Opinion

 

Some time you are right, and some time you are wrong.  A few months ago I offered the opinion that it was unlikely the Texas Supreme Court would exclude a client representative from the courtroom during a trade secrets case when trade secrets were discussed.  I was wrong.  The Texas Supreme Court has said that you can.  There are a lot of procedural issues in this one with respect to what the judge should have done and we’ll save those for another day.

Here is the short of it.  Plaintiff and Defendant are competitors in the equipment and services business for the oil and gas industry.  Both have spent a lot of money developing mesh screens that filter solid matter from drilling fluid.  This allows them to reuse fluid and keep costs down.  Defendant hired one of Plaintiff’s former employees who had a non-compete.  Plaintiff sued Defendant to enforce non-compete.  During a preliminary injunction hearing the Plaintiff intended to introduce evidence about its trade secrets but wanted the Defendant’s corporate representative removed from the courtroom.  (That left the former employee, lawyers, and the Defendant’s experts.)  The trial judge said no and the appeal (mandamus in Texas) resulted.

Here is what the Texas Supreme Court said:

  1. Excluding the representative from the Courtroom was not a violation due process;
  2. The trial judge has to weigh/balance the degree of competitive harm the Plaintiff would suffer – it did not engage in this process; and
  3. Excluding the representative does not violate Texas “open-courts” provision, the Rule of excluing witnesses; Rule 76a of the Texas Rules of Civil Procedure which permits sealing of court records; and is not an offensive use of the privilege.

The Court went on to hold that it could not engage in the balancing process required of the trial court and remanded back to the trial court for that process.  We shall see how that turns out, but the trial judge is now in a position to exclude the witness if he so chooses.  So despite what I thought a corporate represenative could be excluded.  It wasn’t as if no one from the Defendants’ side would be left int he courtroom.  The former employee and experts were still in the courtroom. I wonder what would have happened if this was not the case?  Certainly that would be factored in the balancing process.

This was the first time the Texas Uniform Trade Secrets Act was discussed by the Texas Supreme Court, though not in great detail or substantively.  Obviously, the court takes seriously the notion of protecting trade secrets at the temporary injunction level.

Capture

 

Last week President Obama signed the Defend Trade Secrets Act.  Finally some legislation both sides of the aisle could agree on and the President could sign.  After all, who doesn’t want to protect trade secrets?  So what does this mean for Texas employers faced with a departing employee?

  1.  Another arrow in the quiver.  In October 2013 the Texas Uniform Trade Secrets Act went into effect and we’ve discussed it here previously.  Now we have a federal statute (applicable to all states) that employers can use to protect their secret sauce.
  2. Federal Court – The law creates federal question jurisdiciton.  Put another way – the lawsuit can be filed in federal court not state court assuming the amount in controversy exceeeds $75,000.  Why does this matter?  Sometimes an employer may not want to be in state court.  The reasons can vary from the judge(s) involved, the location of the dispute, etc. So an employer now has a choice.
  3. Definition of Trade Secret – Similar to the TUTSA but there are some minor differences.
  4. Whistle Blower Protection – A whistle blower is afforded some protections if they disclose a trade secret to a government official.
  5. 3 year statute of limitations
  6. Seizures – The law allows a plaintiff to have the government seize its trade secrets from a defendant.  TUTSA has nothing like this.  We shall see how this play out.  This is extraordinary relief.

So, this is now the law of the land.  Stay tuned to see how it develops.

 

Inevitably whenever I talk with a client there is always the discussion about attorneys’ fees and how to get the other side to pay them.  The unfortunate reality is there are very limited circumstances where attorneys’ fees are recoverable.  The US has the “American Rule” which generally means that each party pays their fees.  There are exceptions.  For instance, a contract can provide that if there is a dispute related to a contract, the prevailing party can recover their reasonable and necessary attorneys’ fees.  Statutes can also provide for recovery of fees such as the the Texas Deceptive Trade Practices Act.

In 2013, the Texas Legislature adopted the Texas Uniform Trade Secrets Act.  It provides for the recovery of attorneys’ fees to a prevailing party if: (1) a claim of misappropriation is made in bad faith; (2) a motion to terminate an injunction is made or resisted in bad faith; or (3) willful or malicious misapporpriation exits.  This was a departure from the common law that did not provide for fee recovery.  In a recent case my client succesfully argued that it was entitled to its fees (as a Defendant) because the Plaintiff brought the case in bad faith.  Here is a link – Stream Awarded Legal Fees in Litigation with Solavei _ Business Wire

Unfortunately, the statute does not define what bad faith is.  Courts from other jurisdictions have not been consistent on the issue either.  We argued that bad faith (based on on other cases) equates to an ulterior motive.  The argument went that the Plaintiff brought the case to damage the client’s business, not to litigate or resolve a bona fide trade secret dispute.  This is hard to prove.  There will be very limited circumstances where a defendant will be able to prove “bad faith”.    In terms of the mechanics for prevailing under the statute, we were a “prevailing party” by way of summary judgment.  The same can be acheived by prevailing at trial.  We then proceeded with an evidentiary hearing on bad faith.

So the good news is there is a mechanism, even for defendants, to recover fees under the trade secret act.  The bad news is it will be hard to prove.  We’ll keep you posted as more cases come out that address what constitutes “bad faith” under the statute.

 

 

Texas Non-Compete

Last week I had the privilege of speaking and attending the Texas Non-Compete Camp put on by UT LAW CLE and Mike Maslanka.  There were a number of great lawyers there addressing topics ranging from whether to sue the new employer of a former employee to ethical considerations of representing both the employee and employer.  Here are some items I took away from the employer’s persepctive:

  1.  Spend time considering the non-compete the employee is going to sign.  There is no one size fits all approach and if an employee can show the covenant was overlybroad the court could award them their costs and fees;
  2. The employer doesn’t always have to lead off with a lawsuit – consider pre-suit depositions if more evidence is necessary;
  3. If the employer is going to require a non-compete, also consider non-solicits, anti-raids, and confidentiality provisions;
  4. Always include venue and choice of law provisions;
  5. Consider whether arbitration or jury trial waivers make sense;
  6. Texas has adopted the Uniform Trade Secrets Act and a prevailing party in some circumstances can obtain their attorneys’ fees;
  7. There are other types of agreements that have the impact of a non-compete like stock/equity incentive plan agreements and garden leave agreements that might be considered;
  8. These types of disputes are fast, furious, and expensive;
  9. Remember that most of these disputes will never see a jury and that a judge has a great deal of discretion in temporary restraining orders and injunctions; and
  10. A party seeking a TRO will have to swear to the facts alleged – make sure whatever sworn to is accurate as it can come back to bite you.

 

 

If you follow the ups and downs of non-competes across the country you’ll note that there is a populist fervor in favor of banning non-competes in some states including Massachusetts.  The argument generally goes that non-competes stifle innovation and of course prohibit an employees’ ability to move elsewhere (which is true).  California has essentially eliminated employment non-competes and as a tech leader other states argue they should follow California’s lead.  The Massachusetts approach has been to propose beefed up trade secret laws, specifically adoption of the uniform trade secrets acts, to keep departing employees from using trade secrets with their new employer.  The problem with this approach is what if the employer has an interest worthy of protection (training or something that doesn’t quite rise to the level of a trades secrets -proprietary information).

Texas has not seen the populist fervor against non-competes, yet.  It’s just not the hot button issue it may be in other places or something for politicians to focus on – of course that can always change in the next legislative session.  The Texas Non-Compete Statue has been in place for many years without any significant changes.  I expect that to remain the same.  As we have discussed here previously, an enforceable Texas non-compete must be ancillary to an otherwise enforceable agreement and reasonable in time and scope.  The same holds true for non-solicitation agreements and anti-raid provisions.  In theory it is a very high standard to satisfy the non-compete statute.  Of course most non-compete disputes are resolved by a district or county court judge in Texas and never reach the scrutiny of the appellate court.  That means we’re talking “rough justice” where the trial judge will attempt to do what is fair.

For now Texas remains pro-employer and this holds true for post-employment covenants as well.  There just simply isn’t an anti-non-compete consensus in Texas nor does there to be one on the horizon.  So continue to draft away – in compliance with the statute.

                         

 

 

Not Much in 2013

I kind of feel like a broken record when it comes to Texas non-compete development over the last few years. Since the Marsh opinion I have been anticipating more significant developments in the non-compete and post-employment covenant world as employers attempt to use different types of consideration as the basis for these types of agreements. We just haven’t seen those types of cases role through the lower courts but that is a slow process.

Regardless, employers will continue to use non-competes as employees continue to change jobs and new jobs are created. That fact will remain as there are always employment transitions. The beginning of the year is always a high turnover time period because end-of-year bonuses have been paid and employers are more apt to hire at the beginning of the year as opposed to the end.

So what am I focused on in 2014 – two things.   The first is the use of non-planning provisions in employment agreements. The second is the Texas legislature’s adoption of the uniform trade secrets act.  Today we address the anti-planning provision.

Anti-Planning Provisions

An anti-planning provision looks like this:

The Restricted Parties also agree during the Restricted Period not to acquire, own or have an ownership interest in, manage, operate, or be employed or engaged by, any person or entity that conducts or plans to conduct a business that is in Competition with the [Purchasing Company].

This comes from an employment agreement that the Dallas Court of Appeals confronted earlier in the year.  It provides yet another tool for employers to consider as part of their employment agreements.

Often times that employee will engage in what I will call “gray area” activities as they prepare to compete. This could mean many thing like: (1) preparing a website; (2) preparing a business entity; (3) maybe suggesting to current customers of an intention to move; (4) maybe discussing a potential new venture with current employees; and (5) preparing new business cards and stationery. Regardless, the point is Texas law permits employees to go a long way in terms of preparing to compete. But what if you had a provision in place that essentially said you could not engage in some of this conduct and that what often times falls within “gray areas” is contractually prohibited?

Then fast-forward to a non-compete lawsuit where the employer is seeking to impose a temporary injunction against a competing employee. Though the anti-planning provision may not be enforceable, but  at least the employer could point to its provisions and identify conduct that the employee violated as they prepared to compete.

As the court attempts to balance the equities, it will be faced with a situation where not only did the employee breach the post-employment covenants but he or she also breached their agreement at the time they were employed. Again, something for employers to consider.

 

 

 

                         

At the beginning of the September, the State of Texas followed the majority of other states becoming the 48th to adopt a version of the uniform trade secrets act. So the question becomes, why does this matter to my business or in the context of the employee/employer relationship?

Though the instances where true “trade secrets” are in play is limited, employers that have trade secrets or think they have trade secrets must protect them and treat them as such. The Texas Uniform Trade Secret Act defines a trade secret as:

A formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, that: (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

So, if the information is not readily available and the employer protects it, they may have an argument that there is a trade secret. The interesting thing about the statute is it covers customer or supplier lists which could potentially impact a wide range of sales and other positions.

The statute provides for some other items including a presumption in favor of granting protective orders, allowing injunctions that protect the secrecy of trade secret information to last the life of the trade secret, and allowing plaintiffs to seek damages for the actual loss caused by misappropriation.  Exemplary damages and attorney’s fees are available where there is willful and malicious misappropriation of trade secrets. If a claim of trade secret misappropriation is made in bad faith, attorney’s fees are available for the defendant meaning there is a loser pays provision.

So what happens now? Plaintiffs will now begin to use the statute as a new cause of action with another grounds for attorneys’ fees. The use of the statute will also be a basis for injunctive relief as plaintiffs attempt to demonstrate that are likely to prevail on their lawsuit because of violations of the trade secret act. It will take several years for these types of cases to make their way through the courts and for appellate decisions to interpret the statute. In the meantime, it is likely that practitioners will use cases from other jurisdictions to support their arguments in court.  The statute  only applies to misappropriation that takes place from September 1 forward.

keep-calm-i-told-you-it-was-inevitable-We’ve discussed the inevitable disclosure doctrine in previous posts.  It’s a powerful claim and whether adoption of the uniform trade secrets act makes it viable in Texas remains to be seen.   What is it?  Assume that in your prior job you were exposed to certain trade secrets of your employer that you would “inevitably” use in new employment.  The argument goes from the former employer that you should not be able to work at your new  job because of inevitable use. In practice, the employer would not need an agreement to enforce this type of claim, only the existence and provision of trade secrets.  Wow.  Many courts are reticent to invoke such a doctrine.

Whether such a concept is enforceable in Texas remains an open question.  This is especially true with adoption of the Texas Uniform Trade Secrets Act.  It provides that “Actual or threatend misappropraiation may be enjoined.”  So, could a court use this provision to prevent a former employee from working somewhere else in order to protect a trade secret?  In theory, yes.  There is no reported case of a Texas court doing so.

Last week the Fifth Circuit Court of Appeals waded into the state of the law in Texas on inevitable disclosure.  The results were mixed, but the Court was clear to say that Texas has not adopted inevitable disclosure as a “categorical rule”.  Here is a really long but helpful quote from the case:

It is thus not surprising that more recent Texas case law has rejected the notion of a categorical rule. See Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 242–43 (Tex. App.—Houston [1st Dist.] 2003, no pet.) (observing that “no Texas case expressly adopt[s] the inevitable disclosure doctrine” and holding that it need not decide whether to follow Rugen and Conley’s “modified version of the doctrine” because the employee produced evidence that “raise[d] a reasonable inference . . . that disclosure and use [of former employer’s confidential information] was not probable”); see also M-I, L.L.C. v. Stelly, H-09-cv-01552, 2009 WL 2355498, at *7 (S.D. Tex. July 30, 2009) (stating that “inevitable disclosure” is not yet the law in Texas, and refusing to order an injunction due to lack of evidence that former employees “took any confidential informationwith them or that they are using such information” at their new employers); see also Troy A. Martin, Comment, The Evolution of Trade Secret Law in Texas: Is It Time to Recognize the Doctrine of Inevitable Disclosure?, 42 S. TEX. L. REV. 1361, 1376 (2001) (concluding that “the functional premise behind the doctrine itself is clearly at odds with Texas jurisprudence” and noting that “very few courts in Texas have advanced the theory”).

We’ll continue to montior the state of the law on inevitable disclosure in Texas.  The bottom line is our state courts have been quiet on the subject and the Texas Supreme Court has not addressed the issue.  Here is a link to the opinion.

The more things change…

The old adage goes that the more things change the more they stay the same. For Texas placement professionals there have been no landmark cases or significant changes in the law this year, but the standard issues remain and have become more magnified in the areas of post-employment covenants and the use of social media by recruiters.

Non-Competes and Non-Solicits

Recruiters continue to use non-solicitation and non-compete agreements for their employees. As we have discussed here at length, those types of agreements have gotten easier over the years to enforce in Texas, not harder. Any recruiter that has employees or any employee recruiter should seriously consider the ramifications of using or being subject to such agreements. Assuming that they are properly drafted and comply with the Texas non-compete statute there is a high likelihood that they will be enforceable.

Any departing recruiter should seriously consider trying to negotiate their way out of such an agreement if that is an option. Of course, the best way to handle one is to never sign it, but in most cases that is not an option.  The takeaway is recruiters will continue to use them and they will become standard in any contract.

Social Media

Along the same lines, there have been a number cases this year dealing with the use of social media and whether status updates on Linked In or a tweet about a new employment position somehow violated a non-solicitation provision. There is no one-size-fits-all answer for these types of questions and they will be dependent upon the facts in the case.

As I have written in other places, these types of posts usually will fall into gray areas but you usually know a solicitation when you see it. Employers must remember the power of social media and the ability of employees to leverage all of their contacts quite easily simply through Facebook posts or Linked In posts.

Anti-Planning Provisions

Employers are starting to use anti-planning provisions in employment agreements.   Put another way the employment agreement specifies what and employee cannot do prior to terminating their employment. These are on the “cutting-edge”.   Few courts have dealt with the enforceability of these provisions.  Generally, a Texas employee can prepare to compete as long as they are not doing so during company time etc. Recruiters should start to consider these types of anti-planning provisions if they make sense.

Trade Secrets Act

Finally, the Texas legislature adopted the uniform trade secrets act.  It provides some additional remedies including the right to attorney’s fees for prevailing employers who are successful in establishing the improper use of a trade secret. There have been no cases as the statute is brand new. We will monitor that as time progresses.