The Most Effective Form of Non-Compete in Texas (or Anywhere)

The Most Effective Form of Non-Compete in Texas (or Anywhere)

I previously wrote about the second most effective form of non-compete here. This kind of non-compete is drafted as narrowly as possible to maximize the chance that it will be enforced.

So what is the most effective form of non-compete?

The most effective form of non-compete is a happy employee who doesn’t want to leave the company.

If you’re an employer that’s probably not the answer you wanted to hear. You might even feel cheated by my headline.

Most companies that employ a sales force will not like this advice. But the problem is that companies who think they can solve the problem with a non-compete are probably (1) underestimating the value of happy employees and (2) overestimating the effectiveness of a non-compete.

I’m not a great businessman, so I don’t have any special insight about the value of happy employees, but I can observe what successful business people have said and done. My dad, for example, built a successful software consulting business that literally started in his living room. How? He recruited and retained top-notch talent by focusing on the quality of life of his employees. You might even say I got to go to college because my dad’s company had happy employees.

Another source is a businessman I don’t know personally, but he seems to have done alright. Richard Branson has said: “Take care of your employees, and they’ll take care of your business. It’s as simple as that.” In a similar vein, he said: “Train people well enough so they can leave. Treat them well enough so they don’t want to.”

Frankfurt, Germany - May 17: Richard Branson, Founder And Presid
Sir Richard Branson

So, while I don’t claim to be a business expert, I know that business people who keep their employees happy seem to do pretty well.

Non-competes, on the other hand. Those, I know a little about.

The legal problem with a non-compete is that there is almost always a dispute over whether it’s enforceable. The first thing I do when a client comes to me with a non-compete is to evaluate its enforceability. As I explained here, there are five things I look for in the typical Texas non-compete to determine if it is legally enforceable.

These five things have something in common: often the answer will depend on resolution of disputed facts. In litigator lingo, these five things often raise “fact issues,” meaning the case may have to go to trial before the judge decides if the non-compete is enforceable.  As I explain in this video, that means time and money.  A lot of time and money.

So how can you hold on to your best employees instead of ending up in litigation with them? Regardless of what kind of company you have, I can guarantee that you have two kinds of sales people working for you: above average and below average. Now, ask yourself these questions.

If a below-average sales person wants to leave the company and try to compete with you, do you really care?

If an above-average sales person wants to leave the company to work for a competitor, why?

There is always a reason. If money is an issue, then why is a competitor willing to pay the employee more? Is the competitor miscalculating and overestimating the value of the employee? Does the competitor recognize value that you may be underestimating?

If money isn’t the issue, what are you doing that is making your above-average employees unhappy? Is their boss a jerk? Do you give them enough independence? Do they feel like they can go on vacation?

Some hard-nosed employers will think me naïve. You don’t understand my industry, they will say.  It’s intensely competitive. Everyone is fighting for the same limited group of customers. It’s cutthroat. Sales people only care about money and will leave their employer at the drop of a hat for the promise of a bigger paycheck. I can’t afford to invest a lot of time and money in training my people and helping them develop customer relationships, only to have them turn around and leave, taking customers with them.

So let me get this straight. First, you’re saying your business is very competitive and requires skilled employees. Second, you’re saying that developing high performing employees takes time, money, and effort. Third, you’re saying that if you require your employees to sign non-competes, you can hold on to your best employees and customers.

To which I respond, who is being naïve?

p.s. I’m beta testing my new YouTube channel called “Non-Compete News.” Please check it out here and give me some feedback! Official rollout coming soon.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

 

Proposed Changes to Texas Discovery Rules Threaten Law Firm Revenue

Proposed Changes to Texas Discovery Rules Threaten Law Firm Revenue

We earn our hourly fees the old-fashioned way

Anyone who has been involved in a business lawsuit knows that a lot of time and money is spent fighting over what documents each side must produce.

You send a request for production that includes variations on the theme of “please produce documents supporting your claim that my client did X.” Your adversaries object. You object to their objections. You “confer” with opposing counsel.

You file a motion to compel. They file a response. You go to a hearing where the judge says “I don’t have time for discovery disputes” and tells you to go out in the hall and work it out. Eventually, the judge rules.

After the hearing, you argue with opposing counsel with the wording of the order. You go back to court for the judge to resolve that dispute. The judge finally signs an order. A few weeks later the other side produces documents, but they don’t include all the documents you asked for. You file another motion.

While all this is happening, the other side requests documents from you. You object. Opposing counsel calls you and . . . well, you get the idea.

Does it have to be this hard?

When you serve a request for production of documents, you’re essentially looking for two kinds of documents: good documents and bad documents. Good documents—for the opposing side—are the documents they are going to use to prove their case. Bad documents are the ones you’re going to use against them to prove your case.

Clients spend a lot of time and money essentially getting the other side to produce its good documents and its bad documents. And the proliferation of emails has made it worse.  The only ones left smiling are the law firm partners reviewing the billable hours for the month.

Couldn’t we simplify and just have a rule that says “each party must produce its good documents and its bad documents in 30 days upon request”?

Yes and no. A rule requiring a party to produce its bad documents—the documents that hurt its case—would just not be workable. But a rule requiring production of the documents a party plans to use to prove its case? That sounds sensible.

Federalization of the Texas Rules of Civil Procedure?

Texas may soon have just such a rule.  The Texas Supreme Court Advisory Committee is considering significant changes to the pretrial discovery rules in the Texas Rules of Civil Procedure.  One of those changes would require routine disclosure of the following:

initial-disclosures-rule
Sound familiar, litigators?  This is of course what the Federal Rules of Civil Procedure already require in a party’s “initial disclosures.”

I’ve never understood the point of the alternative to provide a “description” of the documents.  I’m always tempted to respond “Plaintiff is in possession of white paper documents with black printing located in its computers and file cabinets.” Even a more reasonable description, such as “emails between the parties regarding the dispute at issue, located on Plaintiff’s email server,” is practically worthless.  If you see some value to this alternative, please tell me why.

But we must not carp too much. Overall, this change to the Texas Rules would cut the time lawyers spend arguing over requests for production that amount to saying “just give me the documents you’re going to use to prove your case.”

Some lawyers won’t like this. Those of a certain vintage will say, “Back in my day, the partners would hand you a file on Friday and say go try this case on Monday. It was trial by ambush. We never knew what documents the other side had, and we liked it!”

Does that sound old fashioned? Well, if you’re one of the lawyers saying “we used to have to serve dozens of requests for production and file a motion to compel, just to get the documents the other side planned to use,” you may sound the same way to the generation of lawyers coming up now.

Expert Texpert

Another proposed change to the Texas discovery rules could also save money, and also has a Federal flavor.

Currently, Texas lawyers have to be careful any time they communicate in writing with a hired expert witness, because those communications are discoverable. But this proposed rule would change that:

expert-communications-rule

Sound familiar again? This would match a change made to the Federal Rules in 2010.

Some of you won’t like this. You smell a rat every time you see an expert designation. You want to see the emails where the lawyer tells the expert what to say. You fight for the first draft of the expert’s report so you can show he changed opinions under pressure from the client.

“What happened to transparency?” you say. If this rule change happens, the lawyer could practically write the report for the expert, and no one would ever know. The early drafts of the expert report will be like Donald Trump’s tax returns.

There is some merit to this critique, but I think it largely misses the mark. For one thing, telling the expert what to say probably doesn’t happen as often as people think.

It’s an old saw that hired experts will say whatever the hiring lawyer tells them to say. As a litigator who sometimes has to deal with difficult experts, my response is “I wish.” Try persuading a Ph.D. who charges $500/hour that he needs to tweak his methodology. Truth is, most experts who are good enough to be hired have too much pride to let a mere J.D. tell them what to say.

But there is a simpler problem with the critique of exempting attorney-expert communications from discovery. The reality is that under the current Texas rules you hardly ever get any good dirt on the expert anyway.

Litigators know their communications with testifying experts are discoverable, and they act accordingly. They’re not going to email the expert saying “I need you to change part of your report.” Lawyers often twist themselves in knots to make sure there are no documents showing the evolution of the expert’s opinions and report. They scold the expert if he even thinks of jotting down a few notes on a legal pad.

And therein lies the problem. Jumping through hoops to avoid leaving a paper trail of attorney-expert communications costs time and money. Do we really want a rule that incentivizes a lawyer to sit and look over the expert’s shoulder while he types revisions to his report? Better to save that time and let lawyers and experts email each other all they want, without fear of how it’s going to look.

This was basically the thinking when the corresponding Federal rule was changed. And on balance, that thinking was right.

Partners at big law firms may wonder how they are going to make up the billable hours lost because of these changes. But don’t worry. They’ll find a way.

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head-shot-photo-of-zach-wolfe

Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

Texas Jury Finds Damages Totaling $500 Million in Oculus Rift Case

Texas Jury Finds Damages Totaling $500 Million in Oculus Rift Case

On February 1, a jury in a Dallas federal court returned a verdict in ZeniMax v. Oculus, a high-stakes battle over who owns the technology used in the Oculus Rift virtual reality system. The jury found that Oculus and its co-founders caused damages totaling $500 million. That’s a lot of money in some circles, but the COO of Oculus’s owner said “the verdict is non-material to our business.”

You see, the owner of Oculus is a little company called Facebook.

But still, it’s not every day that a Texas jury finds damages of half a billion dollars in a case involving allegations of trade secret misappropriation, copyright infringement, breach of a non-disclosure agreement, trademark infringement, and spoliation of evidence. As a Texas litigator who deals with all of these issues, I was curious to see what lessons could be learned from the Oculus verdict.

The answer: not a whole lot. The problem is that you can read every word of the 90-page jury verdict and still have no idea what happened in the trial. And news reports about the verdict don’t add much. In fact, the Oculus case is a prime example study of how little the typical press coverage of a jury verdict tells you.

Of course, you can at least learn who the main players were:

  • Video game pioneer John Carmack worked for id Software, a subsidiary of ZeniMax.
  • Carmack came into contact with wiz kid Palmer Luckey, who was developing a virtual reality headset called the Rift.
  • Luckey founded Oculus to commercialize the Rift.
  • Carmack worked with Luckey on improving the Rift.
  • ZeniMax entered into a Non-Disclosure Agreement with Luckey and Oculus.
  • Carmack eventually left id Software and joined Oculus.
  • Brendan Iribe was the CEO of Oculus.
  • Facebook bought Oculus for $2 billion.

ZeniMax and id Software sued Carmack, Luckey, Iribe,  Oculus, and Facebook, claiming they misappropriated trade secrets and other intellectual property.

For me, the most interesting nugget was ZeniMax accusing Carmack of stealing documents on a USB drive and wiping his computer to destroy evidence. Carmack denied these allegations in a Facebook post after the verdict, saying “I never tried to hide or wipe any evidence,” but if the jury heard evidence supporting these allegations, it must have colored their perception of other issues in the case.

carmack-facebook-excerpt

The defendants were able to claim a partial victory because the jury found that none of the defendants misappropriated ZeniMax’s trade secrets. But the jury found liability on other causes of action, and significant damages, against all defendants except Facebook:

  • $50 million against Oculus for copyright infringement
  • $200 million against Oculus for breach of the Non-Disclosure Agreement
  • $50 million against Oculus for false designation of origin
  • $50 million against Luckey for false designation of origin
  • $150 million against Iribe for false designation of origin

Add these up, and you get a headline like this: “Oculus lawsuit ends with half billion dollar judgment awarded to ZeniMax.” If you’re a litigator, that kind of headline makes you cringe. Not because of the amount of money, but because you know that a jury doesn’t award a “judgment” at all. The jury renders a verdict. Later, the judge enters a judgment based on the verdict.

Maybe it sounds nit-picky, but reporters make this mistake all the time. When a headline says “Oculus ordered to pay $500 million in ZeniMax lawsuit,” it is simply inaccurate. The jury doesn’t order anyone to pay anything. The jury just fills in a blank in response to a question. The judge decides whether to order the defendant to pay.

screen-shot-2017-02-04-at-8-38-27-am
   I don’t care who you are, that’s a lot of zeroes

The distinction can be important. In some cases, entering a judgment on the verdict is a routine, almost ministerial, act by the judge. But in any moderately complex case, you can bet there will be a battle of post-verdict motions over what to do with the verdict. This is usually the trial court judge’s last opportunity to rule on legal issues in the case before it goes up on appeal.

It’s possible that the judge in the Oculus case will simply render judgment ordering each defendant to pay the amount of damages the jury found that defendant caused, but I don’t expect it will be that simple. You can look at the complicated charge and the number of high-priced lawyers on the case and know there is going to be a battle over the judgment.

Expect the defendants to argue that there was insufficient evidence to support the jury’s answers on both liability and damages. I also wonder if there is an election of remedies issue. When the jury awards damages on several causes of action that arise from the same facts, the judge doesn’t necessarily add up all the dollar amounts and award the total to the plaintiff.

So the verdict is the climax, not the end of the story. We’ll have to wait and see whether the judgment actually awards $500 million (plus interest and maybe attorneys’ fees?), and whether the judge grants an injunction against sales of the Oculus Rift based on the jury’s finding of copyright infringement.

I tried to think of a good football analogy, but golf is better for this point. Discovery and pre-trial motions are the first 17 holes. The trial is getting the ball on the 18th green. The post-verdict motions and appeals are getting the ball in the hole to win the tournament. That’s why they say “trial lawyers drive for show, appellate lawyers putt for dough.”

It will be fun to watch ZeniMax’s lawyers putt for $500 million.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

From Russia with Love: A New Defend Trade Secrets Act Case

From Russia with Love: A New Defend Trade Secrets Act Case

Do Northern California federal courts have jurisdiction over every Gmail user who emails confidential information?

The answer is no, but give points for creativity to the plaintiff in OOO Brunswick Rail Management v. Sultanov, who at least made the argument.  More about that later.

If you like trade secrets cases, you’ve got to love the recent Brunswick case. It has everything. A Russian company. A renegade employee emailing confidential company documents to his personal Gmail account (allegedly). And something every trade secret litigation nerd has been waiting for: an application for an ex parte seizure order under the new federal Defend Trade Secrets Act.

Back in May 2016, then-President Obama signed the Defend Trade Secrets Act (DTSA). As I reported here, the chief practical effect of the DTSA was to give plaintiffs in trade secrets cases the option of suing in federal or state court. Unless you’re a trade secrets litigator like me, that’s pretty boring.

But the sexy part of the DTSA was the new ex parte seizure remedy. “Ex parte” is a Latin phrase that means “you don’t have to tell the judge how crappy your case is.” But seriously, it means only one side presents its case to the judge. The DTSA allows a judge to order federal marshals to seize a person’s property—typically we’re talking about a computer or smartphone—without notice to that person.

This caused some serious handwringing in the legal community. We have an “adversary” system of justice that guarantees due process—at least for now—so lawyers worried about potential abuse of the ex parte seizure remedy.

I agreed with critics who saw no real need for a federal trade secrets statute, but I wasn’t too concerned about a wave of ex parte seizure orders. The DTSA has strict requirements for such orders, and I predicted most federal judges would not grant such an extreme remedy when an ordinary temporary restraining order would do.

A test case for the DTSA’s ex parte seizure remedy

Brunswick is one of the first cases to test my theory. The complaint presented a fairly ordinary misappropriation of trade secrets case, but with a Russian twist:

  • Brunswick is a Russian company that leases railcars to large corporate clients in Russia. After beginning a process to restructure its debt, Brunswick sued its former CEO in a confidential arbitration.
  • A Russian-American named Sultanov went to work for Brunswick and signed a typical confidentiality agreement. Essentially, Sultanov agreed not to disclose Brunswick’s confidential information, that all of Brunswick’s internal information is confidential, and that he would return all Brunswick confidential information on request.
  • Sultanov started acting suspiciously: taking calls one floor up from his office, asking a lot of questions about the debt restructuring, and even coming to work on the weekends. (Big law firm associates take note.)
  • Sultanov emailed confidential Brunswick documents from his work email to his personal Gmail account. He then deleted the emails from his Brunswick account and emptied his “trash” folder. The emailed information could be highly damaging to Brunswick’s debt restructuring negotiations with its creditors.
  • Phone records showed Sultanov repeatedly calling a Brunswick creditor involved in the restructuring.
  • When confronted, Sultanov admitted sending the emails but refused to return his company-issued mobile phone and laptop.

And my favorite allegation from the complaint:

highlighted-brunswick-security-measures

“Extraordinary steps” including “locking its doors.” Wow. I knew Russia had nuclear weapons, but I didn’t realize it now has access to modern door-locking technology.[1]

So far, these facts present an interesting, but typical, trade secrets case against a former employee.[2] Emailing company files to your personal Gmail account on the sly? Come on, man! That’s so last decade. It’s more obvious than getting down on the floor and sticking a USB drive in your PC tower.

But if you’re Brunswick’s lawyer, where do you sue Sultanov? How can you get his computer and phone back quickly? And how can you do it without giving him a chance to tell his side of the story?

It’s time to get creative.

Recent trade secrets case tests two novel theories

First, a little background for my non-lawyer readers. To sue someone in federal court, you need both “subject matter” jurisdiction and “personal” jurisdiction. Subject matter jurisdiction means the court has jurisdiction to hear the type of claim you’re making. Personal jurisdiction means that the court has jurisdiction over the person you’re suing.

Personal jurisdiction is complicated, but in a trade secrets case, it boils down to this: you need to show that the person you’re suing took or received the alleged trade secrets in the state where you’re suing him (as I explained here).

Brunswick came up with the brilliant idea of suing Sultanov in federal court in California for violating the Defend Trade Secrets Act. Subject matter jurisdiction? Check.[3]

Personal jurisdiction? That was a little harder. Sultanov’s sneaky shenanigans all took place in Russia, right?

Not exactly. If you had Encyclopedia Brown on the case, he’d spot a detail you might have missed: Sultanov emailed Brunswick’s confidential information to his Gmail account. And where is his gmail account located? You guessed it: Google headquarters in Silicon Valley.

google-laptop-and-phone

Brunswick argued in its brief that Sultanov was subject to personal jurisdiction in the Northern District of California because he emailed the trade secrets at issue to his Gmail account hosted by Google. Not only that, Sultanov went to high school and college in California and “certainly would be aware that Google is based in California and that his intentional use of Gmail would have effects in California.”

Like I said, points for creativity.

Judge denies ex parte seizure order and rejects creative jurisdiction argument

Brunswick filed suit on January 4, 2017 asking for an ex parte seizure order against Sultanov under the Defend Trade Secrets Act. Two days later, U.S. District Judge Edward J. Avila issued this opinion denying a seizure order but granting a temporary restraining order (TRO).

Judge Davila cited the DTSA provision that a court can grant an ex parte seizure order only if it finds that another form of equitable relief would be inadequate. “Here, the Court finds that seizure under the DTSA is unnecessary because the Court will order that Sultanov must deliver these devices to the Court at the time of the hearing scheduled below, and in the meantime, the devices may not be accessed or modified.”

This seems like the sensible ruling, and the one you would expect most federal judges to make in this situation. It’s the reason I expected that granting an ex parte seizure order would be very rare.

So what happened when Sultanov’s lawyer got a chance to respond? If you’re a litigator, or if you’ve watched a lot of episodes of Law and Order, you know what’s coming.

First, would you believe there was another side to the story? Sultanov’s response painted a very different picture than Brunswick’s complaint. Far from a dishonest employee stealing the company’s trade secrets for personal gain, Sultanov portrayed himself as a conscientious whistleblower exposing corporate fraud, even against his own interest.

I would share more details, but most of Sultanov’s publicly available response looked like this:

sultanov-redacted

Second, Sultanov attacked Brunswick’s creative “Gmail” theory of personal jurisdiction. After hearing arguments from both sides on the personal jurisdiction issue, the judge issued this order siding with Sultanov and rejecting the Gmail theory:

brunswick-excerpt

As a lawyer who has read literally hundreds of personal jurisdiction cases, I can tell you the judge was on solid legal ground.[4] Plus, the Gmail argument would make the Northern District of California to trade secrets litigation what the Eastern District of Texas has been to patent litigation.

That would be bad. I’ve traveled to both Silicon Valley and the Eastern District of Texas for litigation matters. I had some great Korean food in Palo Alto, but California is just too expensive. Tyler and Marshall, on the other hand, are much cheaper and have better BBQ joints.

But I digress.

A lesson about the adversary system

The Brunswick case provides a great lesson about the adversary system, due process, and the reason people got so worked up about the ex parte seizure remedy in the Defend Trade Secrets Act.

First, even when the lawyer asking for an ex parte order is totally honest, he’s unlikely to volunteer any important reasons not to grant the relief. The judge is only going to get one side of the story.

A related problem is that when the judge only hears from one side, no one involved has a strong personal incentive to test the underlying assumptions of the lawsuit. For example, does the court even have personal jurisdiction over the defendant?

So, when the judge in Brunswick issued a 2000-word order granting a TRO against Sultanov, the word “jurisdiction” appeared exactly zero times.

I wasn’t there, but I’m guessing when Judge Davila issued the ex parte order two days after the suit was filed, there wasn’t a robust discussion about whether Sultanov was subject to personal jurisdiction. I’m wondering if the judge was a little ticked off when he later realized that the jurisdictional basis for the TRO he signed was the Gmail theory.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] In fairness to Brunswick, the Complaint also alleged some pretty extensive additional efforts to protect confidential information.

[2] For simplicity, I’m leaving out facts about Brunswick’s claim against another employee, its former CEO Paul Ostling. Adding those facts would turn this into “Ten Minute Law.”

[3] Federal courts have original but not exclusive jurisdiction over DTSA claims. 18 U.S.C. § 1836(c).

[4] The judge also found that the evidence did not support Brunswick’s additional allegation that Sultanov maintained a personal residence in California. The judge cited Sultanov’s testimony that the address at issue was a family friend’s property that he sometimes used as a mailing address.

Do Lawyers Have an Ethical Duty to Disclose That Their Clients Took Confidential Information?

Do Lawyers Have an Ethical Duty to Disclose That Their Clients Took Confidential Information?

A typical customer list scenario illustrates the problem

On the first day of law school, they teach us that the answer to almost every legal question is “it depends.” (And I hear they teach the same lesson on the first day of Economist School.) Opinion 664 from the Texas Center for Legal Ethics takes 1,699 words to say the same thing. The issue: a lawyer’s ethical duty to disclose that he has the opposing party’s confidential or privileged information.

We’re talking lawyer ethics, so you know there’s going to be a hypothetical, right? Well here it is.

Paula Payne Windows sells windows, primarily for residential construction. Dawn Davis, one of Paula Payne’s top sales people, leaves Paula Payne and takes a job with Real Cheap Windows. Paula Payne sues Dawn Davis and Real Cheap for misappropriating confidential information and trade secrets.

Specifically, Paula claims that Dawn took a confidential customer list she compiled while working for Paula—specifically, the names and contact information for her customers stored on her iPhone contacts.

Dawn hires you to represent her in the lawsuit. She tells you she does indeed have the names and contact information for her 50-some-odd customers on her iPhone. Shortly after you file an answer, opposing counsel inadvertently copies you on a confidential email to his client in which he says, “I know it’s silly, but we need to claim that Dawn’s customer list is a trade secret.” The email attaches a memo outlining opposing counsel’s legal strategy.

Two questions: (1) do you have an ethical duty to disclose to opposing counsel that Dawn has the customer list? (2) do you have an ethical duty to disclose to opposing counsel that you received the confidential email?

A recent Texas ethics opinion weighs in on two issues

These two questions, in abstract form, are the subject of Texas Ethics Opinion 664. The answer? “Not necessarily.” Which is another way of saying, “it depends.”

The opinion is careful to distinguish between what a lawyer should do and what the Texas Disciplinary Rules of Professional Conduct require. A lawyer should aspire to inform opposing counsel of an inadvertent disclosure of confidential information, the opinion says, but failing to do so is not necessarily an ethical violation.

texas-bar-journal-cover-december-2016
Don’t miss the ethics opinion tucked away in the December 2016 Texas Bar Journal

In the words of the Opinion: “a Texas lawyer who fails to provide notice to opposing counsel upon receipt of an opposing party’s confidential information outside the normal course of discovery does not necessarily or automatically violate the Texas Disciplinary Rules. The answer is the same whether the information is obtained in an unauthorized manner or inadvertently.”

But the Opinion also notes that the use of the confidential information could violate the ethics rules depending on the circumstances, citing rules that bar lawyers from engaging in or assisting criminal, fraudulent, or dishonest conduct.

The “not necessarily” answer strikes me as basically correct, but not very helpful. To use a technical legal term, Ethics Opinion 664 is too wishy-washy.

A duty to disclose the other guy’s inadvertent disclosure of privileged information would make more sense

The root of the problem is that the opinion tries to address two significantly different questions at once. The opinion underappreciates the difference between the questions, particularly the difference between privileged information and confidential information. Instead of giving a wishy-washy answer that tries to cover both issues, the opinion could have given separate, more definitive answers.

I’ll use my hypothetical to explain what I mean. As Dawn Davis’s lawyer, would you have an ethical duty to disclose to opposing counsel that he inadvertently sent you a privileged memo outlining his legal strategy? I bet when you first read this question you said yes. That seems like the right answer to me as well.

And I’m not the only one. ABA Model Rule 4.4(b) says: “A lawyer who receives a document or electronically stored information relating to the representation of the lawyer’s client and knows or reasonably should know that the document or electronically stored information was inadvertently sent shall promptly notify the sender.”

This seems like a workable common sense rule. Like most good manners, it’s reciprocal: if you tell me when I send you something privileged by mistake, I’ll do the same for you.

One reason this rule would make sense is that in most cases it is obvious when opposing counsel has inadvertently sent you privileged material. The lawyer who receives the communication usually doesn’t have to make a difficult judgment call about whether it’s privileged or not.

A duty to disclose that your client has confidential information would make less sense

The second issue from the hypothetical is quite different. Do you have an ethical duty to disclose that your client Dawn Davis took Paula Payne Window’s confidential customer list? I bet when you read this question you said no, and I agree.

But why? First, it’s important that the confidential status of the customer list is an issue in dispute in the lawsuit. Keep in mind that a customer list can be—but is not necessarily—a trade secret (more about this issue here). If you represent Davis, you’re going to take the position that Davis’s list of her own customers is not a trade secret or even confidential information.

Now imagine that the ethics rules required you to volunteer that your client possesses that information if the information is actually confidential. Your ethical obligation would depend on a judgment call on an issue in dispute in the litigation. This would be unworkable.

img_1287
Ethic Opinion 664 isn’t necessarily wrong. But it could have been better.

Ethics Opinion 664 fails to address this problem. It simply assumes that the information is confidential.

But the problem goes beyond that. Even if we assume that the information held by the client is confidential information or a trade secret, it would be strange for trade secret cases to be subject to a special rule that a lawyer has an ethical duty to volunteer information to the other side about an issue in dispute in the litigation.

Keep in mind we’re talking about an ethical obligation to volunteer information, not the duty to respond to proper discovery requests. If the Court orders Dawn Davis to produce documents that contain customer names and information, then her lawyer’s obligation is clear. But that is not the question presented.

If I ran the zoo

It’s hard to find anything incorrect in Ethics Opinion 664. But the opinion could have provided better guidance. Rather than giving one generic answer to two different questions, the opinion could have drawn a sharper distinction between the questions and taken a stronger stand on each.

Generally, there should be an ethical duty to disclose to opposing counsel that he has inadvertently sent you privileged information. Generally, a lawyer should not have an ethical duty to disclose that his client has documents that the opposing party claims contain confidential information or trade secrets.

But why do I say “generally”? Well, you know. Because it depends.

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head-shot-photo-of-zach-wolfe

Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

Essential MLK Day Reading for Lawyers and Other Humans

Essential MLK Day Reading for Lawyers and Other Humans

Script Idea for New Courtroom Drama

For this Martin Luther King, Jr. Day, I’ve got a movie idea to pitch. Picture this. A racist white sheriff rules his county in the Jim Crow South with an iron fist. A teenage white girl falsely claims she was raped by a black man. An all-white jury convicts on the flimsiest of evidence. It is very likely the young woman was not assaulted at all.

You think it’s been done before in To Kill a Mockingbird? Well I’m going to spice it up for an audience of millennials. Though undeniably gripping, the courtroom drama in the Gregory Peck classic was, sadly, a fairly ordinary story. An all-white jury convicts a wrongfully accused African-American man of raping a young white woman in the segregated American South? No big surprise. The only parts that are at all hard to believe are that a small-town white lawyer would mount a serious defense of the case, and that the defendant would actually make it to trial without getting lynched.

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I’ve got a book recommendation for MLK Day

My movie will be wilder, crazier, more dangerous.  Instead of one accused black man, there will be three. One of the accused men will not even be in the same county when the “crime” occurred.  Instead of a no-name small town lawyer, the lead defense counsel will be a famous civil rights lawyer. Instead of one trial, there will be two, and in between the two trials the case will go all the way to the U.S. Supreme Court.

Action and danger? Imagine this. In the opening scene, the civil rights lawyer runs from the courthouse and jumps in a car that speeds out of the county with angry Klansmen in hot pursuit. Sheriff’s deputies beat false confessions out of two suspects, but a third refuses to confess. In between the two trials, the racist sheriff picks up two of the accused from prison, pulls over to the side of a country road in the middle of the night, pulls a gun, and then . . . well I don’t want to spoil it.

I know, it sounds too sensational. But this story is real. You can read it in Gilbert King’s Devil in the Grove: Thurgood Marshall, the Groveland Boys, and the Dawn of a New America, which won a Pulitzer Prize. If you care about the American civil rights movement, you will want to read this book. If you are a lawyer, you will enjoy learning how Thurgood Marshall and his colleagues handled the actual nuts and bolts of defending three wrongfully accused men under the most difficult conditions. If you are a trial lawyer, you absolutely must read this book.

You can read reviews of the book to find out more details about the story. Here are just a few of the broader points I took away from this riveting account of a chilling episode in American legal history.

Thurgood Marshall, Super Lawyer

I knew that Thurgood Marshall was a pioneering civil rights lawyer who won the landmark Brown v. Board of Education case and went on to serve as the first African-American justice on the U.S. Supreme Court. But before this book I did not realize that Marshall was one of the best trial and appellate lawyers in the country. I pictured the young Thurgood Marshall as a political activist who happened to be a lawyer. But Devil in the Grove shows that Marshall was a lawyer’s lawyer, a top-notch practitioner who wrote meticulous briefs and loved to argue cases.

Marshall was also a shrewd strategist who carefully chose the cases the NAACP Legal Defense Fund took on. In the Groveland case, the goal was not only to save three innocent lives, but to set up a legal challenge to a system that denied due process based on race.

A System Built on Dishonesty

Aside from the obvious injustice of the state-sponsored discrimination that reigned in the South until the 1960s, the most striking feature of the system was its fundamental dishonesty. The basic legal problem for southern segregationists was the 14th Amendment. (Remember that one? We had to fight a civil war to get it.) It guaranteed due process and equal protection of the laws, and it was the supreme law of the land.

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The defense table in the second Groveland trial

So ultimately, the law was on Thurgood Marshall’s side. This meant that openly defending racial oppression was not a viable long-term strategy for defenders of the racist status quo. They had to pretend that African-Americans actually had civil rights. They had to maintain the fiction that black and white schools were “separate but equal.” Brown v. Board of Education’s rejection of the separate-but-equal doctrine was like a collective “come on, man!” from the Supreme Court. Don’t pee on my leg and tell me it’s raining.

Appellate Courts Sometimes Have to Get Real

A related lesson is that appellate courts can’t always take legal arguments at face value. Defenders of the most unjust system can always come up with arguments that have a surface plausibility. For example, when Texas Attorney General Price Daniel and his assistant Joe Greenhill defended Dallas County’s history of all-white grand juries, they could argue with some plausibility that exclusion of blacks from the grand jury was not a denial of equal protection, but merely a result of the fact that the grand jury commissioners did not know any black people who were qualified to serve.

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Thurgood Marshall and colleagues on the steps of the Supreme Court

But this was effectively a lie. Everyone knew the system was designed–formally or informally–to exclude African-Americans. The Supreme Court implicitly recognized as much in Cassell v. Texas, 339 U.S. 282 (1950), when it reversed a murder conviction on the ground that blacks were excluded from the grand jury. One year later, in Sheperd v. Florida, 341 U.S. 50 (1951), the Supreme Court cited Cassell to reverse the convictions in the first Groveland trial. Justices Jackson and Frankfurter wrote a concurring opinion saying they would have reversed based on the failure to remedy prejudicial pretrial publicity of the defendants’ alleged confessions.

Formal Rights Don’t Guarantee Actual Justice

The story of the Groveland trial also teaches a related fundamental point about the law. Formal rights under the law mean nothing if judges and juries don’t sincerely enforce them. When a judge refuses to allow defense lawyers to call to the stand the physician who examined the alleged rape victim, the Equal Protection Clause has not done the defendant much good. When a jury convicts three African-American men based on community outrage and racism, not on solid evidence, the Due Process Clause hasn’t given the defendants much comfort. Favoritism and prejudice on an individual level can make a mockery of even the best-designed institutions.

But these points are way too abstract. At its core, Devil in the Grove is great story-telling.  And it really happened. Hollywood couldn’t make this stuff up.

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head-shot-photo-of-zach-wolfe

Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands. These are his opinions, not the opinions of his firm or clients.

 

Recent Non-Compete Case Teaches Importance of Providing Specialized Training

Recent Non-Compete Case Teaches Importance of Providing Specialized Training

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Proving the employee received confidential information is not the only way to enforce a non-compete

A lawyer recently called me for some free advice on non-competes. It came down to a question of how to make an employee non-compete enforceable when the information the employee would receive was not all that confidential. This presents a problem because, as I explained here, the typical way to make a Texas non-compete enforceable is to tie it to an agreement to provide the employee confidential information.

This experience presented some interesting questions. First, how am I going to maintain a profitable law practice by giving out free advice? Maybe I can follow the philosophy of First CitiWide Change Bank, a bank that specializes in making change: “All the time, our customers ask us, ‘How do you make money doing this?’ The answer is simple: Volume.”

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Specialized training is another way to support a non-compete

Second, what is the best way to make an employee non-compete enforceable in Texas other than a confidentiality agreement? The answer is a non-compete tied to specialized training, the important but sometimes neglected stepchild of the typical non-compete tied to a confidentiality agreement.

Neurodiagnostic Tex v. Pierce found a non-compete enforceable where the employee received specialized training

The recent Texas case Neurodiagnostic Tex v. Pierce shows that an employer’s agreement to provide an employee specialized training—like an agreement to provide confidential information—can also be used to make a non-compete enforceable.

The Tyler Court of Appeals held in Neurodiagnostic that an agreement to provide specialized training met the statutory requirement of an “otherwise enforceable agreement” where:

1. The employer actually provided the promised training (paying for in-house and third party training).

2. There was evidence that the training was specialized (the employee obtained two new board certifications relating to surgical assistance).[1]

This holding should not be controversial. Texas courts have already cited specialized training as an example of an interest worthy of protection by a non-compete.[2] But tying enforceability of a non-compete to specialized training raises some unanswered questions.

Questions raised by tying a non-compete to specialized training

1. Can an agreement to provide ordinary training support a non-compete, or does it have to be specialized training? A non-compete must be “designed to enforce the employee’s consideration or return promise in the agreement.” The Neurodiagnostic court reasoned that there was a “clear nexus” between investing in the specialized training and preventing the employee from using the specialized training to benefit a subsequent employer. But if the training is not specialized, enforcing the non-compete would arguably offend the longstanding Texas principle that an employee is free to use her “general know-how” in competing with a former employer.[3]

2. Is it enough for the employer simply to recite in the agreement that the training is specialized? Especially after Neurodiagnostic, smart lawyers who draft non-competes will include a statement that the training is specialized. Is that enough, or does the judge need to look behind the agreement at the facts? There was sufficient evidence in Neurodiagnostic that the training was specialized, so the court did not have to confront this issue.

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Would this qualify as “specialized training”?

3. Does it matter whether the training was actually specialized? The employer will always think the training is “specialized,” and the agreement will usually say the training is specialized, but does it matter what the evidence shows? The Neurodiagnostic opinion implies the answer is yes: The reason the court found the employer’s interest “worthy of protection” was that there was at least some evidence that the training really was specialized.

4. Who decides whether the evidence proves the training was specialized, the judge or the jury? If there is conflicting evidence, does the issue go to the jury? These procedural questions get less attention, but as a lawyer who litigates non-competes, I find them the most interesting. In Neurodiagnostic, it was undisputed that the employee received certain training and certifications, and the Court of Appeals found that the evidence conclusively satisfied the “otherwise enforceable agreement” requirement. But what if the evidence had been conflicting? If the trial court denies summary judgment on enforceability of the non-compete, doesn’t the underlying fact issue need to be submitted to the jury?

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Now this looks like specialized training

These questions about specialized training are, of course, analogous to the questions that arise when a non-compete is tied to a confidentiality agreement. Is it conclusive that the agreement recites that the information is confidential? Does it matter whether the information was actually confidential? Can this present a fact issue that must go to the jury?

At press time, Texas courts had not definitively answered these questions.

Employers: enforceability is nice, but don’t forget damages

Enforceability is not the only issue in non-compete litigation. Even if the non-compete is enforceable, and even if the employee violates the non-compete, the employer suing to enforce the non-compete still has to prove the breach of the non-compete caused damages. As in most kinds of litigation, there is a danger that proof of damages can  become an afterthought in non-compete litigation.

In Neurodiagnostic, the court found there was no evidence that the employee (Pierce) and the second employer (Synergy) caused any damage to the first employer (Neurodiagnostic) because:

  1. The mere fact that Synergy hired Pierce and competed with Neurodiagnostic was not evidence of damages, where the evidence did not show that Pierce was the technician on any case Neurodiagnostic lost.
  1. Evidence of the profits that Synergy made was not evidence that the breach caused damage to Neurodiagnostic.[4]

Wait a minute, you say. What was the point of the court spending all that time deciding whether the non-compete was enforceable, if there was no evidence of damages? Why didn’t the court just cut to the chase and say “no damages, case dismissed”?

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Don’t forget evidence of damages

Keep in mind that damages are not the only remedy for breach of a non-compete. The employer can also obtain an injunction barring the employee from competing. So, the fact that there was no evidence of damages was not the end of the story. The Court of Appeals sent the case back to the trial court to determine the reasonable scope of the non-compete and whether to enter an injunction.

Lessons Learned

So what does Neurodiagnostic teach Texas lawyers who handle non-compete litigation? If you represent the employer trying to enforce a non-compete that is tied to confidential information or specialized training, be sure to find and offer evidence that:

  1. The employer actually provided the promised confidential information and/or specialized training to the employee
  1. The information was actually confidential, or the training was actually specialized;
  1. The employee competed with the employer and caused damage by taking business that would have gone to the employer.

If you want some ideas on how to prove (or disprove) these points, give me a call. I may even tell you for free.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands. He has received specialized training on how to use phrases like “Comes now, Plaintiff” and “Wherefore, premises considered,” sometimes even in ALL CAPS.  

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] Neurodiagnostic Tex, LLC v. Pierce, No. 12-14-00254-CV, 2016 WL 6426830, at *5-7 (Tex. App.—Tyler Oct. 31, 2016).

[2] See, e.g., Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 655 (Tex. 2006) (non-compete became enforceable once the employer provided the promised confidential information and specialized training).

[3] See, e.g., Evan’s World Travel, Inc. v. Adams, 978 S.W.2d 225, 231 (Tex. App.—Texarkana 1998, no pet.) (“General skills and knowledge developed through the course of employment are not the type of interest which justifies protection under a restrictive covenant”).

[4] Neurodiagnostic, 2016 WL 6426830, at *12.