Texas Non-Compete Law Blog

Texas Non-Compete Agreements: Confidential Information Need Not Rise to Level of Trade Secret

robert.wood@klgates.com (Robert Wood) — Wed, 01 Oct 2008 14:46:42 -0600

A recent case from the federal court in Dallas sheds some light on various issues involving the enforceability of non-compete agreements.

In Staples, Inc. v. Sandler, No. 3:07-CV-0928-K, 2008 WL 4107656 (N.D. Tex. Aug. 29, 2008), the employee, Sandler, upon joining Staples, Inc., signed a “Proprietary and Confidential Information Agreement” and a separate “Non-Compete and Non-Solicitation Agreement” (“Non-Compete Agreement”).

In the “Recitals” section of the Non-Compete Agreement, the employer recited that it “has and will entrust Employee with proprietary information, strategies, knowledge, customer relationships and know-how which would be detrimental to the Company if disclosed.” The court held that, under Sheshunoff, this recital was a “unilateral contract conditioned upon performance.” The court added: “Further, the confidentiality agreement signed contemporaneously with the noncompete provided a promise of confidential information. Thus, Staples promised to provide Sandler with confidential information that would give rise to its interest in restraining Sadler from competing.”

The court confirmed that the confidential information given by Staples to Sandler was sufficient consideration for the non-compete: “Staples has established that it provided Sandler with access to cost margins, pricing lists, sales figures, and assorted business information, including customer information. Although not necessarily trade secrets of the highest order, these may be confidential in the sense that they are not readily available to the public.”

The restrictions contained in the noncompete agreement prohibited Sandler from doing business not only with Staples’ customers, but also with “customers or prospective customers” that he “knew, serviced, or was familiar with prior to joining the Company."

The court held that this restriction was overly broad:

“Here, it is apparent that the restraint on competition is not justified to the extent contemplated in the covenant not to compete given Sandler's relatively short employment, the minimal amount of confidential information he received, and Staples' legitimate interest in protecting the confidential information it provided him during his tenure. Thus, the Court finds that Staples' legitimate interest in confidentiality gives rise only to a restraint on Sandler that prevents him from competing by doing business with customers he gained during his eleven-month tenure with the company. A restraint that prevents him from continuing long-standing relationships that he brought with him to Staples is overbroad, unrelated to Staples; legitimate interest in confidentiality, and would further unreasonably burden these third-party customers.”

OBSERVATIONS:

1. The court emphasized the need for the employer to promise to convey confidential information. However, the court located part of the promise in a different [but contemporaneously signed] document (the Proprietary and Confidential Information Agreement).

2. The Court confirmed that confidential information necessary to justify a non-compete agreement does not have to rise to the level of a trade secret. The Court was skeptical of an argument that employers routinely make to prove that their information is confidential (i.e., “The fact that our information is password protected proves it’s confidential”).

3. The Court found the non-compete restriction overly broad because it applied to customers with whom Sandler worked before he became employed by Staples. It would be interesting to know whether the result might have been different had Staples given Sandler confidential information about these customers. Arguably, if Staples entrusted Sandler with new confidential information (i.e., information that he didn’t previously know) about these customers, the conveying of that information by Staples would have justified the non-compete restrictions.

4. The Court notes the challenge inherent in binding relatively new employees (11 months, in this case) to non-competes (because they may not yet have been exposed to enough confidential information to justify the restrictions).

Texas NonCompete Agreements: Court Rules Explicit Promise Not Required

robert.wood@klgates.com (Robert Wood) — Tue, 29 Jul 2008 10:23:51 -0600

Almost two years ago, in the Sheshunoff case, the Texas Supreme Court rejected the notion that an employer must provide the employee with confidential information at the precise moment the non-compete agreement is signed for the agreement to be enforceable. According to the court, it is not fatal to the agreement's enforceability if the information is actually provided sometime later.

But how exactly must the agreement be worded for it to be enforceable? A recent case out of the Corpus Christi Court of Appeals addresses that question. In Shoreline Gas, Inc. v. McGaughey, an at-will employee was bound by an agreement that contained promises by the employee (a) not to disclose the employer's confidential information and (b) not to engage in post-employment competition.

Significantly, the agreement did not obligate the employer to provide confidential information to the employee. Nevertheless, the court found that the employer had in fact provided such information.

The court first held that the non-compete agreement was an enforceable unilateral contract. The court explained:

McGaughey's promise not to disclose Shoreline's confidential information, though not enforceable when made, constituted an offer for a unilateral contract which Shoreline had the option to accept. Shoreline accepted McGaughey's offer by performing—that is, by supplying McGaughey with confidential information—and so a unilateral contract was formed under which McGaughey became bound by his promise not to disclose that information. . . . Under Sheshunoff, such a unilateral contract constitutes an "otherwise enforceable agreement" sufficient to support an accompanying non-compete covenant.

The court specifically addressed the employee's contention that the agreement was unenforceable because it did not contain a promise by the employer to provide the employee with confidential information:

McGaughey notes that, unlike in the present case, the Sheshunoff employment contract required the employer to provide to the employee with "access to certain confidential and proprietary information and materials belonging to Employer. . . ." Alex Sheshunoff Mgmt. Serv., L.P. v. Johnson, 209 S.W.3d 644, 647 (Tex. 2006). This promise was illusory, however, because the employer could avoid performance simply by terminating employment. Further, this promise was not of the type that could be considered an offer for a unilateral contract that could be accepted by the performance of the promise. Therefore, it could not have formed the basis of an "otherwise enforceable agreement" capable of sustaining a non-compete covenant. See Id. at 650.

Thus, according to the court of appeals in McGaughey, as long as the employer provides confidential information to the employee (even if the agreement does not contain a promise by the employer to do so), a unilateral contract is formed when the employer does so (with the employee's promise not to disclose the information constituting the other part of the unilateral contract). According to the court, this unilateral contract is an otherwise enforceable agreement sufficient to support a promise by the employee not to compete.

This holding should be examined in light of the following passages from Sheshunoff (with emphases supplied):

If only one promise is illusory, a unilateral contract can still be formed; the non-illusory promise can serve as an offer, which the promisor who made the illusory promise can accept by performance. For example, suppose an employee promises not to disclose an employer's trade secrets and other proprietary information, if the employer gives the employee such specialized training and information during the employee's employment. If the employee merely sought a promise to perform from the employer, such a promise would be illusory because the employer could fire the employee and escape the obligation to perform. If, however, the employer accepts the employee's offer by performing, in other words by providing the training, a unilateral contract is created in which the employee is now bound by the employee's promise. The fact that the employer was not bound to perform because he could have fired the employee is irrelevant; if he has performed, he has accepted the employee's offer and created a binding unilateral contract . . . .

* * *

We agree with Light's recitation of basic contract law in footnote six that "[i]f only one promise is illusory, a unilateral contract can still be formed; the non-illusory promise can serve as an offer, which the promisor who made the illusory promise can accept by performance." Upon further review of the Act and its history, however, we disagree with footnote six insofar as it precludes a unilateral contract made enforceable by performance from ever complying with the Act because it was not enforceable at the time it was made.

* * *

We now conclude, contrary to Light, that the covenant need only be "ancillary to or part of" the agreement at the time the agreement is made. Accordingly, a unilateral contract formed when the employer performs a promise that was illusory when made can satisfy the requirements of the Act.

* * *

But if, as in the pending case, the employer's consideration is provided by performance and becomes non-illusory at that point, and the agreement in issue is otherwise enforceable under the Act, we see no reason to hold that the covenant fails.

A few observations:

1. Sheshunoff addressed a non-compete agreement containing a promise by the employer to provide confidential information to the employee, and the opinion speaks of the employer's "promise"—although the promise was "illusory" when made, because the employee could have been fired in the interim—becoming enforceable upon the information being conveyed. Thus, Sheshunoff can be seen as assuming that the employer must promise to provide the confidential information, even if the promise is "illusory" at the time it is made.

2. The court in McGaughey construes Sheshunoff as only requiring the employer to provide confidential information; the contract need not contain an explicit promise to provide confidential information.

3. Obviously, in drafting new agreements, the safest course remains to include language by which the employer explicitly promises to provide confidential information to the employee.

Texas Trade Secret Law: Application of Law in Chemical Formula Cases

robert.wood@klgates.com (Robert Wood) — Mon, 23 Jun 2008 14:24:31 -0600

A recent case from the Dallas Court of Appeals explains several concepts that frequently come up in trade secret theft cases. In Global Water Group, Inc. v. Atchley, No. 05-06-00709-CV, 2008 WL 384436 (Tex. App.--Dallas 2008, no pet. h.), the plaintiff had created a water purification system. When the plaintiff's president resigned and formed a competing company, the plaintiff filed suit and contended that its trade secrets had been misappropriated and were being used by the competitor. The jury found in the plaintiff’s favor, but the trial court reversed the verdict.

The court of appeals’ opinion affirming the trial court contained a useful discussion of the proof needed to support a misappropriation of trade secrets claim.

At the outset, the court noted that to constitute a trade secret, the information in question must actually be secret. The court referenced the Texas Supreme Court’s 1958 holding in the K&G case that “the mere fact that knowledge of a product or process may be acquired through inspection, experimentation, and analysis does not preclude protection from those who would secure that knowledge by unfair means.” But then the court added this key point: “A trade secret must nevertheless be secret.” In other words, even if one obtains his former employer’s information by unfair means, for the employer to be able to make a misappropriation of trade secrets claim, the information must, the court says, still be secret.

This concept, while seemingly obvious, could be very important in a case in which a former employee allegedly steals a customer list. The employer, citing K&G, could argue, “Because the former employee improperly acquired the information, he is precluded from arguing that he could have obtained the information by fair means.” However, the employee, citing this case from the Dallas Court of Appeals will be able to respond, “Even if I obtained the information unfairly, the employer must, as a threshold matter, prove that the information is in fact secret.”

Of course, the employer might have other claims (e.g., conversion) even if it couldn’t prove that the information were secret. But one of the advantages of making a trade secret as opposed to a conversion claim is the increased likelihood of getting injunctive relief with the former claim.

The court discussed at length whether the plaintiff’s water purification formula constituted a trade secret. According to the court, the plaintiff claimed “no secret in any discrete formula, but rather in an approximate 10:90 ratio of KDF (a water purification substance) to carbon. Global asserts this approximate formula is entitled to trade secret protection because it was different from what others in the industry were using.” The court was skeptical of this being a trade secret:

Finally, the imprecise nature of the information weights heavily against it being a trade secret. There is no discrete secret formula at issue, but only an approximate mix of two well-known substances commonly used together. Given the imprecise nature of formula, we question what information Atchley and Aspen should be prohibited from using. For example, should they be prohibited from using a 20:80 ratio, 30:70, 40:60? It thus becomes apparent, it would be difficult to protect such a "formula," without prohibiting fair competition.

Based upon this reasoning, the court of appeals also held that the plaintiff failed to prove “use” of its alleged trade secret:

Global does not contend that Aspen used the same formula, but only that its formula was similar. While two products need not be identical for an inference of use to arise, we nevertheless conclude that similarity under these circumstances is not sufficient to raise such an inference. The similarity lie in the ratio of only two of the components of the mixed media pod, KDF and carbon. As noted above, it is not disputed that others in the industry used canisters with KDF and carbon. Aspen alleged "used Global's trade secret because its product, like Global's, used much more carbon than KDF. While the two products were similar in this regard, there were also differences in the contents of the mixed media pods. For example, Aspen's product contained "separator pads" that kept the KDF and carbon separate. Global's product on the other hand used another purifying substance, PM 1000, as well as gravel. In light of these differences, and the fact that the similarity lie only in the percentages of two commonly used ingredients, no inference of use arises.

The language above could be useful in defending against a claim that one has stolen another’s chemical formula. On the one hand, the defendant can challenge whether the formula is sufficiently distinctive to warrant trade secret protection. Moreover, in the absence of direct evidence of use by the defendant, the defendant can argue that mere similarity between its product and the plaintiff’s is not conclusive evidence of use.

The court of appeals also explained that the plaintiff’s proof was largely conclusory:

Global presented evidence that it guarded its formula, limited access, and required employees to sign confidentiality clauses. There is no evidence however regarding whether or not Global's efforts were successful—specifically whether or not its formula was nevertheless known outside its business.

Further, Global directs us to no evidence of the value of its formula to its business. Global suggests the formula was necessarily valuable because Global had developed the first successful self-contained water purification unit. However, there is no evidence the formula itself was related to the success of the unit. Specifically, Global directs us to no evidence the formula was in any way related to the mobility of the unit or other supposedly novel features of the unit. Weiss did testify that Global's formula removed more contaminates and performed better than anyone else's. This testimony was however largely conclusory and Weiss did not attempt to articulate or explain how Global's formula created better water or how its particular blend gave it a competitive advantage. Nor did he explain how the Global product performed differently than any other product on the market. Indeed, when asked about products that could remove contaminants from water, Weiss responded that he was not an engineer, scientist, or biochemist. Further, there is no expert testimony that the quality of Global's water was superior or that Global's process was cheaper or more efficient. Global has thus failed to point to any evidence to show its formula was valuable. Likewise, Global has not shown the formula gave it a competitive advantage.

This case is a good primer on what a plaintiff in a theft of trade secrets case must prove. Neither secrecy nor use can be assumed; both must be proved. Moreover, conclusory statements of harm are insufficient. The case is particularly informative with respect to trade secret theft cases involving chemical formulas.

Global Water Group, Inc. v. Atchley, No. 05-06-00709-CV, 2008 WL 384436 (Tex. App.--Dallas 2008, no pet. h).

Texas Noncompete Agreements Enforceable? More Clarification on How Definite Promise to Provide Must Be

robert.wood@klgates.com (Robert Wood) — Mon, 19 May 2008 09:30:26 -0600

A recent opinion issued by the federal Southern District of Texas sheds a little light on the question of how definite a promise to provide confidential information must be for a noncompete agreement to be enforceable. In Teel v. Hospital Partners of America Inc., No. H-06-3991, 2008 WL 346377 (S.D. Tex. Feb. 6, 2008), the court, quoting the Light case, noted that an "employer's promise to provide an employee with confidential or proprietary information and an employee's reciprocal promise not to disclose such confidential information `would meet the requirement that the covenant be designed to enforce the employee's consideration provided in the agreement.'"

The agreement in Teel stated that the employee's employment "will involve access to and work with" confidential information. The court, without discussion of whether this language was a sufficiently definite promise to provide confidential information, simply confirmed that the employee did in fact receive confidential information and that the restrictions imposed upon the employee were reasonable.

As noted elsewhere on this blog, several Texas cases discuss how definite the employer's promise to provide confidential information must be for the employee's non-compete promises to be enforceable. Although the Texas Supreme Court in Sheshunoff rejected appellate decisions requiring that confidential information be transferred simultaneously with the signing of a non-compete agreement, it did not explicitly do away with the requirement that the employer actually promise to give the information to the employee.

The question in some cases becomes, "What counts as a promise?" Put another way, "How definite must the promise to provide confidential information be?" In some cases, the employee’s “acknowledgment” that he will receive confidential information gets characterized as an "implied" promise by the employer to convey the information. In the Teel case, the statement that the employee's work "will involve access to and work with" confidential information was evidently deemed to be a promise--either explicit or implied--that the employer would provide such information to the employee.

Texas Breach of Fiduciary Duty Law: Mere Silence Can Constitute Breach

robert.wood@klgates.com (Robert Wood) — Wed, 12 Dec 2007 13:39:24 -0600

It’s long been the law in Texas that an employee can, while still employed, prepare to compete with his employer, as long as he doesn’t actually do so. If he does compete with his employer, he can be found liable for breach of fiduciary duty. In a recent case decided by the federal Fifth Circuit Court of Appeals, the court explained the reason for the preparation vs. competing distinction:

In general, an employee or other agent who plans to compete with the principal does not have a duty to disclose this fact to the principal. To be sure, the fact that an agent has such a plan is information that a principal would find useful, but the agent's fiduciary duty to the principal does not oblige the agent to make such disclosure. . . . In this respect, the social benefits of furthering competition outweigh the principal's interest in full disclosure by its agents.

The relevant facts in the case were as follows:

The plaintiff employer was a national consulting firm. One of its offices was a claims administration practice in Dallas, Texas (the “Claims Practice”). The Claims Practice’s primary business was administering complex class-action settlements.

The two defendants in the case were high level employees who worked for the Claims Practice. Some of their responsibilities included staffing, business development, client relations, and contract negotiations for the Claims Practice.

In the spring of 2001, one of the defendant employees was contacted by a competitor of the company. The competitor was interested in buying the employer’s Claims Practice. In response, the defendant employees prepared a proposal for the competitor to purchase virtually all of the Claims Practice’s clients and employees for $22.5 million. The proposal contained confidential business information about the Claims Practice: revenue projections, backlog estimates, margin rates, staff turnover rates, and profit margins on specific employees. The transaction was to be routed through a “management-owned corporation” – a corporation owned by the two defendants and unrelated to their employer. The defendant employees never informed their employer of this proposal to sell the Claims Practice.

Although the first proposal fell through, the defendant employees continued to submit similar proposals to other competitors – at least three different competitors between 2001 and 2002. In addition, the defendant employees brought representatives of the competitors into the Dallas Claims Practice office and introduced other employees to those representatives.

In May 2001 – just after the initial contact between the defendant employees and the competitor – one of the defendant employees negotiated and signed a four-year lease in a Dallas office building on behalf of the employer. The employer was aware of and approved of the lease; however, the employer was not aware of the proposals being submitted to various competitors.

In June 2002, about a year later, another employee– a computer technician – was instructed to copy company data onto a portable, non-company server as a “special project” for one of the defendant employees. The corporate office became suspicious and visited the Dallas office, telling the employees to stop copying company data.

In September 2002, soon after the visit from the company’s corporate office, a defendant employee contacted one of the competitors that had received a proposal and urged that the two parties quickly reach a deal. Soon after, the defendant employees provided that competitor with a new proposal. The new proposal specifically identified the defendant employees and two other individuals as the sellers of the Claims Practice. The purchase of the Claims Practice was again to be routed through the corporation owned by the defendant employees. The purchase of the Claims Practice was to be for $1.2 million cash, payable to the defendants’ corporation, and 250,000 shares of the competitor’s stock. That same defendant employees also sought to become the competitor’s agents for the progression of the deal.

In late September 2002, the defendant employees approached their employer’s corporate office and asked if they could acquire the Claims Practice in exchange for assuming the four year lease on the Dallas office building. The employer rejected their offer and the defendant employees resigned. Soon after, both accepted employment with the employer’s competitor. Less than two weeks later, the employer filed suit against the defendant employees.

In upholding a jury verdict in favor of the employer, the Fifth Circuit had this to say about the breach of fiduciary duty claim:

Based on the foregoing evidence, there was a sufficient basis for the jury to conclude that in attempting to sell the Claims Practice, Wilkinson and Taulman breached their obligation of fair dealing and good faith, and in the process disclosed Navigant's confidential information.. The jury could have concluded that their acts of introducing Navigant employees to competitors' representatives and flying an employee to interview with a competitor rose to the level of solicitation. There was also sufficient evidence for the jury to conclude that Wilkinson and Taulman breached their fiduciary duty by failing to disclose their plan to sell the Claims Practice before the lease was signed. We do not mean to suggest that the mere fact that an employer signs a new lease gives rise to a duty of disclosure in all employees who have plan to compete with the employer. But in this case. Wilkinson and Taulman were the two top employees in the Dallas office, and they had active roles in negotiating, recommending, and signing the lease. There was also evidence that the plan to compete was itself wrongful, and that part of this plan was to use the lease as leverage against Navigant in future negotiations to acquire the Claims Practice on favorable terms. The reasonable inference for the jury to draw was that Wilkinson and Taulman had a conflict of interest on the lease, because though they were charged to act for Navigant's benefit when recommending it, they also had an interest in seeing Navigant burdened with a liability that they could use as leverage against it in the future. Given these specific facts, the jury was entitled to conclude that Wilkinson and Taulman's failure to disclose their activities before Wilkinson signed the lease constituted a breach of fiduciary duty.

As this case illustrates, determining whether a breach of fiduciary claim exists is a fact-intensive endeavor. In cases in which the employee, while still employed by his employer, telephones the employer’s clients and solicits business for the employee’s new enterprise, the factual and legal analysis is comparatively easy. In this case, though, the conduct was not as egregious—or at least not as blatant—as that. But the cumulative effect of the acts in this case was enough to constitute a breach of fiduciary duty. Perhaps most interestingly, the court held that the employees’ failure to disclose—i.e., their mere silence—was one of their actions forming the basis of the breach of fiduciary duty claim.

Texas Non-Compete Law: Can Duration of Non-Compete Agreements be "Equitably Extended"?

robert.wood@klgates.com (Robert Wood) — Tue, 30 Oct 2007 15:40:49 -0600

In a recent Texas case involving a restrictive covenant, the plaintiff contended that the duration of the non-compete covenant should be judicially extended beyond the agreement’s normal expiration date. In that case, the seller of a dance studio entered into an agreement in which she promised not to compete with the buyer. As is true in most states, non-compete covenants contained in buy-sell agreements are more enforceable than those contained in employment agreements. The covenant in this case was for five years, and the geographical scope consisted of a 50-mile radius around Waco.

The buyer subsequently sued the seller, contending that the latter was in breach of the non-compete agreement. The trial court granted the plaintiff’s motion for summary judgment and an appeal was taken.

On appeal, the seller contended that the trial court erred in holding that the ending date of the covenant not to compete was five years from the date of judgment (as opposed to five years from when the non-compete agreement was signed). The buyer responded that the trial court was right to “equitably extend” the duration of the covenant because of the seller’s “continuous and persistent” violations of the covenant.

The evidence for the alleged “continuous and persistent” violation was as follows:

The Sale and Purchase Agreement was signed on February 27, 2004. Lezley did not begin working for Unity Dance and the Bratchers until July 11, 2005. On August 31, 2005, the trial court temporarily enjoined Lezley from either directly or indirectly soliciting or encouraging any current and/or potential students of Holley's dance studio, Jenni Holley Dance Designs, to become either her student or the student of any other dance company or teacher within 50 miles of Holley's dance studio. She was not specifically enjoined from teaching dance. Unity Dance and Bill and Donna Bratcher were enjoined from either directly or indirectly using Lezley's name in their advertising. They were also enjoined from soliciting or encouraging by direct contact any persons known by them to be current customers of Holley's dance studio as long as Lezley was working at Unity Dance. There is no indication in the record that Lezley, Unity Dance, or the Bratchers violated this temporary injunction.

Based upon these facts, the court of appeals held that the trial court erred in equitably extending the non-compete covenant. However, the court also stated, “We do not hold that a covenant not to compete cannot be equitably extended, but hold that the record does not support Holley’s argument that the violations of the covenant, if any, were `continuous and persistent.’”

Farmer v. Holley, 237 S.W.3d 758 (Tex. App.--Waco 2007), review denied.

Texas Trade Secret Law: When Your New Employee Knows Too Much

robert.wood@klgates.com (Robert Wood) — Mon, 29 Oct 2007 14:16:52 -0600

Not infrequently, whenever an employer hires a competitor’s ex-employee, the competitor sues not only its ex-employee (for an alleged non-compete violation, breach of fiduciary duty, misappropriation of trade secrets, tortious interference, etc.), but also the new employer. The plaintiff contends, for example, that just as its ex-employee is liable for using and disclosing its trade secrets, the new employer is also liable for receiving and using the secrets.

One way in which new employers try to inoculate themselves against such a suit is by directing their new employees not to bring their former employer’s confidential information with them. In a case decided within the past two months, the “new” employer sent an offer letter to its prospective new employee containing the following language:

We are not interested in confidential business information or trade secrets from your former employer. Rather, we are looking for your sales talent to contribute to the success of our business. We do not want you to use any of the confidential and/or proprietary information while you are working for us. We ask that you not use or divulge any confidential and/or proprietary information obtained during your [previous] employment and require that you sign an Agreement on Prohibited Disclosures as a condition of this offer.

After the employee resigned from his “old” job and began his new one, his new employer had him sign a non-disclosure agreement containing the following language:

You agree not to use, have in your possession, or refer to any information, data process, or method which is or was claimed to be confidential or proprietary by any former employer, customer, supplier or consultant.

By way of clarification, and not by limitation, you agree neither to use, have in your possession, nor refer to any of the following items from a former employer . . . if such information is or was claimed to be confidential or proprietary:

·        Blueprints

·        Business Plans

·        Computer Programs

·        Computers

·        Confidential Knowledge

·        Consultant Lists

·        Customer Lists

·        Data Bases

·        Confidential or Proprietary Data

·        Computer Media (e.g., disks CDs)

·        Documents

·        Employee Lists

·        Equipment

·        Training Materials

·        Files

·        Financial Information

·        Formulas

·        Manuals

·        Market Information

·        Marketing Materials

·        Notebooks

·        Notes

·        Original Works of Authorship

·        Sketches

·        Software

·        Telephone Directories

·        Trade Secrets

·        Vendor Lists

When the former employer subsequently sued both its ex-employee and the new employer for misappropriation of trade secrets, the court found the new employer’s insistence that its new employee not bring any confidential information with him (as evidenced by the documents referenced above) as persuasive evidence (but not the only evidence in the case) that the employee had not in fact done so.

When hiring a new employee, especially one involved in sales (i.e., an employee who, were he trying to do so, might be able to “steal” his former employer’s clients), a new employer is wise to direct its new employee not to use or disclose his former employer’s confidential information (and also to have the new employee sign a non-disclosure agreement that contains a provision reiterating that direction).

Texas Noncompete Agreements: Effect of Employer Breach

robert.wood@klgates.com (Robert Wood) — Mon, 22 Oct 2007 08:59:01 -0600

What happens if an employer seeking to enforce a non-compete agreement is itself in breach of the agreement. Does the employer's previous breach adversely affect its ability to enforce the non-compete? Maybe.

It's "hornbook" law in Texas that one party to a contract is precluded from enforcing a contract if that party itself is in “material” breach. In DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 682 (Tex. 1990, the Texas Supreme Court explicitly recognized that an employer in material breach of an employment agreement could be estopped from enforcing the non-compete provisions contained therein. Of course, an issue in every case will be whether, assuming the employer is in breach, the breach is “material.” Failure to pay compensation to which the employee is entitled might, in appropriate circumstances, qualify as material. Thus, an employer wishing to enforce a non-compete agreement should ensure that it is not already in material breach.

Texas Executive Employment Agreements: Checklist for Employees

robert.wood@klgates.com (Robert Wood) — Tue, 16 Oct 2007 07:43:41 -0600

Employees signing employment agreements in Texas should be mindful of the following potential terms:

1. Term of Employment. Employment agreements are typically either for a fixed term or are at-will. An at-will agreement, obviously, can be terminated by either party at any time for any reason. Some agreements contain “Evergreen” provisions, which state that the term of the agreement shall be automatically extended unless one of the parties notifies the other of its intention that the agreement expire at the end of the then current term (with such notice typically being due thirty or sixty days before the end of the term). Moreover, some employment agreements that are purportedly for a fixed term (e.g., a one-year term) also contain provisions pursuant to which the employer may terminate the employee “for any reason” on shorter notice (e.g., “thirty days’ notice”)—such an agreement is in reality a 30-day employment contract.

2. Position, job duties, location. Employment agreements routinely contain provisions outlining what the employee’s title will be, what his duties will be, to whom he will report, where he will work, etc. From the employee’s perspective, it is important that these terms be fairly well defined. For example, does the agreement allow the employer to transfer the employee out of state, or are there restrictions on the employer’s ability to do so? Does the agreement permit the employer to alter the employee’s job duties, or to change the person to whom the employee reports? Especially from the employee’s perspective, it is important that the agreement define these terms with some precision.

3. Compensation. Employment agreements typically reference some guaranteed compensation (e.g., salary) and some discretionary compensation (e.g., bonuses and stock options). On the guaranteed part, employees need to know whether they are to be classified as “exempt” under the FLSA or non-exempt. Employees need to know what must occur for the bonus to be paid. Is payment of the bonus totally discretionary? Does it depend upon the company’s performance, or the employee’s performance, or both? Granting of stock options often usually will be governed by a separate plan, and the employee needs to know what its terms are.

4. Termination for Cause. Employment agreements often provide that an employee may be terminated for “cause,” and “cause” is defined to include various acts or omissions by the employee. Some of the acts—such as commission of a felony, or embezzlement of company funds—are fairly easy to understand. However, defining “cause” to include the employee’s failure to perform her job duties may be somewhat problematic from the employee’s perspective, because whether the employee is performing well can be subjective. Generally, employees want what constitutes “cause” to be defined as precisely as possible. Even in an at-will employment agreement, whether “cause” exists can be relevant for other reasons—e.g., whether the terminated employee is eligible to receive severance benefits.

5. Termination for Good Reason. Employment agreements for a specified term often set forth situations in which the employee may voluntarily resign. “Good reason” for the employee to terminate might exist where the employee is demoted, or his pay is cut, or he his transferred. Again, even in at-will employment situation, the concept of termination for “good reason” might be relevant to whether the employee receives severance benefits.

6. Nondisclosure Agreements. Employment agreements routinely contain provisions prohibiting the employee from disclosing the employer’s confidential or proprietary information to a third party. An employee needs to know what information the employer considers to be confidential or proprietary.

7. Noncompete Agreements. Especially for salespeople, executives, or managers, employment agreements can contain provisions limiting an employee’s right to compete with the employer, both during and after employment. The provision usually will specify certain activities in which the employee may not engage, and will typically contain a geographic scope as well. The employee will want to fully understand how long the non-compete lasts, and what it precludes the employee from doing (both in terms of the activities to be restrained and the geographical scope of the restrictions).

8. Nonsolicitation Agreements. Along with noncompete provisions, employment agreements often contain provisions prohibiting the employee from soliciting the employer’s customers, or its employees, or its vendors. In Texas, these provisions can be enforceable, but they are held to the same standard to which noncompete agreements are held—i.e., the employer must give consideration to the employee (such as confidential information) that justifies the nonsolicitation provision, and the provision must be reasonable in scope.

9. Change in Control. What happens if the employer is purchased by another company? Should that affect the employee’s obligations? Should the employee be able to escape his noncompete and nonsolicitation obligations? On a related note, should the employer be able to assign the agreement to another company (so that the “new” company can enforce the employee’s noncompete and nonsolicitation obligations)? Employment agreements don’t always address these issues, but employees are wise to think about them.

10. Arbitration. More and more, employment agreements state that legal disputes between employers and employees must be submitted to binding arbitration (versus being litigated in court). Provisions like this can be one-sided (i.e., sometimes, only the employee is required to arbitrate its disputes, whereas the employer can go to court). Employers need to be mindful of the effects of agreeing to arbitrate disputes as opposed to litigate them.

11. Choice of Law and Forum Selection. Employment agreements usually specify the state whose law will govern the agreement, and they sometimes specify the place where suit must be filed in the event of a legal dispute. The latter can be especially problematic for an employee, because it may require her to bring any claims she may have in a foreign state, which can be very expensive.

What Does "Solicitation" Mean?

robert.wood@klgates.com (Robert Wood) — Fri, 28 Sep 2007 13:53:00 -0600

Texas non-compete agreements frequently contain non-solicitation provisions, i.e., provisions that prohibit the employee, both during employment, and for a period of time thereafter, from soliciting the employer’s clients, employees, or both. But whether a particular act or communication constitutes solicitation is not always clear.

A Massachusetts case decided a couple of years ago illustrates the difficulty in making this determination. In that case, the following provision was at issue:

Nonsolicitation Covenant. For a twelve (12) year period commencing on the date hereof, Seller shall not, directly or indirectly, (a) employ or contact any person who is employed or engaged by the Company or in any manner seek to induce any such person to leave his or her employment or engagement with the Company. (emphasis supplied)

The court summarized the pertinent facts in the case were as follows:

Since selling her stock in January of 2001, Deborah Halpin has not been employed by anyone else or anywhere else, as she has worked at home taking care of her three children. Subsequent to entering the covenant not to compete, Ms. Halpin has engaged in numerous instances of intentional social contact with several Quaboag employees with whom she is good friends. Ms. Halpin has known one such employee for over twenty (20) years since they worked together in a racquetball club in Charlton. The summary judgment record does not contain any evidence that Ms. Halpin's contact involved any business-related conduct or discussions. In her deposition, Ms. Halpin stated that her communications were strictly personal and social in nature. In response, the plaintiff points solely to the non-solicitation provision, arguing that it prohibits any and all contact, including social contact. (emphasis supplied)

The plaintiff contended that Halpin had violated the non-solicitation provision by having any contact, even though the contact was purely social in nature. The court disagreed:

The words "no contact" in the agreement in question were used in the context of a non-solicitation agreement. The term "solicit" denotes more than simple contact. It consists of "an attempt to obtain something by persuasion, or to ask for the purpose of receiving."

An examination of the heading, "Nonsolicitation Covenant," contained in the covenant suggests it was intended by the parties to bar only contact of this nature. The non-solicitation provision applies only to conduct of a competitive nature when it appears within the context of an agreement such as the "Covenant Not To Compete." There is no evidence that the conduct complained of has hampered Quaboag's stability or success in any manner.

If the contract language is read as the plaintiff suggests it means that the defendants were prohibited from engaging in any form of direct or indirect contact or communication, regardless of the nature of such exchanges, with any Quaboag employees for a period of twelve (12) years beginning on January 1, 2001. Not even in the context of civil restraining orders issued to protect people from domestic violence under G.L. c. 290A is the prohibition of "contact" understood in such a strictly formalistic manner.

Based on the above considerations, there are no facts indicating the Deborah Halpin breached the non-solicitation provision of the covenant not compete. She worked with Quaboag for approximately eighteen (18) years. As such, she likely established lasting professional and personal ties with employees in the Quaboag community. Ms. Halpin's deposition testimony indicates that as she understood the covenant, she could not contact employees or customers for the purpose of enticing them away from Quaboag or interfering with business operations. The fact that Ms. Halpin's continued friendships and frequent social encounters could give her a competitive advantage in the future if she engaged in any of solicitation (of which there is no evidence in the record before me) is not enough to demonstrate a breach by Ms. Halpin.

As this case illustrates, courts can be reluctant to forbid employees from engaging in social contact with their friends (some of whom can be former customers or employees) when the contact does not involve soliciting for business. Of course, social contact can involve solicitation for business—even if no business is actually discussed. The key for employers is, make it clear in the agreement that you not only want to prohibit business contact, but also social contact. And then be able to persuade a court that such a restriction has a legitimate business purpose.

Quaboag Transfer, Inc. v. Halpin, 2005 WL 937305 (Mass. Super. 2005).

Texas Physician Noncompete Agreements: Checklist for Physicians

michelle.roberts@hughesluce.com (Michelle E. Roberts) — Fri, 31 Aug 2007 13:45:35 -0600

In our practice we see many disputes between doctors and their employers from both sides of the fence. Quite often these disputes are between practices or institutions and doctors who are just “hitting their stride,” developing loyal patients and looking at their practice options for the future. At that point, both parties search for the contract they signed and put in a drawer a few years earlier and begin examining its arcane phrases with a scanning electron microscope.

The eventual terms of any agreement between a doctor and his or her employer depend on many factors, including the respective bargaining power of the parties. We thought it would be helpful for you to have a road map of the terms you are likely to encounter in your first agreement.

Like any document prepared by a lawyer, there is some fine print at the end. In the meantime, give some thought to these items (which by no means exhaust the important provisions of an employment agreement) before you make your first commitment as an employee:

How Long. What is the duration – called the “term” – of the contract? This is the duration of your employer’s commitment to you, and yours to your employer. Is it long enough to allow you to establish your practice? Is it so long that you would be unfairly stuck with a fixed compensation structure while your practice grew? Does the contract automatically renew at the end of the initial term and keep renewing (usually for a year at a time) unless one side cancels with notice (called an “evergreen clause”) – which can be both good or bad, depending on how the contract handles it?

How Much. How is your compensation set? Is it tied to performance? If so, does the contract fairly allow you some influence on your performance goals and your employer’s support in meeting them? This tends to be a business term heavily influenced by market factors, but you still need to ensure that your future employer gives you a fair shot to maximize your income.

Review incentive compensation and bonuses. When are they paid? What offsets will the practice take for expenses (such as technicians and nursing staff). If you leave before you receive a bonus, are you entitled to a pro rata share of the bonus or incentive compensation?

Out-of-Pocket (or Purse). You will have a lot of expenses. Most employers pay or reimburse the basics, but consider some unusual expenses, such as costs associated with providing services at multiple locations, and don’t forget necessary certifications and continuing medical education. Don’t assume that your employer will pay all expenses of you being a doctor – get it clear up front.

Vacation. Is there a paid vacation policy? What if you can't or don't choose to take all your paid vacation? Will the days roll over to the next year, or can you cash out your unused days?

Sick Leave/Personal Time. What does your employer provide if you are temporarily disabled due to injury or illness? Does the agreement define the term "disability”? If you are disabled, how long will you receive your base compensation? If you have minimum collection requirements in your contract, can this be adjusted to take into consideration a decrease in productivity due to a temporary disability?

On Call Obligations. Are your “on call” coverage obligations clearly spelled out? Is call limited to specified locations?

If Your Contract Doesn't’t Go to Term. Yes, it happens. That great relationship at the outset of your employment can sour for a multitude of unforeseeable reasons. What are the conditions permitting either you or your employer to terminate the agreement before the end of its term? The procedures are critical here. This is a major source of litigation, as is:

Noncompetition Agreements. The hands-down winner in the I-guess-I-need-to-call-a-lawyer sweepstakes is the famous “covenant not to compete” provision, sometimes shortened to “noncompete.” This is a provision that limits (but does not entirely prohibit) an employee’s ability to work elsewhere after the employment ends or is terminated. Some doctors are under the misimpression that these provisions are not enforceable in Texas because they are anticompetitive. Not – we repeat, not – true. It is true that there are special conditions imposed upon them in Texas, but if those conditions are met, courts will enforce contract provisions that keep you from practicing within a certain geographical area for a certain period of time after your employment ends. The good news is that there are ways to limit the effect of such provisions.

Partnership. If your employer is a medical practice, consider requiring a commitment on its part to consider you for partnership (or whatever form of ownership the practice uses) after a certain period of time.

Your Patients’ Records. Your contract may end or your contract may be terminated prematurely. Either way, if you have your own patients you are going to want their records. You need to provide for that in the agreement.

The More Things Change. With federal law and regulation changing rapidly with respect to matters such as recordkeeping, reimbursement, and even compensation itself, employers have begun inserting provisions permitting them to make unilateral changes to the contract to keep it in compliance with law. Sounds reasonable, but you should have notice of the change and the opportunity for input (or the option to bail out).

Malpractice Insurance. Yes, your employer will provide it, but it’s more complicated than that – what happens when your employment is over? This issue is of particular importance with respect to your second employer and something called tail insurance. Big-dollar item.

Dispute Resolution. If you have a dispute over the terms of the employment agreement, how will it be resolved? Frequently (and, in the case of hospitals, almost always) employment agreements provide for mandatory arbitration (that is, the parties cannot go to court; the dispute is heard by a non-judge with no jury). Does the contract provide that both sides must conduct a face-to-face meeting before initiating legal proceedings? Is there a provision requiring the loser to pay legal fees, and, if so, which side does it favor? (One guess.)

Two Sides to Every Story. We have focused here on things that the new doctor is going to want. Your employer is going to want some things, too, and it’s going to insist on them: Getting and keeping your license; maintaining your privileges at hospitals; abiding by the rules and regulations of the practice or institution; complying with legal requirements; and many more. Still, you want to make sure your employer doesn’t slip in anything unreasonable, or phrases it in such a way that it turns out to be at “gotcha” at some later date.

As noted, this list only hits the highlights. There are many other possible provisions the new employee should carefully heed.

Will YouTube Subject Apple to Copyright Infringement Claim?

robert.wood@klgates.com (Robert Wood) — Mon, 20 Aug 2007 07:09:49 -0600

Here's an interesting article about Apple's possible liability for copyright infringement due to the ability of its iPhone to play YouTube videos:

http://news.com.com/8301-10784_3-9745198-7.html

Enforceable Noncompete Agreements: Is At-Will Employment Really "Illusory"?

robert.wood@klgates.com (Robert Wood) — Mon, 16 Jul 2007 14:39:44 -0600

Texas courts routinely hold that at-will employment is "illusory" consideration. Because the employer is free to terminate the employee at any time, the courts reason, giving an at-will job to someone is, legally speaking, meaningless. Thus, non-compete agreements in Texas based upon that consideration are unenforceable.

Not all states agree. While researching a noncompete matter in Illinois the other day, I came across this passage from a case there:

To be enforceable, a covenant not to compete must be ancillary to either a transaction (an otherwise valid contract), or a valid relationship. Although an at-will employment agreement, whether written or oral, might not be considered "enforceable" in the strictest sense of the term, it is nonetheless an agreement and relationship with numerous legal consequences, imposing rights and obligation son both parties. Therefore, a noncompetition covenant entered into by an at-will employee, whether the employee is employed under a written or oral agreement, complies with the requirement of ancillarity. This is because a covenant in such a situation is not a "naked" restraint on trade, but instead is merely ancillary to the primary purpose of the relationship: an employer-employee relationship. Thus, noncompetition covenants occurring in at at-will employment relationship are not enforceable per se.

According to this court, hiring an at-will employee subjects an employer to potential legal risk. For example, the employee, even though she is at-will, is entitled to all protections under Title VII, the ADA, the ADEA, workers' compensation laws, the FMLA, and other laws. The Illinois court held that at-will employment, therefore, is good consideration, not "illusory" consideration. Although Texas courts disagree, it's interesting to examine foreign law holding otherwise.

Texas Unfair Competition Law: Court Rejects Tortious Interference and Participating and Assisting Breach of Fiduciary Duty Claims

robert.wood@klgates.com (Robert Wood) — Fri, 13 Jul 2007 09:51:56 -0600

In July 2001, Sysco, a distributor of food service products, issued a Request for Proposal (“RFP”). Among the companies that received the RFP were Mark III and BI.

Mark III and BI had a business relationship that involved them sharing information and customers. Unbeknownst to Sysco, their relationship was formalized in a written contract.

Mark III and BI submitted a joint response to the Sysco RFP. Sysco accepted their proposal, awarding Mark III one function and BI a different function.

Sometime later, a BI employee left BI and became a Sysco manager. The new Sysco manager then terminated several Sysco employees and replaced them with BI employees. The manager then informed Mark III that it would no longer perform the functions awarded it under the RFP (and that BI would perform them). BI informed Mark III that it would perform work for Sysco without Mark III’s help.

Mark III filed suit against Sysco for breach of contract, tortious interference with contracts and relationships, and aiding and abetting BI’s breach of fiduciary duty.

In support of its contract claim, Mark III pointed to language in Sysco’s letter awarding the RFP stating that “if there were any issues with either company that could not be resolved to Sysco’s satisfaction, it would be grounds for both companies to lose Sysco’s business.” However, the court held that this language imposed no legal obligation upon Sysco to keep Mark III as one of the companies performing the work.

With respect to Mark III’s tortious interference claim, the court found that Sysco was unaware of the contractual relationship between Mark III and BI. Thus, an essential element of a tortious interference claim could not be met.

The court also declined to accept Mark III’s invitation to recognize a claim for Sysco’s alleged “participating and assisting” BI’s breach of fiduciary duty.

From Mark III’s perspective, this case illustrates the importance of proper documentation of a business deal so that, if the deal falls through, the damaged party enjoys necessary legal protections. Here, Mark III needed a more definite written contract with Sysco, to prevent work from being taken from Mark III and its partner in responding to the RFP, BI.

Mark III Systems, Inc. v. Sysco Corp., 2007 WL 529960 (Tex. App.—Houston [1^st Dist.] 2007).

Noncompete Agreements in Texas: Forum Selection Provisions Are Enforceable

robert.wood@klgates.com (Robert Wood) — Fri, 13 Jul 2007 07:57:00 -0600

Texas courts have long held that Texas law should determine whether non-compete agreements affecting Texas residents are enforceable. As a result, Texas courts generally will not enforce out-of-state choice of law provisions. However, as a recent Texas Supreme Court case illustrates, contractual forum selection provisions can alter that result.

In Re AutoNation, Inc. involved a suit filed in Broward County, Florida, by a Florida corporation (AutoNation) against one of its former employees for allegedly violating a non-compete agreement. A forum selection provision in the agreement mandated that suit be filed there.

Shortly thereafter, the former employee--who lived and had worked for AutoNation in Texas--filed suit in Texas state court, seeking a declaration that the non-compete agreement was unenforceable under Texas law, and seeking to prevent the Florida suit from going forward. The ex-employee, citing some Florida case law, contended that a Florida court likely would apply Florida law to the contract. Given Texas’ strong public policy favoring the application of Texas law to the contract, the ex-employee argued, a Florida court should not be permitted to adjudicate the dispute. The Texas trial court agreed and enjoined AutoNation from taking further legal action against the ex-employee outside of Texas. The trial court held, "Texas public policy will likely be thwarted if AutoNation is permitted to litigate enforceability of the restrictive covenants solely in Florida and solely under Florida law." The court of appeals affirmed.

The Texas Supreme Court reversed. In doing so, the court held that forum selection clauses--unless procured through fraud or overreaching--are enforceable. The court also acknowledged Florida's interest in the dispute (given that AutoNation's headquarters were located there). The court then refused "to presume to tell the forty-nine other states that they cannot hear a non-compete case involving a Texas resident-employee and decide what law applies, particularly where the parties voluntarily agree to litigate enforceability disputes there and not here."

In a concurring opinion, Justice O'Neill wrote:

What is not apparent . . . is that enforcement of the forum-selection clause in this case will result in application of the contractual forum's law in a manner that will undermine Texas public policy. Had there been a clear showing to this effect, I might agree with the court of appeals' analysis, or at least would consider the trial court justified had it decided to abate the Texas declaratory judgment action pending the Florida court's decision. But a mere indication that the Florida court intends to apply Florida law does not, without more, justify a Texas court's interference with the parties' chosen forum.

Time will tell whether Justice O'Neill's concurrence takes some of the bite out of this decision. Based upon her concurrence, the next Texas resident who's sued in a foreign jurisdiction for allegedly violating a non-compete agreement may contend: (a) the foreign jurisdiction is likely to apply its law and (b) that law is contrary to Texas public policy. The latter point might be made, for example, if the foreign state’s law is that at-will employment is sufficient consideration for a non-compete agreement (as opposed to Texas law, which states that such consideration is “illusory”). Whether a stronger showing on the public policy issue than was made in this case could change the result is unknown.

In the meantime, given Texas’ relative hostility to non-compete agreements, out-of-state companies who have employees here should consider adding non-Texas forum selection provisions to their non-compete agreements. Based upon this decision, they may be enforceable.

In re AutoNation, Inc., 2007 WL 1861341 (Tex. Jun. 29, 2007) (this opinion has not yet been inserted into the official reports, and is therefore subject to revision or withdrawal).

Noncompete Agreements in Texas: Some Restrictions Are Overly Broad

robert.wood@klgates.com (Robert Wood) — Thu, 12 Jul 2007 15:24:54 -0600

Non-compete agreements routinely provide for the employer to get injunctive relief in the event the employee engages in post-employment competition. In a recent case, the agreement in question subjected the employee to potentially harsher penalties.

The non-compete in question contained the following provisions:

14. Restrictive Covenant. In consideration of the benefits being provided to the Employee pursuant to this Agreement as outlined in Section 12 and elsewhere, and the unique nature of the Firm's Clients and their business with the Firm as outlined in Section 12, the Employee shall neither call nor solicit, either for himself or for any other Person any of the clients of the firm for a period of twenty-four (24) months immediately following the Employee's period of active employment (the "Post Termination Period")….

15. Payments to firm. …[T]he Firm and the Employee agree that should any Client of the Firm retain the services of Employee or any Person with whom Employee is associated at any time during the "post Termination Period", regardless of whether or not solicited by the Employee or such Person, the Employee shall pay to the firm an amount equal to 150% of the fees billed and accepted by such client during the twelve month period preceding the time when the client retains the services of the Employee or any Person with whom Employee is associated….

The court refused to uphold these provisions on the following grounds:

First, the court held that the monetary penalty was unreasonable. The court explained it in this way: “[I]f Hardy prepared a $500 tax return for a client, and if the same client paid $50,000 during the previous year for accounting services provided by Mann Frankfort, Hardy would have to pay $75,000 to Mann Frankfort."

The court believed this to be excessive.

Second, the court objected to the “Restrictive Covenant” provision:

Hardy's restrictive covenant is not limited to the clients that he served. The agreement states that he may not call or solicit "any of the Clients of the Firm" for 24 months. The client-purchase provision similarly refers to "any Client of the Firm." This type of restrictive covenant that does not require a connection between the clients and the person who is restricted by the covenant is overbroad.

The court continued:

The agreement contains no geographical restrictions, no restrictions to clients that were actually served by Hardy while he was employed by Mann Frankfort, and an exorbitant fee for Hardy's service to clients that did business with Mann Frankfort. We hold the restrictive covenant is unenforceable due to its failure to comply with the requirements of the Texas Business Code. Because Hardy's agreement fails to comply with the Covenants Not to Compete Act, it is unenforceable, as written. (citation omitted)

In all cases involving non-compete agreements, the non-compete restrictions must be reasonable to be enforceable. In this case, the court held that the restrictions were unreasonable.

Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 2007 WL 1299661 (Tex. App.—Houston [1^st Dist.] May 3, 2007).

Conservative Victories at United States Supreme Court

robert.wood@klgates.com (Robert Wood) — Tue, 26 Jun 2007 08:47:07 -0600

By now, everyone has heard about the United States Supreme Court's scaling back of the McCain Feingold campaign finance law. But as this article points out, the naming of John Roberts and Samuel Alito as justices--and the increased tendency of Anthony Kennedy to side with the Scalia wing of the Court--has resulted in conservative wins in several cases:

http://www.washingtonpost.com/wp-dyn/content/article/2007/06/25/AR2007062501047.html?hpid=topnews

Texas Non-Solicitation Agreements Attorney: What Does it Mean to "Solicit"?

robert.wood@klgates.com (Robert Wood) — Wed, 13 Jun 2007 10:44:00 -0600

As all employment lawyers know, courts will enforce non-compete agreements only to the extent necessary to protect an employer’s legitimate interests in restraining competition. However, courts sometimes view a provision restricting solicitation of customers much differently than a blanket non-compete restriction.

Non-compete agreements typically contain provisions prohibiting an employee from “soliciting or calling on” the employer’s customers after the employee is terminated. Employers who have been parties to non-compete litigation know that proving solicitation can be difficult (in part, because the customers who have been “stolen” tend to take the side of the former employee).

But what does it mean to “solicit”? A Washington court defined it this way:

“`Solicit’ . . . means: `To appeal to (for something); to apply to for obtaining something; to ask earnestly; to ask for the purpose of receiving . . . .’” By contrast, “[m]erely informing customers of one’s former employer of a change in employment, without more, is not solicitation.”

Thus, under this definition, informing your former employer’s customer that you have changed companies (which allows the customer to suggest continuing to do business with you) arguably does not constitute solicitation. Conversely, calling the customer and urging him to do business with your new company arguably would.

Of course, there is no guarantee that every court will view solicitation in that way, and every case must be decided on its own merits, but this definition is helpful in understanding the difference between actively soliciting a customer and merely providing him with information.

Dallas Texas Trade Secrets Attorney: Companies Face Increased Risk of Theft of Trade Secrets

robert.wood@klgates.com (Robert Wood) — Wed, 13 Jun 2007 07:23:31 -0600

This is a very interesting article about difficulties companies have in preventing misappropriation of their trade secrets. According to the article, theft of company laptop computers, especially when traveling abroad, is a real concern, as is the loss of sensitive information to "intelligence agents" located in the United States.

http://www.techjournalsouth.com/news/article.html?item_id=3279

Texas Securities Industry Attorney: New York Gives Absolute Privilege for NASD Form U-5

robert.wood@klgates.com (Robert Wood) — Wed, 13 Jun 2007 07:11:07 -0600

Most companies, when they terminate an employee, refuse to disclose the reason for termination to a potential subsequent employer. Companies know that disclosing the reason for termination to a third party may subject them to a defamation suit. As a result, they typically reveal only the ex-employee’s dates of employment and position held.

For companies that are members of the National Association of Securities Dealers (NASD), however, silence is not an option. Pursuant to NASD rules, an employer member firm must file with the NASD a form stating the reason for terminating a registered representative (broker). This “Form U-5” must be submitted within 30 days of termination, and a copy of the U-5 must be given to the terminated broker.

The NASD stores the U-5 on its online registration and licensing database, which is accessible by other member firms and, upon request, by potential investors. Thus, a terminated broker’s potential future employers and any person contemplating doing business with the broker will be able to learn why the broker was terminated.

Because the information provided on a Form U-5 can adversely affect a terminated broker’s efforts to obtain future employment, as well as the broker’s ability to do business with potential clients, statements contained in U-5s are often the subject of defamation claims filed by brokers against their former employers. In such cases, brokers dispute the reasons given for termination, and they contend that the existence of the U-5 has caused them economic harm.

Some states provide an employer defending against a U-5 defamation claim a qualified privilege defense. The qualified privilege does not bar the former employee’s defamation claim. However, it does require the former employee, in addition to proving that the statements in the U-5 were false and harmful, to show that the employer acted with malice (i.e., that the employer knew or should have suspected that its proffered reasons for termination were false). Although Texas cases dealing with U-5s are few in number, it appears that NASD-member employers in Texas enjoy a qualified privilege.

Recently, the highest court in New York gave NASD member firms total protection from U-5 defamation claims. In Rosenberg v. MetLife, Inc., 2007 WL 922920, 2007 N.Y. Slip Op. 02627 (Mar. 29, 2007), the Court of Appeals of New York held that statements on an NASD Form U-5 are absolutely privileged. Unlike a qualified privilege—which constitutes a defense to a defamation claim—an absolute privilege bars the claim. Thus, in New York, there is no claim for defamation based upon a U-5 filing.

The New York court based its decision on several factors. First, the court acknowledged the strong public interest in knowing about brokers who engage in illegal or unethical conduct. The court noted that it had previously granted an absolute privilege to persons who submit grievance letters against attorneys, and it stated that “the regulation of registered brokers in the securities industry is of no less importance” than ensuring that attorneys comply with the law. Indeed, with an absolute privilege, employers may be more forthcoming about a broker’s wrongdoing (whereas currently an employer is well advised to be cautious about what it puts on the U-5).

The court also viewed the filing of the Form U-5 as a “first step in the NASD’s quasi-judicial process.” The court saw the form as “the first indication that the NASD receives regarding possible misconduct by members of the securities industry, and investigations of misconduct reported on the Form U-5 frequently lead to the initiation of disciplinary action by the NASD.” Because statements in a judicial or quasi-judicial proceeding were absolutely privileged, the court held, statements that naturally would result in such proceedings should enjoy the same degree of privilege.

The dissent disagreed, arguing that unlike complaints submitted to an attorney grievance committee, which are confidential, potential future employers in the securities industry must view an individual’s Form U-5 during the hiring process. Thus, a statement in a Form U-5 would represent a “danger of substantial harm to the individual about whom the statement is made.” Furthermore, the dissent was skeptical of the majority’s claim that a Form U-5 was a preliminary step to a quasi-judicial proceeding, noting that the filing of a U-5 imposes no duty upon the NASD to investigate the statements contained therein. In response to employer concerns, the dissent also observed that “truth is a complete defense to a defamation claim.”

Given New York’s preeminent role in the securities industry, other courts may adopt the majority’s reasoning. Potential investors have a significant interest in knowing about unscrupulous brokers. That right to know may be held to outweigh a broker’s ability to sue his former employer for defamation, particularly since the absolute privilege defense does not preclude the broker from filing an arbitration to expunge the alleged defamatory language. Also, if other states follow New York’s lead, the NASD may begin to more carefully scrutinize and investigate the U-5s they receive, and the NASD can penalize firms which include untruthful statements therein.