Texas Contract & Noncompete Disputes Blog

Texas Contract & Noncompete Disputes Blog

Texas Non-Compete, Trade Secrets and Contract Law

Worldwide Noncompete Restriction May Be Enforceable in Texas

Posted in Uncategorized

In the past, Texas courts have not fully embraced the ability of a non-compete agreement to restrict an employee from working anywhere in the world.  In several cases, Texas courts have held that the proper geographic scope of a noncompete agreement is the territory in which the employee worked.  Recently, though, a federal district court in Texas was sympathetic to a noncompete agreement with a worldwide scope. 

Under Texas law, a covenant not to compete is enforceable only if it contains reasonable limitations as to duration, geographic area, and scope of activity.  A non-compete agreement may not restrict the employee more than is necessary to protect the goodwill or other business interest of the employer.

In a recent Texas federal case, the employer conducted business within the narrow field of reactor thermometry.  The field has a small customer base and a limited number of licensors.  The employee worked in the sales department.  Within two years, the employee was promoted to Regional Sales Manager for sales territories that included all of Europe, Russia, and parts of the United States and Canada.  The employee also had access to his employer’s confidential worldwide client and sales information.  The employee also attended global conferences for his employer where he developed contacts with customers, prospective customers, and licensors who operate on a global scale.  Further, the employee’s sales efforts reached beyond his sales territories to countries all over the world.    

The non-compete at issue restricted the employee from performing work or accepting employment with any competitor within the United States and any country in which the employer did business.  The court found that because of the employee’s geographical reach in his job, his exposure to employer’s global confidential information, and the fact that he worked within a narrow field, the non-compete agreement was reasonable and did not restrict the employee more than necessary to protect the employer’s legitimate interests.

Businesses are starting to operate on a more global scale.  Ease of travel and the internet are enabling even the smallest companies to reach a worldwide clientele.  With the courts beginning to accept a worldwide restriction as reasonable, the need for an experienced attorney is great.  Our attorneys have years of experience drafting and litigating non-compete agreements.  We can advise you on whether a worldwide restriction is the right thing for your company and draft an agreement that will give your business the greatest protection while minimizing the risk of it containing an unreasonable restriction.  

 

Possible Tort Claim Not Sufficient Consideration for Noncompete in Texas

Posted in Noncompete Agreements, Uncategorized

In recent years, Texas courts have shown support for the employer’s use of non-compete agreements. The courts have done so by finding certain requirements of enforceability implied in non-compete agreements in some circumstances. Despite this trend, in June 2015, the federal appellate court that covers Texas ruled that a duty to keep information confidential cannot be assumed into a contract merely because there may be a common law or statutory duty to keep information confidential. This ruling provides a limit to the courts tendency to find enforceability requirements implied within non-compete agreements.

In order for a non-compete agreement to be enforceable, the law requires that it be ancillary to or part of an otherwise enforceable agreement. In the employment context, the Texas courts have found that the otherwise enforceable agreement requirement may be met if the employer promises to provide confidential information and the employee promises to keep that information confidential. The court may find that an employer’s promise to disclose confidential information is implied if confidential information must be disclosed in order for the employee to perform his job. While a court may imply into a contract either the employee’s or the employer’s promises, a court will not imply in the same contract both the employer’s promise to provide confidential information and the employee’s promise to keep information confidential.

The federal appellate court over Texas recently reviewed a case in which the agreement did not contain any promises by either the employer or the employee relating to confidential information. In an attempt to have the court imply these promises into the contract, the employer argued that a promise by the employee was not needed because “a promise not to disclose confidential information would have been redundant and unnecessary because, as a matter of state law, . . . [the employee] had that obligation without a written contract or express promise.”

The employer was trying to insert a duty that is found in tort actions (the duty of an employee after termination not to use or to disclose to third persons trade secrets or other confidential information) into the contract. The court categorically dismissed this argument stating that a non-compete agreement is a question of contract, not tort. A duty found in tort does not automatically become a contractual duty and thus make an otherwise unenforceable agreement enforceable.

While an employee has a duty not to disclose trade secrets or other confidential information to third parties, this tort action should only be used as a supplement and not a replacement for a quality-drafted non-compete agreement. At Lindquist Wood Edwards LLP, our lawyers use the most up-to-date law to not only draft non-compete agreements to protect your company’s confidential information, but also to litigate your non-compete and provide the strongest arguments for its enforceability.

Money for a Noncompete in Texas?

Posted in Noncompete Agreements

A Texas appellate court recently addressed the question of whether money is sufficient to support a non-compete agreement.  The court ruled that money was not enough and that the non-compete’s purpose must be to protect a legitimate business interest.

The contract at issue was for a company (“Company A”) to provide hospitalist services and to coordinate the hiring of hospitalist physicians for a hospital for a two year period.  Either party could terminate the contract early with a sixty-day notice.  The contract included a non-compete provision that provided that the hospital was not permitted to contract directly or through another hospitalist service provider with the hospitalist physicians that were retained or recruited by the company.

The hospital terminated the contract early with sixty-days’ notice.  After this termination, but within the time period covered by the non-compete, the hospital contracted with another company (“Company B”) to provide hospitalist services.  Company B then signed contracts with two physicians who were retained by Company A for the hospital.  It was unrefuted that this was a violation of the non-compete agreement.  Before the court was whether the non-compete was enforceable.

In order for a non-compete agreement to be enforceable, the law requires that it be ancillary to or part of an otherwise enforceable agreement.  While the otherwise enforceable agreement must be supported by consideration, the court stated that the non-compete “must be based on additional consideration.”  The contract before the court provided that in exchange for Company A’s services, the hospital would make yearly and monthly payments.  This consideration was for the otherwise enforceable agreement.  However, there was no “additional consideration for [the hospital’s] promise not to hire any physicians if the contract between [Company A] and [the hospital] was terminated.”

A non-compete agreement must have additional consideration to support the promise being made.  If money is the consideration, a Texas court will likely find this as insufficient because it does not set apart a different consideration for the non-compete’s promise.

The court also addressed the need for a valid reason for restricting competition.  “Where the object of both parties in making [a non-compete contract] is merely to restrain competition, and enhance or maintain prices, there is no primary and lawful purpose of the relationship to justify or excuse the restrain.”  (internal cites omitted).  The purpose of the restriction must be to protect a business interest such as goodwill or trade secrets.

At Lindquist Wood Edwards LLP, our lawyers have drafted and litigated numerous non-compete agreements.   We can make certain that your agreement is properly supported by consideration and protecting a legitimate interest.

Borrowed Servant Doctrine: Risks Associated with Asserting Control

Posted in Uncategorized

Temporary workers (“temps”) are a part of many businesses.  Some companies use temps to fill a void left while an employee is on leave, others utilize temps in determining whether or not to offer a permanent position, and still others have temps as part of their everyday business functions.  No matter what the reason is, when you bring a temp into your workplace, exerting too much control over him could lead to an increased risk of liability.

Temps are typically hired and made employees of a temp agency.  They are then placed within a business as an independent contractor.  As long as they are employees of the temp agency, the temp agency can potentially be liable for the temp’s actions.  However, if the business in which the temp is placed begins to exert control over that temp, the employer/employee relationship may shift, opening the business up to liability.  This is known as the borrowed servant doctrine. 

In a recent Texas Court of Appeals case, Davis-Lynch, Inc. v. Asgard Technologies, LLC, Davis-Lynch, Inc. (“DLI”) brought suit against its staffing company, Asgard Technologies, LLC (“Asgard”) for negligence, breach of fiduciary duty, and breach of contract.  Asgard placed a temp at DLI as a receptionist.  At all points in time, this temp was an employee of Asgard.  After 2 years, DLI moved the temp to the accounting department and eventually promoted her to head of accounting.  While in the accounting department, the temp allegedly embezzled over $15 million from DLI. 

One claim DLI brought against Asgard was respondeat superior.  This claim would allow DLI to hold Asgard, as the temp’s employer, liable for the actions of its employee.  Had DLI been successful on this claim, it would have allowed it to recover the embezzled $15 million from a company much more likely to be able to pay.  The borrowed servant doctrine prevented this from happening. 

The borrowed servant doctrine states that the employer that has the right to direct and control the actions of the employee is vicariously liable for the employee’s actions. Since the temp had been moved to accounting, she reported directly to DLI for day-to-day work, accounting issues, and personnel issues.  She was also trained by DLI employees.  Asgard had no involvement with the temp’s transfer to accounting, and Asgard personnel in the accounting department did not report to Asgard.  The court held that it was DLI, and not the temp’s employer, Asgard, who had the right to control Moreno.  Therefore, Asgard could not be liable for the temp’s theft under a respondeat superior claim.

This case is a perfect example of why your company should be careful as who it treats as employees.  Drafting employee and independent contractor agreements can be a helpful way to define the business relationship.  If there is a shift in the workplace between positions, titles, or control, seeking out legal advice could save you from unwanted and unexpected liability later on.

Choice of Law in Texas Injunction Hearings

Posted in Uncategorized

Choice Of Law in Injunction Hearings

In a prior post on Choice of Law in Texas Noncompete Litigation, we discussed the need for a well-thought-out choice of law provision in noncompete agreements.  The courts have again highlighted the importance of this, but this time, it is within the context of temporary injunctions.

Cameron International Corporation v. Guillory, a recent Texas Court of Appeals case, approaches the issue of whether to make a choice of law analysis in an injunction hearing.  While working for Cameron International, Guillory entered into a non-compete agreement.  However, Guillory “signed” this agreement by means of an online prompt stating that he read and understood the agreement.  The agreement also stated that it would be governed by Delaware law. On application for a temporary injunction, the trial court applied Texas law to decline enforcement of the non-compete.

The problem was that Texas law does not favor online “click” agreements like Delaware.  On appeal, Cameron International argued that Delaware law should have been applied during the injunction hearing.  Conversely, Guillory contended that choice of law is a merits question, so deciding it at the temporary relief stage was premature and improper.  The Court of Appeals held that choice of law must be established before addressing the propriety of temporary relief.

The court then applied the standard from Exxon v. Drennen—discussed in the abovementioned blog post.  After analyzing the facts in Cameron International, the court determined that the choice of law provision was enforceable, and as a result, it granted the temporary injunction.

A well-drafted choice of law provision can make a big difference when enforcing your non-compete at the critical temporary injunction stage.  In Cameron International, it was the primary factor in the granting of a temporary injunction.  Not only can a well-drafted choice of law provision prevent potential pitfalls and costly litigation, it can help determine the protections afforded at a very early stage.  At Lindquist Wood Edwards LLP, our lawyers take great care when drafting your non-compete agreements to ensure the maximum likelihood of enforceability.

Texas Federal Court Voids Noncompete Agreement

Posted in Noncompete Agreements

As readers of this blog know, noncompete agreements are increasingly enforceable in Texas.  However, even in Texas, not all noncompete agreements comply with the statutory requirements.

In a case decided a few months ago, the United States Court of Appeals for the Fifth Circuit, applying Texas law, held that a particular noncompete agreement was unenforceable.  In that case, the noncompete agreement did not contain an explicit promise by the employer to provide the employee with confidential information (which typically constitutes the consideration given by the employer in exchange for the employee’s promise not to compete).  The employee argued that the lack of such a promise rendered the noncompete invalid.

The employer countered that, under Texas law (as stated by the Texas Supreme Court in the Mann Frankfort case), the employer need not explicitly promise to provide confidential information for a noncompete agreement to be valid.  And the employer was correct that, under Texas law, a noncompete agreement need only contain an implied promise that the employer will provide confidential information.  An implied promise to provide confidential information exists “when the nature of the work the employee is hired to perform requires confidential information to be provided.”

Nevertheless, the noncompete in this case was invalid.  Reason:  Unlike in the Mann Frankfort case, here, there was no mention in the agreement of confidential information.  In Mann Frankfort, the employee had explicitly promised not to disclose confidential information (thus supporting an inference that the employer had implicitly promised to provide it).  Here, though, there was no such promise by the employee.  In this agreement, there was no mention whatsoever of confidential information.  The court held, “This very important distinction cannot be missed.”

This case is a perfect example of why every company that wishes to bind its employees to a valid noncompete agreement should have its agreements reviewed by an experienced practitioner in this area.  It’s much better to spend a little money on the front end, to ensure that you have a valid agreement, than to be severely disappointed when a lawyer tells you after the fact that you can’t enforce the agreement that your employee signed.

 

Texas LLC Law–Breach of Fiduciary Duty

Posted in Uncategorized

Over 70% of all businesses in the United States are sole proprietorships.  A sole proprietorship is an unincorporated business that is owned and operated by a single individual.  As a sole proprietor, you are entitled to 100% of the profits.  However, you are also 100% personally responsible for all debts, losses, and liabilities.

Many people choose to protect themselves from liability by forming limited liability corporations with other members.  This generally limits liability to the LLC and not each individual member.  However, certain legal duties may require members to disclose pertinent information related to the best interest of the LLC.  These duties are known as fiduciary duties.

In Texas, there are two types of fiduciary duties.  One is formal, the other informal.  A formal fiduciary duty arises under relationships such as attorney-client, partnerships, and trustee relationships.  Informal fiduciary relationships develop when the parties have dealt with each other over long periods of time, and a party expects the other to act in its best interests.  In Texas, the law sometimes recognizes informal fiduciary duties between shareholders in a limited liability company.  Texas courts look to the level of trust and confidence between members to determine if an informal fiduciary relationship exists.

The San Antonio Court of Appeals addressed this issue last summer.  In that case, three life-long friends decided to enter the restaurant business.  They formed a three-member LLC.  A non-managing member invested much more money in the LLC than did the other two managing members.  Eventually, the non-managing member learned of double dealing, and outright theft, by the two managing members.  The non-managing member filed suit and alleged, among other things, fraud by nondisclosure.  However, as a general proposition, fraud by nondisclosure requires a duty to disclose information.  This is where the San Antonio Court of Appeals began its fiduciary duty analysis.

The court stated that while Texas law has not yet recognized formal fiduciary duties between majority and minority shareholders in closely held corporations, the nature of relationships between shareholders in LLCs sometimes give rise to informal fiduciary duties.  For example, the court in this case found that the two managing members had a relationship of trust and confidence with the non-managing member.  All three members had been friends since they were in school.  As adults, they vacationed together.  They used the same attorney to develop the company agreement.  The non-managing member invested $80,000.00 in the LLC, substantially more than the managing members.  The non-managing member gave the two managing members complete management control.  And finally, the company agreement did not expressly disavow the formation of fiduciary duties.  Thus, the court of appeals upheld the trial court’s verdict of $120,000.00 in damages for fraud by nondisclosure.

The limited liability corporation has exploded in popularity.  It has many positive aspects for the average businessperson.  However, it is important to be aware of any legal obligations you have to other members so that you can protect yourself.

Limitations in TX Breach of Contract Cases

Posted in Uncategorized

The statute of limitations first appeared in early Roman law.  It later developed into the criminal and civil common law of England.  The purpose of the statute of limitations in a breach of contract context is to limit the time a plaintiff has to bring a lawsuit.  This is because: (1) a plaintiff should pursue its breach claims with reasonable diligence; (2) a defendant might have lost evidence to disprove a stale breach claim; and (3) long dormant breach claims can work an injustice on a defendant.  Essentially, the law will not award a plaintiff for “sandbagging” its breach claims, or failing to exercise reasonable diligence over its contracts.

Each state has its own statute of limitations period.  They range anywhere between 3 to 15 years depending on the particular state’s law.  Thus, knowing what state’s law governs your contract is vital.

In Texas, the statute of limitations for breach of contract is four years.  The period begins from the day the contract was breached.  A breach of contract occurs when a party fails or refuses to do something it has promised to do.  Understanding when the breach occurs is paramount.  It is not necessarily when the other party fails to meet its ultimate obligation on the contract.  Rather, it is a failure to do something it had promised to do under the contract.  A recent case from the Dallas Court of Appeals illustrates this concept.

In this case, a buyer of delinquent car loans sued the seller for breach of contract.  The buyer claimed the breach occurred when the seller did not deliver “account documents” within ten business days of the “effective date.”  The effective date of the contract was June 28, 2007.  Seller had until July 13, 2007 to meet its obligation.  Accordingly, when Seller did not comply on July 13, 2007, the statute of limitations began to run.  Thus, buyer had four years (July 13, 2011) to bring suit for breach of contract.  But, Buyer did not bring suit for breach of contract until January 3, 2012, well after the statute of limitations had passed.  Nevertheless, the trial court awarded over $3 million in damages to buyer.

The Dallas Court of Appeals reversed.  It held that the buyer brought no evidence asserting that its breach of contract claim began to run on any date other than ten days after the “effective date” of the contract.  Therefore, seller conclusively established that all claims for breach of contract were barred by the statute of limitations.  Buyer’s award of $3 million in damages was reversed.

The concept of the statute of limitations is simple.  However, the complexities of modern commercial life are not.  With that in mind, you must be aware that the law expects people to exercise reasonable diligence in bringing actions for breach of contract.  Whether it is two private parties contracting, or sophisticated businesspeople, the law holds both to the same duty, with very few exceptions.  Therefore, procrastinating on a breach of contract action, or simply failing to recognize it, can have serious consequences on your legal rights and remedies.

Trademark Infringement Basics

Posted in Unfair Competition

It is said that imitation is the most sincere form of flattery.  However, imitating a competitor’s trademark can lead to harsh consequences.  Alternatively, allowing a competitor to imitate your trademark can damage your business.  It is important to understand basic concepts of trademark infringement to prevent infringing, or being infringed upon.

It is important to know that an unregistered trademark can receive protection for infringement purposes.  To receive this protection, the symbols or words of the mark must be distinctive, or strong.  In determining distinctiveness, or the strength of a mark, courts classify marks in four categories, from weakest to strongest: generic, descriptive, suggestive, and arbitrary or fanciful.

  • Generic marks receive no protection. Generic marks or terms refer to the basic nature of the product, rather than the more individual characteristics.  For example, aspirin has been held to be generic and unprotected.
  •  Descriptive marks identify a characteristic or quality of the good, such as color, order, and function. For descriptive marks to gain protection, they must develop secondary meaning.  An example of secondary meaning is that the public, over time, begins to identify the mark as reflecting not only the product, but also the source of the product.  An example is Vision Center in reference to a business offering glasses.
  • Suggestive marks do more than describe the good; they suggest some particular characteristic of the good and require the consumer to exercise their imagination to figure out what the good is. An example is Coppertone regarding suntan products.
  • Arbitrary or Fanciful marks bear no relationship to the products and receive full protection. For example, Kodak bears no relationship to cameras, and Ivory bears no relationship to soap.

After classifying a mark, a court will uses the “digits of confusion test” to determine if there is a likelihood of consumer confusion as to the source of the goods.  The test examines (1) the type of mark allegedly infringed; (2) the similarity between the marks; (3) the similarity of the products and services; (4) the identity of retail outlets and purchasers; (5) the identify of media advertising used; (6) the defendant’s intent in using the mark; and (7) any evidence of actual confusion.

This process was explained in a clothing apparel trademark infringement suit.  In the case, Saturdays Surf LLC sued Kate Spade LLC under the Federal Lanham Act, claiming that Kate Spade’s new brand “Kate Spade Saturday” infringed on its federally registered trademark “Saturdays Surf NYC.”  Saturdays Surf LLC also claimed that its unregistered marks “Saturdays” and “Saturdays Surf” were being infringed.

The court found that “Saturdays Surf NYC” was a protected mark.  However, it did take issue with Saturday Surf LLC’s attempt to claim infringement on its unregistered marks “Saturdays” and “Saturdays Surf.”  First, the court found that many other companies were using the word “Saturday” or “Saturdays” to describe their line of clothing.  The court held that the word “Saturdays” is commonly used in the context of apparel, and that the word alone is not protectable under the Lanham Act.

Second, the court ruled that while many consumers refer to “Saturdays Surf NYC” as “Saturdays Surf,” there was no evidence that any of Saturdays Surf’s products bore the name “Saturdays Surf NYC” without the “NYC.”  Thus, Saturdays Surf failed to show that the unregistered mark “Saturdays Surf” warranted protection.  Third, using the “digits of confusion test” the court found that: (1) the house mark Kate Spade in “Kate Spade Saturday” reflected a strong mark entrenched in the fashion industry; (2) “Kate Spade Saturday” and “Saturdays Surf NYC” were not similar marks; (3) the products produced were not similar, as Kate Spade produced exclusively women’s clothing while Saturdays Surf produced unisex apparel; (4) the products were sold in different channels of trade; and (5) the high price of the apparel reflected that they were marketed to sophisticated consumers.  Thus, Saturdays Surf’s counter claim for trademark infringement lacked merit.

In today’s global economy, consumers have more freedom than ever to choose from a variety of goods and services.  Therefore, trademarks serve a valuable purpose in helping a company distinguish its goods from others.  The cost of tolerating trademark infringement can be high, and engaging in activity that infringes upon a competitor’s mark, even unintentionally, can lead to costly litigation.

Computer Fraud and Abuse Act: Broad Scope of Applicability

Posted in Unfair Competition

Many aspects of modern society are dependent upon computers.  And computer fraud and abuse has become prevalent.  For employers, it is important to have an employee computer access policy to protect your sensitive information.  As an employee, knowing the limits of your authorized access is essential to avoiding adverse employment action.

The Computer Fraud and Abuse Act is a federal law that was enacted by Congress in 1984.  It has been amended several times to keep up with technological advances.  It was originally enacted as a criminal statute, but now also allows for civil enforcement.  The Act defines a violator as “[w]hoever knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value…” The Act defines a “protected computer” as a computer that “is used in or affecting interstate or foreign commerce or communication…”  However, the provision “without authorization, or exceeds authorized access” is not defined, and it can be a trap for the unwary.

For example, in a recent case, the Fifth Circuit Court of Appeals held that “the concept of ‘exceeds authorized access’ may include exceeding the purposes for which access is ‘authorized.’”  In this case, the employee had been given access to a large bank’s internal computer system and the customer account information contained within it.  The employee accessed the information with the purpose of making it available to employee’s co-defendant to conduct fraudulent credit card charges.  Employee argued that the Act did not prohibit access to material to which she had authorization, and that the statute only prohibited her from accessing information she was not authorized to retrieve.

However, the Fifth Circuit concluded that the employee had exceeded her authorization, even though she “was authorized to view and print all of the information that [employee] accessed,” because her use of that information “to perpetrate fraud was not an intended use of that system” and was “contrary to [the] employee policies of which [employee] was aware.”

This concept is further seen in a case decided this year by a federal court in Texas.  Shortly before terminating his employment, an employee allegedly removed documents from an employer’s computer.  Employee argued he was authorized to delete files from employer’s computer.  However, the court stated, “An employer may ‘authorize’ employees to utilize computers for any lawful purpose but…only in furtherance of the employer’s business.”  While the authorization agreement did not prohibit the employee from deleting information form employer’s computer, employee may have exceeded the intended use of employer’s computer if it caused harm to employer’s business by deleting files.

As shown above, this statue can serve as a remedy to an employer whose confidential information has been compromised by unauthorized access of their computer.  Additionally, employees need to be aware of the boundaries of their computer authorization agreements.