This week I’m excited to have a guest post from Craig Huggart. Craig liked my post I’ll Sleep When I’m Dead: The Ignored Epidemic in the Legal Profession and asked if he could contribute something on the topic of sleep. Here are his helpful tips about getting better sleep on the road. – Zach
Do you sometimes struggle to sleep well in hotels? Me too!
However, after more than 600 nights on the road, I found two key things that make it easier to get a good night’s rest on the road – picking the right room and optimizing it for sleep.
Pick The Right Room (or have your assistant do it for you)
Choose The Right Hotel
I pick the closest Hilton and ask them two key questions. One – is this a quiet hotel? Two – are there any events that will disturb the quiet during my stay. If I am satisfied with the answers, I choose this hotel. If not, I ask them to recommend a nearby hotel. I learned this lesson after staying adjacent to the Red Hat Amphitheater. On a Tuesday, from 5 – 10:30 PM, a rock concert was happening and even wearing my noise cancelling headphones, it was very loud.
Choose The Right Room
Two days before check-in, I call the hotel to have them help me choose a room. I tell them I spend about half of the time on the road. I’m not worried about a one bed or two-bedroom accommodation; my priority is sleep. Will they help me choose a quiet room and one that can be made as dark as possible. Then, when I check-in using the app, I just okay the room. This works great!
Optimize The Room For Sleep
Make It Cool (About 64 degrees is optimal for sleep)
Ask for a fan.
Have maintenance check to ensure the HVAC is working well.
Hack the thermostat – A dirty little secret is that many hotel thermostats have governors and motion detectors on them. I once woke up sweating in the middle of the night because the air was cut off due to a motion detector. If a maintenance person doesn’t disable these features for you, go to YouTube and search for something like “hack hotel thermostat and brand name,” and you will find a list of cheat codes to disable this.
Make It Dark (The goal is to have it pitch black)
Close the gap. Curtains almost always have a flap that opens in the middle. A couple of binder clips or pants hangers can fix this.
Block the lights – Cover the door’s peephole, the TV’s red light and other lights using duct or electrical tape. (I love this pocket duct tape). Use towels and pillows to block the light coming from under the door and window.
Use a sleep mask – This is a very personal choice, but my favorite is the Manta Sleep Mask.
Use earplugs. This can take some getting used to but is one of the things that has had the biggest impact on my sleep. I recommend Mack’s Pillow Soft Silicone Earplugs. They block out a bunch of sounds and don’t irritate my ears.
Let’s face it; you’re never going to sleep as well on the road as you will at home. However, these tips can make a huge difference.
I’d love to hear from you. What is your best tip for sleeping better in hotels?
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Craig Huggart has been a legal technology trainer since 2001. He is an Alabama fan, a Star Trek geek, and is passionate about making the lives of lawyers a little better. You can reach him at craighuggart@gmail.com.
Fall is here, football season is back, and for a minute my Dallas Cowboys were on a roll. They started the season 3-0, with Dak Prescott and Co. looking impressive. So, in Week 5 of the 2019 NFL season, I was confident they would handle the Saints, who were missing their injured future-first-ballot-Hall-of-Fame quarterback Drew Brees.
Final score: Saints 12, Cowboys 10.
But hey, maybe the Cowboys can use the loss as motivation. Failure can be a great motivator, as the folks at Dick’s Sporting Goods know. Back in 2012 they put out a great commercial titled Untouchable. It starts with images of four high school athletes who just lost the big game. An unseen speaker, presumably a coach, gives this speech:
It’s tough to come this far and lose.
It hurts.
But you are defined in life by the way you respond to defeat.
That pit in your stomach, fill it with fire.
Next season, starts right now.
Remember this hurt.
Think about it when you want to sleep in in the morning
Think about it when you want to shut it down, instead of doing an extra set.
Promise yourself, that you will never, ever feel like this again.
You promise yourself, that you will come back untouchable.
As these words are said, we see images of each kid’s off-season training regimen. The soccer player tapes the newspaper headline “Westfield Comes Up Short” to her bedroom mirror. The track kid runs by a swimming pool where his friends are hanging out. The football player builds his strength while working construction. The basketball player does dips in the restaurant kitchen where he’s working. Then we see the training scenes from the gym, court, and field.
The next season, they “come back untouchable,” and win.
It’s a great commercial. I used to watch it to get motivated for my next professional goal.
Lawyer or not, we all deal with career losses. Maybe the jury went against you. Maybe you got fired. Or maybe you just didn’t get that promotion you were hoping for. Whatever the setback, you can use that experience as fuel to fire your motivation.
You often hear this kind of message from professional athletes, when they talk about how the “haters” and doubters motivated them to work even harder to succeed.
But why do they need this kind of motivation? I mean, they’re professionals. Isn’t it just part of the job to put in the training you need to succeed? And you could say the same for any profession.
It reminds me of a conversation I once had with a more senior lawyer. I asked for advice on how to deal with the inevitable situations where you don’t perform at your best. In other words, how do you deal with the fact that you can’t always “bring your A-game”? The response: you have to do a cost-benefit analysis looking at the cost of not giving your best versus the benefit of doing so.
That was great advice. For a robot.
For human beings, not so much.
The problem is that consistent excellence requires discipline, and discipline is hard. We’re just not wired to do things we don’t like for long periods of time with no apparent short-term benefit. We need some kind of emotional motivation. Intellectual motivation—merely reasoning “if I consistently stick to my weightlifting regimen this summer I will be a better tackler in the fall”—is not going to cut it.
Unlike humans, robots require no motivation.
Waking up every day to the headline “Westfield Comes Up Short,” on the other hand, may get the fires burning.
So I used to watch that Dick’s Sporting Goods commercial and think, “yeah, I’m going to work even harder after this setback and come back UNTOUCHABLE! AAARGGH!”
Ok, I did not actually grunt. But I did like to think that way.
Then a funny thing happened. I noticed that concentrating on painful losses made me feel kind of, I don’t know, crappy (that’s a clinical term). Feeling angry, resentful, or frustrated did not seem to help me work harder or smarter. In fact, I noticed that a negative mental state tended to make my job performance worse.
I know, it sounds crazy. But bear with me. Because my theory recently received support from a highly regarded authority in industrial psychology: late-night talk show hosts.
You may have heard about a brouhaha between Bill Maher and James Corden. It started with Maher, ever the contrarian, saying that “fat-shaming” needs to make a comeback. You can watch his segment here.
There was a certain cruel logic to Maher’s argument: if we make it ok to make fun of fat kids again, maybe it will motivate them to lose weight.
Sound familiar? That pit in your stomach, overweight kid, fill it with fire. Slim down and come back untouchable!
But James Corden was not having it. Corden, no stranger to struggles with weight, offered a funny and incisive rebuttal you can view here.
Corden’s most insightful point was that bullying people about their weight is not actually effective:
Bill, I sincerely believe that what you think you’re offering here is tough love, and you’re just trying to help by not sugar-coating reality for fat people, even though you know how much fat people love sugar-coating things.
But the truth is you’re working against your own cause.
It’s proven that fat-shaming only does one thing.
It makes people feel ashamed.
And shame leads to depression, anxiety, and self-destructive behavior.
Self-destructive behavior like over-eating.
Sure, Maher had some valid points in his critique of American obesity, but Corden’s response rings true. Feeling bad about yourself is not an effective weight-loss strategy. And we should not expect that dwelling on past defeats would be any more effective as a career development strategy.
Does “fat-shaming” motivate people to lose weight?
Yet the professional athlete paradigm still has a certain gravitational pull. There’s a reason the Dick’s Sporting Goods commercial is effective. We love the stories of professional athletes grinding away in the off-season to prove the haters wrong.
That brings me back to the New Orleans Saints. When their star quarterback Drew Brees went down, the next man up was a guy named Teddy Bridgewater. Serious NFL fans remember he was a first-round draft pick by the Minnesota Vikings. But things did not go as planned. He tore his ACL in practice, missing most of the 2016 and 2017 seasons.
When Bridgewater finally made his return in the fourth quarter of a 2017 game against the Cincinnati Bengals, the crowd gave him a standing ovation. He then made two pass attempts and threw an interception. His experience reminds us that, train as we might, we never really become “untouchable.” We all remain vulnerable.
But Bridgewater did not give up. He eventually found himself a backup on the Saints roster. When Brees injured his thumb, Bridgewater stepped in and had his big comeback in week 2 of the 2019 season, leading the Saints to an emotional 33-27 victory over the Seattle Seahawks.
You can see where this is heading. Cue the interview footage of Bridgewater talking about how he was determined to prove all the doubters wrong while he slowly rehabbed that ACL injury, right?
But that’s not what Bridgewater said. I first saw his reaction in this tweet from jazz saxophonist and New Orleans native Branford Marsalis:
“Thinking about all the ones who believed in me.” Wow. Now that’s motivation.
I hope the Dallas Cowboys are thinking about that.
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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.
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.
Early in my legal career, I worked on a couple big embezzlement cases. In both cases my firm represented the embezzle-ee, not the embezzle-or (are those real words?). And in both cases, the core evidence of the embezzlement was hearsay.
“Hearsay” has been in the news a lot lately. It’s kind of the evil twin of another term getting a lot of play: “direct knowledge.” Hearsay and direct knowledge are not exactly opposites, but you could say they are two sides of a coin.
As a trial lawyer with at least a basic understanding of the hearsay rule, I cringe when people use terms like “hearsay” and “direct knowledge” without really understanding what they mean.
But we lawyers mustn’t carp too much. “Hearsay” has an ordinary meaning in popular discourse that doesn’t pretend to match the legal definition of hearsay. When an ordinary person says that information is hearsay, they just mean it’s secondhand knowledge. There’s nothing wrong with using the word “hearsay” in that ordinary sense—in theory.
Plus, even lawyers have a hard time with the legal definition of hearsay. I doubt the average non-litigator lawyer could give you a good definition. Even some litigators might struggle to explain it. And in my experience, even the average trial court judge doesn’t have a firm grasp of the hearsay rule.[1]
So what is hearsay? The legal definition is simple: an out of court statement offered for the truth of the matter asserted.[2]
But there’s a lot wrapped up in that definition. Plus, as any Law and Order fan knows, there are exceptions to the hearsay rule. More about that later.
The “out of court statement” part is not too difficult. Let’s say I’m trying to prove that Dawn Davis embezzled money from her former employer, Paula Payne Windows. I call Paula Payne, the owner of the company, to the stand. “Ms. Payne,” I ask, “how do you know Ms. Davis forged those checks?” “Because my bookkeeper told me she saw Ms. Davis do it,” she answers.
In this case, it’s an “out of court” statement, meaning the bookkeeper is not there testifying to the statement she made. Instead, it’s Payne testifying about the bookkeeper’s statement.
And notice something else: Payne does not have direct knowledge, i.e. “personal knowledge,” that Davis forged the checks. She only has “secondhand” knowledge. That’s the connection between hearsay and direct knowledge.
In this case, it is clear that the statement—“I saw Davis forge the checks”—is offered for the truth of the matter asserted. Payne is trying to prove that Davis forged the checks. The statement is that Davis forged the checks. So, the statement is offered to prove the truth of the matter asserted.
But trust me, the “truth of the matter asserted” is where the hearsay rule gets hard. It’s the part that even some judges and lawyers struggle to understand. And that’s before we even get to the exceptions.
Let’s start with a relatively easy example where a statement is not offered for the truth of the matter asserted.
“Ms. Payne,” I say, “please take a look at Plaintiff’s Exhibit 10, is that an email from Ms. Davis to your bookkeeper?” “Yes,” Payne says. “What did Ms. Davis say in the email?” I ask. “She said can you please take care of getting the attached invoice paid,” Payne answers.
Here, the statement in the email is clearly an out of court statement. But is it offered for the truth of the matter asserted?
It depends on what I’m trying to prove. Let’s say that the point is to prove a scheme to submit fraudulent vendor invoices on behalf of a company that Davis secretly owned. In that case, I am not offering the email for the truth of the matter asserted. If anything, I’m offering Davis’s statement in the email to prove the opposite of what it asserts.
So in this case, if opposing counsel says “objection, hearsay,” the judge should say “overruled.”
Harder Cases
But it’s not always this easy. Sometimes, a statement is offered both for the truth of the matter asserted and for another purpose.
Let’s say I’m trying to prove that Davis secretly accepted a job offer from Paula Payne’s fierce competitor, Real Cheap Windows. “Mr. President of Real Cheap Windows,” I say, “what did Ms. Davis say to you when you offered her a job at your company?” His response: “she said yes I would like the job.”
“Yes I would like the job.” That’s an out of court statement. But is it offered for the truth of the matter asserted? Well, yes. And no.
On the one hand, I am trying to prove that Davis wanted the job and accepted the job offer. So the statement is hearsay, right?
No, not really. Here’s the thing. It’s not a question of whether the statement “I would like the job” is true or not. The relevant fact is that Davis accepted the job offer.
As my law school Evidence professor used to say, it’s a case where the “saying of the words” itself, not the truth of the words said, is significant. You could also call this a “verbal act.” Some older court opinions tend to call this sort of statement res gestae (“things done”).
Another way to put it: the statement is not hearsay because the probative value of the statement does not flow from the speaker’s belief in the truth or falsity of the statement.
Confused yet? That’s ok. It’s a subtle distinction.
And, frankly, it’s one that a lot of judges may struggle to grasp. Picture this:
Me: What did Ms. Davis say when you offered her the job?
Opposing Counsel: Objection, hearsay.
Me: Your Honor, it’s not hearsay, it’s a verbal act.
Judge: Verbal act? What exception is that?
Me: Uh, that’s not really an exception per se. It’s just that the statement is not hearsay because, well I’m not so much offering it to prove the truth of the matter asserted.
Judge: You’re not offering it to prove she accepted the job?
Me: Well yes, your Honor, I am trying to prove she accepted the job, but . . .
You get the idea. It’s hard enough to explain this subtle distinction. It’s even harder in the heat of a courtroom battle, especially when opposing counsel is happy to contribute to the judge’s confusion.
Luckily, in this case there is an easier way out of the problem. I could simply say “it’s an admission by a party opponent, your Honor, an exception to the hearsay rule.”
This leads me to my Hearsay Practice Tip for lawyers: If a hearsay exception clearly applies and is easy to explain, argue the exception first, rather than trying to make a subtle argument about the “truth of the matter asserted.”
Hearsay Exceptions
I promised we would get to the exceptions.
But first, there is a slight complication. There are two different types of hearsay exceptions. First, there are exceptions that are defined as “not hearsay.” If they are not hearsay in the first place, then you might say they are not “exceptions” at all, but let’s not be pedantic. Second, there are exceptions for certain types of statements that are admissible, even though they are hearsay.
For simplicity, let’s just call both types hearsay “exceptions.”
I once made it a goal to memorize all of the hearsay exceptions. I count 31 of them in the Federal Rules of Evidence and 30 in the Texas Rules of Evidence (they are largely the same).
My heart was in the right place, but this was not an efficient exercise. I mean, it’s great to know that there is an “ancient documents” exception to hearsay, but over 90% of the time there are only a handful of hearsay exceptions a litigator needs to know.
You can probably get by with a thorough understanding of just three of the hearsay exceptions:
Impeachment with prior testimony (like a deposition)
Admission by party opponent
The “business records” exception
You can look up the other exceptions when needed, or memorize them if you are really nerdy. But these three should be second nature to any litigator.
The first one, impeaching the witness with prior testimony, is a trial lawyer’s bread and butter. I probably don’t need to say much about it, although the rule has some little twists and turns that are worth checking.
Admission by Party Opponent
I shouldn’t have to say much about the second exception either, but maybe I need to anyway. I once had a trial where I offered an email from the opposing party’s president to an agent of my client. Opposing counsel jumped up and objected, “hearsay!”
“You’ve got to be kidding me,” I thought to myself. “Your Honor, this is an email from Mr. X as a representative of the company,” I said, “it’s an admission by a party opponent.”
“What exception is that?” the judge said. And this was not a new judge.
It took some discipline for me not to roll my eyes. Instead, I flipped open my Texas Rules of Court to Rule of Evidence 801. “Here it is, Rule 801(e)(2)(A), the statement is offered against an opposing party and was made by the party in an individual or representative capacity.”
Lawyers with trial experience know that exception should have been obvious to the judge. Maybe I was just being tested. And to the judge’s credit, the objection was overruled.
The Business Records Exception
Then there is the business records exception. The actual words are “records of a regularly conducted activity,” but everyone calls it the business records exception. It has a four-part definition they made us memorize in trial advocacy class, but the definition is pretty abstract. It’s easier to give examples: monthly bills, bank statements, receipts, invoices, etc.
Documents like these are admissible “business records” when they are “kept in the course of a regularly conducted business activity” and making the record was a “regular practice.”[3] Documents like these are routinely admitted in evidence even though they are hearsay. (But remember, just because they are admitted doesn’t mean they have to be accepted as true.)
In practice, the business records exception is the most formulaic hearsay exception. It leads to two rituals. First, the lawyer going through the four-part definition with a witness on the stand to “prove up” the business records. Second, the pretrial “business records affidavit,” a signed and notarized statement from a records custodian reciting the four elements of the definition and swearing that the 8,000 pages of attached records meet all those elements.
In both cases it is rare that the witness really has personal knowledge of how each record was generated. But everybody kind of “looks the other way.” Opposing counsel usually doesn’t want to be a jerk and object, knowing you could pull the same move when she offers her business records. And most judges don’t require proof of the business records exception that is truly based on personal knowledge.
That’s probably the way it should be, especially when it is obvious that the documents at issue meet the exception. If it’s the type of document that is clearly a business record—like a monthly bank statement—no time should be wasted going through the elements of the exception. It’s not the time to pull a “gotcha” and suddenly become a stickler for “personal knowledge.”
Direct Knowledge
Personal knowledge, which is essentially what people mean by “direct knowledge,” is important, but sometimes you have to rely on hearsay.
Imagine the owner of Paula Payne Windows gets a call from an anonymous tipster. “Paula, you don’t know me, but I’ve got some important information I feel I need to share with you. I have a friend who heard from someone who has reason to know, and that person said that Dawn Davis has been embezzling thousands of dollars from your business every month. You should probably look into it.”
What is Payne going to say? “I appreciate your call, Mr. Tipster, but I can’t rely on this information, because it is clearly hearsay. I’m not going to accuse someone of stealing based on secondhand information.”
No, obviously, that is not what Payne is going to do. She’s going to investigate this serious allegation to find out if it’s true.
So Payne calls Davis into her office the next day. “Dawn, I hate to ask you this, but I received an anonymous tip that you’ve been stealing money from the company. What do you have to say for yourself?”
“That’s hearsay!” Davis says. “That person doesn’t have any direct knowledge that I embezzled money from you.”
This response does not exactly inspire confidence. Wouldn’t you expect Davis to deny the tipster’s allegation, if it wasn’t true?
Which leads me to my Practical Tip for lawyers and non-lawyers alike: Don’t confuse courtroom rules of evidence with practical rules of life. People reasonably rely on “hearsay”—or secondhand knowledge—to make important judgments about business, politics, and life in general all the time.
Of course, testimony based on personal knowledge is generally more reliable than hearsay or other secondhand information. But it’s not everything.
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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.
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] This is not really a problem, because of course most trial court judges are above average.
[2] More precisely, hearsay is “a statement that: (1) the declarant does not make while testifying at the current trial or hearing; and (2) a party offers in evidence to prove the truth of the matter asserted in the statement.” Fed. R. Evid. 801(c); Tex. R. Evid. 801(c).
Does Texas law recognize the “inevitable disclosure” doctrine? Should it?
This strikes me as the wrong question. The right question is not “should Texas follow the inevitable disclosure doctrine?” but rather “what evidence is sufficient to establish imminent harm from the threatened use of trade secrets?” I propose the following dichotomy:
In a “soft” trade secrets case, the mere fact that a former employee knows a company’s trade secrets and has gone to work for a competitor should usually be insufficient to establish the “imminent harm” necessary to support a temporary injunction barring the employee from working for the competitor. There must be something more, such as evidence of a plan to use the trade secrets, or evidence that the employee has already used or disclosed the trade secrets.
But in a “hard” trade secrets case, “something more” should not be required if the trade secret is so secret and so valuable the employee’s mere knowledge of the trade secret creates an imminent risk that the employee will disclose it to her new employer.
I admit that no. 2 is a little circular, but there’s really no getting around that. At least my test puts the emphasis on the degree of the threat, where it should be.
But what is a “soft” trade secret? Or a “hard” trade secret? And what is the inevitable disclosure doctrine in the first place? Let’s back up a bit.
The Inevitable Disclosure Doctrine
The inevitable disclosure doctrine is a concept in trade secrets law. It is the idea that a person who knows a company’s trade secrets can be enjoined from working for a competitor on the theory that the person will inevitably use that knowledge.[1] For example, in T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc.,[2] the court held that evidence that the defendants possessed the plaintiff’s confidential information and were “in a position to use it to compete” showed an “inherent threat” sufficient to support an injunction.
The Texas Uniform Trade Secrets Act (TUTSA) and the federal Defend Trade Secrets Act (DTSA) do not expressly refer to the inevitable disclosure doctrine. The doctrine can be seen as an application of the common-law “imminent harm” requirement for an injunction. The question is whether harm is imminent when a person with knowledge of the company’s trade secrets is working for a competitor.
The DTSA indirectly rejects—or at least constrains—application of the inevitable disclosure doctrine in two ways. First, it authorizes the court to grant an injunction “to prevent any actual or threatened misappropriation,” but with the important limitation that the court cannot “prevent a person from entering into an employment relationship.” The court can place conditions on such employment, provided the conditions are based on “evidence of threatened misappropriation and not merely on the information the person knows.” In other words, the court cannot limit a former employee’s work for a competitor based merely on the idea that the employee will inevitably disclose the employer’s trade secrets. Second, the injunction cannot conflict with an applicable state law “prohibiting restraints on the practice of a lawful profession, trade, or business.”[3]
Similarly, TUTSA codifies the common-law principle that an injunction may not prohibit a person from using “general knowledge, skill, and experience” acquired during employment.[4] This limitation emphasizes that injunctions should be narrowly tailored to prevent disclosure of trade secrets, not to unreasonably restrict employee mobility. Still, TUTSA at least leaves open the possibility that a risk of “inevitable disclosure” of trade secrets could establish the “imminent harm” needed to support a temporary injunction.
Texas law is unsettled on whether and to what extent the inevitable disclosure doctrine applies.[5] But we can draw some preliminary conclusions from the case law.
First, if there is evidence that the employee has already disclosed the alleged trade secrets to the competitor, or used the alleged trade secrets while working for the competitor, then resort to the inevitable disclosure doctrine is unnecessary. The doctrine really only becomes a real issue when the evidence is that the employee possesses or knows the trade secrets but has not done anything wrong with them—yet.
Second, inevitable disclosure really goes to the question of an injunction, not damages.
Global Supply v. Riverwood
Both principles were apparent in Global Supply Chain Solutions, LLC v. Riverwood Solutions, Inc., No. 05-18-00188-CV, 2019 WL 3852661 (Tex. App.—Dallas Aug. 16, 2019, no pet. h.), a recent case showing the limits of the “inevitable disclosure” argument.
In that case, Global Supply and Riverwood were competitors in the supply chain management industry, including product data management (PDM) services. Id. at *1. They had merger discussions in which Global Supply provided a seven-page PowerPoint presentation containing financial information about Global Supply. Id. at *2. After these discussions were abandoned, Riverwood unsuccessfully solicited two customers of Global Supply and recruited Lori Austin, a consultant for Global Supply, to be Riverwood’s director of PDM services. Id. at *2-3.
Global Supply sued Riverwood and Austin in Collin County District Court, claiming misappropriation of trade secrets, but Global Supply never set a hearing on a temporary injunction. Id. at *4. After some discovery and designation of experts, the parties filed motions for summary judgment, including Riverwood’s motion for summary judgment on Global Supply’s trade secrets claim. Id.
The problem for Global Supply was that there was no “direct evidence” that Austin disclosed any trade secret to Riverwood. Id. at *7. So Global Supply argued that it was “inevitable” that Austin would disclose its trade secrets in the course of her employment at Riverwood. Id. In other words, the inevitable disclosure doctrine.
In support of its argument, Global Supply cited the Seventh Circuit’s statement that “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Id. (citing PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995)).
But Collin County ain’t in the Seventh Circuit, and the trial court granted summary judgment for Riverwood and Austin.
The Dallas Court of Appeals affirmed, rejecting Global Supply’s inevitable disclosure argument. The court cited Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 241-42 (Tex. App.—Houston [1st Dist.] April 3, 2003, no pet.), which said “[w]e have found no Texas case expressly adopting the inevitable disclosure doctrine, and it is unclear to what extent Texas courts might adopt it or might view it as relieving an injunction applicant of showing irreparable injury.” Id.
Global Supply argued that the adoption of TUTSA brought the inevitable disclosure doctrine to Texas, but the court disagreed. The court reasoned that the “ultimate merits” are not at issue in a temporary injunction hearing in a trade secret misappropriation case. Thus, whatever merit the inevitable disclosure argument may have in support of a temporary injunction, the court said the argument is insufficient to raise a fact issue on damages in response to a motion for summary judgment. Id. at *8.
The court then turned to whether Global Supply had offered sufficient evidence on the elements of its TUTSA claim. Global Supply offered the following:
The idea that building supply sourcing could be operated as a standalone business was the trade secret misappropriated by Riverwood.
Riverwood contacted a Global Supply customer about using Riverwood for sourcing building supplies, knowing he was a Global Supply customer.
Austin was doing the same work at Riverwood that she did for Global Supply.
Peck, Global Supply’s president, testified that Austin “must have” disclosed Global Supply’s confidential information in order to do her job at Riverwood.
Peck also testified that building supply sourcing “was unlike anything Riverwood was doing at the time.”
Id. at *14-15.
So, the evidence of misappropriation was pretty thin, especially in light of controverting evidence:
Global Supply did not share any information about its building supply sourcing business model with Riverwood.
The seven-slide PowerPoint presentation did not include this information, and Global Supply conceded that the merger discussions did not involve delivery of trade secrets other than that delivered in writing.
Riverwood had sourced building supplies before the merger discussions.
Peck conceded Riverwood could have provided building supply sourcing without his being aware of it.
Global Supply did not lose any business from the customer Riverwood contacted.
Austin testified she returned all company property to Global Supply, did not retain Global Supply documents, complied with her confidentiality agreement, never disclosed Global Supply’s confidential information or trade secrets to Riverwood, and only used generally known information.
Peck conceded he had no knowledge of the work Austin was actually doing at Riverwood.
Austin testified about how she performed her job responsibilities at Riverwood without using Global Supply’s confidential information.
Id. at *14-15.
Based on the evidence, the Court of Appeals held that the trial court properly granted summary judgment against Global Supply’s trade secrets claim. Id. at *15-16. Thus, the “inevitable disclosure” argument could not fill the gaps in Global Supply’s evidence of misappropriation of trade secrets.
So did Global Supply reject the inevitable disclosure doctrine? Not really. Two significant factors limit the reach of Global Supply. First, it was not a temporary injunction case. Trying to use the inevitable disclosure doctrine as a substitute for direct evidence of damages was a stretch.
Second, the court seemed skeptical of Global Supply’s theory that its business model was a trade secret in the first place. This was apparent in the court’s statement that “Global supply does not point to any summary judgment evidence that it shared with Riverwood any information about its ‘business model’ that ‘took extensive effort to develop.’” Id. at *15.
A Harder Case
Imagine instead a temporary injunction case with evidence that the alleged trade secret is really secret and really valuable. Let’s say an oilfield services company develops a secret drilling technology that a competitor would pay millions for. The engineer who developed the technology for the company gets hired by a direct competitor as Director of Engineering. There’s no evidence that the engineer has disclosed the technology to the competitor, or even evidence that he plans to do so, but the trial court enters a temporary injunction barring the engineer from working for the competitor, citing the imminent risk that the engineer will disclose the technology.
That’s a stronger case for application of the inevitable disclosure doctrine, first because it involves an injunction and second because it involves a “hard” trade secret.
The two quintessential types of hard trade secrets are “secret sauce,” like the Colonel’s herbs and spices or the formula for Coke, and secret cutting-edge technology, like say, laser guidance for self-driving cars. When an employee runs off to a competitor with that kind of secret, it does seem a little unfair to require proof that employee has already given the secret to the competitor.
“Soft” trade secrets are different. Soft trade secrets are things like customer lists, customer information, and pricing information. Virtually every business has this kind of information. That doesn’t mean the information can’t be a trade secret. It can, as I explained in When Is a Customer List a Trade Secret?
But there’s a danger here. If courts grant injunctions too freely in soft trade secret cases, they risk turning trade secret law into a “de facto” non-compete for all employees who have customer information. And Texas courts have recognized we don’t want to do that. See Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 466-67 (Tex. App.—Austin 2004, pet. denied) (“this does not mean that trade secret status automatically attaches to any information that a company acquires regarding its customers; if it did, it would amount to a de facto common law non-compete prohibition”).
That’s why I say in a soft trade secrets case, there should be some evidence that the employee has used or disclosed the trade secrets—or plans to do so—before the court grants a temporary injunction. If Texas courts are going to embrace the notion of “inevitable disclosure” at all, it should be limited to cases involving hard trade secrets.
Of course, the distinction between hard and soft trade secrets is not in the statutes; it’s just my terminology. And you could always have borderline cases (“semi-soft” trade secrets?) But the underlying concept—that the degree of secrecy and value of the alleged trade secrets is a factor in determining whether a temporary injunction should be granted—is sound. At least it focuses on the right question.
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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.
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.
[5]Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 241-42 (Tex. App.—Houston [1st Dist.] April 3, 2003, no pet.); DGM Services, Inc. v. Figueroa, No. 01-16-00186-CV, 2016 WL 7473947, at *5 (Tex. App.—Houston [1st Dist.] Dec. 29, 2016, no pet.) (mem. op.).
If you know anything about Texas non-compete law, you know that the Texas non-compete statute requires reasonable limitations as to “time, geographical area, and scope of activity to be restrained.” Tex. Bus. & Com. Code § 15.50(a).
Yet in my practice, I often see non-competes drafted without a reasonable limit on the scope of activity restrained. Scope of activity is probably the most neglected element of Texas non-compete law. Often, the non-compete will bar an employee from having anything to do with any company in the employer’s industry.
When you read one of these, you can almost feel the drafter’s pride in writing a non-compete that is so comprehensive and ensnaring. But guess what? Writing it that way makes it an “industry-wide exclusion,” which Texas courts have said is unenforceable.
The industry-wide exclusion rule has two halves (plus a corollary I’ll get to later).
The first half says that a non-compete that prevents a company’s employee from working in any capacity in the company’s industry is unreasonably broad and therefore unenforceable.
The second half says that a non-compete must be limited to preventing the employee from doing business with customers the employee had dealings with while working for the employer.
The second half of the rule is found in Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381 (Tex. 1991), which arose from a suit that was already being litigated when the 1989 statute was adopted.
In Haass the Texas Supreme Court cited the Texas common-law rule that the scope of a non-compete must not be greater than necessary to protect the employer’s legitimate interests such as goodwill and confidential information. Id. at 386. The court reasoned that the “fundamental legitimate business interest” protected by a non-compete is “preventing employees or departing partners from using the business contacts and rapport established during the relationship . . . to take the firm’s customers with him.” Id. The court also approvingly cited a Wisconsin case stating that “the restrictive covenant must bear some relation to the activities of the employee.” Id. at 387.
I love that Haass uses the French rapport instead of the Anglo-Saxon “goodwill.” It was a more civilized time.
Anyway, the Haass court held that the non-compete was overbroad because it inhibited departing partners from providing accounting services to clients acquired after the partner left, or with whom the accountant had no contact while associated with the firm, which was not reasonably necessary to protect the firm’s goodwill. Id. at 388.
Haass did not use the term “industry-wide exclusion,” but the Fourteenth Court of Appeals later cited Haass for the proposition that “[t]he Texas Supreme Court has held that an industry-wide exclusion is unreasonable.” John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80, 85 (Tex. App.—Houston [14th Dist.] 1996, writ denied) “In the case of covenants applied to a personal services occupation, such as that of a salesman,” the court said, “a restraint on client solicitation is overbroad and unreasonable when it extends to clients with whom the employee had no dealings during his employment.” Id.
Applying both parts of the rule, the Stroman court held that the non-compete was unenforceable because it imposed an industry-wide exclusion on the employee’s ability to work in the insurance business in and around Harris County and extended to customers the employee had no association with while working for the employer. Id.
The First Court of Appeals applied Haass and Stroman to the oilfield services industry in Brown Services, Inc. v. Brown, No. 01-98-00304-CV, 1999 WL 681964 (Tex. App.—Houston [1st Dist.] Sept. 2, 1999, pet. denied) (mem. op.). Rapport is important in oilfield services, because everybody knows who the customers are.
Brown Services held that a first clause barring the employee from being connected to any oilfield services business was an overbroad industry-wide exclusion. Id. at *6. The court held that a second clause barring the employee from soliciting or selling products or services to anyone who was a customer of the employer during his employment was overbroad, because it was not limited to customers he had contact with. Id. at *7. So you see both halves of the rule.
Same for Wright v. Sport Supply Group, Inc., 137 S.W.3d 289, 298 (Tex. App.—Beaumont 2004, no pet.), where the court cited Haas and Stroman for the propositions that “[a] covenant not to compete that contains an industry-wide exclusion from subsequent employment is unenforceable,” and “a covenant not to compete that extends to clients with whom a salesman had no dealings during his employment is unenforceable.” The court held that the agreement at issue was overbroad and unenforceable because it was not limited to customers the employee had dealings with while employed by the company. Id.
Wright also cited Haass for the principle that “[a] restrictive covenant is unreasonable unless it bears some relation to the activities of the employee.” Id. You might call this the “janitor corollary” of the industry-wide exclusion rule. The idea is that a non-compete that would bar a salesman from working for a competitor as a janitor would be unreasonably broad.
Four years later, the Beaumont Court of Appeals considered whether the Texas Supreme Court’s intervening decision in Sheshunoff changed the industry-wide exclusion rule applied in Wright. See Pool v. U.S. Money Reserve, Inc., No. 09-08-137 CV, 2008 WL 4735602, at *8 (Tex. App.—Beaumont 2008, no pet.) (mem. op.) (addressing Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006)).
The Poole court said that Sheshunoff was distinguishable because it involved a non-compete that only prevented the employee from soliciting prior clients with whom he had personal contact or any previously identified prospective client. Thus, the court reasoned, Sheshunoff did not change the industry-wide exclusion rule. Id. at *8.
(Sheshunoff was the case that cleared up confusion about whether a non-compete is “ancillary to an otherwise enforceable agreement,” an issue I explain in convenient video form here.)
In another post-Sheshunoff case, CDX Holdings, Inc. v. Heddon, No. 3:12-CV-126-N, 2012 WL 11019355, at *10 (N.D. Tex. March 2, 2012), the court held that the scope of activity restrained was overbroad, where the non-compete applied to all anatomic pathology work performed by the employer, even though the employee’s work exclusively involved dermatopathology.
Obviously, dermatopathology is narrower than anatomic pathology. Duh.
The janitor corollary appeared again in Weber Aircraft, L.L.C. v. Krishnamurthy, No. 4:12-CV-666, 2014 WL 12521297 (E.D. Tex. Jan. 27, 2014). In that case the non-compete barred the employees from working for a company providing the same products (seating products and components) as the employer or working for five specific competitors in any capacity. Citing Wright, the court held that a restriction barring the employees from working for five competitors, “even in a position that would not require [the employees] to use any of [the employer’s] confidential information, such as a janitor position,” was unreasonably broad. Id. at *8.
D’Onofrio applied the industry-wide exclusion rule to the travel industry
More recently, the Fifth Circuit weighed in on the industry-wide exclusion rule in D’Onofrio v. Vacation Publications, Inc., 888 F.3d 197, 211-12 (5th Cir. 2018), where it applied Haass and Stroman to a non-compete involving the travel industry. The court held that the non-compete as written was unenforceable because the covenants “amount to an industry-wide restriction—preventing former employees from working in any job related to the sales or marketing of not just cruises, but also a host of other travel products—and are not limited as to either geography or clients with whom former employees actually worked during their employment.” Id. at 212.
Thus, the industry-wide exclusion rule appears to be alive and well in Texas today—in several forms. But the rule has its limits.
1. When the non-compete does not prohibit working in the industry
Of course, a non-compete that is limited to customers the employee did business with does not run afoul of the industry-wide exclusion rule. In Gallagher Healthcare Insurance Services v. Vogelsang, 312 S.W.3d 640 (Tex. App.—Houston [1st Dist.] 2009, pet. denied), the court approvingly cited the industry-wide exclusion rule of Haas and Stroman, id. at 654, but the court held that the non-compete at issue did not violate the rule, because “[u]nlike some covenants not to compete that preclude the employee from working in the same industry, the agreement here does not limit [the employee] from working in the insurance business.” Id. at 655.
Similarly, in Stone v. Griffin Commc’ns & Security Sys., Inc., 53 S.W.3d 687, 694 (Tex. App.—Tyler 2001, no writ), the court held that a non-solicitation clause limited to customers the employees had contact with while employed by the employer was not an impermissible industry-wide exclusion.
2. When the “industry” is broader than the company’s niche
What exactly is the “industry” for purposes of the industry-wide exclusion rule? In M-I LLC v. Stelly, 733 F.Supp.2d 759, 794 (S.D. Tex. 2010), the non-compete applied to any customer or potential customer of the employer in the business of oilfield displacement tools or services. The employee argued this was an impermissible industry-wide exclusion. Id. The employer argued the non-compete only applied to well completion services, not the oil and gas industry generally, and therefore was not an “industry-wide” ban. Id. at 796.
Texas courts have applied the industry-wide exclusion rule to oilfield services
The court sided with the employer. The court distinguished Stroman as involving a bar on the insurance business generally, while the non-compete in Stelly did not apply to the entire oil and gas industry. Id. at 796. Considering the “industry” to be oil and gas, not the “niche” services offered by the employer, the court held that the non-compete did not impose an impermissible industry-wide exclusion, but instead limited its scope to a reasonably narrow business area that correlated to the employee’s work for the company. Id. at 797.
In Salas v. Chris Christensen Systems, Inc., No. 10-11-00107-CV, 2011 WL 4089999, at *20 (Tex. App.—Waco Sept. 14, 2011, no pet.) (mem. op.), the court held that a non-compete that applied to the “pet supply manufacturing and distribution industry” did not apply to “the entire industry pertaining to pets or pet products,” where the employee was free to return to his previous work as a dog handler and groomer.
Similarly, in Merritt Hawkins & Assocs., LLC v. Gresham, 79 F.Supp.3d 625, 641 (N.D. Tex. 2015), the court held that a non-compete applying to permanent and temporary medical staffing was not an industry-wide exclusion, where it did not prohibit the employee from working in “other sections of the staffing industry or the medical industry.”
3. When the evidence does not show the restriction amounts to an industry-wide exclusion
The industry-wide exclusion rule may not apply if the employee fails to offer evidence that a prohibition of being associated with any “competitor” of the company amounts to an industry-wide exclusion.
In Republic Services, Inc. v. Rodriguez, No. 14-12-01054-CV, 2014 WL 2936172 (Tex. App.—Houston [14th Dist.] 2014, no pet.) (mem. op.), the court held that Stroman did not apply absent evidence that the “competitor” scope of the non-compete was “tantamount to an industry-wide prohibition.” Id. at *8. The employee offered no evidence about the industry at issue, the court said, and the employer offered evidence that there were companies in the legal services or legal support services industry that were not competitors of the employer. “On this record, we cannot determine as a matter of law that the covenant imposed an unreasonable industry-wide exclusion.” Id.
“On this record” is a signal courts use to emphasize that the result could be different in a case with different facts.
For example, inMcKissock, LLC v. Martin, 267 F.Supp.3d 841, 855-56 (W.D. Tex. 2016), a non-compete barring the employee from being “connected in any manner with any business or practice which is in competition with [employer]” was overbroad as written.
4. When the employer’s interest is not just its goodwill, but also protecting confidential information
The industry-wide exclusion rule as stated in Haas and Stroman is incomplete because it does not address confidential information. Limiting the non-compete to customers the employee had dealings with may not be required when there is a danger of the employee using knowledge of the company’s confidential information to compete for other customers.
For example, in Accruent v. Short, 1:17-CV-858-RP, 2018 WL 297614, at *1 (W.D. Tex. Jan. 4, 2018), the employee served as a director of client services and a senior engineer for a software services company and had access to a wide range of confidential proprietary information. The non-compete prohibited competing with the portions of the employer’s business in which the employee actively participated or received confidential company information. Id.
The employee in Accruent argued that the non-compete violated the Haass rule because it was not limited to customers and prospects the employee worked with at the company, but the court did not read Haass so broadly. Id. at *5. The court said that Haass applies more narrowly to cases where the employer’s interest “derives from the employee’s relationship with his or her clients.” Id.
In Accruent, the court explained, the employee’s role gave him access to confidential proprietary information concerning the company’s product functionality, development plans, sales pipeline, sales process, customer preferences, and market research. Thus, the concern animating the non-compete was not just that the employee would “use his rapport with his customers to take them with him to a competitor,” but principally the concern that the employee would use the confidential information he learned at the company to help another company compete. Thus, the court found that Haass did not compel finding the non-compete’s scope unreasonable. Id. at *6.
Accruent v. Short applied the Haas rule more narrowly where a software company’s confidential information was at stake
But there was another problem with the non-compete in Accruent. Recall the janitor corollary from Haass and Wright, i.e. the principle that a non-compete must bear some relation to the activities of the employee. The non-compete in Accruent arguably prohibited the employee for working for a competitor regardless of his role, i.e. even if he was “emptying trash cans” for a competitor. The court agreed that a non-compete barring an employee for working for a competitor in any capacity is invalid. To address this defect, the court reformed the non-compete such that it would only prohibit the employee from working for a competitor in the same or substantially similar role that he performed for his previous employer. Id. at *6-7.
5. When the restriction applies to solicitation of employees, not customers
The industry-wide exclusion rule may not apply to solicitation of employees, as opposed to customers. In Smith v. Nerium Int’l, LLC, No. 05-18-00617-CV, 2019 WL 3543583, at *8-9 (Tex. App.—Dallas Aug. 5, 2019, no pet. h.) (mem. op.), the court held that the industry-wide exclusion rule did not apply to a clause barring a former employee from soliciting the company’s other employees, reasoning that the clause did not bar the former employee from working for the company’s competitors. Id. at *9.
PRACTICE TIPS
The cases above suggest some tips for practitioners:
1. Don’t draft your non-compete with an industry-wide exclusion. That should be obvious by now, but you’d be surprised how many non-competes still have this.
2. When drafting the non-compete, consider limiting it to customers the employee had contact with while employed by the company. Alternatively, you can also include customers that the employee received confidential information about. (Check out my Plain-Language Non-Compete for some ideas.)
3. The practice tip suggested by Republic Services is that if the non-compete is not an industry-wide exclusion on its face, the employee should offer evidence that the scope of the non-compete would effectively prevent the employee from working in any capacity in the industry at issue.
4. Finally, remember that determining whether a Texas non-compete is enforceable as written is just the first step. Even if the scope violates the industry-wide exclusion rule, the court can enter a temporary injunction that enforces the non-compete in part, or reform the non-compete to make the scope reasonable. For more on the practical results of Texas non-compete law, see Wolfe’s First Law of Texas Non-Compete Litigation.
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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.
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 scene: Cameron County Courthouse, Brownsville, Texas. Plaintiff’s closing argument in Carduco, Inc. v. Mercedes-Benz USA.
Ladies and gentlemen of the jury, there was a time when a handshake and a man’s word meant something here in the Rio Grande valley. If you made a deal and shook on it, you could take that to the bank.
My client Renato Carduco grew up in that era. He built his successful car dealerships on principles of honesty and hard work. If he told a customer he was going to do something, he did it. If he promised his employees something, he kept the promise. And he expected other people to keep their word too.
He certainly expected that when he made a deal with Mercedes-Benz USA. You heard the testimony. When Mr. Carduco’s son was having trouble with his Mercedes dealership in Harlingen, Mr. Carduco agreed to buy it. But he knew Harlingen wasn’t the best place for it, so he wanted the option to move the dealership to McAllen.
So Mr. Carduco did what any experienced businessman would do. He asked Mr. Oswald, the Mercedes representative, if it would be possible to move the dealership, and Mr. Oswald said “that won’t be a problem, we don’t have any other plans for McAllen.” So Mr. Carduco went into the deal believing he would have the option to move.
But then when Mr. Carduco saw the proposed contract, something was wrong. You may remember Plaintiff’s Exhibit 9, the Purchase Agreement. It had this part saying that Mr. Carduco was, and I quote, “only purchasing the right to conduct a Mercedes-Benz retail sales dealership at Purchaser’s present location in Harlingen, Cameron County, Texas.” And it prohibited Mr. Carduco from changing locations without written consent from Mercedes-Benz USA.
Well that was a red flag for Mr. Carduco. So he called up Mr. Oswald and said, “Frank, I’m concerned about this part of the contract that says I’m only getting the right to have a dealership in Harlingen, what if I want to move it to McAllen?” And you remember what Mr. Oswald said. “Renato, don’t worry about that stuff in the contract, if you decide to move, we’ll take care of you.”
Trouble is, Mr. Oswald didn’t tell Mr. Carduco the whole story. You heard the testimony and saw the emails. At the same time, Mercedes-Benz USA was talking to another Mercedes dealer about building a new dealership in McAllen. But they didn’t disclose that to Mr. Carduco until after he had signed the contract.
So, when Mr. Carduco signed that Purchase Agreement, he believed two things. One, that there were no plans for some other dealer to set up shop in McAllen, and two, that he could relocate his dealership to McAllen if he wanted to.
Ladies and gentlemen, that’s fraud. So I hope that after you consider the evidence, you will write “Yes” in response to Question No. 1.
The Real Case
If you like to keep up with recent Texas Supreme Court opinions—and who doesn’t?—you know this hypothetical closing argument is based on a real case, Mercedes-Benz USA, LLC v. Carduco, Inc.(Tex. Feb. 22, 2019). The jury in that case answered “yes” Mercedes-Benz committed fraud, and found actual damages of $15.3 million and punitive damages of over $100 million.
Let’s pause right there. A jury in the Valley enters a $100 million verdict for a local businessman against a big multinational corporation. Already, you know that verdict is not likely to survive a trip to the Texas Supreme Court.
My friends all have Porsche dealerships . . .
And yes, the Texas Supreme Court later threw out the verdict, holding there was no evidence of fraud. The court said Carduco could not have justifiably relied on alleged statements by Mercedes-Benz USA that the written contract directly contradicted.
But what about the facts in bold in the closing argument above? Mercedes-Benz specifically told Carduco he could move and not to worry about what the contract said. How is that not fraud?
Well, here’s the thing. I made up those facts (the ones in bold). I made them up to make the case harder. To me, the key question raised by Mercedes-Benz is whether those additional facts would have made a difference to the outcome.
Let me explain.
Texas Law on Fraud, Omissions, and Justifiable Reliance
First let’s put the Mercedes-Benz case in context by laying out some basic principles of fraud law:
Fraudulent inducement is a type of fraud. It’s the claim that one party fraudulently induced another party to sign a contract. It allows the defrauded party to avoid the obligations of the contract and, potentially, to recover damages caused by the fraud.
The most basic element of fraud is a misrepresentation. There has to be a material misrepresentation made with some kind of intent. (Let’s set aside the intent and materiality elements for now.)
An affirmative misrepresentation is easy. If you make a statement that is not true, that’s a misrepresentation.
Omissions are harder. Generally, an omission is not fraud, unless there is a duty to disclose.
If one of the parties owes a fiduciary duty to the other, there would be a duty to disclose. But in most “arms-length” transactions between two businesses, there is no fiduciary duty relationship and no general duty to disclose.
A duty to disclose can arise if you make a representation that, while technically true, is rendered misleading by your omission.
The next most basic element of fraud is reliance. The person you make the representation to must decide to sign the contract in reliance on the representation.
It has to be a certain kind of reliance. Some courts say “reasonable” reliance. Recent Texas cases use “justifiable” reliance. In any case, unreasonable reliance is not going to be justifiable reliance.
There is often conflicting evidence regarding whether the alleged misrepresentation is made. But as long as there’s at least a smidgen of evidence, most appellate court decisions addressing fraud will assume the misrepresentation was made.
As you can gather from this summary, there are a lot of “general” rules and a lot of exceptions. But this outline will hold true most of the time.
Here’s where it gets more difficult: the contract. In almost any business transaction, there will be a written contract that contains statements that conflict with the claim of fraud. That’s because the lawyer who drafted the contract (or the form the contract is based on) wanted to avoid claims of fraud.
The most common contractual terms that conflict with a claim of fraud are:
A merger clause, e.g. “This Agreement replaces and supersedes all prior agreements and understandings between the parties regarding the subject matter of this Agreement.”
A disclaimer of reliance, e.g. “No party to this Agreement is relying on a representation or agreement not contained within the four corners of this Agreement.”
A specific substantive contract term that conflicts with the alleged misrepresentation. For example, a clause that says “you cannot move your dealership” when the alleged misrepresentation is “we will let you move your dealership.”
What is the effect of such terms? Do they defeat a subsequent claim of fraudulent inducement?
There is no easy answer. Texas courts—like courts everywhere in the Anglo-American common-law tradition—have struggled with this question for decades, if not centuries. (Courts in other traditions probably struggle with it too, but I have no familiarity with that.)
There are three basic alternatives courts have to choose from:
The contractual terms defeat any conflicting claim of fraudulent inducement.
The contractual terms have no effect on a claim of fraudulent inducement.
It depends on the circumstances.
You can make a reasonable case for each of these, but no. 3 is the most common. Even when courts appear to endorse no. 1 or no. 2, they are probably following no. 3, because they would rule differently if presented with different facts.
The Texas Trend
Texas courts generally follow no. 3, but the pronounced trend in the Texas Supreme Court in the last 30 years has been towards holding that contractual terms negate a claim of fraudulent inducement.
The traditional rule is that “fraud vitiates a contract.” For example, in Dallas Farm Machinery Co. v. Reaves, 307 S.W.2d 233, 239 (Tex. 1957), the court held that a merger clause does not bar a claim that the contract was induced by fraud. Part of the rationale is that you shouldn’t enforce a contractual disclaimer when the disclaimer itself—as part of the contract—was induced by fraud.
The Texas Supreme Court reaffirmed the traditional principle in Williams v. Glash, 789 S.W.2d 261 (Tex. 1990). Writing for the majority, Justice Doggett said “a release is a contract and is subject to avoidance, on grounds such as fraud or mistake, just like any other contract.” Id. at 264.
But in the 1990s the Texas Supreme Court started whittling away the traditional rule. This trend coincided with complete Republican control of the court. This is not surprising, because generally conservatives favor enforcing contractual disclaimers, while liberals favor letting fraud verdicts stand. I’m generalizing, of course, but let’s not ignore the elephant in the room.
The trend began with Prudential Ins. Co. v. Jefferson Associates, Ltd., 896 S.W.2d 156, 161-62 (Tex. 1995), where the court held that an “as is” clause in a real estate purchase contract conclusively negated the reliance element of a fraudulent inducement claim.
Then in Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171, 180-81 (Tex. 1997), the court held that a disclaimer of reliance negated a claim of fraudulent inducement, where the release at issue was intended to resolve a dispute, it was an “arms-length” transaction, the parties had highly competent legal counsel, and the parties were “knowledgeable and sophisticated business players.”
After that, defense counsel in any fraud case with a disclaimer of reliance would rely heavily on Schlumberger. And in Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 58 (Tex. 2008), the court extended Schlumberger to a settlement agreement intended to resolve past and future claims.
The Texas Supreme Court slightly bucked the trend in Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011). The contract in that case had a merger clause, but not a disclaimer of reliance. The court distinguished a mere merger clause from a disclaimer of reliance and held that the merger clause did not negate a claim of fraudulent inducement. Id. at 336.
But the court returned to form in JPMorgan Chase Bank, N.A. v. Orca Assets G.P., L.L.C., 546 S.W.3d 648 (Tex. 2018). This time the issue was not so much the effectiveness of the contractual disclaimer, but the justifiable reliance element of the fraud claim. The court held that an experienced oil and gas business could not justifiably rely on a lessor’s statement that certain acreage was “open,” i.e. not already leased, where the contract contained an unusual negation-of-warranty clause and there were other “red flags” indicating that maybe the acreage was already leased. Id. at 660.
The court in Orca Assets approvingly cited case law holding that in an arms-length transaction, the defrauded party must exercise “ordinary care for the protection of his own interests” and “cannot blindly rely on a representation by a defendant where the plaintiff’s knowledge, experience, and background warrant investigation into any representations before the plaintiff acts in reliance upon those representations.” Id. at 654.
In February 2019, the court addressed justifiable reliance again in Mercedes- Benz (more about that later).
Then the Texas Supreme Court returned to disclaimers of reliance in IBM Corp. v. Lufkin Industries, LLC (Tex. March 15, 2019). In contrast to Schlumberger, Lufkin Industries addressed a contract signed at the beginning of the business relationship, not an agreement to resolve a dispute. But the court held that the customer’s fraudulent inducement claim against IBM was barred, where the parties were sophisticated, both sides had lawyers, and two contract clauses expressly and clearly disclaimed reliance. I wrote about this case in Can Your Business Avoid a Fraud Claim by Putting Magic Words in the Contract?
Most recently, it was justifiable reliance again in Barrow-Shaver Resources Co. v. Carrizo Oil & Gas, Inc. (Tex. June 28, 2019). The court held that a driller could not have justifiably relied on a production company’s oral statement that the company would not unreasonably withhold consent for the driller to assign its interest in a “farmout” agreement.
Truckin’ . . . got the ways and means
As these cases illustrate, the Texas Supreme Court has used both contractual disclaimers and the justifiable reliance element to steadily carve back the fraudulent inducement theory in business transactions.
Back to Mercedes-Benz
Mercedes-Benz was part of this trend. It held that Mr. Carduco’s reliance on the alleged misrepresentation about the dealership was not justifiable, where Mr. Carduco was a sophisticated businessman, both sides had lawyers in the transaction, and the alleged misrepresentation directly conflicted with specific statements in the contract. The court also held that, even crediting Mr. Carduco’s testimony, there was no evidence that Mercedes-Benz made any affirmative misrepresentation to Mr. Carduco.
The part of Mercedes-Benz I don’t fully grasp is why it was necessary to reach the issue of justifiable reliance in the first place. Why didn’t the court just say there was no evidence of a misrepresentation and stop there? The court seemed awfully eager to write about justifiable reliance.
In any case, the result in Mercedes-Benz is not surprising. The plaintiff’s most fundamental problem was the absence of a clear, affirmative misrepresentation.
But what if the facts had been better for Mr. Carduco? What if, as hypothesized in my fictional closing argument above, the Mercedes-Benz representative had specifically told Mr. Carduco something like “don’t worry about what the contract says, we’ll let you move to another location”?
You could argue that the same reasoning in the Mercedes-Benz opinion would still apply and it wouldn’t make a difference. The rationale of Mercedes-Benz was that a sophisticated business can’t justifiably rely on a representation that is directly counter to what the contract says.
And you could cite the Texas Supreme Court’s subsequent decision in Barrow-Shaver. In that case the sophisticated and experienced parties deleted “shall not be unreasonably withheld” language from a consent-to-assign clause in the contract; thus the provision was “specifically negotiated through a back-and-forth process.” Under those circumstances, the court held that the plaintiff could not justifiably rely on the defendant’s oral promises that “it won’t be a problem,” “don’t worry about,” and “we will work with you.”
On the other hand, in Mercedes-Benz there was no back-and-forth negotiation of the term requiring consent to move the dealership. And under my hypothetical facts, you could make a case that Mr. Carduco’s reliance would have been more justifiable. It’s one thing to say that an experienced business person should not rely on his own vague “belief” that he is going to be allowed to do something the contract says he cannot do. It’s quite another to say he can’t rely on a man’s word.
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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who focuses on non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.
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.
But this may be my last post about the statute that fundamentally changed Texas litigation for a short, but exhilarating, time. The reasons will become apparent.
This is my tenth and possibly last blog post on the Texas Citizens Participation Act. My loyal Fivers will remember these great party jams:
You might say whenever I’ve needed a hit, I’ve gone to the TCPA. It’s like a Beach Boys song about cars. Or Trump talking about Hillary’s emails.
And you can gather from my headlines the arc of the TCPA since its enactment in 2011.
From 2011-2017, it was an important but relatively obscure “anti-SLAPP” statute.
Then litigators figured something out. The definitions in the TCPA are so broad, that if applied literally, they cover almost any kind of lawsuit. Especially a departing employee suit, the focus of my law practice.
In 2017, the Austin Court of Appeals held in Elite Auto Body that the statute applied to a claim for misappropriation of trade secrets. The court reasoned that the Texas Supreme Court has mandated application of the “plain meaning” of the statute. Other Courts of Appeals—including Houston and Tyler—followed in 2018. And the Austin court continued to apply the statute broadly and literally in cases like Craig v. Tejas Promotions and Grant v. Pivot Technology.
But cracks in this plain-meaning foundation soon started to form.
The Houston Court of Appeals issued the Gaskamp opinion in late 2018. The majority said the TCPA applied to the allegation that a group of employees conspired to take their employer’s confidential information and trade secrets to a competing venture. But Justice Jennings wrote a concurring opinion arguing that this was a misguided misapplication of the doctrine of textualism. The TCPA was never intended to apply to any of the claims in the case, he wrote, and applying the literal meaning of the statute’s broad definitions would lead to “absurd or nonsensical results.”
Picking up where Justice Jennings left off, the Metroplex courts started to reign in the TCPA. The Fort Worth Court of Appeals went the textualist route in Kawcak, diving deep into several dictionaries to support its holding that a business conspiracy between only two people is not a “common interest” as defined in the statute.
Dyer Straits
Then the Dallas Court of Appeals got to the same place through a different route—blowing open the “absurd results” escape hatch. It held in Dyer that it would be nonsensical and absurd to apply the TCPA’s literally to claims against departing employees that do not implicate public participation.
This led to a slew of Dallas opinions holding that the TCPA does not apply to essentially private business disputes: Dallas Court of Appeals opinions restricting the TCPA have been coming out more often than those “Fast and Furious” movies.
Then it was the legislature’s turn. House Bill 2730 significantly restricted the scope of the TCPA, in two ways. First, it narrowed the TCPA’s definitions of “right of free speech” and “right of association.” Second, it exempted several types of claims, including most non-compete, trade secret, and common-law fraud claims.
Klocked Out
The next carve-back of the TCPA came from an unlikely source: the U.S. Court of Appeals for the Fifth Circuit. It held in Klocke v. Watson that the TCPA does not apply in federal court.
Now we await the Texas Supreme Court’s decision in Pivot Technology v. Grant, which may clarify the scope of the “right of association” and could also address whether the Texas non-compete statute preempts the TCPA. But those issues will become largely moot for other cases, due to House Bill 2730.
So where does this leave us? Many questions remain unanswered, especially issues of procedure.
For example, I recently filed a TCPA motion to dismiss a Rule 202 petition for a pre-suit deposition. There is a split of authority on whether such a petition is a “legal action” under the TCPA. SeeHughes v. Giammanco, __ S.W.3d __, 2019 WL 2292990, at *4-10 (Tex. App.—Houston [1st Dist] May 30, 2019, no pet. h.) (Rule 202 petition is not a “legal action”); DeAngelis v. Protective Parents Colation, 556 S.W.3d 836, 849 (Tex. App.—Fort Worth 2018, no pet.) (Rule 202 petition is a “legal action”). We don’t know where the Texas Supreme Court will come out on that.
And we don’t know how Texas courts will apply the statute’s new definitions of free speech and association.
But we do know the TCPA generally does not apply to the following kinds of cases, among others:
Federal court
Trade secret
Non-disparagement
Non-compete
Family Code Titles 1-5
DTPA
Eviction
Common-law fraud
“Commercial speech” (further defined in the Castleman case)
I say the TCPA “generally” does not apply to these types of cases because there are exceptions, so be sure to read the statute carefully. Still, these categories cover a lot of real estate.
The Preemption Predicament
For my practice, which focuses on non-compete and trade secret disputes, it doesn’t leave much room for filing a TCPA motion to dismiss. The typical departing employee suit includes a claim that a former employee breached a non-compete, or misappropriated trade secrets, or both. Starting September 1, the TCPA won’t apply to those claims.
You might still have a shot at a TCPA motion against other claims. Breach of fiduciary duty is another common cause of action in a departing employee suit. Maybe you can file a motion to dismiss that claim alone–and if you lose still get a stay of the whole case during your interlocutory appeal (?).
But you’ll have to fit the square peg of breach of fiduciary duty into the round holes of “right of free speech” and “right of association,” which are now smaller thanks to HB 2730.
And breach of fiduciary duty is already a shrinking cause of action in departing employee cases. That’s because a common-law fiduciary duty claim that is based on misappropriation of trade secrets is preempted by the Texas Uniform Trade Secrets Act (as I explained here).
And if you’re in federal court? Forget about it. You’ve been Klocked.
So for now, I’m breaking up with the TCPA. I’m sorry, TCPA, but I’m just not that into you anymore.
Don’t take it too hard. We’ll always have Austin.
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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.
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.
Dallas Court of Appeals opinions restricting the TCPA have been coming out more often than those “Fast and Furious” movies.
