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?

_____________________________________

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.

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.

Screen Shot 2020-06-21 at 7.06.55 PM — 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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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.

safe-913452_1920 — 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.

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.

app-entertainment-ipad-mockup-265685 — 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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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.”

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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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?

The 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:

The employee solicited while still employed by the company
The second employer knew about the solicitation
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:

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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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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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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Zach 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.

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:

Find it enforceable and dispositive.
Consider it as a factor favoring an injunction.
Cite it as a factor, but without really giving it any weight.
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.

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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Top 10 COVID-19 Employment Law Tips

I’ll be honest. I don’t really like employment law.

Wait a minute, Wolfe. Your little profile at the end of these posts says you do non-compete and trade secret litigation. Isn’t that “employment” law?

Not really. I see departing employee litigation as essentially contract and tort law (with a statutory overlay). In contrast, when you say, “employment law,” I think of a 100-page employee manual nobody reads that spells out how sick leave accrues and what happens to it when an employee quits.

Blah, blah, blah . . .

Here’s when it hit me. Years ago, I was leaving a big law firm to go to work for a much smaller firm, and the big firm sent out an email attaching the new office dress code with thanks to the Dress Code Committee.

Dress Code Committee, I thought. Seriously? They had to have a whole committee for this? And the dress code really got down in the weeds. There’s something comical about an official memo from a team of elite lawyers using terms like “spaghetti straps” and “crop top.” Employment lawyers live for stuff like that. Me, not so much.

I think it boils down to two reasons. First, I don’t like authority and nit-picky rules. My employee manual would just say “dress appropriately and be cool to each other.”

Second, I don’t like the whole “paper the file” feel to employment law. Who actually reads that 100-page handbook? It feels like it’s just there for the employer to cite if there’s a problem.

But I get it. Obviously, my attitude isn’t going to cut it in corporate America. Employers are trying to avoid liability, and a vague directive that sounds like something from Bill and Ted’s Excellent Adventure creates too much space for discrimination. If the manager was cool with the white male employee wearing Birkenstocks with wool socks, why did he have a problem when the minority employee did it? A detailed dress code avoids this problem.

The same points apply to all this COVID-19 employment law stuff. Everybody’s got a COVID-19 blog post, a COVID-19 webinar, a COVID-19 client alert. I’m sure there’s a COVID-19 employment law podcast. Everybody’s jumping on the bandwagon, but it just doesn’t excite me.

If I ran the zoo, most office employers would use this crisis as an opportunity to ditch their expensive office leases and have more people work from home. I’ve got a friend in the business world who recently told me that’s exactly what he’s doing with the company he runs. Think how much time and gas money his employees will save.

Plus, as Brett Holubek reports in Remote Work and COVID-19, one comparative study found that working from home resulted in a big boost in productivity and a significant reduction in employee attrition.

But again, I get it. WFH won’t work for everybody. Most employers will eventually need guidance on how to bring employees back to work, and other employment law issues raised by the pandemic.

Fortunately, I don’t have to reinvent the wheel. Instead, I present this curated list of the best COVID-19 employment law tips I’ve gathered from lawyers who actually like employment law.

I remember when “curated” only applied to museums. Here, it means I went through a rigorous process of scrolling through my LinkedIn feed and Googling some employment lawyers I know.

1, 2, 3, 4, 5, 6, 7, 8, 9 . . .

It’s the 10 COVID commandments.

#1 Avoid WARN Act issues

The WARN Act generally applies to employers with 100 or more employees, and it requires giving 60 days’ notice of mass layoffs. If you have a hundred or more employees and laid off 50 or more of them temporarily, you may need to act quickly to bring employees back to avoid violating the WARN Act. Holubek’s Texas Labor Law Blog covers the details at How to Reopen a Business and Recall Employees.

#2 Offer a severance agreement

I often get calls from employees who lost their jobs and want to know if the employer is required to pay severance compensation. The short answer is no. Unless the employee has a contract that says otherwise, the employer can lay off the employee and doesn’t have to pay a dime more than what the employee earned before the layoff.

As my friend Stanley Santire once put it, Texas follows the at-will employment rule like most states, but the difference is that Texas really means it. Generally, you can fire an employee for any reason or no reason.

I say generally, because of course there are exceptions. Certain kinds of discrimination and retaliation are unlawful. For that reason, it’s often in the employer’s interest to get a release from the employee.

The employer should consider offering severance in exchange for a release. This lets the employer do something good—cushioning the blow of a layoff—while getting something in return. In the words of Alexis de Tocqueville, it is intérêt personnel bien compris.

If you require employees to sign a release, be sure your form of release complies with the Age Discrimination in Employment Act (ADEA), including a 21-day notice period and a seven-day revocation period.

#3 Be selective about enforcing non-competes

Speaking of severance agreements, sometimes employers try to include a non-compete in the severance agreement. If the employee didn’t already have a non-compete, this is going to be hard to enforce. I’m not saying it’s impossible, but it’s difficult.

On the other hand, if the employee already had a non-compete, then in theory the fact that the employer laid off the employee does not prevent the employer from enforcing the non-compete. I say “in theory” because if you have to file a lawsuit to enforce it, the judge is going to have a lot of discretion, and most judges will be sympathetic to laid off employees in this crisis, as they should be. I explained this in my recent post Can They Lay Me Off *And* Enforce My Non-Compete?

So think about whether you really need to enforce the non-compete. Do you have evidence the employee has taken truly confidential information? Is the employee trying to divert key customers to a competitor? Then you may have no choice. Otherwise, maybe you’ve got bigger fish to fry.

#4 Protect real trade secrets

There’s always a chance a disgruntled former employee will try to use a company’s confidential information against it. Even if the employee doesn’t have a non-compete, you can use trade secrets law to try to prevent this. See my posts When Is a Customer List a Trade Secret? and The Price Undercutting Theory in Texas Trade Secrets Litigation for guidance on some common scenarios.

#5 Manage remote workers reasonably

Here’s another one where I’m probably not the best guy to ask. My Work From Home policy would be something like “stay in touch and keep doing great work.” My philosophy is if you want employees to act like adults, don’t treat them like children.

But I realize some employers will need a little more than that. So you may need to adopt some specific policies setting out expectations about things like responding to emails, Zoom conference etiquette, and returning phone calls.

Just don’t make the policies too rigid. Don’t be “that guy” who expects his midnight email to be answered immediately, and don’t be that company that requires employees to install webcams so you can keep tabs on them.

There is one work from home issue where employers may need to be more strict: cyber-security. It will be even more important for employees to use secure internet connections, take common-sense precautions with devices containing company data, and be on the lookout for scams like “spear-phishing.”

Pro tip: an early morning email from your managing partner simply stating “can you do me a favor?” may not be what it seems.

And if you’re the managing partner, never send an email like this.

You can learn more about data privacy issues with employees working from home in this episode of the Vorys at Work podcast with Jackie Ford and Lisa Reisz. (I told you there would be a podcast!) And Brett Holubek addresses a host of work from home issues at his blog post, including making sure hourly employees know they are not to work “off the clock.”

#6 Keep employees safe and minimize potential liability

Protecting employees from contracting the virus when they return to work breaks down into two categories: (1) screening, and (2) social distancing.

The challenge with screening is to protect employees from the virus while respecting employee privacy and avoiding discrimination. Haynes & Boone has a helpful checklist with suggestions on how employers can screen applicants and employees for symptoms of COVID-19 the right way:

To avoid discrimination, the employer should follow the same screening practice for all employees in the same type of job.
For consistency and documentation, consider using a written questionnaire.
Keep the results of any screening confidential.

Should screening include temperature checks? This strikes me as a little too much. If you’re still that concerned, maybe it’s a sign you should not be bringing employees back yet. But if you must bring them back, and especially if social distancing is not feasible in your workplace, temperature checks may be a necessary part of your screening.

The checklist cited above has some helpful Do’s and Don’ts for this. It also has good common-sense suggestions for on-site safety and social distancing strategies. Also check out Seyfarth Shaw’s Strategies for Developing a Return to Work Action Plan.

#7 Comply with the Family First Coronavirus Response Act

The Families First Coronavirus Response Act makes certain employees eligible for paid sick leave and expanded family medical leave, and it provides refundable tax credits to small and midsize employers to reimburse them for the costs of leave related to COVID0-19.

I don’t touch tax law, see Most Smug Areas of Law Practice, so I won’t try to interpret the FFCRA, but the IRS has a helpful summary and list of FAQs.

#8 Don’t underreact or overreact to COVID-19 positive employees

Don’t let an employee who tests positive for COVID-19 come to work. That should be obvious. Then again, I thought it would be obvious that injecting yourself with disinfectant is not the optimal treatment.

In theory, you also need to keep an employee’s positive COVID-19 status confidential. I say in theory because, let’s be real, his co-workers are going to know. I suppose the point is that people should hear it from the employee himself, not from management. As explained on the Vorys at Work podcast, employers should prepare managers ahead of time on how to handle this.

For employees who get the virus, the Haynes & Boone checklist recommends following CDC guidelines regarding the appropriate time to return to work, and that makes sense to me.

#9 Avoid disability discrimination

The Americans with Disabilities Act (ADA) and other employment laws still apply, but reasonable employer responses to COVID-19 are likely to be accommodated. The best resource on this topic is probably this EEOC page with FAQs and the updated publication Pandemic Preparedness in the Workplace and the Americans With Disabilities Act.

My main takeaways: employers may screen employees and applicants for COVID-19 because it poses a direct threat to health in the workplace, the ADA does not prevent employers from requiring employees with COVID-19 to leave the workplace, and a medical exam is permitted after a conditional offer of employment.

The EEOC page also addresses reasonable accommodations for employees who, due to an existing disability, are at higher risk from COVID-19. “Reasonable accommodation” is always a difficult and fact-intensive issue, but the bottom line is that employers should be flexible.

#10 Be flexible

Flexibility. That seems to be the theme of the day. We’re all going to have to find new ways to be flexible, especially when more people go back to work.

A Very Special Cinco de Mayo Special

If you want more details, mark your calendar for May 5th. You can’t go to your favorite Tex-Mex joint for margaritas, but you can tune in to a great webcast from TexasBarCLE called Top 10 COVID-19 Employment Law Issues. Hosted by Brett Holubek of the Texas Labor Law blog and Zach Wolfe of Five Minute Law.

Wait a minute. Wolfe? He doesn’t even like employment law.

I know, I know. It’s a dirty job. But someone’s got to do it.

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. This post is dedicated to all the 80s kids who stayed up too late to watch Late Night with David Letterman.

How to Get Sanctioned for Deleting Facebook Posts

I ♥ social media. I don’t know how I’d get through this pandemic without it. That live performance by the Rolling Stones that I saw on Twitter last week was just what I needed.

Social media in litigation, on the other hand, can really cause lawyers some headaches. Here are some of the questions it raises:

Does the duty to preserve evidence apply to material a client posts on social media?
Should lawyers give clients guidance about preservation of social media during a lawsuit?
Can a party’s social media posts be used against the party in court?
Should lawyers give clients guidance about what they post on social media during a lawsuit?
Should lawyers prepare their clients to testify about what they did with social media?
If a client deletes relevant social media content during a lawsuit, should the client’s lawyer lie about it?

I’m willing to bet most of my Fivers already know the answers to these questions.

But I bet a smaller number of my lawyer readers regularly do the following:

(1) Specifically advise the client in writing to preserve relevant social media content at the beginning of a litigation matter

(2) Specifically advise the client to avoid posting anything on social media that could be used against the client in the lawsuit.

(3) Specifically prepare the client to answer deposition questions about use and preservation of social media.

This could be a problem. Let me share a couple cautionary tales.

The “Hot Moms” T-Shirt Case

You may have heard about Allied Concrete v. Lester. The case had some funny facts, but it arose from a real tragedy: a concrete truck crossed the center line on the Thomas Jefferson Parkway in Virginia, tipped over, and crushed a vehicle driven by Isaiah Lester, injuring him and killing his wife Jessica. Lester sued the concrete company. Allied Concrete Co. v. Lester, 736 S.E.2d 699, 701 (Va. 2013).

So far, this sounds like a typical, though tragic, personal injury suit. But it had a social media angle. When Lester filed suit in in May 2008, he had an account with Facebook, which had first become available to the public less than two years earlier.

Lester’s lawyer was the managing partner of his firm’s Charlottesville office and had over 30 years of experience. But he was apparently not an “early adopter” of social media. His lack of experience with social media may have contributed to the following chain of events:

1/9/09: Lester sent a Facebook message to Allied Concrete’s lawyer.

3/25/09: Allied Concrete requested production of all pages from Lester’s Facebook page, attaching a photo from Lester’s Facebook page. The photo showed Lester “accompanied by other individuals,” holding a beer can, and wearing a T-shirt emblazoned with “I ♥ hot moms.”

3/26/09: Murray instructed his paralegal, Marlina Smith, to tell Lester to “clean up” his Facebook page cause “we don’t want any blow-ups of this stuff at trial.” She emailed Lester about the photo and also said there were “some other pics that should be deleted” from his Facebook page.

4/14/09: Lester told Smith he had deleted his Facebook page.

4/15/09: Lester signed a discovery response stating “I do not have a Facebook page on the date this is signed.”

5/11/09: After Allied Concrete filed a motion to compel, Lester reactivated his Facebook page, the paralegal printed copies of it, and Lester then deleted 16 photos from it.

5/14/09: Murray produced the printouts of the Facebook page to Allied Concrete.

12/16/09: Lester testified in his deposition that he had never deactivated his Facebook page. This resulted in Allied Concrete serving a subpoena on Facebook and hiring an expert who determined that Lester deleted 16 photos. All 16 photos were ultimately produced to Allied Concrete.

9/28/10: Allied Concrete requested production of emails between Lester and Smith between 3/25/09 and 5/15/09.

11/28/10: Murray filed a privilege log that intentionally omitted any reference to his 3/26/09 email to Smith.

Id. at 701-3.

You can see from this chronology that Murray, Smith, and Lester went wrong in several obvious ways:

(1) Lester deleting potentially relevant posts and deactivating his Facebook page.

(2) Lester falsely testifying that he had never deactivated his Facebook page.

(3) Murray filing a privilege log that intentionally omitted the most damning email.

You don’t need to know a lot of details about social media, legal ethics, or the duty to preserve evidence to know that these things were wrong.

And the consequences were severe. As sanctions, the trial court ordered Murray to pay $542,000 and Lester to pay $180,000 to cover Allied Concrete’s attorney’s fees and costs to address the misconduct. Id. at 703. The trial court also allowed the jury to see all the spoliated evidence and twice instructed the jury on Lester’s misconduct. Id. at 705.

And when it was all over, Murray had to agree to a five-year suspension of his law license. You can read the Virginia State Bar Disciplinary Board’s order here.

You might think the lesson is obvious: don’t let your client spoliate evidence and then lie to the court about it.

But there’s a less obvious lesson in the Allied Concrete case. From the start, Lester’s lawyer got off on the wrong foot by issuing the vague directive to “clean up” the Facebook page. He could have avoided later problems by giving the client specific written advice on (1) what he needed to do to comply with the duty to preserve relevant evidence and (2) what to avoid posting.

But I don’t want to be too hard on the lawyer. From his suspension order, you get the feeling that this was his first rodeo as to Facebook. Today we all understand how Facebook works, but did we know that 11 years ago? Today, how many of us know about wickr? Or Whisper? Or confide? Heck, most us probably don’t even know how to post a “story” on Instagram.

Screen Shot 2020-04-19 at 10.42.15 PM.png — Sure, you know Facebook. But do you know all of these?

Yes, the conduct in Allied Concrete was egregious, especially the lying. But my big takeaway is that even now, we’re all just a couple bad decisions away from getting in hot water over social media evidence.

A more recent case really brings this home.

The “I have the right to do whatever I want” case

In Nutrition Distribution LLC v. PEP Research, LLC, No. 16-CV-2328, 2018 WL 3769162 (S.D. Cal. Aug. 9, 2018), the court sanctioned a defendant for deleting relevant social media posts after the case was filed. The case teaches the importance of preserving social media evidence and preparing your client to testify about social media.

Nutrition Distribution was, from what I gather from the pleadings, sort of a “false advertising troll.” In other words, it sounds like it was more in the business of filing lawsuits against other companies for false advertising than marketing its own products. So you know the defendant, an online seller offering a controversial weight-loss supplement called Clenbuterol, was already highly irritated about getting sued in the first place.

This frustration boiled over in the deposition of Brent Reynders, an individual defendant and representative of the corporate defendant. Here’s a taste (I’m paraphrasing some of the questions):

Q: And since the lawsuit was filed in September 2016, have you deleted any posts from your Facebook?

A: Yes.

Q: Did the deleted posts have anything to do with this lawsuit?

A: It’s possible. Actually, it was—I think it had more to do with any copycat companies, law firms like yours trying to file the same frivolous lawsuit.

Q: Did you delete posts related to the marketing of Clenbuterol?

A: I have the right to do whatever I want to do with my Facebook account, regardless of a lawsuit or not. If I wanted to—if I want to delete every single post on my Facebook page, I have the right to do so.

Id. at *16.

I can just picture Mr. Reynders’ lawyer cringing. You’re not fully a litigator until you’ve had to sit quietly while your client gives deposition testimony like this.

And that was just the beginning. Nutrition Strategies filed a motion for sanctions for spoliation of evidence, asking for the dreaded “adverse inference instruction.” That’s an instruction telling the jury that a party failed to preserve evidence and that the jury can presume the evidence would have been unfavorable to that party.

In the Ninth Circuit, the sanction of an adverse inference instruction requires proof that “(1) the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) the records were destroyed with a culpable state of mind; and (3) the evidence was ‘relevant’ to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.” Id. at *15. The standards in other jurisdictions are pretty similar.

The magistrate judge found that each element was met. The defendant deleted relevant social media posts after the case was filed. The posts allegedly contained the very false advertising that the plaintiff was suing for, so there was no question the defendant had a duty to preserve them. The plaintiff showed that the deleted evidence was relevant because it included ads, photos, marketing, and the misleading statements at issue in the suit. Therefore, even if there was no bad faith, the plaintiff established prejudice. Id. at *16.

The defendants argued there was no prejudice because the plaintiff already had copies of the deleted posts, but the magistrate judge disagreed. There was evidence that plaintiff only had some of the posts, which it obtained in its pre-suit investigation. Id.

The magistrate judge therefore recommended an adverse inference instruction that “the social media posts deleted were false advertising of products that compete with Plaintiff.” Id. at *18.

The district court judge largely agreed. See 2018 WL 6323082 (S.D. Cal. Dec. 4, 2018). But he found that the recommended jury instruction went a little too far. Because the plaintiff’s claim was false advertising, the instruction that the deleted social media posts were false advertising that competed with plaintiff’s products was “tantamount to entry of judgment.” Or as we say in Texas, a “death penalty” sanction.

Noting that the plaintiff preserved some social media posts and that defendants offered to stipulate to the content of the posts, the district judge decided to give a less harsh instruction to the jury:

Defendants have failed to preserve social media posts for Plaintiff’s use in this litigation after Defendants’ duty to preserve arose. You may, but are not obligated to, infer that the deleted social media posts were favorable to Plaintiff and unfavorable to Defendants.

Id. at *5-6.

That’s much better for the defendants, but still pretty bad. A jury trial is hard enough. It’s near impossible when the judge gives the jury an instruction like this against your client.

So what did the jury decide? Well, actually it didn’t. There was no jury trial, because the district judge later granted summary judgment that the defendants did not publish any false advertising that competed with the plaintiff. See Order on MSJ.

You can’t always get what you want.

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"Why do you write like you're running out of time?"

The traditional connection between physical proximity and customer goodwill

The Sales Territory principle

Survey says . . .

What is Strict Textualism?

Strict Textualism’s Central Promise

Bostock v. Clayton County

Alito’s Dissent

Failure to Deliver

“Misappropriation” means stealing, using, or disclosing

The Casteel problem in jury trials

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

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

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

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

Does the Pattern Jury Charge do more harm than good?

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

An employee’s “fiduciary” duty

Why does fiduciary duty matter?

Knowing participation in breach of fiduciary duty

At the bottom of the deep blue sea . . .

I went down to the Crossroads . . .

Don’t encourage him

The Gallagher Case

The Gallagher Dilemma

#1 Avoid WARN Act issues

#2 Offer a severance agreement

#3 Be selective about enforcing non-competes

#4 Protect real trade secrets

#5 Manage remote workers reasonably

#6 Keep employees safe and minimize potential liability

#7 Comply with the Family First Coronavirus Response Act

#8 Don’t underreact or overreact to COVID-19 positive employees

#9 Avoid disability discrimination

#10 Be flexible

A Very Special Cinco de Mayo Special

The “Hot Moms” T-Shirt Case

The “I have the right to do whatever I want” case

**The Casteel problem in jury trials**

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

**The Gallagher Case**

**The Gallagher Dilemma**