Covenant not to compete cases normally arise when an employer seeks to enforce a restrictive covenant by having a former employee enjoined from breaching the covenant and working for a competitor.  They can also arise when the employee is not expressly prohibited from competing, but is subjected to severe economic penalty if he engages in competition.  The recent case of Drennen v. Exxon Mobile Corporation from the Fourteenth Court of Appeals exemplifies the forfeiture scenario and the consequences that can arise when those programs do not comply with the Texas Covenant not to Compete Act.

In Drennen, the plaintiff worked for Exxon for 31 years.  In August 2007, he tendered his retirement papers.  During his employment, Drennen participated in Exxon’s Incentive Program that awarded restricted stock awards and bonuses to reward high-performing employees and to dissuade high-achieving executive-level employees from leaving Exxon to work for competitors.  At his retirement, Drennen had 73,900 shares (approximately $6.2 million) of Exxon stock through the Incentive Program.  

The Incentive Program allowed Exxon to cancel the employee’s awards if he engaged in "detrimental activity."  Detrimental activity was defined, in relevant part, as the employee’s acceptance of duties to a third party that creates or appears to create a material conflict of interest and includes becoming "employed or otherwise engaged by an entity that regulates, deals with, or competes with" Exxon.  The Incentive Program provided that New York law would be used to govern the agreement.  The program also lacked any restrictions as to time, geographic area or scope of activity that might constitute detrimental activity.

After Drennen retired, he interviewed for a position with the Hess Corporation –a global, integrated energy company.  Drennen informed Exxon that he was considering taking a position with Hess and Exxon warned Drennen that he would likely forfeit his incentive awards if he accepted the position.  Nonetheless, Drennen accepted the job with Hess and Exxon notified Drennen that his incentive awards were canceled. 

Drennen sued Exxon on a variety of theories.  Exxon won following a jury trial.  Drennen appealed arguing that the "detrimental activity" clause of the Incentive Program was tantamount to a noncompete that was unenforceable under Texas law.  In reviewing the case, the Court of Appeals had to determine two interrelated questions: 1) is the detrimental activity clause a noncompetition provision; and 2) does New York or Texas law govern the interpretation of the program.

The Court first analyzed whether the enforceability of the "detrimental-activity" provisions differed under New York and Texas law.  According to the Court, the "detrimental-activity" provision was enforceable under New York law (Drennen loses) but not enforceable under Texas law (Drennen wins).   The Court reasoned that under Texas law, "covenants that place limits on former employees’ professional mobility are restraints of trade and are governed by the Covenants Not to Compete Act."  According to the Court, the Act applies regardless of whether the agreement at issue expressly prohibits an employee from competing or subjects the employee to severe economic penalty if he engages in competition.  Because the "detrimental-activity" provision subjected Drennen to a severe economic penalty if he competed (i.e., a forfeiture of over six million dollars), the Act applied.  It was undisputed that the Incentive Program lacked limitations as to time, geographical area and scope of activity to be restrained. 

Having determined that New York and Texas law differed in conclusion of the enforceability of the “detrimental-activity” provision, the court then made the outcome determinative decision of what law should apply. While noting that parties are frequently permitted to elect the law that will govern their transactions, the appellate court concluded that Texas rather than New York law applied because Texas has a materially greater interest in the dispute between the parties. Texas has a strong public policy interest in determining the enforceability of covenants not to compete used in this state. Drennen worked the majority of his career in Texas; he signed the agreements in Texas; he currently resides in Texas and Exxon is based in Texas.  The court rejected Exxon’s argument that, as a large multi-national corporation, it has a stronger interest in uniform application of its employment agreements than Texas’s public policy interest because the Incentive Program at issue provides exceptions to New York law application for foreign-national employees that there was no showing that making other exceptions would significantly impede Exxon’s operations.  Because Texas law dictated that the "detrimental-activity" provision was not enforceable the court ordered that Drennen’s awards be returned to him. 

Because of the amount in controversy and the fact that the ruling likely impacts recipients of awards under an Incentive Program that is probably widely used (and has been in place since at least 1993),  I expect that Exxon seek rehearing en banc or file a petition for review with the Texas Supreme Court.

You can download a full copy of the court’s opinion here.

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The Texas Association of Responsible Nonsubscribers (TXANS) Texas’ leading proponent of sound and ethical practices relating to injury prevention and the provision of quality workplace injury benefits by non-subscribers to workers’ compensation.  TXANS is hosting its 22nd Annual Nonsubscriber Conference and Exhibition March 22, 2012 in Austin, Texas.  I’ll be speaking at the conference.   Some of the other topics that will be covered during the conference, to both subscribers and nonsubscribers, include:

  • New Transportation Regulations: Managing Transportation Risks Effectively
  • ERISA Update: Fiduciary Duties and Liabilities
  • New Regulations to Protect Returning Service Members: Understanding USERRA
  • Engaging Employee to Gain Competitive Advantage
  • Misclassification of Employees: Avoiding Costly Tax & Legal Consequences
  • Union-Free but no Scot-Free: A Warning for Non-Union Employers
  • Navigating the Texas Unemployment Compensation System

You can access the Conference Brochure and register for the event here.

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A while back I took the plaintiff’s deposition in a sex discrimination and harassment case where the plaintiff’s primary answer to any question that called for facts that might undermine her claim was "I don’t know" or "I don’t recall."  The deposition looked a lot like this one.

At a break, my client representative expressed a great deal of frustration because she believed the the Plaintiff was not answering the questions truthfully.  My client didn’t think the deposition was going very well because the Plaintiff wasn’t providing good answers on the questions that would undermine her claim.  Despite my client’s uneasiness for the former employee’s, I knew the deposition was going fine. 

You see, the Plaintiff was unable to remember the specifics of any particular action or conversation she had with my client’s key representatives.  I knew that my witnesses, on the other hand, had very clear and specific recollections about what was said and done with respect to the plaintiff and her employment.  Once the plaintiff has repeatedly claimed, under oath, that she doesn’t know or doesn’t recall things that were said or done, there will be no other witness to dispute my witness’ version of events.  And, if the plaintiff is able to miraculously remember all of the key dates and details of the things she denied knowledge of in her deposition, her credibility at trial will surely be damaged.  Rarely do our memories get better with time.  Credibility wins trials.

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From time to time I’m approached by a small company that has given an employee partial ownership in the company.  While I haven’t yet had one written on the back of a bar napkin, the agreements usually aren’t much more sophisticated than this (or formal either).  By the time I’m consulted, like many once-good marriages, the employment relationship has ended the employer would like to have the former employee out of the company’s ownership structure.  What is the company to do?  Unless the company has the right to buy the employee out, the employer may be left with a carrots and sticks strategy.

Anytime you consider granting an employee partial ownership in the company, you should retain a lawyer experienced in drafting these kinds of arrangements.  The lawyer will ensure that the appropriate documents are drafted that provide the employer the right to buy-out the employee’s interest upon the occurrence of certain triggering events such as the termination of employment.  The documents will likely provide a clear and specific manner of valuing the employee’s interest.  Inevitably, the agreement will contractually require the employee to assign his or her interest back to the company in return for the required payment.

If you lack good contractual documents, you’re left with carrots and sticks.  By that I mean that the employer may be left having the employee agree to return the interest either by paying more than what the interest might be worth (i.e., the carrot) or holding the employee to all of the obligations that ownership of the company might require (i.e, the stick).

The best course of action is to spend the effort on the front end and have the agreement written in such a way that the employer and employee recognize the benefits of partial ownership but provide a clear and meaningful strategy for the business divorce if and when the employment relationship ends.

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The Dodd-Frank Act created a "reward" (bounty) program for  whistle blowers that voluntarily provide original information of fraud or unlawful activity in violation of the Sarbanes-Oxley Act, the Foreign Corrupt Practices Act and other securities law violations.  The Dodd-Frank Act also provides whistle blowers protection from retaliation and renders pre-dispute arbitration agreements of whistle blower or retaliation claims unenforceable.  

As a result of the provisions regarding pre-dispute arbitration agreements, a number of plaintiff-employees have attempted to invalidate their arbitration agreements based on the Dodd-Frank and Sarbanes-Oxley Act provisions.  A recent federal trial court opinions illustrates the limits of those efforts.

In Holmes v. Air Liquide, Inc., the plaintiff asserted claims under the ADA, Texas Labor Code and Title VII following his termination.  During his employment with the company, he signed an arbitration agreement agreeing to submit all disputes to mandatory, binding arbitration.  When the employer sought to compel the case to arbitration, the plaintiff argued that the agreement was rendered invalid and unenforceable with the passage of Dodd-Frank.  While ducking the issue of whether the invalidity of pre-dispute arbitration agreements applies only to claims asserted under Dodd-Frank (as opposed to other federal statutes like the ones Holmes sued on), the Court held the arbitration agreement was valid and enforceable because the agreement was entered before the passage of Dodd-Frank and the statute should not be applied retroactively.  Consequently, the Court enforced the arbitration agreement and compelled the parties to engage in arbitration.

A full copy of the Court’s opinion is available for download here.

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Every once in a while I write a post just for fun. One example was the post I wrote about religious reasonable accommodation and the Church of the Flying Spaghetti Monster.  Today is another fun post I felt compelled to write to justify the hour I spent watching funny video’s this weekend –the first weekend without real football (Yes, I know the Pro Bowl was last weekend but that is not real football).  

If you are a human resources professional or manager of employees you will eventually give you deposition in a lawsuit.  The lawyer that prepares you for your deposition will undoubtedly give you good tips.  He or she will remind you to tell the truth; not to volunteer information and remind you to only answer the questions asked.  Here are few examples of some things you shouldn’t do in a deposition that your lawyer might not specifically cover. 
   
 
So, from this clip we learned 1) not to argue with the lawyer; 2) don’t bring your mother to the deposition; and 3) don’t use a stocking to cover your face during a video deposition.  A better example of how to behave in a deposition is this expert witness in a deposition taken by Texas legend Joe Jamail.
 
The witness remains calm, cool and out of the fray –for the most part –despite the chaos around him.  So remember, when being deposed in a contentious case over an employment decision, be more like our expert witness and less like all of the parties in the first clip.

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When competitors make agreements with one another about what they will charge, the territories they will divide, the customers each will sell or the employees they will hire, red flags should raise because antitrust issues may be implicated. Last year I wrote about the settlement several Silicon Valley technology companies reached with the US Department of Justice’s Antitrust Division over their agreements not to cold-call recruit each others employees. 

Last week, Bloomberg reported on the follow-along civil claim being asserted by a group of tech company employees who claim that their wages were unlawfully depressed by the agreements that were the subject of the DOJ settlement.  According to lawyers for the plaintiffs, the unlawful conspiracy to violate the antitrust laws had the effect of artificially depressing employee wages that could amount to hundreds of millions of dollars.  Regardless of the merits of the civil conspiracy action, it has and will take millions of dollars for the employers to defend the DOJ Antitrust investigation and the resulting civil action.  Competitors must  be careful when they work with one another to ensure not only that their actions comply with the relevant employment laws, but also with state and federal antitrust laws.

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Today the Texas Supreme Court held that when an employee is employed by two employers (a staff leasing company and client company in this case) and both employers have workers’ compensation insurance, the workers’ compensation exclusivity provisions apply to bar negligence claims asserted by the deceased employee’s parents. You can review a copy of the Court’s opinion here. Follow me on Twitter @RussellCawyer.

Yesterday I had the privilege to serve on a panel discussion of employment defense attorneys covering Title VII Litigation: Persistent Evidentiary Challenges.  We had lawyers from twenty-two states registered for the program.  If you have an evidentiary question involving a discrimination, retaliation or harassment claim, these materials may provide you a head start on your research or quick answer to your issue.

You can download a copy of the presentation materials here.

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24 Hour Fitness operates health clubs and fitness facilities across the country.  As part of its operations, 24 Hour Fitness employs sales representatives.  As a condition of employment, employees are required to enter into arbitration agreements to arbitrate their employment disputes with their employer.  FLSA claims (i.e., overtime and minimum wage claims) are covered within the scope of the arbitration agreement.  John Carey was a sales representative for 24 Hour Fitness.  He signed a handbook acknowledgment containing the arbitration agreement.  Not only did the arbitration agreement require the arbitration of disputes, it further provided that disputes could not be brought as class actions or in representative capacities.  Unfortunately for the employer, the handbook also included a provision that permitted it to revise, delete or add to the handbook at any time and that it would communicate those changes to the employees through official written notices.  Nothing in the policy precluded the employer from applying changes to the arbitration agreement retroactively. 

After Carey’s employment ended, he filed an FLSA collective action seeking unpaid overtime on behalf of all similarly-situated employees.  24 Hour Fitness moved the court to compel arbitration.  Carey, in response, argued that he agreement was illusory because the employer retained the right to unilaterally amend the agreement. 

The Fifth Circuit Court of Appeals found against the employer holding that its arbitration agreement was unenforceable.  The Court held that the arbitration agreement was illusory because: 1) 24 Hour Fitness retained the right to alter, amend or changes the policy at any time; 2) the policy did not foreclose the prospect of unilateral amendments to claims existing on or before the amendment; and 3) nothing in the policy precluded the employer from applying any of its changes retroactively.  As a result, 24 Hour Fitness will be left to defend Carey’s lawsuit in Court, with a jury, and potentially as a collective action. 

The take-away form the opinion is that regardless of the type of ADR you use (e.g., arbitration, waiver of jury trial), if the agreement is contained in an employee handbook, ensure that the handbook’s express contractual disclaimer contained in the handbook (You know, that provision that says nothing contained in this agreement is intended to create an express or implied contract) carves out those ADR procedures and specifically states that such provisions are intended to be contractual in nature; that the employer and employee are bound by such provisions and that neither party may alter or amend the contract unilaterally.  At a minimum, if the employer wants to retain the right to unilaterally amend the policy, it should state that the employer cannot amend it to apply retroactively to claims that existed prior to the amendment and notice to the employee. 

A full copy of Carey v. 24 Hour Fitness is available here. 

Follow me on Twitter @RussellCawyer.