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.

Last week we profiled the Nationsbuilders case, an opinion from the Dallas Court of Appeals that touched on a number of post-employment covenant issues. The underlying case was an attempt by a group of defendants to undo an arbitration award entered against them.  They were successful with the trial court but reversed by the court of appeals.

Last week we discussed the anti-planning provision that was in the agreement between the parties. The arbitrator made the following finding with respect to that provision:

[it] not only prohibits the [defendants’] from the active conduct of competition, during the restricted period, but also restricts them to a dormant period, which includes no planning to conduct a business that is in competition. Obviously, passive contemplation would not rise to a material level; however, the provision does clearly contemplate and prohibit planning and conduct which would give the [defendants] any business “head start" prior to the conclusion of the restricted period.

The arbitrator found that the defendants violated this provision and entered an equitable extension of the non-compete for 12 months.

The court spent a significant amount of time discussing Texas courts deference to arbitration awards and the difficulty of reversing an arbitration award under the Federal Arbitration Act. Essentially, the party challenging an arbitration award has to show that the other side or arbitrator lied, stole, or cheated to reverse a finding. The court also recognized the broad discretion the arbitrator has in fashioning award.

To determine whether an award is beyond the scope of the arbitrator’s powers, the court noted it would look only at the result and whether the award is rationally inferable from the contract. The court concluded that the equitable extension of the non-compete was rationally inferable from the contract because the remedy gave the plaintiffs the benefit of its bargain of a one-year period without competition. The court upheld the extension noting that this concept is recognized under both Delaware and Texas law.

Continue Reading Texas Courts Like Arbitration – Nationsbuilders Part II

Recently, an interesting case came out of the Dallas Court of Appeals that addressed a number of the topics dealt with here, including arbitration, choice of law, and equitable extension of a non-compete agreement. A copy of the opinion can be found here. In short, the defendants sold their insurance underwriting company to the plaintiff. Included within the buy sell agreement was a non-compete agreement that provided for Delaware choice of law. In an interesting twist, there was a provision in the non-compete agreement that essentially prevented the defendants from even preparing to compete.

Not surprisingly, the defendants began preparations to compete by sending marketing materials to prospective clients, filing regulatory materials, and preparing business forms.  Once the plaintiff learned of this, it instituted an arbitration proceeding and prevailed. The arbitrator equitably extended the non-compete agreement by one year.

The defendants then challenged the arbitration in the 134th Judicial District in Dallas County. The trial judge set aside the arbitration and there was an appeal. Ultimately, the court of appeals reversed the trial judge and upheld the findings of the arbitrator. I intend to address a number of concepts raised from the opinion over the next few posts.

The first key concept, is the language in the non-compete that specifically prohibited the defendants from preparing to compete. Texas and most other jurisdictions will allow an employee to prepare to compete in their own time. What this constitutes varies and of course most employees will always push the edge. Things such as setting up an LLC, preparing a website, or preparing  business cards generally do not constitute competition. But what happens when an agreement specifically prevents this type of conduct?  Here is the language;

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].

The Dallas Court of Appeals upheld the language of the anti-preparation provision in the agreement. It reasoned  that since the parties bargained for this they were stuck with it. Though the contract was governed by Delaware law, my suspicion is that if the Texas court was applying Texas law, it might reach the same conclusion. Texas courts are very likely to enforce the agreements made between parties as long as they do not violate the law.  This provision will most likely have to pass muster under the Texas non-compete statute.  This is a new twist to efforts to curve preparation for competition by employees. There are no Texas cases on point addressing such a clause. Such a provision might be useful for employers to consider.
 

                                     

The recent controversy surrounding the NSA’s surveillance programs came to head over the last few weeks when a government contractor named Edward Snowden leaked classified information to a number of media sources. Snowden was an employee of Booz Allen Hamilton, a government contractor extensively involved electronic surveillance and other related issues. Snowden made approximately $120,000 a year before taking on his “whistle blower" status. Whether you consider him a whistle blower or a traitor is up for debate. (Time magazine did an expose on Snowden and other high profile leakers and the culture of disclosure that we seem to be in the middle of last week.) 

So what can employers do to prevent leaks or disclosure/use of trade secrets?  The reality it is very tough if not next to impossible to stop a determined employee from doing these things.

In Texas, the issue of respondent superior comes up when an employee usually through some type of negligent act harms a third party. The typical case is the employee driving the company truck that is involved in a wreck resulting in a personal injury. The injured party will usually sue the employer (because that’s where the money is) but may also assert a claim against the individual employee. Often times this is used in order to defeat diversity and prevent removal of a lawsuit to federal court.

The employer may have a defense of a detour or some other type of claim where they allege that the employee was outside the course and scope of his or her employment and the employer is not liable. The injured party may also assert a claim for negligent entrustment where basically the claim is the employer trusted the employee with the vehicle without doing the requisite due diligence (background checks etc.)  to make sure that they were qualified or did not have a bad driving record.

Regardless of the claims or defenses, there is very little an employer can do to stop the rogue employee that has an agenda. I assume that Snowden signed a number of non-disclosure agreements and went through all sorts of background screenings in order to obtain appropriate security clearances to work for the NSA. Nevertheless, even with all of those policies and procedures he still decided to disclose secret information. Ultimately there is not much the employer can do other than putting the proper policies and procedures in place and creating the appropriate culture of  enforcement. There is no doubt a sophisticated employer like Booz Hamilton had these in place.

Ultimately, the employer has to put some faith in its employees to do the right thing. There will always be examples like Snowden. Fortunately for most employers they are an exception not the rule. To date, Booz Hamilton has apologized profusely to the NSA and reiterated its shock and surprise over the leaks. Snowden is in Hong Kong in an effort to place himself outside of the laws of the United States. We shall see what the US Government does terms of chasing him.

Below is recent documentary on Wikileaks that does a fantastic job of shedding light on this culture of disclosure we now appear to be in:

 

https://youtube.com/watch?v=SdezJrNaL70

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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.  
 

 

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.  

 

                                              

 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.

                          

Sometimes employers are stuck with employees who simply do not exercise common sense or good judgment.  At the end of the day, they are left wondering whether the employee, who appeared to be so strong and qualified on paper, simply won’t make the cut because they fail to exercise the judgment necessary for the job.  It begs the question – can that common sense or judgment be taught – I don’t think so.  Certainly, as we gain more experience our judgment improves (hopefully) but common sense or street smarts seems another matter.

I was in a restaurant the other day and happened to look in the restroom on the towel dispenser, a picture of which I have included.  Unfortunately, that dispenser made me wonder about the quality of personnel at the restaurant.  I don’t have an issue with any of the employees, but I wonder why such explicit directions were necessary to instruct an employee as to how to wash their hands.  I believe this is simply part of the company’s risk management policy but it makes one wonder.

If you have an employee that needs this level of instruction on how to wash their hands, I’m not sure they’re actually going to be a very good employee.  Similar to the hand washing example, there are certain situations that employees will deal with every day where common sense and good judgment are required.  This ranges from dealing with superiors, to customers, to subordinates.  Lack of the type of judgment that is necessary will be apparent and will not change.  The employer is going to have to make a change, the question is not so much as if, just when.

          

 

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.