“Direct Access” to Computers in Departing Employee Litigation

“Direct Access” to Computers in Departing Employee Litigation

Imagine a criminal case where the government sends the defendant’s lawyer a request to produce emails between the alleged conspirators, bank records showing payments to the defendant’s offshore account, or a recording of a key meeting. You wouldn’t expect to get much, would you? That’s why we have search warrants.

Civil litigation is different. In a civil case, the system largely relies on the parties themselves to search for and produce documents that the requesting party can then use to prove its case. Generally, you don’t get to search the opposing party’s office for relevant documents.

The same general rule applies to computer files: you don’t get to search the other side’s computers or other devices. There are exceptions, but the Texas Supreme Court has set the bar high for obtaining an order authorizing “direct access” to an opposing party’s electronic files.

In In re Weekley Homes, 295 S.W.3d 309 (Tex. 2009), the court held that intrusive measures such as direct access to a computer or other electronic storage device require, at a minimum, that the benefits of the discovery outweigh the burden imposed. Permitting direct access “is particularly intrusive and should be generally discouraged,” the court said, “just as permitting open access to a party’s file cabinets for general perusal would be.” To obtain direct access, “the requesting party must show that the responding party has somehow defaulted in its obligation to search its records and produce the requested data.”

More recently, the Texas Supreme Court applied Weekley in In re Shipman, 540 S.W.3d 562 (Tex. 2018). The court held that the responding party’s late production of responsive documents and testimony that some files had been deleted years earlier was insufficient to justify direct access. The responding party testified by affidavit that he had searched both electronic and paper files and produced all responsive documents, and the requesting party made no showing that the responding party was incapable of searching his computer.

Weekley Homes and Shipman were not “departing employee” cases—the type of case I handle most often—but direct access is an important issue in departing employee litigation. Let’s look at the transcript of a hypothetical hearing to see how these cases might apply in a typical departing employee case.

Hearing Transcript

Judge Lansing: Alright, next case up is Cause Number 19-24601, Paula Payne Windows v. Dawn Davis. Mr. Livingston, who are you here for?

Livingston: Good morning, judge. I’m here with Phil Hamilton for the plaintiff on a motion to compel.

Reynolds: Maria Reynolds here for the defendants, Your Honor.

Judge: Good morning, Ms. Reynolds. Was there a response to the motion?

Reynolds: Yes, we filed a response yesterday.

Judge: Well if I can get this computer on, maybe I can pull it up. Can you . . .

Reynolds: I have a binder with the motion and response if that would make it easier.

Judge: Sure, I’ll take your binder. This looks like a lot of material. Have y’all talked about this already?

Reynolds: Not really. All I got was an email from Mr. Hamilton demanding we turn over Ms. Davis’s laptop. That’s part of the problem, we’ve been trying . . .

Hamilton: Your Honor, that’s not exactly right. We talked about these issues at Ms. Davis’s deposition. That’s when she said . . .

Judge: Ok, well, I’ll hear your arguments on the motion. But first back up a little and remind me what this case is about. Mr. Hamilton?

Hamilton: Yes, of course. This is a case about theft of trade secrets. Dawn Davis worked for my client, Paula Payne Windows, for five years. She was very well paid. She rose up their top sales position, and she had access to all of their confidential information and trade secrets. Then about six months ago she suddenly left and went to work for a competitor, and that’s the other Defendant, Real Cheap Windows.

Judge: Ok, I remember this case now. But what kind of trade secrets does a windows company have?

Hamilton: There are two things we’re most concerned with, Your Honor. First, Paula Payne has a Master Customer List spreadsheet that has detailed information about every one of their customers. Second, for each customer there is a Sales History spreadsheet that has every sale including price, quantity, date, margins—everything a competitor would need to try to undercut my client.

Judge: I see. So you want me to compel Ms. Davis to produce those documents?

Hamilton: Actually, you already did that. If you take a look at tab C, that’s your order requiring Defendants to produce “all documents Davis received from Paula Payne during her Employment Period, including all customer lists and sales records.” We’re asking you to order her to produce her laptop so our forensic expert can see if our Master Customer List and Sales History spreadsheets were on it.

Judge: Ok, hold that thought. I want to hear from Ms. Reynolds.

Reynolds: Thank you, judge. I’ve been biting my tongue. This is an outrageous demand for direct access to my client’s computer. It is no different than a request to rifle through her file cabinets.

Judge: Well hold on, let’s take this one step at a time. Did your client comply with my previous order?

Reynolds: Absolutely. Ms. Davis searched her home office and produced a banker’s box full of documents. But she didn’t find any customer list or sales history documents. Now they’re asking for native Excel files, but they never specifically requested those. If I could approach, here is a copy of Rule 196.4:

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Judge: What the hell is “magnetic” data?

Reynolds: Honestly, judge, I think that was a little before my time, but the issue here is electronic data. Paula Payne wants to search my client’s computer for electronic files, like Excel spreadsheets, but they never specifically asked for electronic files.

Hamilton: Actually, we did. This is from our First Request for Production:

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Judge: That’s pretty general. Wouldn’t it be better practice to include the electronic files you want in the specific request for production? You could have said “including native Excel spreadsheets and other electronic files” in your request, right?

Hamilton: We could have, Your Honor, but the two leading cases on this, Weekley Homes and Shipman, both say it’s sufficient if we clarify in our motion to compel that we’re asking for electronic files. Here is an excerpt from Shipman, citing to Weekley:

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Hamilton: The situation here is the same. Our definition of “documents” included electronic files, and our motion makes it abundantly clear what we’re asking for.

Judge: Ok, I think you’ve sufficiently asked for computer files, so let’s talk about direct access. What’s your basis for that?

Hamilton: We are allowed to obtain direct access to an electronic device if we “show that the responding party has somehow defaulted in its obligation to search its records and produce the requested data.” That’s straight out of Shipman, quoting from Weekley. And that’s exactly what we have here. After Ms. Reynolds produced the box of hard copy documents, we sent her a letter pointing out that her production did not include any electronic files, and we specifically asked if Ms. Davis had searched her laptop. She responded in an email and said “my client has conducted a reasonably diligent search and has produced all responsive non-privileged documents.”

Judge: So she doesn’t have the documents. What’s the problem?

Hamilton: Later we took Dawn Davis’s deposition, and here’s what she said:

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Hamilton: It’s obvious from her evasive answers that she did not conduct a diligent search of her laptop for the documents we requested, even after we specifically inquired about electronic files. That’s a default in her obligation to search her records and produce the requested records.

Judge: Alright, let me hear from Ms. Reynolds on this.

Reynolds: Your Honor, there is no default. This case is just like Weekley and Shipman, where the Texas Supreme Court ruled against direct access. In Weekley the court said you cannot rely on “mere skepticism or bare allegations that the responding party has failed to comply with its discovery duties.” That is all we have here, just mere skepticism and speculation. There is no proof that Ms. Davis failed to search her laptop.

Judge: Mr. Hamilton, how is this case any different from those cases?

Hamilton: It’s totally different. Weekley was about whether deleted emails were specifically requested; that’s not our issue. Shipman was a case about late production. Here is an excerpt from Shipman with its key facts:

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Screen Shot 2019-05-11 at 8.48.09 PM.pngHamilton: So there are two key differences. First, Shipman searched his computer and produced documents he found. Second, Shipman signed an affidavit specifically stating that he searched his computer files and produced all responsive documents. We don’t have either one here.

Judge: Ms. Reynolds, do you have an affidavit from your client saying she searched her computer?

Reynolds: No, Your Honor. But that’s not my burden. If you look closely at Shipman, the court made it clear that the requesting party has the burden to prove that the responding party has defaulted on its discovery obligations. “Mere skepticism” doesn’t meet their burden:

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Reynolds: It’s the same thing here. Paula Payne hasn’t offered any evidence that my client is incapable of searching her computer or that she hasn’t conducted a diligent search. You have to say no to this.

Judge: What about her deposition testimony? Isn’t that evidence she didn’t do a diligent search.

Reynolds: She said she wasn’t sure if she transferred the customer list or sales histories to her laptop. That’s just like Shipman. The court said that Shipman’s “equivocation about the existence of discrete documents at his deposition” did not “transform general skepticism into discovery default.” Shipman was asked about “discrete, individual documents” from more than five years before the deposition and stated he was “unsure if they existed.” My client’s testimony was similar.

Judge: I understand, but did she search her computer? The defendant in Shipman signed an affidavit that specifically said he searched both electronic and hard copy records.

Reynolds: I don’t know all the details of her search. She has stated that she conducted a diligent search and produced all the responsive documents she found. If Paula Payne wants to ask her about all the little details, they can do that in a deposition.

Hamilton: Your Honor, we tried! We asked . . .

Judge: You can sit down, Mr. Hamilton. I’ve heard enough. I’m going to grant the motion to compel and order Ms. Davis to turn over her laptop to Paula Payne’s expert. Counsel are to confer on the details of a forensic protocol and put it in a proposed order. If y’all can’t work that out, come back and see me.

Reynolds: Your Honor, I really think it would be error to do this. The Texas Supreme Court has been clear.

Judge: Well that’s my ruling. And if y’all have to take it up to the Court of Appeals on mandamus, I won’t be offended. Good to see all of you. Even you, Mr. Livingston [laughter in courtroom]. So did you catch any bass last weekend?

Livingston: I’m afraid not. Nothing biting last weekend except the mosquitoes.

Judge: Well that’s too bad. Anyway, give Connie my best.

Livingston: Thank you, judge, I’ll do that.

Judge: Alright, everyone can be excused.

What Did We Learn Today?

So what do you think? Did Judge Lansing correctly apply Weekley and Shipman? Was there sufficient evidence that Davis defaulted on her discovery obligations? What should Dawn Davis’s lawyer have done differently? Could Paula Payne’s lawyers draft a better request for production? Did they handle the deposition well?

Give me your thoughts before Wednesday, when I’m presenting Dude, Where’s my USB Drive? Forensic Issues in Departing Employee Litigation for Pathway Forensics. It should be almost as much fun as a motion to compel hearing.

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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.

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.

 

Federal-Style Motions to Dismiss May Finally Come to Texas

Federal-Style Motions to Dismiss May Finally Come to Texas

What a Difference a Word Makes

Are you a Texas business, or a lawyer who represents Texas businesses? Get ready for federal-style motions to dismiss to become routine in state court litigation.

As reported here, the Texas House of Representatives recently passed House Bill 3300. With the change of a single word, the bill could bring the biggest change to Texas litigation practice since the adoption of the “new” discovery rules in 1999.

The bill would change Texas Rule of Civil Procedure 91a from “the court shall award costs and reasonable and necessary attorney’s fees to the prevailing party” to “the court may award costs and reasonable and necessary attorney’s fees to the prevailing party.”

This is important. It was already a big deal when the legislature originally mandated motions to dismiss in 2011, leading to the adoption of Rule 91a in 2013. For the first time, the Texas Rules authorized motions to dismiss groundless lawsuits. This moved Texas procedure closer to the more defendant-friendly practice in federal court.

But Texas defense lawyers largely refrained from filing motions to dismiss under Rule 91a. The rule had a “loser pays” provision requiring an unsuccessful movant to pay the responding party’s attorney’s fees. If you’re a defense lawyer, the last thing you want to tell your client is “sorry, we lost the motion and you’re going to have to pay the other side’s attorney’s fees.”

The new version of Rule 91a passed by the House would change that. If enacted, the change would give the judge discretion not to award attorney’s fees, making defendants much more likely to file motions to dismiss.

Want proof? Just look at all the motions to dismiss filed under the Texas Citizens Participation Act (TCPA), also enacted in 2011. That statute authorized motions to dismiss in certain cases but did not require the moving party to pay attorney’s fees if the judge denied the motion. This resulted in a tsunami of TCPA motions. More about that later.

To appreciate the significance of the change to Rule 91a, let’s back up a bit. Since the Swing Era, Federal Rule of Civil Procedure 12(b)(6) has allowed a defendant in federal court to file a motion to dismiss the plaintiff’s lawsuit for “failure to state a claim upon which relief can be granted.” This means you can ask the judge to dismiss a lawsuit—in whole or in part—on the ground that the plaintiff’s pleading on its face fails to state a valid legal claim. Most states have a similar rule.

But not Texas. Prior to Rule 91a (and the TCPA), a “motion to dismiss” was not even a thing under the Texas Rules of Civil Procedure.

There were some exceptions. You could file a motion to dismiss on the ground that Texas did not have jurisdiction over an out-of-state defendant. You could file “special exceptions” asking the court to dismiss a particular cause of action because Texas law doesn’t recognize it (like negligent infliction of emotional distress).

But outside of a few narrow exceptions like these, Texas procedure did not provide for a “motion to dismiss.”

This led to interesting conversations with non-Texas lawyers. Let’s say a New York law firm hired you as local counsel in a lawsuit filed in state court in Hidalgo County. “Should we consider filing a motion to dismiss?” the New York lawyer would ask. “Uh, we don’t really have motions to dismiss here,” you would say. “What?! That’s crazy!”

But in historical context, it was not so crazy. The absence of motions to dismiss was part of a broader Texas philosophy that every plaintiff should get his “day in court.” Traditionally, Texas law has been hostile to procedures designed to short-circuit jury trials. As the proverbial courthouse sign said, “No Spittin’, No Cussin’, and No Summary Judgment.”

Of course, that all started to change around the 1990s, with “tort reform” legislation and Republicans taking over the Texas Supreme Court. The direction of Texas law for the last three decades has been largely “pro-business” and anti-litigation. We want fewer lawsuits, and we want to dispose of them faster.

Rule 91a and the TCPA were in a sense just the latest wave in a broad effort to reign in what is seen as lawsuit abuse.

“Frivolous” Lawsuits

Is this a good thing? In theory, yes. But in practice, Rule 91a and the TCPA are trying to solve a problem that is largely unsolvable: how to quickly and inexpensively dispose of the non-frivolous nuisance case.

You may be thinking that “non-frivolous nuisance case” is an oxymoron. But it’s actually quite common. Let me explain.

First we need to distinguish between a “frivolous” lawsuit and a nuisance lawsuit. A frivolous lawsuit is the inmate claiming the prison cafeteria violated his civil rights by taking pepper steak off the Thursday night menu. It’s unreasonable on its face.

And Texas never needed a new motion to dismiss procedure to combat frivolous lawsuits. Texas already had two procedures—one in Rule 13 of the Texas Rules of Civil Procedure, the other in Chapter 10 of the Texas Civil Practice and Remedies Code—providing remedies for genuinely groundless lawsuits. But those procedures are rarely used, precisely because so few lawsuits are actually frivolous.

Most of the public doesn’t get this. They think frivolous lawsuits are common. But in over 20 years of Texas litigation practice, I don’t think I’ve had a single one.

By the way, the famous McDonald’s hot coffee lawsuit was not frivolous. I mean, reasonable people can disagree about whether McDonald’s should have been liable for keeping its coffee too hot, but the claim wasn’t frivolous. The lady wasn’t claiming she didn’t know coffee is hot. Google it.

When you think about it, it’s not surprising that frivolous lawsuits are rare. How many people are going to pay $250 an hour (at least) to have a lawyer draft and file a lawsuit that has no real chance of winning? Or how many lawyers working for a one-third cut of the recovery are going to waste their time filing a lawsuit they know will ultimately fail? Not many.

But wait, the savvy public says, you’re ignoring the fact that defendants will pay money to settle frivolous lawsuits so they don’t have to pay their lawyers to defend them. That’s why such lawsuits get filed.

Oh really? How many times have you actually seen that happen? How many insurance companies do you know that, when served with a frivolous lawsuit, say “let me get out my checkbook, how much money would you like?”

No, businesses and insurance companies are not falling over themselves to pay off plaintiffs who file groundless lawsuits. If they did, it would only encourage more.

The Problem of the Non-Frivolous Nuisance Lawsuit

Nuisance lawsuits are different. Defendants do pay to settle nuisance lawsuits, on the theory that it’s cheaper to pay a settlement than to pay your lawyer to litigate. Lawyers sometimes call these “cost of defense” settlements. And these cases are quite common.

But how are these nuisance lawsuits any different from the frivolous ones?

The difference is that a nuisance lawsuit has at least some grain of truth to it. That grain may be that if you accept the plaintiff’s allegations as true, there is at least some reasonable legal argument that the plaintiff is entitled to relief from the court. Or it may be that there is at least some evidence to support the allegations made by the plaintiff, even if nine out of ten juries would vote for the defense.

While I’ve never seen a truly frivolous lawsuit in my practice, I’ve seen plenty of nuisance lawsuits. Here are some examples, drawn from my actual experience plus a little imagination:

  • A homebuilder sues a competitor for copyright infringement because the competitor used a floor plan that bears numerous similarities to a floor plan the homebuilder created. The floor plan has unique features such as a large living room with a high ceiling adjacent to an open kitchen.
  • An employee of an oilfield services company never signs a non-compete, but when he leaves to join a competing company, his original employer sues for misappropriation of trade secrets, claiming the employee has knowledge of the company’s confidential customer list, which consists of oil and gas operators.
  • A consultant who was fired a couple months into his one-year contract claims he is owed an entire year of pay, when the contract expressly gave the client the option to terminate early.

These cases have two things in common: they are weak, but they are not entirely groundless.

What’s Wrong with Motions for Summary Judgment?

It’s hard to represent a defendant in this kind of lawsuit, because your client is so frustrated. “Zach, I don’t understand, why can’t we just tell the judge this claim is ridiculous?”

Sarcastic, teenage me might say “your right, that’s a great idea, I’ll just go to the judge and tell her you didn’t do anything wrong, and then the lawsuit will get dismissed!” But older, wiser me respects my clients and wants to keep them, so I explain the problem more patiently.

The problem, of course, is that lawsuits are about disputes. If we had some surefire trick to separate the good guys from the bad guys, we wouldn’t need judges, juries, and complicated rules of procedure and evidence.

“But Zach,” my client will say, “don’t they need evidence to back up their claims?” “Why can’t we tell the judge they have no evidence?”

The answer is yes, they have to have evidence, and yes, there is a procedure to tell the judge they don’t have any evidence. It’s called summary judgment. Like the Federal Rules, the Texas Rules of Civil Procedure allow a defendant to file a motion for summary judgment on the ground that there is no evidence to support the legal elements of the plaintiff’s claims. See Texas Rule 166a(i).

The benefit of a motion for summary judgment is that it avoids the time and expense of a trial. If the evidence doesn’t raise any genuine factual dispute, the judge can dispose of the case by summary judgment.

So what’s the catch? Why doesn’t summary judgment solve the problem of the non-frivolous nuisance case?

In a word: discovery.

Traditionally, the plaintiff has been entitled to take discovery before the court rules on a motion for summary judgment. Discovery includes production of documents, written answers to interrogatories, and depositions. If you’ve ever been in a lawsuit with the slightest level of complexity, you know that 90% of the time and expense is for discovery.

Oh, and there was a development around the 1990s that made the discovery process even more complicated and expensive. It was a little innovation called email.

Now the full context of Rule 91a and the TCPA is coming into focus. Discovery is time-consuming and expensive, and the proliferation of email has only made it worse. The procedures for dismissing frivolous cases (Rule 13 and Chapter 10) are not much help because so few cases are actually frivolous. The procedure for summary judgment doesn’t solve the problem because the plaintiff is usually entitled to take discovery first.

This is why people thought a Texas version of Federal Rule 12(b)(6) was necessary. You need a procedure for weeding out nuisance lawsuits before the discovery process. That’s what will cut down on the time and expense of litigation.

The Law of Unintended Consequences

Those of you who practice litigation already see where this is headed. Does a motion to dismiss procedure actually reduce the time and expense of litigation? Let’s consider a couple data points.

First, we need look no further than federal court to test the hypothesis. Here we have to be careful about our sample. We should exclude, for example, securities fraud cases. Motions to dismiss are the big event in securities fraud class actions. But there’s a special reason: Congress passed a heightened pleading standard that, essentially, requires a plaintiff to allege specific facts showing that the CEO knew he was lying when he said on the analyst call “we think the environment for our expansion into Brazil is looking positive.”

That’s unusual. In an ordinary federal case, all the plaintiff has to do is allege sufficient facts to establish a plausible basis for relief. And when a motion to dismiss is filed, the judge must assume for the purpose of the motion that those factual allegations are true. That means the vast majority of federal motions to dismiss get denied.

Mind you, this doesn’t stop lawyers from trying. BigLaw firms, especially, really like motions to dismiss. Drafting a motion to dismiss is the perfect project to assign to a less experienced litigation associate, who will then research the legal standards at issue, analyze whether the plaintiff’s pleading meets those legal standards, and draft the motion. That’s good for 5-10 billable hours (at least), not to mention the partner’s time for reviewing and revising the draft motion.

Then the plaintiff’s lawyers do the same type of thing to respond to the motion, the defense lawyers draft a reply to the response, the plaintiff’s lawyers sometimes file a “sur-reply” to the reply, the judge might hold a hearing, etc.

Bear in mind that the judge is going to deny the motion. I learned this years ago in a case before U.S. District Judge Sam Sparks. We thought there was a strong argument that one of the plaintiff’s state-law causes of action, on its face, was preempted by federal copyright law.

At a hearing Judge Sparks gruffly asked me, “why should I rule on this issue on a motion to dismiss instead of waiting for a motion for summary judgment?” My answer, in a word: discovery. I told him my client should not have to bear the expense of discovery regarding a claim that was legally defective. “Ok, you’ve got a decent point there,” he said. “Motion denied.”[1]

That kind of shows you how much Rule 12(b)(6) has reduced the time and expense of litigation in federal court.

But could the new Rule 91a be different in state court?

Again, we don’t have to speculate, because we have some data from a similar experiment. Remember the TCPA? It allows a defendant to file a motion to dismiss in certain kinds of cases (essentially any case where the claim is based on a defendant’s “communication” about a good or service). The plaintiff then has to offer evidence to support every element of his claims, before taking any discovery. So, the TCPA essentially functions as a pre-discovery motion for summary judgment.

A pre-discovery motion for summary judgment. Hallelujah! That’s exactly what we’ve been waiting for to combat the problem of the non-frivolous nuisance lawsuit.

But has the TCPA reduced the time and expense of litigation? Let me put it this way: I’ve given presentations on the TCPA, and when I pose this question to a roomful of lawyers, it’s sure to get big laughs.

They laugh because the last thing the TCPA has done is to reduce the amount of litigation. On the contrary, I’ve heard people call the statute a full employment act for appellate lawyers. Just look at the number of appellate decisions grappling with the TCPA.

One more anecdote will make the point plain: I recently called the court clerk in one of my cases to schedule a hearing on a motion. His first question: is this a TCPA motion?

No, the TCPA has not reduced the time and expense of litigation. And here’s a prediction. If House Bill 3300 becomes law, six months from now when you call the court clerk asking for a hearing, he’ll say in a knowing monotone, “is this a Rule 91a motion?”

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*Update: Want evidence that federal courts already have “motion to dismiss fatigue”? Check out this proposed local rule in the Southern District of Texas that would require lawyers to confer before filing a Rule 12(b)(6) motion:

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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.

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] I’m paraphrasing, of course; I don’t have a transcript. And to be fair to the judge, he also grilled opposing counsel about why he included a state-court claim that seemed to be clearly preempted by federal law.

Non-Competes in the Sale of a Texas Business

Non-Competes in the Sale of a Texas Business

If you’re buying a business in Texas and the seller agrees to a non-compete, will it hold up in court? The short answer is yes, but the non-compete should be reasonably limited to the purpose of protecting the goodwill that you are acquiring with the other assets of the business. It’s also a good idea to have the purchase agreement recite that the purchased assets include the goodwill of the business.

To understand why, let’s start with the two requirements in the Texas Covenants Not to Compete Act, affectionately known as TCNCA: (1) a non-compete must be “ancillary to an otherwise enforceable agreement” (whatever that means) and (2) a non-compete must be reasonably limited in time, geographic area, and scope of activity.

How do you make a non-compete “ancillary” to an otherwise enforceable agreement? As I explain in this short video, the most common way is to have a non-compete tied to a confidentiality agreement between an employer and an employee. This is usually sufficient to meet the “ancillary” requirement, as long as the agreement explicitly or implicitly promises to provide confidential information to the employee and the employer actually provides confidential information.

A sale of a business is different. In a typical sale, the buyer acquires the assets of the business, including goodwill. And in this information age, the goodwill is often the most valuable asset of the business.

Trouble is, you can’t just load goodwill on a truck like it’s office furniture or shop tools. Goodwill primarily consists of relationships with customers or clients, and in many cases the customer relationship is with an individual who works for the business, not so much the business itself.

A non-compete is ancillary to the sale of the goodwill because it is necessary to make the transfer effective. See, e.g., Chandler v. Mastercraft Dental Corp. of Texas Inc., 739 S.W.2d 460, 464-65 (Tex. App.–Fort Worth 1987, writ denied) (“the covenant was necessary to protect the business goodwill, the key asset”). Imagine if the seller, after selling the goodwill, could set up a new business the next day and start soliciting the sold business’s customers. Then the buyer would not really get the benefit of the transferred goodwill.

If the law refused to enforce a non-compete in this situation, it would hurt the buyer and the seller. No buyer is going to pay the full value of the goodwill without assurance that the seller cannot immediately start competing for the customers of the business. And then business owners would not be able to cash out the full value of their businesses.

So, if anything, enforcing a non-compete makes more economic sense in the sale of a business than in the employer-employee context. That explains why even California, which generally prohibits non-competes, has an exception for the sale of a business. See Cal. Bus. & Profs. Code § 16600-16602.5.

It also explains why Texas courts have said that “[a] noncompete signed by an owner selling a business is quite different than one signed by an employee.”[1] Texas courts have been more inclined to enforce long, or even limitless, time periods barring competition after a sale of a business.[2] For example, in Oliver v. Rogers, 976 S.W.2d 792, 801 (Tex. App.—Houston [1st Dist.] 1998, pet. denied), the court held that the lack of a time limitation did not render a non-compete unreasonable when it was part of the sale of a business.

But let’s not get carried away. Since 1989, all Texas non-competes are governed by the TCNCA. In addition to the “ancillary” requirement, the statute requires a non-compete to contain “limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.” Tex. Bus. & Com. Code § 15.50(a). To the extent that any Texas case—especially a pre-1989 case—suggests that these limitations are not required in the sale of business, it should be taken with a grain of salt.

The non-compete statute does give the buyer of a business one advantage that may not be immediately obvious. In an employment agreement, the burden of proving the reasonableness of the non-compete is usually on the employer. But in the sale of a business, the burden of proof will usually be on the seller to show that the non-compete is unreasonable. See Tex. Bus. & Com. Code § 15.51(b) (placing burden of proof depending on whether the “primary purpose” of the agreement is to obligate the promisor to render “personal services”).

But again, reasonableness is still required. And here’s the slightly counter-intuitive part: if you represent the buyer in the sale of a business, you don’t want to go overboard on drafting a super-broad non-compete. In fact, it will usually be in your client’s interest to tailor the non-compete as narrowly as possible to the legitimate purpose of protecting the goodwill of the business. Anything more is too much.

What does that mean specifically?

First, you should include a reasonable time period. The time period should be no longer than necessary to protect the goodwill. Will the previous owner’s relationships with customers really have significant value four or five years later? Consider whether a two or three year period would be enough.

Second, you should include a geographic area. This will depend on the type of business, but generally a reasonable geographic area will coincide with the area where the company is doing business with its existing customers.

Third, the scope of activity restrained should be limited. This is perhaps the most neglected limitation. Remember, the purpose is to protect the goodwill of the business, which means relationships with existing customers. If the non-compete would bar the seller from competing in any way, for any customers, a judge might consider it an unenforceable “industry-wide exclusion.” The case law prohibiting industry-wide exclusions focuses on the employer-employee context, but the same concept can be applied to the sale of a business.

Ok, the seller of a business might say, but why not draft the non-compete as broadly as possible, and then if there’s a dispute you negotiate down from there?

Good question. Texas non-compete law is quite “pro-reformation,” especially in comparison to some other states. If a non-compete is unreasonably broad, that’s not the end of the story. The statute requires the trial court to reform the agreement to the extent necessary to make it reasonable. So, all is not lost if the buyer’s lawyer drafts the non-compete too broadly.

But there is a cost to be paid for making the non-compete too broad. First, if things go wrong and the seller of the business starts competing for the business’s customers, the new business owner may need to go to court to get a temporary injunction enforcing the non-compete. As a litigator who handles temporary injunction hearings, I can tell you it will be easier to make a case for a temporary injunction if the non-compete is already reasonably limited.

Second, if the non-compete is written too broadly, it effectively means that the buyer will be unable to recover damages for the seller’s breach. See Tex. Bus. & Com. Code §15.51(c). That’s a big bargaining chip to give away by making the non-compete too broad.

So if you represent the buyer, consider making the non-compete as narrow as you can while still protecting the goodwill your client is buying.

That brings up one more tip: the agreement should actually provide for the sale of the goodwill. If the purchase agreement does not expressly identify the goodwill as part of the assets being sold, there is a risk that a judge could say that the non-compete was not ancillary to an otherwise enforceable agreement.[3]

You could argue the sale of the goodwill is implied when all the other assets of the business were sold.[4] But why chance it? Unless there is a good reason not to include the goodwill (maybe a tax reason?), the safer course is to include an express recitation that the goodwill is part of the assets being sold.

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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. Occasionally he writes a boring, useful post. 

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] Heritage Operating, L.P. v. Rhine Bros., LLC, 02-10-00474-CV, 2012 WL 2344864, at *5 (Tex. App.—Fort Worth June 21, 2012, no pet.) (mem. op.).

[2] Id. (citing cases).

[3] See, e.g., Bandera Drilling Co. v. Sledge Drilling Corp., 293 S.W.3d 867, 872-75 (Tex. App.–Eastland 2009, no pet.).

[4] The Texas Supreme Court has recognized that an agreement, such as an agreement to provide confidential information, can be implied in a non-compete. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009).

Can Your Business Avoid a Fraud Claim by Putting Magic Words in the Contract?

Can Your Business Avoid a Fraud Claim by Putting Magic Words in the Contract?

If you run a business and use contracts drafted by a lawyer, there’s a good chance you’ve seen a clause like this:

This Contract contains the complete agreement between Buyer and Seller concerning the sale of the Products and Services and replaces any prior oral or written communications between them. In entering into this Contract, Buyer is not relying on any representation made by Seller that is not stated in this Contract.

The first part is called a “Merger Clause.” The idea is that it “merges” all prior representations, understandings, and agreements into the written Contract. The second part is called a “Disclaimer of Reliance.”

The main point of the Disclaimer of Reliance is to prevent Buyer from making a fraud claim if the deal goes south. The word “fraud” sometimes intimidates non-lawyers, but the basic concept is simple: if you lie to someone in a business deal and they take action in reliance on the lie, that’s fraud.

One special flavor of fraud is “fraudulent inducement.” It sounds legalistic, but the idea is simple: if I lie to you to get you to sign a contract, that’s fraudulent inducement.

When a business deal goes bad, fraudulent inducement is a popular theory, for two reasons. First, if you prove fraudulent inducement you may be able to avoid all the self-serving terms the other guy’s lawyer put in the contract. Second, you may be able to recover actual damages and even punitive damages.

But once upon a time, a smart lawyer figured this out and put the Merger Clause and the Disclaimer of Reliance in the contract he drafted for his client. The hope was that these clauses would prevent the other party from later claiming fraudulent inducement. The idea caught on, and soon his form went viral.

So today, any time a client needs a contract, a lawyer is going to pull up some form that likely includes both a Merger Clause and a Disclaimer of Reliance. For simplicity, let’s focus on the Disclaimer of Reliance.

If a party to the contract tries to claim fraudulent inducement—either to get out of the contract or to try to get damages—the smart litigator representing the other party is going to say, “sorry, Disclaimer of Reliance.”

Not so fast. The equally smart litigator representing the party claiming fraudulent inducement has an ace up her sleeve too. The Disclaimer of Reliance is ineffective, she’s going to argue, because the entire contract—including the Disclaimer of Reliance—was induced by fraud.

Expecto patronum!

Of course, whether the seller actually lied to the buyer to induce him to sign the contract is almost always in dispute. But let’s assume for the sake of argument that the seller made material misrepresentations to the buyer that caused the buyer to sign the contract.

I know, this is Texas. Like Robert Earl Keen says, “nobody steals, nobody cheats.” But just as a hypothetical, what are courts to do with this common situation?

What Rule Should Apply to a Disclaimer of Reliance?

Let’s consider four different rules courts could choose:

A. A Disclaimer of Reliance has no effect on a fraudulent inducement claim.

B. A Disclaimer of Reliance defeats a fraudulent inducement claim.

C. A Disclaimer of Reliance is effective if, when signing the contract, the parties lit incense, struck a ceremonial gong, and recited the Latin phrase caveat emptor in unison.

D. It depends on the circumstances.

I know, choice C sounds silly, but stay with me.

Choices A through C have one clear benefit: they are what lawyers call “bright-line” rules.

Of course, there could always be a factual dispute about whether the incense was actually lit, or a legal dispute about whether the original public understanding of “gong” included a cymbal. But let’s put those quibbles aside. Choices A through C draw clear, bright legal lines that judges can apply with certainty.

But which outcome is more just? The case for Choice A is that “fraud vitiates everything.” The idea is that when one party fraudulently induces the other party to sign the contract, the whole contract is tainted. There is also a certain “realist” case to make for Choice A: the Disclaimer of Reliance is almost always standard “boilerplate” that was not specifically negotiated by the parties. So it should have no effect.

The problem with Choice A is that it tends to encourage more litigation and less certainty. Any party who regrets doing the deal can claim fraudulent inducement, even if the claim has no merit, and it can take months—or years—and thousands of dollars in legal fees to resolve that claim.

That’s why many lawyers—especially transactional lawyers—would pick Choice B: the Disclaimer of Reliance defeats the fraud claim. The rationale for B is that it may mean less justice in a handful of cases where there is real fraud, but overall it’s better for business if companies don’t have to spend time and money litigating fraud claims. Better to stick to what’s in black and white in the contract.

But there’s an obvious counter-argument to Choice B, too. If courts adopt a bright line rule that a Disclaimer of Reliance bars a fraudulent inducement claim, then everybody is going to put a Disclaimer of Reliance in their contracts (as almost everybody already does). Then you have effectively abolished the fraudulent inducement theory.

And what about Choice C, the incense ritual? No one would seriously pick Choice C, and the reason is obvious. Why should the parties’ legal rights depend on whether incense was lit and the gong was struck? Modern judicial decisions should not turn on such ritualistic formalism.

Ok, but isn’t Choice B effectively the same as Choice C? If we say that a business can avoid a fraudulent inducement claim simply by reciting the magic words “disclaimer of reliance” in the contract, is that really any different from the “gong” rule, in principle?

I think this very point—the reluctance to attach too much significance to “magic words”—is why most courts are going to pick Choice D: It depends. Courts recognize that, while a bright-line rule can provide certainty, reality is just too messy to pick one result that should apply in all cases.

That’s a less satisfying answer—especially for non-lawyers—but it’s an answer that allows courts to enforce contract terms generally, while recognizing that justice may require exceptions in some cases.

At least that’s the theory. Let’s look at a case study to see how it applies.

Big Trouble for Big Blue?

Lufkin Industries manufactures machinery and equipment for the energy industry. It needed to upgrade its business operations software, so it called a little company called International Business Machines, which I call “IBM” for short. IBM recommended its “Express Solution for SAP.”

Before the contract was signed, IBM represented to Lufkin that the Express Solution was a preconfigured system that could be implemented within four to six months and meet 80% of Lufkin’s requirements without any enhancements. Oh, and IBM knew this was false (allegedly).

Would you believe the implementation of the software system did not go well? On the day of the “go-live-ugly” (what a great term), Lufkin followed IBM’s instruction to deactivate its old system. But the IBM system didn’t work. Lufkin was unable to use the Express Solution to invoice customers, manage inventory, track orders, calculate payroll, or pay employees and vendors. In short, the system failure crippled Lufkin’s business.

A jury later found that IBM fraudulently induced Lufkin to sign the contract and awarded over $20 million in damages.

But guess what was tucked away in the IBM-Lufkin contract? That’s right, a Disclaimer of Reliance and a Merger Clause. Section 2 of the Statement of Work said:

In entering into this SOW, Lufkin Industries is not relying upon any representation made by or on behalf of IBM that is not specified in the Agreement or this SOW, including, without limitation, the actual or estimated completion date, amount of hours to provide any of the Services, charges to be paid, or the results of any of the Services to be provided under this SOW. This SOW, its Appendices, and the Agreement represent the entire agreement between the parties regarding the subject matter and replace any prior oral or written communications.

These were the facts of IBM v. Lufkin Industries, decided by the Texas Supreme on March 15, 2019.[1]

So what rule did the Texas Supreme Court apply to determine if this clause was effective?

In theory, the court applied a version of Choice D: It depends.

The court started by noting its decision in Italian Cowboy Partners that said a merger clause, standing alone, does not bar a fraudulent inducement claim. But a disclaimer of reliance, in contrast, can be effective: “a clause that clearly and unequivocally expresses the party’s intent to disclaim reliance on the specific misrepresentations at issue can preclude a fraudulent-inducement claim.”

gong-701647_1920
Bang a Gong

On the other hand, “[n]ot every such disclaimer is effective,” and courts “must always examine the contract itself and the totality of the surrounding circumstances when determining if a waiver-of-reliance provision is binding.” In other words, the court must look to both extrinsic and intrinsic facts concerning the contract.

The most important fact is whether the contract was a settlement agreement that resolved a lawsuit or other dispute. Under the Schlumberger case, a disclaimer of reliance in a settlement agreement will usually be effective to bar a later fraud claim. The idea is that there has to be a way for parties to sign an agreement that ends litigation with certainty.

But most business contracts are signed at the beginning of the relationship, before any dispute. In that case, the relevant factors include whether:

(1) the terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute;

(2) the complaining party was represented by counsel;

(3) the parties dealt with each other at “arm’s length”;

(4) the parties were knowledgeable in business matters; and

(5) the release language was clear.

When two businesses negotiate a contract and lawyers are involved, factors (2)-(5) will almost always apply. And in most cases the second part of (1) will be true. It’s hard to see how there could be a genuine fraudulent inducement claim if the issue in dispute was not discussed before the contract was signed.

All of those factors were present in the IBM case. With at most one factor weighing against enforcement, the court said it had “no trouble” concluding that the factors supported a finding that the disclaimer of reliance was effective. “The parties negotiated the Statement of Work at arm’s length,” the court said, “they were both knowledgeable in business matters and represented by counsel, and the two clauses expressly and clearly disclaim reliance.”

The court didn’t say much about the first half of the first factor: whether the merger clause and disclaimer of reliance were negotiated terms or mere boilerplate. I think we can assume the latter. And I think the court’s silence on that factor tells us the court doesn’t care too much about it.

So, despite the IBM opinion’s touchy-feely language about multiple factors and “totality of the surrounding circumstances,” it comes pretty close to this “bright-line” rule: when two businesses represented by lawyers negotiate a contract that contains a clear disclaimer of reliance, there is no fraudulent inducement claim, even if the disclaimer is boilerplate.

I think the “factors” and “circumstances” language is intended to give the court some wiggle room to allow a fraudulent inducement claim in a truly egregious case, e.g. where the party duped into signing the contract is an unsophisticated consumer not represented by a lawyer. But in most business cases, fraudulent inducement is out in Texas.

As long as you said the magic words.

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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. This post is dedicated to 80s supergroup The Power Station. 

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] Int’l Bus. Machines Corp. v. Lufkin Indus., LLC, No. 17-0666, 2019 WL 1232879, __ S.W.3d __ (Tex. Mar. 15, 2019).

Metroplex Courts Push Back on Broad Application of TCPA

Metroplex Courts Push Back on Broad Application of TCPA

If you just returned from a two-year sabbatical to the Himalayas, you should know the Texas Citizens Participation Act (TCPA) has become kind of a big deal in Texas litigation.

You remember the TCPA, right? It’s the “anti-SLAPP” statute the legislature passed to solve the problem of people filing lawsuits “regardless of whether the claim is valid.” See the Fort Worth Star-Telegram, Your right to share your opinion is threatened by this proposed state law.

The TCPA has taken on a surprising life of its own. This is partly because Texas courts have applied the statute’s broad definitions literally, allowing defendants in cases the legislature never intended to file motions to dismiss that require the plaintiff to prove its case before taking any discovery.

But in a pair of recent opinions, the Dallas-Fort Worth appellate courts have pushed back on broad application of the TCPA, especially to the kind of “departing employee” case I often handle.

First, in Kawcak v. Antero Resources, the Fort Worth Court of Appeals held that the TCPA’s broad definition of “right of association” is not so broad that it includes a conspiracy between a departing employee and a single alleged co-conspirator.[1] After a painstaking textual analysis of the statute’s phrase “common interest,” the court said “[o]ur opinion is long but our holding is narrow: the plain meaning of the word ‘common’ in TCPA section 27.001(2)’s definition of ‘the right of association’ requires more than two tortfeasors conspiring to act tortiously for their own selfish benefit.”

Second, the Dallas Court of Appeals held in Dyer v. Medoc Health Services that the TCPA’s broad definitions of “right of association” and “right of free speech” are not so broad that they encompass communications between a departing employee and an alleged co-conspirator about misappropriating an employer’s proprietary software and confidential information to set up a competing business.[2]

You see a theme here?

These propositions may sound uncontroversial. But other Texas appellate courts have applied the TCPA’s expansive definitions more literally. For example, the Austin Court of Appeals has held that the TCPA applies to allegations that a departing employee disclosed a company’s trade secrets to his new employer, and to a claim for conspiracy to misappropriate trade secrets. The Tyler Court of Appeals and Houston Court of Appeals have made similar rulings. See the cases summarized here.

But in Dyer, the Dallas Court of Appeals was just not having it. The court found that applying the TCPA to an alleged scheme to misappropriate confidential information would be illogical and even absurd:

Because the text messages between Basiti and Dyer were private communications related to an alleged conspiracy between the two men and did not involve public or citizen’s participation, it would be “illogical” to apply the TCPA to those communications.

Further, construing the statute such that appellants would have a “right of association” based solely on Dyer’s and Basiti’s private communications allegedly pertaining to the misappropriation of appellees’ proprietary software and confidential business information is an absurd result that would not further the purpose of the TCPA to curb strategic lawsuits against public participation.[3]

The Fort Worth Court of Appeals reached a similar result, but it was not so quick to blow open the “absurd results” escape hatch. The Kawcak opinion is notable for the lengths Justice Bassel went to justify the holding on textualist grounds—citing no less than four dictionaries and Scalia and Garner’s Reading Law. It shows you just how much cache textualism has acquired among a significant chunk of Texas appellate judges.

There was a more pragmatic era when Texas judges would have brushed aside the defendant’s argument in Kawcak without giving it a second thought. As if to say, “The ‘right of association’ includes a conspiracy between two people? Don’t be silly.”

Don’t get me wrong. Kawcak is not a bad opinion. It is meticulously written and reasoned. But part of me wonders if we really need so much textualist hand-wringing. When interpreting a statute gets down to parsing the order of different definitions in different dictionaries, have we perhaps lost our way?

But these days Texas appellate courts don’t like to say a statute is ambiguous. As the Kawcak court said, “if an undefined term has multiple common meanings, it is not necessarily ambiguous; rather, we will apply the definition most consistent with the context of the statutory scheme.”[4] Rather than calling a statute ambiguous, some judges prefer to explain why one—and only one—side’s interpretation is reasonable.

This isn’t necessarily wrong. But maybe we should cut to the chase and acknowledge the obvious: the definitions in the TCPA have more than one reasonable interpretation. When a text has more than one reasonable interpretation, it’s ambiguous. Or at least vague. When a statute is ambiguous or vague, the courts are free to adopt the reasonable interpretation that makes the most sense.

Of course, you can also look to the purpose of the statute (as the TCPA itself tells courts to do). But the “purpose” of a statute almost always has two sides. In this case, for example, the purpose of the TCPA is to protect constitutional rights and to protect the right to file meritorious lawsuits. So, the purpose is really a wash. The real task, I think, is for the court to pick the interpretation that makes the most public policy sense.

Isn’t that what Kawcak and Dyer are really doing anyway? I’ll save that for my upcoming dissertation, tentatively titled Toward a Legal Realist Critique of TCPA Jurisprudence (The Texas One, Not the Telephone Consumer Protection Act).

The more practical question for litigators who handle departing employee cases is how far Kawcak and Dyer reach. Both cases involved communications about an employer’s confidential information between two individuals. What happens when a departing employee communicates with a group of people about starting or joining a competing venture? (This is not unusual in such cases.) Does that implicate a “common interest” as defined in Kawcak, making the TCPA apply? That’s a harder case.

And would it make a difference if the alleged conduct is not as egregious as it was in Kawcak and Dyer? There is more than a whiff of moral disapproval running through both opinions. One might read the pair of cases as holding that the TCPA does not apply when two or more defendants join together to engage in some kind of wrongdoing.

But that would be going too far. The meanings of “right of free speech” and “right of association” as defined in the TCPA cannot turn on whether the defendants are accused of wrongdoing. The plaintiff is always going to allege that the defendants did something wrongful. This is something the press and the politicians don’t always grasp: there is no quick and easy way to sort out at the beginning of a lawsuit whether the plaintiff is the good guy or the bad guy.

You might even say this is the fundamental problem at the root of the TCPA, from which all its errant branches spread.

It will be up to the Texas Supreme Court to decide which way the branches grow. This recent pair of decisions from the Metroplex sets up a conflict with the cases from the Austin Court of Appeals and other courts that apply the TCPA’s definitions more literally.

If you take another long sabbatical now, we might know the answer by the time you get back. But maybe go somewhere a little warmer this time.

*Reminder: If you love these TCPA issues—and who doesn’t?—then check out the webcast I moderated for UT Law CLE here.

*Update: On 5/10/19 the Texas Supreme Court denied a petition for review in Kawcak. I wouldn’t read too much into this given the narrow holding of the case.

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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 first law job was in that big building with the green lights. 

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] Kawcak v. Antero Resources Corp., 02-18-00301-CV, 2019 WL 761480, at *1 (Tex. App.—Fort Worth Feb. 21, 2019, pet. denied).

[2] Dyer v. Medoc Health Servs., LLC, 05-18-00472-CV, 2019 WL 1090733, at *5-7 (Tex. App.—Dallas Mar. 8, 2019, pet. filed).

[3] Id. at *5.

[4] Kawcak, 2019 WL 761480 at *9 (quoting Thompson v. Tex. Dep’t Licensing & Regulation, 455 S.W.3d 569, 571 (Tex. 2014)).

I Can’t Drive 25 (Requests for Production)

I Can’t Drive 25 (Requests for Production)

Senior Texas lawyers despair, the last vestiges of the “trial by ambush” era are being swept away like the Imperial Senate.

It looks like changes to the discovery rules are coming to Texas in 2019. Some of the changes will be significant improvements, while others will be less consequential tweaks. But there is one proposed change that is just a bad idea: limiting each side to only 25 requests for production of documents. More about that later.

The Discovery Subcommittee of the Texas Supreme Court Advisory Committee has been working on changes to the discovery rules for a few years now. I wrote about this two years ago in Proposed Changes to Texas Discovery Rules Threaten Law Firm Revenue. As I wrote then, the two biggest changes are requiring Federal-style initial disclosures and making communications with testifying experts undiscoverable.

These changes struck me as basically a good idea, with the potential to reduce gamesmanship and litigation expense. I say “reduce” because you’re never going to eliminate gamesmanship from discovery. This is litigation, after all. Plus, one man’s “gamesmanship” is another man’s proper use of the rules to protect his client’s interests.

In any case, the changes I wrote about—and others—may be coming soon. On February 11, 2019, the Discovery Subcommittee transmitted its recommended rewrite of the Texas discovery rules to the Supreme Court Advisory Committee.

I’ve only got five minutes, so I won’t try to cover all the changes, but here are some highlights:

  • Rule 190.4 would require a Federal-style initial conference followed by a discovery control plan and docket control order. I often find the initial conference a waste of time—it’s too early to address all those issues—but it’s relatively harmless.
  • Rule 192.4(b) would change “the burden or expense of the proposed discovery outweighs its likely benefit” to “the discovery sought is not proportional to the needs of the case.” In other words, the proposal writes proportionality into the rule, although proportionality is already implicit.
  • Rule 193.2(a) targets “prophylactic” objections: “An objection must state whether any responsive materials are being withheld on the basis of the objection.” This sounds like a good rule, but expect it to be routinely ignored.
  • Rule 194 would now require Federal-style initial disclosures. Unless otherwise agreed or ordered, both sides would have to serve them within 30 days after the defendant’s answer. For Texas practice, this completes the decades-long shift in philosophy from “trial by ambush” to putting your cards on the table from the start. Also, like the federal rule, the new rule would allow “a description by category and location” in lieu of actually producing the documents—I’ve never understood the point of this.
  • Rule 195.5(a)(4) would expand the scope of expert disclosures to be closer to Federal Rule 26.
  • Rule 195.5(c) would generally exempt communications with testifying experts from discovery (like the Federal rules–notice a pattern?). Overall, this is a good change for reasons I explained in my “Proposed Changes” post.
  • Rule 199.1(b) would add total hour limits for depositions (50 hours for a typical case).
  • Proposals for addressing ESI and spoliation are still being discussed.
  • Rule 196.1(c) would provide: “Unless otherwise stipulated or ordered by the court, a party may serve on any other party no more than 15 requests for production or for inspection in a Level 1 case or 25 requests for production or for inspection in Level 2 or Level 3 cases, including discrete subparts.” [record scratch]

Wait, what?! You’re telling me in a typical case I only get to serve 25 requests for production?

If you’re not a lawyer, or if you’re a lawyer who doesn’t litigate, that probably doesn’t sound unreasonable. But trust me, 25 requests for production is not a lot.

I’ve been practicing business litigation in Texas for over 20 years. That’s not as long as most of the people on the Supreme Court Advisory Committee, but it’s still a pretty good run. I don’t think I’ve ever had a case of even the slightest complexity where each side served fewer than 25 requests for production.

My fellow litigators understand that you don’t know what you’re going to get when you serve that first broad set of requests for production. And you usually don’t know what the real factual disputes are until you get some substantive documents from the other side and take one or two depositions.

That’s not all. It’s hard enough to get the documents to prove your claim or defense when the other guy is cooperating. When opposing counsel is actively trying to obstruct your efforts to get the documents you need, it’s even harder. For example, I had a fairly simple non-compete case where I had to serve about a dozen sets of requests for production because the opposing party was so slippery.

Surely I’m not alone. I’m a little surprised that the highly experienced litigators on the Supreme Court Advisory Committee would endorse a 25-request limit. I’d be curious to know how many of them have ever had a business lawsuit where 25 requests for production were adequate.

IMG_7223
Take my license, all that jive

Maybe they’ve seen too many cases with an excessive number of requests for production. But there is already an inherent reasonableness limit. Let’s say a party has already served 75 requests for production in three separate sets and then serves a fourth set of 25 more requests. If those requests are unreasonable or duplicative of prior requests, then the responding party can file a motion for protective order asking the judge to limit the number of requests. I don’t think anyone doubts the trial court judge’s discretion to grant a motion like that.

If, on the other hand, those new requests are relevant to issues in the case, reasonably tailored, and not duplicative of prior requests, I say they should be allowed.

But we must reduce the cost of discovery, right?

I’m all for trying to contain the cost of discovery. But it’s not the number of requests for production that is driving up the cost of discovery. In my experience, it’s really two things: (1) emails, and (2) fighting over discovery.

The impact of emails on the cost of litigation is well known. That ship has sailed.

The other factor that makes discovery so expensive is when the lawyers can’t get along. It’s really the discovery battles that drive up the cost. These skirmishes are usually the result of requesting lawyers serving unreasonably broad requests and/or responding lawyers making a litany of unreasonable objections. The problem is then compounded when trial court judges don’t want to get their hands dirty.

These are the main factors that make discovery expensive, not the number of requests for production.

I don’t know how to fix these problems. But I do know that limiting parties to 25 requests for production isn’t going to make lawyers more cooperative, and it isn’t going to change the fact that reviewing and producing thousands of emails is expensive.

If anything, this new speed limit is likely to increase gamesmanship and battles over discovery. If you only get 25 requests, your incentive is to make them broad. That’s going to lead to more objections and more discovery motions. And don’t get me started on arguing about “discrete subparts”; we already know from interrogatories how much time lawyers can waste on that.

Proponents of the limit will point out that you won’t need as many requests for production because the other party has to produce their evidence as part of the new initial disclosures. That’s a fair point, but it doesn’t help me with getting the documents I need to prove my case.

In fairness to the proposal, I also have to point out the preamble: “Unless otherwise stipulated or ordered by the court . . .”

That’s a good safety valve. It leaves the parties free to agree on a greater number of requests for production, and I expect a lot of litigants—especially in complex cases—will avail themselves of that option. And even if the parties don’t agree, the judge can order a greater number of requests if a party offers a good reason.

So the proponents of this revision would say, listen dude (that’s what they call me), you’re overreacting.

But I still don’t think we should start with the presumption that 25 is a reasonable number of requests for production. When the parties can’t agree, some judges are likely to fall back on the number in the rules. So if we’re going to have a number, it should be a good number. Even better, let’s have no presumptive limit and just rely on an inherent limitation of reasonableness.

That was the decision the Texas Supreme Court effectively made when it adopted the “new” discovery rules back in 1999, when I was a new lawyer and Gary Cherone was singing for Van Halen. Those rules limited the number of interrogatories a party could serve but left the number of requests for production open-ended.

The Supreme Court Advisory Committee should do the same thing now. Most of the proposed changes look good. Just take out that 25-request limit.

And May the Force be With 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. He likes both David Lee Roth and Sammy Hagar. 

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.

Legislation Aims to Reign in the TCPA, Protect Non-Compete Suits

Legislation Aims to Reign in the TCPA, Protect Non-Compete Suits

Winston Churchill said democracy is the worst possible form of government, except for all the alternatives. I recall that sentiment any time I think about the Texas legislature. I also think of the words of another wise man, Obi-Wan Kenobi, when he described Mos Eisley spaceport to a young Luke Skywalker.

But sometimes the legislature surprises you and does something halfway sensical.

To wit: on February 28, 2019, Representative Jeff Leach (R-Plano) filed House Bill 2730, which would amend the Texas Citizens Participation Act (“TCPA”). My Fivers already know the TCPA is the hottest thing in Texas litigation right now, and that it could use some amending.

The bill would make these fundamental changes:

  • The TCPA would be limited to suits implicating the constitutional rights to petition, speak freely, or associate, as those rights are applied by state and federal courts—not as those rights were broadly defined in the original TCPA.
  • The TCPA would not apply to suits to enforce non-competes or NDAs.

Notably, the bill does not exempt suits brought under the Texas Uniform Trade Secrets Act (TUTSA) from application of the TCPA.

The bill would also make these less fundamental, but still important, procedural changes:

  • Certain motions—including a motion to compel and a motion for summary judgment—would not trigger the right to file a TCPA motion to dismiss.
  • The TCPA would expressly state that its purpose is procedural (to avoid application in federal court?)
  • At least 14 days’ notice of a hearing on a TCPA motion would be required.
  • The responding party could avoid the TCPA motion—and any award of attorney’s fees—by filing a nonsuit at least three days before the hearing.
  • The statute would not apply to a compulsory counterclaim.

In departing employee litigation, the overall effect would be to shift the balance of power back towards companies who sue to stop their former employees from working for competitors.

More bills have since been filed. Senator Angela Paxton (R-McKinney) introduced SB 2162, which matches HB 2730. Rep. Joe Moody (D-El Paso) has offered a narrower bill, HB 3547, that would exclude trade secret and non-compete claims from the definition of “right of association.” And Rep. Dustin Burrows (R-Lubbock) has offered House Bill 4575, another more limited rewrite, which would exempt DTPA and non-compete claims.

You can find a useful comparison chart of these bills here at Sean Lemoine’s “Anti-Slapp Texas” blog, which is a great source for TCPA developments generally.

How the Sausage Gets Made

No doubt these bills were in response to Five Minute Law’s call for reform in It’s Alive, It’s ALIVE! How to Kill a TCPA Motion in a Trade Secrets Lawsuit. Right?

More likely it was in response to the chorus of Texas appellate judges saying something has to be done to limit the TCPA it to its stated purpose of protecting constitutional rights. Nobody really intended the statute to apply to, for example, an ordinary departing employee lawsuit alleging breach of a non-compete and/or misappropriation of trade secrets.

On the other hand, I doubt much happens in the legislature unless either (1) some powerful donor or interest group is pushing for a change (I was going to say “special” interest group, but that would be somewhat redundant), or (2) some issue has personally irritated a legislator.

Then it hit me. Leach, a Republican representing parts of Collin County, practices complex commercial and civil litigation with Gray Reed. So I’ll bet he has some firsthand experience with TCPA motions.

Plus, as I speculated in Can You “Plead Around” the TCPA?, “[c]ompanies that want to enforce their non-competes and protect their (alleged) trade secrets are going to push back on broad application of the TCPA.” You had to think that business groups were going to get behind some effort to reign in the TCPA.

And right on cue, “Texans for Lawsuit Reform” circulated an 18-page report urging changes to the TCPA. See TLR Comes Out Swinging Against the Texas Anti-SLAPP. From the press I’ve seen, it appears that TLR is backing the more sweeping changes in the bills offered by Leach and Paxton.

Naturally, this has produced a counter-offensive from media interests and free speech groups, resulting in editorials like the Fort Worth Star-Telegram’s Your right to share your opinion is threatened by this proposed state law. The Star-Telegram prefers Moody’s narrower bill, warning that the broader rewrites “would allow anyone to file a lawsuit against a speaker or writer regardless of whether the claim is valid.” (Can you imagine?!)

For more articles, see Media Groups Come Out Swinging Against Changes to the Texas Anti-Slapp.

This is politics, of course, so you don’t always know exactly who is backing what and with what motives. But I can tell you that the opinions you find in the editorials have very little to do with the actual reality of TCPA practice. When practicing litigators who actually handle TCPA motions read the heated rhetoric, we just kind of shake our heads and chuckle.

If I Ran the Zoo . . .

Some have asked me, as a lawyer who handles a lot of departing employee litigation, what I think about the proposed legislative changes. But I’m a guy who thinks Texas should have a state income tax, so that tells you how much currency my opinions hold.

As with so many things in politics, I don’t even know where to begin.

If it were up to me, Texas would encourage more competition by only allowing non-competes in the sale of a business. This would mean less non-compete litigation, thus less billable work for me. On the other hand, employers would just shift to suing former employees for misappropriation of trade secrets—the “de facto” non-compete—so maybe my business wouldn’t dry up.

And if I made the rules, we wouldn’t have special-interest legislation that adopts a different set of rules for one particular type of litigation. So the TCPA (and a lot of other statutes) would have never passed in the first place.

But of course, we are not writing on a blank slate. In politics, as in law, you have to take the world as it is, not as you wish it to be. Considering Texas has a non-compete statute that allows reasonable non-competes and a TCPA that has the stated purpose of protecting constitutional rights, it does make sense to change the TCPA’s broad definitions and to carve non-compete suits out of the statute.

The Preemption Predicament

But does the TCPA apply to non-compete lawsuits in the first place? Section 15.52 of the Texas Covenants Not to Compete Act states that its criteria for enforceability, procedures, and remedies for non-competes are exclusive and preempt other law. Citing this provision, some have argued that the non-compete statute already preempts the TCPA.

Similarly, Section 134A.007 of the Texas Uniform Trade Secrets Act states that it “displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret.” Does this mean that TUTSA preempts the TCPA?

Texas appellate courts have yet to rule on these preemption questions.

Ironically, if House Bill 2730 becomes law, it could imply that the non-compete statute never preempted the TCPA. If the non-compete statute already preempted the TCPA, one could argue, there would be no reason for the legislature to add an exemption for non-competes to the TCPA. After all, the law is a seamless web.

And what would passage of the legislation mean, if anything, for trade secrets claims?

As with so much legislation, the proposed changes to the TCPA in House Bill 2730 and the other bills would answer some questions but raise others. Every time the legislature messes with the civil justice system, there are unintended consequences. But this is how we do it.

As Obi-Wan might say, “Who is more foolish? The fool or the fool who follows him?”

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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.

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.