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

One of my favorite new things to listen to is the Fairly Competing podcast put on by Ken Vanko, Russell Beck, and John Marsh. The podcast addresses a number of issues related to non-competes and trade secrets and recently discussed a court's preference to enforce a non-solicit over a non-compete. The basic premise is that courts and for that matter juries are more likely to enforce a non-solicit because it prevents the former employee from targeting customers as opposed to putting the employee out of work.

Under Texas law there is no real legal distinction in terms of enforceability. Both a non-compete an non-solicit must satisfy the Texas non-compete statute meaning the agreement has to be reasonable and ancillary to an otherwise enforceable agreement, among other things. That said, there is a real psychological value to being able to tell the judge that you want the former employee to stay away from company customers as opposed to putting he or she out of work.

It is always a very effective argument for the employee to say that they are just trying to make a living and depending upon their circumstances may have been in the same line of work for many years with multiple employers. Of course these are not always the facts and there are many instances where a non-compete makes sense.

Arguing simply for a non-solicit removes the “out of work" defense and restricts the covenant to keeping the former employee from taking current customers. Just from a psychological perspective, courts are more likely to embrace these because they seem fair and equitable.  Most folks can identify with wanting to restrict access to company customers after the employee leaves the company.

One of the recommendations made in the podcast is to seek injunctive relief based both on the non-compete and non-solicit. If the lawyer is unsuccessful with the non-compete arguments he or she can fall back to the non-solicit agreement.

As with any case, your mileage will vary based upon the facts and circumstances. If there is a blatant violation of both agreements the court should enforce both, but this is not always the case. Employers should consider using both types of post-employment covenants but seriously consider whether they ask the judge to enforce both.  A judge considering a temporary restraining order or injunction has wide latitude and the employer who appears to be fair and not overreaching has a better chance of success.  
 

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I really liked Steve Boese’s article on non-competes in the fistful of talent recruiting blog.  Steve considers the non-compete as HR's equivalent to a prenuptial agreement.  Steve also hit on what is most effective about a non-compete whether it is enforceable or not:

Just the threat of potential legal action and the leverage a non-compete appears to give the employer often causes employees to think twice about jumping ship to one of their organizations competitors - or at least for making the jump in one step.

The most critical time period for a non-compete, like a prenup, is when the employee is considering whether to sign it or not.  Yes, there may be attack on it enforceability on down the line but the employer like the spouse has an agreement that employee signed an agreed to follow.  I can not overstate how important this concept is in non-compete litigation.  The employee always had the right not to sign though in most cases this means they won't get the job or could be fired for not signing it in certain circumstances.

Judges and juries deal with cases all the time where one party or another is not complying with an an agreement they signed.   Almost everyone can identify with this circumstance, whether it was a bad paint job, a lemon for an automobile, or the DVD player that didn't work.  Judges and juries like to make people and companies comply with the agreements they signed.  The same holds true for the non-compete or other post-employment covenant.  The most critical point in non-compete litigation is when the employee signed it.  That cannot be undone.

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A few weeks ago, we discussed realities of recovery of attorney’s fees in litigation. This post attempts to narrow that focus on post employment covenants.  Under Texas Law, a party can recover its reasonable and necessary attorney’s fees for a breach of contract under Texas Civil Practice and Remedies section 38.001. A non-compete agreement or non-solicitation agreement is a contract. So, prevailing wisdom is that like any other contract, an employer seeking to enforce post employment covenant can recovery its attorney’s fees, especially when the contract calls for fees.

There is however a line of cases emerging from some courts of appeals that says otherwise. The rationale behind these cases is that since the legislature did not provide for recovery of attorney’s fees in the non-competes statute, they are not recoverable.

The courts of appeals are not in unison and the Texas Supreme Court has not addressed the issue.   So, what to do?  Make sure to specify for the recovery of attorneys' fees in non-compete/employment agreements. Eventually the Texas Supreme Court will address the issue. Be prepared to confront this argument from both employers and employees.
 

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Today I have the privilege of speaking to the DFW Texas Recruiters Network. Over the years I have had the privilege of representing placement professionals in a number of circumstances.  Some tips:

1. Make sure your engagement agreements/contracts make sense and are enforceable;
2. Remember that non-competes and non-solicitation agreements in Texas can be enforceable;
3. Screen your candidates to determine if they have entered into a non-compete or non-solicit;
4. Remember that if someone you placed is sued it is likely that their new employer will be as well;
5. Protect your candidate and client information - that information can be a trade secret;
6. Make sure you are in compliance with the Texas Occupations Code;
7. A little money spent on an attorney up front can save a lot of money down the road;
8. Be factual when you talk about a potential employer;
9. Don't give legal advice; and
10. If you sign an agreement prepare to have to comply with it.

Below are some resources and previous writings placement professionals might find of use:

• Texas Occupations Code Section 2501 (Related to Placement Professionals)
• Previous entries related to placement professionals including discussion of the Texas Occupations Code; and
• Previous entries related to Social Networking.

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Parties to lawsuits sometimes try to seek solace in the fact that the ongoing attorneys’ fees they are paying will be recoverable at the end of their case. The reality of the situation is that just because an attorneys’ fees claim is proper does not mean those fees will ultimately be recoverable. In most cases, whether the case is resolved by settlement (as most are) or by a judge or jury, the successful party is not going to recover all of their attorneys’ fees. The reason for this is because judges and juries have wide discretion in awarding fees and settlements don't usually result in recovery of all fees.

The "American rule" for attorney's fees is basically that each party is responsible for the fees that they incur as part of any lawsuit. State legislatures and Congress created exceptions to this doctrine and have created claims or laws that permit recovery. In Texas, the successful party to a breach of contract claim can recover their attorneys’ fees under Texas Civil Practice and Remedies Code Section 38.001. These are also recoverable under other statutes like the Texas Deceptive Trade Practices Act.

So how are fees awarded? As any other damages would be awarded. If it is a bench trial or summary of judgment, the judge will be called upon to make an award of attorneys’ fees. While int the context of a jury trial, the jury will actually consider the testimony of an attorney, and then write down on the jury charge what they believed reasonable and necessary attorneys’ fees are. Many times juries have a hard time awarding a party attorneys’ fees. Usually this is because attorneys’ fees are disproportionate to the controversy for relative merits of each party to the controversy. So, if the jury thinks that a party should win but it is a close call, they can potentially hedge on attorneys’ fees and award less than what is being sought. The same calculation could be made by a judge as well.

Courts can consider a number of factors:

1. The time and labor required, the novelty and difficulty of the question involved, and the skill requisite to perform the legal service properly;
2. The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
3.  The fee customarily charged in the locality for similar legal services;
4. The amount involved and the results obtained;
5. The time limitations imposed by the client or by the circumstances;
6. The nature and length of the professional relationship with the client; 
7. The experience, reputation, and ability of the lawyer or lawyers performing the services; and
8. Whether the fee is fixed or contingent.

 So what can a party do to ensure that they recover their fees? Other than trying to make sure that their lawyers bill is reasonable, not much. High-stakes litigation or litigation where injunctive relief is involved means high fees. Ultimately, each party evaluating the relative merits of the case has to understand that they may not be able to recover those fees that they are incurring. Recovery of 100% of fees like any other damage, is not likely and must be appropriately evaluated.  

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At the end of each year I try to address and take inventory of what has occurred in post-employment covenant litigation in the State of Texas.  After several years of dramatic Texas Supreme Court opinions on the subject of non-competes, 2012 was a quiet year.  We heard nothing from the Texas Supreme Court on the issue and very little from the lower courts construing the 2011 Marsh opinion.  This is not surprising.  It will take some additional time for cases to wind themselves through our lower courts to get some clarity on Marsh and give us a better flavor for where Texas jurors prudence on non-competes stands. Regardless, those who are attempting to enforce non-competes are in a better position in 2012 than they were in 2010.

What have I seen from the trenches? The extensive use of non-solicitation and non-compete agreements in a wide range of industries.  This includes recruiters, bakers, furniture sales persons, doctors, and about any other industry that comes to mind.  The reality is business owners will use non-competes even if they are not enforceable simply to make employees rethink leaving or going out on their own. As a result, the mere threat of a non-compete is very effective even if the non-compete or the non-solicitous is ultimately unenforceable. 

It is the rare circumstance where a lawyer should tell their client employee that a court will not enforce a non-compete. Because enforcement is usually done through an injunction, the court is proceeding in equity and can usually fashion whatever relief it deems fair.  For this reason, mere inclusion of a non-compete should give any former employee or potential new employer pause. This type of litigation can be very expensive and very quick.  Employers should continue to enforce non-competes uniformly and design an agreement that will be enforced by courts.

So what do I expect for 2013?  More of the same.  Employers are going to continue to use these kind of covenants and former employees will try to get out of them.  Hopefully some lower Texas courts of appeal will provided further guidance on non-compete enforcement.

An issue that employers should be considering is how they want to enforce their agreements.  Consideration of jury trial waivers and arbitration is appropriate.  To often, employers spend more time thinking about terms and less time thinking about enforcement.  If you are going to spend the time and money to draft these types of agreement be ready to enforce them.

Best of luck in 2013.

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Employers generally like to include arbitration agreements in their employment agreements because it keeps them out of court and away from juries.  There are pluses and minuses when it comes to arbitration that we have discussed previously.  Some arbitration agreements also apply to enforcement of non-compete, non-solicit, and other post-employment covenants.  The United States Supreme Court recently ruled that an Oklahoma court could not address the merits of a non-compete agreement when the contract containing the non-compete contained a valid arbitration clause.  I will leave that analysis to some other folks who have already addressed the ramifications of the Supreme Court’s holding.  Needless to say, the Supreme Court’s ruling further enforces the concept that arbitration clauses contained in employment contracts will be enforced. 

What struck me about the opinion is the inter-play between injunctive relief (temporary restraining orders, injunctions, and permanent injunctions) and arbitration.  In most non-compete cases, the employer is dealing with an employee that is actively competing or soliciting customers in violation of their contract.  The employer needs immediate relief.  In most cases, a court as opposed to an arbitration panel, is in a better position to provide that immediate relief.  The reasons for this are pretty simple.  Arbitration panels generally are not set up to provide quick injunctive relief.  In fact, it will usually take several weeks and sometimes months to actually compose an arbitration panel.  Courts, on the other hand, are set up to deal with injunctive relief and do so regularly.    

So what should an employer do to make sure they can preserve their rights?  To begin with, there are some cases both in Texas and federal courts that permit a party to seek injunctive relief even though they have an arbitration agreement.  Basically, the employer would file a lawsuit, obtain injunctive relief, and then proceed to arbitration.  Instead of relying on this case law, I would suggest that it makes more sense to craft an arbitration agreement that permits and specifically states that the employer may seek injunctive relief in court and litigate the underlying claims that give rise to the injunctive relief.  That means the employer would deal with non-compete claims in court as opposed to arbitration, but still force all other employment disputes to arbitration.

Please consult with a lawyer before you attempt to draft this type of an agreement.  It is somewhat complicated because the employer is trying to have its cake and eat it too.  

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Potential litigants in Texas can always consider the pre-suit deposition under Texas Rules of Civil Procedure 202  as a precursor to the filing of a lawsuit. The 202 petition, which is available in Texas state court, permits a party to take a deposition to investigate either potential claims or in anticipation of a potential lawsuit.  The benefit is the party does not have to prepare a formal lawsuit with causes of action and generally gets the deposition in a short amount of time.

The mechanics of the rule require that the party seeking the deposition verify the basis for the deposition (swear under oath as to the facts) and identify any adverse party if suit is anticipated. The petition is filed, the deponent is then served, and the court conducts a hearing on the issue. Provided the party seeking the deposition has met all requirements under the rule, the Court will enter an order specifying the time and place for the deposition and make certain findings as required by the rule.

What is the purpose of such a procedure? There are many. In the non-compete or non-solicit situation, a former employer can use this 202 to explore whether or not the former employee is in fact competing or soliciting customers. The deposition could target the new employer or the former employee. When obtaining information about a potential lawsuit, it also provides for a dialogue between the former employer and the former employee/new employer meaning there is a chance of early resolution. A 202 petition allows you to skip the steps of filing a lawsuit and get testimony right away.  Generally, it is a good way to try and resolve disputes early on and avoid the costs of discovery and litigation.
 

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As we discussed a few weeks ago, the number of EEOC charges against Texas employers are on the rise.  The reality is a former employee can file a charge without a lawyer and with relatively little effort.  So the question becomes, once the employer receives the charge, how should they respond? 

Generally, the EEOC will request information related to the claims asserted by the charging party.  In Texas, the EEOC has essentially subcontracted out some of this work to the Texas Workforce Commission.  No matter what agency is leading the investigation, I always encourage clients to be responsive, provide a full explanation, and avoid any further requests from the EEOC or TWC for additional information.  Usually, requests may include witness statements, a response to the actual charge, evidence of other instances similar to the one alleged, and basic factual information. 

In many cases, the EEOC claim will have been preceded by an unemployment proceeding with the TWC.  Always review those filings, both by the employer and the charging party to make sure responses and allegations are consistent from case to case .  There always tend to be some admission by the employee in a TWC proceeding that could potentially bear on the EEOC proceeding.

During the EEOC proceeding, the parties will also have the opportunity to mediate the dispute.  Obviously, resolving cases is good and avoiding attorneys' fees is better.  An EEOC mediation does not cost anything and if you have a case that you think should or could be resolved, mediation might be worth a shot.   Some employers consider a request for a mediation a weakness, I disagree. Mediation provides both the lawyer and the employer an opportunity to size up what type of witness the former employee is actually going to be and provides for essentially some free discovery on a potential lawsuit. 

The majority of charges examined by the EEOC result in a dismissal and a right to sue letter.  Then the question becomes whether the employee will actually proceed with a lawsuit?  If the employee is represented by a lawyer during the EEOC process, odds are the employer is more likely to see a lawsuit. 

Employers, can of  course represent themselves through the EEOC or TWC proceedings.  Of course, as a lawyer, I recommend that they retain counsel to handle these matters.  Though there are many employers who have been through the process on numerous occasions and are more than qualified to deal with it themselves.  That is going to be a case by case, employer by employer determination.

Take the EEOC charge seriously, remember that whatever the employer files could potentially come back as evidence during a lawsuit.  Make sure that your positions are consistent between unemployment proceedings and the EEOC proceeding.

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We are coming up upon the one year anniversary of the Marsh v. Cook decision where the Texas Supreme Court altered the non-compete playing field in favor of Texas employers, again.  In Marsh, the Court held that stock options could serve as the basis for a non-compete agreement and that the traditional trade secretes/training/proprietary information giving rise to the non-compete was no longer the exclusive method for forming enforceable non-competes.

In response to the opinion, many commentators questioned what additional items, such as signing bonuses, stock, etc. could form the basis for a non-compete in Texas.  Surprisingly, we have not seen much in the way of new opinions from Texas' lower courts discussing this issue.  Our appellate courts are slow moving animals and the ramifications of an opinion like Marsh will take several years to arise.  In sum, we have no further guidance from the courts and the questions that we raised after the opinion still remains.

That said, employers that have something worthy of protection or simply want to prevent employees from competing should aggressively consider the use of non-competes in light of the Marsh opinion.  Obviously, consult with your lawyer when drafting or considering using post-employment covenants, but design them so that they will be enforceable and enforce them.

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 The EEOC recently made the breakdown of its individual charge filings available online for each state.  The statistics run from fiscal year 2009 through fiscal year 2011.  The top Texas discrimination charges are: (1) retaliation (41%);  (2) race (36.3%); (3) retaliation - Title VII (35.9%); and (4) sex discrimination (29.4%).

Total charges in Texas continue to rise as across the nation.  Employers need to anticipate and be ready for the EEOC charge, whether there is merit to it or not.  All it takes is a former employee to fill out the necessary paperwork and file it with the EEOC.  No lawyer is required and there is no charge for the filing.  From the employee's standpoint, what does it hurt? Maybe they can get the employer to pony up some money to resolve the dispute, even if it is baseless.

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Texas is a blue line state when it comes to the enforcement of non-compete agreements.  What does this mean?  It means that courts can perform or rewrite non-compete agreements so that they are enforceable under Texas law.  What this really means is, the judge can rewrite the contract to a form that he or she thinks is palatable and fair.

In some states, the blue line does not apply.  This means that if the court finds a non-compete is overly broad or unenforceable, there is no way to enforce the agreement and the parties can operate as if it never existed.  In Texas, employers who may be concerned about the enforceability of a non-compete should always remember that they will be in a position in litigation to request that the court re-form the agreement to make it enforceable.  This usually takes the form of the declaratory judgment action and could potentially give rise to attorneys' fees.

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Bruce Carton of law.com tracked down a great story about a Victoria, Texas hospital (in between San Antonio and Houston) that has implemented a hiring policy that requires potential employees to have a Body Mass Index of less than 35.  According to the Texas Tribune, the policy shapes up like this:

1. Existing employees who become obese over the course of their employment are not terminated;
2. The hospital offers to help job candidates get their body mass index down;
3. The policy is based upon the concept that an employee's physique "should fit with a representational image or specific mental projects of the job of a health care professional."

Suzanne Lucas provides her take on the policy and points out that  BMI is not a good indicator of obesity.  Of course, we can always debate over what constitutes obesity, the bottom line is that this country has a weight problem.  

Now the legality of the policy is another issue.  Being overweight is not a protected class, but a policy like this that has a disparate impact on a particular group could be.

"Health qualifications" for potential jobs are here to stay.  Earlier in the year, a Texas hospital implemented a no smoking hiring policy.  It would appear that health care business have a pretty good argument that nondiscriminatory policies which promote health, such as a no smoking or obesity policy make sense.  

The bottom line is that more and more employers are going to implement these type of policies.  Whether or not President Obama's health care legislation is upheld by the Supreme Court, the cost of health care continues to rise for private employers.  This is going to force private employers to consider health-related issues as they related to their health premiums, and will flow through into the hiring process.  Employers will have to be very careful in terms of what policies they ultimately implement to ensure they are not discriminatory.

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Last week we talked about the considerations, frankly negative considerations, employers and business owners should consider before they go to trial. That post raises the following question: What, if any benefit is there to a trial for a company?

Frankly, I am not sure there are any, unless demands made by the Plaintiff are so extreme that settlement is simply not an option. Even when a company wins, it may lose, in terms of the attorneys’ fees incurred. Winning a trial or case is all relative.

If the Plaintiff offers to settle a case for $500 and you win the case, but end up spending $1,000 in attorneys’ fees, that may be a win in principle but not financially. Likewise, if a Plaintiff makes a settlement demand of $500 and the jury awards $100 and you’ve incurred attorneys’ fees of an additional $200, that is technically a win. Whether a case is ultimately a win or a loss is in the eye of the beholder. Principle is a wonderful thing. I have had many clients tell me that they would rather spend the money with me than pay the Plaintiff any money whatsoever. Unfortunately, that story never usually turns out that well.

The reality is, trials are few and far between in our system. It is usually very bad cases that are tried or cases where one side misevaluates their exposure or chance for success making a trial necessary. Whether to settle or try a case should at all times be a business decision based on the financial ramifications and the advice of attorneys. Keep the emotion out of it.

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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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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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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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Last week, Baylor Healthcare System made employment waves in Texas when it announced it would no longer be hiring individuals that smoked.  There is no prohibition that, as of yet, would prevent an employer from hiring or even firing an employee because of their use of tobacco products – they are not a protected class.

There have been a number of commentaries and articles about the policy, the links of which are below. The reasons for instituting such a policy vary. There is no doubt that smokers can affect workplace productivity. They take breaks during the day to smoke and those breaks affect workflow and continuity of the office. Additionally, there are the health issues to consider that come along with smoking ranging from respiratory issues to cancer.  Smokers can also drive up health insurance premiums.

It makes sense for a healthcare provider to implement such a policy, though I imagine there will be more to follow. There are not pros or benefits from smoking in the workplace. More and more employers, regardless of the industry are sure to implement such policies.

Links

The Baylor Policy

Lawyer Russell Cawyer's Thoughts

Related Stories

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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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To Jury or Not to Jury

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

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

The Typical Waiver

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

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

Yes or No.

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

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

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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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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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A few social media signs that an employee is leaving:

1. The Obvious -  A Linked-In or Facebook profile update that includes the name of a person's new employer;
2. The Obvious - An actual description of the new employer or business in a social media profile;
3. The Obvious - A status update where the employee announces their departure;
4. The Obvious - A posted link to the new business or venture;
5. The Obvious - Outright solicitations from the former employee to the employer's customers;
6. The Obvious - General solicitations for business or leads;
7. Subtle - A request for a reference for a website designer or IT help;
8. Subtle - A request for a reference for someone to put together business cards, stationary, etc. - basically anything someone would need to start up a business;
9. Subtle - A request for legal advice regarding business entities (the new business will need a corporate form; and
10. Though not a necessarily social media related, a request from the employee for their employment contract. 

The interesting byproduct of social media sites is that many employees now maintain their business contacts on line.  A departing employee will alert their contacts that they are leaving.  The question then becomes what can or will the employer do to keep their clients/customers?

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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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Another strategy employers use to prevent employees from walking away with customers, proprietary information, and trade secrets, is the use of a “garden leave” provision in the  employment agreement. Basically, the provision works like this: the employee agrees that they have to provide three weeks notice of their intent to go and work for a new employer. Most clauses then allow for the employee to essentially quit working, but remain on the payroll of the employer during this “transition period.”

The effect of this provision is to prevent the overnight departure of business and proprietary information.  If followed by the employee, the employer can contact clients and address the situation.  Breach of such a provision could in some instances serve as an additional basis for a temporary restraining order.

Garden Leave provisions coupled with non-solicitation agreements, non-compete agreements and anti-raid provisions can be effective. These types of  provisions are appearing more often in the broker/securities business and trace their origins to Europe where they are commonly used. Employers should confirm that any provision is enforceable under applicable state law. Similarly, employees should be very careful before they sign any type of agreement along these lines.
 

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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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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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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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A few weeks ago we analyzed the enforceability of a college football coach's non-compete agreement.  The example we cited was Texas assistant Will Muschamp.  Make that former assistant Will Muschamp.  Muschamp left Texas over the weekend to take the Florida job.  No claim of a non-compete from Texas and as we discussed unlikely it could have been enforced even if there was such a provision.

 Bobby Petrino signed a new 7 year multimillion dollar deal with Arkansas late last week.  Included in the agreement was a non-compete provision that reportedly prevents Petrino from moving to another SEC school.  Whether that agreement is enforceable under Arkansas law is an issue for the Arkansas lawyers. 

If it were in Texas, the agreement would appear to be reasonable in that excludes Petrino from working for any of Arkansas' competitors.  It is unknown what the duration of the non-compete is under the new deal.  As pointed out previously, how a non-compete with a coach is ancillary to an otherwise enforceable agreement, a Texas requirement, is unclear.  What Arkansas is providing to Petrino that gives rise to the non-compete is the issue.  What would that be?  A lawyer will probably be able to come up with something but it will be difficult for that argument to survive appellate scrutiny.   

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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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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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Here is a link to a presentation on the Top Ten Issues for Texas Employer and FINRA Social Media compliance. I hope you find it helpful.

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It's that time of year - the NFL season is drawing to a close and fantasy football leagues are in the midst of the playoffs.  Fantasy leagues are as popular as ever and cover all sports, not just football.  Fantasy leagues based on the NFL are by far the most popular and in many instances are comprised of co-workers and in some cases the use of company resources like email.

Which leads us to the firing of four employees in Fidelity Investments' Westlake, Texas office for playing Fantasy football.  Fidelity's take on the firing:

We have clear policies that relate to gambling. Participation in any form of gambling through the use of Fidelity time or equipment or any other company resource is prohibited. In addition to being illegal in a lot of places, it can also be disruptive. We want our employees to be focused on our customers and clients.

One of those fired, Cameron Pettigrew, knew that Fidelity did not permit playing fantasy on company time but claimed he never used company email for the league.  Fidelity did find two instant messages that included fantasy content.  Pettigrew explained:

One of my buddies sent me something about how bad Trent Edwards was playing or something like that, So they called me in and talked to me for about 90 minutes on everything I ever knew about fantasy football. They interrogated me as though I was some sort of international gambling kingpin. Then they released me for the day, and I was like, 'OK.’ I never thought they’d fire me for this, but, the next day, I get the call saying I had been terminated.

Tough time of year to be fired and Pettigrew knew he wasn't allowed to play at work, but was he really playing?  The Ft. Worth Star Telegram asked its readers if Fidelity overreacted:

Did Fidelity overreact by firing fantasy football players?
(1) No. (19%, 60 votes)
(2)Yes. (57%, 185 votes)
(3)Depends. (There's no way outsiders can know the whole story.) (24%, 78 votes) 

It seems unlikely that Pettigrew and his cohorts have any legal challenges to the firing as Texas is an at-will employment state.   If a company has a policy against playing in a fantasy league during work time, don't play.
 

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In a breach of non-compete or non-solicit lawsuit, the former employer will almost always claim their customer lists are trade secrets.  Texas Courts consider the following factors when determining if something is a  trade secret:

(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of the measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Texas Courts have found that customer lists can be trade secrets:

The Texas Supreme Court has noted that merely because a trade secret can be discovered by fair and lawful means does not preclude its owner of the right to protection from those who would secure possession of it by unfair means. See K & G Oil Tool & Serv. Co. v. G & G Fishing Tool Serv.,  314 S.W.2d 782, 788 (1958). This general rule applies to customer lists. See American Precision Vibrator Co., 764 S.W.2d at 278. Therefore, although a customer list may be considered a trade secret, to be entitled to the protection of the court, the proprietary information must be more than merely of a kind and character encompassed by the definition. The information must not be publicly available or readily ascertainable by independent investigation. (citations omitted)  A corollary to this is when a customer list is not considered to be a trade secret and its contents are readily ascertainable from sources other than the employer's records, the former employee may legitimately compete with his former employer for those customers. 

Adco Indus. v. Metro Label Corp., 2000 Tex. App. LEXIS 5644 (Tex. App. Dallas Aug. 23, 2000).

An employer claiming a customer list is a trade secret must treat it as such.  Lists should not be "floating" around the office and should be protected via a computer password or some other type of precaution.  The employer should also be a able to document and demonstrate the origins of the list (i.e. developed over many years) and should identify it at as a trade secret in any non-compete, non-disclosure, or non-solicit agreement.  This will not guarantee trade secret protection but is a good start.

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In a recent non-compete decision, Federal District Court Judge Steven Robinson denied an injunction sought by IBM to keep a former vice-president, Steven Johnson, from going to work for Dell.  The court rejected IBM’s contention, that Johnson had access to trade secrets:

The court believes . . . that IBM has overstated its case.  Mr. Johnson does not have the sort of information that is considered quintessential trade secret information ‑‑ detailed technical know-how, formulae, designs, or procedures.

Employers attempting to enforce non-competes in Texas have to ensure that what they are claiming as trade secrets are trade secrets.  With recent Texas Supreme Court opinions in favor of the employer, an employees' chief defense to non-compete enforcement will be to attack whether there is actually a trade secret that gives rise to a non-compete.

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Two weeks ago on the Office, Michael Scott gave Dunder Mifflin notice of his  resignation. Upon return to Scranton, Michael hatched a plan to start Michael Scott Paper Company and started with some due diligence (I apologize for the advertisement but NBC has to pay the bills):

Michael then asked most of the Scranton staff to come to his new company and started working on putting together  paper order forms.  Eventually the higher-ups got wind of Michael's new venture:

Unfortunately, for Michael there is no two week "immunity" period. Employees in Texas can set the stages for starting a competing venture (assuming there is no non-compete or other restrictive agreement) on their own time, but not while at work.  The good news for Michael is that Pam the receptionist left Dunder Mifflin to join Michael.

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In a survey of 950 former employees, 60 percent admitted to taking confidential information from their former employers. 

Most of the data takers (53 percent) said they downloaded the information onto a CD or DVD, while 42 percent put it on a USB drive and 38 percent sent it as attachments via e-mail, according to the survey.

The survey also found that many companies seem to be lax in protecting against data theft during layoffs. Eighty-two percent of the respondents said their employers did not perform an audit or review of documents before the employee headed out the door and 24 percent said they still had access to the corporate network after leaving the building.

With layoffs taking place across the employment spectrum, employers must be vigilant in protecting their proprietary information from walking out the door with their former employees.  I've previously addressed what a trade secret is under Texas law, but just because something isn't a trade secret doesn't mean a former employee can take it with them.  So what can be done?  Here are a few suggestions:

1. Ensure that your employee manual or agreement contains defines what the proprietary information is and requires the departing employee to return it at the conclusion of their employment term.
2. Ensure there are appropriate safe-guards for proprietary information.  Is it password protected? Can you determine when employees have accessed databases or other company information?  If so, you can prevent or at least ascertain whether an "information dump" has taken place.
3. During exit interviews with the employee, have a candid conversation with them about their obligations under the aforementioned agreements and confirm they have returned all proprietary information.
4. Cut off the the departing employee's access to the company network. 
5. Keep an eye on what former employees are doing.  Are they using company information with a new employer or new venture?

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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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Recording phone conversations.

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

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

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

Polygraph testing your employees.

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

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

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

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

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Joe Torre's recent memoir concerning his stint with the Bronx Bombers has prompted some in Yankee circles to suggest the need for non-disparagement clauses for players and managers.  Typically, non-disparagement clauses appear in settlement and severance agreements.  The idea is that in exchange for money a former employee will not bad mouth his or her former company. 

Here is an example from a settlement agreement:

Non-disparagement. The Parties agree not to make any statements, written or verbal, or cause or encourage others to make any statements, written or verbal, that defame, disparage or in any way criticize the personal or business reputation, practices, or conduct of Defendant, its employees, directors, and officers. The Parties acknowledge and agree that this prohibition extends to statements, written or verbal, made to anyone, including but not limited to, the news media, investors, potential investors, any board of directors or advisory board or directors, industry analysts, competitors, strategic partners, vendors, employees (past and present), and clients.

The Parties understand and agree that this Paragraph is a material provision of this Agreement and that any breach of this Paragraph shall be a material breach of this Agreement, and that each Party would be irreparably harmed by violation of this provision.

The above is couched to support the application for an injunction, hence the "irreparably harmed" language.  While wonderful in theory, (who wouldn't want to prevent an ex-employee from belittling the company) actually enforcing such an agreement is another matter.  As with any breach of contract claim, the plaintiff will have to prove breach and damages.  Proving damages in a non-disparagement case is akin to proving damages in a defamation case, both are difficult.   

Quantifying a damage number based upon a written or oral communication is cumbersome.  For that reason, some clauses attempt to tie a liquidated damage into any breach.  In order to enforce a liquidated damage clause in Texas, the court must find: (1) that the harm caused by the breach is incapable or difficult of estimation, and (2) that the amount of liquidated damages called for is reasonable forecast of just compensation (not punitive). 

Including a non-disparagement clause in a severance or settlement agreement is good practice, but enforcement of the clause is an entirely different matter.  Every effort should be made to ensure that the language defining "disparagement" is specific enough to remove all doubt as to whether the statements are actionable.  Whether an aggrieved party can quantify the the damage caused by the disparagement will be an uphill battle in most cases.

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