Texas Employment Law Update : Texas Employment Lawyer & Attorney : Russell D. Cawyer : Kelly Hart & Hallman Law Firm : Dallas TX Labor Updates

In Part 1, I covered some thoughts on enforcing noncompetition agreements in Texas following the Texas Supreme Court's new decision in Marsh USA.  Today I'm addressing some tips that employees (and their representatives) who are asked to sign or are attempting to bust a noncompetition agreement might consider.

Prior to signing the agreement, negotiate everything you can.  For example:

• Carve out customers or clients the employee serviced before becoming employed by the employer requesting the noncompete.
• Seek very specific scope of activity restraint rather than a very generalized restraint (e.g., employee shall not engaged in any business that competes with any of the products or services of the company).
• Negotiate a garden leave provision (i.e., the employee will receive some amount of money during the term of the noncompete period)
• Ask for a buy-out clause where the employee (or his new employer) can buy out of the noncompetition agreement.
• Ask that the noncompete be automatically waived if the employers ends the relationship through no fault of the employee (e.g., the employee is laid off).

When joining a new employer, the employee should seek an agreement the new employer will indemnify, defend and/or advance defense costs if the employee is sued over an alleged violation of the noncompete.  The employee should also try and ensure that his employment will not be terminated by the new employer in the event he is enjoined over a restrictive covenant with a former employer (Don't laugh, I've seen an new employer provide this protection in an offer letter when it expected the former employer would sue the new hire).

When litigating over the terms of a noncompetition agreement:

• Emphasize to the Court how limited the holding in Marsh USA is.  Marsh USA just ruled out a per se rule that noncompetes tied to stocks are unenforceable.
• Emphasize the lack of imminent, irreparable harm.
• Determine the primary purpose of the agreement and emphasize to the Court that the real purpose is to stifle competition rather than protecting goodwill or confidential information.
• Identify lesser restrictions that will protect the employer's interest.
• Distinguish your client from the long-term, highly valued Managing Director in Marsh USA.

Follow me on Twitter @RussellCawyer.

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Yesterday, Ryan Miller and I were invited to speak at the Tarrant County Bar Association's Labor and Employment Section luncheon.  Our topic was the recent changes to Texas noncompete jurisprudence.  A copy of the Power Point presentation we jointly presented can be accessed here.

For my contribution, I presented some thoughts on the practical effect the Marsh USA decision will have for employers and employees that dealing with noncompetes.  Here is a summary of thoughts:

REPRESENTING THE EMPLOYER USING NONCOMPETES

• Employers should continue to tie noncompetes to promises to provide confidential information and trade secrets to the employees and the employees' return promises not to disclose that information to third parties.  Trial courts are familiar with this concept and will expect it Marsh USA notwithstanding;
• Consider linking the noncompete to some financial benefit provided to the employee that is reasonably related (Marsh USA eliminates the "gives rise to" requirement of Light) to encouraging the employee to generate goodwill for the company.  Who knows how far courts will take Marsh USA, but bonuses, salary, for cause termination provisions, favorable parking spaces, fancy job titles, business expense accounts to entertain clients are a few examples of financial benefits that might be reasonably related to encourage employees to create goodwill that come to mind.
• Resist the urge to make the restrictions broader than necessary.  Courts have a statutory obligation to reform overly broad covenants, but any damages that accrue prior to reformation aren't recoverable.  Remember, reformation kills damages.
• Marsh USA isn't a magic bullet.  Marsh USA doesn't change the standard to obtain a temporary injunction (and there is where the battle often lies).  Employers still have to show probable right of success on the merits (arguably easier post-Marsh USA) and imminent irreparable harm.

In the next post, I'll cover my thoughts on what employees who may be subject to a noncompete might consider.

Follow me on Twitter @RussellCawyer.

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Yesterday Rob Radcliff over at the Smooth Transitions Law Blog wrote a post about a lawsuit filed by an attorney against the recruiter that placed him at his new law firm.  In essence, the attorney alleged that the recruiter made representations that she was independent (and not tied to any particular law firm) and fraudulently convinced the attorney to join a Washington D.C.-based firm with whom the recruiter had a retainer relationship.  Radcliff warned recruiters about being explicit in representations made to potential candidates and disclosing who has retained the recruiter to avoid claims of misrepresentation and breach of fiduciary duty.

There is another area where recruiters need to be careful when conducting their search activities.  Recruiters need to be careful about where they place a candidate when they know the candidate has a noncompetition agreement that restricts the candidate's post-employment activities.  Recruiters can be sued for tortious interference with contract and/or conspiracy when the recruiter knowingly assists a candidate in violating his or her noncompetition agreement by putting the candidate in touch with a client company or for a position that would violate the terms of the candidate's post-employment obligations. 

On a few occasions, I'm aware of recruiters (and their search firms) who have been sued along with the former employee and the new employer over violations of a noncompetition agreement.  In those cases, the recruiters expressed shock and surprise that he/she could be held liable for assisting the candidate in violating the noncompetition agreement.  In one particular case, when the recruiter was asked whether she was concerned about putting a candidate with a noncompete in touch with a direct competitor (that was prohibited by the noncompete), she proclaimed, under oath, "That is just not something that I worry about!"   

As recruiters increasingly become entangled in disputes among competitors over enforcement of noncompetition agreements, the existence of a candidate's noncompetition agreement is probably something that recruiters should be concerned about.

Follow me on Twitter @RussellCawyer.

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I've had a chance to reread and digest the Marsh USA opinions over the weekend.  For those looking for easy ways to set aside or void noncompetition agreements in Texas, Marsh USA is strike three.  (Strike 1, Strike 2).  The Texas Supreme Court has, in the past five years, taken Texas from one of the more difficult states to enforce a noncompete to one of the easiest (so long as its reasonably limited).

Important Takeaways from the Opinions:

• Confirms that goodwill is a protectable interest worthy of protection through noncompetition agreement.
• Identifies contact with employer's "key customers" as a component of goodwill worthy of protection.
• Personal relationships and contact between customers and employees is goodwill of the employer that is protectable.
• Newly holds that nonsolicitation of employee provisions are subject to the Texas Covenant not to Compete Act.
• No requirement that employee receive the consideration for the noncompete prior to the time the employer's interest in protecting goodwill arises.
• Suggests that other financial incentives such as raises, bonuses or even a salary might be adequate consideration to support a noncompete if it can be established that such incentives enhance or protect employer goodwill.
• Recommends that trial courts conduct searching inquiries to determine whether the purpose of the agreement is improper protectionism or protection of goodwill (concurring opinion).

More from BusinessInsurance.com  Stock Options Offer Valid in Marsh Noncompete Dispute: Texas High Court.

Follow me on Twitter @RussellCawyer.

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Many times one competitor sues another competitor over the hiring or two or more employees (whether over allegations of a breach of contract or misappropriation of trade secrets), the Complaint will make allegations of employee "poaching".  This gives rise to the question about whether Texas recognizes a cause of action for one competitor's poaching of another competitor's employees.  The answer is "yes" and "no." 

While there is no recognized cause of action called "poaching" for a competitor's targeting, soliciting and hiring groups of its competitor's employees (remember, Texas is a right to work state and restraints of trade are highly disfavored), there are recognized causes of action, remedies and tools available to employers who find their workforce the target of a competitor's poaching.  These include use of and enforcement of covenant not to competes; investigating and bringing claims for misappropriation of confidential information; theft of trade secrets; claims for unfair competition; breach of the duty of loyalty and fiduciary duty; tortious interference with contract; computer fraud and abuse; and conspiracy to tie together all the defendants acting in concert together.  

So while there may be no claim titled "poaching" under state law, there are recognized claims that can allow for an employer remedy against a competitor that has unlawfully targeted another competitor's employees.

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I've previously written about the specific requirements that must be included in a covenant not to compete with a licensed physician to make the restrictive covenant enforceable.  The Dallas Court of Appeals recently affirmed a trial court's decision that a noncompetition agreement between a surgical practice and several limited-partner physicians was unenforceable because the agreement lacked one of the statutorily required provisions.  You can access the Court's opinion in Greenville Surgery Center Ltd. v. Beebe here.  In short, the noncompete lacked the buy-out clause required by the statute.  That defect alone was sufficient to render the noncompetition obligation unenforceable.

Beebe should remind Texas employers that when drafting noncompetition agreements, it is important to have a knowledgeable, Texas attorney review the agreement before having employees or partners sign it.

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A trial court's order granting or denying a temporary injunction in a noncompete case is rarely reversed by the court of appeals.  This week the Fourteenth Court of Appeals took the unusual step of reversing a trial court's denial of an employer's application for temporary injunction seeking to prohibit a former employee from engaging in certain competitive activities.

In EMS USA, Inc. v. Shary, EMS brought suit against its former employee (Shary) to enforce the terms of a noncompetition agreement.  The agreement prohibited, in relevant part, Shary from soliciting any of the company's customers existing as of the date of termination.  The trial court issued a temporary restraining order and later held hearings on EMS's application for temporary injunction.  At two temporary injunction hearings the trial court did not take evidence but merely heard oral argument.  Shary argued that the noncompete was overly broad as a matter of law because it was not limited to the customers that he actually dealt with but instead included all customers existing on the date of his termination.  Without taking any evidence, the trial court concluded that EMS had not shown its entitlement to an injunction.

On appeal, EMS argued that the trial court abused its discretion in failing to take evidence addressing the reasonableness of the restrictions; whether the agreement should be reformed; and whether the restrictions were ancillary to or part of an otherwise enforceable agreement such as a personal services agreement. 

The Fourteenth Court of Appeals held that the trial court abused its discretion in denying the temporary injunction without first hearing evidence.  The appellate court found that the trial court should have heard evidence regarding the reasonableness of the restrictions; the circumstances surrounding the execution of the contract; and whether the former employee had dealings with all existing customers of EMS or only part of them.  Consequently, the court of appeals reversed the denial of the temporary injunction and remanded the case to the trial court for further proceedings.

A copy of the opinion is available here.

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In an unpublished opinion, the San Antonio Court of Appeals held that a former employee cannot avoid the effects of a noncompetition agreement under the doctrine of unclean hands, as a matter of law, when the inequitable conduct the employee complains of is separate from the issue in dispute.  (Opinion available here). 

In Central Texas Orthopedic Products, Inc. v. Espinoza, CTOP sued Espinoza after he resigned his employment and went to work for a direct competitor in violation of a noncompetition agreement he signed with CTOP.  Espinoza contended that the noncompetition agreement could not be enforced against him because CTOP had violated a separate Compensation Agreement by failing to pay all wages and commissions owed to him.  The trial court agreed and granted summary judgment for Espinoza.

The San Antonio Court of Appeals reversed the judgment for Espinoza and held that since CTOP's alleged failure to pay Espinoza did not grow out of the obligations outlined in the Noncompetition Agreement, the alleged breaches of the separate Compensation Agreement could not, as a matter of law, constitute an unclean hands defense to the noncompetition agreement.

Employees frequently try to avoid the effects of restrictive covenants claiming that the employer violated some obligation to the employees; thereby precluding the enforcement of the restrictive covenant under the doctrine of unclean hands.  CTOP continues the Texas judiciaries' trend of making it easier to enforce noncompetition agreements in the state of Texas.

Earlier:   Texas Supreme Court holds that Covenants Not to Compete that Contain Implicit Promises to Provide Confidential Information are Enforceable.

Texas Appellate Court Continues Trend of Enforcing Noncompetition Agreements.

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In addition to containing reasonable restrictions as to time, geographic scope and scope of activity to be restrained, Texas imposes additional requirements for enforceable covenants not to compete with licensed physicians.  Those additional requirements include that the covenant: 

1. 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;

2. 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;

3. 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;

4. 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

5. 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.

This legislative session, the law was amended to clarify that these additional limitations are not required to enforce a noncompetition agreement covering a physician's business ownership interest in a licensed hospital or licensed ambulatory surgical center.  (Link here).  An ambulatory surgical center is a facility that operates primarily to provide surgical services to patients who do not require overnight hospital care.  In connection with a physician's ownership interest in those operations, only the standard requirements for enforceability in the non-physician context apply. 

The additional physician-specific requirements for covenant not to compete enforcement appear to still apply to those licensed physicians who perform management or administrative roles within hospitals and healthcare facilities. The new law become effective September 1, 2009.

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