Let’s Roll: Do’s and Don’ts for Texas Trade Secrets Injunctions

Let’s Roll: Do’s and Don’ts for Texas Trade Secrets Injunctions

Recent case offers lessons on how to get (or avoid) a trade secrets injunction in Texas

When I say “drywall installation,” I’m guessing “trade secrets” is not the first thing that pops into your mind. Personally, I think of John Goodman’s character Dan Conner from the TV show Roseanne.

But a recent opinion from a federal district court in Dallas may change that. See Marek Brother Systems, Inc. v. Enriquez, No. 3:19-CV-01082, 2019 WL 3322162 (N.D. Tex. July 24, 2019).

Marek Brother Systems offered commercial and residential construction services, including ceilings, “acoustical solutions,” flooring, and paint. Juan Enriquez was a Marek project manager. Id. at *1. It does not appear that Enriquez signed any non-compete.

Enriquez did two typical things before resigning from Marek to run his own business. First, he formed an LLC, JP Acoustics and Drywall. Second, he sent a Marek customer list to his personal email address.

Let’s pause here for just a moment. Neither one of these things is necessarily wrongful, but both are a bad idea.

Under Texas law, it is not a breach of an employee’s limited fiduciary duty to make plans to compete with his employer. This can even include forming the entity the employee plans to use to compete. See Fiduciary Duty Lite: What Employees Can and Can’t Do Before Leaving.

But employees, why would you want to do this? Forming an LLC is relatively quick and easy. You can do it the day after you resign, and that’s one less thing for the employer to complain about.

Likewise, sending a company customer list to your personal email address is not necessarily wrong. In most businesses, it’s not unusual for employees to email or transfer company documents to their personal devices or accounts for work at home or on the road. This often happens, even when the company prohibits such personal use on paper. So, if a salesman emails himself an open orders list every week, it’s less suspicious if he does so the week before leaving, and if everybody at the company knows employees sometimes do this.

But again, unless you’re certain you will stay with the company until retirement, why would you do this? You should keep in mind Wolfe’s First Law of Trade Secrets Litigation: whatever company information the employee takes on the way out the door will be the alleged “trade secrets” in the company’s subsequent lawsuit.

Enriquez’s third mistake was naming the company “JP Acoustics and Drywall.” I would have called it “JP Drywall . . .” An “acoustics” company sounds like it has trade secrets; a “drywall” company doesn’t.

But let’s get back to the legal issues. Marek claimed that Enriquez’s email included confidential contact information for Marek’s customers and “proprietary notes” about the customers. Id. at *1. One of Marek’s customers was Muckleroy and Falls, id. at *1, which sounds like a business in a Frank Capra movie. Both Marek and JP Acoustics did work for Muckleroy and Falls after Enriquez left Marek. Id. at *4.

Marek claimed that Enriquez was using Marek’s confidential information to advance his business. Id. at *1. Marek sued Enriquez and JP Acoustics, claiming misappropriation of trade secrets, as well as breach of fiduciary duty, tortious interference with contract, and violation of the Computer Fraud and Abuse Act. Marek asked for an injunction to stop the defendants from doing business with any company that was a customer of Marek during the 12 months before Enriquez resigned. Id. at *2.

Marek claimed it spent years accumulating the customer information, and that it made diligent efforts to ensure the secrecy of its customer information, including restricted access to facilities, computer passwords, and disclosure to employees only on a “need to know” basis. Id. at *4.

The defendants responded that the customer information was readily available online or in the Yellow Pages. Id.

So was Marek entitled to a trade secrets injunction?

Let’s pause again to note that this is about as plain-vanilla a soft trade secrets case as you are going to find. You could have said to me “drywall manager leaves company, company files trade secrets suit,” and I could have guessed the essential facts (except maybe the name of the customer). So the outcome of the case may tell us something about how courts deal with typical customer list cases.

The federal district court judge said no, Marek was not entitled to an injunction.[1] First, the court said that the claims for breach of fiduciary duty and violation of the Computer Fraud and Abuse Act were based on conduct that occurred before termination of employment, any resulting damage was “readily quantifiable,” and therefore there was no threatened irreparable harm. Id. at *3. For the authoritative explanation of these concepts, see Injunction Junction, What’s Your Function?

Then the court turned to the claims of trade secrets misappropriation and tortious interference with contract. Illustrating Wolfe’s First Law, Marek claimed that its trade secrets were the customer information Enriquez emailed to himself.

But the court was not persuaded. It started by quoting the Trilogy Software case:

“[I]nformation that a firm compiles regarding its customers may enjoy trade secret status under Texas law.” Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 466 (Tex. App.—Austin 2004, pet. denied) (citations omitted). “But this does not mean that trade secret status automatically attaches to any information that a company acquires regarding its customers; if it did, it would amount to a de facto common law non-compete prohibition.” Id. at 467. “Before any information can be a trade secret, there must be a substantial element of secrecy.” Id. (citation omitted). Secrecy requires that the information “is not generally known or readily ascertainable by independent investigation.” Id. (citations and quotation marks omitted). “It is the burden of the party claiming secrecy status to prove secrecy.” Id. (citations omitted).

If this sounds familiar, it might be because I discussed this case in my post When is a Customer List a Trade Secret?

Marek failed to persuade the court that the customer information was not “readily ascertainable.” The court cited several things missing from Marek’s case:

  • Marek did not provide the court with the email attachments containing the alleged trade secrets.
  • Marek did not describe the nature of the “proprietary notes” or why they should be considered proprietary information.
  • Marek did not offer specific facts to support its allegation that it “spent years accumulating” the customer contact information.

Id. at *4.

Maybe Marek should have seen it coming. The same judge had denied a TRO two months earlier in Computer Sciences Corp. v. Tata Consultancy Servs. Ltd., No. 3:19-cv-970-L, 2019 WL 2058772, at *3-4 (N.D. Tex. May 9, 2019), finding there was no evidence the emailed confidential software source code was actually shared with software developers.

But let’s not be too quick to fault Marek’s counsel. The deficiencies in Marek’s evidence seem obvious, but maybe the email attachments were not that helpful to Marek’s case. Perhaps the proprietary notes were not that proprietary. Perchance there were no more specific facts to be offered. Or maybe there was just not enough time to get the evidence needed.

And even if Marek had proven the customer information was a trade secret, there was another big hole in Marek’s evidence: proof of some nexus between the use of the alleged trade secrets and loss of sales to customers. (Picture Marek saying “Causation!” the way Jerry Seinfeld says “Newman!”)

The court said Marek did not allege that Defendants outbid Marek for any particular job or otherwise took Muckleroy and Falls business from Marek. Rather, both parties were servicing Muckleroy and Falls “to neither’s detriment and without direct competition.” In the absence of evidence that the defendants were injuring Marek’s business relationship with the customer, the court said, it could not find that Marek was substantially likely to suffer an irreparable injury due to the defendants’ contact with the customer. Id. at *4.

Injunction denied.

Nevertheless, the story had a happy ending. The parties later signed this Agreed Injunction that barred Enriquez and JP Acoustics from initiating new business with a list of specified customers.

And the Marek case provides lessons for both employees and employers in trade secrets cases.

Employees:

  • DON’T form an LLC for your future competing business any sooner than you really need to.
  • DON’T send company documents to personal devices or email accounts, even for valid reasons.
  • DON’T take customer lists when you leave. Is it really that hard to find the customers? (If so, the list might actually be a trade secret.)
  • If you take a customer list, DO show that the information in it is readily ascertainable.
  • If you do something you shouldn’t have before leaving, DO argue that it can be compensated with damages, so no injunction is warranted.
  • DO watch my video Dumb Things Employees Do Before Leaving a Company for similar tips in convenient audiovisual form.

Employers:

  • DO offer the misappropriated confidential documents as evidence, under seal if necessary.
  • DO specifically explain why the customer information is valuable and not readily ascertainable.
  • DO try to offer evidence that the employee has actually used the confidential information to take specific customer business from you (I know, this is often easier said than done).
  • DON’T expect to get an injunction merely because an employee has taken confidential company documents.
  • DO watch my video Smart Things Companies Can Do to Protect Confidential Information.

Finally, whether you’re an employee or employer, do get advice from a lawyer as early as possible, preferably one with experience handling departing employee disputes. That might help you avoid the common mistakes above. In the words of another John Goodman character, “Donny you’re out of your element!”

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] To be precise, the court construed the motion for preliminary injunction as a motion for temporary restraining order, denied a TRO, and set a hearing on a preliminary injunction.

Is Writing a Big Paper Good Business Development for Lawyers?

Is Writing a Big Paper Good Business Development for Lawyers?

Typical Saturday at the Wolfe casa: I was bragging about an article I wrote on Texas Securities Act litigation. 10YO asks, “what’s that?” I said, “it’s just a kind of litigation, like when you invest money in a company and they steal the money.” “Oh, ok,” he said.

Whether you can explain a lawsuit in terms simple enough for a ten-year-old to understand is probably a good test for any lawyer (although my kid is savvier than most, thanks to his mom and big sister).

But the ability to simplify, by itself, won’t make you an expert on a legal topic. You also need to understand the nuances, the grey areas. And a good way to do that is to write a big paper on the subject. Maybe even a comprehensive paper. And maybe, if you’re really ambitious, the comprehensive paper.

That’s sort of what I tried to do with Texas Securities Act litigation. It started with a series of securities fraud cases my firm defended from around 2000-2005. When it was all over, I had accumulated a ton of research and briefing on case law applying the Texas Securities Act.

That coincided with a time in my career when I felt like I needed to start developing my own business (around eight years out of law school).

Up to that point my business development strategy had been somewhat, uh, thin. My earliest experience was with insurance coverage litigation, and I had written some articles for the Journal of Texas Insurance Law. But I wasn’t getting any traction.

This was partly my fault (I didn’t do much other than write the articles) and partly due to circumstances beyond my control (my firm didn’t get many insurance coverage matters). So I had pretty much given up on writing about insurance law.

But I knew if I was going to bring in business I needed to develop some kind of specialty beyond “business litigation,” and securities litigation seemed as good as any. Plus, I already had the knowledge and the material. I wouldn’t have to “reinvent the wheel.”

So I started writing the paper, one little chunk at a time. It literally took years for it to come together, but eventually I had a good long rough draft. Then the problem was figuring out what to do with it.

Fortunately, I got by with a little help from my friends. A more senior lawyer helped me get an opportunity to present the topic at a bar association event. That was just the push I needed to finally finish the paper. And then a peer at my law firm was willing to co-author the paper and fill in some sections that still needed work. The paper debuted at a CLE presentation in 2013. The response was small but enthusiastic.

I presented the topic at a few more CLE programs, and I updated the paper a couple times. You can download the most recent version here.

This big paper doesn’t cover every possible Texas Securities Act issue, but it at least touches on each major issue, and it explores some of the key issues in detail. In my humble opinion, I don’t think you will find a better paper on Texas Securities Act litigation that is both comprehensive and practical. I’m pretty proud of it.

Step 1 was complete. I was on my way to developing a thriving securities litigation practice. I would continue doing presentations and making a name for myself in the field. Other lawyers would start referring securities litigation cases to me, and I would eventually develop a robust book of business of my own.

Except none of that actually happened. I didn’t bring in a single securities litigation matter.

Then a funny thing happened. A friend I met at a presentation I gave for the Houston Bar Association needed help with a non-compete lawsuit. Around the same time I found myself trying to support a solo law practice. At first, I thought we’d settle the case, but it blew up and eventually went all the way to a jury trial. Along the way I got referrals for some other non-compete cases. Sometimes it was a lawsuit, but other times people just needed some advice. These matters started taking up more of my time.

That’s when it hit me. If I was going to develop business, I needed to turn down those pesky non-compete matters and keep my focus on securities litigation. It would be stupid to waste all that time I had spent writing and speaking about the Texas Securities Act. Right?

No! That was exactly wrong. The smart move was the opposite: focus on developing a reputation for the kind of work I was actually getting. This is the point business development expert Maria Granovsky made in a guest post right here on Five Minute Law. In Maria’s terms, the smart move for me was to stop looking for elusive copper deposits and to pick up the gold bricks at my feet.

But this time, I thought, I’m done spending hours and hours writing long legal papers that no one reads. Instead, I would focus on writing short articles that people might actually enjoy. Blog posts, to be specific. I would write about a wide variety of topics, but with an emphasis on the departing employee cases I was already working on. And I would try to keep the posts short enough that people could read them in, oh I don’t know, five minutes.

But what to call the blog?

books-with-folded-pages-2377295
There are some benefits to writing a big paper

Eventually I solved that problem, and now, five years after I started focusing on departing employee litigation, my business development efforts have had some modest success. I regularly receive inquiries for matters involving non-competes, trade secrets, and other departing employee issues. I still work on a variety of business litigation matters, but the departing employee disputes are my focus.

Then another funny thing happened. Recently a potential client saw that Texas Securities Act paper on the Internet and called me up. Keep in mind, this was over four years after I published the last version of the paper.

So maybe I was too quick to give up on the “big paper” concept. It obviously has some value.

Here are my main takeaways on lawyers writing big papers for business development:

  • Writing a big paper on a legal topic is a good way to become a true expert on that topic. The legal profession is remarkably democratic in the sense that just about any lawyer can become an expert on an area of law by putting in the time to read and understand the key cases. (Credit to the late Mark Kincaid, a top-notch insurance coverage litigator and adjunct professor, for impressing this point on me.)
  • The downside is that writing a big paper is very time-consuming. You can write a blog post, email alert, or short LinkedIn article in much less time, and people will be more likely to actually read it.
  • On the other hand, once you’ve written a big comprehensive paper, it’s easy to update or repurpose it. Take a lesson from law professors. Charles Alan Wright didn’t rewrite all of Federal Practice and Procedure every time. McCarthy on Trademarks is not above recycling old material.
  • Another lesson from law professors: you can get help from colleagues on a big paper. This can be a real win-win. You get to share credit with other lawyers, they can help lighten your load, and you can make new friends along the way.
  • The major pitfall with writing a big paper is thinking it’s going to develop business for you by itself. It rarely happens that way. You need to present the paper at events, network with people at the events, share the paper on social media, etc. At the risk of using a corporate buzzword, you need to create synergy between the big paper and your other business development efforts.
  • When you combine the big paper with networking, you’ll start to see another benefit of the big article: credibility. People who see that you have written a serious paper on a particular practice area will assume—usually correctly—that you know what you’re talking about.
  • The big paper can also enhance the credibility of your professional profile. If you’re going after corporate clients, especially big ones with in-house lawyers, they are probably not going to find you by Googling “securities lawyer.” But a client who is referred to you will look at your profile on LinkedIn or your firm’s website and see you wrote that article.
  • Individuals, and even corporate clients, will sometimes find you literally by Googling a practice area and seeing your article or name pop up. This is only going to become more common over time.

I can vouch for this last point from personal experience. If a potential client can see my big paper from four years ago and call me, the same can happen to you.

Now the big paper bug has bitten me again, in several ways:

First, I’ve already co-authored and updated a “medium” sized paper called Texas Trade Secrets 101. I plan to continue updating it.

Second, if you can keep a secret, I was already developing a monster paper on Texas non-compete litigation. I regularly monitor Texas non-compete cases and write about non-compete issues on my blog. I figure I might as well use that material for a big, comprehensive paper, especially if I want to be known as the top non-compete lawyer in Houston.

Third, even though securities litigation is not my focus these days, it’s still an arrow in my quiver, and I’m thinking I should update that big paper on Texas Securities Act litigation.

But that’s a lot of work, especially when I’m already blogging, composing the magnum opus on Texas non-compete litigation, and training for the 2022 Crossfit Open. I don’t want to work myself to death like a scene out of Amadeus. If I’m going to update the securities paper, I need a collaborator.

Unfortunately, my ten-year-old is not interested. So if you want to research and write about Texas securities law, hit me up. And maybe four years from now the clients will be calling you.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. His son’s comment on this post was “I like the part about me.” 

He’s joking about training for the 2022 Crossfit Open. Sort of. These are his opinions, not the opinions of his firm or clients. Every case is different, so don’t rely on this post (or the big paper) as legal advice for your case.

Does the Amended TCPA Still Apply to Departing Employee Lawsuits?

Does the Amended TCPA Still Apply to Departing Employee Lawsuits?

I know what you did last summer

They say that breaking up is like knocking over a coke machine. It’s just not going to happen on the first push. This is also true of my attempt to break up with the Texas Citizens Participation Act, or “TCPA.”

A quick recap: I fell in love with the TCPA when Texas courts started applying its broad definitions so broadly that you could file a motion to dismiss in just about any kind of lawsuit, as long as the claims had something to do with a “product or service in the marketplace.” That included departing employee lawsuits, the focus of my practice.

I’ll admit, it was a toxic relationship, one the Texas legislature probably never intended.

Then the backlash came. The Texas legislature, the Fifth Circuit Court of Appeals, and the Dallas Court of Appeals conspired to sabotage our relationship. See Turn Out the Lights, the Party’s Over: Texas Legislature Takes All the Fun Out of the TCPA.

The legislature dealt the cruelest blow. Last summer it amended the TCPA to carve out most claims based on non-competes and trade secrets. See Tex. Bus. & Com. Code § 27.010(a)(5).

Like a meddling parent, the legislature was determined to keep me and the TCPA apart. How am I supposed to file a TCPA motion to dismiss a departing employee lawsuit if the statute doesn’t apply to non-compete and trade secrets claims anymore? That’s my bread and butter.

Keep hope alive

But wait. There is hope. Breach of non-compete and misappropriation of trade secrets are not the only claims made in departing employee lawsuits. As I explained in my viral YouTube video What Are the Key Legal Issues in a Departing Employee Lawsuit?, breach of fiduciary duty is another common claim when an employee leaves a company to work for a competitor.

Does an employee really owe an employer a fiduciary duty, the highest common-law duty known to man? Well, sort of. For a brief explanation, see Fiduciary Duty Lite: What Employees Can and Can’t Do Before Leaving.

The typical theory in a departing employee lawsuit is that the employee, while still on the company’s payroll, schemed with others to compete with the company. If the employee crosses the line into actually competing with her employer, that can be a breach of the employee’s limited “fiduciary” duty to the employer.

There’s no exemption in the amended TCPA for claims of breach of fiduciary duty, and Texas courts have applied the statute to such claims. See, e.g., O’Hern v. Mughrabi, 579 S.W.3d 594, 603-4 (Tex. App.–Houston [14th Dist.] 2019, no pet. h.) (TCPA applied to suit making single claim of breach of fiduciary duty); Elite Auto Body LLC v. Autocraft Bodywerks, Inc., 520 S.W.3d 191, 194, 205 (Tex. App.–Austin 2017, pet. dism’d) (TCPA applied to claims against former employees including breach of fiduciary duty).

So if you’re on the defense side of a departing employee lawsuit, you may not be able to file a TCPA motion to dismiss the non-compete and trade secret claims, but you could still file a TCPA motion to dismiss the breach of fiduciary duty claim. And even if that motion is denied, you get an interlocutory appeal.

This is especially important when the employee doesn’t have a non-compete. Proving that the employer’s information was a trade secret can be difficult, so in cases without a non-compete, breach of fiduciary duty is sometimes the employer’s strongest theory.

Hey, I just met you

Still, my loyal Fivers know that carving out non-compete and trade secrets claims was not the only change the legislature made to the TCPA last summer. The legislature also changed the definition of “matter of public concern.”

The previous definition of “matter of public concern” was the match that lit the prairie fire that swept across Texas litigation. That definition covered communications about a product or service in the marketplace, which meant just about any kind of lawsuit.

But House Bill 2730 reigned in that broad definition, making these changes:

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Screen Shot 2019-11-03 at 2.48.46 PM.png

Is this new definition of “matter of public concern” broader or narrower?

Before, the definition included an issue related to a product or service in the marketplace. That prong of the definition covered a potentially wide range of lawsuits, but its language was fairly specific.

The new definition, in contrast, is vague to the point of being tautological. The statute now effectively defines “matter of public concern” to include “a subject of concern to the public.” Wow, thanks for that clarification, Texas legislature.

So does a claim for breach of a former employee’s breach of fiduciary fall under the new definition of matter of public concern?

And this is crazy

Here’s the argument that it applies. Let’s say a salesman decides he’s not happy with his job. He starts talking with some co-workers, or maybe with a competitor, about leaving the company and forming a new venture that will compete for the company’s customers. Then he starts talking to his customers about it. Maybe he even tells his customers to delay their orders until after he leaves.

Arguably, those communications are about competition in the salesman’s industry, which is a matter of interest to the community and a subject of concern to the public. So if the employer claims breach of fiduciary duty based on these communications, you could argue the TCPA applies.

The counter-argument says this is just too much. If “matter of public concern” is construed to include competition between two private companies, one could argue, then the TCPA would still apply to almost everything. That can’t be what the legislature intended.

That’s essentially what the Dallas Court of Appeals said about the previous version of the TCPA. In a series of decisions, the Dallas court reigned in the scope of the TCPA by holding that communications between private parties about doing business are not matters of public concern, despite the broad “product or service in the marketplace” language that was in the statute. The Fort Worth Court of Appeals took a similar view. See Metroplex Courts Push Back on Broad Application of TCPA.

It’s a safe bet those courts will take the same approach to the TCPA’s new definition of a matter of public concern. They are likely to reject the argument that an employee’s communications about competing with his private employer are a subject of concern to the public just because there is a general public interest in free competition.

But other courts may be more receptive to the argument. The Austin Court of Appeals and the Houston Court of Appeals took more of a “plain meaning” approach to the earlier version of the TCPA. That’s how the TCPA got applied to non-compete and trade secrets claims in the first place. See A SLAPP in the Face to Texas Trade Secrets Lawsuits.

So call me maybe

If you take a similar plain meaning approach to the new definition of matter of public concern, there is at least a reasonable argument that the definition applies to communications about competing with an employer. So, if an employer sues a former employee for breach of fiduciary duty based on the employee’s alleged scheme to compete with the employer, the employee should at least consider filing a motion to dismiss the claim under the TCPA.

I’ve prepared a sample motion that does just that.

*MASSIVE LAWYER DISCLAIMER: Every case is different, and this sample motion is just an idea for Texas litigators to consider; I’m not necessarily endorsing it, and non-lawyers should consult with qualified counsel about these issues.

Keep in mind, the plaintiff can defeat the TCPA motion by offering evidence that the employee owed a fiduciary duty, the employee breached the duty, and the breached caused damages.

But that can be a real hurdle for the employer. Whether the alleged conduct of the employee constitutes a breach may present a legal question for the judge. And even when there is evidence of a breach, it is sometimes difficult for the employer to show the breach caused actual compensable damages. (Another lurking issue is that the fiduciary duty claim may be preempted by the trade secrets statute, but I’ll save that for the “advanced” course.)

Bottom line: filing a TCPA motion to dismiss a breach of fiduciary duty claim in a departing employee lawsuit will sometimes be a good strategy for the defense.

Some will think it crazy to apply the TCPA to a claim against an employee for breach of fiduciary duty. But is it any crazier than the cases that applied the earlier version of the TCPA to departing employee litigation? As discussed above, the new definition of matter of public concern is arguably just as broad as the old definition.

Plus, this may shock you, but sometimes employers use contrived claims of breach of fiduciary duty to try to punish or bully employees who exercise their right to leave the company and compete freely. Isn’t that the kind of claim the TCPA is supposed to prevent?

If so, maybe I’m not so crazy to consider getting back together with the TCPA. The statute promised me it has changed its ways, so maybe I’ll give it one more chance before I finally tip over that coke machine.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

Jurassic Non-Competes

Jurassic Non-Competes

Do Ancient Cases Hold the Secrets to Understanding Present-Day Texas Non-Compete Law?

“Non-compete abuse” is a hot topic. The press says some employers now require even rank-and-file employees to sign non-competes. The Jimmy Johns case was perhaps the low point. You’re going to make sandwich makers sign non-competes. Really? Are they going to run off with the secret bread-slicing techniques? Misappropriate goodwill from Jimmy Johns and take it to Quiznos?

Here’s another case I recently read about that just goes too far. The Patterson Institute, a small music school in Hillsboro, Texas, hired young Bill Crabb to teach piano, organ, violin, mandolin, and banjo, as well as music theory, harmony, and history. Crabb signed a 10-month employment contract, which included a non-compete barring him from teaching music in Hillsboro if he quit the job.

Then tension developed between Crabb and the Institute’s senior music teacher, Mary Rice. Crabb quit and opened a small music school of his own in Hillsboro. The Patterson Institute filed suit and obtained a temporary injunction, but the trial court dissolved the injunction after a trial.

The Court of Appeals reversed, holding that the statute prohibiting restraints of trade did not apply. The court reasoned that it would be inequitable for Crabb to teach at an independent school in Hillsboro, that the statute did not bar the restrictive covenant, and that the Institute was entitled to an injunction. The court cited Gates v. Hooper, in which the Texas Supreme Court held that a non-compete in the sale of a business was not an illegal restraint of trade.

But enforcing a non-compete against a small-town music teacher? This is just too much. The Texas legislature should do something about this kind of non-compete abuse.

Unfortunately, it’s too late for Mr. Crabb. You see, his case was decided in 1899. See Patterson v. Crabb, 51 S.W. 870, 871-72 (Tex. Civ. App. 1899).

But his case is a good reminder that non-competes have been around for a long time. By comparison, the Texas non-compete statute is relatively young. It just celebrated its 30th birthday in September.

I’ll confess that, even as a lawyer who has read a lot of Texas non-compete cases, I usually don’t pay attention to case law that predates the 1989 statute. But the statute was largely intended to codify Texas common law on non-competes (or at least parts of it). So, many of the issues found in older cases are still relevant.

Here’s a chronological sampling of some principles in older Texas non-compete cases that still apply today.

1. Texas courts generally favor non-competes in the sale of a business.

Gates v. Hooper, 39 S.W. 1079, 1080 (Tex. 1897), was the case cited in Patterson v. Crabb. It’s the oldest Texas non-compete case I have found so far. (If you find an older one please email me.) You can tell it’s an old case because the opinion is short but the paragraphs long.

This was the Gilded Age when monopolistic “trusts” were a major concern. But the court in Gates upheld a one-year non-compete in a contract for the sale of a mercantile business in Batesville. The court held that the non-compete was not a prohibited “trust” or “combination” because the transaction did not combine the capital, skill, or acts of the parties into any kind of “union, association, or co-operative action.” Id. at 1080-81.

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That was it. Nothing about reasonableness. But it set a precedent favoring non-competes in the sale of a business.

2. Non-competes are uniquely and primarily about protecting goodwill.

The two most common justifications for non-competes are (1) protecting a company’s goodwill and (2) protecting a company’s confidential information.

Reading between the lines, we can imagine both issues were present in Patterson v. Crabb. The opinion is pretty thin on reasoning, but we can assume the Patterson Institute established goodwill with its customers, i.e. its students. We can also assume that Mr. Crabb knew the students, knew the tuition they were paying, and could use that knowledge to set his own school’s tuition just low enough to “undercut” the Institute.

But there’s a fundamental difference between these two interests. There are multiple areas of law that protect an employer’s confidential information. See The Matrix: Making Sense of the Patchwork of Employee Confidentiality Duties.

In contrast, there is really only one legal mechanism to protect goodwill: a non-compete.

And a non-compete always has two fundamental problems. First, it hurts customers. If Mr. Crabb can’t teach music in Hillsboro, the students in Hillsboro may have only one place to go. Second, a non-compete can prevent someone from making a living doing the thing they do best. It doesn’t seem right to force Mr. Crabb to either move out of Hillsboro or change careers.

3. Non-competes should not restrain the right to earn a living.

These problems are not new. Over a hundred years ago, in Miller v. Chicago Portrait Co., 195 S.W. 619 (Tex. Civ. App.—San Antonio 1917, writ ref’d), Mr. Miller signed an employment contract with Chicago Portrait Company, which was in the business of enlarging photographs into portraits. The contract contained a one-year non-compete. Id. at 619.

The Court of Appeals reversed an injunction issued by the trial court. As to confidentiality, the court noted there was “no evidence of trade secrets connected with inducing people to have their photographs magnified into portraits and placed in expensive frames.” Id. at 620.

As to goodwill, the court distinguished between a contract for the purchase of a business and an employment contract, citing an employee’s interest in earning a living:

Courts will not favor contracts that would drive a man out of Texas to seek occupation in a business, with which he is perhaps better acquainted than any other, or put him in another business for which he is not trained or suited. This is a different case from the sale of a business induced by a contract not to engage in a similar business in a named locality in a specified time. The contract in this case is aimed at the right to obtain employment in a similar business. It is an attempt to restrain the right to earn a living.

Id. at 621.

So yes, there is a legitimate interest in protecting goodwill, but that interest must be weighed against an employee’s right to earn a living (and to stay in Texas), especially where no real trade secrets are involved.

Today, the Texas non-compete statute does not expressly refer to the employee’s interest in making a living, but that interest is embedded in the statute’s key concept: reasonableness.

4. Reasonableness is the key to non-compete law.

Given the competing interests at stake in any non-compete dispute, the fuzzy standard of “reasonableness” is critical.

The idea of measuring the enforceability of a non-compete by its reasonableness made an early appearance in Texas law in Randolph v. Graham, 254 S.W. 402 (Tex. App.—San Antonio 1923, writ ref’d). In that case, Dr. Randolph sold his medical practice to Dr. Graham, who agreed not to practice medicine within a 20-mile radius of Schertz, Texas. Id. at 402.

The Court of Appeals affirmed the trial court’s temporary restraining order enforcing the non-compete. The court first cited the policy in favor of enforcing non-competes tied to the sale of a business, reasoning that “professional men” or “skilled artisans” ought to be able to sell the goodwill of their businesses, and invoking “liberty and freedom of contract.” Id. at 402-3.

But the court implicitly recognized the limits of freedom to contract by then addressing the reasonableness of the restriction. The court cited cases from other jurisdictions holding that a contract in restraint of trade is unreasonable and void when it is unlimited in time and space. While the non-compete at issue was unlimited in time, it was limited to the Schertz area, and the court found that limitation sufficient to make the non-compete reasonable and enforceable. Id. at 403-4.

This would not be the last time that parties argued about whether the scope of a Texas non-compete was reasonable.

5. Reasonableness means a non-compete injunction should do no more than necessary to protect the goodwill the employee developed for the company.

By 1925, the essential elements of early Texas non-compete law came into focus, as illustrated by City Ice Delivery Co. v. Evans, 275 S.W. 87 (Tex. Civ. App.—Dallas 1925, no writ).

That case involved an employment contract between a driver and an ice delivery business in Dallas. The business divided its territory into districts, assigning each district to an employee. The contract prohibited the driver, Mr. Evans, from engaging in the ice business within the territory covered by his route, or within five squares of his route. Id. at 88-89.

By this time, the court said it was the “settled law” of Texas that a contract for the sale of a business may include a non-compete reasonably necessary to protect the purchaser’s interest in the goodwill of the business. Id. at 89.

But did the same principle apply to an employment contract? Looking to authorities outside Texas, the court found that non-competes in employment contracts should be governed by the same principles:

The test generally applied to determine the validity of such a covenant in a contract of employment depends upon whether or not restraint placed upon the employé after employment has ceased is necessary for the protection of the business or good will of the employer, and whether it imposes on the employé any greater restraint than is reasonably necessary to secure protection to the business of the employer or the good will thereof. If the covenant in question goes no farther than to accomplish this purpose, it is generally held to be valid.

Id. at 90. (NB: An “employé” is an employee who speaks French.)

In short, like a non-compete in the sale of a business, a non-compete in an employment contract is governed by the related principles of reasonableness and necessity to protect goodwill.

Screen Shot 2019-10-26 at 9.28.31 PM

Thus, the court said, the burden is on the employer to establish both the “necessity for” and the “reasonableness of” the non-compete. Applying this principle to the employer’s claim for an injunction, the court said that the evidence clearly established the necessity of the non-compete as to the immediate territory where Evans delivered ice to the company’s customers. Id.

But there was no such necessity for the five squares outside of his territory, the court reasoned, because the company had no goodwill outside of the employee’s territory that was due to the employee’s “personal contact” with the trade while in service of the employer. Id.

This critical principle is sometimes ignored but still applies today. An injunction should extend no further than necessary to protect the goodwill that the employee developed on behalf of the employer.

Seven years later, the Dallas Court of Appeals would cite City Ice Delivery and other cases and distill the essential requirements of Texas non-compete law as follows:

(1) Is the restraint placed upon the employee, after the employment had ceased, necessary for the protection of the business or good will of the employer?

(2) Does it impose upon the employee any greater restraint than is reasonably necessary to procure protection to the business of the employer or the good will thereof.

Martin v. Hawley, 50 S.W.2d 1105, 1108 (Tex. App.—Dallas 1932, no writ).

This language is strikingly similar to the language the legislature would use over 50 years later in the 1989 non-compete statute. The court also cited the general principle that “contracts restricting the liberty of employment are not viewed by the courts with favor.” Id. at 1108.

Thus, even back in 1932, we can clearly see the two competing considerations: protect the employer’s goodwill to the extent necessary, but without unduly restricting employee mobility. The dividing line is what is reasonably necessary to protect the employer’s goodwill.

6. Generally Texas courts will enforce an unreasonable non-compete to a reasonable extent.

While the basic reasonableness concept took shape in Texas cases as early as the 1930s, it was not entirely clear what a Texas court was to do if a non-compete was unreasonably broad.

This issue was implicit in City Ice Delivery, where the court enforced the non-compete only in part, to the extent of prohibiting competition in the driver’s immediate territory. Later the Texas Supreme Court addressed the issue more directly in Lewis v. Krueger, Hutchinson & Overton Clinic, 269 S.W.2d 798 (Tex. 1954).

In that case, young Dr. Lewis signed an employment contract with a clinic that barred him from practicing medicine in Lubbock County if his employment ceased. The trial court found the non-compete entirely unenforceable because it had no time limitation. The Court of Appeals disagreed but reduced the limitation to three years. Id. at 798-99.

Dr. Lewis argued the court could not make a new and different contract for the parties, but the Texas Supreme Court rejected this argument. Even though the non-compete could be interpreted as applying for life, “it would hardly be doing violence to the established principles to hold that the restriction is merely void or unenforceable with respect to that portion of the time beyond what the court considers reasonable.” Id. at 799-800.

This “blue pencil” rule allows the court to effectively rewrite the non-compete, and it still applies today. Enforcement of a non-compete is not all or nothing in Texas. Generally, if the non-compete is unreasonably broad, it can still be enforced, but only to a reasonable extent.

7. You can’t get damages for breach of an unreasonably broad non-compete.

But what about damages? Can the employer get damages for the employee’s breach of a non-compete that’s unenforceable as written?

The Texas Supreme Court addressed this issue in Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d 950 (Tex. 1960). Citing Martin v. Hawley, the court said the non-compete as written was unreasonable because it had no territorial limitation. Then, citing Lewis, the court said an injunction could still be granted to restrain the employee from competing within a reasonable area. Id. at 952.

But the court said a claim for damages was not available prior to reformation. “We hold that an action for damages resulting from competition occurring before a reasonable territory and period have been prescribed by a court of competent jurisdiction must stand or fall on the contract as written.” Id. at 953. In other words, if the employer drafts a non-compete that is too broad, the employer can still seek an injunction, but it can’t get damages that occur before the court narrows the scope of the non-compete.

The Texas Supreme Court later clarified that the court’s power to reform the non-compete applies to both time and area. Justin Belt Co. v. Yost, 502 S.W.2d 681, 685 (Tex. 1974).

The Weatherford rule concerning damages was later codified in the 1989 statute. Five years later, Jimmy John’s started franchising. And the rest is history.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Be sure to follow the Five Minute Law Facebook account, if anybody still uses Facebook.

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 Strategies to Getting Better Hotel Sleep

2 Strategies to Getting Better Hotel Sleep

This week I’m excited to have a guest post from Craig Huggart. Craig liked my post I’ll Sleep When I’m Dead: The Ignored Epidemic in the Legal Profession and asked if he could contribute something on the topic of sleep. Here are his helpful tips about getting better sleep on the road. – Zach

Do you sometimes struggle to sleep well in hotels? Me too!

However, after more than 600 nights on the road, I found two key things that make it easier to get a good night’s rest on the road – picking the right room and optimizing it for sleep.

Pick The Right Room (or have your assistant do it for you)

Choose The Right Hotel

  • I pick the closest Hilton and ask them two key questions. One – is this a quiet hotel? Two – are there any events that will disturb the quiet during my stay. If I am satisfied with the answers, I choose this hotel. If not, I ask them to recommend a nearby hotel. I learned this lesson after staying adjacent to the Red Hat Amphitheater. On a Tuesday, from 5 – 10:30 PM, a rock concert was happening and even wearing my noise cancelling headphones, it was very loud.

Choose The Right Room

  • Two days before check-in, I call the hotel to have them help me choose a room. I tell them I spend about half of the time on the road. I’m not worried about a one bed or two-bedroom accommodation; my priority is sleep. Will they help me choose a quiet room and one that can be made as dark as possible. Then, when I check-in using the app, I just okay the room. This works great!

Optimize The Room For Sleep

Make It Cool (About 64 degrees is optimal for sleep)

  • Ask for a fan.
  • Have maintenance check to ensure the HVAC is working well.
  • Hack the thermostat – A dirty little secret is that many hotel thermostats have governors and motion detectors on them. I once woke up sweating in the middle of the night because the air was cut off due to a motion detector. If a maintenance person doesn’t disable these features for you, go to YouTube and search for something like “hack hotel thermostat and brand name,” and you will find a list of cheat codes to disable this.

Make It Dark (The goal is to have it pitch black)

  • Close the gap. Curtains almost always have a flap that opens in the middle. A couple of binder clips or pants hangers can fix this.
  • Block the lights – Cover the door’s peephole, the TV’s red light and other lights using duct or electrical tape. (I love this pocket duct tape). Use towels and pillows to block the light coming from under the door and window.
  • Use a sleep mask – This is a very personal choice, but my favorite is the Manta Sleep Mask.

Make It Quiet (Block out all you can)

  • Use a white noise machine. I use the Marpac Rohm Portable, but a friend of mine uses the SNOOZ.
  • Use earplugs. This can take some getting used to but is one of the things that has had the biggest impact on my sleep. I recommend Mack’s Pillow Soft Silicone Earplugs. They block out a bunch of sounds and don’t irritate my ears.

Let’s face it; you’re never going to sleep as well on the road as you will at home. However, these tips can make a huge difference.

I’d love to hear from you. What is your best tip for sleeping better in hotels?

___________________________

Craig Huggart has been a legal technology trainer since 2001. He is an Alabama fan, a Star Trek geek, and is passionate about making the lives of lawyers a little better. You can reach him at craighuggart@gmail.com.

What’s My Motivation?

What’s My Motivation?

Fall is here, football season is back, and for a minute my Dallas Cowboys were on a roll. They started the season 3-0, with Dak Prescott and Co. looking impressive. So, in Week 5 of the 2019 NFL season, I was confident they would handle the Saints, who were missing their injured future-first-ballot-Hall-of-Fame quarterback Drew Brees.

Final score: Saints 12, Cowboys 10.

But hey, maybe the Cowboys can use the loss as motivation. Failure can be a great motivator, as the folks at Dick’s Sporting Goods know. Back in 2012 they put out a great commercial titled Untouchable. It starts with images of four high school athletes who just lost the big game. An unseen speaker, presumably a coach, gives this speech:

It’s tough to come this far and lose.

It hurts.

But you are defined in life by the way you respond to defeat.

That pit in your stomach, fill it with fire.

Next season, starts right now.

Remember this hurt.

Think about it when you want to sleep in in the morning

Think about it when you want to shut it down, instead of doing an extra set.

Promise yourself, that you will never, ever feel like this again.

You promise yourself, that you will come back untouchable.

As these words are said, we see images of each kid’s off-season training regimen. The soccer player tapes the newspaper headline “Westfield Comes Up Short” to her bedroom mirror. The track kid runs by a swimming pool where his friends are hanging out. The football player builds his strength while working construction. The basketball player does dips in the restaurant kitchen where he’s working. Then we see the training scenes from the gym, court, and field.

The next season, they “come back untouchable,” and win.

It’s a great commercial. I used to watch it to get motivated for my next professional goal.

Lawyer or not, we all deal with career losses. Maybe the jury went against you. Maybe you got fired. Or maybe you just didn’t get that promotion you were hoping for. Whatever the setback, you can use that experience as fuel to fire your motivation.

You often hear this kind of message from professional athletes, when they talk about how the “haters” and doubters motivated them to work even harder to succeed.

But why do they need this kind of motivation? I mean, they’re professionals. Isn’t it just part of the job to put in the training you need to succeed? And you could say the same  for any profession.

It reminds me of a conversation I once had with a more senior lawyer. I asked for advice on how to deal with the inevitable situations where you don’t perform at your best. In other words, how do you deal with the fact that you can’t always “bring your A-game”? The response: you have to do a cost-benefit analysis looking at the cost of not giving your best versus the benefit of doing so.

That was great advice. For a robot.

For human beings, not so much.

The problem is that consistent excellence requires discipline, and discipline is hard. We’re just not wired to do things we don’t like for long periods of time with no apparent short-term benefit. We need some kind of emotional motivation. Intellectual motivation—merely reasoning “if I consistently stick to my weightlifting regimen this summer I will be a better tackler in the fall”—is not going to cut it.

robot-2791671_1920
Unlike humans, robots require no motivation.

Waking up every day to the headline “Westfield Comes Up Short,” on the other hand, may get the fires burning.

So I used to watch that Dick’s Sporting Goods commercial and think, “yeah, I’m going to work even harder after this setback and come back UNTOUCHABLE! AAARGGH!”

Ok, I did not actually grunt. But I did like to think that way.

Then a funny thing happened. I noticed that concentrating on painful losses made me feel kind of, I don’t know, crappy (that’s a clinical term). Feeling angry, resentful, or frustrated did not seem to help me work harder or smarter. In fact, I noticed that a negative mental state tended to make my job performance worse.

I know, it sounds crazy. But bear with me. Because my theory recently received support from a highly regarded authority in industrial psychology: late-night talk show hosts.

You may have heard about a brouhaha between Bill Maher and James Corden. It started with Maher, ever the contrarian, saying that “fat-shaming” needs to make a comeback. You can watch his segment here.

There was a certain cruel logic to Maher’s argument: if we make it ok to make fun of fat kids again, maybe it will motivate them to lose weight.

Sound familiar? That pit in your stomach, overweight kid, fill it with fire. Slim down and come back untouchable!

But James Corden was not having it. Corden, no stranger to struggles with weight, offered a funny and incisive rebuttal you can view here.

Corden’s most insightful point was that bullying people about their weight is not actually effective:

Bill, I sincerely believe that what you think you’re offering here is tough love, and you’re just trying to help by not sugar-coating reality for fat people, even though you know how much fat people love sugar-coating things.

But the truth is you’re working against your own cause.

It’s proven that fat-shaming only does one thing.

It makes people feel ashamed.

And shame leads to depression, anxiety, and self-destructive behavior.

Self-destructive behavior like over-eating.

Sure, Maher had some valid points in his critique of American obesity, but Corden’s response rings true. Feeling bad about yourself is not an effective weight-loss strategy. And we should not expect that dwelling on past defeats would be any more effective as a career development strategy.

slimming-2728331_1920
Does “fat-shaming” motivate people to lose weight?

Yet the professional athlete paradigm still has a certain gravitational pull. There’s a reason the Dick’s Sporting Goods commercial is effective. We love the stories of professional athletes grinding away in the off-season to prove the haters wrong.

That brings me back to the New Orleans Saints. When their star quarterback Drew Brees went down, the next man up was a guy named Teddy Bridgewater. Serious NFL fans remember he was a first-round draft pick by the Minnesota Vikings. But things did not go as planned. He tore his ACL in practice, missing most of the 2016 and 2017 seasons.

When Bridgewater finally made his return in the fourth quarter of a 2017 game against the Cincinnati Bengals, the crowd gave him a standing ovation. He then made two pass attempts and threw an interception. His experience reminds us that, train as we might, we never really become “untouchable.” We all remain vulnerable.

But Bridgewater did not give up. He eventually found himself a backup on the Saints roster. When Brees injured his thumb, Bridgewater stepped in and had his big comeback in week 2 of the 2019 season, leading the Saints to an emotional 33-27 victory over the Seattle Seahawks.

You can see where this is heading. Cue the interview footage of Bridgewater talking about how he was determined to prove all the doubters wrong while he slowly rehabbed that ACL injury, right?

But that’s not what Bridgewater said. I first saw his reaction in this tweet from jazz saxophonist and New Orleans native Branford Marsalis:

Branford Marsalis tweet

“Thinking about all the ones who believed in me.” Wow. Now that’s motivation.

I hope the Dallas Cowboys are thinking about that.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

 

What is “Hearsay” Anyway? Tips for Lawyers and Non-Lawyers

What is “Hearsay” Anyway? Tips for Lawyers and Non-Lawyers

Early in my legal career, I worked on a couple big embezzlement cases. In both cases my firm represented the embezzle-ee, not the embezzle-or (are those real words?). And in both cases, the core evidence of the embezzlement was hearsay.

“Hearsay” has been in the news a lot lately. It’s kind of the evil twin of another term getting a lot of play: “direct knowledge.” Hearsay and direct knowledge are not exactly opposites, but you could say they are two sides of a coin.

As a trial lawyer with at least a basic understanding of the hearsay rule, I cringe when people use terms like “hearsay” and “direct knowledge” without really understanding what they mean.

But we lawyers mustn’t carp too much. “Hearsay” has an ordinary meaning in popular discourse that doesn’t pretend to match the legal definition of hearsay. When an ordinary person says that information is hearsay, they just mean it’s secondhand knowledge. There’s nothing wrong with using the word “hearsay” in that ordinary sense—in theory.

Plus, even lawyers have a hard time with the legal definition of hearsay. I doubt the average non-litigator lawyer could give you a good definition. Even some litigators might struggle to explain it. And in my experience, even the average trial court judge doesn’t have a firm grasp of the hearsay rule.[1]

So what is hearsay? The legal definition is simple: an out of court statement offered for the truth of the matter asserted.[2]

But there’s a lot wrapped up in that definition. Plus, as any Law and Order fan knows, there are exceptions to the hearsay rule. More about that later.

The “out of court statement” part is not too difficult. Let’s say I’m trying to prove that Dawn Davis embezzled money from her former employer, Paula Payne Windows. I call Paula Payne, the owner of the company, to the stand. “Ms. Payne,” I ask, “how do you know Ms. Davis forged those checks?” “Because my bookkeeper told me she saw Ms. Davis do it,” she answers.

In this case, it’s an “out of court” statement, meaning the bookkeeper is not there testifying to the statement she made. Instead, it’s Payne testifying about the bookkeeper’s statement.

And notice something else: Payne does not have direct knowledge, i.e. “personal knowledge,” that Davis forged the checks. She only has “secondhand” knowledge. That’s the connection between hearsay and direct knowledge.

In this case, it is clear that the statement—“I saw Davis forge the checks”—is offered for the truth of the matter asserted. Payne is trying to prove that Davis forged the checks. The statement is that Davis forged the checks. So, the statement is offered to prove the truth of the matter asserted.

But trust me, the “truth of the matter asserted” is where the hearsay rule gets hard. It’s the part that even some judges and lawyers struggle to understand. And that’s before we even get to the exceptions.

Let’s start with a relatively easy example where a statement is not offered for the truth of the matter asserted.

“Ms. Payne,” I say, “please take a look at Plaintiff’s Exhibit 10, is that an email from Ms. Davis to your bookkeeper?” “Yes,” Payne says. “What did Ms. Davis say in the email?” I ask. “She said can you please take care of getting the attached invoice paid,” Payne answers.

Here, the statement in the email is clearly an out of court statement. But is it offered for the truth of the matter asserted?

It depends on what I’m trying to prove. Let’s say that the point is to prove a scheme to submit fraudulent vendor invoices on behalf of a company that Davis secretly owned. In that case, I am not offering the email for the truth of the matter asserted. If anything, I’m offering Davis’s statement in the email to prove the opposite of what it asserts.

So in this case, if opposing counsel says “objection, hearsay,” the judge should say “overruled.”

Harder Cases

But it’s not always this easy. Sometimes, a statement is offered both for the truth of the matter asserted and for another purpose.

Let’s say I’m trying to prove that Davis secretly accepted a job offer from Paula Payne’s fierce competitor, Real Cheap Windows. “Mr. President of Real Cheap Windows,” I say, “what did Ms. Davis say to you when you offered her a job at your company?” His response: “she said yes I would like the job.”

“Yes I would like the job.” That’s an out of court statement. But is it offered for the truth of the matter asserted? Well, yes. And no.

On the one hand, I am trying to prove that Davis wanted the job and accepted the job offer. So the statement is hearsay, right?

No, not really. Here’s the thing. It’s not a question of whether the statement “I would like the job” is true or not. The relevant fact is that Davis accepted the job offer.

As my law school Evidence professor used to say, it’s a case where the “saying of the words” itself, not the truth of the words said, is significant. You could also call this a “verbal act.” Some older court opinions tend to call this sort of statement res gestae (“things done”).

Another way to put it: the statement is not hearsay because the probative value of the statement does not flow from the speaker’s belief in the truth or falsity of the statement.

Confused yet? That’s ok. It’s a subtle distinction.

And, frankly, it’s one that a lot of judges may struggle to grasp. Picture this:

Me: What did Ms. Davis say when you offered her the job?

Opposing Counsel: Objection, hearsay.

Me: Your Honor, it’s not hearsay, it’s a verbal act. 

Judge: Verbal act? What exception is that?  

Me: Uh, that’s not really an exception per se. It’s just that the statement is not hearsay because, well I’m not so much offering it to prove the truth of the matter asserted. 

Judge: You’re not offering it to prove she accepted the job?

Me: Well yes, your Honor, I am trying to prove she accepted the job, but . . .

You get the idea. It’s hard enough to explain this subtle distinction. It’s even harder in the heat of a courtroom battle, especially when opposing counsel is happy to contribute to the judge’s confusion.

Luckily, in this case there is an easier way out of the problem. I could simply say “it’s an admission by a party opponent, your Honor, an exception to the hearsay rule.”

This leads me to my Hearsay Practice Tip for lawyers: If a hearsay exception clearly applies and is easy to explain, argue the exception first, rather than trying to make a subtle argument about the “truth of the matter asserted.”

Hearsay Exceptions 

I promised we would get to the exceptions.

But first, there is a slight complication. There are two different types of hearsay exceptions. First, there are exceptions that are defined as “not hearsay.” If they are not hearsay in the first place, then you might say they are not “exceptions” at all, but let’s not be pedantic. Second, there are exceptions for certain types of statements that are admissible, even though they are hearsay.

For simplicity, let’s just call both types hearsay “exceptions.”

I once made it a goal to memorize all of the hearsay exceptions. I count 31 of them in the Federal Rules of Evidence and 30 in the Texas Rules of Evidence (they are largely the same).

My heart was in the right place, but this was not an efficient exercise. I mean, it’s great to know that there is an “ancient documents” exception to hearsay, but over 90% of the time there are only a handful of hearsay exceptions a litigator needs to know.

You can probably get by with a thorough understanding of just three of the hearsay exceptions:

  1. Impeachment with prior testimony (like a deposition)
  2. Admission by party opponent
  3. The “business records” exception

You can look up the other exceptions when needed, or memorize them if you are really nerdy. But these three should be second nature to any litigator.

The first one, impeaching the witness with prior testimony, is a trial lawyer’s bread and butter. I probably don’t need to say much about it, although the rule has some little twists and turns that are worth checking.

Admission by Party Opponent

I shouldn’t have to say much about the second exception either, but maybe I need to anyway. I once had a trial where I offered an email from the opposing party’s president to an agent of my client. Opposing counsel jumped up and objected, “hearsay!”

“You’ve got to be kidding me,” I thought to myself. “Your Honor, this is an email from Mr. X as a representative of the company,” I said, “it’s an admission by a party opponent.”

“What exception is that?” the judge said. And this was not a new judge.

It took some discipline for me not to roll my eyes. Instead, I flipped open my Texas Rules of Court to Rule of Evidence 801. “Here it is, Rule 801(e)(2)(A), the statement is offered against an opposing party and was made by the party in an individual or representative capacity.”

Lawyers with trial experience know that exception should have been obvious to the judge. Maybe I was just being tested. And to the judge’s credit, the objection was overruled.

The Business Records Exception

Then there is the business records exception. The actual words are “records of a regularly conducted activity,” but everyone calls it the business records exception. It has a four-part definition they made us memorize in trial advocacy class, but the definition is pretty abstract. It’s easier to give examples: monthly bills, bank statements, receipts, invoices, etc.

Documents like these are admissible “business records” when they are “kept in the course of a regularly conducted business activity” and making the record was a “regular practice.”[3] Documents like these are routinely admitted in evidence even though they are hearsay. (But remember, just because they are admitted doesn’t mean they have to be accepted as true.)

In practice, the business records exception is the most formulaic hearsay exception. It leads to two rituals. First, the lawyer going through the four-part definition with a witness on the stand to “prove up” the business records. Second, the pretrial “business records affidavit,” a signed and notarized statement from a records custodian reciting the four elements of the definition and swearing that the 8,000 pages of attached records meet all those elements.

In both cases it is rare that the witness really has personal knowledge of how each record was generated. But everybody kind of “looks the other way.” Opposing counsel usually doesn’t want to be a jerk and object, knowing you could pull the same move when she offers her business records. And most judges don’t require proof of the business records exception that is truly based on personal knowledge.

That’s probably the way it should be, especially when it is obvious that the documents at issue meet the exception. If it’s the type of document that is clearly a business record—like a monthly bank statement—no time should be wasted going through the elements of the exception. It’s not the time to pull a “gotcha” and suddenly become a stickler for “personal knowledge.”

Direct Knowledge

Personal knowledge, which is essentially what people mean by “direct knowledge,” is important, but sometimes you have to rely on hearsay.

Imagine the owner of Paula Payne Windows gets a call from an anonymous tipster. “Paula, you don’t know me, but I’ve got some important information I feel I need to share with you. I have a friend who heard from someone who has reason to know, and that person said that Dawn Davis has been embezzling thousands of dollars from your business every month. You should probably look into it.”

What is Payne going to say? “I appreciate your call, Mr. Tipster, but I can’t rely on this information, because it is clearly hearsay. I’m not going to accuse someone of stealing based on secondhand information.”

No, obviously, that is not what Payne is going to do. She’s going to investigate this serious allegation to find out if it’s true.

So Payne calls Davis into her office the next day. “Dawn, I hate to ask you this, but I received an anonymous tip that you’ve been stealing money from the company. What do you have to say for yourself?”

“That’s hearsay!” Davis says. “That person doesn’t have any direct knowledge that I embezzled money from you.”

This response does not exactly inspire confidence. Wouldn’t you expect Davis to deny the tipster’s allegation, if it wasn’t true?

Which leads me to my Practical Tip for lawyers and non-lawyers alike: Don’t confuse courtroom rules of evidence with practical rules of life. People reasonably rely on “hearsay”—or secondhand knowledge—to make important judgments about business, politics, and life in general all the time.

Of course, testimony based on personal knowledge is generally more reliable than hearsay or other secondhand information. But it’s not everything.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] This is not really a problem, because of course most trial court judges are above average.

[2] More precisely, hearsay is “a statement that: (1) the declarant does not make while testifying at the current trial or hearing; and (2) a party offers in evidence to prove the truth of the matter asserted in the statement.” Fed. R. Evid. 801(c); Tex. R. Evid. 801(c).

[3] Rule 803(6).