Top 15 Proposed Changes to Texas Lawyer Advertising Rules

Top 15 Proposed Changes to Texas Lawyer Advertising Rules

I took a Professional Responsibility course in law school, but I can’t remember the grade I received. I think it was at least a B, so hey, that’s good enough for a thought leader, right?

Anyway, major changes to the ethics rules that govern Texas lawyer advertising—including the use of social media—may be coming soon. The proposed changes would modernize and improve the advertising rules. If the changes are enacted, Texas law firms will be allowed to use trade names, and Texas lawyers will be able to use social media more freely without fear of stepping on ethical landmines.

The proposed changes would amend Part VII of the Texas Disciplinary Rules of Professional Conduct, which contains Rules 7.01-7.07 governing lawyer advertising and solicitation. These rules are, frankly, kind of a mess. They were obviously written to regulate plaintiff’s personal injury lawyers, and they are awkward to apply to other practice areas.

For example, how is a defense lawyer or a transactional lawyer supposed to comply with the requirement that when stating results obtained, “the amount involved was actually received by the client”? See Rule 7.02(a)(2)(ii). This is just one example. And these were problems before social media.

Applying these rules to social media is even more awkward. I’ve written about this problem before. See Five Rules Texas Lawyers and Other Professionals Must Follow When Using Social Media. As I explained, the good news was that the Texas State Bar Advertising Review Committee helped by issuing Interpretive Comments that clarified application of the rules to social media.

The bad news was that the Interpretive Comments still left open the possibility that (a) all the Texas lawyers who have LinkedIn profiles they haven’t filed with the State Bar are technically violating the requirement to file all lawyer advertising, and (b) every time a Texas lawyer posts something on social media, it could be an “advertisement in the public media” that is supposed to be filed.

For these reasons, when the Committee on Disciplinary Rules and Referenda circulated proposed changes to the advertising rules earlier this year, I recommended some changes to clarify these issues. See Influential Blogger Recommends Tweaking New Texas Ethics Rules.

To their credit—and to my pleasant surprise—the Committee members took the time to review my detailed memo, expressed appreciation, and listened attentively to my comments at the public hearing. They even invited me to share additional comments at a subsequent meeting and made further changes to the proposed rules to address some of the issues I raised. That was pretty cool.

As a result, the proposed rules include an exemption from the filing requirement for social media posts that are primarily “informational” or “educational,” as well as an exemption that would cover most lawyer social media profiles.

These are significant improvements that will encourage use of social media by Texas lawyers, while continuing the general prohibition of false or misleading lawyer advertising.

Want to see the details? Check out the submission packet for the proposed changes, including a redlined version of the rules. The packet even includes my memo and a transcript of my public comments. For the 15 changes that seem most important to me, read on.

Proposed Structural Changes

I call the first five changes structural in nature. These are the kind of changes that lawyer ethics nerds will love.

#1: One general “false and misleading” rule would replace the previous “per se” rules

This first one requires a little explanation, so bear with me.

The prohibition of false or misleading statements has been moved from Rule 7.02 to Rule 7.01, but the definition of “false or misleading” is the same:

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The new part is an expanded definition of a “misleading” statement:

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The key terms here are “substantial likelihood,” “reasonable person,” and “unjustified expectations.” This is more specific than the previous prohibition, which has been deleted:

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The idea is to prohibit statements that, while literally true, would cause a reasonable person to expect too much. The classic example would be something like “we got a $5 million verdict for a trucking accident victim, and we can do the same for you!”

This is a good clarification, but I don’t view this as a material change.

The bigger change is that the rules now rely on the general prohibition of false and misleading statements, without also enumerating specific types of false and misleading statements.

Previously, the rules identified certain statements that were false and misleading per se, particularly as to past results. Now the per se rule about past results would be deleted:

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This is a welcome change. This awkward rule created ambiguity because there are so many situations where it just doesn’t apply. The Advertising Review Committee had to clarify with Interpretive Comment 26, which essentially said just comply with the parts of the rule that apply to your situation:

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With the deletion of the previous per se rule about results obtained, this interpretive comment would no longer be necessary. The only downside is that I would no longer get to gripe about this rule when I present this topic at CLE seminars.

#2: The rules would now have a definition of “advertisement,” with the key language “offers or promotes legal services”

The new Rule 7.01 “governs all communications about a lawyer’s services, including advertisements and solicitation communications.” Believe it or not, the old rules did not define an “advertisement” in the public media, but the new Rule 7.01 would:

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The definition has three key elements:

(1) “substantially motivated by pecuniary gain”

(2) made to “members of the public in general”

(3) “offers or promotes legal services”

In my memo to the Committee, I quibbled with the “pecuniary gain” element because it’s subjective. Plus, isn’t most of what lawyers post on social media motivated by “pecuniary gain” to some degree? But it’s probably not a big deal. The “substantially motivated” language should be sufficient to keep this from being a problem.

The two other elements are really the key. To trigger the advertising requirements, it has to be a communication to the public, so a private post viewable only by your 50 Facebook friends is probably not advertising. And it has to offer or promote legal services. So a tweet that says “I’m working this weekend on a brief for a client” won’t be considered an advertisement.

Why does this matter? For one thing, the rules generally require advertisements to be filed with the Advertising Review Committee. More about that later.

#3: The rules would now have a definition of “solicitation,” which includes “offering to provide legal services”

The proposed rules also have a new definition of a “solicitation communication”:

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This definition has three elements, which correspond to the three elements in the definition of advertisement we looked at earlier:

(1) “substantially motivated by pecuniary gain”

(2) made to a “specific person who has not sought the lawyer’s advice or services”

(3) “offering to provide legal services . . . in a particular matter”

Thus, the difference between an advertisement and a solicitation communication is that a solicitation communication is to a specific person about a particular matter. This can be important because there are specific rules about solicitation in Rule 7.03, including a prohibition on solicitation through social media (with some exceptions).

#4: The rules would now expressly refer to social media

Speaking of social media, the proposed rules would include “social media” in the communications regulated by the rule on solicitation:

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Nobody thinks the existing rules don’t apply to social media, but expressly acknowledging social media in the advertising rules is a welcome update. I only wonder if, 20 years from now, the phrase “social media” will be out of date and people will cringe when they read it.

#5: There would be no separate rule for law firm websites

The current rules have a special provision just for law firm websites in Rule 7.07(c). That provision is old enough that it had to include a definition of “website.” The upshot of that rule is that law firms can file the homepage but not worry about filing changes to the rest of the website.

The new rules would have the same effect, but they would do it by adding a filing exemption for portions of the website other than the homepage. (I address this exemption below.)

Those are the major structural changes I see in the proposed new rules. The next five changes are new exemptions to the filing requirement. These exemptions would have more of a practical impact.

Proposed Exemptions from the Filing Requirement

Unless an exception or exemption applies, Texas lawyers must file advertisements and solicitation communications with the Advertising Review Committee, which requires filling out a form and paying a fee. This general requirement will not change.

This filing requirement creates a problem for lawyers who use social media for professional networking and business development. Most Texas lawyers do not file their social media profiles (such as LinkedIn), and they don’t want to have to think about filing every time they post something on social media that might be considered an advertisement.

The good news is that the new exemptions would clarify that in most cases Texas lawyers do not need to file their social media profiles or posts as advertising.

#6: The new rules would have an exemption for content published for informational, educational, political, artistic, or entertainment purposes

In my comments to the Committee, I suggested adding an express safe harbor for communications of an “educational or informational” nature. This would track the current guidance from the Advertising Review Committee in Interpretive Comment 17, which says the filing requirement does not apply to “[b]logs or status updates considered to be educational or informational in nature.”

The revised proposal expands the exemption:

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This would be a significant improvement that would provide needed clarity to Texas lawyers who are active on social media. It would allow attorneys to post freely on social media for informational, educational, political, artistic, or entertainment purposes. As long as such posts do not “expressly offer legal services,” they would not have to be filed as advertising.

#7: The new rules would have an exemption for “the type of information commonly found on the professional resumes of lawyers”

Initially, the draft rule revisions included a filing exemption for “a communication on a professional social media website to the extent that it contains only resume-type information.”

In my comments to the Committee, I suggested tweaking this social media exemption to make it clear that the typical lawyer profile on LinkedIn would be exempt.

The proposed language is now a little broader. The exemption would cover a social media profile that does not expressly offer legal services and that:

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This exemption would probably cover the typical lawyer profile on LinkedIn, as long as it does not “expressly offer legal services.”

My only hesitation is that one might question whether Endorsements and Recommendations, a staple of LinkedIn profiles, are commonly found on professional resumes of lawyers. But if this exemption is enacted, I think it would be a fairly safe bet to assume your LinkedIn profile does not have to be filed, at least until the State Bar says otherwise.

#8: Most of a law firm website would be exempt from the filing requirement

As noted earlier, the current rules have a special rule specifically for law firm websites, in Rule 7.07(c). That rule would be eliminated, but there would be a specific filing exemption for law firm websites:

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In other words, the homepage of a law firm website must be filed, unless all of the information on the homepage is covered by other exemptions. The rest of a law firm website would not need to be filed.

The effect is similar to the current rules, except in some cases firms wouldn’t even have to file the homepage.

#9: The newsletter exemption would be expanded

Existing Rule 7.07(e), newsletters sent to existing or former clients, other lawyers or professionals, and certain members of nonprofit organizations are exempt. The proposed rule would slightly expand this exemption to cover:

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Thus, a newsletter sent to a business person who is experienced in using the type of legal services the lawyer offers would be exempt, as would a newsletter sent to anyone who asked to receive it.

#10: Certain basic types of information about a lawyer or law firm would continue to be exempt

The proposed Rule 7.05(i) would carry forward most of the exemptions for certain basic information about a lawyer or law firm now found in Rule 7.07(e), such as names, contact information, court admissions, educational background, licenses, foreign language abilities, and board specializations.

Proposed Rule 7.05(i) would not include the previous exemption for “the particular areas of law in which the lawyer or firm specializes or possesses special competence,” but in most cases that information would be covered by the “professional resume” exemption addressed above.

Things Texas Lawyers Would Now Be Allowed To Do

#11: Use a trade name (if not false or misleading)

This is the big one. Rule 7.01(c) would expressly provide that “[l]awyers may practice under a trade name that is not false or misleading.” Law firm names would no longer be limited the name or names of current or past partners.

I don’t really have a dog in the trade name fight, so I’ll leave it to others to debate this one. I’ll just be curious to see how far creative firms push this. Will we see a firm called Badass Trial Lawyers of Abilene? Trademarks R Us? The Lollipop Firm?

Keep in mind, the only limit is that it can’t be false or misleading. Nothing in the proposed rule requires good taste.

#12: Say you “specialize” (instead of “focus,” “concentrate,” etc.)

Under the current rules, only lawyers certified by the Texas Board of Legal Specialization can say they “specialize” or call themselves “specialists” in a certain type of practice.

Of course, almost every lawyer today specializes in one or more specific areas of law practice, whether board certified or not. And there are many specialties—hmm, non-compete and trade secret litigation comes to mind—that have no board certification.

This is not a big problem, because those lawyers can simply say they “focus” or “concentrate” on their type of practice, rather than “specialize.” But this really puts form over substance.

The proposed changes would end this silliness. Rule 7.02(b) would allow lawyers to say they practice in particular fields of law:

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The part about “particular fields of law” does not use the word “specialize,” but the proposed comments to Rule 7.02 make it clear that lawyers would be allowed to say they specialize:

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There are limits, of course. As the proposed comment notes, the statement about specialization must not be false or misleading. And as the rest of Rule 7.02(b) provides, there are limits on stating you’re a member of an organization with a name that implies its member possess special competence.

But generally, it will now be ok to say you specialize in a particular type of practice, as long as that’s true.

#13: Promote past successes and results obtained without specific conditions

As noted above, the current Rule 7.02(a) imposing specific conditions on statements about past successes would be deleted. So, for example, there would no longer be a requirement that the lawyer was lead counsel.

But again, to comply with Rule 7.01, the statement can’t be false or misleading, or create unjustified expectations. And the proposed comment to Rule 7.01 says the lawyer who cites a past result must have “played a substantial role in obtaining that result.”

#14 Compare yourself to other lawyers (if not false or misleading)

Current Rule 7.02(a)(4) prohibits comparisons to other lawyers that are not based on objective, verifiable data. In other words, you can’t compare yourself other lawyers based just on opinion. At least that’s the rule. I’m not sure it is followed.

But this rule would be deleted:

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This is one case where I like the current rule. Do we really need lawyers expressing opinions comparing themselves with other lawyers? I admit I’m a little old-fashioned on this issue.

On the other hand, deleting this prohibition wouldn’t mean that anything goes. Under the new Rule 7.01, Texas lawyers still wouldn’t be allowed to make comparisons to other lawyers that are unsubstantiated.

The proposed comment to Rule 7.01 makes this clear:

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So, assertions like “we’re the best lawyers in town,” or “we can get you a recovery when others can’t” are probably still off limits.

#15: Solicit business from personal or professional contacts

In addition to expanding the filing exemptions for advertisements, the proposed changes would simplify and slightly expand the filing exemptions for solicitation exemptions.

The current solicitation exemptions in Rule 7.05(f) would be deleted:

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These exemptions would be replaced by the following solicitation exemptions in the new Rule 7.05:

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While the “pecuniary gain” exemption would be deleted, it would effectively remain in place because the new definition of “solicitation communication” in Rule 7.01(b) would include the element of “substantially motivated by pecuniary gain.”

The new exemptions for other lawyers and experienced business users will be especially advantageous for business lawyers who seek to develop business through contact with other lawyers and potential business clients.

Bonus Change: Hammer Don’t Hurt ‘Em

I said the top 15 changes, but here’s a bonus. The proposed changes include a rule that would prohibit telling potential clients you can get results through violence:

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Apparently we needed to clarify that lawyers can’t do this. Only in Texas.

My Grade for the Proposed Changes

The Committee on Disciplinary Rules and Referenda has done good work to update and modernize the rules governing Texas lawyer advertising for the social media era. It will be impossible for the changes to please everyone, but the proposed new rules would be a significant improvement in clarity over the old rules.

The new rules would rely heavily on the command to avoid false or misleading statements. That may be a “fuzzy” command that reasonable lawyers can disagree on in any particular case, but at least the command is intuitive and easy to understand.

The proposed rules would also have the benefit of making it easier for Texas lawyers to share information freely on social media without fear of violating the advertising rules. This is a development Texas lawyers should welcome. I give the Committee an A.

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IMG_4571Zach 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.

Irreparable Injury, I presume?

Irreparable Injury, I presume?

Does misappropriation of trade secrets create a presumption of irreparable injury in Texas?

This is one of my best blog posts to come down the pike. It’s going to cement my blog’s status as one of the best sources for new developments in Texas trade secrets law. But maybe I’m being too presumptuous.

I’m guessing my Fivers don’t obsess over every new Texas trade secrets case like I do. So you may not realize the Texas Supreme Court made a big change to Texas trade secrets law on Juneteenth 2020.

The opinion, Pike v. Texas EMC Management, LLC, __ S.W.3d __, 2020 WL 3405812 (Tex. June 19, 2020), sparked a huge debate on law Twitter. One camp says that when Justice Brett Busby writes an opinion pouring out a multi-million-dollar jury verdict, it’s a “Buzz-burn.” The other faction says it’s a “Buzz-kill.”

But the change I’m talking about may have flown under the radar. Justice Busby’s opinion covered a lot of legal ground. So you may not have noticed that Pike overruled a line of Texas cases that say irreparable injury is presumed when a defendant misappropriates trade secrets.

At least I think it did.

Let’s drill down into the Pike case to understand why, and then I’ll explain why it’s important.

The secret sauce in Pike was a new kind of cement developed by EMC Cement. Pike was the President. When concrete cratered, a new company called VHSC bought the EMC Cement plant at a foreclosure sale and hired President Pike. See id. at *1-3.

The jury found that VHSC and Pike misappropriated EMC Cement’s trade secrets, and the trial court entered a judgment for millions in damages, including $1.5 million for misappropriation of trade secrets. Id. at *4. The Texas Supreme Court reversed the damage award on the kind of procedural and evidentiary grounds only an appellate lawyer could love. See id. at *12-13.

EMC Cement had also asked for a permanent injunction to stop VHSC and Pike from continuing to use the trade secrets. The trial court denied that request. Id. at *22.

But if the jury found that the defendants misappropriated the trade secrets, why didn’t that finding entitle EMC Cement to a permanent injunction against future use of its trade secrets?

The Court of Appeals presumed imminent and irreparable injury

That’s what the Waco Court of Appeals wanted to know. The Court of Appeals first said that the misappropriation of trade secrets established a presumption of imminent harm. Pike v. Texas EMC Mgm’t, LLC, 579 S.W.3d 390, 427 (Tex. App.—Waco 2017). Pike and VHSC “were in possession of EMC Cement’s trade-secret information and were in a position to use it,” the court said, so “imminent harm is presumed.” Id.

But imminent harm is not the same as irreparable harm, as I explained in Injunction Junction, What’s Your Function? Imminent means something is about to happen. Irreparable means you can’t compensate for that thing with damages. Those are two different things.

It’s easy to see why misappropriation of trade secrets would establish a presumption of imminent harm. If the defendant takes the plaintiff’s trade secrets and is in a position to use them, it’s not a big stretch to say harm is about to happen.

But irreparable? I don’t see how possession of the plaintiff’s trade secrets by a defendant in a position to use them proves that damages would be inadequate to compensate for the use of the trade secrets. That’s a non sequitur. I suspect this notion started with courts confusing imminent and irreparable. Plus, courts may have been looking for an easy rationale for affirming injunctions, even where there was really no evidence of irreparable injury.

However it came about, there is a line of Texas cases suggesting a presumption of irreparable injury arises when a defendant is in a position to misuse the plaintiff’s confidential information or trade secrets, and the Court of Appeals in Pike cited some of those cases. Id. at 428.

For example, in Williams v. Compressor Engineering Corp., 704 S.W.2d 469, 470 (Tex. App.—Houston [14th Dist.] 1986, writ ref’d n.r.e.), the court said a finding of irreparable injury is unnecessary where a former employee is working for a direct competitor.

In IAC, Ltd. v. Bell Helicopter Textron, Inc., 160 S.W.3d 191, 200 (Tex. App.—Fort Worth 2005, no pet.), the court said that “[w]hen a defendant possesses trade secrets and is in a position to use them, harm to the trade secret owner may be presumed,” and “[t]he threatened disclosure of trade secrets constitutes irreparable injury as a matter of law.”

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The Pike case went all the way to the peak of Texas courts

Based on the case law, the Court of Appeals held that the plaintiffs satisfied both the imminent harm and irreparable injury requirements, and it was therefore an abuse of discretion for the trial court to deny a permanent injunction. Pike, 579 S.W.3d at 428.

In other words, the Court of Appeals said the misappropriation of trade secrets established a presumption of irreparable injury, supporting an injunction. But what does that really mean?

What’s a “presumption” anyway?

Let’s camp out for a second on “presumption.” What does that really mean? There are two kinds of presumptions in the law. A conclusive presumption is a legal conclusion that arises from certain facts and cannot be disputed. A rebuttable presumption is a legal conclusion that arises from certain facts, but that conclusion can be rebutted with other facts. When the law just says “presumption,” that usually means a rebuttable presumption.

So rebuttable presumptions are more common, and they essentially shift the burden of proof. Once a party offers evidence sufficient to create the presumption, the other party can rebut the presumption by offering some evidence—it doesn’t have to be a lot—that the presumption is wrong. At that point the presumption disappears. Poof! Then it’s up to the fact-finder to weigh the evidence and decide who is right.

So, for example, let’s say the cases cited by the Court of Appeals in Pike are correct that threatened misappropriation of trade secrets creates a presumption of irreparable injury. That means the burden then shifts to the defendant to offer evidence that the misappropriation will not cause irreparable injury. The defendant can rebut the presumption by offering evidence that the alleged harm can be adequately compensated by damages. Then the presumption should disappear.

That sounds pretty easy, right? You might even wonder why the presumption is such a big deal if it is so easily dispelled.

I’ll come back to that.

The question here is whether the Court of Appeals was right that the jury finding of misappropriation of trade secrets created a presumption of irreparable injury, which would entitle the plaintiffs to an injunction.

The Texas Supreme Court’s reasoning on irreparable injury

The Texas Supreme Court said no, the trial court was right and the Court of Appeals was wrong. Despite the jury’s finding of misappropriation of trade secrets, EMC Cement failed to show irreparable injury.

How can this be? What about the presumption?

Let’s remember what irreparable injury means: harm that cannot be adequately compensated by damages. As the Pike court recited:

“If there is a legal remedy (normally monetary damages), then a party cannot get an injunction too.” Pike, 2020 WL 3405812 at *24 (citing Schneider Nat’l Carriers, Inc. v. Bates, 147 S.W.3d 264, 284 (Tex. 2004)).

“[A] plaintiff can prove there is no adequate remedy at law where damages cannot be calculated.” Id. (citing Dresser-Rand Co. v. Virtual Automation Inc., 361 F.3d 831, 848 (5th Cir. 2004)).

“For purposes of injunctive relief, an adequate remedy at law exists when the situation sought to be enjoined is capable of being remedied by legally measurable damages.” Id. at *24 n. 38 (citing Dresser-Rand, 361 F.3d at 848).

So the question in Pike became whether damages for the future use of the trade secrets could be calculated in some legally measurable way. The Texas Supreme Court found that damages could be measured—and therefore there was no irreparable injury—where three factors were present:

(1) the plaintiffs themselves sought actual damages for misappropriation of the trade secrets,

(2) the plaintiffs presented expert testimony at trial that attempted to quantify the damages for the misappropriation of the trade secrets, and

(3) the damage calculation presented by the plaintiffs included damages attributable to future use of the trade secrets (not just past use).

See id. at *23.

In short, where the plaintiffs sought damages and presented expert testimony of damages partly attributable to future harm, the trial court did not abuse its discretion when it denied the plaintiffs a permanent injunction on the ground that they had an adequate remedy at law. Id. at *24.

You might be thinking this is no big deal for the plaintiffs in Pike because, hey, they still got to recover millions in damages, right? Well, no. Remember, the court poured out the trade secrets damage award.

But the fact that the plaintiffs failed to present sufficient expert testimony to support the damage award did not change the court’s conclusion that damages would have been adequate. “The failures of the EMC plaintiffs’ experts to take the necessary steps to connect their opinions to supporting data do not establish that no damages could be calculated.” Id.

Ouch. That does burn a little.

Pike teaches us that the plaintiff won’t be entitled to a trade secrets injunction where (1) the plaintiff seeks actual damages for trade secrets misappropriation, (2) the damages could be properly quantified, (3) the plaintiff presents expert testimony that tries to quantify future damages in some way, and (4) the trial court decides not to grant an injunction.

This tells us that just because there is misappropriation of trade secrets doesn’t mean there is irreparable injury. But it leaves many questions unanswered.

Questions left unanswered by Pike

First, don’t sleep on the standard of review. Technically, the holding in Pike was not that the trial court’s denial of an injunction was the right decision, but only that the trial court’s denial of an injunction was not an “abuse of discretion.” In theory, if the trial court judge had decided to grant an injunction, the court could have found that decision was also not an abuse of discretion (and I suspect that’s what would have happened).

But still, the standard of review is not the whole story. What happened to the presumption of irreparable injury? The Texas Supreme Court didn’t say it was overruling the cases that say misappropriation of trade secrets creates a presumption of irreparable injury. But it did say there was no irreparable injury, even where the jury found misappropriation of trade secrets. So how could the presumption still apply?

There are two ways to look at this. One is that Pike overruled the “presumption” line of cases sub silentio. “Sub silentio” is a Latin phrase that means “like a thief in the night.” You could interpret Pike as rejecting the presumption of irreparable injury without expressly saying so.

But another way to look at it is that, even assuming the evidence of misappropriation created a presumption of irreparable injury, there was other evidence that rebutted the presumption. Namely, the evidence that damages could be calculated. This is probably the better interpretation.

 

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It’s really not my place to tell you how to interpret Pike

The rest of the questions raised by Pike arise from the old trick of removing just one of the factors present in the case and asking if the result would change.

Let’s say the plaintiff presents expert testimony limited to past damages, without taking into account any future damages. Or let’s say the plaintiff doesn’t present any expert testimony whatsoever on damages. Would these differences change the result?

You could argue it shouldn’t make any difference. The question is not whether the plaintiff asked for damages or proved damages, but whether the plaintiff could have sought damages for the alleged misappropriation and reasonably quantified them.

So I think it comes down to whether anyone offers evidence that damages could or could not be calculated. And that leads to my practice tips.

Practice tips suggested by the Pike decision

Considering the importance of the irreparable injury requirement, you’d think lawyers on both sides of trade secrets injunction fights would routinely offer evidence to show that damages would or would not be adequate to compensate the plaintiff. But in practice, lawyers rarely do this, especially at the temporary injunction stage.

Why is that?

I think it’s mainly because the lawyers are focused on other issues. Litigators in these situations instinctively focus on whether the defendant did something wrong. Whether the resulting injury is “irreparable” is usually an afterthought.

And there is good reason for this instinct. In practice, trial court judges usually decide temporary injunctions based on how wrongful they think the defendant’s conduct was. See Does a Breach of a Texas Non-Compete Cause “Irreparable Injury”?  The judges don’t always think that hard about whether the threatened harm is irreparable.

And the trial court judges really don’t need to worry too much about it. A decision on a temporary injunction almost always holds up on appeal, because the Court of Appeals applies an “abuse of discretion” standard.

That’s not the only reason lawyers and judges don’t focus on irreparable injury. Even when they address the common-law requirements for an injunction, they tend to focus on whether the injury is imminent. But as I said, imminent and irreparable are two different things. Imminent means something is about to happen if the judge doesn’t stop it. That has nothing to do with whether damages would be adequate to compensate for the harm that is about to happen.

In many cases, you can get by focusing on whether the harm is imminent, but if you really want to bring your “A game” to a temporary injunction fight, you should actually offer evidence concerning the irreparable injury element. This isn’t my first temporary injunction rodeo, so I have some ideas on this, some of which I previously shared in Temporary Injunction Rulings in Texas Non-Compete Cases.

If you represent the plaintiff who is trying to get a temporary injunction in a trade secrets case, you want somebody to testify that it would be difficult to calculate the damages that would result from the defendant’s use of the trade secrets. Even better, you want that person to give specific reasons why calculating damages would be difficult.

Conversely, if you represent the defendant in a trade secrets injunction hearing, you want to offer evidence that the plaintiff could calculate the damages resulting from the use of the alleged trade secrets. This can be counter-intuitive, especially to your client. So you’ll want to explain in advance why it sounds like you’re offering evidence to prove damages for the plaintiff.

But what kind of evidence? One great way to get this evidence is on cross-examination of the plaintiff or plaintiff’s representative. “So Mr. CEO, it says in this Petition your company is claiming trade secrets damages in this case, correct?” Yes, the CEO will have to say. “But there’s no way you could calculate those damages with any reasonable certainty, is there?” You get the idea.

At the least, you can prepare your client to testify that “the plaintiff could calculate the damages that would result from my use of the alleged trade secrets.” That’s better than nothing. But that sounds a little conclusory, so it’s even better if your client can testify specifically about how damages could be calculated. If this makes you nervous, you can preface it by saying “we’re not agreeing to any claim for damages made by the plaintiff.”

But if you really want to show that damages would be adequate, consider expert testimony. You usually don’t have much time to prepare for a temporary injunction, but you probably have enough time to find and hire a qualified damages expert. The expert doesn’t have to do a whole damages calculation.

All you really need is for the expert to review the plaintiff’s pleadings, and maybe the depositions (if there are any), and then to testify that a qualified expert could calculate the amount of damages that would result from the use of the trade secrets alleged by the plaintiff. “I have calculated damages in dozens of cases like this one,” your damages expert can probably say. “It’s not necessarily easy, but it can be done with reasonable certainty, and it could be done in this case.”

Boom. You just rebutted any presumption of irreparable injury.

Now that’s a Buzz-burn.

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IMG_4571Zach 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.

Geographic Area of a Texas Non-Compete – Part 1

Geographic Area of a Texas Non-Compete – Part 1

The reasonable geographic area requirement of Texas non-compete law is delightfully dated. It’s an analog throwback in a digital era. When Texas courts say a non-compete must be limited to a reasonable geographic area, you can just feel the needle dropping into the well-worn grooves of your uncle’s vinyl copy of Frampton Comes Alive!

But some of you will object that requiring a geographic limitation in a non-compete is an obsolete relic of a bygone era, like Microsoft stores. We’re in the WFH era now. The physical location of an employee doesn’t matter. You might argue a sales person with a cell phone and a laptop can do just as much damage to your business from a beach chair in Fiji as a cubicle in Pearland.

Maybe so. But if the non-compete says “within Pearland,” you’re kind of stuck with that. Plus, the Texas non-compete statute still requires a non-compete to have a reasonable limitation as to “geographical area.” Tex. Bus. & Com. Code § 15.50(a).

The traditional connection between physical proximity and customer goodwill

This is perhaps the most old-fashioned part of Texas non-compete law. It hearkens back to a time when physical proximity was the key to a salesman maintaining goodwill with the customer.

Consider Randolph v. Graham, 254 S.W. 402, 403-4 (Tex. App.—San Antonio 1923, writ ref’d), where the court held that a medical practice non-compete was reasonable and enforceable, despite having no time limitation, because it was limited to practicing medicine within a 20-mile radius of Schertz, Texas.

The court didn’t explain why the geographic area was reasonable, but it’s easy to understand. People like to go to a doctor with an office near them. So, if a doctor sells his practice in Schertz and moves to Austin, it is unlikely his patients will follow him. (The drive from Schertz to Austin is 65 miles up I-35, which usually takes 5-7 hours.) A 20-mile radius sounds about right to prevent the doctor from taking advantage of the goodwill he developed with his patients.

Two years later, the geographic limitation requirement took shape in City Ice Delivery Co. v. Evans, 275 S.W. 87 (Tex. Civ. App.—Dallas 1925, no writ). The court said the test for enforceability of a non-compete in an employment contract was whether it imposed “any greater restraint than is reasonably necessary to secure protection of the business of the employer or the good will thereof.” Id. at 90.

Applying this principle to the geographic area of the non-compete, the court held that the employer was entitled to an injunction against the employee competing in the ice delivery business in the territory where he had delivered ice to the company’s customers, but not against competition outside of the territory, where the company had no goodwill based on the employee’s “personal contact” with customers. Id.

Again, we can see why it made sense to limit the non-compete to the employee’s delivery area. In a business that involves physical delivery of the product to the customer, it was unlikely that a salesman was going to develop goodwill with customers outside his delivery area. Especially in 1925, when the ice would melt if you had to go too far.

So there you have it. Two keys to the geographic area requirement: (1) it should be limited to the territory where the employee interacted with customers, because (2) that is the area where the employee developed goodwill with the customers on behalf of the company.

64 years later, the Texas legislature enacted the 1989 non-compete statute. It provides that a non-compete must contain limitations as to time, geographical area, and scope of activity to be restrained that are “reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.” Tex. Bus. & Com. Code § 15.50(a).

How have Texas courts interpreted the statute’s reasonable geographic area requirement? In principle, not much has changed since City Ice Delivery.

The Sales Territory principle

In most cases, where the employee worked in some kind of customer-facing sales role within a defined territory, the reasonableness of the geographic area will turn on whether it matches the employee’s sales territory. Let’s call this the Sales Territory principle.

When the case involves a sales person or other low to mid-level employee, the Sales Territory principle will usually explain why the court found the geographic area reasonable or unreasonable. In other words, the Sales Territory principle usually applies when the case does not involve a high-level executive. That leads to our first general rule.

General Rule 1: Non-executive + no geographic limitation = probably unreasonable

The easiest cases are those involving a non-executive who has a non-compete with no geographic limitation.

One of the first cases to apply the statute’s geographic area requirement was Zep Manufacturing Co. v. Harthcock, 824 S.W.2d 654 (Tex. App.—Dallas 1992, no writ). That case involved a non-compete between Zep, an industrial chemical manufacturer, and Harthcock, an industrial chemist. Id. at 656-57. Harthcock’s non-compete barred him from performing services similar to those he performed for Zep for two years following termination, with no geographic limitation. Id. at 660.

The court cited the general principle that “what constitutes a reasonable area generally is considered to be the territory in which the employee worked while in the employment of his employer.” Id. (citing two pre-statute cases, Justin Belt Co. v. Yost, 502 S.W.2d 681, 685 (Tex. 1973), and Diversified Human Resources Group v. Levinson-Polakoff, 752 S.W.2d 8, 12 (Tex. App.—Dallas 1988, no writ)).

The court then said the non-compete failed to comply with the statute because it contained no limitation as to geographic area. Id. at 661. Thus, the non-compete would prohibit Harthcock from working as an industrial chemist anywhere, regardless of whether it was in an area not serviced by Zep or Harthcock.

“Noncompete covenants with broad geographical scopes have been held unenforceable,” the court said, “particularly when no evidence establishes that the employee actually worked in all areas covered by the covenant.” Because the non-compete contained no geographic restriction, the court held it was unenforceable. Id.

But today, most Texas lawyers are smart enough to include some geographic limitation in the non-compete. What then?

General Rule 2: Non-executive + ill-defined geographic limitation = probably unreasonable

Texas courts have reached similar conclusions when the non-compete has some geographic limitation, but is so broad or vague that it has no connection to protecting the goodwill developed by the employee.

For example, in TENS Rx, Inc. v. Hanis, No. 09-18-00217-CV, 2019 WL 6598174, at *1 (Tex. App.—Beaumont Dec. 5, 2019, no pet.) (mem. op.), the non-compete applied “in any state or geographical territory in which Employer is conducting, has conducted or anticipates conducting its business.”

The employee filed a motion for summary judgment that the non-compete was unenforceable because the geographic limitation and scope of activity restrained were unreasonable. Id. at *2. The employer argued that the employee was bound by the contractual stipulation that the geographic restriction was reasonable, stating it was “disingenuous” for the employee to now assert the contrary. Id. at *3.

This brings up one of my pet peeves: lawyers for the first employer love to argue that the employee is being dishonest or “disingenuous” when the the non-compete recites that its limitations are reasonable and the employee later argues they’re unreasonable. I don’t find this persuasive, and I’m guessing most judges don’t either. Almost every non-compete contains self-serving recitals like this. Even when I’m representing the employer trying to enforce the non-compete, I would rather just demonstrate that the limitation is reasonable than play this game.

In any case, the trial court in TENS Rx didn’t buy the “disingenuous” argument. It granted summary judgment that the non-compete was unreasonable in geographic scope and scope of activity restrained. Id.

Because the non-compete related to provision of personal services, the employer had the burden to prove the non-compete was reasonable. Id. at *4. On appeal, the employer cited no authority that the restrictions were reasonable, instead merely arguing that the employee was bound by the contract’s stipulation that the restrictions were reasonable. Id. at *4. The court appeared to reject this argument, instead looking to Texas case law on reasonableness of a geographic limitation. Id.

The question is “whether the covenant contains limitations that are reasonable as to geographical area and do not ‘impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.’” Id. (citing Marsh USA Inc. v. Vook, 354 S.W.3d 764, 777 (Tex. 2011)).

“The territory in which the employee worked for an employer is generally considered to be the benchmark of a reasonable geographic restriction,” the court said. Id. “Noncompete covenants with broad geographical scopes have been held unenforceable, particularly when no evidence establishes that the employee actually worked in all areas covered by the covenant.” Id.

“Here, there is no definite territory stated and no evidence that Hanis worked in all areas covered by the covenant,” the court said. “It is also unreasonable to impose a condition upon Hanis that would require her to know where TENS ‘anticipates doing its business.’” Id.

close-up-photo-of-assorted-color-of-push-pins-on-map-1078850
Sales territory is usually the benchmark for a reasonable geographic area

TENS Rx shows the risk of making the geographic limitation too abstract. Sure, there is some logic to defining the area as “the employee’s sales territory.” What better way to comply with the Sales Territory principle? But the risk of defining the geographic area this way is that the court may say it is too indefinite. How are the employee—and the court—to know what the sales territory is if it’s not spelled out in the contract?

On the other hand, the company may not know in advance what the employee’s sales territory will be. What if the employee works for the company for over a decade and the territory changes? I don’t have any foolproof solution to this problem, other than to say that usually the better practice is to include a specific geographic area that predicts, as well as the company can, what the employee’s likely sales territory will be.

Let’s say the employer tries to do that and limits the non-compete to a specific, concrete geographic area, such as “within Harris County, Texas.” Is that reasonable? It will probably depend on the employee’s actual sales territory, which leads us to the next general rule.

General Rule 3: Non-executive + well-defined geographic area broader than sales territory = probably unreasonable

When the employee is not a high-level executive and the non-compete has a specific geographic area, the question will be whether the geographic area is broader than the employee’s actual sales territory.

This creates an obvious problem. Dozens of Texas cases say that the reasonableness of a non-compete is a question of law. But how can a judge decide the reasonableness of the non-compete’s geographic area without considering extrinsic evidence about the facts?

Suppose the non-compete’s stated geographic area is “within Harris County, Texas and surrounding counties.” On a motion for summary judgment, the Employee signs a sworn affidavit stating “my sales territory was limited to Harris County,” while the Employer’s CEO signs a sworn affidavit stating “Employee’s sales territory included Harris County and all the surrounding counties.” In other words, conflicting evidence. How can the trial court decide that issue as a question of law?

It can’t. And this illustrates why Texas courts are simply wrong when they declare that the reasonableness of a geographic limitation is always a question of law. On the other hand, if the facts regarding the employee’s sales territory are undisputed, then the reasonableness of the geographic area could present a question of law for the court.

Consider Fomine v. Barrett, No. 01-17-00401-CV, 2018 WL 6376500, at *1 (Tex. App.—Houston [1st Dist.] Dec. 6, 2018, no pet.), which prohibited a chiropractic case manager from competing within a 500-mile radius of the clinic’s location. The former case manager, Barrett, moved for summary judgment that the geographic limitation was unreasonable, extending beyond her work responsibilities for the clinic. Id. at *2.

The Court of Appeals affirmed summary judgment for Barrett. The court began by citing the Sales Territory principle, i.e. “[t]he territory in which an employee worked for an employer is generally considered to be the benchmark of a reasonable geographic restriction.” Id. at *3.

The clinic argued that a 500-mile radius was reasonable because Barrett marketed to patients throughout the State of Texas, but the court rejected this argument. Even assuming Barrett’s sales territory included all of Texas, a 500-mile radius would include all of Louisiana and significant portions of Alabama, Arkansas, Mississippi, Oklahoma, and Mexico. Id. at *3. The geographic scope was therefore “significantly broader” than the geographic scope of Barrett’s employment with the clinic, and the non-compete was therefore unenforceable as written. Id. at *4.

Fomine shows the importance of the employer offering evidence that an employee responsible for generating sales actually worked in the entire geographic area stated in the non-compete. Otherwise the area may be found broader than necessary to protect the employer’s goodwill.

The Sales Territory principle can also apply when the defendant is not a sales employee. Ortega v. Abel, 562 S.W.3d 604 (Tex. App.—Houston [1st Dist.] 2018, pet. denied), was a non-compete case involving the sale of a Hispanic-themed grocery store chain. The geographic area was a 10-mile radius from each of the five stores sold, which equated to most of the Greater Houston area. Id. at 611. The defendants’ expert testified that a three-mile radius would be more than sufficient to protect the goodwill of each store, reasoning that people in a city like Houston rarely travel more than 10 to 12 minutes to go to the grocery store. Id. The plaintiff, Ortega, did not present any evidence to contradict this testimony. Id. at 612.

The Court of Appeals held that the evidence was sufficient to support the trial court’s determination that the 10-mile radius in the non-compete was greater  than necessary to protect Ortega’s goodwill. Id. The court reasoned that “[t]he goal of a covenant not to compete is to establish the restraints on trade reasonably necessary to protect the goodwill or other business interest of the promise, not to prevent any competition.” Id. The expert’s testimony supported the trial court’s conclusion that a 3-mile radius was sufficient. Id.

General Rule 4: Non-executive + geographic area basically matching sales territory = probably reasonable

The next application of the Sales Territory principle is where the employee is a sales person or other lower to mid-level employee, and it is undisputed that the geographic area matches the sales territory the employee actually worked (or is at least pretty close).

That presents a fairly easy case for the court to hold that the geographic area is reasonable.

For example, in Gehrke v. Merritt Hawkins & Associates, LLC, No. 05-18-001160-CV, 2020 WL 400175, at *4 (Tex. App.—Dallas Jan. 23, 2020, no pet. h.), the non-compete between a national physician recruiting firm and a salesman prohibited competition in states in which the salesman worked during his last year with the firm. The court held that the multi-state geographic restriction was enforceable because the salesman actually worked within those states. Id.

But of course not every case involves an ordinary sales-level employee. What if the employee was a high-ranking executive who knew everything about the company and was responsible for all of the company’s customers?

I feel like I should save that for Part 2.

Do you feel like I do?

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IMG_4571Zach 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.

Bostock Opinion Shows Strict Textualism Fails to Deliver on its Central Promise

Bostock Opinion Shows Strict Textualism Fails to Deliver on its Central Promise

Survey says . . .

I’m going to ask you to take an opinion poll.

But first, I have one small request: put aside, for a moment, whether you think discriminating against homosexual or transsexual employees is wrong, or whether you think it should be illegal. Easy, right?

Now here’s the question: Do you think that an employer firing an employee because the employee is gay is firing “because of sex”? You’ve got three choices:

A. Yes. And this is the only reasonable interpretation.

B. No. And this is the only reasonable interpretation.

C. Maybe. The phrase “because of sex” is ambiguous. Both A and B are reasonable interpretations, even if one is better.

If you picked A, you agree with Justice Gorsuch, who wrote the majority opinion in Bostock v. Clayton County. If you picked B, you agree with Justice Alito, who wrote a scathing dissenting opinion. If you picked C, then you agree with Five Minute Law.

Notably, both Gorsuch and Alito purported to apply the method of judging known as “textualism.” My thesis is that this teaches us an important point about textualism: it fails to deliver on its central promise of providing an objective, determinate, non-political basis for deciding hard cases.

Let’s break it down.

What is Strict Textualism?

First we need to distinguish between two kinds of textualism. For convenience, I’ll label them “Modest Textualism” and “Strict Textualism.”

Modest Textualism says when interpreting a statute the court should start with the text. If there is only one reasonable interpretation of the text of the statute, the court should stop there and not consider extrinsic sources.

“Extrinsic” sources means everything other than the text, but most notably, it could include what Congress intended the words to mean, how courts have interpreted the text in the past, pragmatic factors, and considerations of what is fair, just, or good public policy.

Virtually everyone who is serious about the law is at least a Modest Textualist. No serious practitioner—i.e. a judge or practicing lawyer—says “in interpreting a statute, the text of the statute is totally irrelevant.”

No. Everyone agrees you start with the text. Of course you start with the text.

The difference of opinion arises when different people interpret the text differently.

Even then, the Modest Textualist does not immediately jump to extrinsic sources. The mere fact that two litigants disagree over the statute’s interpretation does not mean the court has to look beyond the text. A party’s proffered interpretation must be at least reasonable. The court can reject an unreasonable interpretation without looking beyond the text.

But what if I told you that sometimes, just sometimes, there is more than one reasonable interpretation of a statute? Not only that, but once in a blue moon, there are two reasonable interpretations of a statute that lead to diametrically opposite results.

That’s called a Hard Case. And that’s where Modest Textualism and Strict Textualism part ways.

In a Hard Case, the Modest Textualist says ok, there are two reasonable interpretations of this statute. That means the statute is ambiguous as applied to this dispute. So we’re going to have to look to something else to decide which interpretation to adopt. The text alone just doesn’t give us the answer.

And of course, I’m joking when I say “once in a blue moon.” This happens all the time, at least in the kind of case that makes it up to the Supreme Court. And as a practicing litigator, I can tell you it even happens fairly often in the kind of boring, ordinary business disputes I handle.

So what should the judge do in such cases?

In theory, the Strict Textualist agrees that when a statute is ambiguous, the court can look to extrinsic sources. The difference is that the Strict Textualist tries really, really hard to avoid jumping to extrinsic sources too quickly. The Strict Textualist will first use close reading of the statute, “canons of construction,” and dictionaries to interpret the statute. It is only when those methods fail to yield a clear answer that the Strict Textualist will even consider looking to extrinsic sources. (In theory)

This immediately raises a complication, because Strict Textualism does allow the judge to look at the “ordinary public meaning” of the statute at the time it was enacted, which can include looking at dictionaries, which are an extrinsic source.

And Strict Textualism has a close cousin named Originalism, which says you must look to extrinsic sources—e.g. the Federalist Papers—to interpret the “original understanding” of the Constitution, especially considering that the broadly worded text of the Constitution just doesn’t give you the answers to Hard Cases.

But for simplicity, let’s just say the Strict Textualist tries really hard to confine the inquiry to the text.

You might object to my sharp distinction and argue the difference between the Modest Textualist and the Strict Textualist is only a matter of degree. And you’d have a point. But still, the difference is pretty easy to spot in the wild. If a judicial opinion gets down into  the punctuation of a statute and parses multiple definitions of ordinary words from multiple dictionaries, that’s probably a Strict Textualist writing the opinion.

You might also object that my distinction is too abstract. So far, I’ve ignored the elephant in the room (no pun intended). Strict Textualists are almost always Republicans.

Now, in the abstract, there is nothing inherently “liberal” or “conservative” about either form of textualism. But in practice, one political ideology tends to favor Strict Textualism.

Everybody knows that conservatives and Republicans like Strict Textualism, while liberals and Democrats like Modest Textualism. But why is that? Modest Textualism does not necessarily lead to a liberal result, and Strict Textualism does not necessarily lead to a conservative result (again, in theory), so why the stark difference?

I’ll come back to that. First we need to understand the rationale behind Strict Textualism.

Strict Textualism’s Central Promise

The rationale behind Strict Textualism has two parts.

First, Strict Textualism says that judges must have an objective, non-political basis for deciding Hard Cases. Otherwise, judges would just be deciding cases based on their own personal opinions on what is fair, just, or good public policy. That would not be the rule of law, the proponent of Strict Textualism says. That would be legislating.

Thus, even if Strict Textualism did not exist, the Strict Textualist says, judges would have to invent it.

Second, Strict Textualism says that Strict Textualism provides an objective, non-political basis for deciding Hard Cases. When Strict Textualism is applied correctly, it yields a single determinate answer, even in Hard Cases where there appear to be strong arguments on both sides. This is the central promise of Strict Textualism.

Now, let’s clear aside one obvious objection to this central promise. Strict Textualism does not claim that the answer will always be obvious, or that all reasonable people will agree on the answer.

No, the Strict Textualist realizes that reasonable people will disagree on the correct application of Strict Textualism. Not only that, even the foremost legal experts, or even members of the Supreme Court, will sometimes disagree. But the fact that they disagree doesn’t change the fact that there is still a single correct answer.

The Strict Textualist might analogize to medicine. Two doctors who are renowned experts in their field could examine the same patient and come up with diametrically opposite diagnoses. The fact that they disagree does not change the fact that only one of them is correct. The one true diagnosis is “out there,” even if it is sometimes hard to discern.

So even if judges applying Strict Textualism sometimes get it wrong, the important thing is that they apply it, Strict Textualism says. That is the only way to maintain the rule of law and avoid turning judges into de facto legislators.

In short, Strict Textualism promises political legitimacy.

And one more thing. The corollary is that other theories of adjudication are illegitimate. Strict Textualism does not just claim to provide determinate answers to Hard Cases. It claims to be the only theory of adjudication that does so (with the possible exception of Originalism, but that’s another can of worms).

This turns Strict Textualism into a sword that can be used to attack a judicial decision as not only wrong, but as illegitimate. This is the key to its political appeal. And for various reasons I don’t have time to get into here, this appeal is especially strong for conservatives.

But does Strict Textualism deliver on its promise? Oh, if only we had a test case.

Enter Bostock.

Bostock v. Clayton County

Bostock is almost the perfect test case for Strict Textualism. It has it all: a hot-button social issue that turns on the interpretation of just three words in a statute, i.e. “because of sex.”

Specifically, Bostock presented a question of statutory interpretation concerning Title VII of the 1964 Civil Rights Act: does discrimination “because of sex” include discriminating against an employee for being a homosexual or transsexual. Writing for the 6-3 majority, conservative Justice Gorsuch said yes.

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The results of my highly scientific poll about Bostock

In a role reversal, Justice Gorsuch’s opinion offered a “textualist” rationale for this “liberal” result. Chief Justice Roberts, another conservative, joined in the Gorsuch opinion, along with the four liberal justices. The three most conservative justices—Alito, Thomas, and Kavanaugh—dissented.

Justice Gorsuch reasoned that the text of the statute provided one—and only one answer—to this question. Therefore, it did not matter what Congress intended when it passed Title VII of the Civil Rights Act of 1964. “When the express terms of a statute give us one answer and extratextual considerations suggest another,” he wrote, “it’s no contest.” Only the “written word” is the law.

This was textbook Strict Textualism, at least on its face. “This Court normally interprets a statute in accord with the ordinary public meaning of its terms at the time of its enactment,” Gorsuch wrote.

And he offered the textbook justification for this method of adjudication: constraining judges and thereby providing legitimacy. “If judges could add to, remodel, update, or detract from old statutory terms inspired only be extratextual sources and our own imaginations,” he said, “we would risk amending statutes outside the legislative process reserved for the people’s representatives.”

Justice Gorsuch then made a painstaking logical argument for why the plain meaning of “because of sex” necessarily includes sexual orientation and gender identity. Under the Supreme Court’s precedents, discrimination “because of sex” means any discrimination where the individual’s sex is a “but for” cause of the employer’s action. Applying that standard, Justice Gorsuch reasoned, there is just no way for an employer to take an action because of an individual’s sexual orientation or gender identity that does not in some way take into account the individual’s sex. His logic hypotheticals would make the LSAT proud.

Some of you will buy his argument, and others will not. I’ll wager this will depend largely on whether you think discrimination on the basis of sexual orientation or gender identity should be illegal or not. It will be a rare case where someone says “I strongly believe discrimination based on sexual orientation should be against the law, but the statute simply doesn’t say that,” or vice-versa.

I only hope you will agree that Justice Gorsuch’s interpretation of “because of sex” is at least one reasonable interpretation. I mean, he’s a pretty smart guy, with generally conservative views. The idea that he just made it up to “appeal to college campuses and editorial boards” doesn’t seem credible. And the justices who joined him are intelligent too. They all have degrees from fancy law schools and years of judicial experience.

Of course, none of this proves they are right, but isn’t the fact that six out of nine justices on the highest court in the land agree with this interpretation some indication that their interpretation is at least reasonable? Surely they haven’t all lost their minds.

Alito’s Dissent

So how did Alito respond? Ever the gentleman, he began by saying:

My learned colleague Justice Gorsuch has written an opinion that sincerely attempts to decide this hard question through the good-faith application of textualism, a theory we both agree with, but I fear he has gone astray and applied the method incorrectly.

I’m kidding, of course. It was quite the opposite. Alito’s anger was palpable. He lashed out at Gorsuch’s opinion as not only incorrect, but as dishonest and illegitimate. “There is only one word for what the Court has done today: legislation,” he led off. “The document that the Court releases is in the form of a judicial opinion interpreting a statute,” he said, “but that is deceptive.”

Why so angry?

I think it was a combination of three things. First, the result. Second, the fact that Gorsuch and Roberts joined the liberals. Third, and perhaps the most galling, was the fact that Gorsuch wrote a textualist opinion justifying the result. “The Court’s opinion is like a pirate ship,” Alito  wrote. “It sails under a textualist flag,” he said, but it actually reflects the illegitimate theory that courts should “update” old statutes so they reflect the “current values of society.”

Let’s put aside Alito’s anger for the moment and just look at what the disagreement tells us about textualism.

Alito characterized the majority opinion as holding that the only reasonable interpretation of “because of sex” is that it includes sexual orientation and gender identity. In Alito’s words, the majority argued “not merely that the terms of Title VII can be interpreted that way but that they cannot reasonably be interpreted any other way.” “According to the Court,” he said, “the text is unambiguous.”

On this point Alito got the majority opinion right. Gorsuch did not argue that “because of sex” is ambiguous and then offer an argument for choosing one of two reasonable interpretations. No, Gorsuch argued that application of the plain meaning of the statute yields only one result: discrimination based on sexual orientation or sexual identity is inherently discrimination “based on sex.”

Alito wasn’t buying it. “The arrogance of this argument is breathtaking,” he wrote. “The Court’s excuse for ignoring everything other than the bare statutory text is that the text is unambiguous,” Alito said, “and therefore no one can reasonably interpret the text in any way other than the Court does.” But “to say that the Court’s interpretation is the only possible reading is indefensible.”

You might expect Alito’s next move to be an argument that the majority’s interpretation is only one reasonable interpretation, and that the statute is therefore ambiguous.

But no. Alito believes that the majority’s interpretation is not only wrong, but that his opposite interpretation is the only reasonable one. In other words, Alito would pick option B, not C, in my opinion poll above. “The Court’s argument is not only arrogant,” he said, “it is wrong.”

Alito argued that “because of sex” does not include sexual orientation or gender identity. He supported his interpretation with evidence that included:

  • The fact that Congress has considered—but rejected—attempts to amend the statute to expressly add “sexual orientation” and “gender identity.”
  • Dictionary definitions showing that “sex” did not mean “sexual orientation” or “gender identity” in 1964. (Remember, textualists love dictionaries.)
  • The fact that ordinary people in 1964 would not have understood “discrimination because of sex” to include discrimination because of sexual orientation or gender identity. (This is textualism’s “ordinary public meaning.”)
  • Evidence that Congress didn’t intend to prohibit discrimination based on sexual orientation or gender identity.

I’ll let others get into the weeds on these points. Conservatives will tend to find Alito’s evidence compelling. Liberals will tend to reject it.

I only hope to make the modest point that Alito’s interpretation of the statute, like the majority’s, is at least one reasonable interpretation.

Ask people on the street, either today or in 1964, if discrimination “based on sex” includes discrimination based on sexual orientation—without telling them the effect of their answer—and plenty of people will say no. As Justice Kavanaugh emphasized in his separate dissent, textualism means applying the “ordinary” meaning of a phrase, not the “literal” meaning of an isolated term.

Surely, Justice Alito’s interpretation of “because of sex” to mean “because the person is male or female but not because of that person’s sexual orientation” is at least one reasonable interpretation, even if you ultimately disagree with it.

Failure to Deliver

If I’m right—if both Justice Gorsuch and Justice Alito have reasonable interpretations of the statute—then Bostock shows that Strict Textualism fails to deliver on its central promise, at least in practice.

Remember, the promise was that Strict Textualism would provide an objective, determinate way to decide Hard Cases, i.e. a method that would yield only one correct answer. But Strict Textualism had its chance in Bostock, and it failed spectacularly.

Instead of a single correct answer, there was a reasonable textualist argument for construing the statute one way (Gorsuch’s) and a reasonable textualist argument for construing it the other way (Alito’s). That left each side to pick the reasonable interpretation that would yield the result it wanted. The fact that each side acted like its interpretation was the only reasonable one did not change this.

Thus, Strict Textualism did not provide any constraint on the justices choosing the interpretation they considered fair or just. In other words, it did not prevent them from making a political judgment about the better outcome.

Objection, the Strict Textualist says, Bostock proves no such thing. The mere fact that judges will sometimes disagree over the result of applying Strict Textualism does not mean that Strict Textualism fails to provide a determinate answer, the Strict Textualist will protest. Remember the medical analogy.

This argument strikes me as plausible in theory, but unpersuasive in practice. I’m not saying Strict Textualism must provide a determinate answer that is obvious to everyone. But if Strict Textualism cannot yield an answer that can be demonstrated to people skilled in the law to be the single correct answer, I just don’t see how it provides any meaningful constraint on judges. In practice, it simply fails to provide the special legitimacy it claims.

But doesn’t this leave us in an untenable state of affairs? If Strict Textualism fails to deliver on its central promise, doesn’t that mean that judges will be allowed to do what Justice Alito accused the Bostock majority of doing, legislating instead of judging? And if judges decide cases based on what they think is fair or just, do we even have the “rule of law”?

Fair questions, but there are no easy answers. Trouble is, there’s just no avoiding this problem. You can argue that judges shouldn’t decide cases by picking the interpretation they think is fair and then reasoning their way into that interpretation. But isn’t that effectively what judges are already doing–what they’ve always done–regardless of the label they put on it, and even if they sincerely think they are doing something else?

We just have to muddle through somehow.

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IMG_4571Zach 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 Jury Charge in Texas Trade Secrets Litigation

The Jury Charge in Texas Trade Secrets Litigation

When you hear “misappropriation of trade secrets,” you might picture some elaborate heist where the thief is lowered into the secure underground vault from an opening in the AC duct, like Tom Cruise in Mission Impossible. The thief hacks into the company’s server, downloads the secret weapons technology, then boards a plane to China where he hands the flash drive to a shadowy figure in exchange for a briefcase full of cash.

Of course, most trade secrets lawsuits are nothing like that.

For one thing, the typical trade secrets claim involves boring “soft” trade secrets like customer lists, pricing, and other customer information. And even in cases involving “hard” trade secrets like the literal or figurative secret sauce, the parties to the dispute usually had some legitimate business or employment relationship with each other before things went south.

That means in most trade secrets lawsuits, the person who allegedly “misappropriated” the trade secrets initially acquired them lawfully.

For example, in the typical departing employee dispute, an employee legitimately acquires the company’s trade secrets while working for the company. Another typical scenario is a contract between two companies containing an NDA. It might be an agreement between a vendor and a customer, or an agreement between two companies pursuing some kind of joint venture. They voluntarily share confidential information with each other, agreeing not to use it outside of that particular transaction.

In these situations, the initial acquisition of the trade secrets is not tortious. The claim is that misappropriation happened later, when the person did something with the trade secrets that he wasn’t supposed to do.

Both the Texas trade secrets statute and the federal trade secrets statute anticipate this kind of claim in the same way: a complicated multi-pronged definition of “misappropriation.”

“Misappropriation” means stealing, using, or disclosing

The definition of “misappropriation” is the same in both the Texas and federal trade secrets statutes. See Tex. Civ. Prac. & Rem. Code § 134A.002(3); 18 U.S.C. § 1839(5).  I would quote it but that would just confuse you. Instead, I’ll just sum it up as Wolfe’s Second Law of Trade Secrets Litigation: You can’t steal a trade secret, and you can’t use or disclose a trade secret without the owner’s consent.

(In case you missed it, Wolfe’s First Law of Trade Secrets Litigation says whatever company information the employee takes on the way out the door will be the alleged “trade secrets” in the company’s subsequent lawsuit.)

My Second Law is, of course, an oversimplification. And the statute doesn’t use the word “steal.” But Wolfe’s Second Law does capture the essence of “misappropriation.”

What I call stealing is what the statute calls “acquisition” of a trade secret by someone who knows or has reason to know that the trade secret was acquired by “improper means.”

The statute has a non-exclusive definition of “improper means” that includes “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, to limit use, or to prohibit discovery of a trade secret, or espionage through electronic or other means.”

As you can see, “acquisition” through “improper means” is not limited to stealing a trade secret. It also includes getting a trade secret from someone you know (or should know) stole it. But for simplicity, let’s stick with “stealing.”

Stealing is fundamentally different from the other kind of misappropriation, use or disclosure. If you steal a trade secret, you can be held liable, even if you never do anything else with it. In other words, if you steal a trade secret in the woods and nobody hears it, it still makes a sound.

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Is this where they keep the trade secrets?

This distinction between stealing and using/disclosing becomes important in litigation. If you’re thinking ahead, you can see where this is going: the use or disclosure of a trade secret will often cause compensable damages to the owner of the trade secret, but how does mere acquisition of a trade secret harm the owner?

To make this more concrete, suppose an employee walks out the door on his last day with the company’s entire secret customer list, throws it in a drawer, and never looks at it again. How does that cause any damages?

Hold that thought.

The Casteel problem in jury trials

In most cases, the trade secrets damages question will be for a jury to decide, if the case gets that far. The Court’s Charge will give the jury questions, definitions, and instructions to guide the decision.

Typically, a trade secrets charge will have three key questions: (1) is the information actually a trade secret? (2) did the defendant “misappropriate” the trade secret? (3) what damages, if any, did the misappropriation cause?

But why only three questions? What if there are multiple trade secrets at issue in the case? And what if there are multiple ways the defendant allegedly “misappropriated” the trade secrets? In cases like that, it seems like it would be more precise to break these broad questions down into more specific questions.

Well, that’s not the way we typically do it. Texas law requires “broad-form” submission of questions to the jury, at least when “feasible.” There is a mountain of literature on what broad-form submission means, but to save you time I’ll sum it up as follows: the trial court should submit one broad question on each element of a cause of action, except when there is a good reason not to.

Let’s apply this to the most ordinary kind of lawsuit, a personal injury claim arising from a car accident. Typically, there will be one damages question that combines multiple elements of recoverable damages. The instruction might look like this:

In determining the damages Big Trucking caused Ms. Smith, you may consider:

    1. Physical pain and mental anguish.
    2. Loss of earning capacity.
    3. Physical impairment.
    4. Medical care.

Yawn. What could be more ordinary?

But suppose during the trial Ms. Smith’s lawyer offered no evidence whatsoever regarding loss of earning capacity. And suppose Big Trucking’s lawyer specifically objected to this instruction ahead of time, saying “Your Honor, you can’t include loss of earning capacity in the instruction because there’s no evidence.”

The judge brushes aside the objection, the jury returns a verdict for $90,000 in damages, and the trial court enters judgment for Ms. Smith in that amount. What should the Court of Appeals do with that?

A. Affirm the judgment. Any error is harmless, because the jury could have based the $90,000 on the other three elements of damages.

B. Reverse the judgment and order that Ms. Smith gets nothing. Her lawyer shouldn’t have included loss of earning capacity in the charge.

C. Reverse the judgment and remand for a new trial. Including an element for which there was no evidence is reversible error because there is no way for Big Trucking to show whether the $90,000 improperly included some amount for loss of earning capacity.

There is a case to be made for A, emphasizing judicial economy and respect for jury verdicts. If you picked B, you might be a sociopath. But if you picked C, you are in sync with the Texas Supreme Court.

These were essentially the facts of Harris County v. Smith, 96 S.W.3d 230 (Tex. 2002), except the defendant was Harris County, not Big Trucking. Harris County held that it was an error for the trial judge to submit a broad-form question that included an element for which there was no evidence, and that this was a harmful error because it prevented the appellate court from determining whether the jury based its verdict on an invalid element of damages. Id. at 234.

The court based this decision on a precedent from two years earlier, Crown Life Ins. Co. v. Casteel, 22 S.W.3d 378 (Tex. 2000). Casteel had followed the same reasoning, except that Casteel involved a liability question (not damages), and the objectionable element in Casteel was improper because it was legally invalid (not because of lack of evidence).

In Harris County the Texas Supreme Court found these distinctions immaterial. It therefore established a general principle for Texas jury trials: If a question to the jury includes an element that should not have been submitted, either because it is legally invalid or there is no evidence to support it, and if the complaining party timely and specifically objects to that defect, then the jury’s affirmative answer cannot stand.

Appellate lawyers now call this a Casteel error. They could call it a Harris County error, but that doesn’t have the same ring to it.

Ok, but what does this appellate procedure detour have to do with trade secrets litigation?

The definition of “misappropriation” is custom-designed to create a Casteel problem

It is easy to see how a trade secrets lawsuit could create a Casteel error. This is likely to happen in several ways.

First, suppose the plaintiff claims that it has two kinds of trade secrets. Maybe one is a customer list and the other is a proprietary software program. Suppose there is evidence that the software is a trade secret, but insufficient evidence that the customer list is a trade secret. If the judge submits a single broad question asking whether the plaintiff owned a trade secret and the jury answers “yes,” how do we know if the jury improperly based that answer on the customer list?

Second, let’s assume the court submits a single damages question, but the plaintiff advances multiple theories about what was a trade secret and how the trade secrets were misappropriated, some of which have no evidence to support them. How do we know which theory the jury based the damages on?

Third, and most to the point here, there is the question on “misappropriation.” Let’s say the plaintiff claims both kinds of misappropriation, i.e. stealing and using/disclosing. What if there is no evidence of stealing? If the jury answers yes, there was misappropriation, there is no way to know if the jury based that answer on stealing or not.

In other words, a Casteel problem.

Fortunately, we have the Texas Pattern Jury Charges to help.

The Texas Pattern Jury Charge tracks the statute’s definition of “misappropriation”

A committee of the State Bar of Texas publishes the Texas Pattern Jury Charges, affectionately known as the PJC. The PJC provides standardized jury questions, definitions, and instructions. It is not legally binding on judges, but most judges will follow it most of the time.

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The 2016 PJC included trade secrets questions for the first time

In 2016 the PJC added new questions specifically addressing trade secrets claims. These questions line up with the three questions I outlined earlier, i.e. (1) existence of a trade secret, (2) “misappropriation” of a trade secret, and (3) damages.

Reviews were largely positive. See Book Review: The New Texas Pattern Jury Charge on Trade Secrets. As one reviewer wrote:

The new questions and instructions on trade secret misappropriation do what the Pattern Jury Charge is supposed to do. They provide a template for submitting trade secrets misappropriation questions that is consistent with Texas law and broad enough to apply to different kinds of cases.

Above all, the one thing you want to avoid in a jury instruction is misstating the law. The PJC question on misappropriation of trade secrets tries to avoid this by asking one simple question, “Did Don Davis misappropriate Paul Payne’s trade secret,” and following that question with instructions that track the statutory definition of “misappropriation.” This is a common PJC approach.

You can see the appeal of this. How can the other side complain about your proposed jury instruction if it quotes the language of the statute verbatim?

The problem with the Pattern Jury Charge approach to “misappropriation”

Still, tracking the language of the statute is not always the best approach, and sometimes it’s even the wrong approach, as we will see.

The problem is that the statutory language may not fit the facts of the case. As one reviewer noted back in March 2017:

There is a danger of rote use of the PJC questions when more specific questions tied to the facts of the case would be more appropriate and more understandable to the jury. . . . If the dispute is about whether the former employee used the employee’s customer list, why not just ask “did Don Davis use Paul Payne’s customer list?”

Ok, I confess. That reviewer was me. But still, it’s a valid point.

As I explained in my review, I tend to prefer more factually-specific trade secrets questions. “I like my questions better than the PJC questions,” I wrote. “They get right to the point and are easier for the jury to understand.”

But I neglected to mention another benefit of a trade secrets question that is specifically tailored to the facts of the case: it helps you avoid a Casteel problem.

A case study on “misappropriation” and the Casteel problem: Title Source v. HouseCanary 

The San Antonio Court of Appeals applied Casteel to a trade secrets claim in Title Source, Inc. v. HouseCanary, Inc., No. 04-19-00044-CV, 2020 WL 2858866 (Tex. App.—San Antonio June 3, 2020, no pet. h.). The jury question tracked three alternative elements of the statutory definition of “misappropriation” and quoted the statutory definition of “improper means.” The problem, Title Source argued, was that there was no evidence to support one of those elements.

The stakes for this technical issue of appellate procedure? Only a $706 million verdict, the largest in Bexar County history (according to Title Source’s brief).

The case arose from a contractual relationship in which acquisition of the alleged trade secrets was initially lawful. Title Source, a company affiliated with Quicken Loans that provides services including real estate appraisals, contracted with HouseCanary, a real estate analytics company, to develop an iPad app that could be used to perform appraisals more efficiently. The parties signed several contracts that included nondisclosure obligations.

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Title Source hired HouseCanary to create an iPad app for real estate appraisers

The facts detailed in the opinion are worth reading, but suffice to say that Title Source claimed the app didn’t work, while HouseCanary claimed that in the course of the relationship Title Source misappropriated HouseCanary’s trade secrets to develop its own app, called MyAVM. The jury answered yes to the misappropriation question and then found actual damages of $235.4 million and punitive damages of $470.8 million. Id. at *1-6.

There were also some juicy allegations that came out after the trial, including alleged collusion between HouseCanary and a Title Source officer and “hush money” paid to HouseCanary employees. You can read about that in Title Source’s Brief. (I would also include HouseCanary’s brief, but it was filed under seal.)

The Court of Appeals didn’t need to reach these spicier issues, because it focused on the Casteel problem presented by the misappropriation question. That question told the jury it could find misappropriation based on either a “use” theory” or an “acquisition by improper means” theory (my “stealing”). Id. at *9.

HouseCanary argued that the evidence showed that Title Source used HouseCanary’s trade secrets by relying on the information to assist or accelerate its own research and development. Id. at *10. And there seemed to be at least some evidence to support this argument.

The problem was that the jury question on misappropriation included elements for which HouseCanary had no evidence, i.e. a Casteel error.

The question went wrong in two ways. First, it quoted the statutory definition of “improper means” verbatim. It was therefore a correct statement of the law, but the definition of “improper means” included “bribery” and “espionage,” and there was no evidence that Title Source acquired the trade secrets through bribery or espionage. Because there was no evidence to support those theories, they should have been omitted from the “improper means” definition submitted to the jury. Id.

Hold on a minute. In HouseCanary’s defense, what if no one ever said anything about bribery or espionage in the trial? What is the chance that the jury actually based its answer on a theory that was included in the definition but never argued? This seems like a hyper-technical application of Casteel.

HouseCanary argued this very point, citing a Casteel exception: “a Casteel issue is not reversible if the reviewing court can be ‘reasonably certain’ the jury did not base its findings on the invalid theories.” Id. (citing Romero v. KPH Consol., Inc., 166 S.W.3d 212, 227-28 (Tex. 2005)). HouseCanary never pursued bribery or espionage theories at trial, it argued, so it was reasonably certain the jury did not base its answer on those theories.

But the Court of Appeals sidestepped this argument by focusing on the second problem with the misappropriation question. The question allowed the jury to find misappropriation based on acquisition of the trade secrets through “breach of inducement of a breach of a duty to maintain secrecy, to limit use, or to prohibit discovery of a trade secret.” And HouseCanary argued that theory throughout the seven-week trial, and on appeal. Id.

“But there is no evidence that TSI actually acquired the trade secrets through those breaches,” the Court of Appeals said. “Instead, the evidence shows those breaches, if any, occurred after HouseCanary willingly turned over its data under the NDA, the licensing agreement, and Amendment One.” Therefore, “those breaches do not support a misappropriation finding.” Id.

This was harmful error under Casteel, especially considering the arguments made by HouseCanary’s counsel in the trial. “[B]ecause HouseCanary so heavily emphasized the evidence it presented to the jury of TSI’s alleged post-acquisition breaches, we cannot rule out the possibility that the jury found misappropriation based on those breaches.” Thus, including the acquisition by improper means language in the charge was reversible error. Id.

The result: the Court of Appeals poured out the $700+ million trade secrets verdict and remanded the trade secrets claim for a new trial. Id. at *11. (According to legal-lingo.net, “pour out” is slang for “to deny (a claimant) damages or relief in a lawsuit.”)

Suppose instead that HouseCanary had submitted a simpler misappropriation question like the one I suggested in my review of the PJC, something like “did Title Source use HouseCanary’s trade secrets to aid or accelerate development of its own app?”

Do you think the jury still would have answered yes? Would the verdict and judgment have stood up on appeal?

We’ll never know for sure, and most of my cases don’t involve $700 million verdicts, so what do I know. But I can at least say this simpler question might have avoided the Casteel problem that got the judgment reversed.

Does the Pattern Jury Charge do more harm than good?

To be fair, the PJC question on trade secrets misappropriation anticipates the kind of problem illustrated by Title Source v. HouseCanary. Tucked away in the Comment section to PJC 111.2 (Question and Instructions on Trade-Secret Misappropriation), you will find these nuggets:

For further discussion, see PJC 116.2 regarding broad-form issues and the Casteel doctrine.

The above instruction lists these six alternative improper methods of acquisition, use, or disclosure in brackets, but only the method(s) supported by the pleadings and evidence should be submitted. 

Only those [improper] means raised by the evidence should be submitted.

Only the methods or means raised by the evidence should be submitted! It’s right there in the PJC comments. They even mention Casteel by name.

So, defenders of the PJC could say, with some justification, that the problem in Title Source v. HouseCanary was not that the judge followed the PJC on “misappropriation,” but that the judge didn’t follow the PJC closely enough.

Still, it makes me wonder. Does the PJC question on misappropriation of trade secrets do more harm than good? Might it be better just to tell trial courts to look at the statute and then apply it to the specific facts in dispute?

Keep in mind, it is likely that most Texas trial court judges have never submitted a trade secrets case to a jury. This is based on purely anecdotal evidence, but I’d be willing to bet money on it. Even if I’m wrong, I guarantee most of them could count their trade secrets jury trials on one hand.

I don’t mean this as a criticism, just to point out that jury trials on trade secrets claims are very rare.

As a result, most trial court judges may feel a little unsure of themselves when deciding how to charge the jury on a trade secrets claim. They will tend to fall back on the PJC and the language of the statute, because that feels like the safer thing. It wouldn’t surprise me if that is what happened in Title Source v. HouseCanary.

But the safer thing is not always the best thing.

Just ask Tom Cruise in Mission Impossible.

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IMG_4571Zach 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.

Texas Supreme Court Opens Door to Voting by Mail

Texas Supreme Court Opens Door to Voting by Mail

There’s a scene in The Incredibles where Mr. Incredible, working a desk job as a civilian for a bureaucratic insurance company, loudly informs the proverbial little old lady that her claim is rejected. But this is just for the benefit of his superiors. He then whispers instructions on how she can get her claim approved. It’s a great moment.

Well, the Texas Supreme Court pulled a Mr. Incredible this week.

While loudly proclaiming that lack of immunity to COVID-19 is not a “disability” entitling a voter to an absentee ballot, the Texas Supreme Court quietly rejected Texas Attorney General Ken Paxton’s petition for a writ of mandamus. Paxton had asked for an order prohibiting county clerks from informing the public that lack of immunity to COVID-19 alone is a “disability” entitling a voter to an absentee ballot. But the court said no. See In re State of Texas (Tex. May 27, 2020).

(A writ of mandamus is essentially an order from a court requiring a government official to perform some official act.)

It was not a complete loss for Paxton, as the Court agreed in principle with his argument that a voter’s lack of immunity to COVID-19, “without more” or “by itself,” is not a “disability” as defined by the Texas Election Code. But the court emphasized that “a voter can take into consideration aspects of his health and his health history that are physical conditions in deciding whether, under the circumstances, to apply to vote by mail because of disability.”

Thus, the court clearly left the door open for individual voters to decide that lack of immunity plus some other risk factor—such as a heart condition, asthma, being overweight, you name it—is a “disability.”

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And perhaps the most important part: The court emphasized that it is up to each voter to decide whether to apply to vote by mail based on a disability, and that county clerks have no duty to look beyond the face of the application, which simply has a box to check for “disability.” No explanation required.

As the court said, the county clerks “do not have a ministerial duty, reviewable by mandamus, to look beyond the application to vote by mail.” While the AG claimed that clerks are accepting “improper applications,” the court said “there is no evidence in the record that any has accepted a faulty application.” Because the clerks assured the court they would discharge their duty to follow the law, the court rejected Paxton’s petition for a writ of mandamus.

This means county clerks can’t tell Texas voters that lack of immunity to COVID-19 alone is enough to get an absentee ballot. That would be like an insurance company telling its policyholders how to get their claim approved.

But what does this mean for Texas voters?

As a practical matter, the Texas Supreme Court’s ruling clears the way for voters who claim lack of immunity to COVID-19 plus some other risk factor to request an absentee ballot if they decide that is a “disability.”

In effect, the Texas Supreme Court whispered instructions to voters who fear contracting COVID-19 at the ballot box: “just decide you have a disability because of some other risk factor and check the box . . . shhh!”

Mr. Incredible would be proud.

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IMG_4571Zach 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, Do not rely on this post as legal advice for your particular situation. Consult your own lawyer.

 

What is “Knowing Participation” in Breach of Fiduciary Duty?

What is “Knowing Participation” in Breach of Fiduciary Duty?

TexasBarToday_TopTen_Badge_VectorGraphicThe knowing participation in breach of fiduciary duty theory in departing employee litigation

Conspiracy. Cooperation. Participation. “Collusion.” Which of these will get a company in legal trouble when it hires an employee away from a competitor?

A recurring problem in the law is deciding when a third party, let’s call it a “secondary” actor, is liable for the wrongful conduct of a “primary” actor. There are numerous legal theories for this, but in essence they all share two common elements:

(1) some level of knowledge or intent by the secondary actor

(2) some level of action taken by the secondary actor

The arguments usually center around how much knowledge and what level of action.

Let’s apply this to a common legal theory in departing employee litigation: breach of fiduciary duty. When an employee leaves a company to work for a competitor, the first company will often claim that the employee breached her fiduciary duty to the company, and that the subsequent employer “knowingly participated” in the employee’s breach of fiduciary duty.

What kind of evidence is necessary to prove such a claim?

An employee’s “fiduciary” duty

Before we get to that, let’s back up a bit and ask a more fundamental question: does an employee owe her employer a fiduciary duty?

The short answer: “sort of.” In Texas, where I practice law, an employee owes a kind of “fiduciary” duty to her employer, which I call Fiduciary Duty Lite.

I say “kind of” because a true fiduciary duty would include a duty to put the employer’s interests first and to disclose all material facts to the employer, but no one says an employee owes that kind of fiduciary duty.

Texas courts have said that it is not a violation of the employee’s fiduciary duty to make plans to compete with the employer and even to conceal those plans from the employer. See Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 201 (Tex. 2002); Wooters v. Unitech Int’l, Inc., 513 S.W.3d 754, 763 (Tex. App.—Houston [1st Dist.] 2017, pet. denied); Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 510 (Tex. App.—Houston [1st Dist.] 2003, no pet.). This policy recognizes the need for employee mobility.

So what kind of conduct violates an employee’s “fiduciary” duty? There are two key categories:

(1) misappropriating the company’s confidential information or trade secrets*

(2) soliciting the company’s employees or customers while still employed by the company

Why the asterisk on the first category? The problem is that the Uniform Trade Secrets Act expressly preempts common-law civil remedies for misappropriation of trade secrets. See Tex. Civ. Prac. & Rem. Code § 134A.007.

So, despite references to misappropriation of trade secrets in the fiduciary duty cases, in Texas you cannot assert a common-law breach of fiduciary duty claim based on allegations of taking or using trade secrets. Super Starr Int’l, LLC v. Fresh Tex Produce, LLC, 531 S.W.3d 829, 843 (Tex. App.—Corpus Christi 2017, no pet.).

The open question is whether TUTSA also preempts a fiduciary duty claim that is based on alleged misappropriation of information that is confidential but not a trade secret. So far, courts in Texas are split on that question. See Embarcadero Technologies, Inc. v. Redgate Software, Inc., No. 1:17-cv-444-RP, 2018 WL 315753, at *2-4 (W.D. Tex. Jan. 5, 2018).

That means in most cases the fiduciary duty claim is going to focus on allegations of solicitation of employees or customers.

Why does fiduciary duty matter?

But why does this matter when employment agreements often prohibit such solicitation? There are a few reasons.

First, in some cases the employee may not have a contract that prohibits soliciting employees and customers.

Second, even if the employee already has a contractual non-solicitation obligation, a breach of fiduciary duty claim gives the employee a potential remedy that a breach of contract claim typically does not: forfeiture or “disgorgement” of compensation as an alternative to actual damages. For a recent case awarding forfeiture on this theory, see Orbison Case Shows Need for Texas Courts to Limit Employee “Fiduciary” Duties.

Third, the fiduciary duty theory gives the first employer a potential claim against the second employer, who is usually a deeper pocket. The first employer can assert a claim for “knowing participation” in breach of fiduciary duty, which allows recovering damages from the second employer.

Knowing participation in breach of fiduciary duty

That brings us back to my original question: how does the first employer in a departing employee lawsuit prove knowing participation? I glean three essential elements from the case law:

  1. The employee solicited while still employed by the company
  2. The second employer knew about the solicitation
  3. The second employer participated in the solicitation

In practice, the knowledge element is somewhat redundant. If the second employer participates in the solicitation, it will almost always have knowledge of the solicitation. You are rarely going to find a case of “unknowing” participation. So the second employer’s participation is really the key element.

“Participation” sounds simple enough, but like “collusion” it can be more difficult to define in practice. To understand participation better, let’s take a look at a couple recent Texas cases applying knowing participation in breach of fiduciary duty to typical departing employee scenarios.

At the bottom of the deep blue sea . . .

In Wooters v. Unitech International, Inc., 513 S.W.3d 754 (Tex. App.—Houston [1st Dist.] 2017, pet. denied), Unitech operated in the offshore and subsea oil and gas production industry. Two Unitech employees made plans with Wooters, who has not a Unitech employee, to form a competing business called Infinity Subsea.

The jury found that Wooters conspired with the Unitech employees to breach their fiduciary duties, but the Court of Appeals held that the evidence was insufficient to support the jury’s verdict.

In reaching this decision, the court emphasized what is and is not a breach of an employee’s “fiduciary” duty. As we’ve seen already, making secret plans to compete with your employer is not a breach of fiduciary duty, even if it violates a contractual duty. Therefore, even though there was evidence that Wooters communicated with the employees about their plans to compete, that was no evidence that Wooters participated in any breach of fiduciary duty.

What about misappropriation of confidential information and trade secrets? As pointed out earlier, that can be a breach of fiduciary duty (putting aside the preemption problem).

There was evidence that the two employees misappropriated Unitech’s secret design information, and the jury even found that the two employees committed theft. But the jury answered “no” when asked if Wooters conspired with the employees to commit theft. So the jury’s “yes” answer to the conspiracy to breach fiduciary duty question had to be based on something else.

The only thing left was the possibility that Wooters participated in solicitation of Unitech customers or employees. But there was no evidence of this. “[N]othing in the record shows that Wooters possessed knowledge of and was complicit in Pennington and Kutach’s solicitations of employment of any Unitech employees,” and “Infinity Subsea did not hire any Unitech employee.” Id. at 766.

So the Court of Appeals reversed the trial court’s judgment against Wooters and rendered judgment that Unitech take nothing against Wooters. A big win for Wooters, obviously. (And this summary of the case does not do justice to the juicy facts, which included things like video surveillance of an employee and an office break-in.)

The practice tip I derive from Wooters is that if you represent the plaintiff claiming “knowing participation,” you need to tie the secondary actor’s participation to the part of the scheme that breached the employee’s fiduciary duty, not just to the scheme in general.

In other words, it’s not enough to show that the “participator” joined in a plan for the employees to compete with their employer. You’ve got to show he participated in the solicitation of employees or customers, or some other conduct that violated the employees’ fiduciary duties. This was the evidence that was lacking in Wooters.

But what if there had been evidence like that? Let’s say the Unitech employees, while employed by Unitech, had solicited a key Unitech engineer to go to a competing company they planned to join. Generally, that would be a breach of their fiduciary duty. And let’s suppose the new venture, Infinity Subsea, had communicated with the Unitech employees about the solicitation and hired the key engineer away from Unitech.

Surely, that would be sufficient evidence of the second employer’s “participation” in the employees’ breach of fiduciary duty, right?

I went down to the Crossroads . . .

Not necessarily. In Crossroads Hospice, Inc. v. FC Compassus, LLC, __ S.W.3d __, 2020 WL 1264188 (Tex. App.—Houston [1st Dist.] March 17, 2020), the same Court of Appeals held that facts like these were insufficient to prove that the second employer participated in the employee’s solicitation of another employee.

In the Crossroads case, Clement was the executive director of Compassus, a hospice care provider. Clement and several colleagues discussed leaving Compassus, Clement discussed those plans with a competitor, Crossroads, and Crossroads expressed hope that Clement could “bring her whole team.” While still employed by Compassus, Clement emailed Crossroads a list of staff and an introduction to another Compassus employee, Dr. Lee.

Here’s the kicker: when Crossroads later hired Dr. Lee, a Compassus VP asked Clement if she knew what was going on, and Clement pulled a Sargent Schultz: I know nothing.

Those facts were probably sufficient to make a case for breach of fiduciary duty against Clement, but the question was whether those facts established knowing participation by Crossroads. The Court of Appeals said no, for two reasons.

First, every one of the actions cited by Compassus was taken by Clement, not by Crossroads. Id. at *8.

Second, the fact that Crossroads knew what Clement was doing was not evidence that Crossroads participated in what Clement was doing.

“That Crossroads knew about Clement’s actions, and even approved of and benefited from them,” the court reasoned “does not constitute interference in the employment relationship or participation in the solicitation of these employees.” Id. The fact that Crossroads hired employees from Compassus was not “in and of itself” evidence that Crossroads knowingly participated in soliciting those employees. Id.

Thus, the Crossroads opinion sets the bar pretty high for evidence of participation. Perhaps too high. It seems clear from the emails that Clement and Crossroads were cooperating–perhaps even “colluding”?–in a plan for Clement to bring her “team” to Crossroads, with Crossroads at least implicitly encouraging Clement to do so. Is that not “participation”?

Wherever you come down on this, you probably agree that the decision in Crossroads slices the cheese pretty thin on what constitutes “participation.”

Don’t encourage him

That leads to my second practice tip. If you represent Employer 1 in this scenario, you need to try to obtain evidence that Employer 2 contributed to causing Employee 1 to solicit Employee 2. It may not be enough to show that Employee 1 and Employer 2 talked about soliciting Employee 2. Ideally you want to offer evidence that Employee 1 would not have solicited Employee 2 if Employer 2 had not encouraged it.

In a deposition or courtroom cross-examination of Employee 1, it might go something like this:

Screen Shot 2020-05-25 at 5.33.10 PM

It won’t always go this smoothly in practice. But if you can get testimony like this, it may be enough to clear the “participation” hurdle the Crossroads opinion sets up.

On the other hand, if you represent Employer 2, you want to prepare Employee 1 for this kind of questioning.

Of course, there is only so much you can do. If the fact is that Employer 2 caused Employer 1 to solicit Employer 2, there may be no way around that. But if the second employer didn’t encourage the solicitation, you want to make sure the witness doesn’t stumble into saying it did.

Or maybe just tell the witness to repeat “there was no participation” a hundred times. It’s the new “collusion.”

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IMG_4571

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.

Recent Case Illustrates Catch-22 for Texas Non-Compete Injunctions

Recent Case Illustrates Catch-22 for Texas Non-Compete Injunctions

They say the early bird gets the worm, but they also say all good things come to those who wait. In Texas non-compete litigation, both things can be true.

Let’s illustrate with a hypothetical. Dawn Davis leaves her sale job at Paula Payne Windows and goes to work for a fierce competitor, Real Cheap Windows. Company president Paula Payne calls her outside counsel and says, “Johnny, you’ve got to do something before Dawn takes her customers with her.”

“Have any of them left yet,” he asks. “No,” Paula says, “but it’s only a matter of time.” (#Hamilton)

“Here’s the problem,” Johnny says. “To get an injunction, I’ve got to show imminent harm, and the mere fact that she joined a competitor may not be enough.”

Paula Payne Windows reluctantly decides to wait. Then, over the next four weeks, half of Dawn’s customers stop ordering from Paula Payne and start buying their windows from Real Cheap.

Desperate to stop the bleeding, Paula Payne assigns a new sales guy, Eric Boonster, to the rest of Dawn’s accounts. But Eric doesn’t have Dawn’s experience, or her personal relationships with the customers. Two more customers jump to Real Cheap.

That’s the last straw. Paula Payne Windows sues Dawn and Real Cheap in Texas state court. Paula Payne asks the judge for a temporary injunction barring Dawn from doing business with any of the customers she serviced while working for Paula Payne.

At the hearing, Paula Payne Windows argues that its new sales guy can service Dawn’s customers, and that the customers will stick with Paula Payne Windows if the court orders Dawn to stop doing business with them. But on cross examination, Paula admits the customers are free to go to any company they want, and that she could quantify the amount of lost profits from any sales the company loses to Real Cheap.

Dawn doesn’t buy it. She gets on the stand and says, “I’ve known most of these customers for years, and there’s no way they will stay with Paula Payne if the court tells them they’re not allowed to keep buying from me.”

So, under Texas law, what is the correct ruling by the trial court judge?

(A) Grant a temporary injunction prohibiting Dawn from doing business with any of her former customers from Paula Payne Windows from that point forward. The loss of sales and customer goodwill establishes irreparable injury.

(B) Grant a temporary injunction prohibiting Dawn from soliciting or doing business with any of her former customers who have not yet left Paula Payne Windows, because there is insufficient evidence the customers who have already left would go back to Paula Payne Windows.

(C) Deny a temporary injunction. There is no evidence the customers at issue will buy from Paula Payne if they can’t buy from Dawn, and any sales Paula Payne loses can be adequately compensated with damages.

Personally, I tend to favor answer C, for reasons I explained in The Problem With Non-Competes. But to be fair, you can make a case for each one of these choices. You can find Texas cases to support any one of them.

In one recent case, the court chose answer B, the intermediate option. There is some logic to that choice, as we will see, but it results in a dilemma for the employer who is trying to enforce the non-compete and hold on to customers.

The Gallagher Case

In Gallagher Benefit Services v. Richardson, No. 6:19-cv-00427, 2020 WL 1435111 (E.D. Tex. March 24, 2020), Richardson admitted she was servicing over 60 former Gallagher insurance clients, despite her two-year non-compete. Gallagher sued Richardson for breach of non-compete and sought a preliminary injunction in federal court.

A preliminary injunction requires proof of a substantial threat of irreparable harm. The judge’s ruling on this element was mixed.

As to clients who were still doing business with Gallagher, the court found that Richardson’s admitted possession of a Gallagher producer report and servicing of former Gallagher clients established a threat of irreparable harm. Id. at *6.

But why would this harm be irreparable if Gallagher could obtain lost profits damages for the loss of client business?

“As to the violation of the noncompete clause,” the court said, “irreparable harm may be shown where future damages would require quantification estimates that can be avoided by an injunction that prevents the damages in the first place.” That harm could be avoided, and the status quo preserved, by enjoining Richardson from recruiting or working for any current Gallagher clients. Id.

If those clients leave Gallagher as a result of Richardon’s competition, the court acknowledged, Gallagher could attempt to quantify its damages. “But that quantification will involve estimates and thus potential undercompensation,” the court said. That irreparable harm can be avoided by an injunction against competition for current Gallagher clients, the court reasoned, noting that courts “routinely” enjoin prohibited competition in these circumstances. Id. (citing federal district court cases).

On the other hand, the court rejected Gallagher’s irreparable harm argument as to clients Richardson was already servicing. The court had specifically asked what evidence supported Gallagher’s argument that Richardson’s current clients would have stayed with Gallagher, id. at *2, and Gallagher argued that the court could “infer” that some of the clients would return to Gallagher if the court enjoined Richardson. Id. at *6. But the court said Gallagher did not prove sufficient facts to support that inference, including its capacity to service those clients.

Therefore, as to clients who had already left Gallagher for Richardson, the court found there was not enough risk to warrant disrupting the status quo with an injunction. Id. at *7.

“Without evidence of how many additional competitors Gallagher faces in the marketplace, or of Gallagher’s ability and realistic prospects of regaining any of the clients now with Richardson,” the court said, “Gallagher has not met its burden of showing more than this minimal extent [of] irreparable injury.” Id. at *8.

The court noted that “other courts have also been hesitant to eliminate a defendant’s book of business where the plaintiff has not offered sufficient evidence that the clients in question would return to the plaintiff.” Id. (citing First W. Capital Mgmt. Co. v. Malmed, No. 16-cv-1961-WJM-MJW, 2016 WL 8358549, at *11-12 (D. Colo. Sep. 30, 2016)).

Based on this reasoning, the court entered a preliminary injunction that prohibited Richardson from doing business with any Gallagher clients she serviced during her last two years at Gallagher, except for accounts she was already servicing as of the date of the injunction. Id. at *7.

The Gallagher Dilemma

Gallagher v. Richardson illustrates a Catch-22 facing an employer who wants to get an injunction to stop a former employee from taking customers with her. If the employer files suit and asks for an injunction before customers have left, it may be difficult to prove imminent harm, because the employee hasn’t violated the non-compete yet. But if the employer waits until after customers have left, the judge may take the Gallagher v. Richardson approach and say it’s too late to get an injunction to stop the employee from doing business with those customers.

So what is the employer with the non-compete to do?

Ideally, the employer would offer testimony that it has the ability to service the customers even without the ex-employee and that the customers are likely to continue doing business with it.

If the employer can get some of the customers to vouch for this, even better, but that’s usually hard to pull off. The last thing you want to do when you’re trying to hold on to customers is drag them into a lawsuit, especially when you’re asking them to testify against the sales person they like. And if the customer already wants to stay with you, why would you need an injunction?

So the employer may have trouble persuading the trial judge the customers will come back, and it may get stuck with the intermediate result of Gallagher v. Richardson. For that reason, some might say the lesson of the Gallagher case is that the employer should immediately file suit when the employee leaves to join a competitor.

That’s a plausible position, but it strikes me as too simplistic. What if you go to the temporary injunction hearing before any customer has left, and the employee testifies that she only plans to go after new customers? How are you going to show imminent harm? This approach strikes me as too hot.

Perhaps the “just right” approach is to monitor the situation closely and file suit as soon as two or three customers jump ship. Then you can point to those defections as evidence of imminent harm, but you can try to get an injunction to stop the employee from taking any other customers.

This still leaves the question of why damages would be inadequate.  But the employer at least has cases it can cite on that issue—as the Gallagher opinion illustrates.

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IMG_4571Zach 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.

 

One Weird Trick for Stunning Blog Results

One Weird Trick for Stunning Blog Results

After almost four years of blogging, I want to talk about what I have learned, the hard-won wisdom I have earned. For my 150th blog post I thought it was about time I “gave back” to the community that has so generously enabled my crazy blogging habit. So, here are my top five tips for any lawyer—or really any kind of professional—who is thinking about starting a blog.

Five Minute Law, five tips. See what I did there?

Tip number five is a variation on the Nike slogan: just don’t do it. Blogging will consume your life. Every new judicial opinion you see will become a potential blog post. You’ll start steering every conversation towards your last blog topic. You will become almost as insufferable as appellate lawyers arguing about fonts on Twitter.

And forget about more important things, like spending time with your kids on the weekend, exercising, or catching up on Tiger King. In laboratory testing, nine out of ten mice chose checking their number of blog views over food pellets, until they eventually starved to death.

So take a tip from Nancy Reagan and just say no. As Ronald Reagan famously said, once you start down the dark path, forever will it dominate your destiny. Or maybe that was Yodah. I don’t know, the 80s are kind of a blur to me. Too much crack, I guess.

Anyway, my number four blogging tip is if you must have a law blog, then outsource it. There are plenty of good consultants who will write the blog posts for you. The downside is that they often demand money. But it’s a good deal, because all you do is tell them your practice area, and then they do the work. Just make sure your consultant’s firm is “Fair Blog” certified and doesn’t use child labor from New England prep schools to write the posts.

Speaking of harsh labor conditions, if you’re a partner at a law firm and don’t want to pay a consultant, just make an associate write your blog. You’ll be sure to get at least one post every three months, and associates love non-billable projects that give them free “exposure.”

My number three tip is related to number four. Don’t put too much of your own personality into your blog posts, especially if you’re looking for corporate clients. Studies show that sophisticated clients prefer lawyers who have no children or other personal problems, no sense of humor, and above all, no sense of irony. They also like guys named “Chad” who bought Peloton for their wives last Christmas. So the more generic your posts, the better.

Think of your blog post as the navy suit every law school student wore to on-campus interviews, but with better results.

Oh, and no opinions. Let’s make that tip number two: avoid expressing a view on any controversial issue. For all you know, that next potential client might think injecting people with light and disinfectant is a great idea.

I wouldn’t even give your opinion on a bland legal issue. What if you have to argue that issue in court, and opposing counsel doesn’t even do you the courtesy of reading  your blog post and citing it against you? How embarrassing.

Finally, my number one tip for law bloggers: don’t start your blog until all conditions are ideal. A blog is serious business. Don’t try to start one while you’re still swamped with client work, trying to fit into those pre-pandemic suit pants again, and dealing with surly toddlers or screaming teenagers at home. You must be able to focus.

So first get caught up on all those other things, achieve “In Box Zero,” and complete the Marie Kondo plan. Only then can you devote all your attention to researching the best blog template, choosing the optimal blog name, and constructing the perfect blog distribution list.

What then? Pick up a pen, start writing.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He’s joking about the crack, of course.

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.

 

Can a Non-Compete Grant an Injunction by Stipulation?

Can a Non-Compete Grant an Injunction by Stipulation?

Listen. Do you want to know a secret? It doesn’t really matter whether a contractual stipulation to an injunction is binding on a court.

Still, most non-competes contain some kind of stipulation that a breach will cause the company irreparable injury, and the company is therefore entitled to an injunction in the event of a breach. Let’s call this an “ipso facto” clause.

There are essentially four ways courts can approach an ipso facto clause:

  1. Find it enforceable and dispositive.
  2. Consider it as a factor favoring an injunction.
  3. Cite it as a factor, but without really giving it any weight.
  4. Disregard it entirely.

In my personal opinion, no. 4 is the correct approach. I don’t think a judge should give this kind of stipulation any weight. We wouldn’t let private parties stipulate to their own rules of evidence or procedure. And it seems especially inappropriate for a temporary injunction, which is both an “extraordinary” remedy and, traditionally, an “equitable” remedy left to the discretion of the judge.

You might cite “freedom of contract.” Ok, but how much weight would you give a clause that says “in the event of any litigation between Company and Employee, the court shall declare Company the winner”?

No, I don’t think this is the kind of decision we let private parties dictate in advance, and that may explain why you won’t find many Texas cases saying an ipso facto clause is dispositive and binding on the court.

In Wright v. Sport Supply Group, Inc., 137 S.W.3d 289, 293-94 (Tex. App.—Beaumont 2004, no pet.), the court said it was unaware of any Texas case holding that an ipso facto clause alone establishes, for injunction purposes, that remedies at law will be inadequate. And in Shoreline Gas, Inc. v. McGaughey, No. 13-07-364-CV, 2008 WL 1747624, *11 (Tex. App.—Corpus Christi 2008, no pet.) (mem. op.), the court, citing Wright, said the employer cited no Texas case holding that an ipso facto clause proves there is irreparable injury or no adequate remedy at law.

Addressing an analogous issue, the court in Forum US, Inc. v. Musselwhite, No. 14-17-00708-CV, 2020 WL 4331442 (Tex. App.–Houston [14th Dist.] July 28, 2020, no pet. h.) (mem. op.), rejected the employer’s argument that the non-compete was reasonable because the agreement recited it was reasonable. “If the rule was otherwise,” the court explained, “every employer could require employees to sign an acknowledgement or reasonableness as a condition of employment and courts would be powerless to hold unreasonable covenants not to compete unenforceable as a violation of Texas public policy.” Id. at *10.

But Texas courts have sometimes cited ipso facto clauses as a factor to consider. In Wright, the court held that an ipso facto clause provided some “substantive and probative evidence” to support the trial court’s temporary injunction, citing the strong public policy of Texas favoring freedom of contract. Wright, 137 S.W.3d at 294.

This kind of “punting” seems to be the most common approach. See South Plains Sno, Inc. v. Eskimo Hut Worldwide, Ltd., No. 07-19-00003-CV, 2019 WL 1591994, at *6 (Tex. App.—Amarillo April 12, 2019, no pet.) (mem. op.) (citing ipso facto clause, in addition to evidence of irreparable injury, in support of affirming trial court’s temporary injunction); Poole v. U.S. Money Reserve, Inc., No. 09-08-137CV, 2008 WL 4735602, at *8 (Tex. App.—Beaumont Oct. 30, 2008, no pet.) (mem. op.) (citing ipso facto clause as “but one consideration in our analysis”).

Citing the ipso facto clause as a non-dispositive factor is kind of an easy way out, so I get why courts would do it. But I wonder. In these cases where courts cited an ipso facto clause as a factor, did the clause actually make a difference? In other words, would the case have come out the same way if the agreement had no such clause?

I suspect the answer is yes, but of course there is no way to be sure.

I do know of at least one Texas case that seemed to find an ipso facto clause conclusive. In Henderson v. KRTS, Inc., 822 S.W.2d 769 (Tex. App.—Houston [1st Dist.] 1992, no writ), the buyer of a radio station obtained a temporary injunction prohibiting the seller from interfering with the buyer’s efforts to move the station. Id. at 771-73. On appeal, the seller argued the temporary injunction was improper because damages would be an adequate remedy. The Court of Appeals disagreed, citing the ipso facto clause. The court held that the seller, “by agreement, stipulated that [the buyer] could seek injunctive relief without the necessity of proof of actual damages.” Id. at 776. But the opinion simply decreed this without any analysis.

In a more recent case, the First Court of Appeals reached the opposite conclusion, without citing Henderson. In Malone v. PLH Group, Inc., No. 01-19-00016-CV, 2020 WL 1680058 (Tex. App.—Houston [1st Dist.] Apr. 7, 2020, no pet. h.) (mem. op.), the court said an ipso clause had no effect.

The employment agreement in Malone contained restrictive covenants prohibiting the employee from competing against the company, soliciting the company’s employees, and using or disclosing the company’s confidential information. Id. at *1. The agreement also contained an ipso facto clause, stating any breach of the restrictive covenants would cause “irreparable damage” to the company, and the company “will be entitled as a matter of right to equitable relief, including temporary or permanent injunction, to restrain such breach.” Id.

After a bench trial, the trial court found that the employee breached the confidentiality clause by forwarding a bid log report to his private email account, but the trial court also found the company failed to prove a “continuing violation” of the confidentiality provision, and it therefore denied equitable relief. Id. at *6.

On appeal, the company argued that it was entitled to an injunction under the ipso facto clause based on the breach of the confidentiality requirement. The Court of Appeals disagreed, for two reasons. First, there was sufficient evidence to support the trial court’s finding that there was no continuing violation. Second, the court said “a contracting party’s acknowledgment that the other contracting party has a right to equitable relief does not bind judicial actors or require a court to grant the equitable relief ultimately requested.” “Trial courts are afforded discretion in granting equitable relief,” the court explained, and the company “cannot remove that discretion by eliciting a contractual term from Malone authorizing injunctive relief.” Id. at *6 (citing Shoreline Gas).

So the same Court of Appeals has reached the opposite conclusion on this issue? What gives?

Here’s a hint. In both cases, the Court of Appeals affirmed the trial court’s ruling. In Henderson, the trial court granted an injunction, and the Court of Appeals affirmed. In Malone, the trial court denied an injunction, and the Court of Appeals affirmed.

Similarly, in Shoreline Gas, the case cited in Malone, the trial court denied a temporary injunction, and the Court of Appeals affirmed.

You might deduce (or is it induce?) that the rule in non-compete injunction cases is that the party who wins in the trial court wins.

That would be pretty close to accurate, but the truth is a little more complicated. Here’s what I think the “real” rules are:

1. If the trial court grants a temporary injunction to enforce a non-compete, and there is some evidence to support it, the Court of Appeals will usually affirm the injunction and might cite the ipso facto clause as a factor supporting it (although it wouldn’t be necessary, because there would be some evidence to support it anyway).

2. If the trial court denies a temporary injunction, and had some reasonable basis to do so, the Court of Appeals will usually affirm the denial and either say the ipso facto clause had no effect (as in Malone), or say that it was just one factor to consider (as in Wright).

These two rules will apply in the vast majority of cases. And in both scenarios, the Court of Appeals can punt because it doesn’t really have to decide whether the ipso facto clause is dispositive.

In the rare case where the trial court grants an injunction and there is really zero evidence of irreparable injury, then the Court of Appeals might have to bite the bullet and decide whether the ipso facto clause establishes irreparable injury, despite the lack of any evidence. But that will be rare.

So should employers continue to include ipso facto clauses in their non-competes? Well, as much as I hate to include language that I personally think should have no effect, I do include an ipso facto clause in my form non-compete. See The Plain-Language Non-Compete.

For one thing, there’s no real harm in including it. And some judges might consider the clause as a factor, or even find it dispositive, although that would be a mistake.

There’s one more reason I like to include an ipso facto clause in my form non-compete. If I later have to go to court to try to get an injunction enforcing that non-compete, the employee’s stipulation to an injunction can be useful. Why?

Sorry, you can’t expect me to give away all my secrets.

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IMG_4571Zach 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.