Smooth Transitions Law Blog
Addressing the legal issues arising from the departure of employees & business breakups

Non-Compete Agreements

Breaking Down Legal Jargon on Texas Non-Competes
February 8, 2010

                    

In Texas a non-compete has to be ancillary to an otherwise enforceable agreement. What does this mean?  The consideration (or value) in the separate agreement must give rise to the employer’s interest in keeping the employee from working and the non-compete must be designed to prevent the employee from breaching the promise she gave as consideration (value) in the other agreement. Examples are the best way to understand what this means.

Say I go to work as a programmer for a  company that makes a state of the art mp3 player with a highly advanced new technology.   In order to carry out my job I will be provided access to the source code for the technology and my job will include manipulating and altering the  code.  The company states in my employment agreement that it will provide me with the source code and that because I am being provided with the source code I cannot work in the mp3 player industry for 1 year after I quit or am fired from the company.  (Yes there is a nondisclosure agreement and common law duty not to disclose an employer’s trade secrets but ignore that.) So, there is an otherwise enforceable agreement (the agreement to provide me with the source code) and providing me with the code gives rise to the non-compete.

The alternative is an agreement that has nothing to do with a non-compete.  Say a company agrees to pay me $100 in the event I quit or am fired.  There is also a one year non-compete.  Yes, there is an ancillary agreement – the promise to pay $100- but it has nothing to do with keeping me out of the industry for a year.  This doesn’t work.

The trick is to tie what the company is trying to protect to the non-compete.  Court’s are far more likely to enforce a non-compete when the employer has provided something of value that is worth protecting.

 

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Non-Compete Agreements

Lessons from Conan’s Non-Compete Negotiations
January 20, 2010

                                                        

The Conan O’Brien/Jay Leno imbroglio of the last couple weeks appears to be winding to an end.  According to reports from TMZ, Conan will receive a $32.5 million dollar payout but sit on the bench and not start a new show until September.  The rumor is he will start a new show with Fox.

There has been speculation that Conan had a non-compete agreement with NBC.  Jay Shepherd points out in his blog that it is unlikely the non-compete was governed by California law because it would be unenforceable:

And California, as many of you know, prohibits noncompetes. Section 16600 of the California Business and Professions Code makes employment-related noncompetes — like the one Conan reportedly has — void.

Unfortunately, his contract with NBC is not available on line, but let’s assume Conan had an enforceable non-compete under Texas law.  (There are a whole bunch of reasons why it’s not, but give me some latitude.)  What can Conan teach us?  Bottom line, negotiations never end.  Conan’s failure at NBC actually created leverage for him in negotiations.  NBC wants Leno back in hopes that he will drive up ratings but is tied to Conan who waited for years for Leno’s departure.  Conan isn’t going to go back to the later time spot, who knows what his contract says about that.  So NBC elects to pay him off.  Much of the money is salary he would have earned in the interim anyway, and he agrees to stay on the sidelines for a few month.  Win win, or so it seems.

The typical employee is not Conan and the typical employer is not NBC.  But, when an employer is facing a departing employee with a non-compete that may be unenforceable it’s time to think outside the box to see if some other type of resolution can be reached.  Maybe an agreement to stay away from certain customers or stay out of the industry for a shorter time – be creative.  The same goes for the employee.  This won’t always be appropriate but it beats significant legal fees, expedited discovery, and  temporary injunction hearings. 

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Non-Compete Agreements

Weight Loss Center Non-Compete
January 12, 2010

                                                

Non-compete agreements cover a range of businesses/industries from financial services, to food and beverage, dance studios, and even pet care.  It should come as no surprise that a lawsuit was filed by Surgical, Cosmetic, and Weight Loss Centers of America against a former employee that started work with the University of Texas Medical Branch – Center of Weight Loss Management.  The lawsuit was filed in Jefferson County, Texas.

The Defendant signed a three year noncompete that restricted her from working for a competing business that was within a 25 mile radius of her former employer.  Three years is a long time for a non-compete but Texas courts evaluate non-compete terms on a case by case basis – there is no bright line rule on the term of a non-compete.   The employer alleges in the lawsuit:

Defendant, while working for plaintiff, was provided material, substantive benefits which made defendant as a medical professional more marketable in the field of her expertise. . .

As previously discussed, a Texas non-compete agreement must be ancillary to an otherwise enforceable agreement.  Employers usually claim that some type of trade secret was provided to the employee.  It will be interesting to see what benefits were provided to the Defendant in this case that give rise to the non-compete.  Typically, employers fail in enforcing non-competes when they cannot establish that they provided the employer with the consideration promised, such as specialized training, access to trade secrets, etc.  Assuming the scope and duration of the non-compete are acceptable, an attack on consideration is one of the last lines of attack in Texas after recent rulings from the Texas Supreme Court.

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Non-Compete Agreements

Keep your employment agreements handy.
December 29, 2009

                    

Whenever I talk with an employee or employer about a noncompete or nonsolicitation agreement the number 1 question is "Can you provide me with the agreement you (or the employee) signed?"  Usually, the employer has a nice neat employment file that contains all agreements.  Employees on the other hand are usually a different story. 

In the last week I’ve talked to two highly paid employees who were contemplating making a move to a new company.  One thought they had a noncompete, the other couldn’t remember.  Neither had the actual agreement but was going to request one from their employer. 

An employee requesting their employment agreements at the end of the year sends out a red flag – "I am looking for a new job."  There is a lot of employment transition at the end of the year as the employee has presumably received their bonus and there is less financial incentive to stay.  Yes, your employer will provide you with your agreements, but if they’re smart you will be under the microscope.

Point is, keep anything you sign with your employer.  Ask for a copy at the time you execute any agreement, including any amendments or supplements you sign through the years.  It just makes good sense for a variety of reasons.  Remember, the agreement your coworker signed isn’t necessarily the same agreement you signed. 

(H/T Virgina Non-Compete Law Blog)

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A dog eats dog world: Petsmart sues over noncompete.
November 24, 2009

                                      The original party animal.

Petsmart recently sued a St. Louis petshop over a former employee’s alleged violation of a noncompete.  The agreement prevents Chris Lee, a co-owner of A Walk in the Park, from working at a petshop within a five-mile radius of any Petsmart location in St. Louis.  There are 12 Petsmart locations in St. Louis.  Lee, a dog groomer, claims the noncompete prevents him from working.

A Walk in the Park has tried to foster some grassroots opposition to the lawsuit. The following briefly appeared on the company’s website:

WE NEED YOUR HELP!

A Walk in the Park is currently under attack. We hosted our Grand Opening Party on Sunday, November 8th from 2-6pm and posted that information on our website (awalkintheparkgrooming.com). At 2pm on that Sunday, in front of our guests, we were served by Petsmart’s attorneys. Petsmart, Inc. is suing us under a “non-compete” clause and threatens to shut our doors.

The entire posting goes into much greater detail.  We’ll continue to monitor the suit.

Happy Thanksgiving to you and your family.

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Non-Compete Agreements

Courtroom Observations: Non-Compete TROs.
November 5, 2009

                                               

Over the last few weeks I’ve been involved in defending and applying for temporary restraining orders in non-compete/trade secret cases in Houston and Dallas County District Courts.  A few observations on those proceedings:

  • It is much easier to get injunctive relief in Texas since after the Texas Supreme Court’s rulings in  Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006) and Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding.  Courts are well aware that the Texas Supreme Court has eliminated many of the technical arguments that were previously used to defeat non-competes on their face.   That being said, you still have to satisfy the statute.
  • Companies have become much smarter about drafting non-competes and non-disclosure agreements.  The majority of agreements I see satisfy Texas law.  They generally have a one year duration, have a reasonable geographic limitation, and in most instances are ancillary to a promise to provide some type of trade secret.
  • Courts want  to see "blood".  Not literally, but Courts need to see inequitable conduct from the alleged non-compete violator.  Did they take trade secrets out the door with them? Are they calling on former customers within days of leaving?  Are they trying to take employees with them?  A mere suspicion is not enough to support a temporary injunction and the Texas Supreme Court has not recognized inevitable disclosure. 

Depending upon your perspective, the good news is non-competes are easier to enforce from a legal standpoint.  That notwithstanding, a party seeking a temporary injunction to enforce a non-compete needs to have its facts lined up to justify this type of relief.

 

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Second Circuit Denies IBM Non-Compete Appeal
October 27, 2009

                                          

In July we discussed IBM’s non-compete case against former director David Johnson.  The trial court denied IBM’s injunction and IBM appealed to the Second Circuit.  The Second Circuit denied IBM’s appeal. 

The summary order addressed IBM’s failure to show a likelihood of success on the merits:

We do not reach the question because IBM failed to make sufficient showings that it had a likelihood of success on the merits or that a balance of the hardships tipped decidedly in its favor.  The district court’s conclusions on these issues were well-supported by the court’s findings that Johnson was extremely credible, and that IBM’s designated witness was much less credible chiefly because IBM’s designated witness lacked familiarity with documents bearing on the controversy.

So, Johnson will continue to work with Dell which recently announced plans to purchase Perot Systems Corp. for $3.9 billion.  Johnson was the former director of mergers and acquisitions at IBM and started at Dell 4 months before the Perot acquisition was announced. 

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Is your covenant for personal services?
October 19, 2009

                    

The Texas non-compete statute reverses the burden of proof in certain limited situations:

If the primary purpose of the agreement to which the
covenant is ancillary is to obligate the promisor to render
personal services, for a term or at will, the promisee has the
burden of establishing that the covenant meets the criteria
specified by Section 15.50 of this code. If the agreement has a
different primary purpose, the promisor has the burden of
establishing that the covenant does not meet those criteria. For
the purposes of this subsection, the "burden of establishing" a
fact means the burden of persuading the triers of fact that the
existence of the fact is more probable than its nonexistence.
 

An example is a franchise agreement that prevents a franchisee from competing with a franchiser during the term of agreement or a non-compete that is included within a buy/sell agreement of a business.  In those circumstances the party subject to the non-compete will have to establish that the non-compete at issue is not enforceable.  (For purposes of an injunctive relief, the party seeking to enforce the non-compete will still have to meet its injunction burden.)  In the typical non-compete case this will not be an issue, but always be on the lookout for an opportunity to reverse the burden.

 

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Non-Compete Agreements

Coffee Wars
October 17, 2009

                                        

On October 3rd, Starbucks determined through an Internet search that former senior vice-president Paul Twohig had accepted a position with rival Dunkin Donuts.  In response Starbucks filed a lawsuit in Seattle seeking to enforce the18 month non-compete agreement Twohig signed.  He left Starbucks in March.

Twohig was responsible for developing the Starbucks brand and according to the complaint was involved in formulating business plans to counter competitors like Dunkin Donuts.   His non-compete prevents him from participating in management operation or control of any business that competes with Starbucks. Apparently, Twohig contacted Starbucks in August and asked to be released from the non-compete. Starbucks refused the request.  Starbucks has asserted claims for breach of contract, unjust enrichment, and a request for injunctive relief.

Surely Dunkin and Twohig discussed his non-compete prior to his hiring?  Dunkin would have to assume that Starbucks would sue to enforce the non-compete.  The law and facts seems to be on Starbucks’ side but there are two sides to every story.  We’ll keep you posted.

 

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Non-Compete Agreements

The Man Signed a Contract
September 17, 2009

An update on Robert McCann’s lawsuit challenging a non-compete agreement he entered into with Merrill Lynch.  McCann wants to work for UBS, but BofA won’t let him.  BofA lawyer Steven M. Kayman’s take on the lawsuit:

This man signed a contract.  He got paid a substantial amount of money for it. Now he wants the court’s permission to break it.

The Judge has reserved ruling and encouraged the parties to settle.  Turns out McCann left Merrill when he did not receive a bonus in 2007.  This was after a $6.85 M bonus in 2005 and $8.85 million in 2006.  Not so sure a jury would be very sympathetic.

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Non-Compete Agreements



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