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

Non-Compete

Wine and Non-Competes
March 22, 2011

                                          

 

A recent non-compete/injunction opinion was delivered by Judge Marcia Cooke who presides in the Southern District of Florida.  The opinion deals with the departure of a California wine executive to another competitor. It addresses many of the issues addressed in this blog under Florida law including choice of law issues, whether customer information is proprietary and protectable, and the elements necessary for an injunction.

The Court ultimately denied the injunction.  One factor the court commented upon was the fluidity of employees from one employer to another in the wine business:

Southern Wine points out that it has lost several employees following Simpkins departure. Deposition testimony shows that fourteen employees have since left after Simpkins. Still, other deposition testimony indicates that in the wholesale alcohol distribution industry that defection of employees from one competitor to another is quite common and that Southern Wine itself – the top competitor in California – has hired employees from Young’s Market as well. These facts are indicative of the fluidity of transfer within this industry and that major competitors remain
successful because they foresee the possibility of defection and thus plan for it.

So the Plaintiff had actually hired employees away from it’s former employee’s new employer Though it doesn’t appear the injunction turned on this issue it certainly highlights the fact that the conduct of employers in the marketplace will be scrutinized when they are trying to enforce a non-compete. 

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Injunction

Non-Competition Without a Non-Compete
March 11, 2011

In Texas there are other options to prevent departing employers from competing with your business:

A Non-Solicitation: Instead of tying down your employee with a non-compete consider a non-solicitation. The non-solicit will still have to meet non-compete standards, but it can be used for specific customers as opposed to geographic areas. The rub, there will always be a debate about the right of a customer to do business with a departing employee and whether the former employee actually solicited the business or was contacted.

 

A Non-Disclosure: An employer can always attempt to lock down an employee by preventing them from using proprietary information they were exposed to through a non-disclosure. Basically the argument is the former employee cannot work for the company’s customer because they are using the company’s propriety information. This is very close to the inevitable disclosure doctrine, which is not recognized in Texas, but a non-disclosure should certainly be considered.

 

Compensation: Can the employer somehow tie future compensation into not competing? Basically, the company will agree to make payments to the departing employee for a period of time after they depart, but payment is dependent on non-competition. The rub, the company probably cannot enforce this agreement in Court, but if the employee decides to compete they don’t get any money.

 

The Anti-Raid Provision: The anti-raid provision prevents a departing employee from hiring your employees. The rationale is to keep the departing employee from setting up shop down the street.

 

There are other options as well, but these should be considered as part of any employment agreement. The more hurdles that can be put in the way of a departing employee, the better.

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Non-Solicitation Agreements

The World of Non-Competes 1st Edition
March 2, 2011

                                       

We’ve written about non-competes involving firework choreographers, dog groomers, dance instructors, recruiters, executives, and salespeople.  The point is they run the gamut.  Periodically we will cover some of the more interesting cases out there.  Here’s what’s happening:

 The Florida Tatoo Artist

In a case  from last year, a Florida court enforced a non-compete agreement against a tattoo artists who was alleged to have a violated a non-compete agreement that included a 15 mile radius. The artist was alleged to have taken the customer list of his former employee and set up shop down the road.  Would there have been a different outcome if the artist hadn’t taken the list?  It’s a lot easier for judges to rule in favor of the ex-employee when they don’t take things with them.

 Microsoft Strikes Again

A Washington state court judge issued a temporary injunction barring a former Microsoft employee from working for a competitor in the cloud computing business. The employee argued the scope of his work for Microsoft was international as opposed to his domestic oriented new job. The judge did not agree and the employee is barred from working for his new employer at lease through trial.  Microsoft is aggressive when it comes to enforcing their non-competes and appears to have a lot of success.  It also helps to enforce them in your backyard, King County, Washington.

 

IBM Non-Compete No Good

In this case a New York judge refused to enforce a non-compete agreement against a former IBM employee who was going to work for Hewlett Packard. The court held that IBM didn’t provide any trade secrets to the employee, other employees were not subject to similar type agreements, and there was testimony that the non-compete was merely a retention tool to keep employees from leaving. 

If you’ve run across any cases of note please let us know.

 

 

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Non-Compete Agreements

Texas Non-Compete Myth #2
February 25, 2011

                         

 

#2: Non-Compete Agreements Are Unenforceable in Texas.

Texas courts have been enforcing non-compete agreements for many years and they are specifically authorized by Texas law – Texas Business and Commerce Code Section 15.50.  The highlights from that statute:

a covenant not to compete is enforceable if it is ancillary to or part of an
otherwise enforceable agreement at the time the agreement is made
to the extent that it contains limitations as to time, geographical
area, and scope of activity to be restrained that are reasonable and
do not impose a greater restraint than is necessary to protect the
goodwill or other business interest of the promisee
 

The Texas Supreme Court has made non-compete agreements easier to enforce over the years and that trend is likely to continue.  If proper, employers should be using non-competes as a legitimate business tool to protect themselves from unfair competition.  

 

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Non-Compete Agreements

Texas Non-Compete Myth #1
February 16, 2011

                         

 

#1: Employers can’t enforce non-competes when they terminated the employee.

Wrong – Assuming the non-compete satisfies Texas law, it can survive termination or resignation.  Most agreements will spell this out in the agreement, some do not.  (Now of course this also assumes the firing was legal, i.e., not based on race, national origin, gender, etc.) 

This makes sense in most cases.  What if there is an employee who purposely gets fired so they can go out and compete – it happens.  Should the employer be penalized because they fired the employee – no.  Now, what about  a situation where the employer merely fires the employee to gain some tactical advantage in the marketplace and then enforces the non-compete?  A judge asked to enforce a non-compete on facts like that may have a different view on enforcing the non-compete in the context of a temporary restraining order and injunction.

The balance of non-compete cases are resolved early on, either through a TRO or injunction.  TROs and injunctions force the parties to: (1) spend significant fees early on in the process; (2) get in front of the judge; and (3) negotiate.  Parties looking to defend or enforce a non-compete should be considering what the optics will look like to the Court in the context of injunctive relief – usually a situation where the employer is attempting to keep the employee from working for a new employer. 

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Injunction  / Non-Compete Agreements

Enforce that Non-Compete!
February 8, 2011

                                       

Texas businesses routinely use non-compete agreements to protect proprietary information in a variety of industries and occupations.  Assuming an employee has executed an enforceable non-compete agreement, what else should Texas employers be doing to enforce these agreements?

To begin with assume a situation where the employee is or has departed.  As part of any exit interview they should be reminded of, provided with, or even asked to acknowledge that they previously signed a non-compete agreement.  This sets the tone from day one of the departure – the company is poised and will likely enforce the agreement.

In the event the employee quits and there is no exit interview, immediately provide them with a reminder letter and provide the agreement.  Use mail, email, delivery or whatever means is appropriate.  The point is to re-notice them.

Make sure the employee has returned all proprietary information (that should be in an employment agreement) and can no longer access company files or email.

Now the hard part – uniformly enforce the non-compete.  If the employee is violating a non-compete, enforce the non-compete. Why?  First of all an ex-employee that is considering competing might reconsider if they know they are going to be sued.  Second, it is very effective for a lawyer to be able to represent to a Judge that the company uniformly enforces the non-compete agreement and takes it seriously.

Yest it can be expensive.  But, if the company has something worth protecting enforcement is an easy decision.

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Non-Compete Agreements

Why you should negotiate your non-compete
January 31, 2011

Illinois lawyer Ken Vanko does a great job on his blog, "Legal Developments in Non-Competition Agreements".  His latest entry addresses the reasons a job candidate should negotiate or at least attempt to negotiate their proposed non-compete.  A few of the reasons:

  1. The candidate will have a better understanding of the non-compete once they have scrutinized the agreement;
  2. They may get a better idea of the employer’s previous issues with departing employees and enforcement of the non-compete; and
  3. The employer might actually make some concessions.

These are all great thoughts.  I can’t tell you how often an employee will testify they never saw the non-compete or just assumed it was unenforceable. 

From an employer’s side, discussion regarding the non-compete will show the employee was fully apprised of the agreement and it wasn’t one of 10 forms they signed when employment began.  From an employee’s side, there may come a time when they are considering changing jobs and need to evaluate how or if the employer’s non-competes have been enforced in the past.

The large company may be unwilling to negotiate.  A smaller company might.  Either way you don’t know until you ask. 

 

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Non-Compete Agreements

Non-Competes That Don’t Work
January 21, 2011

                    

In Texas a non-compete agreement has to be reasonable in time and scope and ancillary to an otherwise enforceable agreement.  The latter is difficult to decipher but basically there must be an agreement where the non-compete enforcer has agreed to give something to the enforcee and the non-compete protects what was provided.  In most cases this would include trade secrets or some type of other proprietary information.

What have Texas courts concluded does not give rise to a non-compete?  A few examples:

  • financial benefits;
  • a promise to compensate an employee in the event of economic hardship;
  • a deferred compensation agreement;
  • stock option; and
  • the payment of money.

We are waiting on an opinion from the Texas Supreme Court dealing with whether stock options can serve the basis for a non-compete.  Likely not considering the dearth of law stating that compensation cannot, but we shall see.

 

 

 

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Non-Compete Agreements

Employers – Ask potential candidates if they signed a non-compete!
January 3, 2011

                                           
 
Employers  should be asking potential employees and even independent contractors whether they previously signed a non-compete/non-solicit agreement.  Of course, some employees may have forgotten or are unaware they signed one – if possible ask to see their previous employment agreements to screen for any restrictive covenants.
 
What should a potential employer be looking for: 
 
  • a non-compete agreement;
  • a non-solicitation agreement;
  • a non-disclosure agreement; and
  • an anti-raid provision.
 
The first is self explanatory.  A non-solicit could have the effect of a non-compete by keeping a new hire from contacting previous customers/clients.   A non-disclosure could have a non-compete effect depending on the circumstances (i.e. a non-disclosure that prevents an employee from disclosing previous client/customer information).  The anti-raid prevents an employee from attempting to hire folks from their previous place of employment.
 
Why should the employer be worried?  When a company sues over a non-compete they almost always sue the former employee and their new employer.  By doing so a plaintiff can shut down the employee and also the employer who may or may not be benefiting from the former employee’s non-compete breach.
 
Employers should be pro-active in the hiring process in determining whether a non-compete is in place.  If one is in play, the employer needs to assess its risk, hopefully with the help of a lawyer.

 

(more…)

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Non-Compete Agreements

A Final Word on Texas Non-Competes for 2010
December 30, 2010

        

Last night I was at dinner with some friends and the subject came up of the enforceability of non-competes in Texas. The first statement/question I always here is that they are not enforceable. I’m not sure where that “common knowledge” comes from. Maybe it’s just some core American/Texas value that someone cannot restrict your right to make a living, which a non-compete/non-solicit agreement can do for some period of time. It also is troubling that such an agreement can effectively put an employee out of their profession to some extent – even doctors (but not lawyers).

The Texas Supreme Court was silent on non-competes this year, though it is considering a new non-compete case from the Dallas Court of Appeals, Marsh USA Inc., v. Cook, previously discussed here. That said the court beginning with the Sheshunoff case in 2006 and followed by Mann has made non-competes easier to enforce by eliminating some technicalities that prevented enforcement.

The basic requirements for non-competes remain the same. They must be reasonable in scope and ancillary to an otherwise enforceable agreement. Employers will continue to use them in appropriate and inappropriate situations. Employees will attempt to find ways to circumvent them or even have courts declare the provision unenforceable.   Each party should obtain legal counsel before they draft or sign a non-compete. An ounce of prevention is well worth the expense.

Happy New Year.

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Non-Compete Agreements



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