Texas Employment Issues/FINRA and Social Media
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.
Fantasy Football Firing
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.
Are customer lists trade secrets? Sometimes.
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.
Non-Compete Battles: IBM versus Dell
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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.
The Office: Michael Scott Shows How Not to Compete
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.
Employee Departures and Trade Secrets
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.
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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:
- 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.
- 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.
- 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.
- Cut off the the departing employee's access to the company network.
- Keep an eye on what former employees are doing. Are they using company information with a new employer or new venture?
Non-Compete Enforcement Tips
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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:
- Know the law from state to state, the enforceability of a non-compete in Texas is quite different from California;
- 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;
- 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.
- 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.
- 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)
- Remember your targets. Not only the employee who left, but the company they left for or formed.
Recording Phone Calls & Polygraph Testing
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.
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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.
Non-Disparagement Clauses
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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.
