Over the last few months I’ve started following Formula 1 Racing.  There are fast cars with interesting personalities and races all over the world including Austin, Texas in October.  It is also a very expensive sport backed by big brands and wealthy people.  Without getting into the nuances of race car driving (I couldn’t tell you what they are anyway) each team has 2 cars with of course 2 drivers.  There are 10 teams – 20 cars.  On Saturday the drivers qualify and seed themselves for the race. There are differences between the cars and millions of dollars go into the design and development of those cars.

Mercedes has been on top for the last few seasons with a driver named Lewis Hamilton from Great Britain as their lead driver.  He’s one of the most highly compensated athletes in the world and pretty good at what he does.   Red Bull (the energy drink) has a stellar history but been able to keep up with Mercedes.

Recently Red Bull made a play for Mercedes engineer Ben Hodgkinson and successfully lured him away.  Currently, Red Bull relies on Toyota for its engines but is going to begin building its own engines which is where Hodgkinson comes into the story.  Reportedly, Hodgkinson has a garden leave provision in his contract with Mercedes – meaning once Hodgkinson gave notice to Mercedes that he was leaving he is required to sit out and continue to get paid by Mercedes.  Yes, that’s right, Mercedes pays him and he can’t work.   By all accounts Hodkingson won’t be available to work as Red Bull as a technical director until the end of 2022.  For employees that have technical know-how like Hodgkinson, it makes sense for Mercedes to keep him off the market even if it costs them some money.   So Hodgkinson is on “gardening leave” for the near term.

The concept of garden leave came from European financial services company.  No Texas court has construed the enforceability of a similar type provision and American companies have have been slow to adopt the garden leave approach to post-employment covenants.   That said you often times see notice provisions that require certain amount of notice before an employee can leave.

 

 

 

 

The usual gamut of post-employment covenants includes non-compete restrictions, non-solicitation of customer restrictions, confidentiality restrictions, and in many cases the anti-raid provision designed to keep a departing employee from hiring away a former employer’s employees and contractors.  The anti-raid is not always given a lot of thought, but it should be.  Why?  Because when there is an orchestrated departure, the odds are a departing employee will attempt to hire away the top lieutenants.   In most cases, the departing employee would rather use the same team as opposed to staring from scratch.

An anti-raid provision is a restraint of trade and subject to the Texas non-compete statute.  In the 2011 Marsh opinion that we have previously discussed, the Texas Supreme Court confronted this very issue.  The non-compete agreement in that case contained a clause stating that the departing employee could not “solicit any employee of [former employer] who reported to [departing employee] directly or indirectly to terminate his employment with [former employer] for the purpose of competing with [former employer].” In the section of the opinion where the court was laying out general rules for evaluating enforceability of non-competes, the Court reasoned: “Covenants that place limits on former employees’ professional mobility or restrict their solicitation of the former employers’ customers and employees are restraints on trade and are governed by the [Covenants Not to Compete Act].” See Marsh USA, Inc. v. Cook, 354 S.W.3d 764, 768 (Tex. 2011). Other courts have made similar rulings relying on Marsh.

So, like a non-compete agreement, generally the anti-raid must be ancillary to and otherwise enforceable agreement and reasonable in time and scope to satisfy the non-compete statute.  In most situations the anti-raid will accompany a non-compete agreement and non-solicit agreement because they are held to the same standard.  That said, a court may be more likely to enforce an anti-raid provision as opposed to the non-compete.  Why?  Because a court would rather keep a former employee from hiring folks away as opposed to putting them out of work.

What are some things to consider when drafting an anti-raid?  (1) Should the agreement apply to individuals the departing employee actually worked with?  (Yes, the narrower the better and the odds are the departing employee isn’t going to hire folks they don’t know or haven’t worked with.) (2) Try to use language that is broad in terms of the actions the former employee can use to hire someone one away but narrow enough to be enforceable (not always easy).  (Usually we see the use of the phrase “direct or indirect” but there are other ways to deal with this issue.  (3) Make sure you consistently use the anti-raid provision for all employees as appropriate. (Often times an orchestrated raid may involve multiple former employees trying to take customers away.)  (4) Include a reasonable time period.  (Usually this is the same length as the non-compete or non-solicit.)  (5) Remember Texas is an at-will state and employees can leave.  Try to keep them happy.

 

Quite often I have lawyer friends ask me why Texas lawyers (and lawyers from other states) aren’t the subject of non-competes?  There aren’t really any cases that I’ve run across on the subject, which sometimes is an indicator that law firms aren’t trying to enforce them.  The answer is not that complicated. Queue Texas Rule of Disciplinary Procedure 5.06:

Restrictions on Right to Practice

A lawyer shall not participate in offering or making: (a) a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement; or

(b) an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a suit or controversy, except that as part of the settlement of a disciplinary proceedings against a lawyer an agreement may be made placing restrictions on the right of that lawyer to practice.

The comments to the rule provide that the purpose of the rule is not only to prevent restrictions on lawyers post-employment moves but also to prevent restrictions on clients from selecting their lawyer of choice. Put another way, it’s not fair to keep a client from engaging their attorney of choice because they left their previous firm.  This is no different than non-lawyer cases where the argument is made that a customer should be able to pick whom they want do business with even if a non-solicitation agreement is in play.  This rule is found in similar form in other states.

Beyond post-employment issues, the comments also make clear that settlement agreements cannot prevent lawyers from agreeing not to represent other clients in lawsuits against defendants.

In Texas we really don’t have any particular statutes/rules/regulations directed towards particular professions other than doctors.  Those particular agreements require that the doctor have a buy out provision for their non-compete.

 

 

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.

 

 

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A few weeks ago I placed an order with Amazon Prime and selected the option for same day delivery.   As promised, my order arrived late that afternoon.  To my surprise the delivery was made by a driver in what appeared to be their own private vehicle.  It was not a UPS or USPS truck.

It turns out that Amazon is using private drivers to handle some of its deliveries.  Kind of like Uber.  Also, similar to Uber, Amazon drivers have sued Amazon alleging they are employees, not independent contractors.  The Los Angeles Times offered the detail of the California state court lawsuit over the weekend.  In sum:

other drivers for Amazon Prime Now weren’t considered employees of Amazon or Scoobeez, its contracted courier company. Instead, they were treated as independent contractors — making them ineligible for overtime pay, mileage reimbursement, workers’ compensation and other protections given to employees under state and federal law.

We’ve discussed the tests for who is or is not an independent contractor.  There are strength in numbers in these types of lawsuits and most attempt to proceed as a class action.  It all comes down to money.  It is much more expensive to employ folks as opposed to treat them as independent contractors.  If these companies are forced to treat contractors as employees it will challenge the company’s business model.  As a result the companies are going to fight these types of cases to protect themselves and lawyers will continue to look for these types of claims to purse.  We will keep you posted on any developments but expect other cases to follow.

In a case from last week the Fifth Circuit found upheld a district court’s judgment ruling that a recruiting firm was not liable for placement of a medical group’s office manager who embezzeled $60,000.  The case provides an interesting analysis of a recruiter’s responsibility in terms of presenting a candidate who turns out to be a thief and the validity of a refund provision.  A brief summary of the facts:

  • the medical group needed a new office manager and the recruiter provided five resumes for review;
  • the medical group interveriew four of the five and asked for references for two including the thief;
  • the recruiter performed a background check on the thief that did not reveal any records from the national database;
  • the recruiter was paid $7,275 for the referral;
  • the thief worked for the medical group for six months until it was determined she was embezzling money;
  • the thief did not have an undergraduate degree and was not an RN;
  • the thief had a deferred adjudication in 2007; and
  • the recruiters guarantee provided for: (1) full refund if the placement left within 30 days of employment (regardless of reason); (2) a prorated refund or free placement if the placement was employed for 30-90 days; or (3) a replacement for half-price if the placement was employed from 90 days to 5 years.

The medical group sued the recruiter under the Texas Deceptive Trade Practices Act alleging the recruiter was the producing cause of its damages and wanted its placement fee back.  The district court held that the recruiter was not the producing cause and the Fifth Circuit agreed.  Specifically, the district court found:

  1. the medical group interviewed the the thief;
  2. the medical group made the decision to hire the thief;
  3. the medical group relied on the thief’s resume;
  4. the medical group relied on its interview of the theif and feedback from the former office manager; and
  5. the recruiter’s representation that the thief was an RN was not what caused the medical group to hire her.

In addition to its DTPA claim, the medical group claimed the recruiter’s refusal to refund the placement fee was unconsionable.  Again, the Fifth Circuit disagreed and affirmed, holding that it was not “unconscionable for [the recruiter] to follow its clear-cut express warranty rather than refunding the full fee and providing restitution.”  It’s unclear whether the medical group will take the recruiter up on a half-price placement.  After several years of litigation and an appeal to the Fifth Circuit I suspect the answer is no.

The takeaways for the recruiter: (1) make sure your engagement/guarantee agreement is enforceable and follow it; (2) be careful on what is represented to a client in terms of the background of a candidate; and (3) always make factual representations.  For the employer – don’t rely on a recruiter’s background check and conduct your own due diligence.

Thanks to our friends over at 600camp for pointing out this case and here is link to the opinion.

 

A few months ago we considered the Jimmy Johns non-compete that received national attention and was even the subject of a class-action lawsuit.  The short of it was the non-compete applied to the nice sandwich maker that filled your order and most folks didn’t think a non-compete for those folks made sense.

Up to bat next was a recent Amazon non-compete that applied to its hourly workers.  It provided in typical non-compete speak:

During employment and for 18 months after the Separation Date, Employee will not, directly or indirectly, whether on Employee’s own behalf or on behalf of any other entity (for example, as an employee, agent, partner, or consultant), engage in or support the development, manufacture, marketing, or sale of any product or service that competes or is intended to compete with any product or service sold, offered, or otherwise provided by Amazon (or intended to be sold, offered, or otherwise provided by Amazon in the future) that Employee worked on or supported, or about which Employee obtained or received Confidential Information.

Amazon made the right move and dropped the non-compete for its hourly workers.  In many instances there are stituations where non-compete or other post-employment covenants makes sense and designed to protect the employer’s interests.  There are other situations where agreements don’t make sense the employee signs it because he or she has no other option and wants to work.  The problem is a bad non-competes undermine the perception of non-competes accross the board.  The media never picks up stories about “good” non-competes, it only reports on “bad” non-competes.

A non-compete in Texas has to be reasonable in time and scope and ancillary to an otherwise enforceable agreement.  Neither the Jimmy Johns’ nor Amazon hourly worker non-compete would seem to pass the test and do you actually think either company was actually going to enforce these agreements against a warehouse worker or sandwich maker?  The answer is no.  In retrospect both companies are probably considering why they ever included such a provision in their agreements in the first place.

 

It’s been 3 and a half  years since the Marsh opinion that redefined what could constitute consideration for a Texas non-compete and courts have bee relatively quiet on non-competes since then.   That’s not surprising from the Texas Supreme Court as Marsh was the third of a trilogy of opinions dealing with the subject.  Appellate courts have continued to address the enforceability of non-competes from time to time but there have not been any cutting edge opinions.

Frankly, I thought we would see cases where employers were using signing bonuses, stock options (like Marsh), or other financial incentives to support non-competes.  Those types of things may be happening out in the field but have not made their way to appellate courts, yet.  Employers should definitively be considering them.  From an anecdotal standpoint (my view from the courthouse and discussions with employers/employees) it appears that folks in Texas are more resigned to the fact that the non-compete that was signed at the outset of employment is enforceable but the new employer or former employee is willing to take the risk of breaking it.

My high level thoughts on non-competes haven’t changed and were most recently covered in a Texas Lawyer article last summer that you can read here.  Some highpoints:

  1. The Texas non-compete statute has not changed in years – follow it;
  2. Make sure the non-compete is reasonable in time and what it covers;
  3. Remember that at some point the former employee is going to be able to compete;
  4. If the employer is going to put in the time to draft a non-compete then enforce it;
  5. Think about items such as jury trial waivers, forum provisions, choice-of-law provisions, and even arbitration;
  6. Courts like to enforce non-solicits over non-competes because they are “fairer” – you’re not putting the employee out of business, but they can’t contact your customers; and
  7. If you are an employee remember you can never “unsign” a non-compete.

We’ll continue to monitor the non-compete front here in Texas.

I really enjoyed an article about Madison, Wisconsin based Epic Systems’s non-compete agreement and the comments of those former employees who were abiding by it.  There was some scuttlebutt about whether Epic was going to extend the term from 1 to 2 years.  Epic is big in the healthcare IT world and its ex-employees go on to consult for other companies on Epic software and make good money.

Based on the article it appears that most Epic employees respect the enforceability of the non-compete.  I would guess that some have tried to challenge it in the past and have been unsuccessful.  There is a signficant amount of time in the article devoted to Epic’s seriousness in protecting its intellectual property and the training it invests in its workers – hence the non-compete.  It’s not often you see an article focusing on the merits of a non-compete.  It seems like every story or article out there is about a non-compete that doesn’t make any sense.  Probably because a lot of them do not – see Jimmy John’s for example.

The point is a well-written, well-thought-out, and enforced non-compete agreements can go a long way to protecting a business. Too many times I see agreements that meet none of the cited criteria.  But when I am evaluating a well written agreement that I know the employer has a history of enforcing it goes a long way to informing my opinion on the enforceability of the agreement.  Most employeees and prospective employers don’t want to get into litigation over a non-compete.  If a business is going to use them, put the time and money necessary into preparing and if need be enforcing the agreement.  Once a company develops the reputation, like Epic, of enforcing an agreement it goes a long way towards thwarting a possible breach of the agreement.

Here is a link to the article I wrote for the Texas Lawyer earlier in the year providing non-comepte reccomendations.

My friend Jon Hyman has a great discussion over on his Ohio Employer’s Law Blog about the firing of an employee over appearing in Playboy.  The employee claimed the employer gave her permission to do so, but she was fired anyway.

Here in Dallas, we have a situation where a newly hired school teacher appeared in a Playboy website prior to being hired.  Shockingly, word made it around the school and school district about her appearance.  Now the school district is  left in a quandary about what to do.

Nothing illegal happened, but some have raised the issue of whether her appearance violates the Educators’ Code of Ethics which states: "The educator shall be of good moral character and be worthy to instruct or supervise the youth of this state."  Apparently the school district is considering the issue now and the story is going viral.

Now the pictures were taken two and half years ago, well before she was hired.  She teaches in a high school and apparently the internet savvy youth of the school have found the pictures.  So the pictures are going to follow her around forever and the media attention will simply exacerbate the situation.

If this wasn’t a school it might not be as dicey an issue, but it remains to be seen whether the district has the right to fire her.  My guess (without seeing her contract) is that it probably can find some basis somewhere.  If this were a private employer in Texas there could be a free speech claim but because we are an "at will" state, the employer could probably fire her.  

Employers generally don’t want to get into regulating their employees’ lives with good reason.  Here you wonder what the teacher’s thought process was with respect to the pictures and being a teacher? My guess, there wasn’t one.  Nevertheless it wasn’t the best judgment.  We’ll see what the school district does.

 

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