is employed by or otherwise affiliated with you; or (ii) any subsequent employer you may have ...

Former employees can conceivably use social media sites like LinkedIn and Facebook to reach out to former customers. In the TLK Networks case, a former employer sued former employees over a non-compete and used LinkedIn communications as evidence. 

 Through "updates" and "tweets" individuals can reach out to possibly hundreds of individuals with a short message. Something like "Anyone aware of an individual who might be interested in a position with [insert name of company] doing xyz?" or "Anyone have any leads for someone who might be interested in purchasing [xyz product] for [xyz price]?

Though the solicitation is not directed at any particular individual what if former customers or clients who might be interested in the job or product could follow up on the communication? While we tend to think of solicitations as a phone call or letter, social networks blur what is really a solicitation.

A non-solicit could be drafted that could address this communication and specifically prohibit it. The employer could define an improper solicitation "to include any type of communication, including but not limited to, status updates, tweets, etc. on any type of social network to include but not be limited to LinkedIn, Facebook Twitter, etc."  Employers need to review their agreements to make sure they address ever evolving communications tools like social media.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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)

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link