Requirements for Physician Noncompetes Strictly Enforced

Posted on April 2, 2013 by Robert Wood

 An opinion by the Dallas Court of Appeals shows how the courts apply the Texas Noncompete statute to covenants involving physicians.  

In the opinion, a surgery center was registered as a limited partnership. The general partner was a corporation, and the limited partners were physicians. The partnership agreement prohibited the limited partners from owning an interest in a competing facility while being a limited partner.

Nine of the physicians began discussing the purchase of land to build a new facility. The physicians entered into a contract to do so. They determined that construction of the new facility would take 18 months, and the physicians intended to stay with the surgery center during that time.   The corporation requested to be part of the new facility, and the physicians denied the request.  The attorney for the corporation threatened to sue the physicians for violating their noncompete agreements.  The physicians filed suit, requesting declaratory relief that the noncompete agreement was not enforceable. The physicians then filed a motion for summary judgment, which was granted. The corporation appealed.

On appeal, the corporation contended that the trial court erred in applying the statute which requires a physician noncompete agreement to contain a buyout provision. The corporation argued that the statute did not apply because the covenant did not affect the physicians’ practice of medicine.

Section 15.50(b) of the Texas Business and Commerce Code provides:

A covenant not to compete relating to the practice of medicine is enforceable against a person licensed as a physician by the Texas Medical Board if such covenant complies with the following requirements:

(1) the covenant must:

(A) not deny the physician access to a list of his patients whom he had seen or treated within one year of termination of the contract or employment;

(B) provide access to medical records of the physician's patients upon authorization of the patient and any copies of medical records for a reasonable fee as established by the Texas Medical Board under Section 159.008, Occupations Code; and

(C) provide that any access to a list of patients or to patients' medical records after termination of the contract or employment shall not require such list or records to be provided in a format different than that by which such records are maintained except by mutual consent of the parties to the contract;

(2) the covenant must provide for a buy out of the covenant by the physician at a reasonable price or, at the option of either party, as determined by a mutually agreed upon arbitrator or, in the case of an inability to agree, an arbitrator of the court whose decision shall be binding on the parties; and

(3) the covenant must provide that the physician will not be prohibited from providing continuing care and treatment to a specific patient or patients during the course of an acute illness even after the contract or employment has been terminated.

The court, based upon the plain language of the statute, held that since the physicians were licensed by the Texas State Board of Medical Examiners, the covenant not to compete had to include a buyout provision. The covenant did not include a buyout provision; therefore, it was unenforceable against the physicians.

As this opinion demonstrates, requirements applicable to covenants not to compete must be strictly observed.   Failure to do so may result in a covenant not being enforceable. 

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Texas Tortious Interference Law: Explicit Threat Not Required

Posted on December 20, 2012 by Robert Wood

An opinion by the San Antonio Court of Appeals demonstrates that in order to prevail on a claim for tortious interference of contract, the claimant need not prove an outright threat.   Certain statements and requests may be sufficient. 

A salesman was recruited to work for a company by a general manager and a sales manager. Later that year, the salesman and his wife purchased a house from the president of the general partner of a general contractor, an important customer of the company.  The president and the general manager were long-time friends. 
 
When the salesman was preparing to move into the house, he discovered what he believed to be problems with the foundation.  The salesman and his wife met with the president, and the salesman told the president that he wanted the president to buy back the house.   The meeting grew tense, and the salesman left the meeting.  The president testified later that he expected the salesman to file a lawsuit if he did not buy back the house. 
 
After the meeting, the president called the general manager to discuss his anger over the situation.  When the salesman returned to work, he was called into a meeting with the general manager and sales manager and told that he could no longer work at the San Antonio office.  The general manager then sent an email to the human resources department.  The email stated that the president had made it clear that having an employee from one of his major suppliers threaten legal action could jeopardize all current and future work.  The email also stated that the president had directed the general manager not to allow the salesman to call on any project of the general contractor. 
 
The salesman filed suit against the president and the general contractor, asserting tortious interference and other claims.   The salesman contended that he was fired because the president threatened the company’s business if the salesman remained an employee of the company.  The defendants moved for summary judgment, and the trial court granted the motion. The salesman appealed.
 
The court of appeals noted that conduct constituting an interference may be an inducement.  An inducement is any conduct conveying to the third person the actor’s desire to influence him not to deal with the other.   It may be a simple request or persuasion.   It may also be a statement having the same effect as a request. 
 
The court of appeals concluded that summary judgment was not warranted.  The president testified at trial that he did not intend to have the salesman fired; however, the salesman produced evidence that the general contractor was an important customer of the company and that the president was aware of this fact when he called the general manager.   It was undisputed that the president called the general manager and instructed him not to allow the salesman to call on an of the general contractor’s projects.   It was also undisputed that the general manager understood the president’s statements to be a threat to discontinue its business with the company.   The court of appeals held that the evidence was sufficient to raise a fact issue about whether the president intentionally interfered with the salesman’s employment. 
 
As this opinion demonstrates, conduct that constitutes interference with a contract need not be an outright threat.  It may be a request or statement that could be interpreted as a threat.  In addition, in a summary judgment proceeding, the burden of the non-movant to produce evidence of intentional interference may be met with circumstantial evidence. 
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Texas Temporary Injunction Law: Fact-Specific Inquiries

Posted on December 20, 2012 by Robert Wood

Whether an injunction should issue in a particular case involves a fact-intensive analysis.  A recent opinion by the Dallas Court of Appeals demonstrates how the courts may conduct this analysis in cases involving claims for misappropriation of trade secrets and violations of the Texas Theft Liability Act.  

A broker/dealer investment services company hired an employee as a Vice President.   The employee was paid a salary and received commissions for bringing in new clients.   The employee had access to all of the company’s confidential information concerning its clients.  The employee downloaded the information to his laptop.  The information included clients’ social security numbers, account numbers, balances, and investment preferences. 
 
After ten years of working for the company, the employee was terminated and went to work for another broker/dealer.  The employee had retained copies of the files from his laptop.  Using the contact information contained in those files, the employee sent letters to 800 clients of his former employer, asking them to transfer their accounts to his new employer. 
 
The former employer sued its former employee for misappropriation of trade secrets, violation of the Texas Theft Liability Act, breach of contract and other claims.  The company sought injunctive relief.   The trial court entered a temporary restraining order prohibiting the former employee from using the files he had copied. 
 
At the temporary injunction hearing, witnesses testified that when a registered representative changes broker/dealers, the representative’s clients remain with the original broker/dealer.   The registered representative may contact the clients that he/she brought to the first broker/dealer and ask them if they would like to move to the new broker/dealer.   If the client chooses to move, the client must fill out a form to do so.   The registered representative does not need the client’s social security number, account balance, account number or preferences to move the client to the new broker/dealer.   The former employee testified that he thought he was sending out letters only to clients he had personally developed.   The former employee and the former employer each presented an exhibit with a list of materials that the former employee had copied and highlighted the materials the party believed to be confidential.   The court issued a temporary injunction only on the files that the former employee believed to be confidential and proprietary.   The former employer appealed the denial of the temporary injunction on the files that it wanted protected which were not protected by the temporary injunction. 
 
The court of appeals first reviewed the evidence to determine whether the former employer had established a cause of action against the former employee and a probable right to relief sought. The evidence demonstrated that the former employer did not permit independent contractors to access the computer systems and that the former employee had accessed and downloaded files from the computer system for use in his role as an independent contractor.   The court of appeals held that the former employer did establish a cause of action against the former employee.   The court of appeals also determined that the former employer had established a probable, imminent, and irreparable injury.  There was testimony at trial that the former employer was required by the Financial Industry Regulatory Authority (FIRA) to keep records of its clients and to safeguard that information.   If the former employer failed to meet those requirements, FIRA could take action, including actions as severe as shutting down the company. 
 
The court of appeals determined that since the former employee was allowed to contact his clients and ask them if they wanted to move to the new broker/dealer, the former employee was allowed to take and possess the files containing client names and addresses.   However, the rest of the information in the files was not needed to move a client from one broker/dealer to another and therefore was confidential and proprietary.   The court of appeals determined that the injunction should have extended to all information regarding clients that were not personally developed by the former employee as well as social security numbers and account information of clients that were developed by the former employee. 
 
As this opinion demonstrates, determining whether an injunction should issue in cases involving alleged misappropriation of trade secrets and violations of the Texas Theft Liability Act requires a thorough analysis of the facts.   In these types of cases, the court will look at each type and category of information to determine whether an injunction should issue. 
 
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Usurpation of Corporate Opportunity in Texas

Posted on December 18, 2012 by Robert Wood

 What constitutes “usurpation of corporate opportunity”?  There is no clear answer.   However, an opinion by the Texarkana Court of Appeals is instructive.  

 
During merger negotiations, the company’s Chief Financial Officer (who was also a director and stockholder in the company) and another director/stockholder agreed that the CFO would waive an important provision in his employment contract in exchange for a promise by the other director/stockholder to provide the CFO with an interest in three new stock offerings.  The CFO’s employment contract provided that the CFO would have guaranteed continued employment or a large monetary award if he was terminated as a result of a change in control of the company.  The CFO apparently believed the merger would benefit the company but not him personally. 
 
After the merger was finalized, the corporation reassigned the CFO. The CFO claimed he was constructively terminated and sued the corporation. The corporation filed suit against the former CFO, asserting several claims, including breach of fiduciary duty for usurpation of corporate opportunity. The corporation argued that in making the deal with the director/stockholder and accepting the stock, the former CFO breached a fiduciary duty owed to the company.
 
At trial, the court granted the corporation’s motion for summary judgment and ordered the former CFO to pay to the corporation the money he had made from the stock.
 
In its opinion, the court of appeals noted that in order to establish a breach of fiduciary duty for usurpation of corporate opportunity, the corporation must prove that an officer or director misappropriated a business opportunity that properly belonged to the corporation. 
 
The court found that there was no evidence that the opportunity from which the former CFO benefited was a corporate opportunity.  Although the former CFO may have blocked the merger if he had declined to waive his contractual rights, he did not do that.   The merger was completed; therefore, the corporation was not harmed by the former CFO’s actions. 
 
As this opinion demonstrates, to establish a claim for usurpation of corporate opportunity, the corporation must sustain actual harm.  It is not sufficient for the corporation to assert that it merely could have been harmed.  Here, the CFO’s actions did not harm the corporation. 
 
 
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Tortious Interference and Breach of Contract in Texas

Posted on December 17, 2012 by Robert Wood

 A recent opinion by the Dallas Court of Appeals demonstrates that conduct in violation of an employment agreement may also constitute tortious interference. 

 
In that case, two companies provided in-home nursing care for seriously ill pediatric patients.  Several employees of Company A went to work for Company B, including the Chief Operating Officer, a case manager and an employee who worked in scheduling.  All of the employees at Company A signed a “Confidential and Proprietary Information Agreement” which included nondisclosure and nonsolicitation provisions. 
 
Company A sued Company B, the chief operating officer, the case manager, and the other employee for breach of their employment agreements, tortious interference, and other claims.   At trial, the jury found in favor of Company A against Company B, the chief operating officer and the case manager.  
 
The appellate court pointed out that the evidence at trial showed that when the case manager and the other employee joined Company B, they were responsible for opening a new branch office.  When that office opened, it had 12 patients, 11 of whom had transferred from Company A.  The CEO of Company A testified that other employees and patients had left Company A in the past; however, they had never had 11 patients leave in one day, much less that many patients transfer to the same agency.   The transfers were also unusual in that the attending nurses of these patients had also left. 
 
There was evidence at trial that the patient lists included schedules, care plans, billing information, and patient and employee contact information.  This information was password protected.  A nurse who worked for Company A testified that when the employee was leaving Company A, she told the nurse that she was going to use the list of patients from Company A and give them the contact information for Company B.   The employee said she was working with the case manager. 
 
With respect to the Chief Operating Officer, there was evidence that he knew that the case manager and employee were soliciting patients of Company A and told the case manager not to contact any patients or nurses.  He hired an attorney to investigate, yet he did not ask any of the parents of the patients whether they were solicited.  He also did not ask any of the transferring nurses whether they were solicited.  The court noted that there was no evidence that he refused to allow transferring patients to receive care from Company B until he had investigated the situation. 
 
In its opinion, the court noted that use of the confidential information to solicit patients constituted both a breach of the nondisclosure and nonsolicitation agreements as well as tortious interference with Company A’s agreements with its employees and clients.  The court of appeals held that there was sufficient evidence for the jury to conclude that the chief operating officer, the case manager and the other employee had breached their employment agreements and engaged in tortious interference. 
 
As this opinion indicates, conduct that violates an employment agreement may also be actionable through other claims such as tortious interference. 
 
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Under Texas law, how secret must trade secret be?

Posted on November 26, 2012 by Robert Wood

A recent opinion by the Dallas Court of Appeals explains what constitutes a trade secret and gives an example of information acquired through unfair means.

The court defines a trade secret as “any formula, pattern, device, or compilation of information that is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not know or use it.” The opinion lists a number of items which have been recognized as trade secrets, including customer lists, pricing information, blueprints, and market strategies. Furthermore, the court noted that “secret” implies the information is not generally known or available; however, when information is acquired through unfair means, the fact that it is available through experimentation and analysis does not mean that the information is not protected.

The lawsuit involved owners and executives of long-term acute care hospitals. These facilities treat patients who require longer care than a regular acute care hospital. According to the opinion, the Plaintiff filed a lawsuit against several of its former executives and several entities for misappropriation of trade secrets and other claims. One of the issues presented before the court was whether market summaries, which included information regarding reputation and acquisition targets, referral sources, and a bed need analysis, should be afforded trade secret protection.

At trial, the chairman of the board for the Plaintiff testified that a considerable amount of time, money, and effort had been put into developing the infrastructure and contacts necessary to gather the information. He testified that if competitors received the information, the Plaintiff would be at a competitive disadvantage. He described the information as the Plaintiff’s “strategic work product” and noted that the information also conveyed the Plaintiff’s vulnerabilities. Specifically with regard to the bed need analysis, one defendant testified that the analysis determines how many beds are needed in the market based on the current demand for rehab beds and the current number of beds. He explained the process for conducting the analysis and also admitted that the information generated from the analysis would be considered confidential.

The Defendants argued that the information was readily available through the internet or by talking with others in the industry and therefore should not be afforded trade secret protection. The court held that just because the information is available through inspection or analysis does not preclude it from being afforded trade secret protection.

The evidence at trial showed that one former executive had made a number of contacts while employed by the Plaintiff and used those contacts to acquire information regarding the Plaintiff’s target market and business plan. He then sent that information to another long-term acute care hospital while he was still employed by Plaintiff. The court noted that the important question is not “How could he have secured the knowledge?” but rather “How did he?” The information gave its holder an opportunity to gain a competitive advantage over competitors who did not know or use it. Therefore, the court held that the information should be afforded trade secret protection.

As this opinion demonstrates, information that may technically be available to others may still be afforded trade secret protection when it is acquired through unfair or improper means. 

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Who is a fiduciary under Texas law?

Posted on November 26, 2012 by Robert Wood

As a recent opinion by the Fifth Circuit indicates, an employment agreement that provides that all work product created by the employee becomes the property of the employer may give rise to a fiduciary relationship between the employee and employer.

In that opinion, a company entered into an employment agreement with a chemist. The contract provided that “[a]ny formulae, applications, or concepts created, designed or contemplated by [employee] during the course of his employment with [employer] will be the property of [employer].” The contract also provided that “ . . . [employee] will devote 100% of his profession time to the affairs of [employer] and [employer’s wholly owned subsidiary].” The employee agreed to serve as one of the directors of the employer, and the parties agreed that the employee would ultimately own 25% of the outstanding shares. The employee also agreed to serve as president of the subsidiary. Soon after the employment agreement was executed, a partnership was formed to market any technology developed by the chemist. The partnership entered into negotiations with a paint company for the paint company to purchase the right to sell compounds developed by the chemist; however, these negotiations never resulted in an agreement.

The employer, the partnership, and another related entity sued the chemist, alleging breach of fiduciary duty and other claims. The plaintiffs alleged that the chemist conducted secret negotiations with the paint company and that the chemist had stopped working for the employer and refused to turn over test results and work product, all while receiving payment as an employee.

One of the issues on appeal was whether a fiduciary relationship existed between the chemist and the employer. The court noted that even when there is not a written contract, a fiduciary relationship exists between employee and employer such that the employee may not use trade secrets or confidential or proprietary information in a manner adverse to the employer. In this case, there was a written employment agreement that provided that all work product created by the employer would be the property of the employer. Therefore, the court held that the employment agreement prohibited the chemist from using confidential information against the employer, which gave rise to a fiduciary relationship.

The next issue was whether the chemist breached his fiduciary duty to the employer. The plaintiffs argued that the chemist tried to negotiate an employment agreement with the paint company while the chemist was under the original employment agreement, and that because of their negotiations, the paint company refused to agree to a joint venture with the plaintiffs and instead agreed to hire the chemist at a fraction of the price. Plaintiffs even produced evidence in the form of an email where the chemist asked the paint company to pay his legal fees so he could breach his agreement with his employer. In the response to the email, a representative of the paint company said they would pay his legal fees. Other evidence indicated that the chemist had stopped working for the employer eight months before he officially resigned.

Based on that evidence, the court held that the trial court erred in granting summary judgment and finding that there was no genuine issue of material fact regarding whether the chemist had breached his fiduciary duties.

As this opinion indicates, whether a fiduciary duty exists can be a complicated and fact-intensive inquiry. A fiduciary relationship can arise from an employment relationship. Also, conduct which appears disloyal to one’s current employer may result in a breach of fiduciary duty. 

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What is tortious interference under Texas law?

Posted on November 26, 2012 by Robert Wood

A recent opinion by the Dallas Court of Appeals demonstrates that merely inducing a party to a contract to do something that it is permitted to do under the contract generally cannot, standing alone, constitute tortious interference.

In that case, a bank held a piece of real property in trust. A partnership executed a contract with the bank to purchase the property. In the contract, the bank agreed that for the term of the contract, it would not market the property nor accept other offers to purchase the property. The contract gave the partnership a certain amount of time to pay for the property or withdraw from the contract. The contract required the partnership to deposit a sum of money in escrow. The contract also provided for an initial inspection period and three options to extend the inspection. In order to extend the inspection period, the partnership would have to direct that $75,000 be taken out of escrow and paid to the bank. That money could not be used to pay any of the purchase price of the property.

After the initial inspection period had passed, a representative from the bank approached a group of entities to inquire whether they would be willing to work with the bank to purchase the property. The bank representative expressed concern regarding paying the extension fees. A representative of the entities said that he understood the cost of extending the contract and could “help out” if it became an issue. The bank and the entities eventually entered an agreement where the entities could offer to purchase the property despite the provision in the original contract that precluded such offers.

Later, the entities terminated the contract and the bank sued the entities for tortious interference, breach of contract, and other claims.

One of the issues on appeal was whether the trial court erred in granting summary judgment on the bank’s claim for tortious interference. The bank argued that the entities intentionally interfered with the bank’s performance of the original contract by making performance more burdensome and expensive, eventually causing the bank to discontinue its option under the original contract.

The court noted that actionable tortious conduct does not require the conduct to result in a breach. If the tortious conduct makes performance more burdensome or difficult, that is sufficient to prevail on a claim for tortious interference. However, merely inducing a party to a contract to do something which it already has the right to do under the contract does not amount to tortious interference.

The court explained that the bank already had a right to extend the inspection period by paying the extension fee. Therefore, the fact that a representative of the entities said they could “help out” with the extension fees only encouraged the bank to do that which it already had the right to do. The offer to pay part or all of the extension fees did not make the bank’s performance more difficult or burdensome. Therefore, the court held that summary judgment was properly granted in the bank’s tortious interference claim.

As this opinion demonstrates, conduct that may seem to constitute tortious interference may not be actionable if the conduct is permitted in the contract. 

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Texas Noncompete Agreements: Not Always Enforceable, Even After Marsh USA

Posted on November 9, 2012 by Robert Wood

Even after the Marsh USA case, some noncompete agreements are still unenforceable in Texas.  In a recent opinion by the Texarkana Court of Appeals, the noncompete agreement stated as follows: 

I agree not to seek employment on a temporary, contract or permanent basis at any company where introduced by Hiring Partners, Inc. for a period of ninety (90) days. I will not seek to induce any client to call other temporary or contract agencies for their temporary, permanent or project assignments. This means that I will not knowingly inform other services of Hiring Partners, Inc. clients and/or rates charged at these client companies. Nor will I discuss my hourly rate with other individuals working for Hiring Partners, Inc. nor other temporary or employment agencies. 
 
Hiring Partners, Inc. realizes that clients may seek help from other temporary or employment agencies and, that I may also be called upon by another agency to fill other positions; however, I may not accept an assignment through another agency for a period of ninety (90) days at a firm/company that applicant has been introduced to by Hiring Partners, Inc.
 
Hiring Partners, Inc. reserves the right to replace a candidate working on assignment at its own discretion, without this signed agreement being altered in any way and considers such to remain in effect for a period of ninety (90) days from the date last worked by applicant. 
 
The court noted that there was no mention of confidential or trade secret information or specialized training in the agreement.  In addition, at trial, the operations manager for the Plaintiff testified that no confidential information was provided to the employees as part of their employment.  
 
The agreement specified that employment was on an at-will basis.  The court held that employment at will, by itself, is insufficient consideration for a noncompete agreement.   
 
As this opinion demonstrates, even after the Marsh USA case, employers must ensure that their noncompete agreements so that they are supported by proper consideration.  A mere promise of "at will" employment is not enough. 
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Texas Courts Enforce Sale of Business Noncompetes

Posted on August 24, 2012 by Robert Wood

Noncompete agreements in the context of a sale of a business have long held to be more enforceable than restrictive covenants in an employer/employee context. This was recently reaffirmed in a case handed down by the Fort Worth Court of Appeals. There, the owners of Company A sold their shares to Company B. As part of the sale, Company A's owners signed noncompetition agreements. One of the owners, Kendall, was paid $500,000 for his interest in Company A and for his agreement not to compete.

In a subsequent legal dispute involving the noncompetition agreement, the trial court found that the noncompete was unreasonable in time. The trial court reformed the agreement by giving the restriction a five-year duration.

The court of appeals considered the fact that some of the intangible interests purchased (including customer and pricing lists) lost value after five years. However, there was no evidence that all of the intangible interests eroded in the first five years. This was important because these intangible assets were argued to constitute part of the consideration given for the noncompete agreements. The party attempting to enforce the noncompete agreements was able to argue that not all of the consideration given was “stale.”

The court of appeals then noted the greater degree of enforceability afforded noncompete agreements in the context of the sale of business: “A noncompete signed by an owner selling a business is quite different than one signed by an employee. . . . Courts have been more inclined to enforce a long or limitless time barring competition after a sale of a business. . . . “

The court of appeals held that a ten-year restriction was reasonable in this case.

In the context of a sale of a business, restrictive covenants are far more enforceable in Texas than they are in the employer/employee context (which is saying a lot, given the relative greater enforceability of covenants in the employer/employee context as of late). Persons who are bound by covenants not to compete in Texas stemming from a sale of the business cannot be confident that they are unenforceable.

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