Social Media in Litigation Part 2: Cleanup Time

Social Media in Litigation Part 2: Cleanup Time

A senior lawyer once said to me that “practicing law would be great, if it wasn’t for the clients.”

It’s a joke, of course. Lawyers couldn’t practice law without clients, and the clients pay the bills. So we definitely appreciate our clients.

But there’s no question that practicing law would be easier if we didn’t have to worry about the bad decisions our clients sometimes make.

Take social media, for example. In Part 1 of this series, I talked about lawyers using social media to do opposition research, i.e. to dig up dirt on the opposing party. Ethically, that’s generally ok as long as you limit your research to publicly available content and you don’t “friend” or communicate with the other party.

That sounds fun. But guess what? The lawyer on the other side is busy doing the same thing to your client. So, before you start scrolling through your adversary’s Facebook photos, you may need to advise your client about her own use of social media.

Here comes the hypothetical.

The continuing saga of Paula Payne v. Dawn Davis

As we know from last time, Dawn Davis left her sales job at Paula Payne Windows to work for competitor Real Cheap Windows. After getting sued for violating her non-compete, Dawn Davis hires litigator Maria Reynolds from the law firm Burr & Associates.

Reynolds, who is naturally suspicious after 20 years of litigation practice, Googles her own client and is appalled at what she finds. Right there on Dawn’s public Facebook page, Reynolds finds photos of Dawn downing margaritas at Matt’s El Rancho with the head of Real Cheap, two months before Dawn resigned from Paula Payne. Reynolds fires off an email to Dawn: “Dawn, delete that photo from Matt’s now, and clean up your Facebook page ASAP!”

Fortunately, Reynolds’ young associate, Peggy Schuyler, sees this email and politely suggests to Reynolds, “rather than deleting the photo, maybe we just tell Dawn to make her settings private so the other side can’t see it.”

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What will opposing counsel find on your client’s Facebook page?

Meanwhile . . .

Paula Payne’s lawyer, John Laurens, is discovering that not every problem can be settled by committee. He’s been so busy working on his firm’s dress code committee that he hasn’t had much time to focus on Paula Payne’s lawsuit. After having an associate slap together an Original Petition (that’s what we call the Complaint in Texas), Laurens neglects to tell his client anything about social media.

Laurens doesn’t even realize that the president of the company, Paula Payne herself, has launched a tweetstorm against Dawn Davis and Real Cheap. The latest salvo from Paula: “Real Cheap steals employees and customers from Paula Payne Windows. Sad! #LockedAndLoaded.”

What advice should lawyers give clients about using social media during litigation?

I sense a possible ethical violation here. But what is it? Which of these things will get a lawyer in ethical hot water?

(A) Advising the client to change her social media settings to make potentially relevant evidence private.

(B) Suggesting in writing that the client be cautious about using social media during the lawsuit and avoid posting anything that could be used as evidence against the client.

(C) Telling the client to stop using social media entirely while the lawsuit is pending.

(D) Instructing the client to remove a potentially relevant photo from Facebook but to send a copy of the photo to the lawyer to hold.

(E) Directing the client to “clean up your social media accounts” without any guidance.

(F) Failing to give the client any advice about using social media while the lawsuit is pending.

(G) Telling the client to delete a potentially relevant photo from Facebook, without saving a copy.

Seven choices! This is worse than the Property law final I had to take in my first year of law school. (Prof. Gerald Torres was a pretty cool guy, but his exam was ridiculous.)

But unlike the Rule Against Perpetuities, this issue is fairly intuitive. Based on the consensus emerging from ethics opinions across the US, the answers above are listed in order from most to least advisable.[1]

Answers (A) and (B) are not only ethical, but almost mandatory to meet the lawyer’s ethical duty of competence. Changing settings to private does not destroy or alter evidence, and telling a client to be cautious about what she posts is not telling the client to give false testimony. Plus, all lawyers these days should know enough about social media to give this basic advice.

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Defendant’s Exhibit 1?

I don’t see any ethical problem with Answer (C), telling the client to stop using social media entirely, but it seems like overkill. Social media has become an integral part of most people’s daily lives. Lawsuits can take years to resolve, and it would be unnecessarily onerous to tell a client she can’t use social media at all during that entire time.

Answer (D) is on the borderline. Remember that there is a legal duty to preserve relevant evidence. Whether that duty includes social media content may have been a novel issue back when MySpace was the next big thing, but it should be a no-brainer to everyone today. (Everybody loves to pick on MySpace.)

There are ethics opinions suggesting that a lawyer can advise a client to remove content from a social media account, provided that any evidence relevant to the lawsuit is preserved. So, for example, in a personal injury suit, you can remove that photo of the plaintiff wake-boarding the weekend after the accident, as long as you preserve a copy of the photo, which is likely to be requested in discovery.

But sometimes that won’t be enough to solve the problem. Suppose that the relevant evidence is not merely the photo itself, but the fact that the plaintiff posted the photo and commented on it. Or maybe there is a comment from a third party that is relevant. In those cases, preserving relevant evidence may require preserving the social media content itself. I suggest caution.

While (D) is debatable, it should be pretty obvious that Answers (E) through (G) can get you in deep doo-doo.

The only question here is whether I have (E) and (F) in the right order. Which is worse, giving a client bad advice to “clean up” her social media, or giving her no advice about social media at all? Remember that a lawyer has an ethical duty of competence, and claiming ignorance of social media is no excuse. See ABA Model Rule 1.1, Comment 8 (“To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology”). So giving no advice is only a little better than giving bad advice.

Finally, there is a technical legal term for Answer (G), telling the client to delete a potentially relevant photo from Facebook, without saving a copy: boneheaded.

Actually, the term is “spoliation,” which comes from the Latin word spoliare. Translated, it means “oh crap, Brutus, the judge is going to hammer us.” Deleting relevant evidence is intentional spoliation, which can lead to severe sanctions known, oddly, as “spoliation sanctions.”

And that’s a fate even worse than my first-year Property final.

*Houston-area lawyers, I’ll cover this and many other hot issues in upcoming presentations on Ethics of Social Media in Litigation on September 20 and September 27. Stay tuned to my Facebook page for more details.

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head-shot-photo-of-zach-wolfeZach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands.  

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.

This post is dedicated to John Lennon.

[1] See Florida Bar, Advisory Opinion 14-1 (2015); Pennsylvania Bar Association, Formal Opinion 2014-300 (2014); Philadelphia Bar Association, Opinion 2014-5 (2014); North Carolina Bar Association, Formal Ethics Opinion 5 (2014); New York County Lawyers Association, Formal Opinion 745 (2013). I could say more about these opinions, but I really can’t improve on Dallas lawyer John G. Browning’s 2015 article You Tweeted What?, which thoroughly discusses them.

Social Media in Litigation Part 1: Opposition Research

Social Media in Litigation Part 1: Opposition Research

Top 100 legal BlogsTexasBarToday_TopTen_Badge_VectorGraphicI remember learning that quantum physics theorizes that observing a situation or phenomenon necessarily changes it. I have no idea why, but that sounds cool.

This reminds me of an ethical question that comes up in almost every lawsuit: can a lawyer view an opposing party’s publicly available social media profile and posts?  The consensus answer is yes, if the lawyer merely views publicly available information without communicating with the opposing party.[1]

Without communicating with the opposing party. There’s the rub. How do you know when viewing the target’s social media will alert the target that you are doing the viewing?

You knew there was going to be a hypothetical

Let’s take my favorite fictional non-compete case, Paula Payne Windows v. Dawn Davis. Dawn Davis leaves her window sales job at Paula Payne and goes to work for a competitor, Real Cheap Windows. Paula Payne hires lawyer John Laurens from the litigation boutique Hamilton & Associates, and Laurens promptly files suit against Dawn Davis and Real Cheap.

Naturally, one of the first things Laurens wants to do in the lawsuit is some opposition research. He wants to know who Dawn Davis and Real Cheap are and what they’ve been doing lately.

The problem is that generally a lawyer is not allowed to communicate with an opposing party who is represented by counsel. (Let’s assume that Laurens knows that Dawn Davis and Real Cheap have hired a lawyer to handle their dispute with Paula Payne.)

There’s a minor complication for corporate parties. Questions arise about whether the rule against communicating with a represented party applies to employees of a company. It’s safe to say the prohibition applies to high-ranking executives. Whether the rule applies to lower-level employees is more debatable.

But let’s put that issue aside. My hypothetical assumes that Laurens is not allowed to communicate directly with Dawn Davis or Real Cheap.

It should be pretty obvious that Laurens can’t send a friend request to Dawn or Real Cheap, and certainly not on false pretenses. It should also be obvious that Laurens can’t get around this rule by having an assistant or third party do the dirty work for him.[2]

But it also seems obvious that lawyers are allowed to look at public information available on the Internet.

What can lawyers do?

So which of the following is Laurens allowed to do?

(A) Google “Dawn Davis” and “Real Cheap Windows” and see what pops up

(B) View every page of Real Cheap’s website

(C) Look at Dawn’s public profile on LinkedIn

(D) View Dawn’s Facebook posts that are publicly available

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Can a lawyer view an opposing party’s profile?

Surely there is nothing wrong with (A), Googling the opposing party’s name to see what information is publicly available. Same with (B). Just looking at a company’s website is not communicating with the company, right?

Answer (C), looking at Dawn’s public profile on LinkedIn, also seems innocuous at first glance.

But most of you have probably noticed that LinkedIn offers a “Who’s Viewed Your Profile” feature. As of the time I’m writing this, LinkedIn says here that the Basic (free) account allows you to view information about who has viewed your profile recently, while the Premium account allows you to see the entire list of viewers from the past 90 days.

This complicates things. If Dawn Davis can see that Laurens has viewed her LinkedIn profile, then Laurens may have crossed the border into prohibited-communication land.

The same issue can arise with (D). At press time, I don’t believe Facebook makes it as easy as LinkedIn does to see who has viewed your public profile or posts. But I’m sure there are ways that savvy Facebook users can do this, perhaps with the use of third-party software. Those of you who keep up with this sort of thing, please weigh in.

In any case, the fact that I’m not really sure how Facebook functions on this point just illustrates the problem. And even if I knew exactly how it worked, it could easily change tomorrow.

Creepy or convenient?

To avoid these complexities, I propose this general ethical rule: a lawyer can observe publicly available social media content of an opposing party, as long as the lawyer does not communicate with or harass the party through the social media platform, even if the party becomes aware of what the lawyer did.

I would analogize to a lawyer driving by an opposing party’s house.

Yes, millennials (everybody loves picking on millennials), there was a time before social media when litigators would drive by an opposing party’s home to get a little intelligence. What kind of neighborhood does he live in? Is the house expensive? How many cars parked in the driveway? What kind of cars? Bumper stickers? Any boats? Even in a digital age, these little analog facts might tell you something useful.

I don’t think anyone would argue that simply driving by an opposing party’s house is a prohibited communication–even if the party happens to look out the window and see the lawyer. Taking a quick look at someone’s recent social media posts—assuming they are publicly available—seems similar in principle.

Of course, there are also ethical limits on harassing people, and harassment is a little harder to define. Simply driving by someone’s house is one thing. What about slowly driving back and forth in front of their house ten times and staring at their kids playing in the front yard? At some point, observation can cross the line into harassment.

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Is LinkedIn out of bounds?

I think the same holds true for social media. At some point, a lawyer’s surveillance of publicly available social media content could become obtrusive to the point of being creepy. And it’s a more sensitive issue if we’re talking about investigating members of a jury pool, a distinct issue I will address in a later post.

But in general, I don’t think the mere fact that a party to litigation becomes aware that he is being observed by an opposing lawyer means that the observing is a prohibited communication with a party represented by counsel.

Where do we draw the line?

This view is not universal. I have seen the position that a lawyer cannot view an opposing party’s social media content if the observed person can see that the lawyer has done so. But if you’re going to take that position, where does it stop, where do we draw the line?

Remember Answer (B) about viewing a company’s website? We all agreed that was ok, right? Well I’m willing to bet that many companies have some sophisticated ways of determining who has viewed their website. Does that mean we’re going to say websites are off limits?

It seems too burdensome to place the burden on the lawyer to determine what kind of digital footprint she’s going to leave each time she views something that is publicly available on the Internet.

Technology changes. Social media sites constantly update their features and terms of use. People alter the settings on their social media accounts. This makes it impracticable to lay down fixed rules for lawyers like “you can view a public Facebook profile, but not a public LinkedIn profile.”

So if it were up to me, I would not prohibit John Laurens from viewing Dawn Davis’s public social media account just because Dawn might become aware she’s being watched. Let’s leave the “observer effect” to quantum physics. Whatever that is.

*Houston-area lawyers, I’ll cover this and many other hot issues in a presentation on Social Media in Litigation on September 20.  Stay tuned to my Facebook page for more details.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands. 

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] See Oregon State Bar, Formal Opinion No. 2013-189 (2013) (lawyer may access publicly available information on a social networking website); San Diego County Bar, Legal Ethics Committee, Opinion 2011-2 (2011) (“Nothing blocks an attorney from accessing a represented party’s public Facebook page,” but the attorney may not make an ex parte friend request of a represented party); New York State Bar Association, Committee on Professional Ethics, Opinion 843 (2010) (lawyer may view the public Facebook or MySpace (!) pages of opposing party in litigation so long as the lawyer does not “friend” the other party or direct a third person to do so).

[2] I would have thought these were no-brainers, but there have been ethics opinions seriously grappling with these issues.  See the San Diego and Oregon bar opinions cited above.

I’ll Sleep When I’m Dead: The Ignored Epidemic in the Legal Profession

I’ll Sleep When I’m Dead: The Ignored Epidemic in the Legal Profession

TexasBarToday_TopTen_Badge_VectorGraphicThere is an epidemic in the legal profession, one we don’t like to talk about. It affects other professions as well. It stresses our minds, weakens our mental and physical health, and strains our relationships with family and friends.

Alcoholism? Drug abuse? Depression? Yes, those are serious problems that disproportionately afflict lawyers. But I’m talking about something else: sleep deprivation. You know the problem is real when a prominent law firm installs napping pods in its break room.

We just don’t get enough sleep. See Law Is Second-Most Sleep-Deprived Profession. And usually our sleep deprivation is coupled with a physical addiction to caffeine or other stimulants. Now, being addicted to a double tall cappuccino is not the worst thing in the world (it’s $3.95 with tax), but it’s an addiction nonetheless.

The curious thing about this epidemic is that it is widely acknowledged but just as widely ignored. Imagine you’re the managing partner of a law firm. Would you allow lawyers to work while drunk? Of course not. But see Studies Show Sleep Deprivation Performance Is Similar to Being Under the Influence of Alcohol. When was the last time you heard a law firm partner say “listen, John, I’m really concerned about you coming to work without getting enough sleep”?

Lawyers react to the epidemic

If you tell a lawyer he or she is not getting enough sleep, you’re likely to get one of these reactions:

The “NSS” response. This stands for, as we used to say in junior high, “No S**t, Sherlock.” This response acknowledges the problem but shrugs and says, “hey, that’s life, what are you gonna do?”

The “Macho” response. This one sounds like a lament but actually celebrates the problem. “Yeah, last month was rough, I billed 250 hours and only slept four hours a night.” It wears sleep deprivation as a badge of honor, like a commando talking about sitting in frigid water for hours during Navy SEAL training.

Denial. “I know I should be getting more sleep, but I get by once I’ve had my morning coffee. It’s not that big a deal.”

And you can just imagine the lack of sympathy you’ll get from a non-lawyer. “Yeah, it must be tough making $250K a year and not getting enough sleep. Well, my dad was a bricklayer and worked two full-time jobs just to put food on the table.” Or the white-collar version: “You lawyers should stop whining; try working an overnight shift in the ER.”

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Liquid job performance?

Ok, I respect that (sort of). But the thing I find most interesting about these typical responses is that they ignore a crucial question: how does sleep deprivation affect job performance?

People tend to look at sleep and work as competing priorities. It turns into a debate: sensitive souls who say you shouldn’t sacrifice your personal life to get ahead in your profession vs. tough guys who say “I’m going to grind while you sleep.”

But what if we’re looking at this all wrong? What if getting more sleep would improve job performance?

Another paradigm: professional athletes

There’s a different profession that takes a fundamentally different view of sleep and job performance: professional sports. Most elite athletes take sleep pretty seriously.

Granted, even in professional sports, there is some celebration of sleep deprivation. This is especially true of NFL quarterbacks. We venerate the QBs who supposedly get to the team facility every morning at 5 am and stay up late at night watching film.

But that’s the exception, not the rule. Most professional athletes understand you can’t stay in peak physical shape on five or six hours of sleep. They also know that getting enough sleep is crucial to mental sharpness. In fact, many professional athletes are almost obsessive about getting an amount of sleep you might consider excessive. Houston Texans superstar JJ Watt reportedly tries to go to bed at 7:30 pm during the season.

Even quarterbacks, the guys we picture staying up until 2 am breaking down defenses, understand this. One NFL quarterback said, “I think sleep is so important because I break my body down so much with my sport.” He said he usually goes to sleep by 9 pm, and even earlier during the season. His name? Tom Brady.

So what if lawyers and other professionals approached sleep and job performance like athletes do?

Unfortunately, the legal profession tends to measure performance by the number of hours worked. This insidious notion is embedded in everything lawyers do. To wit: when law firm accounting software generates a “productivity report,” it’s just a tally of the number of hours lawyers billed. That’s obviously not real productivity.

In contrast, no one really cares how many hours an athlete works ahead of time. Productivity in sports comes down to one thing: winning. And sleep-deprived athletes are not going to win. At least not consistently.

“Overworked associates of the world, unite”?

Some of you are rolling your eyes. You’re thinking this sounds like just another touchy-feely article calling for “work-life balance” and criticizing big law firms for working lawyers too hard.

But my point is not to take up arms with BigLaw associates against management. Lawyers at big law firms get paid a lot of money and usually know what they’re getting into.

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What if lawyers approached sleep the way elite athletes do?

I’m more concerned with another constituency: clients. Clients are to law practice what fans are to professional sports. They pay the bills, and they suffer when the team doesn’t perform at its best.

When sleep-deprived lawyers bill hundreds of caffeine-fueled hours doing mediocre work, it’s not the clients who benefit. Generally, clients would be better served by razor-sharp mental focus and efficiency.

That’s where the professional athlete paradigm is superior. The application to trial lawyers is obvious. Clients don’t care how many hours you worked leading up to the trial; they want to see you perform your best and win on game day, when it really matters.

But the professional athlete model isn’t limited to trial work. Every significant client “deliverable” is like a mini-game day, whether it’s drafting an agreement, taking a deposition, or arguing a hearing. Instead of racking up hours, lawyers should be focused on winning each game.

Objections to the professional athlete paradigm

So what are the major objections to my proposed paradigm shift? Here are the things I expect lawyers to say.

1. My job is mental, not physical.

An athlete who repeatedly shows up to games physically exhausted is not going to perform well. But admittedly, this is not a perfect analogy. Lawyers don’t have to be in elite physical condition to get their work done. (But see 7 Things Physical Fitness Teaches You About Professional Success.) Their job is primarily mental, not physical.

So, there is a grain of truth to this response, but the problem with it is obvious. Nature doesn’t respect the physical/mental dichotomy the way we do. Your brain is physical, and it’s not going to fire on all cylinders when you don’t get enough sleep.

2. There is no way I can get enough sleep and get all my work done.

Hey, I get it. Sometimes you have 18 hours of work to get done and only 24 hours to do it, whether it’s filing a brief in an appeal or finalizing a contract for a major transaction. Getting a full night’s sleep is just not an option.

But in the long run, is getting less sleep really helping you get your work done?

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Not going to hit my billables this month

Let’s say you typically sleep 6 hours and spend 11 hours at the office. I bet you’re tired and not all that focused during those 11 hours, and you probably waste a couple hours doing unproductive stuff because your mind is weary.

What if you slept one more hour and spent one less hour at the office? I’d be willing to bet that with the energy you gain from one more hour of sleep, you could get the same amount of work done in less time.

3. But there is no way I can get enough sleep and meet my billable hours requirement.

If this is true, then you’re probably working for the wrong law firm. Find a firm that values doing excellent work on time, not filling a billable-hours quota by doing busy work.

4. To get more sleep, I would have to sacrifice family time or some other personal priority.

This is the toughest one. The reality for many of us is that spending more time sleeping would mean no time for coaching our kid’s soccer team, meeting friends after work, exercising, reading, doing a hobby, etc. We don’t want to be robots who do nothing but work, eat, and sleep.

But I’m not necessarily saying you need to sleep more (although you probably do). I’m proposing a change in your mindset. Lawyers and other professionals would improve their job performance—and make clients happier—by thinking less like assembly-line workers and more like professional athletes.

Lawyers who manage other lawyers would also benefit from this paradigm shift. But I fear they are a lost cause. You’ve got to pick your battles.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Dallas Cowboys fan who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands. 

These are his opinions, not the opinions of his firm or clients. Citations to Tom Brady do not reflect endorsement of the New England Patriots, although a team that wins that many Super Bowls in the salary-cap era deserves a little grudging respect.

Learning by Rote: Non-Competes for Insurance Agencies

Learning by Rote: Non-Competes for Insurance Agencies

TexasBarToday_TopTen_Badge_VectorGraphicBig insurance companies spend millions on advertising to convince people they provide a better product than their competitors. But the typical home and auto policies consumers buy are written on standard industry-wide forms, so the coverage options are not that different. The same is true for the CGL (Commercial General Liability) policy, the typical liability insurance businesses buy.

There are, of course, differences between insurance companies in financial strength, claims handling, and price. But the coverage they provide is fairly standardized. So it is only a slight exaggeration to say that insurance agents, especially independent agents, are selling an essentially fungible commodity.

So how do insurance agents differentiate themselves? It comes down to two things: personal relationships and customer service. If you can get insurance anywhere, you’re going to prefer an agent you know personally, and you’re going to stick with an agent who provides good customer service.

This creates a legal problem for insurance agencies that want to protect their assets. The law protects an insurance agency’s information in several ways: trade secrets law, enforcement of confidentiality agreements, the “Fiduciary Duty Lite” owed by an employee.

But the most valuable assets insurance agencies “own” are the personal relationships with customers. Accountants call this goodwill. It is literally the “good will” that a customer has towards a business.

People in the insurance industry call this a “book of business,” as if the book can simply be moved from one agency’s shelf to another’s. But the problem for insurance agencies is that the goodwill is usually directed at an individual not at an agency. This means that most of the value in an insurance agency is found in the personal relationships of the individual agents.

The agency must not allow the agents to discover this fundamental truth. If the agents ever found out the agency owner is making profits off their relationships, surely the agents would take to the streets and throw off the yoke of oppression. Insurance agents of the world unite, you have nothing to lose but your chains!

There must be a way for insurance agencies to prevent this and save capitalism as we know it. That’s where non-competes come in.

Enforceability of insurance agency non-competes

The more interchangeable the product, the more important it is to maintain goodwill with your customers. But goodwill is a relationship, not information. So there is really only one legal device to prevent employees from taking goodwill: a non-compete. Naturally, insurance agencies, like many other businesses, will often require their insurance agents to sign non-competes.

The legal problem is that a non-compete is a restraint of trade, and restraints of trade are generally illegal. I say “generally” because most states recognize an exception for non-competes. These states only differ on the size and contours of the exception.

If we had to sum up the Law of Non-Competes in the states that allow them, we could say this: there must be consideration for a non-compete, and the non-compete must be reasonably limited to the purpose of protecting the company’s goodwill with its existing customers.[1]

Just about every state that allows non-competes follows some variation on this theme. When courts find that non-competes are unreasonable, it is usually because they are too broad in time period, geographic area, or the scope of activity they prohibit.

Case study in insurance agency non-competes: Allstate v. Rote

Let’s use a recent case to illustrate how these typical requirements for non-competes can apply to an insurance agency.

In Allstate v. Rote, the agent signed an Exclusive Agency Agreement that contained a one-year non-compete. For one year following her termination, the agent could not solicit any person in competition with Allstate:

(1) who bought insurance from the agency and was an Allstate customer at the time of termination;

(2) who was an Allstate customer at the time of termination and who the agent discovered as a result of her employment with the agency and access to Allstate confidential information; or

(3) from within a one-mile radius of the agency office.[2]

In short, the Allstate non-compete barred the insurance agent from soliciting any insurance customers from within a one-mile radius, or soliciting the agency’s customers anywhere.

The court considered whether this non-compete was enforceable under Oregon law. Like Texas and many other states, Oregon requires that a non-compete be supported by consideration, limited in time and geographic area, and reasonably limited to protecting the company’s interests.[3]

The judge found that the Allstate non-compete met these requirements: the appointment as exclusive agent was sufficient consideration, the non-compete protected Allstate’s legitimate interests in its customer relationships and confidential information, and the one-year time period and one-mile radius were reasonable.[4]

But the judge denied Allstate the injunction it wanted. While the judge granted an injunction to protect Allstate’s confidential information, he declined to enjoin the agent from competing.[5]

Why? Well, as with any injunction, to get an injunction to enforce a non-compete against an insurance agent, it’s not enough for the company to prove the non-compete is enforceable.[6] The company also has to prove that an injunction would be fair.

Non-compete injunctions

Different jurisdictions formulate injunction requirements differently, but in essence it comes down to three words: imminent, irreparable, and equitable. First, there must be an “imminent” threat of harm to the plaintiff, meaning the harm is about to happen. Second, the threatened injury must be “irreparable,” meaning money damages are inadequate to compensate the plaintiff. Third, the injunction must be “equitable” and serve the public interest.

“Equitable” is just a fancy legal word for “fair,” so let’s say the third requirement is that the injunction must be fair to the defendant and to the public.

As a litigator who reads a lot of injunction cases (you can read about some non-compete injunction cases here), I should warn you to take these theoretical requirements with a large grain of salt. For example, courts often water down the “irreparable injury” requirement so much that it becomes almost meaningless. For example, in the Rote case, the judge had to follow Ninth Circuit law, which apparently says that a breach of a non-compete causes irreparable harm “[b]ecause the harm is intangible and difficult to quantify.”

Time out for a quick rant. It always bugs me when courts say this kind of thing. It is just wrong to suggest that the harm resulting from breach of a non-compete is always “intangible” and “difficult to quantify.” In many cases, the harm will be quite tangible and relatively easy to quantify: the amount of profits the company lost as a result of its customers buying a product from the former employee rather than the company.

Now back to the requirements for injunctions. Judges also vary widely in how much weight they give the third factor: equity and the public interest. Courts often brush aside these considerations with a rote statement to the effect of “enforcing reasonable non-competes is in the public interest, therefore an injunction here will not disserve the public interest.”

But some judges, like the one in Allstate v. Rote, take this requirement more seriously. As to Allstate’s demand that Rote cease operating out of her former agency location, Judge Hernandez said “[t]he controlling consideration is the harm that Allstate would suffer from the erroneous denial of a preliminary injunction compared to the harm Rote would suffer from the erroneous grant of such relief.” Considering the fact that Rote had signed a five-year lease at her office location, the judge found that granting the injunction would cause Rote “severe financial loss and ability to sustain her profession.” This tipped the “balance of equities” in Rote’s favor.[7]

So, Allstate v. Rote shows us that even when an insurance agency non-compete is reasonably limited, the judge may decline to enjoin an agent from competing, especially where an injunction would cause the agent significant financial hardship.

Fact issues in insurance agent non-compete cases

Lawyers who enforce non-competes can sympathize with Allstate’s counsel. They are all too familiar with the employee’s lament of “judge, how can I possibly make a living and put food on my family’s table if you enforce this non-compete?” It’s an occupational hazard. But that’s not the only problem for an insurance company, or any company, that tries to enforce a non-compete.

There is also the “fact issue” problem. Insurance company non-competes tend to be especially susceptible to this. Often the insurance company will do what Allstate did and limit the non-compete to “solicitation” of customers. This makes it more likely the non-compete will be found reasonable and, therefore, enforceable.

The problem is that whether the insurance agent “solicited” the agency’s customers is often a fact in dispute.

Let me put it in terms lawyers will understand. Let’s say you’re a litigator who has seven active litigation matters. You leave your law firm to go to another firm. You call each of your seven active clients say, “I just wanted to let you know I’ve joined the firm of Burr & Hamilton; you are free to decide whether to stay with my old firm or not.” Has the lawyer just “solicited” the clients?

Different people will interpret “solicit” differently, plus there may be a dispute about exactly what was said on each phone call.

This was the issue in Allstate v. Sidakis. In that case, Allstate claimed that the defendants solicited Allstate customers in violation of a non-compete. Allstate even produced signed statements from customers claiming they were solicited. But the defendants denied this, and the court found that the conflicting testimony presented a fact issue for trial.[8]

This problem is compounded by the fact that customers, who don’t want to be treated like property and told where they can and can’t buy insurance, are usually not inclined to testify in support of the insurance company.

Put all this together and you get fact issues. That means the judge cannot grant summary judgment, and the case has to go to trial. And a trial means more time and money. A lot of money (I explain how much in this video).

Good for lawyers. Not necessarily good for insurance companies, agencies, and agents. They’re already spending a lot of money on all those commercials.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands.

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] Please don’t take this generalization as legal advice for your situation; consult with a lawyer about the law in your state.

[2] Allstate Ins. Co. v. Rote, No. 3:16-cv-01432-HZ, 2016 WL 4191015, at *1-2 (D. Or. Aug. 7, 2016) (unpublished).

[3] Id. at *4 (citing Nike, Inc. v. McCarthy, 379 F.3d 576, 584-85 (9th Cir. 2004)).

[4] Id.

[5] Id. at *7.

[6] In Texas, there are some cases suggesting that the traditional common law requirements for an injunction do not apply to an injunction to enforce a non-compete, which is governed by statute. This is currently an open issue under Texas law.

[7] The judge also cited the important factor that there was no evidence that Rote had taken any business from Allstate by operating from her former agency location. Id. at *6. Perhaps the equities would have tipped back towards Allstate if Rote had been actively poaching Allstate customers.

[8] Allstate Ins. Co. v. Sidakis, No. 13-CV-7211, 2016 WL 556869, at *5, 8 (E.D.N.Y. Feb. 10, 2016) (unpublished).

How (Not) to Handle Bad Emails in Litigation

How (Not) to Handle Bad Emails in Litigation

TexasBarToday_TopTen_Badge_VectorGraphicBad emails. Trial lawyers love them and hate them. When your client sends them, there’s nothing worse. When the person you’re suing sends them, there’s nothing better.

Scratch that. There is one thing better: when the person you’re suing changes his story after you confront him with bad emails he didn’t know you had.

Let’s consider a hypothetical.

Paula Payne Windows v. Dawn Davis

Dawn Davis was a salesperson for Paula Payne Windows, a wholesaler that supplies windows to builders in the construction industry. Paula Payne maintained a Master Customer List containing detailed information about all of its customers.

Dawn had a friend, Bob Coldstone, who did marketing for Real Cheap Windows, one of Paula Payne’s competitors. In June 2016, Bob emailed Dawn to set up a meeting with Natalie Vessel, the owner of Real Cheap. Bob said Natalie wanted to discuss Dawn joining Real Cheap.

The series of ensuing emails between Dawn and Natalie included these statements:

  • Dawn: “I can get you all the pricing information you want. I know my way around the network here like nobody else.”
  • Natalie: “Will you be able to bring all the information you need with you?”
  • Dawn: “The master customer list is password-protected, but guess who has the password?”
  • Natalie: “I hope Paula Payne will drop this idea of going after our customers.”

One month later, in July 2016, Paula Payne had a senior sales staff meeting to discuss moving more aggressively into a sales territory dominated by Real Cheap. Dawn Davis pushed back on the idea, saying that it would be difficult to compete with Real Cheap on prices, and that Paula Payne should focus on its existing customers. Heeding Dawn’s advice, the sales team dropped the idea.

In November 2016, Dawn announced to Paula Payne that she was leaving the company. A day before leaving, Dawn emailed Paula Payne’s master customer list to her personal gmail account and copied all of Paula Payne’s sales records for the past 90 days to a USB drive.

After Dawn left, most of her customers stopped buying windows from Paula Payne. The company then discovered Dawn was working for Real Cheap. Dawn was selling windows to her customers from Paula Payne and starting to solicit additional Paula Payne customers.

Dawn’s Deposition Testimony

Paula Payne sued Dawn Davis and Real Cheap Windows, claiming breach of Dawn’s non-compete, breach of fiduciary duty, and misappropriation of trade secrets. When Paula Payne’s lawyer took Dawn’s deposition, this exchange happened:

Screen Shot 2017-07-15 at 9.33.02 AM

Screen Shot 2017-07-15 at 9.34.45 AM

At trial, Paula Payne’s lawyer played the video of this portion of Dawn’s deposition. After finding that Dawn and Real Cheap misappropriated trade secrets, the jury found lost profits damages of $989,000, the amount calculated by Paula Payne’s expert.

Afterwards, one member of the jury commented to Dawn’s lawyer, “your client seemed pretty nice, but those emails just killed her.”

So where did Dawn Davis and her lawyer go wrong?

How Not to Handle Bad Emails

Paula Payne v. Dawn Davis is a case study in how not to handle bad emails in litigation. If you want to maximize your client’s exposure at trial, here’s what you should do.

1. Don’t find bad emails ahead of time and discuss them with your client

The first time Dawn’s lawyer focused on the emails marked as deposition exhibit 7 was in the deposition. By then, Dawn had already blown her credibility by making statements in conflict with the obvious import of the emails.

You need to know about the bad emails ahead of time. This point is obvious, but neglected more often than you might think.

Plus, even when lawyers are diligent, reviewing every email isn’t always feasible. Sometimes the volume of documents is just too large. Some clients can’t afford to pay for a team of BigLaw associates to review and code every document.

If finding all the bad emails ahead of time isn’t practical, then at least admonish your client to tell the truth and not to trust her memory too much. People have a great capacity to remember things happening in a way that supports their position. (This is true—I’m not just being sarcastic). When Dawn said Natalie never asked about prices, she may have thought that was true, but that’s the kind of statement a witness shouldn’t make unless she’s absolutely sure.

2. Conceal and delay as long as possible

If you do find the bad emails ahead of time, what do you do with them? Let’s assume that Dawn’s lawyer found the bad emails on Dawn’s hard drive but didn’t produce them in discovery. The problem was that Paula Payne’s forensic expert found them by restoring deleted emails on Paula Payne’s server.

This leads to the worst of both worlds: the bad emails eventually come out and they look even more incriminating because Dawn concealed them.

3. Pretend bad emails don’t mean what they obviously mean

It’s a deposition ritual to ask the witness to admit that a bad email means what it obviously implies, even if it doesn’t say it explicitly. Take Natalie’s statement, “I hope Paula Payne will drop this idea of going after our customers.” What should Dawn say when asked if Natalie was asking her to make sure Paula Payne dropped the idea?

It always depends on the circumstances, but if it’s obvious that Natalie was asking Dawn to stop Paula Payne from going after Real Cheap’s customers, then Dawn should freely admit that. Don’t pretend a bad email doesn’t mean something that everyone on the jury will know it means.

4. Dispute everything rather than focusing on your strong points

There is a certain type of litigator that follows an easily recognizable playbook: Contest every issue. Concede nothing. Attack on all fronts.

That approach can have short-term benefits, but it usually doesn’t end well. Plus, it tends to cost the client more money. It is usually better to concede the bad facts you ultimately can’t avoid, and to focus your efforts on the good facts that help you.

For example, Dawn Davis didn’t want to concede that she took Paula Payne’s master customer list to her new employer, Real Cheap. Perhaps a better approach would be for Dawn to admit she took the list, but to focus on the argument that the list is not a trade secret. If it’s true that anyone in the industry can readily construct the same list of builders who buy windows, then Dawn and her lawyer should focus on that fact.

5. Don’t have your client practice answering questions about bad emails

The first four tips are great in theory, but they won’t help your client much if you don’t practice. Answering tough questions about bad emails is not easy. Rehearse how your client will answer hard questions about bad emails ahead of time.

And be careful responding to emails after 10 pm when you’ve had a long day at work. That’s how bad emails are born in the first place.

*Nominations for the ABA Journal’s Web 100 (formerly the Blawg 100) are open through July 30. You can submit your nominations here. Please, no wagering.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

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.

“Is that a yes? Uh, yes” inspired by Lin-Manuel Miranda, “We Know,” Hamilton.

Texas Supreme Court Raises the Bar for Trade Secrets Damages–Again

Texas Supreme Court Raises the Bar for Trade Secrets Damages–Again

Horizon v. Acadia finds expert’s assumptions too speculative to support lost profits verdict

Mamas, don’t let your babies grow up to be damages experts in Texas.

That’s the refrain CPAs may feel like singing after the Texas Supreme Court recently raised the bar for proving lost profits damages in trade secrets lawsuits—again.

It started in 2016 with Southwest Energy v. Berry-Helfand, where the damages expert calculated lost profits for misappropriation of oilfield trade secrets by assuming a flat reasonable royalty rate of 3%, which was consistent with industry standards. As I reported here, the Texas Supreme Court said this opinion was faulty because the information available to the expert would have allowed for a more precise calculation.[1]

More recently, the Texas Supreme Court addressed trade secrets damages again in Horizon Healthcare v. Acadia Healthcare. The court rejected the expert’s calculation of lost profits damages because it was based on assumptions about causation and profitability of contracts that were not supported by the evidence.[2]

Horizon had somewhat complicated facts, but in essence it was a typical departing employee case where a management group left a company to work for a competitor:

  • Horizon provided contract management services to healthcare providers
  • Four Horizon executives, the “Saul group,” signed non-competes with Horizon.
  • The Saul group began negotiating to join Acadia, a Horizon competitor.
  • The Saul group solicited Piechocki, a successful Horizon salesman, to join them in moving to Acadia.
  • Shortly before leaving, Saul secretly copied a “massive amount” Horizon documents to an external hard drive.
  • The copied documents included contracts, financial models, and lists of Horizon’s sales leads.
  • After leaving Horizon to join Acadia, the former Horizon employees began competing with Acadia and soliciting Acadia’s clients.

If you think these facts are bad, you should read some of the emails recounted in the Court of Appeals opinion. But bad facts don’t necessarily make a good damage model.

The facts concerning damages were a mixed bag. Here is what Horizon’s damages expert had to work with:

  • After leaving Horizon, Piechocki used Horizon’s financial models to win a contract from Westlake.
  • Westlake was on Horizon’s “lead list” but was not a Horizon client.
  • Horizon did not lose any existing clients to Acadia.
  • Piechocki was an at-will employee without a non-compete who could have left Horizon at any time.
  • Piechocki was Horizon’s best salesperson.

So, if you represent Horizon, how do you work with your expert to construct a defensible damages theory?

Keep in mind that Texas law does not require lost profits damages to be “susceptible of exact calculation.” Lost profits must be calculated with “reasonable certainty.”[3]

As I explained here when I reported on the oral argument in Horizon, calculating lost profits damages requires entering a hypothetical world. The question is how much profit the plaintiff would have earned if the defendant had not used the plaintiff’s trade secrets, breached the non-compete, etc. This necessarily requires making assumptions.

Assumptions made in Horizon v. Acadia – the Westlake contract

Take the Horizon case as an example. To calculate lost profits based on the Westlake contract, Horizon’s expert assumed that Westlake would have signed a similar contract with Horizon if it had not signed the contract with Acadia. Based on that assumption, the expert calculated lost profits of $898,000 on the Westlake contract, and the jury included that amount in its verdict.[4]

Was it a mistake for the expert to assume Horizon would have won the Westlake contract? Not necessarily. To prove causation, Horizon had to show it would have obtained the contract but for the defendants’ wrongful conduct. It was an essential assumption.

But was it a reasonable assumption? The challenge for the plaintiff’s lawyer is that there must be evidence to support the assumption. The strategic question is how to support the assumption: with expert opinion or with some other evidence?

Often it will be better to prove the assumption with other evidence. Financial experts are good at crunching numbers, so it’s pretty easy for them to calculate the amount of profits that would have been made on a contract. But whether the plaintiff would have gotten a contract is another story. On that issue, a CPA doesn’t necessarily have any special insight that an ordinary jury member doesn’t have.

The problem for Horizon was not so much that the expert made the assumption, but that there was insufficient evidence to support the assumption. The Texas Supreme Court said it was “pure speculation” to assume Horizon would have won the Westlake contract if the defendants had not. This was especially true given the fact that there was no evidence that Horizon would have included a specific $150,000 incentive that Acadia included in its bid. Thus, “Horizon failed to establish the fact of damages relating to the Westlake contract with reasonable certainty.”[5]

Assumptions made in Horizon v. Acadia – Piechocki’s future contracts

The Westlake contract was not the only one lost. Horizon’s loss of Piechocki, its top salesperson, also caused Horizon to lose the future contracts Piechocki would have obtained if he had stayed at Horizon.

To quantify the lost profits for these hypothetical contracts, Horizon’s expert had to make assumptions about three issues:

(1) how long Piechocki would have stayed at Horizon

(2) how many contracts Piechocki would have generated at Horizon

(3) the amount of profits Horizon would have made on those contracts

Based on ten years of Horizon’s retention data for employees in Piechocki’s position, the expert provided two alternatives: Piechocki would have stayed either two years or four years. This was only an assumption, because Piechocki was an at-will employee not bound by a non-compete or any employment agreement. The court found there was some evidence to support this assumption, including testimony by Piechocki himself that suggested he would have stayed at Horizon if not solicited to work for Acadia.

There was also some evidence to support the assumption that the loss of Piechocki caused Horizon to lose future sales. This included an email from one of the defendants saying “I cannot think of a bigger body blow relative to impacting future new sales for Horizon than to get Piechocki out of there.”

But the Texas Supreme Court said there was no evidence to support the third assumption: the profitability of contracts Piechocki sold or would have sold had he remained at Horizon. In the court’s view, the specific problem with the expert’s calculation of lost profits was that it was based on the historical profitability of Horizon contracts generally, rather than the historical profitability of Piechocki’s Horizon contracts. The court held that the absence of evidence showing the profit associated with Piechocki’s sales was “fatal” to Horizon’s lost profits claim.[6]

A trend of nit-picking expert calculations of lost profits damages

I see the logic in the Horizon court’s criticism of the expert’s third assumption, but isn’t this getting a little nit-picky? The evidence of Horizon’s contract profitability generally seems like at least a scintilla of evidence of the profit Horizon would have made on Piechocki’s contracts. Remember that all it takes to uphold a jury verdict on appeal is some evidence (in theory).

But at least the Texas Supreme Court has been consistently nit-picky about lost profits damage theories lately. As mentioned earlier, the court did the same thing in Southwest Energy v. Berry-Helfand, finding that the reasonable royalty rate assumed by the expert was not precise enough.

So what practice pointers can prudent practitioners pry from this pair of persnickety opinions? First, if you represent the plaintiff in a lost profits case and you hire a damages expert, you need to work closely with the expert to identify the key assumptions underlying the expert’s calculations, and to evaluate whether the evidence will support those assumptions. If you don’t have the evidence, find another theory.

Second, the at-will status of departing employees is not necessarily fatal to proving causation. Yes, the Texas Supreme Court ultimately found there was insufficient evidence to support Horizon’s damage theory, but its opinion makes clear that an expert can make a reasonable assumption about how long an at-will employee would have stayed at the company, provided there is evidence to support the assumption.

That brings us to the third tip: Whatever assumptions the damages expert is going to make, the plaintiff’s lawyer must be prepared to offer evidence to support those assumptions.

Easy, right?

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. He correctly predicted that the Texas Supreme Court would not like the lost profits award in Horizon

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] Sw. Energy Prod. Co. v. Berry-Helfand, 491 S.W.3d 699, 720 (Tex. 2016).

[2] Horizon Healthcare Co. v. Acadia Healthcare Co., __ S.W.3d __, 2017 WL 2323106, at *5-8 (Tex. May 26, 2017).

[3] Id. at *4 (citing ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 876 (Tex. 2010)).

[4] Id. at *5.

[5] Id. at *6.

[6] Id. at *6-8.

A SLAPP in the Face to Texas Trade Secrets Lawsuits, or Much Ado About Nothing?

A SLAPP in the Face to Texas Trade Secrets Lawsuits, or Much Ado About Nothing?

Part 3 of 3 in my series

Fivers, you may be wondering why I have not yet reported on the Texas legislature’s recent amendments of the Texas Uniform Trade Secrets Act. I like trade secrets law. I like litigation. And I like making fun of whatever the Texas legislature does. So what gives?

Well, three things. First, you can already find other good reports on this topic, like Leiza Dolghih’s blog post here. Second, the recent changes to the Texas trade secrets statute, while important, are not that big of a deal. And third, I predict that recent court decisions applying the Texas Citizens Participation Act (TCPA) are going to be a bigger deal for Texas trade secrets litigation.

That’s because filing a motion to dismiss under the TCPA is likely to become a routine move by defendants in Texas trade secrets lawsuits.

Texas courts have held that the TCPA applies to claims based on disclosure of alleged trade secrets

So how did we get here? To recap Part 1 and Part 2:

  • The TCPA is the Texas “anti-SLAPP” statute intended to protect the “little guy” from nuisance litigation filed in retaliation for exercising free speech rights.
  • The TCPA allows the defendant to file a motion to dismiss that stays discovery and requires the plaintiff to offer evidence proving each element of its claims.
  • The purpose of the statute is to protect constitutional rights, but the Texas Supreme Court has instructed Texas courts to apply the “plain meaning” of the text, which is much broader.
  • In Elite Auto Body, the Austin Court of Appeals followed the Texas Supreme Court’s instructions and held that the TCPA applied to a company’s claim that its former employees communicated the company’s confidential information and trade secrets to a competitor.[1]

In Part 1, I explained how this issue provides a sort of case study for the “textualist” theory of statutory interpretation, which has received some airplay recently with Neal Gorsuch taking the Scalia seat on the Supreme Court. In Part 2, I hypothesized that the holding in Elite Auto Body is inconsistent with the legislature’s intent and suggested that this illustrates a problem with strict textualism.

But if you’re a lawyer or a party in a trade secrets lawsuit, you don’t care about all that. You want to know what Elite Auto Body means for your lawsuit.

Will it become routine for defendants in Texas trade secrets lawsuits to file motions to dismiss under the TCPA?

It seems likely that defendants in trade secrets lawsuits will now routinely file motions to dismiss under the TCPA. First, because Elite Auto Body says they can. Second, because it will usually be good strategy.

The crux of the Elite Auto Body decision was the statute’s broad definition of the “exercise of the right of association” as “a communication between individuals who join together to collectively express, promote, pursue, or defend common interests.”[2]

The court found that the plaintiff alleged two kinds of communications falling under the statute’s broad definitions: (1) communications between the departing employees and the second employer disclosing confidential information or trade secrets; and (2) communications with employees of the first employer to induce them to work for the second employer.[3]

So, in any case where the plaintiff alleges either (1) communication of the plaintiff’s trade secrets or (2) solicitation of the plaintiff’s employees, the defendants have the option to file a motion to dismiss under Elite Auto Body. I will even provide this Form Motion to Dismiss you can use if you want.[4]

Filing a motion to dismiss will often have benefits for the defendant:

  • The motion will take the wind out of the plaintiff’s sails by immediately staying discovery until the court rules on the motion.[5]
  • It requires the plaintiff to respond with evidence of each element of its claims.[6] This will force the plaintiff to put its “cards on the table” early in the case.
  • In some cases, it will be difficult for the plaintiff to meet its burden before it has had any meaningful discovery.

Of course, there are potential disadvantages to filing a motion to dismiss. Despite the Texas Supreme Court’s instruction to apply the plain meaning of the statute, some trial court judges will still be reluctant to dismiss trade secrets claims that do not implicate constitutional free speech rights. Fighting over the motion to dismiss will often be expensive, and if the judge denies the motion, it will tend to embolden the plaintiff, which could make settlement more difficult. Worst case, if the judge finds that the defendant’s motion was frivolous or solely intended to delay, the court can award attorneys’ fees to the plaintiff.[7]

Despite these concerns, in most cases filing an early motion to dismiss under the TCPA will be good strategy for defendants, if the plaintiff alleges “communication” of the alleged trade secrets.

But that’s a big “if.”

Will it become routine for plaintiffs to plead around the TCPA?

If it becomes routine for defendants to file a motion to dismiss in Texas trade secrets lawsuits, plaintiffs will catch on.

And Elite Auto Body suggests a solution for them. As I pointed out in Part 2, the court in Elite Auto Body said that the TCPA does not apply to allegations of using the alleged trade secrets, as opposed to communication of the trade secrets. That’s why the Austin Court of Appeals only dismissed the plaintiff’s claims in part. It did not dismiss the claims based on conduct that does not constitute “communications” as defined by the TCPA.[8]

So, as Patrick Keating suggested on his trade secrets blog here, it may become routine for plaintiffs to avoid a motion to dismiss by pleading only use of the alleged trade secrets rather than disclosure of the alleged trade secrets. (Here is a Form Original Petition that does just that.) If that happens, then case law applying the TCPA to trade secrets claims may become, as Keating says, “much ado about nothing.”

But I’m not sure this maneuver will become totally routine. First, the plaintiff doesn’t always have a basis to claim use of the trade secrets. Second, the disclosure of the trade secrets is sometimes just too good a part of the story to leave out.

In many cases, the employer will discover that an employee has taken company information and joined a competitor, but the employer will not have any direct knowledge that the employee has used the information. And it is not unusual for employees to take company information when they leave but to refrain from using it after coming to their senses (or talking to a lawyer).

In cases like that, it may be dangerous for the employer to plead that the employee has used the alleged trade secrets. The plaintiff must have a good-faith factual basis for the allegation. Look for more plaintiffs to plead “on information and belief” that the defendant has used the alleged trade secrets.

In other cases, the plaintiff will really want to plead disclosure of the trade secrets, because that will be the juiciest part of the story. When an employee secretly emails confidential company information to his next employer, who can resist emphasizing that fact in the lawsuit? In those situations, the plaintiff’s lawyer will have to weigh the value of pleading bad acts by the defendants against the possibility of inviting a motion to dismiss.

Or just make a federal case of it

On the other hand, the plaintiff’s lawyer can simply avoid this dilemma by filing suit in federal court under the federal Defend Trade Secrets Act. All you need is a sufficient connection to interstate or foreign commerce, and any claim you would make under the Texas trade secrets statute can be made under the federal statute. And then the TCPA would not apply.

Or would it? I will let the appellate lawyers and former law review editors discuss among themselves.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. 

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. The provided forms are only for the convenience of other lawyers. Every case is different, so don’t rely on this post or the forms as legal advice for your case. 

[1] Elite Auto Body LLC v. Autocraft Bodywerks, Inc., No. 03-15-00064-CV, 2017 WL 1833495 (Tex. App.—Austin May 5, 2017, no pet. h.).

[2] Tex. Civ. Prac. & Rem. Code § 27.001(2).

[3] Elite Auto Body, 2017 WL 1833495 at *8.

[4] See my disclaimer about forms above.

[5] Tex. Civ. Prac. & Rem. Code § 27.003(c). Under Section 27.006(b), for good cause the court may allow “specified and limited discovery” relevant to the motion.

[6] See Tex. Civ. Prac. & Rem. Code § 27.005(c).

[7] Tex. Civ. Prac. & Rem. Code § 27.009.

[8] Elite Auto Body, 2017 WL 1833495 at *9.