If you’re a lawyer who handles departing employee litigation—including non-compete and trade secrets issues—you may sometimes find yourself tip-toeing around some ethical landmines. To avoid stepping on a landmine, first you have to know where they are. 

Let’s use a hypothetical to find them.

Paula Payne Windows sells—you guessed it—windows to builders. Dawn Davis quits her job as a legal assistant, goes to work for Paula Payne, and within a few years becomes Paula Payne’s top sales person. Paula, the owner, promotes Dawn to President and asks her to run the company.

But Paula just can’t help herself. She keeps butting in and interfering with Dawn. The sales people don’t know whether to take orders from Dawn or Paula.

Dawn gets frustrated and decides to start her own window business. She’ll call it Real Cheap Windows, she decides, and she’ll take Paula Payne’s best customers and employees with her.

Dawn has access to all the sales records, so she can easily offer to undercut Paula Payne’s prices as an extra enticement to the customers. Plus, she knows how much all the employees are making, so she can offer them a little more to jump ship to the new company. Shortly before announcing her resignation, she looks into creating her own LLC and saves 60 days’ worth of sales reports to a USB drive she takes home with her.

So far this is a fairly typical departing employee scenario. Now let’s see what ethical issues it can raise for lawyers.

1. Conflict of Interest and Communications Seeking Representation

Suppose you represent Paula Payne. You worked closely with Dawn Davis last year when a sales person got fired and made an employment discrimination claim.

Dawn has learned to value your opinion, so one day she calls you up and says she has a question. “Suppose I left Paula Payne Windows and started my own company,” she says, “and let’s say I don’t sell to any of Paula Payne’s existing customers, would that violate my non-compete?”

Hopefully you are already thinking wait, I have a duty not to represent a client in a matter adverse to my current client, Paula Payne Windows. In Texas, where I practice, this duty is found in Rule 1.06(b) of the Texas Disciplinary Rules of Professional Conduct.

So what should you do?

A. Give Dawn your honest opinion but caution her to “keep in mind, my client is Paula Payne Windows, not you individually.”

B. Tell Dawn “sorry, Dawn, I would love to help you with this, but Paula Payne Windows is my client, so I just can’t give you advice on this,” and leave it at that.

C. Tell Dawn the same thing in B, and then call Paula Payne to tell her what Dawn asked.

It is a good idea to make sure Dawn understands you don’t represent her. See Parker v. Carnahan, 772 S.W.2d 151, 157 (Tex. App.—Texarkana 1989, writ denied) (“an attorney can be held negligent where he fails to advise a party that he is not representing them on a case where the circumstances lead the party to believe that the attorney is representing him”).

But A is still problematic. Even if you make clear to Dawn that you don’t represent her, giving her your opinion about her non-compete may violate the duties of loyalty and confidentiality you owe to Paula Payne Windows. See Rule 1.05.

B is probably a safer answer than A. Just politely tell Dawn you can’t advise her on this issue and explain why.

But then what do you do? If you don’t tell Paula Payne Windows about the conversation, are you violating a duty of disclosure to Paula Payne Windows? If you do tell Paula Payne Windows, are you violating any duty to Dawn Davis?

Let’s change up the hypothetical. Suppose Dawn doesn’t call you, but one morning you see an email from one of your partners in the law firm with the subject line “Confidential Conflict Check.” The email simply says, “Any conflict with representing Dawn Davis in the formation of an LLC?”

Hmm. Why would Dawn be forming an LLC? You should probably let Paula Payne know about this.

But keep in mind that the attorney-client privilege can extend to communications made in seeking legal representation. See Tex. R. Evid. 503(a)(1)(B) (“client” includes person who “consults a lawyer with a view to obtaining professional legal services from the lawyer”). So you may have a duty to keep that confidential conflict check confidential, even if that means not revealing it to your own client.

2. Lawyer as Witness

One crisp fall morning you’re pulling out of the Starbucks drive through with your Pumpkin Spice Latte (I won’t judge), and you get a call on your cell phone. “Hey, Paula,” you answer “how are you?”

“I’m sorry to bother you like this,” Paula says, “but I need you to get over to our office right away.”

“What’s going on?”

“I need to fire somebody, and I need you here to see it.”

“Wow, ok, does Dawn know about this?”

“Dawn’s the one I’m firing. I just found out she formed her own company a month ago, and she’s been sending some of our best customers there. I’m meeting with her in an hour.”

You attend the meeting, where Dawn admits that she sent some of Paula Payne’s customers to her new company, but claims Paula Payne was too pricey for those customers. “They weren’t going to give Paula Payne that business anyway,” she says. “I’m sorry, Dawn,” you say, “but we’re going to have to let you go.”

The next day, Paula Payne asks you to file a lawsuit against Dawn Davis. What should you do?

A. Accept the representation and file the lawsuit

B. Tell Paula Payne you can file the lawsuit but can’t be the lead lawyer in the courtroom because you may be a material witness.

C. Tell Paula Payne it would be better to have one of your partners represent the company, because you may be a material witness.

D. Tell Paula Payne it would be better to send the matter to Zach Wolfe, Thought Leader, because you may be a material witness.

Obviously, the best answer is D.

Kidding. I’m just kidding.

But you can see the issue. You’re a witness to Dawn’s admission that she diverted customers to her new company. Perhaps not an essential witness, because Paula Payne can testify to the same thing, but at a minimum your testimony might be needed to corroborate Paula.

This implicates the lawyer-as-witness rule. See Rule 3.08. The bottom line is that you may not be able to act as the courtroom advocate for Paula Payne Windows if you’re also going to be a witness on a key potential fact dispute.

3. Duty of Candor

One of my favorite plot devices is that Superman is not capable of lying. You start with that premise and the story practically writes itself.

But did you know that lawyers are also not allowed to lie?

I know, it sounds like the setup for a bad punchline, but it’s true.

Rule 4.01 of the Texas Disciplinary Rules of Professional Conduct says that “[i]n the course of representing a client a lawyer shall not knowingly . . . make a false statement of material fact . . .”

A lawyer shall not knowingly make a false statement of material fact. Think about that. How many times do you think the typical lawyer knowingly makes a false statement of material fact to opposing counsel in a lawsuit?  

It’s probably not as many as you think, but still, it seems like lawyers ignore this rule more than they should. There’s no exception in the rule for “negotiations with opposing counsel.”  

Or is there? Comment 1 says that “under generally accepted convention in negotiation, a party’s supposed intentions as to an acceptable settlement of a claim may be viewed merely as negotiating positions rather than as accurate representation of material fact.”

But still, the general rule is that a lawyer can’t make a false statement of material fact.

Now let’s apply that.

Suppose Paula Payne Windows sues Dawn Davis for misappropriation of trade secrets, and Dawn hires you to defend her. Dawn confidentially tells you that she has the USB drive with 60 days of sales reports on it. 

Paula Payne’s counsel schedules a temporary injunction hearing. You call her to see if there’s a way to avoid the hearing. “Dawn doesn’t have any confidential documents from your client,” you say, “not a single one.”

Have you violated Rule 4.01?

A. No, because Dawn’s statement to you that she had confidential documents was attorney-client privileged.

B. Yes, because you knowingly made a false statement of material fact.

C. No, because whether the documents are confidential or not is a matter of opinion.

A strikes me as not quite right. It’s true that you shouldn’t reveal confidential attorney-client information to Paula Payne’s lawyer. But that doesn’t give you a license to make a false statement of material fact.

Of course, reconciling the duty of confidentiality and the duty of candor can get messy. Let’s say opposing counsel asks you point blank, “did Dawn take any Paula Payne documents with her?” If you say “I’m sorry, I’m not at liberty to say,” then you might as well say yes. Does that mean it would be ethical to lie and say no?

Perhaps answer C provides a way out of this dilemma. If there’s a reasonable basis to take the position that the sales reports don’t contain confidential information, then it’s not necessarily a false statement of material fact to say that Dawn doesn’t have any confidential Paula Payne documents.

But I think that approach only works if you have a good-faith basis for saying the documents are not confidential. Which leads me to the next issue.

4. Meritorious Claims and Contentions

A lawyer cannot take a position in a lawsuit without a reasonable good-faith basis. In Texas, Rule 3.01 provides: “A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless the lawyer reasonably believes that there is a basis for doing so that is not frivolous.”

The term “frivolous” gets thrown around a lot, so let’s look at how the comments to the rule define it.

For starters, comment 2 says a contention is frivolous “if it contains knowingly false statements of fact.” That’s pretty obvious. But the motive behind the contention also matters. An assertion is also frivolous if it is made “primarily for the purpose of harassing or maliciously injuring a person.”

“It is not frivolous, however,” comment 3 says, “merely because the facts have not been first substantiated fully or because the lawyer expects to develop vital evidence only by discovery.”

Comment 3 goes on: “Neither is it frivolous even though the lawyer believes that the client’s position ultimately may not prevail.”

I think we can synthesize these principles in the overarching principle that a lawyer must have a good-faith and reasonable basis for making a contention in a lawsuit. Good faith means the motive is not merely to harass. Reasonable means the lawyer expects the evidence may support it.

Now let’s apply that to the lawyer for Paula Payne Windows. Suppose Dawn Davis has no non-compete. Suppose she didn’t start competing until after she left. In that case, Paula Payne’s best bet is to sue for misappropriation of trade secrets.

But what if Paula Payne doesn’t know whether Dawn Davis took any documents and has no evidence that Dawn used any confidential information or trade secrets? As a lawyer, can you ethically file a lawsuit against Dawn Davis asserting that she misappropriated Paula Payne’s trade secrets?

A. No, because you don’t have evidence to support the elements of the cause of action.

B. Yes, but only if you plead misappropriation of trade secrets “on information and belief.”

C. Yes, if your purpose is not merely to harass Dawn, and if you reasonably believe you will discovery evidence supporting the claim.

I think some judges want the answer to be A, especially in federal court, but that is not current law. Generally, you are not required to have evidence to support every element of every cause of action when you file a lawsuit. That is what discovery is for. And the comments to Rule 3.01 make this clear.

Some lawyers will instinctively gravitate to B. It’s a common practice for lawyers to say “on information and belief” when pleading an allegation that does not yet have evidence to support it.

I’ve never really understood this. There’s no “on information and belief” exception in Rule 3.01, the Texas Rules of Civil Procedure, or the Federal Rules of Civil Procedure. As the lawyer, you rarely have personal knowledge of the facts, so everything you plead is “on information and belief” in a sense.

I say you either have a reasonable good-faith basis to plead it or you don’t. I think “on information and belief” just clouds the issue.

And that’s why I think C is the better answer. It comes down to a question of reasonableness. If you have a reasonable basis to claim that Dawn misappropriated trade secrets, then you can sue for it. If you don’t, then you can’t.

5. Conflict of Interest and Joint Representation

For our fifth and final ethical issue, let’s change up the hypothetical. Assume that Real Cheap Windows was already a competitor of Paula Payne Windows, not a new company formed by Dawn Davis. Paula Payne is seeking an injunction barring Real Cheap from employing Dawn. The owner of Real Cheap wants to know if he can save some money by hiring you to defend both Real Cheap and Dawn in the lawsuit.

Can you represent both of these defendants?

A. No, because there is a potential conflict of interest between Real Cheap and Dawn.

B. Yes, if Real Cheap and Dawn both waive the potential conflict of interest.

C. Yes, if you confirm there is no actual conflict of interest and inform Real Cheap and Dawn that you cannot represent both of them if a conflict develops.

This may be our toughest issue. The potential for a conflict between Real Cheap and Dawn is real. Rule 1.06(b)(2) prohibits representing a person if the representation “reasonably appears to be or become adversely limited by the lawyer’s or law firm’s responsibilities to another client.”

It’s easy to see how that could happen. Suppose Paula Payne Windows offers to settle for no money as long as Real Cheap agrees to fire Dawn. That might be an ok deal for Real Cheap, but not for Dawn.

Still, I don’t necessarily think answer A is required. Let’s say you talk to the owner of Real Cheap Windows, and he says, “I don’t care how much money we have to spend on litigating, I want Dawn at my company, and I’m not going to let Paula Payne Windows tell me who I’m allowed to hire.”  

I have sometimes represented both defendants in scenarios like this, even through trial, and I don’t think I violated any conflict-of-interest rule.

But if you’re going to represent both defendants in a departing employee lawsuit, it’s important to do two things. First, satisfy yourself that the employee and her new employer have aligned interests such that an actual conflict is not present. Second, explain the potential for a conflict of interest in writing to both defendants and make it clear that you will be unable to take sides if a conflict between them develops.

Of course, this is not foolproof. It’s a judgment call.

So, A is the correct answer if you want to err on the side of caution, and this is often what defendants in this situation do.

I have separately represented the employee while another lawyer represented the new employer, and vice versa. In those scenarios I have typically worked closely with the lawyer for the other defendant. But the separate representation ensures that each defendant gets legal advice based solely on that defendant’s interests.

In other words, avoid the landmines by not walking into the minefield in the first place.

__________________________

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

2 thoughts on “Ethical Issues in Departing Employee Litigation

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