Texas Contract & Noncompete Disputes Blog

Texas Contract & Noncompete Disputes Blog

Texas Non-Compete, Trade Secrets and Contract Law

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.

Fraudulent Inducement and Settlement Agreements Under TX Law

Posted in Uncategorized

Settlement Agreements: Fraudulent Inducement and the Duty to Read Your Contract

Settlement agreements are contracts.  They impose binding obligations on both parties.  Consider the following example.  Employer sues ex-employee for breach of non-compete.  Employee files a counterclaim for unpaid sales commissions.  Eventually, the two parties sign a settlement agreement.  As part of the settlement agreement, the parties agree to release all pending litigation.  The ex-employee and the employer also agrees not to bring suit in the future regarding the dispute at hand.  Although these agreements are typically binding, there are some exceptions.

Specifically, a party cannot be induced by fraud to sign a settlement agreement.  However, a party claiming fraud nonetheless has a duty to exercise ordinary care and reasonable diligence when contracting.  In other words, the defense of “I didn’t know that was in the contract” generally will not work.  Commonly, courts in Texas say, “you should have read it before you signed it.”

The Texas Supreme Court recently dealt with a case of this nature.  In this case, the parties settled their dispute in mediation.  In exchange for the plaintiff’s release of litigation against the defendant, the defendant orally agreed to give to the plaintiff: (1) a partnership share in his company, (2) $1 million in cash, and (3) an interest in future profits from the sale of property in dispute.  Later, a written agreement was signed by both parties.  When the plaintiff never received his other cash, profits, and partnership interest, he read the settlement agreement, for the first time.  To his dismay, the written settlement agreement only required the defendant to tender $500,000 to the plaintiff in exchange for his release of its claims.  The plaintiff brought suit for breach of contract, specifically, fraud in the inducement of a settlement agreement.

At trial the plaintiff admitted he did not read the settlement agreement, and relied solely on the defendant’s oral promise.  However, the court held that the plaintiff could not have relied on the statements by the defendant because the plaintiff did not read the settlement agreement.  The court ruled that it would not save the plaintiff from his contract because he had a “reasonable opportunity to review the written agreement but failed to exercise ordinary care to do so.”

Texas Noncompete Agreements Must Be Reasonable in Scope

Posted in Noncompete Agreements

Hiring employees, training them, and granting them access to industry secrets or client lists exposes employers to the possibility that employees will utilize this valued information against them.  In order to protect themselves, employers will often include a covenant not to compete provision in an employment contract, commonly known as a “non-compete.”  However, it is important for both employers and employees to understand the legal limits of a non-compete.  Drafting a non-compete that is too broad can lead to counterproductive results, while drafting one that is too narrow might be ineffective in protecting your economic interests and business goodwill.

In Texas, a covenant not to compete must state a duration of time, geographical area to be limited, and scope of activity to be restrained that is reasonable to protect goodwill and other business interests of the employer.  It is important to also remember that the non-compete provision must be ancillary or part of an otherwise enforceable agreement or contact.  The “reasonableness” of a non-competition agreement is a question of law that a court must decide.  As a general matter, except for a few unique circumstances, a non-competition agreement that is indefinite or without geographical limitations will be ruled unreasonable and unenforceable.

For example, the Dallas Court of Appeals recently held that independent contractors are subject to covenants not to compete. However, the same “reasonableness” standard applies.  In that case, the plaintiff was an independent contractor selling insurance policies pursuant to an agent agreement with the defendant.  Part of the agent agreement contained a covenant not to compete that prevented the plaintiff, upon termination or resignation, from “attempting to replace business with any policyholder by soliciting or offering competing policies…to which Agent sold any policy of insurance pursuant to this agreement.”  The Dallas Court of Appeals held that this term was unenforceable because there was no duration on time, as policyholders of the defendant could renew their policies indefinitely, thus leading to the plaintiff not being able to solicit or offer policies to them forever.  The result of the holding was that the plaintiff could compete with defendant immediately.

The above case is an example of an employer thinking it had sufficiently protected its economic interests, only to find out that its non-competition agreement was ineffective.  It is important for employers to understand Texas non-compete law so that they can effectively protect their economic interests and business goodwill.  For employees, knowing the limits of covenants not to compete in Texas will prevent them from being unlawfully restricted in offering their unique skills and services.

Oral Promises Enforceable in Texas

Posted in Noncompete Agreements

“An oral contract is as good as the paper it is written on”—this is simply not true.  In fact, a Texas jury awarded $11 billion dollars in damages to Pennzoil when Texaco interfered with an oral contract for the sale of Getty Oil to Pennzoil, one of the largest jury verdicts in U.S. history.  While it is true that some contracts must be in writing, such as the sale of real estate, Texas courts will enforce many oral promises.  To understand the concept of an oral contract, we first need to know the elements of a valid contract.

According to Texas law, a contract is a promise(s) with legal consequences that are formed when an offer is made, the offer is accepted and valuable consideration (money, services, etc.) is exchanged for the promise(s).  In determining the existence of an oral contract, Texas courts look to the communications between the parties and to the acts and circumstances surrounding those communications.  Furthermore, a breach of an oral contract occurs when (1) there is a valid contract, (2) a plaintiff performs its obligation, (3) the defendant breaches his obligation and (4) the plaintiff sustains damages from the breach.

Oral promises can have disastrous consequences.  An example is seen in a case decided by the Houston Court of Appeals in 2012.  In that case, the trial court awarded an employee $42,500.00 in damages for breach of an oral contract promising her an end-of-year bonus.  The court of appeals affirmed the trial court’s ruling.  That court stated that there was sufficient evidence of an oral contract when the vice-president of operations for a family-run business told an employee that she would receive a bonus for work performed during the previous calendar year.  The employer argued that it told the employee she “might” receive a bonus.  However, the court found that a reasonable jury could find that an oral contract was formed from the evidence presented at trial.  The result: The employer was on the hook for $42,500.00 due to the employee.

From oil giants to small business owners, Texas courts have no problem enforcing oral promises if they meet the requirements of a valid contract.  The above case is a cautionary tale to employers, as well as employees in certain circumstances, to choose their words wisely when making oral promises.  The enforcement of an oral promise ultimately turns on the communications between the parties and to the acts and circumstances surrounding those communications.