“It Never Hurts To Be Bold”: Karen Kaplowitz, Trailblazer for Women in the Law

“It Never Hurts To Be Bold”: Karen Kaplowitz, Trailblazer for Women in the Law

This week’s post is my interview of Karen Kaplowitz, who I first knew as a business development coach for lawyers. Turns out she was also a real trailblazer for women in law practice, as you will see. If you prefer to watch the interview in convenient video format, you can find it here on my YouTube channel, That Non-Compete Lawyer.

Z: I’m Zach Wolfe. I’m here with my friend, Karen Kaplowitz. Karen, welcome.

K: Thank you, Zach. Thanks for inviting me to have this conversation with you.

Z: You’re welcome. So, let’s start with what you do today, and that is you are the founder and owner and operator of The New Ellis Group.

K: That is true. The New Ellis Group is a business development strategy and coaching firm, which I started in 1997 when I was a practicing trial lawyer in Los Angeles. So, for the last 23 years, I have been the owner, operator, proprietor, chief cook and bottle washer of the New Ellis Group.

Z: And that’s actually how I first met you. You were doing some business development coaching for a firm that I formerly worked for, and we had a firm retreat and you gave some great tips. And so I’ve kept in touch with you and gotten lots more great tips over the years. But what led me to want to do this was I started hearing some of your stories about law practice, law school, all kinds of things. So we’ll come back to the New Ellis Group later, but first let’s go back in time. It’s the late 1960s, and a young Karen Kaplowitz is a student at the University of Chicago Law School. Now, people who are not lawyers might not realize this, that is one of the elite law schools in the country. So, you’re a student there. And there were not a lot of women students at that time. What was that like?

K:  I am a child of the sixties, which was a time, which was a lot like now in some ways. I started law school in the fall of 1968, the day after there were riots in Grant Park, in Chicago, in connection with the Democratic National Convention. It was a time of great political turmoil and crisis. Robert Kennedy had been assassinated that spring. Martin Luther King had been assassinated that spring. It was a time of chaos and violence and political upheaval. It reminds us a lot of what it’s like now, 50 years later. So, I’m about to celebrate my 50th law school reunion from the University of Chicago. But the struggle in those days, a lot of it had to do with the Vietnam War. And I was admitted to the University of Chicago Law School because of the Vietnam War. The University of Chicago saw that men were being drafted and decided that instead of having empty seats, they would accept women law students. My class, the class of 1971, was the first class at the University of Chicago Law School with 20% women law students. That’s how I got into law school. It was an economic decision on the part of the law school. So that’s where I fit kind of historically. And here we are, you know, 50 years later.

Karen Kaplowitz, lead plaintiff in Kaplowitz v. Univ. of Chicago

Z: When you started law school, what did you have in your mind that you wanted to do with that law degree?

K:  I wanted to be a civil rights lawyer. I wanted to change the world. I wanted to create more racial equity in particular. I was just beginning to think about gender equity. That wasn’t as much on the horizon in those days, but I thought I’d be a civil rights lawyer or a legal aid lawyer. I didn’t expect to end up in a commercial kind of law firm environment.

Z: Speaking of gender equality, what was the on-campus law firm interviewing like for women at the University of Chicago in the late sixties?

K: Well, so that was one of the surprises. You know, there we were, there were 30 women in my class and maybe 15 or 20 in the class ahead of us and the law school had accepted us, but law firms weren’t hiring women lawyers yet in any great numbers. And so one of the things women in my class encountered was a lot of really overt sex discrimination.  Law firms would show up and they’d just kind of blow off the women law students. And, you know, “we don’t really need to talk today.” “We’re not hiring trusts and estates lawyers this year.” “So there’s no point in our talking to you,” with the subtext, that the only reason we’d consider a woman would be for a trust and estates job. So that was pretty disconcerting. And we found to our dismay that when we took those experiences to the law school administration and said, this is what’s happening, please help us deal with it, the law school was pretty indifferent initially.

Z: And it turns out there was even a lawsuit, and there’s an opinion. People can actually read about this. And the case is called Kaplowitz v. University of Chicago [387 F. Supp. 42 (N.D. Ill. 1974)]. Now, would you happen to know the named plaintiff in that case?

K: Well, so when we experienced, when some of the women in our class experienced sex discrimination and the law school wouldn’t take action, one of my classmates who had just studied the new civil rights law, Title VII of the Civil Rights Act of 1964,  said, “you know, the law school is acting like an employment agency, and don’t we have rights to enforce a non-discriminatory environment against a law school as an employment agency?” Ultimately we filed a Title VII charge, and then a lawsuit, asking the federal court to require the law school to protect women from overt discrimination.

Z: Reading that case, it seemed like the law school had a very clear written policy of non-discrimination. So if that was the case, what did the law school do wrong?

K: What the law school did wrong was failed to take action. When it discovered through complaints filed by women law students, that there was actual overt discrimination taking place on its premises, in connection with the recruiting function, having a non-discrimination policy that’s not enforced was not, to our minds, a sufficient application of the spirit of the law involved.

Z: The federal district court judge agreed with the theory that the law school was acting as an employment agency as defined in Title VII. So that was a win. And then I want to read just a little portion of the judge’s opinion. He said: “Sex discrimination is a bane to both men and women in this society, and to the extent that it is practiced by the employers who use the University of Chicago Law School placement facilities, it is a particularly ugly scar on the legal profession. In this decade of heightened consciousness, it is disheartening to note the degree to which sexism flourishes. It is prevalent in both professional and non-professional careers and all the more odious because of the subtle manner in which it is practiced.” That sounds pretty darn good. So you had the right judge, right?

K: And the judge by the way, was named Abraham Lincoln Marovitz.

Z: So Judge Marovitz ruled in your favor?

K: In some ways. This case, Kaplowitz v. University of Chicago, is a landmark case because it is the first case interpreting the scope of the employment agencies’ section of Title VII broadly. So, from that standpoint, it was a win. But the judge at the end of the day told the women in my class that we needed to exercise our rights against employers directly against the employers, and that we could not require a law school to hold hearings to make determinations. So we lost that part of our case. And at that point we took the part we won and we called it a day.

Z: It definitely set a precedent. And I imagine that even though you didn’t get the relief you were asking for in the lawsuit, this must have had ripple effects in the law school community.

K: For sure. This year is my 50th law school reunion. And we’re expecting to be doing a panel at reunion weekend in the spring on 50 years of women at the University of Chicago Law School, students, faculty, and alumni. So yes, we made our mark, elicited a lot of commitment on the part of the Law School, more of a commitment to gender equity. And that was at the end of the day, what we really wanted to accomplish.

Z: Now on just a personal level, when I think back to when I was in law school, I was just like, okay, just keep your head down. Don’t cause trouble, don’t make anybody mad at you, get good grades, get a job offer. I would be terrified to take on the entire law school and, and, you know, have people think, oh, that guy’s a troublemaker. Did those thoughts go through your mind at the time?

K: Well, you know, I didn’t act on my own. I was one of about 15 women law students who confronted the law school over these issues. And there’s safety in numbers. This was an era of protest and commitment to civil rights. I honestly really never thought too much that it would have adverse consequences, and the opposite turned out to be true. Because I was a leader of that group, I had a lot of interaction with the faculty and with the administration of the law school. And the Dean of the Law School taught me an incredible lesson about professionalism. You know, the Dean never held it against me—that I knew about anyway—that I had confronted the law school in this way and challenged their policies, and he went out of his way to be helpful to me. So that was kind of an interesting lesson on the outcome of being bold and of being courageous. It didn’t hurt. It probably helped me in my career.

Z: That’s great. Okay, so you graduate from law school and you start doing civil rights law?

K: No, I actually ended up deciding that before I became a civil rights lawyer, I wanted to get some conventional experience in a big law firm. And I joined what was then the largest law firm in Los Angeles, O’Melveny and Myers, where I was recruited by a University of Chicago alum who was very committed to bringing in more women. And I was the third woman lawyer at O’Melveny and Myers.

I love L.A.

Z: So, I know what it’s like to be a brand-new lawyer at a firm with experienced lawyers who know what they’re doing, and you’re trying to figure out what to do. You had to do that while being just the third woman at the firm, right?

K: Well, what that meant though, was that there were people who mentored me, you know, like the lawyer who recruited me, he was a mentor to me. There were other people at that office in those days who cared about the idea of being more diverse. Warren, Christopher, who later became Secretary of State was a partner in the firm, for example. There were people of goodwill, in other words.

Z: That’s great. So back to the subject of civil rights, I understand there were issues early in your career with the LA County Women’s Jail. Can you tell us how did that come about?

K: O’Melveny and Myers absolutely supported lawyers doing pro bono work. And I took on a project to investigate and then challenge civil rights violations at the Los Angeles Women’s County Jail, along with the ACLU. I organized a group, there were about 25 lawyers involved, and we investigated civil rights violations. And then we brought a civil rights lawsuit against the Women’s County Jail. And this was all under the rubric of pro bono work at O’Melveny and Myers. That was a tremendous learning experience for me as a young lawyer.

Z: Was that the case where you had sort of a run in with the FBI, or was that another case?

K: No, ultimately, I didn’t have a run in with the FBI. I was a young lawyer. I was like a second year lawyer doing this civil rights work. And I made a really classical mistake of a young lawyer. My mistake was that one of the named plaintiffs in our civil rights case was a member of the Manson family, if you remember Charles Manson. So this woman who was an inmate at the Women’s County Jail was not one of the murderers. She was a burglar in the Manson family, and we included her as a named plaintiff in the case. And at the hearing, when we filed the lawsuit, there was a TRO hearing at which the County Counsel had to stop the rest of the hearing to explain to the judge that our plaintiff had just tried to escape from the Women’s County Jail and that she had a hacksaw blade, which he was sure must have been smuggled into her by one of her lawyers, pointing at me.

Now, the good news was the judge did not take seriously the idea that I had smuggled a hacksaw blade to this member of the Manson family, but my hearing on the TRO, you know, blew up, didn’t get too far. Fast forward a couple of years, and I get a call one day from the FBI. And the FBI is calling me around the time that Squeaky Fromme, another member of the Manson family, had tried to assassinate President Ford, and the FBI called to say, we got your name off a list that Squeaky Fromme had in her possession. And we’re calling to warn everybody whose name was on the list to be careful. And I said, if my name was on the list, it probably wasn’t an enemies list. I represented another member of the Manson family in connection with my civil rights case. So that was my contact with the FBI. The FBI was trying to protect me from a risk I probably didn’t have.

Z: When your named plaintiff escaped using the hacksaw, did she tie the bedsheets and climb out the window?

K: She didn’t escape, she attempted to escape.

Z: Oh, she attempted escape.

K: She attempted an escape and they confiscated her hacksaw blade.

Z: Got it. That’s just an amazing story. Now, you also had something early in your career involving the Beverly Hills Hotel?

K: Yes. So, you know, I’ve explained that I started my law career at O’Melveny and Myers, and I stayed there for three years. At the end of three years, I left and started a women-owned law firm in Los Angeles with two other women lawyers, one from Gibson Dunn & Crutcher, the other big firm in town, and the other from the State Attorney General’s office. And that was a law firm that was designed to handle civil rights cases. So, I started with an idea of civil rights, I went to O’Melveny and Myers for three years, and then I started a women-owned law firm to handle civil rights cases. And one of our cases was against what’s now probably still well-known, the Beverly Hills Hotel. Former President Trump had some alleged liaisons that took place at the Beverly Hills Hotel.

Well, in those days they had a bar called the Polo Lounge, and the Polo Lounge had a rule. The rule was a woman who was not escorted could not enter the premises. And the concept behind that rule was that if a woman was unescorted, she must be a prostitute. So, our law firm represented somebody, an unescorted woman who tried to patronize the Polo Lounge and was of course, escorted out. And we brought a lawsuit against the Beverly Hills Hotel on the grounds that that was sex discrimination. They couldn’t arbitrarily say an unescorted woman was not allowed on the premises. And we resolved that case quite quickly.

Beverly Hills, that’s where I want to be.

Z: So, you were at this women-owned firm in the mid-seventies in LA and you’re doing all kinds of different cases. This like sounds to me like basically a women’s version of LA Law. This has got to be made into a TV show.

K: We’ve been asked actually on several occasions to submit some information on our stories. One of my favorite stories I can share with you, in those days, was the lawsuit we brought against the California Court of Appeal. The court itself was advertising to hire a new deputy court clerk. And we had a client who had experience in the trial court level being a court clerk, who applied to become the deputy clerk of the court of the Court of Appeal. And the man who was the court administrator flatly turned her down, saying quite explicitly he would not hire a woman. So that was one of our very favorite cases. We brought a Title VII lawsuit against the California Court of Appeal itself. And again, the Court quickly settled that case because we kind of had them dead to rights. It was a pretty blatant act of sex discrimination.

Z: Now, again, in that case, you’re successful with the case, but did you worry about some kind of retaliation later on by, you know, judges or other lawyers who were not happy about this?

K: You know, we didn’t really worry about it. One of my law partners in those days had been in the State Attorney General’s office, and the offices of the California Court of Appeal were in the same office building as the Attorney General’s office. My partner knew justices on the California Court of Appeal. One day she was in the lobby of that building. One of the justices she knew well came over and started to give her a hug, and then he said, “oh no, I better not do that, you’re suing us”. So, you know, it was the right thing to do. It didn’t seem like it took a lot of courage to do it. It needed to be done. It was simply the right thing to do. And fortunately for us, we did not suffer any retaliation that I’m aware of.

Z: So then, I guess all good things must come to an end. You eventually leave that firm and you go to a bigger litigation boutique, is that right?

K: So after six years of our women-owned firm, my partners and I parted because we just had different interests. One of my partners became one of the most prominent family law attorneys in Los Angeles. I joined a twenty-five-lawyer litigation boutique and stayed there for close to 20 years.

Z: How did you end up becoming the marketing partner, in effect, for that firm?

K: When I joined the firm, I was of course used to running my own small firm and bringing in clients and managing client work. And that firm had a problem. The problem that my new firm had was that one lawyer, a very prominent trial lawyer, brought in most of the work in the firm, and that created a risk. That was a risk for everybody else because he was young and healthy. But if anything happened to him, if he got hit by a bus, the firm would have collapsed because there were 25 lawyers who mostly depended on a work he generated. So, I became initially really just the de facto go-to person to help any other lawyers in the firm who wanted to create more independence, wanted to create their own pipeline of clients and cases. So that’s kind of what I did, just to be a good team player and to fill a need.Over time, it became something I really enjoyed, which ultimately led me to start my consulting business.

Z: In addition to your consulting and helping people with business development, I know that you’re active in a number of nonprofit causes. I think one of those is Legal Momentum. Can you tell us a little bit about Legal Momentum, and what’s your involvement with them?

K: Legal Momentum is a women’s civil rights organization that was started 50 years ago. When I moved to the East Coast in 1998, after starting my consulting business, I began working on a pro bono basis for Legal Momentum and created what became known as the Aiming High Awards. The idea of the Aiming High Awards has been to recognize very powerful and successful business leaders who care about civil rights and would bring their companies and their business partners to an event to honor them and to support Legal Momentum. So, for the last 20 years, my core pro bono work has been raising money to sustain their work in women’s civil rights.

For example, one of the things that they are best known for is being an advocate for something called the Violence Against Women Act, VAWA. This is a law that was passed in 1994, which creates protection and has pumped literally billions of dollars into police departments and police programs to help support protection of women against domestic violence and other violence. So, that’s been a core part of what I’ve done on a pro bono basis. I don’t practice civil rights law anymore, but I found another way to contribute to the cause.

Z: And I think it was a few months back, I was able to watch these awards online. When is the next presentation of the Legal Momentum awards?

K: The next awards will be sometime this fall. We haven’t set the date yet. We will be honoring another group of people, including our Man of Distinction this year, the Chief Legal Officer and Secretary of Comcast, Tom Reid. And we’ll be honoring a group of people. I’ll be happy to let you know the date as soon as it’s set.

Karen is heavily involved in Legal Momentum’s “Aiming High” awards

Z: Great. I’m sure people will be interested in that. So, you become sort of the marketing guru at this previous firm, but then at some point you decide to move on from the practice of law to full-time consulting to help lawyers. What was that like, starting your own consulting business?

K: You know, it felt like a leap because I had practiced law for over 25 years and that was kind of the core of what I knew. It was a little bit scary to do that, but when I thought about what interested me and what I wanted to do, I kept thinking back to my mother’s experience. My mother had been an immigrant born in Eastern Europe who came to the United States speaking no English at age 13. And I thought, okay, well, it’s a little bit scary for me to leave my secure job as a partner in a very successful law firm in Los Angeles and start a business, but probably not nearly as scary as being an immigrant, coming to a strange country and not speaking the language and having no resources. So, you know, that’s, that was kind of my reference point. My mother was my reference point. So when I started my business, I called it The New Ellis Group, Ellis being a reference to my mother’s experience, being an immigrant at Ellis Island.

Z: What a great inspiration for the name. Now I have to ask you this. What did your mother think when she found out you were going to be the plaintiff in Kaplowitz v. University of Chicago?

K: I’ll tell you what my mother thought when I left O’Melveny and Myers and started my own law firm.  I don’t remember what she said about my lawsuit, but I do remember what she said about my leaving a secure job and starting my little law firm. She said, “are you crazy? Are you crazy? You went to the University of Chicago Law School, you have this fabulous job in a big law firm. And, you know, you get a paycheck.” I mean, you know, the paycheck in those days was probably $15,000 a year, but you know, that was a lot of money in the early seventies. And my mother was literally horrified, but she assured me that no matter what happened, she would always be there to support me.

Z: Well, that’s great. And that reminds me, what did the bank tell you when you went to get a loan to start your law firm?

K: Ah, yes. Well, so I had banked for the three years I was at O’Melveny and Myers at a bank called Security Pacific National Bank, which was later acquired by Bank of America.  I’d been a loyal and, you know, creditworthy customer of Security Pacific for three years. And when we started our women-owned law firm in 1974, we decided we needed a line of credit. So I went to my bank, Security Pacific, and I said, may I please have a line of credit? I don’t even remember if it was for $10,000 or $20,000, whatever it was, it was a modest sum of money. And they said, of course, we are happy to provide you with a line of credit, provided that you deposit an amount equal to the line of credit in the bank and do not touch it during the term of the line of credit. And I said, if I had whatever the amount was, $10,000 or $20,000, to deposit in your bank account, I wouldn’t need a line of credit. That would be enough for me. I need a line of credit because I don’t have $10,000 or $20,000 just lying around. They turned us down.

Z: But you started anyway.

K: We did start anyway.

Z: Good for you. Well, when I first heard the story about your lawsuit back when you were a law student, you told me “being bold, never hurts.” What did you mean by that?

K: I meant that I’ve been lucky in my life that when I’ve done things that you might’ve thought were bold, like bringing a lawsuit against the Law School, or leaving a secure job and starting a women-owned law firm, or starting a new business doing business development, coaching, and strategy, I’ve been lucky that those things turned out well. I may have shared with you a story.  As a young lawyer, I was aggressive, all the time, and had a lot of agendas, especially in the women’s rights arena. And about 20 years into my law practice, I ran into a judge before whom I’d appeared as a young lawyer, who had gone on to the Court of Appeal by that time. He was a very well known judge and I met him at some bar event or a cocktail party. And I said, you know, I want to share with you that I’ve mellowed, since you knew me as a young lawyer out there fighting the good fight in your courtroom. I’ve really mellowed a lot. And I’ll never forget his response. He said, “I’m sorry to hear that.”

Z: That’s great.

K: Yeah. So, I’ve been lucky. I’ve been lucky that the things that I’ve been passionate about and have advocated for and worked hard to accomplish, haven’t hurt me. That’s the good news. As I look back on 50 years of practicing law and look at, you know, this time period marked on one end by, you know, riots in Grant Park in Chicago and marked at the other end, by January 6th, the riots at the US Capitol, you know, I am saddened that more has not changed in these intervening 50 years, and that we are again, fighting to preserve our democracy, our rule of law, and I’m glad that I’ve had a small part in being part of a profession whose core commitment is to preserving the Constitution, preserving the rule of law, and preserving our democratic institutions. So, that’s kind of how I look back on these 50 years.

The name of Karen’s consulting company was inspired by her mother

Z: Well, I think “small part” might be a little bit of an understatement. That is quite a career of accomplishment. So thank you for sharing some of those stories with me and with our audience. Before we wrap up, I just want to get back a little bit to your current consulting practice. I know that I’ve gotten so much great input from you on business development issues. What would you say makes your consulting approach different from some of the other coaches who are out there?

K: Thanks for asking. I would say that the one thing that I try hard to do in my coaching work is to help people figure out how to identify their best opportunities and how to integrate what they do in the realm of business development and marketing into their everyday work. So it’s not an add on, it’s not an extra burden, it’s part and parcel about how they go about their everyday opportunities. It’s a real privilege for me to have worked with literally hundreds of partners in law firms around the country to help them build their practices. And I’m glad to have run into you, and glad to have had the opportunity to work with you and your former law firm, and appreciate this opportunity to talk to you about work, law, and life in 2021.

Z: Well, I was so happy to do it, and if you are a lawyer looking for coaching, I highly recommend Karen. And if you’re not ready to take that leap, at least check out Karen’s newsletter, which is called what?

K: Monday Monday.

Z: Monday Monday, a great song and a great newsletter. It comes out usually once every two weeks?

K: Every two weeks. Right. People can go to my website, newellis.com, and they can sign up.

Z: And I recommend people do that. It’s concise, it’s fresh, it’s right to the point. It’s worth a few minutes, every two weeks to check it out, if you’re a lawyer who cares about business development. Okay. Thank you, Karen!

K: Thank you so much.

_______________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation.

Disclaimer: Every case is different. Suing your elite law school in federal court may not achieve similar results.

When is a contract “unconscionable” under Texas law?

When is a contract “unconscionable” under Texas law?

When electric bills hit mailboxes next month, many Texans may wonder, does the law allow a consumer to get out of a contract if the result of enforcing the contract terms turns out to be really unfair?

The short answer is no.

But what if the result of the contract is really, really, really unfair?

Then the short answer is maybe. In that case the contract might be considered “unconscionable,” and therefore unenforceable.

Texas law recognizes the common-law defense of unconscionability, at least in theory. But how does Texas law define “unconscionable,” how do Texas courts apply that definition in practice, and how should they apply it?

Before we get to those questions, let’s set the goalposts.

On one end, everyone agrees, in principle, that you can’t get out of a contract just because the result turns out to be unfair.

Suppose I sign a contract with Bob the plumber to do some work on my historic Houston home for $2,000. I need the work done in two weeks because an inspector is coming. But in the meantime, a freak winter storm hits Texas, causing rates for plumbers to skyrocket. Bob could make $10,000 on other jobs instead of doing my job.

Sorry, Bob, you’re out of luck. It may be unfair to hold you to the contract, but it’s inherent in a contract that the parties take on the risk that the market rate could change. The shift in the market doesn’t make my contract unconscionable.

Several policies support this conclusion. First, freedom of contract. See Besteman v. Pitcock, 272 S.W.3d 777, 787-88 (Tex. App.—Texarkana 2008, no pet.) (“The high threshold a party must meet in proving unconscionability is based on a strong policy favoring the freedom of contract”).

My first scientific survey

Of course, there are some kinds of contracts people are not free to make: gambling, prostitution, selling illegal drugs, to name the usual suspects. But generally, private parties are free to agree on the terms of their contract, and courts aren’t going to second-guess whether those terms are “fair.” People who like economics and “free markets” really like this rationale.

A second, related reason for enforcing even unfair contracts is the principle that people should honor their agreements. Of course, this principle has deep roots in Judeo-Christian morality—it’s no accident that Anglo-American contract law uses the word “covenant”—and not only that, I would bet this principle is found among virtually every faith and culture.

There’s a third, less obvious, reason the law generally doesn’t like to get into whether a contract is fair or not. We could call this the “capability problem” or maybe “judicial economy.” If we allow people to get out of contracts just because they’re unfair, then the courts will be constantly clogged with such disputes, and it’s hard to decide what’s fair. Let’s call this the “pragmatic” rationale for not second-guessing contract terms.

Ok, so there are strong reasons for the principle that you can’t get out of a contract just because it’s unfair. But now let’s go to the other end of the football field.

Everyone agrees, in principle, that a contract term can be so grossly unfair that the law refuses to enforce it. The “pound of flesh” contract from The Merchant of Venice would fail today for this reason.

But even when the unfairness is purely economic, almost everyone agrees that there is some limit to how unfair a contract can be.

Let’s say I’m late to see the musical Memphis at the Hobby Center in Houston, and I can’t find a parking spot. I pull into a downtown parking garage and the attendant hands me a clipboard with a pre-printed parking agreement to sign. I’m in a hurry so I quickly skim through it, it seems fine, and I sign.

Assume I’m an educated, intelligent person—maybe I even have a law degree!—and  that there’s no disparity in “bargaining power” between me and the parking attendant. I’m free to say “no thanks, I’ll park somewhere else.”

After the show I hang around the stage door trying to get an autograph, and when I finally get back to the garage I find my car has been towed. It turns out the contract has a clause stating that if I’m late removing my car, the building owner can keep it as a late fee. Assume the clause is “conspicuous,” and that if I had read the contract more carefully I would have seen it.

Now, there may be some of you who say tough luck, counselor, a deal’s a deal. Cf. Allright, Inc. v. Elledge, 515 S.W.2d 266, 268 (Tex. 1974) ($100 limit of liability in month-to-month parking agreement was not void as against public policy).

But some of you also prefer Pepsi to Coke. I’m guessing that the vast majority of you would say no way, that clause is just too unfair. It’s so grossly one-sided that it should not be enforced.

In a word, it’s unconscionable.

The policy behind this unconscionability defense is perhaps a little harder to identify, but in short, it’s fairness. At some point, almost everyone agrees the policies favoring enforcement of unfair contract terms—freedom of contract, honoring one’s agreements, judicial economy—must yield when enforcement would be so grossly unfair.

But where is that point? How do we draw the line between a contract term that is merely unfair and one that is so one-sided that it should not be enforced? 

That’s the hard question. Let’s look at how Texas courts have tried to answer it.

Black letter law on unconscionability

Unconscionability is a “common law” defense, meaning law made by judges. There is no Texas statute defining “unconscionable” (except the Texas DTPA, which I’ll get to later). So we have to look at the case law.

Here are the general principles of unconscionability we can derive from the Texas cases:

  • A contract is unenforceable if, “given the parties’ general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract.” In re Poly-America, L.P., 262 S.W.3d 337, 348 (Tex. 2008).
  • “Unconscionability is to be determined in light of a variety of factors, which aim to prevent oppression and unfair surprise; in general, a contract will be found unconscionable if it is grossly one-sided.” Id.
  • “Unconscionability must be determined on a case-by-case basis in light of a variety of factors.” Besteman v. Pitcock, 272 S.W.3d 777, 787-88 (Tex. App.—Texarkana 2008, no pet.).
  • Unconscionability has “no precise legal definition.” Id.
  • An unconscionable contract is “basically” one that is “grossly one-sided.” Id. at 789.
  • A “disparity in bargaining power” can result in oppression or unreasonableness that is labeled “unconscionable.” Id.
  • A contract is not unconscionable “simply because it is foolish for one party and very advantageous to the other.” Instead, “a term is substantively unreasonable where the inequity of the term is so extreme as to shock the conscience.” Id. (quoting Anaheim Indus. v. GMC, No. 01-06-00440-CV, 2007 WL 4554213, at *9 (Tex. App.—Houston [1st Dist.] Dec. 20, 2007, pet. denied)).  
  • Texas courts sometimes distinguish between “procedural” unconscionability, which addresses “how did the parties arrive at the terms in controversy,” and “substantive” unconscionability, which asks “are there legitimate commercial reasons justifying the terms of the contract.” Ski River Development, Inc. v. McCalla, 167 S.W.3d 121, 136 (Tex. App.—Waco 2005, pet. denied).
  • “In other words, in deciding the fairness of a contract’s substantive terms, the court must also consider whether there were ‘procedural abuses,’ such as an unfair bargaining position between the parties at the time the agreement was made.” Id.
  • The party asserting unconscionability has the burden to prove both procedural and substantive unconscionability. Id. 
  • Factors in determining unconscionability include: the “entire atmosphere” in which the agreement was made, the alternatives available to the parties at the time, the “non-bargaining ability” of one party, whether the contract is “oppressive” or “unreasonable,” any “gross disparity in the values exchanged,” and any “gross inequality of bargaining power.” Id., citing Restatement (Second) of Contracts § 208.
  • The grounds for both procedural and substantive unconscionability must be “shocking.” Id.

So there you have it. Now you know how to determine if a contract is unconscionable or not.

Just kidding. No, of course you don’t. These are just general principles. They tell you almost nothing about how Texas courts actually decide whether any particular contract term is unconscionable. In other words, these generalities don’t help you predict whether a particular contract clause would be found unconscionable.

This is why law schools typically use the “case method.” In olden times, law school students primarily read “hornbooks” that summarized general principles of law derived from years and years of cases. But then someone figured out it was more instructive to read the key cases themselves, so students can see how courts apply the principles to specific facts.

But I digress. The question is how Texas courts have applied these principles of unconscionability.

In a perfect world, I would read hundreds of Texas cases before daring to hazard an answer, but I’m a blogger, not a law school professor, so I’ll just tell you the answer based on a sample. 

How Texas courts have applied the unconscionability defense

From dipping my toe in the Texas unconscionability waters, I can share a couple observations.

First, the vast majority of Texas cases that address the defense of unconscionability hold that the facts did not support the defense. If you research the issue, you’re going to read case after case where the court says sorry, this doesn’t rise to the level of unconscionability.

Second, it is hard to find any recent Texas Supreme Court case that found a contract unconscionable—outside of two very specific arenas.

One is arbitration agreements. See, e.g., In re Poly-America, L.P., 262 S.W.3d at 353. A lot of the cases addressing unconscionability are arbitration cases. Arbitration agreements are a special animal, so I’m just going to set this category aside.

The other category where the Texas Supreme Court has found a contract unconscionable in recent years is attorney fee agreements. See, e.g., Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 563 (Tex. 2006). Attorney fee agreements are also a special animal, because lawyers have ethical duties to clients that just don’t apply in an ordinary commercial or consumer setting. So let’s set those aside as well.

Outside of those two categories, you’re not going to find many Texas Supreme Court cases in the last 30 years finding contracts unconscionable—if any.

My second scientific survey

You can find some cases from the intermediate Texas Courts of Appeals holding that a contract term was unconscionable.

For example, in Ski River Development v. McCalla, the facts were like a scheme cooked up by Boss Hogg on The Dukes of Hazard. The Bakers were living in a trailer home heated by a stove. Deep in debt and desperate for money, they signed a 99-year lease of their land with the Davises. (Hmm, Jefferson Davis Hogg?) The lease provided for the Davises to pay the Bakers $3,000 per month for only 12 ½ years, and only $75 per month after that, while the Bakers agreed to pay the real estate taxes for the entire time. 167 S.W.3d at 137-39.

Those were just some of the facts, but you get the picture. The court said the evidence established “unfair bargaining positions, unfair terms, gross disparity in the value exchanged, no substantial benefit to the Bakers, shocking circumstances of the procurement of the lease, and shocking/gross lease terms.” Id. at 139.

Outside of extreme hard luck stories like that, most Texas appellate opinions that consider the defense find that the contract term at issue was not unconscionable. See, e.g., Besteman v. Pitcock, 272 S.W.3d at 789-90 (enforcement of written-notice provision of lease would not be unconscionable).

In short, Texas courts have set the bar extremely high for the common law defense of unconscionability.

Too high, in my opinion.

Is the common law bar too high?

For one thing, there seems to be too much focus on bargaining power. You can almost always say the party complaining about the unfairness of the contract terms had the right to just walk away. “Nobody put a gun to your head,” is the typical refrain.

That kind of argument confuses duress and unconscionability. Duress is already a contract defense. When we ask whether a contract is unconscionable, we’re already assuming the parties freely entered into the contract.

And while a gross disparity in bargaining power is an important factor, it’s not the only factor. In my view, unconscionability is also about the reasonable expectations of the parties based on the practical social context in which the contract is made—especially for consumer contracts.

Consider my hypothetical parking garage contract. There was no gross disparity in bargaining power, and I could have read the contract. Despite those factors not favoring unconscionability, two other factors made that agreement clearly unconscionable.

First, the forfeiture clause was way out of line with what a reasonable person would customarily expect a parking garage agreement to say. In other words, “unfair surprise.” In re Poly-America, L.P., 262 S.W.3d at 348.

Second, even if I could have avoided that surprise by reading the contract, there would still be a “gross disparity in the values exchanged.” Ski River Development, 167 S.W.3d at 136. Requiring me to forfeit an entire car for being five minutes late is just grossly out of proportion with the value of what the garage agreed to provide to me. In principle, it’s not that different from slipping in a clause saying “and I agree to pay building owner A MILLION DOLLARS!”

Keep in mind, I’m talking consumer contracts, not so much commercial contracts negotiated between two businesses. In most consumer settings, especially increasingly prevalent “click-wrap” agreements, the reality is that people just don’t read those agreements. The common law defense of unconscionability doesn’t seem to be keeping up with that reality.

Perhaps a legislative solution is needed. Or maybe . . . there already is one.

DTPA unconscionability to the rescue?

Remember when I mentioned the DTPA? That’s what we call the Texas Deceptive Trade Practices—Consumer Protection Act. Well, the DTPA generally prohibits an “unconscionable” action or course of action. And guess what. The DTPA definition of “unconscionable” is not the same as the common law definition.

(The DTPA’s “laundry list” of prohibited deceptive practices includes taking advantage of a disaster declared by the Governor or President by selling fuel or another necessity at an “exorbitant or excessive price,” Tex. Bus. & Com. Code § 17.46(b), but this post is about unconscionability, so let’s set that aside.)

The DTPA defines “unconscionable” as: “an act or practice which, to a consumer’s detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree.” Tex. Bus. & Com. Code § 17.45(5).[1]

In short, taking advantage of a consumer to a grossly unfair degree. That sounds pretty broad. Maybe DTPA unconscionability is better for consumers than common law unconscionability.

But don’t get too excited. As with common law unconscionability, Texas courts have set the bar high for DTPA unconscionability. The resulting unfairness must be “glaringly noticeable, flagrant, complete and unmitigated,” Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 677 (Tex. 1998), even though those words do not appear in the statutory definition. And when you look for cases applying DTPA unconscionability, it seems like most of the cases find that the facts did not support the theory.

My final scientific survey

Still, the bar for DTPA unconscionability is not insurmountable. There are cases holding that there was sufficient evidence to support a finding that the act or practice was unconscionable.

For example:

  • In Rice v. Metropolitan Life Insurance Co., 324 S.W.3d 660, 677-78 (Tex. App.—Fort Worth 2010,  no pet.), evidence that the insurance company represented that the policyholder had coverage and left plaintiffs with no opportunity to obtain coverage was sufficient to raise a fact issue on a claim for unconscionability under the DTPA.
  • In Century 21 Real Estate Corp., 890 S.W.2d 118, 127-28 (Tex. App.—Texarkana 1994, writ denied), the franchisors committed an unconscionable act under the DTPA by placing a second franchise in the franchisee’s area.
  • In Fort Worth Mortgage Corp. v. Abercrombie, 835 S.W.2d 262, 266 (Tex. App.—Houston [14th Dist.] 1992, no writ), it was unconscionable to cancel a mortgage protection policy and to substitute a policy with significantly reduced benefits.
  • In Franks v. Associated Air Center, Inc., 663 F.2d 583, 593 (5th Cir. 1981), the court held that an aircraft repair company’s charges for 80-113 hours of repair work were “grossly disparate” to the value the plaintiff received, considering another mechanic later fixed the same problem in one hour.

So, it is possible to prove unconscionability under the DTPA. Does that mean we will now see a wave of DTPA suits filed by Texas consumers who receive exorbitant electric bills they never would have expected?

I sure hope so.

_______________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation.

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] Before September 1, 1995, the DTPA’s definition also included an act or practice that “results in a gross disparity between the value received and consideration paid.” Although this “gross disparity” is no longer part of the statutory definition, it may still be evidence of unconscionability under the current definition. Ketter v. ESC Med. Sys., Inc., 169 S.W.3d 791, 800 n.6 (Tex. App.—Dallas 2005, no pet.).

Texas Trade Secrets Law 101 (Remastered)

Texas Trade Secrets Law 101 (Remastered)

Fixing a hole . . .

Why would you redo a masterpiece?

In the case of Sgt. Pepper’s Lonely Hearts Club Band, perhaps the most famous rock album of all time, it was mainly because of the technology available when the Beatles originally recorded the record in 1967.

Giles Martin, son of famed Beatles producer George Martin, explained this in an interview with NPR. He identified at least four important limitations of the recording and mixing technology available at the time.

First, stereo was still a new thing, and the Beatles had released most of their albums in mono. This explains why George Martin reportedly spent three weeks on the mono mix of Pepper and only three days on the stereo mix.

Second, you couldn’t sit at a computer for hours mixing all the tracks until you got it just right. As Giles Martin explained, mixing was essentially a live performance where his dad and famed engineer Geoff Emerick adjusted the levels on the fly.

Third, they had to keep the drum levels down, literally to keep the needle from jumping out of the groove of the record. Sorry, Ringo.

And finally, the Beatles recorded Sgt. Pepper on the four-track technology available at the time. If you know the album at all, you know the songs must have had more than four tracks. This magic was achieved by recording one four-track tape to a single track of another four-track tape.

Voila! Sixteen tracks. But sound quality was lost in the process.

When Giles Martin remixed the classic album in 2017, he was able to avoid all four problems. The result was a version of Sgt. Pepper that was noticeably different—and better, according to most listeners—without sounding too different.

The act you’ve known for all these years . . .

That’s what I wanted for Version 3.0 of my “Texas Trade Secrets Law 101” paper. Stick to the original concept—talk right down to earth, in a language lawyers and non-lawyers can easily understand—but update and improve it.

I had one problem Giles Martin didn’t: the temptation to make the paper longer. Giles wasn’t about to add new songs to the album (aside from alternate takes and songs available on the Super Deluxe version), but I had the ability to add new sections, new cases, new commentary.

To avoid the trap of making the paper longer and less readable, I imposed a limitation on myself: add new case cites where helpful, but keep the paper under five thousand words.

How? I had to count them all. Plus, I got under the limit by deleting some unnecessary citations, trying to tighten up the language throughout, and eliminating some of my personal commentary.

That last part was perhaps the hardest. My personal views gave earlier versions flavor. But sometimes you just have to cut the fluff. And I have to admit, it’s getting better.

After all, the goal of Texas Trade Secrets Law 101 (Remastered) is not to wax philosophical, but to give Texas business people and the lawyers who represent them a practical but substantive guide to the essentials of Texas non-compete law and litigation. You can download it here:

wolfe-texas-trade-secrets-law-101-version-3.0-1Download

As I say in the Conclusion, the paper only scratches the surface, but it’s Texas Trade Secrets Law 101, not Advanced Texas Trade Secrets Law.

You’ll have to wait for the “Advanced” version. It can’t get no worse.

_______________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation.

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 (or the paper) as legal advice for your case.

Lawyer Lessons from Cobra Kai

Lawyer Lessons from Cobra Kai

These are the facts, and they are undisputed: Cobra Kai is my current favorite show on Netflix (considering WandaVision is on rival Disney Plus).

And yeah, I was late to the party, considering Netflix picked up the series in June 2020, but once I started watching, I was hooked.

If you haven’t watched it, here’s the premise. It’s about 30 years after the events of The Karate Kid. Daniel LaRusso (Ralph Macchio) owns a successful luxury car dealership in the San Fernando Valley. He has a smart, beautiful wife, two kids, a fancy house with a pool, and a country club membership. As Dean Martin sings in the intro to episode 2, “how lucky can one guy be?”

Things haven’t gone so well for Danny’s high school rival, Johnny Lawrence (William Zabka). He and his ex don’t get along, his teenage son wants nothing to do with him, and he just lost his handyman job after calling a customer “bitchy.” He seems to spend most of his time drinking Coors Banquet and scoping chicks from his ratty Pontiac Firebird.

Blasting Poison’s “Nothin’ But a Good Time,” natch.

But then everything changes when Miguel (Xolo Maridueña), Johnny’s teenage neighbor who lives with his single mom and grandma, gets assaulted by the cool kids and wants to learn karate. The Cobra Kai dojo is reborn in a Reseda strip mall, to Daniel LaRusso’s dismay.

And the rest of Season 1 practically writes itself. I loved every episode.

I mean, Cobra Kai isn’t deep like The Sopranos, or Friends, but it can be surprisingly moving. And if nothing else, it has some great lessons for lawyers.

That’s because it’s really a show about perspective. Naturally, the original movie told the story from Danny’s perspective. Cobra Kai flips the script and starts from Johnny’s perspective—waking up with a hangover in his crappy apartment.

I came in expecting Johnny Lawrence would be the hero, or at least the anti-hero, while LaRusso would turn out to be the villain. And in the first few episodes, you’re definitely pulling for Johnny, despite his obvious flaws, while it seems Daniel-san has become rich, pretentious, and a little vindictive. But as the season progresses, you see more of the redeeming qualities that made Danny likeable in the movie.

What emerges is a series that deftly shows how much conflict can develop between people who sincerely think they are doing the right thing, from their own point of view.

In the words of Ben Kenobi, the Mr. Miyagi of Star Wars, “you will find that many of the truths we cling to depend greatly on our point of view.”

This becomes clear early on in Cobra Kai, when we learn Johnny’s back story. Would you believe he didn’t become a bully out of nowhere? No, while Johnny did grow up in an upscale neighborhood, turns out he had an emotionally abusive stepfather who bullied him every day. So even if we don’t approve of Johnny beating up Danny in high school, at least we understand.

And when we hear the story from Johnny’s point of view, we even start to wonder if we had it all wrong. Some new kid from out of town moves in on your girl, sprays you with a hose at high school dance, and swipes your All Valley karate title with an illegal kick. Are you supposed to just sit there and take it?

More about that later.

Whatever we think of adolescent Johnny, present-day Johnny is at least trying to do something right. He asks his ex if his son Robbie (Tanner Buchanan) can come live with him. He becomes a father figure to Miguel; they celebrate with a big bear hug after Miguel’s first successful date (with Danny’s daughter, of course). Johnny ridicules his students to their faces, but only so they’ll toughen up and learn to stand up for themselves.

Danny, on the other hand, is not having it, and we can understand why. He wasn’t some rich kid like Johnny; he had to earn success the hard way. Plus, he knows Johnny’s sensei was John Kreese, a coldblooded sociopath. Kreese is now dead, but surely the apple doesn’t fall too far from the tree, Danny thinks.

On Cobra Kai, it’s just like old times

So, even as we’re pulling for Johnny to get more students at his struggling dojo, we also sympathize with Danny trying to protect the kids of his community from a bad influence.

And that, for me, was the biggest lesson of season 1. You see two protagonists in direct conflict with each other, but you fully understand where each one is coming from.

This, of course, is an important skill for a lawyer, especially a trial lawyer. Granted, as a litigator you’re advocating for one side. But the ability to see the case from the opposing side’s perspective is critical.

For one thing, it’s just good strategy. Understanding the motivations of the party who is suing your client, or getting sued by your client, will help you know what to expect and plan accordingly.

But it’s not just that. I think the ability not only to understand where the other side is coming from, but to empathize with the opposing party is important. Whether you’re trying to get a witness to admit an important fact in a deposition or trying to persuade a judge that your motion for summary judgment should be granted, the ability to actually feel what that person is feeling makes a difference.

I’ll take it a step further and say the ability to empathize with everyone involved in a dispute is important. It could be the opposing lawyer, a witness, your legal assistant, a court reporter. Most of these people, most of the time, are doing what they think they are supposed to do. You won’t understand them until you understand that.

Like Atticus Finch famously said, “you never really understand a person until you consider things from his point of view . . . Until you climb inside of his skin and walk around in it.”

And yet, we must not confuse point of view with the truth, as we also learn in Cobra Kai.

Consider Johnny’s rendition of his teenage run-in with Danny. We hear this from Johnny in episode 8, while images from the original movie flash on the screen.

Here’s what Johnny says about his breakup with Ali and ensuing feud with Danny, contrasted with what we see from the flashback:

I figured we would work things out eventually, but then Daniel LaRusso came in town. [Danny arrives with his mom, not looking happy]

Next thing I know he’s hitting on her. I see the two of them flirting with each other. [Danny and Ali with a soccer ball on the beach]

I walked over to have a simple conversation with Ali. [“What is your problem?!” Johnny says to Ali, then grabs her boom box out of her hands]

But LaRusso kept butting in. [Johnny throws the boom box at Danny, knocking him to the sand]

I told him to get lost, mind your own business. Out of nowhere the guy sucker punches me. [Danny gets up and punches Johnny]

I did what any dude would do, I defended myself. [Johnny delivers three hard blows, Danny falls to the ground]

I figured that was that, but LaRusso wouldn’t leave it alone. At the Halloween dance, I’m sitting there minding my own business [Johnny rolling a joint in the bathroom stall], he douses me with a water hose.

I hadn’t seen the guy in months, and he turns a water hose on my head. So I chase him down, try to put an end to things that night, right? [Johnny and his four sidekicks corner Danny]

Turns out the guy’s got a karate master of his own. Guy comes out of nowhere, jumps us, assaults me and my friends. [Mr. Miyagi taking out the five Cobra Kais]

Johnny having a simple convo with Ali, in the original

Sure, we can understand Johnny’s perspective on what happened, but notice what he leaves out.

The fact is that Ali had already broken up with Johnny when she met Danny at the beach.

The fact is that Johnny instigated the fight at the beach.

The fact is that Johnny and his friends were bullying the new kid from out of town.

The fact is that Mr. Miyagi was only defending Danny from five attackers.

I think the lesson here is not to take the whole “perspective” thing too far. Different people have different perspectives on the truth, but the truth is out there. The facts are the facts.

So, many years later, when Johnny shows up angry at Danny’s house after Danny’s cousin sets fire to his car, we can understand why Danny is not about to back down. He knows what really went down back in the day. So when Johnny confronts him, he puts up his dukes. It feels like two aggressive lawyers about to mix it up at a deposition.

Then something interesting happens. Danny’s wife Amanda (Courtney Henggeler) comes out of the house to see what’s going on. She could have said “you’re right, Danny, he’s a bully!” Or she could have said, “you’re wrong, Danny, you should be the one apologizing after what your cousin Louie did.”

But no. Here’s what Amanda says to her husband:

Yeah, you two seem to have this pretty well in hand. It’s a normal Saturday afternoon, a couple of grown men about to kick each other into a pool. You know, as much as I would like to watch you and your childhood karate rival duke it out, I kinda don’t want to get any blood on the patio. So what do you say we try to resolve this over some breakfast instead?

Instead of focusing on who is right about the facts, Amanda makes the guys see how silly they’re acting.

“You wanna go inside?” Danny says. “I could eat,” Johnny replies. Situation defused.

This, my friends, is emotional intelligence. Sometimes it’s not about the facts.

_________________________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation. This post is dedicated to his wife Rebecca.

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.

Let the Light In: The Legacy of the Most Famous Texas Non-Compete Case

Let the Light In: The Legacy of the Most Famous Texas Non-Compete Case

When I started practicing law in Texas in the 90s, the key non-compete case was Light v. Centel Cellular Company of Texas, 883 S.W.2d 642 (Tex. 1994). Light held that a non-compete in an at-will employment agreement was unenforceable because it was not “ancillary” to an otherwise enforceable agreement, as required by the Texas non-compete statute. We spent the next decade arguing about what that means.

Today, Light is not such a big deal, as subsequent decisions have largely abandoned it. You might say it’s the Pennoyer v. Neff of Texas non-compete law, in that it presents a dilemma for anyone teaching the subject. Does Light only deserve a brief mention, considering it is now largely obsolete, or is it worth getting down in the weeds and understanding all of its nuances and the subsequent decisions that tried to apply it?

I’m opting for a middle approach. You can find other articles that get down in the weeds. And sure, it would be fun to chronicle the 90s turf battle between the Texas Supreme Court and the Texas legislature over non-competes (see the snark in Light‘s footnote 7, for example).

But I’m just going to focus on three key hurdles Light created for enforcement of non-competes: (1) the “illusory contract” problem; (2) the “give rise to” requirement; and (3) the “designed to enforce” requirement.

The Texas Supreme Court would later knock down two of these hurdles, but one remains (maybe).

The “illusory contract” problem

Let’s start with the illusory contract problem. Light reasoned that an agreement to provide at-will employment cannot not be the “enforceable agreement” in “ancillary to an otherwise enforceable agreement” because the agreement is not really enforceable by the employee. “Describing something as an at-will obligation is nonsensical,” Light said. Id. at 645 n.7.

You can see the logic. If the employer can fire the employee at any time for any reason or for no reason, then what rights does the employee actually have to enforce? Thus, Light said that an agreement to provide at-will employment cannot be the “otherwise enforceable agreement” to satisfy the “ancillary to an otherwise enforceable agreement” requirement. See id. at 644-46.

Did this mean an at-will employee cannot have an enforceable non-compete?

No. Light made it clear that an otherwise enforceable agreement “can emanate from at-will employment so long as the consideration for any promise is not illusory.” Id. at 645.

This theorizing about illusory promises was all well and good, but employers just wanted to know, how do we meet this “ancillary” requirement if an agreement to provide at-will employment is illusory? The Light opinion gave them an answer in its famous footnote 14: an employer’s agreement to provide an employee confidential information or trade secrets can be the “otherwise enforceable agreement.”

Predictably, that is exactly how employers tried to make non-competes stick after Light. The standard form of non-compete would have a non-compete tied to a confidentiality agreement.

But there was a problem, one based on the reasoning of Light itself. If the employment is at will, isn’t the employer’s agreement to provide the employee confidential information also “illusory”?

That objection was correct in theory, but unworkable in practice. What are we supposed to do, exasperated employers asked, draft the contract to require handing the employee a stack of confidential documents at the moment she signs the contract? And believe me, there was much confusion and uncertainty.

The Texas Supreme Court later cleared this up. The Alex Sheshunoff case solved the “illusory contract” problem by holding that an agreement to provide confidential information to an at-will employee becomes an “otherwise enforceable agreement” when the employer performs its obligation to provide the confidential information. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 655 (Tex. 2006). Thus, the “illusory contract” problem addressed in Light was largely solved.

And this was probably a good thing. Like I said, the “illusory contract” point made some sense in theory, but it caused a lot of confusion, which Sheshunoff cleared up.

The “give rise to” requirement

Light also grappled with the meaning of “ancillary.” What does it mean for a non-compete to be “ancillary” to an otherwise enforceable agreement?

We could look up “ancillary” in a dictionary, but I say it’s more important to understand the purpose of the requirement. So let’s step back and ask a more fundamental question: what is the point of the “ancillary” requirement in the first place?

Put simply, the purpose of the “ancillary” requirement is to balance two interests: the interest in enforcing the contracts of private parties and the interest in encouraging free competition.

Let’s illustrate. Imagine you’re an ice delivery business in the 1920s making huge profits. (See Jurassic Non-Competes.) The last thing you want is for a salesman to quit and start selling ice to your customers. So any time an employee quits, you offer to pay him $500 in exchange for agreeing not to compete for a year.

That would be a “naked” non-compete, i.e. a non-compete that is not “ancillary” to an otherwise enforceable agreement, and we don’t want that. In that scenario, we give more weight to the interest in free competition than the interest in enforcing contracts.

So, the “ancillary” requirement has to mean something more than requiring the non-compete in exchange for some benefit provided to the employee. But what?

Citing to the US Supreme Court, the Restatement (Second) of Contracts, and its own decision in DeSantis v. Wackenhut, the Texas Supreme Court reasoned in Light that “ancillary” means two things:

(1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee from competing; and

(2) the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement.

Id. at 647.

To illustrate the first prong, the “give rise to” requirement, Light cited the example already discussed, a confidentiality agreement. In that case, the confidential information is the consideration given by the employer. Providing confidential information to the employee “gives rise to” the employer’s interest in restraining competition, at least where the employee could use the confidential information to compete. See id. at 647 n.14.

Personally, I think Light got this point exactly right. “Ancillary,” in this context, has to mean something more than just related. The non-compete will always be related to some benefit provided to the employee; otherwise, it would be void for lack of consideration under basic contract law principles.

But Texas employers didn’t like this “give rise to” requirement. Yes, this requirement was fairly easy to apply in the typical case where the non-compete was tied to a confidentiality agreement, but in other contexts it presented more of a problem. For example, suppose an employer requires a non-compete as part of an agreement to provide stock options to a trusted executive. It’s hard to see how the stock options “give rise to” an interest in restraining the executive from competing.

Put it this way: Does competition from an executive who has stock options do more damage than competition from a former executive who doesn’t have stock options? I don’t think so.

Still, businesses don’t want employees with stock options to compete, and the Texas Supreme Court likes businesses, so the court jettisoned Light’s “give rise to” requirement in Marsh USA Inc. v. Cook, 354 S.W.3d 764, 773-76 (Tex. 2011). Instead of requiring the consideration to “give rise to” the employer’s interest in restraining competition, Marsh held that it is sufficient for the consideration to be “reasonably related” to an interest worthy of protection, such as confidential information or goodwill. Id. at 775. Applying this new “reasonably related” test, Marsh held that stock options were reasonably related to the protection of goodwill. Id. at 777.

“Reasonably related” is pretty weak sauce. Personally, I think getting rid of the “give rise to” requirement was a mistake, for reasons already covered. Plus, the majority opinion in Marsh is heavy on economic theory and light on practical experience. (For a look at how non-competes actually work in practice, see The Problem With Non-Competes.)

But I’ll bet most lawyers applauded Marsh, because applying the “give rise to” requirement outside the typical confidentiality agreement scenario was such a headache. And I will give Marsh its due: it at least had the benefit of making the “ancillary” requirement simpler to apply.

Still, Marsh did not completely extinguish Light.

The “designed to enforce” requirement

Remember, Light also said “the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement.” In the typical case where the non-compete is tied to a confidentiality agreement, the non-compete meets this requirement because it is designed to enforce the employee’s promise not to use or disclose the employer’s confidential information. At least, that’s the theory.

So, in the typical case involving a confidentiality agreement, Light’s “designed to enforce” requirement will usually be satisfied.

But what about other types of “otherwise enforceable agreements”? Do they still have to meet Light’s “designed to enforce” requirement? Or did Marsh abolish that requirement too?

That was the issue in Titan Oil & Gas Consultants, LLC v. Willis, No. 06-20-00026-CV, 2020 WL 6878418 (Tex. App.—Texarkana Nov. 24, 2020, no pet. h.). In Titan, the employer argued that Marsh overruled Light’s “designed to enforce” requirement, but the Court of Appeals disagreed. Marsh specifically stated that it was only addressing the “give rise to” prong of Light, the Titan court said, not the “designed to enforce” prong. Id. at *5.

The Court of Appeals was therefore bound to follow the “designed to enforce” requirement. “Neither Marsh nor any other Texas Supreme Court that has considered Light has overruled Light’s designed-to-enforce element of an enforceable covenant not to compete,” the court said. And it is not the function of a court of appeals to abrogate or modify Texas Supreme Court precedent. Id. at *6.

So, Light’s “designed to enforce” requirement survives. For now.

Does the requirement make any practical difference? It did in Titan, but the circumstances there were unusual. The employee signed a contract with one company, Titan, but received the confidential information from a different company, Apache, and the non-compete only restricted the employee from working for Apache. The court reasoned that a restriction on working for Apache was not designed to enforce the employee’s promise not to disclose Apache’s confidential information. Id. at *6.            

Outside of oddball situations like Titan, the “designed to enforce” requirement probably doesn’t do much for the employee. But lawyers in Texas non-compete cases should at least be aware of the requirement and consider whether the contract meets it.

______________________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation. This post is dedicated to Bob Schneider.

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.

Common Misconceptions About the Settlement Communications Rule

Common Misconceptions About the Settlement Communications Rule

Nobody likes it when the other party to a confidential settlement communication spills the beans in public. Like they say, snitches get stitches.

Lawyers try to avoid this problem by putting something like this at the top of their letters and emails about settlement:

*CONFIDENTIAL SETTLEMENT COMMUNICATION SUBJECT TO FRE 408*

Why do lawyers do this?

The answer is that if you put this at the top of your email or letter, then the party who receives it is not allowed to use your statements against you for any purpose. This is federal law.

I’m just kidding. That’s not what the law is. Cue the “Bad Legal Takes” account on Twitter.

But there are some common misconceptions about the settlement communications rule, even among lawyers.

Before I get to those, let’s take a look at the rule itself.

Federal Rule of Evidence 408 says this:

Most states have a similar rule. Texas, where I practice, has its own version of Rule 408, which is similar to—but not identical to—the Federal Rule:

For simplicity, let’s put aside for now the part of the federal rule about certain criminal cases. We can then see, based on the text alone, that both the Texas rule and the federal rule make a statement inadmissible if:

(1) there is a “disputed claim”

(2) the statements is “made during compromise negotiations about the claim”

(3) the statement is offered for the purpose of proving or disproving “the validity or amount of a disputed claim.”

The “exceptions” in part (b) are not exceptions per se; they really just clarify that the rule does not bar admission of a settlement communication offered for some other purpose.

Seems simple enough, but what does this really mean, and why do we have this rule?

Let’s take a very basic example. Suppose you get in a car accident with Dave Driver and there’s a lawsuit. During a discussion of settling the case, Dave says “ok, I ran the red light, but the damages you’re asking for are just too much.”

Under Rule 408, you can’t offer Dave’s statement “I ran the red light” as evidence in court. As the federal version of the rule makes clear, you can’t even offer the statement as impeachment evidence if Dave testifies in court “that light was green.”

At first, this doesn’t seem fair. How can Dave get away with admitting he ran the red light and then say the opposite in court?

But if you think about it, if you could use Dave’s statement against him in court, his lawyer might never let Dave say a word in settlement discussions. Why chance it?

No, we want to encourage people to speak candidly and freely in settlement negotiations. We don’t want them to think anything they say can and will be used against them. That would have a “chilling effect” on attempts to compromise disputed claims. That’s why we have Rule 408.

On the other hand, we don’t want people to use the rule to block admission of evidence that is relevant for some other purpose. Suppose Dave’s insurance company offers Pam Passenger money in exchange for an agreement not to testify that Dave ran the red light. Part (b) of the rule clarifies that evidence offered for some other relevant purpose—such as showing Pam’s bias—could still be admissible.

And keep in mind, the statement has to be part of a communication about a compromise. A statement that simply asserts a party’s position or makes a demand may not be a “compromise” communication.

Now that we understand the elements of the rule and its purpose, let’s look at some common misconceptions about the rule.

1. Thinking that labeling something a “Rule 408 settlement communication” makes it so

This one seems pretty obvious, but some lawyers still seem to think that if they put this kind of label at the top of a letter, the letter can never be offered as evidence. Some will even get bent out of shape and accuse you of being unprofessional if you try.

Whether this is unprofessional will of course depend on the circumstances, but of course, just because one lawyer labeled something a Rule 408 communication does not make it inadmissible. If you’re going to object to the admission of the statement in the courtroom, you will still have to meet each of the elements I outlined earlier.

On the other hand, putting the “Rule 408” label on your letter isn’t a total waste of time. It does at least provide some evidence that at least one party intended the communication as a “statement made during compromise negotiations about the claim,” and that doesn’t hurt.

Conversely, leaving out the Rule 408 label does not mean that Rule 408 does not apply, but again, it probably doesn’t hurt to use the label—if you’re concerned about the communication being used against your client later in court.

2. Thinking that Rule 408 bars admission of a settlement communication for any purpose

This one also seems fairly obvious if you read the rule. But it’s not uncommon for lawyers to object to any evidence of a statement made during a settlement negotiation, even when the evidence is offered for some other purpose. And if the judge doesn’t grasp the distinction, the objection may even be sustained.

But still, lawyers should not think that the rule will keep out evidence of settlement communications, regardless of the purpose. Several times in preparing for a trial I have pulled case law applying Rule 408 to support or respond to an anticipated objection, and I can tell you that most of the cases you run across say that Rule 408 did not bar admission of the evidence, because the evidence was offered for some other purpose.

3. Thinking that Rule 408 bars admission of evidence that a party to a dispute committed a crime in a settlement communication

This is really a corollary to misconception no. 2. If a party’s settlement communication itself is evidence of commission of a crime, then Rule 408 would not bar offering that communication for the “other purpose” of proving that the party committed a crime.

Suppose a mob boss is a party to a contentious civil lawsuit about a restaurant lease. During a conference call to discuss settlement, he says “this is really a reasonable offer, and if you don’t take it, bad things could happen to your nice restaurant.”

In that case, Rule 408 would not prevent the government from offering the mob boss’s statement as evidence in a prosecution for extortion. The statement would meet the first two elements of Rule 408—it was made during compromise negotiations of a disputed claim—but it would not be offered for the purpose of proving or disproving the validity or amount of a disputed claim. Rather, the evidence would be offered for the purpose of proving that the mob boss committed a crime by making the statement.

4. Thinking that Rule 408 establishes a privilege

This is a somewhat subtle distinction, especially for non-lawyers, but it’s an important one.

Rule 408 on its face talks about whether evidence is “admissible.” It doesn’t say that the evidence is “privileged.”

This is an important distinction. To illustrate, let’s consider the attorney-client privilege rule in contrast. That rule governs both admissibility and privilege. If I have a confidential communication with my lawyer for the purpose of obtaining legal advice, that communication is generally privileged.

Privileged means both that I can’t be required to disclose the communication in a lawsuit, and that the opposing party cannot offer the statement as evidence in court.

Rule 408 doesn’t work like that. It says nothing about making the statement privileged from disclosure. Generally, if a settlement communication is relevant to disputed issue in a lawsuit, then Rule 408 doesn’t prevent a party to the lawsuit from demanding disclosure of the communication, such as in a pretrial deposition or in a request for production of documents.

So, while I can object to the opposing party attempting to offer the settlement communication as evidence, that doesn’t mean the statement is exempt from disclosure.

5. Thinking that Rule 408 bars disclosure to third parties

This one is similar to no. 4. Rule 408 is a rule of admissibility, not a rule of confidentiality. The rule says nothing about disclosing an opposing party’s settlement communication to a third party, or to the general public.

So if Dave Driver says “I ran the red light” during a settlement discussion, there is nothing to stop the other party from going to the press and saying “Driver admitted he ran the red light!”

That is, unless the parties agreed to keep the settlement communications confidential. But that would be a contract law issue, not a Rule 408 issue. Dave would have to prove the existence of an agreement to keep the settlement communications, a breach of the agreement, and damages resulting from the breach. Of course, in some cases there could be public policy issues with enforcement of the agreement.

Practice Tips

This leads to my settlement communication practice tips for lawyers:

1. If you’re concerned about sensitive statements your client might make during a settlement negotiation, consider entering into a written agreement up front providing that both sides will keep the settlement communications confidential and not offer them as evidence for any purpose. (This would be broader than Rule 408.)

2. Understand that, as a practical matter, your client’s only recourse in the event of public disclosure will be a claim for damages, which will probably be difficult to prove and won’t really undo the reputational damage.

3. Suggest your client try to avoid making any statements that could be considered a crime.

Like they say, don’t do the crime if you can’t do the time.

_____________________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas Super Lawyer® for Business Litigation. He hereby designates this entire blog post confidential under FRE 408.

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.

The Most Common–and Easily Fixable–Mistake in Texas Noncompete Litigation

The Most Common–and Easily Fixable–Mistake in Texas Noncompete Litigation

I made a big mistake last Friday. I opened my Twitter feed before watching the season finale of The Mandalorian with my kids. Y’all can guess what happened.

Speaking of spoilers, here’s a SPOILER ALERT: If you would rather learn for yourself the most common and easily fixable mistake in Texas non-compete litigation, I recommend first litigating a bunch of non-compete cases in Texas and getting them wrong. But if you just want the answer, read on.

And if you’ve watched my YouTube video The Reasonable Time Period Requirement for a Texas Non-Compete, you probably already know the answer.

As that video hints, the most common and easily fixable mistake lawyers make in Texas non-compete litigation is failing to offer evidence—not just argument—regarding the reasonableness of the non-compete’s time period.

Fortunately, this is easily corrected. Just offer testimony from your client explaining why the time period is or is not longer than necessary to protect the company’s confidential information and/or goodwill with customers (depending on which side you’re on). And make sure the testimony is specific, not conclusory.

Even better, offer expert testimony on this issue. In most cases, your client or client representative probably has enough experience in the industry to qualify as an expert, so you won’t need to hire one. For example, if you represent a former employee who has a two-year non-compete, offer expert testimony that the employer’s confidential information becomes stale within a year, or that goodwill with customers is likely to dissipate in a year.

This is sure to draw an objection, but if the witness has significant experience in the industry and gives specific reasons for the opinion, what’s the objection?

You may also draw an objection that reasonableness is a question of law, but that’s wrong (sort of), as I explained in Blown Call: The Thing Texas Courts Get Wrong About Non-Competes.

Anyway, fact or opinion testimony should, at a minimum, create a fact issue regarding the reasonableness of the time period, and thus, the enforceability of the non-compete.

And yet, lawyers in Texas non-compete litigation hardly ever do this.

(Reminder: This is not legal advice for your case. Every case is different, and there may be valid strategic reasons not to offer such evidence in a particular case.)

I’ve handled a lot of non-compete disputes, and in my experience, lawyers on both sides rarely offer evidence about the reasonableness of the non-compete’s time period. And expert testimony on the issue is even more rare.

Most of the time, reasonableness of the time period is an afterthought. At most, the lawyers will offer argument about it, rather than evidence, and cite a few cases.

Why is that?

Let’s back up a bit to put this problem in context.

Enforceability is almost always a key issue in a non-compete lawsuit. In the typical case where an employer sues a former employee to enforce a non-compete, the employer has the burden to prove that the non-compete is enforceable. See Tex. Bus. & Com. Code § 15.51(b). That includes proving that the non-compete is reasonable in time period, geographic area, and scope of activity restrained. Tex. Bus. & Com. Code § 15.50(a).

One caveat: in a temporary injunction hearing, it is debatable whether the judge should address enforceability of the non-compete. On the one hand, likelihood of success on the merits is one of the elements required for a temporary injunction. See, e.g., Tom James of Dallas, Inc. v. Cobb, 109 S.W.3d 877, 884 (Tex. App.—Dallas 2003, no pet.).  On the other hand, the court does not decide the “ultimate issue” of enforceability at the temporary injunction stage. Id.

Let’s put that complication aside and assume that enforceability of the non-compete is somehow an issue before the court, whether it’s a TCPA motion to dismiss, a temporary injunction, a summary judgment motion, or at trial.

In that case, the employer needs to offer evidence that the time period is reasonable. Otherwise, the court may rule that the employer failed to meet its burden of proof. And if you represent the employee, you should offer evidence that the time period is unreasonable, even if you don’t have the burden of proof.

So, for example, even if the time period is only one year, evidence that one year is longer than necessary to protect the employer’s confidential information or goodwill may be enough to prove that the non-compete is unenforceable.

That’s what happened in CDX Holdings, Inc. v. Heddon, No. 3:12-CV-126-N, 2012 WL 11019355 (N.D. Tex. March 2, 2012). In that case, the court held that the plaintiffs failed to meet their burden to show one-year limitation was reasonable, where there was testimony that the information was confidential and would be valuable to competitors, but there was also testimony that the information was “continually changing and updated” and had a “short shelf life.” Id. at *9.

I don’t know if that was the right factual determination, but the approach in CDX Holdings was correct. The court should look at the evidence to decide whether the time period is reasonable.

That is not what usually happens. Here’s the typical scenario. The time period of the non-compete will be less than five years. The employer’s counsel will cite Texas cases for the “Five-Year Rule,” which says that Texas courts have repeatedly upheld non-competes with time periods of two to five years. The employee’s counsel will then make some argument—but not offer any evidence—that this case is different for some reason. In most cases, if the issue goes up on appeal, the Court of Appeals will cite the Five-Year Rule and say the time period was reasonable.

Funny thing about the Five-Year Rule, though: when you investigate its origins, you find that the first Texas case that cited it basically just made it up. I explained this in What is a Reasonable Time Period for a Texas Non-Compete? But the rule has now been repeated so many times that it has become a sort of self-fulfilling prophecy.

Here’s another funny thing about the Five-Year Rule: if you look at the opinions that cite it, very few—if any—are cases where there was conflicting evidence about the reasonableness of the time period. (Or if there was conflicting evidence, the opinion ignores it.)

Let’s look at a recent example.

In Reilly v. Premier Polymers, LLC, No. 14-19-00336-CV, 2020 WL 7074253, at *1-2 (Tex. App.—Houston [14th Dist.] Dec. 3, 2020, no pet. h.) (mem. op.), a commodity polymers company sued a former sales manager and his new employer, claiming breach of contract, tortious interference, and misappropriation of trade secrets. The court held that the 18-month period of the manager’s non-solicitation covenant was reasonable, citing the usual suspects for the Five-Year Rule. Id. at *10-11.

Curiously, the opinion did not cite any evidence from the record about whether 18 months was longer than necessary to protect the employer’s confidential information, goodwill, or other business interest.

So I looked at the Appellants’ Brief (at pp. 41-43) and the Appellee’s Brief (at pp. 35-36) to see if the parties cited any evidence about whether 18 months was reasonable. Nope.

Instead, the defendants argued that the 18-month period was punitive, and therefore unreasonable, because the agreement also provided that employees terminated for reasons other than for “cause” were only subject to a one-year non-solicitation restriction. 2020 WL 7074253 at *11. In effect, the agreement imposed an additional six months of non-solicitation as a punishment for employees who quit, the defendants argued.

That sounds like a plausible argument to me, but the defendants cited no case law to support it, and the plaintiff attacked it as a “made-up rule.” The Court of Appeals sided with the plaintiff, declining to adopt the defendants’ proposed standard, “particularly where the 18-month period at issue is well-within what other courts have deemed reasonable.” Id.

Thus, as in most Texas non-compete lawsuits, it appears neither side offered any evidence about whether 18 months was longer than necessary, and the Court of Appeals decided the case based purely on argument and case law, without considering any evidence in the record.

But what if the defendants had offered evidence?

Let’s say Reilly, who worked as a salesperson and regional manager for the polymers company for seven years, testified as an expert that a one-year non-solicitation covenant would be sufficient to protect the company’s confidential information (if any) and customer goodwill, giving specific reasons based on his familiarity with the company, its customers, and the industry. Would that have been sufficient evidence that 18 months was unreasonable, and the restriction therefore unenforceable?

We may never know, but you should try it. This is the way.

_______________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas Super Lawyer® for Business Litigation.

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.

Why Is Discovery So Expensive?

Why Is Discovery So Expensive?

Changes to the Texas discovery rules go into effect January 1, 2021. I wrote about some of these proposed changes in Proposed Changes to Texas Discovery Rules Threaten Law Firm Revenue. The new Texas Rules will now have initial disclosures and other features more like the Federal Rules.

The changes are partly intended to address an obvious problem: the discovery process is too expensive.

If you’re a lawyer who litigates, or just a business person who has been involved in litigation, you know that civil litigation is very expensive. And most of that expense is for document discovery, depositions, and other pretrial discovery.

So why is this process so expensive?

One possible answer: emails. Today most discovery is about emails and other documents that exist in electronic form.

This is a change so big we sometimes don’t even notice it. When I started practicing law in Texas 23 years ago, most of the discovery was about old-fashioned paper. In the first big case I worked on, would you believe there were zero emails produced in discovery? Now, most of the documents produced in a lawsuit are emails and other documents found in electronic form. And this has made discovery more expensive.

On the other hand, you could make a case that e-discovery hasn’t fundamentally changed discovery. It was already expensive. The term “Rambo tactics” emerged from discovery battles in the 1980s, before e-discovery was even a thing. You could argue that email just exacerbated a problem that already existed.

So aside from email, why is discovery so expensive?

Results of my scientific survey

There’s no single answer, but in my experience, it comes down to three key things.

First, I hate to say it, but there are some bad lawyers out there, and all else being equal, bad lawyers tend to be more obstructive.

Second, even good lawyers often engage in obstructive tactics in discovery.

Third, judges don’t like to get their hands dirty dealing with discovery disputes.

Notice what I left out. I didn’t say discovery is too expensive because the Texas Rules of Civil Procedure need to be changed.

That’s why I don’t expect changes to those Rules to have much impact on the cost of discovery. It’s not like discovery is going to be too expensive if you get 25 interrogatories, but suddenly manageable if you only get 15. Limits on the number of depositions could have more of an impact, but even there, I think fights over written discovery are the bigger culprit, and I don’t see how limits on the amount of discovery will have much impact on that problem.

To understand better, let’s drill down on the three things that make discovery expensive, using my favorite hypothetical lawsuit, Paula Payne Windows v. Dawn Davis, to illustrate.

Suppose Paula Payne Windows sues Dawn Davis and her new employer, Real Cheap Windows, claiming that Dawn breached her non-compete and misappropriated trade secrets. Let’s say the lawyers on both sides are less than top notch.

If the lawyers are not so good, you are likely to get two things in discovery: discovery requests that are overbroad and poorly written, and discovery responses that simply repeat a bunch of formulaic objections. And even with good lawyers, you may still get some of this.

Let’s look at some examples.

Example 1: the overbroad request for production

Paula Payne Windows serves a request for production that seeks “all documents relating to sales of windows to customers of Paula Payne Windows.”

You see this kind of request a lot, in all kinds of litigation, and it is usually objectionable, for two reasons.

First, it is too indefinite. What the heck does “relating to” mean? I mean, I know what it means generally, but it’s such a broad and vague term. How do I decide whether a particular document “relates to” sales of windows? It’s just too fuzzy to provide meaningful guidance.

Second, the request is overbroad. In other words, it is not reasonably tailored to obtain relevant documents, while excluding irrelevant documents. It doesn’t even have a date range. And even if it was limited to a relevant time period, there are likely hundreds of documents, if not more, that “relate to” sales of windows to Real Cheap Windows, and most of those documents will have little or no relevance to the issues in dispute. That also means the request is probably “unduly burdensome,” another common objection.

Put it this way: If Paula Payne Windows gets the invoices identifying the sales, does it really need every single email with every customer about the sales?

Example 2: boilerplate objections to a reasonable request for production

Lest you think that obstructive tactics are limited to requesting too much discovery, let me assure you, there are plenty of obstructive responses as well.

Suppose Paula Payne Windows serves this request for production instead: “Your invoices reflecting sales of windows to customers of Paula Payne Windows from the time you hired Dawn Davis to the present.”

Is this proper? Of course, it depends on the circumstances, and every case is different, but in a typical non-compete lawsuit, this would usually be a proper, reasonably tailored request. So let’s assume this is a well-drafted request.

Will the response be “please see attached invoices”? [Litigators laugh here.]

Not likely. First, you’re probably going to get a bunch of “general” objections that supposedly apply to every request for production. Sometimes these go on for pages. They may include objections like, “Defendants object to each request to the extent that it exceeds the permissible scope of discovery.” I joked about this sort of thing in Agree on These Litigation Rules to Level the Playing Field.

Usually, most of these general objections are, pardon my French, bullshit.

Now, don’t get me wrong, there are some “general” responses that I typically include in my responses, but I keep it to a minimum, and I try to include only general responses that really do apply to each request.

In contrast, most “general objections” I see don’t legitimately apply to every request, which makes them obstructive and unnecessary.

But that’s not all. In response to your specific request, you are likely to get something like this:

These are representative examples of “boilerplate” objections. By boilerplate, I mean the lawyer probably just did a cut and paste of a bunch of objections, rather than narrowly tailoring the objections to fit the requests.

This is usually the result of laziness, or sharp tactics, or both.

It’s lazy because it’s easier to just cut and paste the same objections over and over, rather than really thinking through what is objectionable about the request.

But it can also be a deliberate tactic. Even a good lawyer might choose to include a bunch of objections in every response. One rationale is that you don’t want to fall into the trap of waiving an objection that you might later need to argue to the judge. Another, more cynical rationale is that everybody does this, and you don’t want to make it too easy on the other side to get the documents they need. Why should you unilaterally disarm?

You see the same thing with another type of discovery request, the interrogatory.

Example 3: boilerplate objections to a reasonable interrogatory

An interrogatory is a written question that the responding party has to answer in writing, signed under oath by the responding party or its representative.

Here’s how I might draft an interrogatory if I represent Dawn Davis: “Please describe in reasonable detail the alleged trade secrets you contend Dawn Davis misappropriated.”

This is exactly the kind of question that interrogatories were designed for. So is the lawyer for Paula Payne Windows likely to respond with, “Dawn Davis misappropriated the following trade secrets . . .”?

That would be a pleasant surprise. No, the response is more likely to look like this:

It’s hard to see how these objections are warranted. The interrogatory expressly asked for reasonable detail. So the objection that the interrogatory improperly requires the responding party to “marshal evidence” just doesn’t apply here.

Rule 197 of the Texas Rules of Civil Procedure expressly provides that an interrogatory “may ask the responding party to state the legal theories and to describe in general the factual bases for the party’s claims or defenses.” In other words, the rule allows reasonable “contention” interrogatories.

In fairness, maybe the objections were made like that because the responding attorney is so accustomed to poorly drafted interrogatories. Let’s look at an example of that.

Example 4: the unduly burdensome interrogatory

Litigators have all seen this kind of interrogatory: “Please state all facts supporting your contention that Dawn Davis misappropriated trade secrets from Paula Payne Windows.”

Here, the problem is not so much that the request is irrelevant or overbroad. On the contrary, it is expressly limited to relevant facts supporting a specific claim made by one of the parties to the lawsuit.

The problem is that requiring the responding party to state all facts supporting the contention would just be too burdensome.

That’s why Texas Rule 197 specifically says “interrogatories may not be used to require the responding party to marshal all of its available proof.”

I’ll repeat: interrogatories are not for requiring the other side to marshal all its evidence. That’s what a “no evidence” motion for summary judgment is for. [rim shot]

But seriously, Rule 197 couldn’t be more clear about this. The comment to the rule says that “interrogatories that ask a party to state all legal and factual assertions are improper.” So an interrogatory that asks for “all facts” is almost always objectionable.

Yet people still draft interrogatories that way. Why? Especially when you know the responding party is just going to object.

Again, I think laziness is the main reason. And maybe also a cynical view that says it doesn’t matter that much how you draft it, because the other side is just going to object anyway. Plus, even if you have to file a motion to compel, it’s unlikely the judge will get down into the weeds of how the interrogatory was worded.

Ah, judges. The other piece of the puzzle.

How judges typically respond to obstructive discovery tactics

How do judges usually respond to requests that are too broad, or objections that are too obstructive?

I can tell you exactly how most judges respond. Picture a summer vacation in the family station wagon, let’s say in the 1970s. You’re one of three kids, sitting in the middle, bare legs sticking to the vinyl seat. Cigarette burning in the ash tray up front. Your brother in his shorts and tube socks keeps invading your space. “Mommy, Johnny keeps touching me!” “That’s a lie, I did not!” “Yes, you did!”

What would Mommy or Daddy say? “If you kids don’t shut up and behave, I swear to God, I’m going to pull this car over right now and give you both a spanking!” (I mean back in the day, of course.)

Did Mommy and Daddy care who started it? Did they care who was right and who was wrong? No, they just didn’t want to be bothered.

And that, my friends, is why discovery is so expensive.

_________________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. Thomson Reuters named him a 2020 Texas Super Lawyer® for Business Litigation.

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.

Imagine There’s No Lawyers

Imagine There’s No Lawyers

I was telling my 11YO son about a new client, and he says “you know, Daddy, when you think about it, you really make money off the misfortune of others.”

Ouch. I could respond by saying that we live in a world where people have disputes, and lawyers serve a necessary function by helping people resolve disputes under the rule of law.

But what if we lived in a world where there was no crime, and people didn’t fight over money? Lawyers like to think they serve justice, but wouldn’t we be better off in a more just world where disputes disappear, making lawyers unnecessary?

Perhaps we should consult the greatest book about justice, which—sorry, John Rawls—was written over two thousand years ago.

Let me take you down . . .

In Plato’s Republic, Socrates went down to the Piraeus and made a bold claim: justice requires that the city’s children be raised in common, not by individual families.[1]

His audience is shocked, but there is a certain logic to the claim. There is perhaps no greater source of inequality than the family. The children of rich parents have all the advantages, while the children of poor parents have it much harder. That was just as true in ancient Athens as it is today. If there is to be real justice—i.e. fairness—then the traditional family must be abolished, Socrates suggests.

And while we’re at it, we’d better get rid of private property too.[2] That’s another source of injustice.

Then, with women, children, and property shared in common among the city’s elite “guardian” class, “lawsuits and complaints against one another [will] vanish from among them thanks to their possessing nothing private but the body, while the rest is common.”[3]

Thus, Socrates suggests that a just society requires a sort of “communism,” although that term would be an anachronism in ancient Greece.

This sounds dangerous, of course, especially to us moderns who have seen the catastrophic results of 20th-century totalitarianism. It starts with lofty talk of remaking culture and society and ends with “reeducation” camps.  Is that really what Plato—through his character Socrates—thought justice requires?

That question is subject to interpretation and debate. One interpretation is to take Socrates at face value. When he says that justice requires a sort of communism, he really means it. He’s advocating that kind of society.

Another interpretation says that Socrates is serious, in a sense, when he says that justice requires abolishing the family and private property. But it’s one thing to say what justice demands, it’s another to say what should be done. Justice, after all, is not the only human good. Perhaps the lesson of Plato’s Republic is that a utopia of justice would actually be a kind of dystopia.

That’s a sober lesson. It means that even the best society will have to make tradeoffs between justice and other values, and that’s a messy proposition. By asking us to imagine what a perfectly just city would look like, Plato forces us to confront that tension.

He’s a real nowhere man

This reminds me of another famous guy who asked us to imagine what a utopian world would look like. John Lennon released the album Imagine in 1971. Surprisingly, the iconic title track never reached no. 1 on the US charts, peaking at no. 3 that year. But since then, “Imagine” has become Lennon’s greatest post-Beatles hit.

Musically, it is an almost perfect pop song. That piano lick with the reverb and just a hint of the blues, Phil Spector’s ethereal but not too-syrupy strings, the tasty drum fills, and of course, John’s incomparable vocal. It’s no wonder millions of people, young and old, have downloaded the song from iTunes.

But not everyone is a fan. Behind that majestic music are some lyrics that are, let’s face it, kind of dark when you think about it.

I imagine Lennon himself would be bemused to see his provocative song embraced as a classic by middle America, to the point where you might hear it at a kid’s ballet recital. It’s how Bruce Springsteen must feel when “Born in the USA” is played at political rallies. What countercultural revolutionary wants to see his musical manifesto turned into something like the soundtrack for a Coke commercial? It’s supposed to make people uncomfortable, not teach the world to sing.

“Imagine” is especially jarring if you’re religious. Right off the bat, Lennon hits you with “imagine there’s no heaven.” Then, later, just in case you missed it, he comes back with “and no religion too.”

Granted, he never says “imagine there’s no God,” but he comes pretty close.

Then Lennon goes after two more things most Americans hold dear: patriotism and capitalism. “Imagine there’s no countries,” he sings in the second verse, “it isn’t hard to do.” And in the third verse he takes aim at private property. “Imagine no possessions, I wonder if you can.”

Not just equal possessions, no possessions. That is hard to imagine, and not very appealing.

(The common objection that it’s hypocritical for a rich rock star to sing about “no possessions,” while understandable, has always struck me as pretty weak sauce. Would the line suddenly become valid if sung by a poor person?)

But for me, the lyric in “Imagine” that everyone, regardless of political or religious beliefs, should have a real problem with is the line “nothing to kill or die for.”

That line is in the context of nationalism, coming right after “imagine there’s no countries,” and let’s remember, this was in the middle of the Vietnam War, which Lennon despised. So maybe the point was to criticize excessive militarism.

But still, if you take that line literally, it paints a picture of a world that would be pretty bland and joyless.

Nothing to kill or die for? Think about all the great literature, poetry, and cinema that would make no sense if there were nothing worth dying for. No Odyssey, no Les Miserables, not even Saving Private Ryan. And Shakespeare? Forget about it. His tragedies and histories are all about people dying for things they love more than life itself.

Getting rid of those things might make the world more just, but a lot less interesting.

Not only that, but nothing to kill or die for suggests no loved ones. Think about the things in your own life that you would lay down your life for. Yes, of course, God and country and justice and all that, but most of you probably thought about family members first. Is Lennon really saying that a world without family would be a utopia?

Better free your mind instead

Maybe we have it all wrong. Maybe John Lennon wrote “Imagine” to make us see that a world without countries, religion, possessions, and things worth dying for would actually be a dystopia. Perhaps it’s an ironic anthem.

That’s an interpretation, but an unlikely one. Just considering the face of the lyrics, the final line of the song is “I hope someday you’ll join us, and the world will live as one.” That sounds like a fairly earnest call to action. Then when we look outside the lyrics, the extrinsic evidence tells us that the song’s critique of religion, nationalism, and materialism aligns pretty well with the beliefs Lennon espoused in interviews.

In short, the ironic interpretation of “Imagine” doesn’t seem very plausible.

On the other hand, John Lennon was fond of ambiguity. This is the guy who sang “I’d rather see you dead, little girl, than to see you with another man” before he wrote the hippie anthem “All You Need Is Love.”

Even more famously, his song “Revolution” reads like a critique of 60s radicals who embraced the idea of violent Marxist rebellion. “But when you talk about destruction,” he sang on the original single version (the fast one), “don’t you know that you can count me out.” He was all about giving peace a chance.

Or so we thought. Later, when the Beatles released the slower, doo-wop version of “Revolution” (the one on the White album), John sang “don’t you know that you can count me out . . . in.”

Out . . . in. What was that all about?

This ambiguity suggests we need to consider Lennon’s whole body of work, and when we do that, a more complex picture emerges.

Just like starting over

Nine years after Imagine, John Lennon released a comeback album called Double Fantasy. I consider it his best solo album, but strangely, there’s nothing on it about politics. Instead, the songs were all about relationships. (“Woman, I can hardly express, my mixed emotions at my thoughtlessness.”)

What happened? Did John go soft?

One thing that happened is that John’s son Sean was born in 1975. At that point, Lennon did something almost unimaginable for a rock star who stood at the top of the world. He quit making music, became a house husband, and stayed home with his kid, changing diapers and watching Sesame Street.

This eventually led to another song with a memorable piano riff: “Watching the Wheels.” It responds to the questions people kept asking John during his self-imposed exile from show business. “Don’t you miss the big time, boy, you’re no longer on the ball?”

But the song on Double Fantasy that has really resonated with people is “Beautiful Boy,” a musical love letter to John’s son. Even if you don’t know the song, you probably recognize its signature line: “life is what happens to you while you’re busy making other plans.”

Everyone can relate to that, especially if you have children. We all have big plans when we’re young. Some want to get rich, or famous, or both. Others want to make the world a better place.

Raising children has a way of bringing us back to reality. This is precisely why Socrates thought the family would stand in the way of complete justice.

And the hard truth is, sometimes having a family gets in the way of those big plans you had. But you learn that the best stuff in life is what happens along the way. You’d think that people would have had enough of silly love songs, but you look around you and you see it isn’t so.

I think this points to a third possible interpretation of “Imagine.” Maybe we need to pay more attention to the title.

Perchance the point is not to get rid of everything we care about and fight over. “Imagine” suggests that the things human beings love the most can also be the very things that make us behave the worst. But by imagining a more just world, we can at least remind ourselves not to let our selfish concerns for our own families, possessions, and beliefs feed into greed, intolerance, and violence.

If that means less work for lawyers, I can live with that. Maybe I can have a second career as a rock star.

__________________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. Thomson Reuters named him a 2020 Texas Super Lawyer® for Business Litigation.

These are his opinions, not the opinions of his firm or clients.

[1] “All these women are to belong to all these men in common, and no woman is to live privately with any man. And the children, in their turn, will be in common, and neither will a parent know his own offspring, nor a child his parent.” The Republic (On the Just), Book V, 457d (Basic Books 2d ed. 1991, trans. Bloom).

[2] “There mustn’t be private houses for them, nor land, nor any possession.” Id. at 463c.

[3] Id. at 464e.

What Is a Reasonable Time Period for a Texas Non-Compete?

What Is a Reasonable Time Period for a Texas Non-Compete?

Baseball legend Yogi Berra reportedly said “I usually take a two-hour nap from one to four.” He also said “the future ain’t what it used to be.” Obviously the guy had a unique sense of time.

Time is on my mind because of this week’s blog topic: What is a reasonable time period for a Texas non-compete?

For almost a century, Texas case law has required that a non-compete be limited to a reasonable time period, and in 1989 the legislature codified this requirement in the Texas Covenants Not to Compete Act. The time period must be no longer than necessary to protect the employer’s goodwill or other business interest (usually confidential information). See Tex. Bus. & Com. Code § 15.50(a). And in the typical context of an employment contract, the burden is on the employer to prove the time period is reasonable. See Tex. Bus. & Com. Code § 15.51(b).

The time period of a Texas non-compete must be reasonable. That much is clear. But what does “reasonable” mean in practice? Is there any rule we can discern from the decades of case law?

Unfortunately, the Texas case law applying the reasonable time period is remarkably unsatisfying. You’re just not going to find much analysis defining what makes a time period reasonable or not. The best I can do to synthesize a “rule” from the cases is the “Five-Year Rule.”

The Five-Year Rule says that when addressing the reasonable time period requirement, the court will declare that Texas cases have upheld non-competes of two to five years, and if the time period at issue is five years or less, the court will then find the time period reasonable, without discussing any specific evidence.

I don’t find the Five-Year Rule very helpful or persuasive. As the statute indicates, the question is whether a shorter time period would be sufficient to protect the interest at issue, which is usually the employer’s confidential information and/or goodwill.

I propose an alternate rule, the Wolfe Rule. The Wolfe Rule says that when there is conflicting evidence about whether the time period of a non-compete is reasonable, it presents a fact issue for the jury.

Now, you’re not going to find the Wolfe Rule stated explicitly in any Texas cases, but it is the correct rule. I would even go as far as saying it is obviously the correct rule, and the fact that Texas courts have not expressly stated it presents something of a mystery. And one more thing: the Wolfe Rule does not necessarily conflict with the Five-Year Rule.

How can all of this be true?

To understand, first we need some historical perspective.

We’ll start in the Ice Age. I call it that because you could write the early history of Texas non-compete law based on cases involving the ice delivery business. I wrote about one of these cases, City Ice Delivery Co. v. Evans, 275 S.W. 88 (Tex. App.—Dallas 1925, no writ), in Jurassic Non-Competes.

There were at least four more Texas non-compete cases about ice delivery in the 1920s alone. Oak Cliff Ice Delivery Co. v. Peterson, 300 S.W. 107 (Tex. Civ. App.—Dallas 1927, no writ); Carpenter v. Southern Properties, Inc., 299 S.W. 440 (Tex. Civ. App.—Dallas 1927, writ ref’d); Texas Ice & Cold Storage Co. v. McGoldrick, 284 S.W.615 (Tex. Civ. App.—San Antonio 1926, writ ref’d); Bettinger v. North Fort Worth Ice Co., 278 S.W. 466 (Tex. Civ. App.—Fort Worth 1925, no writ).  

You can find in these cases many of the principles that still apply in Texas non-compete law today, including the requirement that the non-compete must have a reasonable time period. For example, in Carpenter v. Southern Properties the court said a non-compete can only prohibit competition “for a reasonable space of time” after employment, and the employer has the burden to prove that the non-compete is reasonable “in its duration of time.” 299 S.W. at 443.

The non-compete in Carpenter had a two-year time period. Id. at 442. Was this reasonable? “[T]he trial court has found that the negative covenant sought to be enforced was both reasonable and necessary,” the court said, “and we are not prepared to say that there is not substantial evidence sustaining such finding.” Id. at 444.

That was it. Nothing about what the evidence regarding the time period was. Nothing about why the evidence established that two years was reasonable. And the depth of analysis of the reasonable time period requirement in the next century of Texas case law would not significantly improve.

By 1960, it was well established that a non-compete should be limited “for such a time as is reasonably necessary to protect the employer’s business and good will,” and that the “burden of proof is on the former employer” to establish “by satisfactory evidence” the reasonableness of the non-compete. Weber v. Hesse Envelope Co., 342 S.W.2d 652, 654-55 (Tex. Civ. App.—Dallas 1960, no writ).

And by that time Texas courts had moved from ice delivery to a more fascinating business: envelope sales. Yes, Weber was about a two-year non-compete signed by an envelope salesman. No word on whether Weber also owned a beet farm.

This battle in the great Metroplex envelope wars was tried to the bench, the salesman was the only witness, and the trial court declared the non-compete enforceable. Id. at 653. As to the two-year time period, the Court of Appeals said only that there was “ample support in the evidence” for the trial court’s implied finding that the two-year period of the non-compete was reasonable. Id. at 655.

That was it. The court didn’t cite any of the “ample” evidence or explain how the evidence established that two years was reasonable.

Are you detecting a pattern?

About 20 years later, the superficial treatment of the reasonable time period requirement got worse in AMF Tuboscope v. McBryde, 618 S.W.2d 105 (Tex. App.—Corpus Christi 1981, writ ref’d n.r.e.). That case addressed another two-year non-compete, this one involving the oilfield pipe inspection business. On an application for temporary injunction, the trial court found the time period unreasonable. Id. at 108.

The Corpus Christi Court of Appeals disagreed. The court did not cite any evidence from the record on the reasonableness of the time period, but it stated that the employees had cited no case authority for the proposition that two years is unreasonable. Id. The court then declared: “Two to five years has repeatedly been held a reasonable time in a noncompetition agreement.” Id.

This appears to be the earliest statement of the Five-Year Rule.

AMF Tuboscope cited three cases in support of the Five-Year Rule, but curiously, none of those cases supported the rule:

  • In Arevalo v. Velvet Door, Inc., 508 S.W.2d 184, 185 (Tex. Civ. App.—El Paso 1974, writ ref’d n.r.e.), there was a three-year non-compete but “no contention that the time or space limitation is unreasonable.”
  • In Electronic Data Systems Corp. v. Powell, 508 S.W.2d 137, 138-40 (Tex. Civ. App.—Dallas 1974, writ ref’d n.r.e.), the court upheld the limited scope of the trial court’s temporary injunction. The non-compete at issue had a three-year period, but the reasonableness of that time period was not one of the issues raised in the case.
  • As we have seen, in Weber v. Hesse Envelope, the court said there was ample evidence to support finding the two-year period reasonable, but the opinion said nothing about five years.

You read that right. None of these cases involved a five-year non-compete. And only one of them even addressed whether the time period at issue was reasonable.

So, while I hate to be harsh, the fact is, the statement of the Five-Year Rule in AMF Tuboscope was at best inaccurate, and at worst dishonest.

Almost 30 years later, the Houston Court of Appeals repeated this error verbatim in Gallagher Healthcare Insurance Services v. Vogelsang, 312 S.W.3d 640 (Tex. App.—Houston [1st Dist.] 2009, pet. denied), a case involving a two-year non-compete in the insurance brokerage business. The trial court granted summary judgment that the non-compete was unenforceable, but the Court of Appeals reversed. Id. at 642-43.

Gallagher reasoned that the two-year period was “not unreasonable” because the evidence showed that insurance contracts lasted for a year. Id. at 655. That at least reflected some analysis based on the evidence.

But then the court declared, “Two to five years has repeatedly been held as a reasonable time in a noncompetition agreement,” citing the same three cases cited in AMF Tuboscope. Id.

Thus, not only did Gallagher repeat the same error made in AMF Tuboscope, it did so while addressing a two-year non-compete.

But once the Five-Year Rule was expressly stated in at least two opinions, Texas courts started to invoke it almost routinely, and not just for two-year non-competes.

For example, in Salas v. Chris Christensen Systems, Inc., No. 10-11-00107-CV, 2011 WL 4089999 (Tex. App.—Waco Sept. 14, 2011, no pet.), the court considered the reasonableness of a five-year non-compete in the dog grooming products industry.

Salas did not cite any evidence about the reasonableness of the time period. Instead, it simply said “Texas courts have held that two to five years is a reasonable time restriction in a non-competition agreement,” citing Gallagher and the same three cases cited by Gallagher and AMF Tuboscope. Id. at *19. “Given this,” the court said, “we cannot say that the Agreement’s five-year restraint is per se unreasonable.” Id.

This, of course, misstated the issue. The question should have been whether the employer met its burden to prove that the five-year period was reasonable, not whether a five-year period was “per se” unreasonable.

But the damage has been done. Since Salas, both state and federal courts in Texas have continued to cite the Five-Year Rule, even when the non-compete at issue has a time period of just one or two years:

All of these cases cite the Five-Year Rule uncritically, perhaps without realizing that AMF Tuboscope pretty much just made up the rule, almost 40 years ago.

But in a sense, the Five-Year Rule has become a self-fulfilling prophecy. Now that so many Texas courts have cited and applied it, it has effectively become true.

So that solves the mystery of how Texas courts came to adopt the Five-Year Rule, at least in part.

But is it the right rule?

I’ll cover that in Part 2. It ain’t over til it’s over.

__________________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. Thomson Reuters named him a 2020 Texas Super Lawyer® for Business Litigation.

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.