Set Phazrs to Stun: Motions to Dismiss in Texas Trade Secrets Litigation

Set Phazrs to Stun: Motions to Dismiss in Texas Trade Secrets Litigation

I’m not big on motions to dismiss, for reasons I’ll explain later.

Still, I often handle lawsuits with trade secrets claims, and sometimes those claims are a little questionable, even on their face. So maybe I should give motions to dismiss another look.

It’s an important issue, because if you represent the defendant, you may be able to get the trade secrets claim dismissed before your client has to pay an arm and a leg fighting over production of documents and other discovery issues. Conversely, if you represent the plaintiff in a suit for misappropriation of trade secrets, you need to know how to adequately plead the  claim so you can survive a motion to dismiss.

That’s true of any kind of lawsuit, but it’s especially important in a trade secrets lawsuit. To understand why, let’s look at a cousin of a trade secrets claim: a claim for breach of a non-compete.

It’s not hard to plead a claim for breach of a non-compete. You allege, for example, that Dawn Davis signed an employment agreement with Paula Payne Windows that includes a non-compete, that Dawn quit and went to work for a competitor, and that she has breached the non-compete by bringing her customers to the new company.

Dawn’s lawyer is going to have a hard time getting that suit dismissed at the pleading stage. In federal court, Dawn could file a Rule 12(b)(6) motion to dismiss, but good luck with that. To overcome a Rule 12(b)(6) motion, all the plaintiff has to do is plead facts that are sufficient on their face. At that point the plaintiff doesn’t have to prove the facts.

It’s even easier for the plaintiff in state court in Texas, where I practice. Traditionally, there was no “motion to dismiss” in Texas procedure. The best you could do was to file “special exceptions” asking the plaintiff to plead the claim more specifically.

That has changed to some degree. Texas now has “Rule 91a” motions to dismiss and “TCPA” motions to dismiss. There was a short, glorious era when you could move to dismiss a trade secrets claim under the Texas Citizens Participation Act, but those days are gone. (See Shrinkage: TX Legislature and 5th Circuit Cut the TCPA Down to Size.)

So that leaves us with Rule 91a motions in Texas state court practice. Rule 91a is sort of the Texas equivalent of federal Rule 12(b)(6). I say “sort of” because it’s similar in some ways, different in others. Maybe I’ll cover that in a future post, but for now just Google it and you’ll probably find some decent articles.

Anyway, the point of that detour was that in both state and federal court, it’s not going to be hard for Paula Payne Windows to plead a case for breach of the non-compete. We’re not talking about whether Paula Payne ultimately wins the case, just whether it can plead enough facts to avoid getting dismissed at the outset.

Pleading problems in trade secrets cases

Adequately pleading a trade secrets claim can be more difficult. In a typical departing employee scenario, you often run into three problems.

First, you don’t always know what documents the employee took.

Second, even if you have evidence the employee took documents containing the alleged trade secrets, you may not have any direct evidence that the employee has already used the trade secrets or disclosed the trade secrets to the new employer.

Third, specifically identifying the trade secrets in your pleading may be difficult, or undesirable, or both.

Here’s an example. Suppose a company called Phazr developes cutting-edge millimeter wave (mmwave), virtualized Radio Access Network (vRAN), and Radio Frequency (RF) technology for 5G wireless communications networks. Just hypothetically.

Three of Phazr’s engineers leave the company and go to work for Mavenir, a company that competes with Phazr but does not have the capacity to develop or produce these particular technologies.

Suppose you are Phazr’s outside litigation counsel. Phazr’s general counsel calls you, freaking out. “Mavenir took our three key guys,” she says. “I’m talking about our principal wireless systems engineer, a vice president, and our principal RF engineer.”

“But did they have access to your trade secrets,” you ask.

“Absolutely,” she says. “They had access to the password-protected database and knew everything about our proprietary technology. We’ve got to get an injunction before they give Mavenir everything!”

Trouble is, Phazr doesn’t yet have any evidence that the engineers took documents containing the secret technology, nor does it have evidence that the former employees disclosed the technology to Mavenir or used it to compete with Phazr.

So you do the best you can. You plead the facts about the importance of the secret technology, the positions the employees held, their knowledge of the technology, and their access to the confidential information.

And to establish “misappropriation,” you allege that each employee “misappropriated Plaintiff’s trade secrets by taking trade secrets learned during his employment and stored on a password-protected shared database and has or will potentially use them during his employment with Mavenir to Plaintiff’s detriment.”

These were essentially the facts in the recent case Phazr, Inc. v. Ramakrishna, No. 3:19-CV-01188-X, 2019 WL 5578578, at *1-2 (N.D. Tex. Oct. 28, 2019).

Were these allegations sufficient to state a claim for misappropriation of trade secrets?

Everything I learned was wrong

If this had been a question on my first-year Civil Procedure exam in law school, it would have been easy. Sure, the pleading is not very specific about how and when the employees allegedly used the trade secrets, but the allegations are more than sufficient to give the defendant “fair notice” of the basic nature of the claim. Unless it’s a claim for fraud, which must be pled with “particularity,” that’s all the Federal Rules of Civil Procedure require.

That’s the answer I would have scribbled in my blue book. And I knew a guy like Prof. Mike Tigar wasn’t big on nit-picky pleading standards. And if you had asked me the same question in my second-year Texas Civil Procedure class, it would have been even more of a no-brainer.

That’s because the Texas pleading standard was “fair notice” on steroids. If the pleading isn’t specific enough, file some special exceptions. Or serve some contention interrogatories and take a deposition. This ain’t federal court. I can just imagine Prof. Jack Ratliff saying this in his Texas twang.

But that was a long time ago. Before the dark times. Before Twombly and Iqbal.

Turns out that “fair notice” stuff was all wrong. After I graduated law school, the U.S. Supreme Court decided a pair of cases affectionately known as Twiqbal, holding that a plaintiff has to plead enough specific facts to state a claim for relief that is “plausible” on its face. And plausible means more than merely “probable.” Fair notice isn’t enough.

Technically that’s just for federal court. Texas is still Texas. But the Texas Rules of Civil Procedure are becoming more “federalized” all the time. See Federal-Style Motions to Dismiss May Come to Texas.

Mind you, the “plausible” standard is still a fairly low bar, and it leaves a lot of room for interpretation. But you know if the defendant’s lawyers can make a plausible case that the plaintiff’s allegations are implausible, they’re likely to file a motion to dismiss, even if the chance of success is low.

Why BigLaw likes motions to dismiss

Motions to dismiss are especially popular in the BigLaw world. Big law firms often defend big lawsuits filed in federal court. And a Rule 12(b)(6) motion to dismiss is the perfect assignment for a BigLaw associate. You study the petition, research the law that applies, write a nice legal research memo, and then draft the motion. The partner revises the motion, and then you file it. The plaintiff files a response, you file a reply, and if you’re lucky you even get a hearing with the judge. It’s good for at least 20 billable hours.

Chances are, you will lose the motion, but that’s ok. In addition to the billable hours, this approach suits the standard BigLaw defense playbook: delay. Stop the plaintiff’s momentum. Drive the cost of the litigation up for the plaintiff. Plus, you want to try to put off the time and expense of discovery to your client as long as possible.

Even aside from the billable hours, motions to dismiss are often important in the lawsuits big law firms like to defend, like securities fraud class actions against big public companies. The pleading standard is even higher for such cases, especially in the Fifth Circuit, so beating a motion to dismiss is a huge win for the plaintiff. There’s a decent chance the case will then settle because of the cost of discovery to the defendant. So the motion to dismiss is often the key event in the lawsuit.

In my litigation practice, not so much. In a typical case I’m representing a smaller business, a startup, an entrepreneur, or an individual executive or salesperson. The damages are more often in the low to mid six figures, not the millions. So like a lot of small-firm lawyers, I’m not looking to delay things and drive up the cost. I usually want to get right to the merits and either settle or duke it out in court.

So like I said, I’m not big on motions to dismiss.

But two developments may change my mind. First, I see increasing use of contrived trade secrets claims to try to impose a “de facto” non-compete on departing employees. I touched on this issue in When Is a Customer List a Trade Secret?

Second, I’m seeing cases like Phazr that can be cited in support of a motion to dismiss.

The Phazr Case

The complaint in Phazr stated a pretty plausible case that the three employees had access to the company’s confidential technology. But the pleading fell short because it did not state enough facts to make a plausible case for the misappropriation element of the claim. Phazr, 2019 WL 5578578 at *4. There were three reasons for this.

First, while the complaint said the right words–“misappropriated and used or disclosed”–this was insufficient, because the “formulaic recitation of the elements of a cause of action will not do.” Id.

Second, the the complaint only speculated that the three employees misappropriated trade secrets. While the complaint alleged the employees took trade secrets stored on a password-protected database, it “fail[ed] to identify what trade secrets the individual defendants took from the database.”

Even aside from that, the plaintiff did not allege facts establishing that the defendants disclosed or used the alleged trade secrets:

Even if Phazr had identified the trade secrets the individual defendants took from its database (which it did not), it still fails to adequately allege that the individual defendants ever disclosed the trade secrets to Mavenir or used them at Mavenir. Indeed, Phazr has failed to show that Mavenir ever acquired the trade secrets from the individual defendants. In short, Phazr at best pleads possibility rather than plausibility.

The court added that Mavenir’s mere employment of three former Phazr employees did not establish that Mavenir acquired and used Phazr’s trade secrets. Id. This was obviously a nod to my post The “Inevitable Disclosure” Doctrine in Texas Trade Secrets Litigation.

Third, the allegation did that Mavenir lacked the capacity to develop competing technologies before it hired the three employees did not establish “actual causation,” i.e. that Mavenir gained the capacity to develop the technologies by hiring the employees. Id. at *5.

The court concluded that Phazr had failed to adequately alleged misappropriation of trade secrets and therefore failed to state a claim. Id.

This conclusion was consistent with precedent, the court said. The court acknowledged that plaintiffs have survived motions to dismiss by “identifying specific trade secrets that defendants used to assist competitors in stealing clients.” Id. (citing BRG Ins. Sols., LLC v. O’Connell, No. 3:16-CV-2448, 2017 WL 7513649, at *8 (N.D. Tex. July 18, 2017)).

In another case, the plaintiff avoided dismissal by alleging that employees emailed themselves confidential data and that, when they joined a competitor, the competitor acquired the data and used it to bid against the first employer. Id. (citing Clean Energy v. Trillium Transp. Fuels, LLC, No. CV H-19-244, 2019 WL 1522521, at *3 (S.D. Tex. Mar. 22, 2019)).

But this was not such a case. When the complaint lacks factual content showing that a defendant took or participated in using specific information, dismissal of a trade secrets claim is appropriate. Id. (citing Red Ball Tech. Gas Servs., LLC v. Precise Standards & Sols., Inc., No. 4:17-CV- 2090, 2018 WL 276467, at *4–5 (S.D. Tex. Jan. 3, 2018)).

In short, “Phazr fail[ed] to allege particular acts of acquisition, disclosure, or use of its trade secrets that would constitute actual—and not merely possible—misappropriation.” Id.

The philosophical divide

So maybe next time I feel like a trade secrets claim against my client is especially weak, I’ll file a motion to dismiss and cite Phazr and the other cases it cites.

But the response I’ll get from the plaintiff’s lawyer is obvious: we don’t yet have specific evidence of how the defendants used or disclosed our trade secrets because they have hidden that information from us. We need discovery to find that out.

It’s at least a reasonable argument, and it points to the fundamental philosophical divide over pleading standards and motions to dismiss. One side thinks that you should not have the right to file a lawsuit and open the floodgates of discovery unless you already have evidence to support your allegations. The other side thinks you should only need a reasonable basis for pleading the claims, and the purpose of discovery is to allow you to obtain evidence to support the claims.

There’s enough wiggle room in the pleading standards to allow judges of either school of thought to decide whether they think a particular trade secrets claim is strong enough to proceed. There’s also enough room for interpretation to allow judges to block trade secrets claims they think are contrived and without merit. And maybe that’s how it should be.

For litigators like me, the bottom line is that cases like Phazr identify some common pitfalls to try to avoid when drafting the complaint (or petition), and conversely, opportunities to move to dismiss lawsuits that fall short.

_______________________________

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

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

 

Influential Blogger Recommends Tweaking New Texas Ethics Rules

Influential Blogger Recommends Tweaking New Texas Ethics Rules

If you scour every issue of the Texas Bar Journal for proposed changes to the ethics rules that govern Texas lawyers–and who doesn’t?–then you saw that the March 2020 edition included proposed changes to Texas Disciplinary Rules of Professional Conduct 7.01-7.06. These are the rules that regulate lawyer advertising, including social media. You can find background material about these changes here.

I’ve blogged about this topic (see Five Rules Texas Lawyers and Other Professionals Must Follow When Using Social Media) and taught continuing legal education programs on it, so you know I was eager to check out the proposed changes. And guess what, the proposed changes are generally an improvement.

It gets even better. You can submit public comments on the proposed changes to the Committee on Disciplinary Rules and Referenda by email to CDRR@texasbar.com or by clicking here. You can also call in for a public hearing on the proposed changes on my birthday, April 7. They will even let law bloggers participate. (Thanks to the Rules and Referenda Staff Attorney, Brad Johnson, for providing this helpful info.) 

You know I’m not going to pass up a chance to give my two cents on these proposed revisions. So here’s a draft of my memo to the Committee.

Memo

To:            Texas Committee on Disciplinary Rules and Referenda

From:       Five Minute Law

Re:            Changes to Texas Disciplinary Rules of Professional Conduct 7.01-7.06

Date:         3/23/20

A. Overview

  • My focus is on application of the advertising rules to social media. I am a practicing Texas litigator who has taught CLE programs on this topic for ethics credit.
  • The overhaul of the advertising rules is a welcome change. The old rules were unwieldy and difficult to apply to current reality, especially social media.
  • A literal application of the current rules could mean that a lawyer has to file every social media post with the Advertising Review Committee.
  • In addition, the current rules could be read to require all lawyers to file their LinkedIn profiles (and other “landing page” profiles). Hardly any Texas lawyer does this.
  • The new rules offer some guidance by now defining “advertisement.” The definition has three elements: (1) communication to the public, (2) offers or promotes legal services, and (3) substantially motivated by pecuniary gain.
  • The new definition of “advertisement” is helpful, but could be improved.
  • The Advertising Review Committee’s current Interpretive Comment 17 provides helpful guidance that “[b]logs or status updates considered to be educational or informational in nature are not required to be filed with the Advertising Review Department.”
  • Consistent with Interpretive Comment 17, the new definition of “advertisement” should include a carve-out or safe harbor to confirm that educational communications are not “advertisements.”
  • The new Rule 7.05 expands the exemptions from the filing requirement to include “a communication on a professional social media website to the extent that it contains only resume-type information.” Again, this is an improvement, but it could be better.
  • It is unclear whether the typical lawyer LinkedIn profile—which often includes endorsements and recommendations—would fall under this exemption. This should be clarified.

B. My Perspective

My perspective on the advertising rules and their application to social media is based on several things:

  • I have been a practicing Texas litigator for over 20 years.
  • My current practice focuses on representing both employers and employees in disputes involving non-competes, trade secrets, and other departing employee issue. There is no board certification for this practice area.
  • I am a frequent user of social media for both professional networking and sharing educational content with other lawyers and the public.
  • I publish a weekly blog, Five Minute Law, which focuses on litigation-related topics for both lawyers and non-lawyers.
  • I have written about the ethics of lawyer use of social media in Texas at my blog and have presented the topic multiple times at continuing legal education programs.

C. Problems with the Current Rules

The current Texas advertising rules were written specifically to regulate plaintiff’s personal injury lawyers, but they apply to everybody.

So, for example, Rule 7.02(a)(2) says a communication about past results is false and misleading unless:

(i) the communicating lawyer or member of the law firm served as lead counsel in the matter giving rise to the recovery, or was primarily responsible for the settlement or verdict,

(ii) the amount involved was actually received by the client,

(iii) the reference is accompanied by adequate information regarding the nature of the case or matter, and the damages or injuries sustained by the client, and

(iv) if the gross amount received is stated, the attorney’s fees and litigation expenses withheld from the amount are stated as well.

The problems with this rule are obvious. What if you weren’t lead counsel? What if you’re a defense lawyer who got a take-nothing verdict, so no amount was “actually received by the client”? What if you’re a transactional lawyer and there was no litigation, settlement, or verdict at all?

Fortunately, the Advertising Review Committee of the State Bar recognized the problem and published Interpretive Comment 26. It says, essentially, comply with the parts of the rule that apply to your situation, and don’t worry about the rest.

Even aside from these specific flaws, the way the current rules define false or misleading communications by reference to specific instances is problematic. I’ve always thought it would make more sense to have one general rule, i.e. don’t make false or misleading statements. The new proposed Rule 7.01(a) essentially does that. This is a definite improvement.

Another problem with the current rules is that, generally, a lawyer can’t say “I specialize” or “I’m a specialist”—even if it’s true—if the lawyer is not board certified in that practice area.

The reality today is that most lawyers specialize in a particular practice area but are not board certified. And what do you do if you specialize in, for example, non-compete and trade secret litigation? There’s no board certification for that.

The answer is that you just use a different word. Rather than say “specialize,” you say that your practice “focuses” or “concentrates” on a particular area of law.

Obviously, this puts form over substance. A limitation so easily avoided seems silly.

The new Rule 7.02 seems to fix this. It allows a lawyer to say the lawyer “practices in particular fields of law” and removes the express prohibition on a non-certified lawyer saying the lawyer is a “specialist.” It even appears that under the new rule a non-certified lawyer could say “specialize” or “specialist,” provided that statement is not false or misleading.

That is what the rule should be. The only constituencies that might have a reason to oppose this are board-certified lawyers and the Texas Board of Legal Specialization.

So I applaud this and the other proposed improvements to the “false and misleading” rules. But that still leaves the problem of social media.

D. Problems Applying the Current Rules to Social Media

Obviously, the current advertising ethics rules were not written with social media in mind, and applying them to social media is difficult.

The fundamental problem is that lawyers do not usually think of their social media profiles or posts as advertising, but these communications could be considered advertising under a literal application of the current rules. That would mean for every profile or post, the lawyer would need to fill out an application, pay a fee, and file a copy with the Advertising Review Committee of the State Bar of Texas.

Take LinkedIn. It is by far the most popular platform for professional networking for lawyers. Almost every Texas lawyer has a LinkedIn profile.

The profile includes an “About” section that usually contains a self-promoting description of the lawyer’s practice written by the lawyer, an “Experience” section showing the firms the lawyer has worked for, and an “Education” section with the lawyer’s degrees. These sections are followed by the “Skills and Endorsements” section and the “Recommendations” section (more about those later).

In short, the point of the profile is to promote the lawyer’s experience and qualifications as a lawyer. And in the vast majority of cases, the profile is set to be viewable by the public. So is it an “advertisement” that must be filed?

It sure sounds like advertising, and the Advertising Review Committee has said it is. Interpretive Comment 17(C) says: “Landing pages such as those on Facebook, Twitter, LinkedIn, etc. where the landing page is generally available to the public are advertisements.”

It therefore appears that, generally, Texas lawyers must file their LinkedIn profiles.

Of course, hardly any lawyers do this. I have plenty of anecdotal evidence from raising this question at multiple CLE presentations. It appears that thousands of Texas lawyers are currently breaking the rules by not filing their LinkedIn profiles (arguably).

This is an untenable situation.

One possible solution is for a lawyer to limit the material in the LinkedIn profile to matters that are exempt from the filing requirement under current Rule 7.07(e). The exemption includes some basic resume-type information, including “the particular areas of law in which the lawyer or firm practices.”

That helps, but it does not entirely solve the problem. Remember Endorsements and Recommendations? They expressly promote the qualifications and experience of the lawyer, and they do not seem to fall under any existing exemption. So, even a lawyer who tries to limit her profile to material that falls under an exemption is still going to have a hard time achieving strict compliance.

And the problem is not limited to profiles. There is also the problem of social media posts.

E. The Problem with Social Media Posts

Let’s take a typical LinkedIn post by a lawyer. The lawyer shares an article that recognizes the lawyer’s firm as a top firm in a particular practice area, adding the comment “Congrats to my wonderful colleagues!” If the lawyer published this in a magazine, we would all agree it’s an advertisement. But it is unlikely the lawyer will consider the social media post an advertisement, and even less likely the lawyer will file it with the Advertising Review Committee.

I suppose the Bar could take a hard line and strictly enforce the filing requirement. But the likely result would not be lawyers filing their LinkedIn profiles and posts as advertisements, but lawyers getting off LinkedIn. That would not benefit the profession or the public.

The problem is even greater on Twitter. A lawyer who is active on Twitter may share dozens of tweets, retweets, and responses to tweets in a day. But we don’t want to make  the lawyer evaluate each tweet to determine if it’s an “advertisement,” file a copy of each one that crosses the line into advertising, and pay multiple fees each day.

F. The “Educational or Informational” Solution

Interpretive Comment 17 offers a potential solution by drawing a line between “educational or informational” content and advertising: “Blogs or status updates considered to be educational or informational in nature are not required to be filed with the Advertising Review Department.”

So, a lawyer who wants to post content on social media can avoid violating the filing rule by keeping the content “educational or informational” rather than self-promotional.

For example, a tweet that comments on a recent Texas Supreme Court decision would not be advertising, because it’s educational or informational, but a tweet that says “my firm just won a huge case for our client X at the Texas Supreme Court” might be advertising.

It’s not a perfect solution, but it helps.

G. The Proposed New Definition of “Advertisement”

The new Rule 7.01 improves on the situation by defining “advertisement.” The proposed definition is “a communication substantially motivated by pecuniary gain that is made by or on behalf of a lawyer to members of the public in general, which offers or promotes legal services under circumstances where the lawyer neither knows nor reasonably should know that the recipients need legal services in particular matters.”

The last part of the definition is there to distinguish an advertisement from a “solicitation.” I will focus on the first part.

The proposed definition has three elements:

(1) communication to the public

(2) offers or promotes legal services

(3) substantially motivated by pecuniary gain

One of these things is not like the other. Elements 1 and 2 are objective. Element 3 is subjective. In other words, you can evaluate elements 1 and 2 solely by looking at the communication on its face. Element 3, in contrast, requires looking into the mind of the lawyer who made the communication.

It would be preferable to make the definition entirely objective. The focus should be on the substance of the communication, not its motivation.

The problem with the subjective element, in a nutshell, is that there is almost always some pecuniary motivation to content a lawyer shares on social media. Even when a lawyer shares a post that is entirely educational, the lawyer is probably hoping that the post will help to generate interest from a potential client or referral source.

I’ll use myself as an example. My last three blog posts covered application of force majeure clauses, drafting considerations for Texas non-competes, and a recent Texas Supreme Court case on whether an exchange of emails established an enforceable purchase agreement.

Each of these posts was primarily “educational” in its content, for both lawyers and members of the public. And at the risk of flattering myself, I would also say the content was helpful to understanding the topics.

Was my motivation purely educational? Of course not.

Yes, I enjoy educating people, but my blog posts are also part of an overall networking and business development strategy. Obviously, I am hoping that these posts will help generate referrals by other lawyers or inquiries by potential clients. You might call that a “pecuniary” motivation.

H. Applying the New Definition of “Advertisement”

So would my blog posts be “advertisements” under the new proposed definition?

Probably not. That’s because my posts do not “offer or promote legal services,” at least not expressly. Ignoring the advice of marketing experts, I never add a “call to action” to my posts, e.g. “if you need help with drafting a force majeure clause or a non-compete, please contact me.” I avoid the call to action because it sounds too “salesy” for my taste, but also because I don’t want to turn my educational blog post into an advertisement that I’m supposed to file.

Plus, I could make a case that the post was only partly, not “substantially,” motivated by pecuniary gain.

The problem is the “probably.” It would be better if the new definition would provide more certainty that an educational post is not an advertisement, following Interpretive Comment 17. The “motivated by pecuniary gain” element adds some uncertainty.

To mitigate this problem I propose the following modification:

An “advertisement” is a communication substantially motivated by pecuniary gain that is made by or on behalf of a lawyer to members of the public in general, which and that offers or promotes legal services under circumstances where the lawyer neither knows nor reasonably should know that the recipients need legal services in particular matters. A communication, including an article, blog post, or social media post, that is primarily educational or informational and does not expressly promote the experience or qualifications of the lawyer or solicit potential clients is not a communication that “offers or promotes legal services.”

This continues existing policy (under Interpretive Comment 17) but provides more certainty.

I. The New Exemption for Resume-Type Information

The new Rule 7.05 expands the list of things that are exempt from the filing requirement. It includes a new exemption for “resume-type information” on social media:

(g) a communication on a professional social media website to the extent that it contains only resume-type information.

This is a welcome improvement. It potentially solves the problem with LinkedIn profiles—and other social media profiles—discussed above. Lawyers should be free to post resume-like information about their experience and qualifications on their social media profiles without worrying about whether they are required to file the profiles as advertisements.

The problem with the proposed exemption is that the term “resume-type information” is vague. In particular, it is not clear whether resume-type information includes endorsements and recommendations, and therefore it is not clear whether the exemption solves the LinkedIn profile problem.

To address this issue with more certainty, I propose the following revision:

(g) a communication on a professional social media website to the extent that it contains only resume-type information; “resume-type information” includes third-party endorsements and recommendations and other information about experience and qualifications customarily provided on social media profiles, provided the information is not false or misleading under Rule 7.01;

Again, lawyers are already sharing this information. We need a rule that accommodates this reality. A situation where thousands of lawyers are potentially violating the rules by not filing their profiles does not increase public confidence in the legal profession.

J. Conclusion: Lawyer Use of Social Media Should be Encouraged

The assumption that implicitly underlies my comments is that the rules should encourage lawyers to engage with other lawyers and the public on social media. There is a real benefit to both lawyers and non-lawyers when lawyers freely share information on social media. Any rule that would have a chilling effect on lawyer engagement on social media should be avoided.

Granted, there is a danger to the public from unscrupulous lawyers using social media, just like there was a potential danger when we allowed lawyers to write articles in magazines, place ads in the yellow pages, record TV and radio commercials, and put up billboards. But the general prohibition on false or misleading communications can do most of the work. Protecting the public does not require antiquated and byzantine rules that were never intended for social media.

I hope my comments are helpful to the Committee’s admirable effort to update and streamline the Texas advertising rules for the social media era.

So what do you think of my draft public comment? I’d love to hear your feedback. And if you agree with my suggested improvements, please email the Committee on Disciplinary Rules and Referenda at CDRR@texasbar.com and tell them “I agree with Zach Wolfe’s proposed revisions published at Five Minute Law.”

_______________________________________

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

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

Use the Force (Majeure)

Use the Force (Majeure)

Even if you’re not a lawyer, you’ve probably heard the phrase force majeure, which is French for “use the force, Luke.” Not as clumsy or random as the Latin, vis major. It’s an elegant phrase, for a more civilized age.

Force majeure actually means something like “superior force,” and it’s a concept you find in contract law. It’s the idea that a party to a contract is excused from strict performance of the contract’s terms if some extraordinary event beyond that party’s reasonable control prevented performance.

Force majeure is closely associated with an English phrase, “act of God,” which gives you an idea of the kind of event we’re talking about: hurricanes, tornados, cats and dogs living together.

Force majeure in contract law

Force majeure is an exception to the general rule of contract law. Unlike the law of negligence, contract law is usually not concerned with fault. If a party fails to perform a material requirement of a contract, it has breached the contract and is liable for the resulting damages to the other party. Generally, it doesn’t matter if the breaching party has a good excuse. You might say contract law imposes “strict liability” on the breaching party. It’s a “no fault” regime.

Is that fair?

Here’s one way to look at it: the whole point of a contract is to allocate risk between the contracting parties. Let’s say Pop Tarts are currently trading at $2.00 per box. If we sign a contract that says I will deliver a truckload of strawberry Pop Tarts to your store in 30 days for $2.00 a box, I’m taking the risk that the price will go up, and you’re taking the risk that the price will go down. If there’s a run on Pop Tarts after we sign the contract and the price doubles, I don’t get to complain that the contract price we agreed on isn’t fair.

That’s what I mean here by “strict liability.”

But this concept has its limits. In 1712, the King’s Bakers Company signed a contract to deliver 13 dozen strawberry tarts to Ye Olde Tavern for 15 shillings per dozen. An extraordinary cold snap destroyed that year’s strawberry crop, and the King’s Bakers could not deliver. The English court adopted the rule of force majeure, holding that this act of God was an unforeseen circumstance that excused the seller from performing.

Ok, I made that case up, but that was basically the common-law rule of force majeure. Then lawyers started incorporating this concept into the contracts they wrote. Today, force majeure is no longer a common-law rule that applies to all contracts. The issue now is interpreting the scope of the particular force majeure clause the parties agreed to (if any).

This should make it easy to figure out if a particular occurrence qualifies as a force majeure event. Just look at the definition in the contract.

But I know my Fivers. You’re shaking your heads no. You know it’s going to be more complicated than that.

A typical force majeure clause

Let’s look at an example. Here’s a typical force majeure clause:

Screen Shot 2020-03-14 at 10.10.06 PM.png

I’m sure you see the obvious problem: no Oxford commas. But let’s set that aside.

This definition has a two-part structure that you see in many legal definitions, whether in a contract or a statute. It defines a key concept by listing specific instances followed by a broader “catch-all” clause.

In this case, there are seven instances listed:

  • fire
  • flood
  • storm
  • act of God
  • governmental authority
  • labor disputes
  • war

Those are the specific enumerated events that qualify as force majeure. They are followed by the catch-all: “any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected.”

It is, of course, a little more complicated than that, because one of the seven specific things is “act of God,” which is also a kind of catch-all. But you get the idea.

The interesting thing about this kind of structure is that the catch-all informs interpretation of the enumerated events, while the enumerated events inform interpretation of the catch-all. (The latter principle is called ejusdem generis–again with the foreign languages!)

We don’t want to take the specific events out of context. Let’s say I can’t deliver the truckload of Pop Tarts because I set fire to my warehouse to get the insurance money. Under a literal interpretation, the force majeure clause would apply.

But obviously, that’s not the kind of “fire” the parties intended. You can see that from the catch-all, which shows the parties intended an enumerated event would only excuse performance if it was beyond the reasonable control of the party affected.

Should we apply force majeure clauses literally?

Let’s take a harder case. Say there’s a thunderstorm in the Houston area the day the truck is scheduled to arrive, and it causes such bad traffic that the truck is late. That’s a “storm,” and it is not an event under the reasonable control of the seller, so if the storm actually prevented timely delivery, the force majeure clause would apply, right?

Most of you are instinctively resisting this conclusion. But why? If you interpret the clause literally, it seems to apply. Shouldn’t a court enforce the “plain meaning” of the words the parties freely negotiated and agreed to?

I think the problem is that, for all our hard-nosed talk about plain meaning and strict liability, we can’t entirely avoid importing our moral notions of fairness into interpretation of the contract.

Our moral intuition tells us it’s not fair for the seller to avoid the contract just because there happened to be a thunderstorm and bad traffic that day. On the other hand, it doesn’t seem fair to hold the seller liable if the truck couldn’t get to the store because Hurricane Harvey flooded the roads.

Is there a way to rationalize this moral instinct, so that judges have an objective rule they can follow to determine whether a particular event falls under the definition the parties agreed to?

A recent case applying a force majeure clause

Let’s look at a fairly recent attempt to do that. In a 2-1 decision in TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176 (Tex. App.—Houston [1st Dist.] 2018, pet. denied), the majority tried to solve this problem with a concept that was not stated in the contract but is pervasive in the law: foreseeability. The dissent, in contrast, tried to solve the problem with textualism.

Did either succeed?

The contract in TEC Olmos was a farmout agreement to test-drill land in search of oil and gas. The contract set a deadline to begin drilling and included a liquidated damages clause requiring Olmos to pay $500,000 if it missed the deadline. Id. at 179. By pure coincidence, the force majeure clause in the contract was exactly the same as the example I used above.

Of course, something unexpected happened after the parties signed the contract. In the summer of 2014 the price of oil was over $100 a barrel. By December 2015 it was around $40. As a result of the significant drop in the global oil market, Olmos could not get the financing it needed to do the drilling. So Olmos tried to invoke the force majeure clause to extend the deadline.

The response from ConocoPhillips? You owe us $500,000.

But Olmos had a simple argument for avoiding liability: under the plain meaning of the force majeure clause, the worldwide drop in oil prices and resulting inability to obtain financing was “beyond the reasonable control” of Olmos.

The Court of Appeals disagreed. The court held that the change in the oil and gas market making it impossible for Olmos to obtain financing was not a force majeure event as defined by the contract. The court reasoned that a “foreseeable” event—such as a decline in the oil and gas market—cannot qualify as force majeure under the “catch-all” provision of the force majeure clause. Id. at 181-82, 186.

Foreseeability was part of the common-law force majeure doctrine, but it was not mentioned in the clause the parties agreed to. So was unforeseeability an implied requirement? The court said yes. “A term’s common-law meaning will not override the definition given to a contractual term,” the court said, but “we may consider common law rules to ‘fill in gaps’ when interpreting force majeure clauses.” Id. at 181.

The court explained that “when parties specify certain force majeure events, there is no need to show that the occurrence of such an event was unforeseeable.” Id. at 183. But when the party seeking to avoid performance relies on a catch-all provision, it must show that the event at issue was unforeseeable. Id. 183-84.

The majority reasoned that it would make no sense to allow a foreseeable event to satisfy the catch-all clause. “To dispense with the unforeseeability requirement in the context of a general ‘catch-all’ provision,” the court said, would “render the clause meaningless because any event outside the control of the nonperforming party could excuse performance, even if it were an event that the parties were aware of and took into consideration in drafting the contract.” Id. at 184.

I’m not sure I follow this reasoning. Dispensing with the unforeseeability requirement may render the clause broad—and maybe broader than what is fair—but it doesn’t render the clause meaningless. And shouldn’t we apply the plain language of the contract the parties agreed to? The word “foreseeable” didn’t appear in the force majeure clause.

The textualist dissent

Justice Brown made this point in his dissent. “The contract does not say that an event must have been unforeseeable to suspend performance,” he wrote. “I dissent because the Texas Supreme Court has repeatedly told us that it is this state’s policy to enforce contracts as they are written.” Applying this policy to the force majeure clause, Justice Brown said “[i]f parties wish to limit the scope of their negotiated force majeure provisions to require that an event must have been unforeseeable to excuse performance, it is not difficult to insert that single adjective into their written agreements.” Id. at 189.

Rather than reading an unforeseeability requirement into the force majeure clause, Justice Brown focused on the language of the clause. He emphasized that the clause used the word “hindered,” which dictionaries define to include “get in the way of” and “to make difficult.” “The word hinder suggests a low threshold before the force majeure clause applies,” he wrote. “The party does not have to be prevented from performing, only hindered.” Id. at 199.

In short, Justice Brown took a textualist approach to interpreting the force majeure clause, rejecting the majority’s notion that unforeseeability was implied.

I’m skeptical about whether textualism provides a definitive basis for deciding if a force majeure clause applies. It’s usually going to come down to a question of whether the event at issue falls within the “catch-all” clause, and the catch-all clause is always a little “fuzzy.” The reason there’s a dispute in the first place is that it’s debatable whether the event at issue is covered by the language of the clause. Still, I tend to agree with Justice Brown that the express language of the clause should take priority over a superimposed concept of foreseeability.

Plus, even aside from the the text, there’s a more fundamental problem with making the scope of a force majeure clause turn on whether the event at issue was “foreseeable.”

The problem with “foreseeable”

The majority in TEC Olmos assumed—and the parties apparently agreed—that a worldwide decline in the market causing an inability to obtain financing was foreseeable. Id. at 181 n.1. This was in part due to precedent that a downturn in the oil and gas market is foreseeable. Id. at 183 (citing Valero Transmission Co. v. Mitchell Energy Co., 743 S.W.2d 658 (Tex. App.—Houston [1st Dist.] 1987, no writ)).

But is an extraordinary global market crash any more “foreseeable” than the other “acts of God” typically listed in a force majeure clause? A hurricane, for example, is surely the type of event that can trigger a force majeure clause, but the parties to a contract can foresee that hurricanes happen, especially if they are on the Gulf Coast. An event that has its own “season” can’t be that unpredictable. I would guess a hurricane hits the Gulf Coast more often than the global oil market crashes.

The problem is that you can almost always make a reasonable argument that a given event is or is not “foreseeable.” No, the parties don’t sign the contract expecting that a fire is going to destroy the warehouse. On the other hand, the parties know fires sometimes happen. That’s why people buy fire insurance. So is a fire “foreseeable”?

Foreseeability is a common concept in the law, but after doing litigation for over 20 years, I don’t think the concept is that useful for reasoning our way to a conclusion. I think “foreseeable” is just a label we apply to an event or risk that our intuition tells us a party should be responsible for.

It’s not a binary question of whether an event is foreseeable or not. It’s really a question of how likely the event is, and to what extent the performing party has the ability to mitigate the risk of that event occurring. It’s a sliding scale with these two components.

I think this is the basic calculation we intuitively perform when we decide whether a particular unexpected event is the kind of event that should excuse a party from performance. I confirmed this with a scientific process: going through several hypotheticals with my wife and two kids while we ate tacos at the dinner table. It got a little heated.

But I think my wife hit on something when I asked why a global market drop would not satisfy the force majeure clause. “A market drop is beyond the party’s reasonable control, and that’s what the contract says,” I argued.

“But that’s just not how business works,” she responded. “It’s common sense!”

Common sense. Ultimately, I think that’s the best guide to deciding a force majeure dispute. And whether you agree with that or not, I think that relying on common sense and basic intuitions about fairness is usually what judges are doing anyway, regardless of how they write the opinion.

That’s not very satisfying as an objective basis for deciding disputes. But we just have to muddle through somehow. And based on TEC Olmos v. ConocoPhillips, if you’re a lawyer arguing a force majeure issue, you have to speak the language of “foreseeability.”

Do, or do not. There is no try.

_______________________________

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 had to cut the whole section on ejusdem generis because, hey, this is *Five Minute* Law.

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.

 

Top 15 Drafting Considerations for Texas Non-Competes

Top 15 Drafting Considerations for Texas Non-Competes

TexasBarToday_TopTen_Badge_VectorGraphic

When I think about drafting a Texas non-compete, I think about these words to a song I liked in the 80s:

Freedom of choice, is what you got. Freedom from choice, is what you want.

It would be so much easier if we didn’t have so many choices, especially when drafting non-competes.

You’ve got two basic choices at the start. You can just cut and paste from a form, like my Plain-Language Non-Compete, or you can take the time to consider the client’s particular needs, the legal issues raised, and the practical considerations, and then draft accordingly. If you do the latter, here are my top 15 things to think about.

1. Does your client really want or need a non-compete?

This is not really a “drafting” tip. But before you start drafting a non-compete, you might want to ask the client “are you sure you really want a non-compete?” I explain why in The Most Effective Form of Non-Compete in Texas (or Anywhere). Spoiler alert: the answer is that you are better off with a happy employee than with an unhappy employee who was required to sign an airtight non-compete (if such a thing existed).

2. Should you include a choice of law clause?

If you’re drafting a non-compete for an employee working in Texas, can you improve the chance of enforcing the non-compete by including a choice of law clause selecting some other state’s law?

Probably not. There are two reasons for this.

First, you are probably not going to find a state that is significantly more favorable to non-competes than Texas. There are some things about Texas law that are favorable to the employee, such as the fact that you can’t get damages for breach of an overbroad non-compete (see no. 6) and the prohibition of industry-wide exclusions (see no. 9) But overall, Texas law is relatively friendly to non-competes.

So if you’re going to select some other state’s law (Delaware is a likely contender), you should at least take the time to understand whether that state’s law is actually better for your client.

But even then, there’s a second reason choosing another state’s law won’t work: Texas law on choice of law.

If the employee is working in Texas, a choice of law clause selecting some other state’s law is probably not going to be enforceable in a Texas court. I cover this in “This Stuff’s Made in New York City!” How Texas Courts Decide Which State’s Law Applies to a Non-Compete.

I say “probably” because there is some wiggle room in the three-part test for enforcing a choice of law clause. But in most cases you’re better off just avoiding this complication and selecting Texas law.

3. Which state’s law will apply?

We’ve been assuming the employee is going to work in Texas. But what if the employee is going to work outside of Texas? Will your Texas choice-of-law clause be enforceable? If not, what requirements of the other state’s law do you need to comply with?

This can get complicated. And your client probably doesn’t want to pay for you to spend hours researching the nuances of Oklahoma’s choice-of-law jurisprudence.

But here’s what I suggest. Assume there is a good chance the other state’s law will apply, and spend an hour researching the basic requirements of that state’s non-compete law. You might be surprised what you find. For example, Louisiana requires a non-compete to expressly state which parishes it covers.

Second, make the non-compete as narrow as reasonably possible (see nos. 6-9). That will tend to enhance its enforceability no matter which state’s law applies.

4. How do you meet the “ancillary” requirement?

Texas law requires a non-compete to be “ancillary to an otherwise enforceable agreement.” There is a lot of case law on what this means, some of it now obsolete. It boils down to two categories: (1) a non-compete tied to a confidentiality agreement and (2) everything else.

The most common way to meet the “ancillary” requirement for an at-will employee is to tie the non-compete to a confidentiality agreement. The Texas Supreme Court simplified this in the Alex Sheshunoff case. The court said the employer can meet the “ancillary” requirement by doing two things: agree to provide the employee confidential information and then actually provide the promised confidential information.

A corollary to this rule is that the employer can do the same thing by agreeing to provide specialized training and then actually providing such training.

Given this clear guidance from SCOTX, you’d be surprised how many Texas non-competes don’t expressly state that the employer will provide the employee with confidential information (or specialized training).

Not to worry. The Texas Supreme Court said in the Mann Frankfort case that the agreement to provide confidential information can be implied, if the nature of the employee’s work necessarily requires access to confidential information.

But why chance it? It’s so easy to include an express agreement to provide confidential information. Same for specialized training. And it helps if the training is actually “specialized.”

A harder question is how to make sure your client actually provides confidential information to the employee. I have one form of non-compete that includes a form for the employee to fill out 60 days later acknowledging that the employee has received confidential information.

Of course, after signing this acknowledgment the employee could still claim later that the information was not really confidential, but the signed form at least gives the employer’s litigation counsel good impeachment material.

On the other hand, what if the employer forgets to have the employee sign the acknowledgment? Now the evidence is messier, possibly creating a fact issue. For that reason, I stopped including the acknowledgment in my standard form of non-compete.

But it’s still an option to consider.

The next most common way to meet the “ancillary” requirement is to tie the non-compete to the sale of a business. I addressed this in Non-Competes in the Sale of a Texas Business. Generally, Texas law is friendlier to non-competes in this scenario.

My main drafting tip for a non-compete tied to the sale of a business is to make sure that the asset purchase agreement expressly states the buyer is obtaining the goodwill of the business. Protecting the goodwill is the rationale for allowing the non-compete, so you don’t want any ambiguity about whether the goodwill is being sold.

5. As to customers, should you include both a non-solicit and a non-compete?

It is very common for a Texas non-compete to have both a “non-solicitation” section and a separate non-compete section. The non-solicitation section will say, for example, that for two years the employee agrees not to solicit any person who was a customer or prospect of the employer during the last year of employment. The non-compete will more broadly prohibit competing with the employer. This means the non-solicit is really just a subset of the non-compete.

Why do lawyers draft it this way? And is it a good idea?

In my opinion, it’s generally a bad idea, although I admit this is more art than science.

First, let’s get one thing out of the way. A non-solicitation agreement is a form of a “covenant not to compete” and is therefore subject to the requirements of the Texas non-compete. See Is a Non-Solicitation Agreement a Non-Compete? This is one area of non-compete law where the Texas Supreme Court has not put form over substance.

That means including a separate non-solicitation section isn’t going to do anything to avoid the requirements of the statute.

So what’s the benefit? I think the idea is that the non-solicit is a sort of insurance policy. If a court finds the non-compete too broad, the employer can still fall back on the non-solicit, which is narrower and more likely to be found reasonable.

But tying the non-compete to “solicitation” creates practical problems of its own.

Here’s a familiar scenario that will illustrate what I mean:

Chris Customer: [answers phone] Hello? 

Dawn Davis: Hey, Chris. It’s Dawn. How have you been? 

Chris: Oh pretty good, Dawn. You know, just trying to keep up with all my construction projects.

Dawn: I hear you. I guess that’s a good problem to have.

Chris: Yeah, I can’t complain. So how are things going at Paula Payne Windows?

Dawn: Fine, I guess. But I’m not working there anymore. I’m the sales manager at Real Cheap Windows now.

Chris: Oh, cool. I didn’t know that. How do you like it so far?

Dawn: So far it’s great. We’ve got an excellent team here. We’re really doing good things for our customers. 

Chris: Glad to hear it. Well it’s nice hearing from you. Will I see you at the kids’ soccer game Saturday?

Dawn: Yup, I’ll see you there.

Question: did “solicitation” just happen in this phone call? The problem is that there will almost always be a factual dispute about whether the communication at issue was solicitation. And the particular problem for the employer is that the customer will tend to back up the employee’s assertion that there was no solicitation.

Perhaps you could solve this problem by including a definition of “solicit” in the agreement. But now you’re creating more opportunities for argument and interpretation.

And there’s an additional, more subtle problem with solicitation: causation. Even if the employer proves the employee solicited the customer and the customer left, that doesn’t necessarily prove the solicitation caused the customer to leave. What if Chris testifies under oath, “I’ve gone to church with Dawn and her husband for over ten years, and I would have taken my business to Dawn regardless of whether she solicited my business or not.” Wouldn’t that evidence negate causation?

For all these reasons, I tend to favor tying the non-compete to doing business with the company’s customers, not solicitation of the company’s customers. Whether the employee has done business with the customer, i.e. providing goods or services to the customer for money, is usually a more objective fact.

6. In general, should you make the non-compete broad or narrow?

I think you know what I’m going to say. But it’s worth taking a moment to explain why.

The employer’s instinct is to make the non-compete as broad as possible. If you represent the employer, part of your job is to explain why that’s not in the client’s best interest. There are two main reasons for this.

First, it will be easier to get a temporary injunction enforcing the non-compete if the non-compete is enforceable as written. True, the trial court judge can enter a temporary injunction that only partially enforces the non-compete, but as a non-compete litigator I would much rather go into the courtroom defending a non-compete I know is already reasonable in scope.

Second, if a court finds that the non-compete was not reasonable as written, the court can reform the agreement, but the employer cannot recover damages that occur before reformation. See Tex. Bus. & Com. Code § 15.51(c). In practical terms, that means drafting an overbroad non-compete is going to cost your client a significant bargaining chip.

When you explain those two facts to your employer client, the client may start to understand the need to resist the instinct to make the non-compete as broad as possible. Instead, a good rule of thumb is to “narrow the non-compete until it hurts.” When your client’s reaction is “ouch, only one year, that’s going to hurt,” you know you’re on the right track.

7. How do you meet the reasonable time period requirement?

Like I said, shorten the time period until it hurts. Texas courts have enforced non-competes as long as 3-5 years, but why chance it? The time period must be no longer than necessary to protect the employer’s legitimate interest, which usually means goodwill and confidential information. That usually means no more than two years. And one year is even better.

8. How do you meet the reasonable geographic area requirement?

There are Texas cases that, despite the command of the statute, you don’t need to have an express geographic limitation if there is a reasonable limitation on the scope, but again, why risk it? Put some geographic limitation in, even if it’s broad. Better yet, make the geographic scope as narrow as possible. The rule of thumb is that it should match the territory the employee is actually going to be responsible for.

9. How do you meet the reasonable scope requirement?

This is where I see the most mistakes in Texas non-competes. It seems many lawyers who draft agreements with non-competes are not aware that Texas law generally prohibits an “industry-wide exclusion.” I explained this in Burning Down the Haass: The Industry-Wide Exclusion Rule in Texas Non-Compete Law. (Again with the 80s songs.)

There are exceptions to the industry-wide exclusion rule, but again, why chance it? It’s best to limit the non-compete to customers the employee deals with or learns confidential information about while working for the company.

10. Should you include stipulations that the non-compete is enforceable, that a breach will cause irreparable injury, etc.?

You see clauses like this all the time. Essentially, these are just attempts to have the employee waive objections to enforceability.

Do clauses like this have any legal effect? Texas law is unsettled. Usually the court will cite a clause like this as an additional reason for enforcement, without saying the clause is dispositive. I don’t think I’ve seen any case that says, for example, that a stipulation that a breach will cause irreparable injury is conclusive.

My personal opinion is that these clauses should be given exactly zero weight. You can’t waive a public policy issue. And I don’t think private parties can change the requirements for obtaining an injunction any more than they could stipulate to different rules of evidence or procedure.

Despite my personal view, do I still include clauses like this when I draft a non-compete for an employer? Yes, of course. It doesn’t hurt. And it can help in cross examination of the employee.

How? You can’t expect me to give away all my secrets.

11. Should you include a tolling clause?

A tolling clause says that the time period of the non-compete will be extended by the amount of time that the employee is in breach. I’m starting to see more of these.

These clauses strike me as introducing more potential uncertainty than they are worth. A time period of one year from termination is objective and usually easy to apply. Figuring out the period of time the employee has been in breach can present a factual dispute. If you’re the employer, the last thing you want is to add yet another potential fact issue.

The court might even say the tolling clause renders the time period too indefinite to be enforced. I haven’t seen a case on this, but if I represent the employee I might at least make the argument.

12. Should you include a liquidated damages clause?

A liquidated damages clause specifies a specific amount of damages for a breach. I covered the requirements of a liquidated damages clause generally in Liquidated Damages Lessons from the Stormy Daniels Settlement.

I don’t like liquidated damages clauses in non-competes. It’s usually not that hard to calculate actual damages after the fact; in most cases it’s lost profits. But coming up with a dollar amount in advance that reasonably estimates what the actual damages are likely to be is difficult. For these reasons, you’re likely to have an argument over whether the liquidated damages clause is enforceable. That’s one more argument the employer doesn’t need.

If you do include a liquidated damages clause, be sure you also include a clause expressly stating that the employer can still obtain injunctive relief in addition to the liquidated damages. Otherwise, a court might say the liquidated damages are the employer’s exclusive remedy.

13. Can you avoid enforceability problems by structuring the non-compete as a forfeiture clause?

The short answer is no. If the agreement says the employee is free to compete but will forfeit his equity ownership in the company if he does so, the reasonableness requirements for Texas non-competes could still apply. And even if the court doesn’t consider the agreement a non-compete, it would still have to be reasonable.

For the longer answer, see my post When Is a Forfeiture Clause a Non-Compete?

The bottom line is that structuring the non-compete as a forfeiture clause—as opposed to an express prohibition on competition—won’t necessarily avoid enforceability issues, and if you do go the forfeiture route, you should still include reasonable limitations on time period, geographic area, and scope.

14. Can you improve the effectiveness of the non-compete by including severance pay? Garden leave?

When employees consult with me about non-competes, I sometimes suggest that if the employer is going to require a one-year non-compete, for example, then maybe the employee should ask for one year of severance pay. The rationale is that if the employee is going to sit out of the industry for a year, she should at least get paid for that year.

There is a certain logic to this, but of course that doesn’t mean employers will like it. Companies don’t usually like paying people to do nothing.

Still, there could be a benefit to the employer. This is why you sometimes see “garden leave” provisions. Under garden leave, the employee technically remains employed by the company for some period of time but is no longer actively doing anything for the company. The idea is that it’s easier to enforce a non-compete against a current employee than a former employee. Plus, competing with the employer while still employed would usually violate the employee’s limited “fiduciary” duty. See Fiduciary Duty Lite: What Employees Can and Can’t Do Before Leaving.

I don’t have as much experience with non-competes tied to garden leave, but it’s an idea employers should at least consider.

15. Can you draft an effective non-compete in the middle of employment? When the employee is on the way out the door?

The short answer? It’s hard, but not impossible. And it’s easier to do it in the middle than at the end.

The problem, in a word, is consideration. If the employee is already working for the company and has already received confidential information, what’s the new consideration for the non-compete?

Typically, the agreement in this situation will recite continued employment as consideration. But to improve the argument for enforceability, the employer should try to tie the new non-compete to a promotion, a higher level of responsibility, and/or increased access to confidential information.

Having the employee sign a non-compete after notice of termination is usually not going to work, even if the employer agrees to pay severance for it. Traditionally, a mere agreement to pay money has not satisfied the “ancillary to an otherwise enforceable agreement” requirement. But you can try. And feel free to be creative.

Like another song says, freedom’s just another word for nothin’ left to lose.

________________________________________

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

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

 

Texas Supreme Court Says Emails “Subject To” Later Agreement Do Not Establish “Definitive Agreement”

Texas Supreme Court Says Emails “Subject To” Later Agreement Do Not Establish “Definitive Agreement”

I don’t always agree with Nathan Hecht, Chief Justice of the Texas Supreme Court. But I’ll give him this. The man knows how to start an opinion.

Here’s part of his intro to the opinion issued last Friday in Chalker Energy Partners III, LLC v. Le Norman Operating LLC:

Email can be a convenient way to reach agreement, but it is also a distinctly conversational, informal medium. Hitting send may be deliberate; it may be hasty. And so in this brave new world, or at least this braver new world, we must decide whether an email exchange reflected the meeting of minds required for a contract, given the nature of the transaction and the parties’ expressed contemplations. And we must begin to give certainty to this developing area of contract law.

This is what marketing experts call a “tease.” It draws the reader in, promising something exciting. A brave new world! Certainty!

But then the opinion fails to deliver.

You see, the Texas Supreme Court’s Chalker Energy opinion isn’t really about emails. It’s about a “No Obligation” clause. Chalker Energy held the communications at issue did not constitute a “definitive agreement” required by the No Obligation clause in the parties’ preliminary agreement.

It just happens that the communications at issue were emails. The reasoning of the opinion shows the result would have been the same if the communications had been faxed letters, for example. So we will have to wait for another opinion to deliver the promised certainty for the brave new world of contracting by email.

Still, Chalker Energy is an important case for businesses and the lawyers who represent them. It’s worth looking at what the court decided and what it didn’t.

The “rule” of Chalker Energy

In the first year of law school they teach us to “brief” a case by outlining its facts, holding, reasoning, and rule. The “rule” is the hard part. It’s the abstract principle to be derived from the case and applied to future disputes.

The rule of Brown v. Board of Education, for example, is that the doctrine of separate but equal has no place in public school education. The rule of Texaco v. Pennzoil is that they’ll name a law school library after you if you make enough money.

So what is the Chalker Energy rule?

Before I take a stab at it, let’s understand what a No Obligation clause is. It’s a provision in an initial agreement between the parties to a contemplated business deal. It says the parties will have no legal obligation concerning the potential transaction until they sign a final written agreement.

The purpose? A No Obligation clause allows the parties to communicate freely about the terms of a deal without fear that their communications will establish a binding contract. It also provides certainty (hopefully) about whether the parties do or do not have a legally binding agreement.

With that understanding, the rule established by Chalker Energy is this:

An agreement on deal terms in written communications between the parties is not a definitive agreement contemplated by a No Obligation clause, where the communications reflect that the parties intended the agreement to be “subject to” signing a more detailed written agreement later, even if (a) the agreement is reached after the bidding process the parties agreed to has ended and (b) there is some evidence that the parties thought the emails established a binding agreement.

I realize that’s a fairly complicated “rule.” But that’s because Chalker Energy is a fairly fact-intensive opinion. You may see headlines that proclaim more broadly “Texas Supreme Court Rejects Agreements by Email” etc., but don’t believe the hype. Change one or two key facts, and the result could be different.

But which facts would make a difference?

Ah, there’s the rub. Now we have to get down in the weeds, at least a little.

The essential facts of Chalker Energy, shorn of any extraneous details

Chalker represented a group of working interest owners holding 70 oil and gas leases in the Texas Panhandle worth hundreds of millions of dollars. Chalker invited bids from potential buyers, who had to sign a Confidentiality Agreement. If a seller accepted a bid, the buyer and seller would sign a definitive purchase-and-sale agreement, or PSA.

The Confidentiality Agreement contained the following No Obligation clause:

Screen Shot 2020-02-29 at 7.54.58 PM.png

It came down to two bidders, LNO and Jones Energy. Both of them submitted bids the sellers did not accept.

The sellers then offered to sell 67% of the assets. In response, LNO sent an email with the subject line “Counter Proposal.” The email listed seven key terms, including price, a closing date, and execution of a PSA.

Then the best part of the email: “We will not be modifying or accepting any changes to the base deal described above and don’t want to be jerked around anymore.”

Oops, I promised no extraneous details.

Anyway, the sellers responded with an email stating they were “on board to deliver 67% subject to a mutually agreeable PSA. We were calling to discuss next steps and timing. Chalker et al will be turning a PSA tonight to respond to your last draft.”

Various emails ensued. One of the sellers congratulated one of LNO’s private equity investors on “winning the bid.” Jones Energy got wind of the deal and emailed a seller, saying it “heard that we lost the deal again.”

Did Jones Energy give up? Come on, this is a Texas oil and gas case about whether two parties had a binding multi-million-dollar contract. You know there’s going to be a third party who stole the deal.

Jones Energy made a new offer, the sellers accepted, and Chalker and Jones Energy signed a PSA. “That same day, unaware of what had happened, LNO’s general counsel sent Chalker a redlined PSA.”

I love that little detail too. I’ve been waiting for redlining to make an appearance in a major contract case. That’s almost as good as a discussion of fonts. Plus, you can just picture LNO’s people going ballistic after finding out Chalker had already done a deal with Jones Energy.

And when business people go ballistic, they file lawsuits.

The exciting “procedural history”

LNO sued the sellers for breach of contract, arguing that the sellers breached the agreement to sell 67% of the assets reflected in the emails.

The trial court granted summary judgment for the sellers, concluding that the parties did not intend to be bound, a PSA was a condition precedent (pre-see-dent) to contract formation, and the No Obligation clause precluded a binding contract without an executed, delivered PSA. (A condition precedent is an event that must occur before a binding contract is formed.)

The First Court of Appeals (Houston) disagreed with the trial court. It held that whether the alleged contract was subject to the bidding procedures in the Confidentiality Agreement and whether LNO and the sellers intended to be bound by the terms in the emails were fact issues, which preclude summary judgment. That meant there would have to be a trial.

The Texas Supreme Court’s reasoning

The Texas Supreme Court disagreed and reversed the Court of Appeals. The Supreme Court reasoned as follows:

  • No Obligation clauses are enforceable under freedom-of-contract principles, especially for “arms-length” negotiations between sophisticated business entities.
  • In two prior Texas Supreme Court cases cited by LNO, there were fact issues about whether a contemplated formal document was a condition precedent to contract formation, but neither case involved the kind of No Obligation clause in Chalker’s agreement.
  • The facts were more similar to WTG Gas Processing, a case where the Fourteenth Court of Appeals (also Houston) held that a No Obligation clause precluded a binding contract where the parties never signed a PSA.
  • The emails in Chalker were more akin to a preliminary agreement than a definitive agreement to sell, and the parties’ dealings suggest they intended a more formal PSA would satisfy the definitive agreement requirement.
  • LNO’s email referred to a PSA, and the sellers’ acceptance was made “subject to a mutually agreeable PSA.”
  • The court threw in one more little fact: no agreement was “executed and delivered” as required by the No Obligation clause.

The Supreme Court rejected the Court of Appeals’ reasoning that the emails set out the key provisions such as the assets, the price, and the closing date, noting there were still key agreements to be negotiated including an escrow agreement, non-compete agreement (my favorite!), and a joint operating agreement.

The Supreme Court also rejected the Court of Appeals’ reliance on evidence that some of sellers thought they had a deal:

  • Chalker declared the group was “committed to sell”
  • One seller sent a congratulatory message to LNO
  • Chalker referred to assets as “what is being sold to LNO”
  • Several sellers testified that they intended to sell the assets to LNO as of the date of the email

Pish posh. The Supreme Court said these “one-off musings” of a few sellers out of 18 owners “could be construed many ways” and could not create a fact issue in light of the unambiguous No Obligation clause.

“If mere proposals that contemplate a later-executed PSA and the subsequent exchanging of unagreed-to drafts are sufficient to raise a fact question on the existence of a definitive agreement,” the court said, “No Obligation Clauses will be stripped of much of their meaning and utility.”

The court also rejected the argument that the sellers waived the condition precedent created by the No Obligation clause.

I gather from all this that the Chalker Energy decision rested on two key facts: (1) the preliminary agreement had an unambiguous No Obligation clause requiring a definitive agreement, and (2) the emails LNO relied on made it clear the deal was “subject to” a PSA the parties intended to sign later.

In short, when the parties agree to a No Obligation clause and it’s undisputed they intended to sign a more detailed agreement later, you don’t have a definitive agreement, even if the parties exchange written communications stating agreement on key terms.

That’s the Chalker Energy rule in a nutshell.

What Chalker Energy did not address

But how far does the Chalker Energy rule go?

Let’s change the facts a little. Suppose the emails didn’t reference a later PSA. Let’s even suppose the offer email stated “your acceptance of this offer by reply email will create a legally binding definitive agreement between us,” and the reply email simply stated “we accept.”

That would be a definitive agreement, right? The Chalker Energy rule wouldn’t apply. The condition precedent in the No Obligation clause would be satisfied.

But hold on. There’s a problem. Some of you might remember something else the No Obligation clause said. It didn’t just require a definitive agreement; it required an “executed and delivered” definitive agreement. (Executed is a fancy legal word for signed.)

Can an exchange of emails regarding key terms be an “executed and delivered” agreement?

We don’t know yet. Like I said, the Texas Supreme Court’s Chalker Energy opinion is not really about the brave new world of emails.

So did the opinion promise more than it delivered? Hecht, yes!

________________________________________

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

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

 

50 Things Law School May Not Teach You (But Twitter Law School Can)

50 Things Law School May Not Teach You (But Twitter Law School Can)

Twitter is not all bad. One good thing about it is the opportunity for lawyers and law school students to interact. It gives the students a chance to hear what’s going on in the real world of law practice. And it gives lawyers a chance to do what they love best: talk about themselves and their jobs. You might call it “lawsplaining.”

A common law-Twitter trope: the law student expresses anxiety about exams, or interviewing, or student loans, and a snarky lawyer responds with something like, “You think your Property final is hard? Just wait until you’re a lawyer and your boss emails you at 10 pm saying he needs a motion for summary judgment researched, drafted, and on his desk by tomorrow morning!”

Yes, we lawyers tend to lay it on a little thick. So if you’re a law student following lawyers on Twitter, adjust your settings for “associate gallows humor,” “bitter senior partner venting,” and the like. And keep in mind that most of us lawyers like our jobs and the profession, even if we sometimes act like we’d rather have some horrible menial job, like accounting.

Plus, it’s hard to compare the existential dread of law school and the bar exam with the everyday headaches of practicing law. Sure, it can be a pain dealing with difficult clients, demanding bosses, irritable judges, billable hours, or bringing in business. But that’s more of a daily grind, and you get used to it. It’s not the same kind of scary as taking that Secured Transactions exam that will determine whether you will get a job or have to default on your student loans.

Not only that, you have to adjust for the experience and capabilities of the person experiencing the adversity. The Bible says God will not test you beyond what you can bear. Whether you believe that or not, in professional life your ability to handle stress does tend to expand as the tests become more challenging.

I mean, you wouldn’t say to your ten-year-old, “You think fractions are hard? Just wait until you have to get a job and pay a mortgage!” Or maybe you would. But the point is that lawyers shouldn’t try to make law students feel like they’re being wimps for complaining about how tough law school can be.

So, real law school students, take the pearls of wisdom you find on Twitter School of Law with a grain of salt. (Talk about mixed metaphors.)

But still, you can learn a lot from Twitter about what it’s really like to be a lawyer. I have firsthand knowledge of this. I recently tweeted the following:

Screen Shot 2020-02-23 at 11.42.54 PM

I was serious. In law school, you wouldn’t dream of turning in a paper citing a case that didn’t support the proposition it was cited for. You certainly would not be so careless as to cite a case that said the opposite. So when I was a law student, I would not have expected real lawyers to do that.

But in the real world of litigation, this sort of thing happens more often than you would think.

It was just an offhand comment, but my tweet went viral (at least by my standards). Over 200 retweets, almost 2,000 likes, and over 300 comments.

The comments were really the best part, although some people seemed to misunderstand the question. The question was about what would surprise law school students, not just “what is something about law practice that you would like to gripe about?”

But still, the responses were fun to read. Some were funny, some insightful, and most of them had a nugget of wisdom.

They were so good that I decided to select the top 50. Now, keep in mind, my goal here was to select things that struck me as both true and unexpected. So if you responded with some unparalleled wisdom that didn’t make the cut, maybe I just thought your point would not be that hard for a law student to believe.

As I selected the top 50, I noticed two things. First, there were some discernible recurring themes. Second, most of the comments were, shall we say, a little on the negative side? So, I’ve grouped the responses by theme, and where needed I’ve offered a counterpoint accentuating the positive.

Law school vs. law practice

1. “The practice of law is way more stressful and demanding than the study of law once prickly senior partners, combative opposing counsel, fearsome judges, and difficult clients are part of the picture.” 

2. “Grades don’t matter in practice. Once your in the profession, how well you did means nothing when it comes to how you will do at your job.”

The first response is the typical one I mentioned earlier, although said in a nicer way. And it has a point: practicing law is more demanding than law school, at least in absolute terms. But don’t despair. You have to look at it in relative terms. With more experience under your belt, you’ll be able to handle it. 

And here’s some news that may lighten the load of exams: Law school grades do make a difference in getting that first job offer, of course, and low grades may cut off some elite career paths. But for the most part, nobody is going to care about your law school grades after you get that first job.

BigLaw is great, but . . .

My impression is that BigLaw sucks up most of the recruiting oxygen on law school campuses. Still, as these comments point out, don’t think that working for a big law firm is the only worthwhile career path. 

3. “That some of the best (and happiest) lawyers work for government agencies. They become experts in their fields. And although they won’t get rich, they make a comfortable living, have healthcare and guaranteed retirement, and go home at a reasonable hour.”

4. “That working for a smaller firm can get you way better mentorship sometimes and as such be better for your better for your career in the long run.”

5. “That quite often, the only advantage that a BigLaw firm has over a solo is the ability to marshal large numbers of (hourly billing) attorneys. That the underlying work sometimes is done better by the solo.”

On the other hand, big law firms hire a lot of students out of law school, and that’s where the money is. Plus, as I conceded in my post Should Clients Pay a Premium for Big-Name Law Firms?, most of the superstar lawyers are at the big firms. So it’s only natural that law students focus on them.

Law is messier than you think

6. “That fact patterns aren’t give to you in a neat, digestible format. You must pull the facts from your client and other witnesses (often, on multiple occasions) and organize them yourself.”

7. “That there is not going to be authority providing neat answers to many/most questions you are researching. So many of the issues we have to deal with are in grey areas, and I don’t think law school prepares you for that.”

8. “Managing ambiguity is part of the job. Sometimes, there’s no clear answer or path to recommend to your client.”

9. “The ethical issues that arise are not usually defendants admitting crimes or telling you where the bodies are. They are often relatively small, easy to miss instructions to do something that you might not immediately realize is unethical.”

The theme here is that law–and legal ethics–are messier than your meticulous outlines. On the other hand, you might be surprised how often you find yourself recalling and applying concepts you learned even decades earlier in law school. So those lessons do have value. Just don’t expect them to give a you a definitive answer all the time.

So much work, so little time

10. “That projects that take half a semester in law school you’ll have to do 2-3 every day.”

11. “How little time there is to do a lot of the work.”

It’s true. That motion for summary judgment you spent a semester on in law school? You might have one night to write it. But again, it’s ok. As the amount of work increases, your capacity for doing the work will increase too.

It’s not all sophisticated legal analysis

12. “My assumption in law school that I’d do a lot of talking as a lawyer was correct, but I though more of it would be in the courtroom. In reality, it’s mostly from my office on the phone. Sometimes I feel like I work at a call center. Dozens of calls a day, 30-60 min. ones are common.”

13. “That a strict system of file organization and client contact tracking heads off 90% of potential problems.”

14. “How far basic things like good record keeping and calendaring will get you. You can write amazing briefs, but if you’re always filing them late that’s going to catch up to you.”

15. “Transactional lawyer here. First, the amount of managing a project needed to get a deal done (vs anything having to do with the law). Second, the use of forms.”

16. “You may well spend days, even weeks completing administrative tasks.”

17. “How much of practice isn’t obvious from reading the rules. For example, how do you get the court to actually consider the motion you just filed and rule on it? In federal court, you sit and wait. In state court, you often have to get on a hearing calendar somehow.”

Law school doesn’t teach you much about practical office skills or internal court procedures. I don’t have a problem with that. Law schools focus on teaching substantive areas of law, because that’s what law schools are good at. Just don’t let that make you think you’re going to spend all your time focused on the law.

It takes a village to raise a baby lawyer

18. “Admins run everything, they all talk, and woe to the baby lawyer who runs afoul of the Admin Network.”

19. “The most important person at your law firm is probably a paralegal.”

No, you don’t want the secretaries and legal assistants mad at you. But if you’re lucky (like me), you’ll get to work with some great non-lawyers who will make your work life so much easier.

Respect your elders?

20. “That the amount lawyers charge has little to [do] with their level of skill or competence.”

21. “That a lot of attorneys who have decades of experience over you doesn’t mean they are better or know what they are doing.”

22. “You will come across senior lawyers, some of them prominent and respected, whose affidavits would get a failing grade in law school.”

23. “That the fact that someone has been practicing for a long time does not mean that they know what they are doing.”

Yes, you will discover that the most prominent or most senior lawyers sometimes have mediocre practice skills–or worse. But don’t disrespect the old folks. I have found that I can learn something valuable from almost every experienced lawyer I encounter. And the really good ones can teach you everything you need to know if you pay attention.

Judges

24. “That judges often don’t read one’s impeccably drafted and cite-checked briefs prior to hearings.”

25. “How many judges were terrible lawyers, then always brag about how great they were once on the bench.”

26. “How absolutely ordinary judges are.”

27. “I was really surprised to hear how much judges talk to other judges about attorneys that appeared in their courtroom. If you were disrespectful or respectful, judges talk to each other about that. A LOT.”

In law school I had an image of judges as the most experienced and esteemed lawyers who went on the bench after successful careers in litigation. The reality is that many judges are judges because they are good at politics, not because they are good at practicing law.

But there are still some really good ones. Given the system we have–elections for state court judges (at least in Texas) and federal appointments based on political connections –it’s a pleasant surprise how many excellent judges there are, especially when you consider they could make 3X more money in private practice (at least).

And regardless of what you think of the judge, follow the rules and be respectful. Word gets around.

Nice guys finish last?

28. “That you will actually get along with, and at times develop friendships with opposing counsel and more surprisingly, it’s almost always a good thing and benefits your client.

29. “Opposing counsel can be an ally. No need for snark. Civility can win.”

30. “How often you end up engaging in respectful conversations with opponents as you resolve disputes! I wish this was featured more in law school to counteract the popular notion that lawyers go around screaming at everyone who doesn’t share their position.”

Finally, some warmer, fuzzier responses. As these tweets indicate, don’t let TV and movies–or a fierce mock trial competition–convince you that the best lawyers treat opposing counsel like dirt.

90% of law practice is showing up?

31. “The awful work product you’ll come across from opposing lawyers, generally. Or the discovery abuse that is never addressed by the court.”

32. “That legal writing assignment that you got a C+ on is probably better quality than 90% of stuff that lawyers file.”

33. “That if you do simple things like show up for court, prepare, answer phone calls from your client, keep up with deadlines, and refrain from actively trying to screw over your client, you will instantly be in the top 10% of lawyers in your city.”

This may be a little exaggerated. But it’s true that after working so hard in law school, you will probably be surprised at how much bad lawyering is out there. So take the job seriously and take care of the fundamentals, and you will already be ahead of the game.

Difficult clients

34. “Sometimes people will be literally angry that you won’t do that legal task for free.”

35. “Despite the fact that you, the lawyer, with your education and practical experiences, are instructing them to do X, they will invariably state that you are wrong and they will do Y. They will then get upset (at you) when Y blows up in their face. Paper your advice folks.”

“Invariably” might be too strong. But you will be surprised how often a client will pay you $400 an hour (or whatever) for your expertise and then want to ignore your advice. On the other hand, it can be very gratifying when a client does trust your advice. 

Will justice be done?

36. “You will lose. You can be right on the law, you can have justice on your side, you can write the most gorgeous brief, opposing counsel can do a lousy job… and the judge can go against you and there’s nothing you can do about it.”

37. “A winning argument is sometimes a losing argument when made by a no-name firm. A losing argument is sometimes a winning argument when made by a silk stocking or local firm.”

Sometimes judges and juries just get it wrong. And sometimes you will lose because of favoritism, not the merits. But overall, if you do your best work for every client, in the long run the overall results will be good.

Discovery, rules, and deadlines

38. “The lack of control over the discovery process by the courts despite the pretty detailed rules re timing and sanctions for ignoring said rules.”

39. “As a litigator: That some courts don’t give a single goddamn about schedules or rules.”

You can learn all the rules for discovery and other pretrial matters, but they’re not set in stone. This was another recurring theme. Still, if you play by the rules and meet your deadlines, you will be in a better position to get good results for your client.

Emotional intelligence > legal intelligence

40. “How much of your job is managing personalities.”

41. “If two people describe a situation completely differently, it doesn’t mean either one is lying. You’ll get much further if you assume both are trying their best, and think hard about how each one could see it that way.”

42. “How often even large ‘sophisticated’ corporate clients make litigation decisions based on emotion (usually pride or arrogance) rather than cold hard reason. Starting out you tend to think this is only how family law clients behave. Decisions still made by people.” [Ok, full disclosure: this was mine.]

It can be frustrating when clients make bad decisions based on emotion. But part of your job as lawyer is to put yourself in the clients’ shoes and understand where they’re coming from. Be glad that your clients are not robots.

Business skills vs. legal skills

43. “This doesn’t apply to every lawyer, but for many: customer service skills >>>>> legal skills.”

44. “Practicing law is not the business of law. You have to know and do both. Hard work does not equate with success.”

45. “A corollary to yours, but there are an awful lot of successful lawyers who are great at business development, handwaving, speechifying, etc., but just really terrible at lawyering.”

46. “The huge amount of time, effort and money to market your practice. And that marketing is almost as important as the practice of law these days.”

47. “Unless you have an amazing mentor/rainmaker who takes you under their wing and transitions clients to you, you need to start networking and building a book from day one. Stellar legal work is not enough.”

Oh man, that last one hit me hard. I was clueless about that sort of thing when I came out of law school. I thought I was just not the “rainmaker” type, so I would focus on doing the client work. But that was unwise.

You will enjoy the practice of law a lot more if you bring in your own clients, and you need to start developing the skills to do that from day one. Law schools are not going to teach those skills, and it would be folly for them to try.

The good news is that you can learn those skills. Find yourself a mentor if you can, or at least follow some rainmakers on Twitter. 

And now for the true wisdom . . .

48. “Wait, law students wouldn’t believe that? What, did they not do article review for their journals?”

49. “Despite depictions in ads and website photos, you would be surprised to learn that lawyers rarely stand around with their arms crossed.”

50. “Some associates take bathroom breaks. Stunning to me. I didn’t go until my 8th year.”

These responses actually made me lol.

See, I told you Twitter isn’t all bad. Now, Facebook? Facebook sucks. 

________________________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Be sure to follow his Facebook page @fiveminutelaw

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.

 

Takedown: How To Protect Your Intellectual Property From Infringement on Social Media

Takedown: How To Protect Your Intellectual Property From Infringement on Social Media

Whether you’re a small business, a multi-national corporation, an entrepreneur, or a social media “influencer,” chances are someone at some point is going to use your content on some kind of social media. You don’t want to just let this go, but at the same time, you don’t want to break the bank hiring a lawyer to send a demand letter every time it happens.

What can you do? Is there any fair, quick, and inexpensive method for addressing these issues?

For blatant infringement, yes. For closer cases, no. Social media platforms just aren’t going to take the time and effort to adjudicate intellectual property disputes between their users and the complainers in any satisfying way.

You’ve got two basic choices when someone uses your intellectual property on social media. Either submit a complaint through the platform’s portal and hope for the best, or have a lawyer send a demand letter and, if it becomes necessary, file a lawsuit. The first option is unlikely to get you what you want, and the second option is time consuming and expensive.

Still, doing nothing is not a good option. So if you’re a business owner or a lawyer who represents businesses, it’s worth your time to understand both the basic legal principles and the practical avenues available.

The first step is to understand the kind of “intellectual property” at issue. Nine times out of ten, if someone is posting your material on social media, it will be either a copyright or trademark issue.

So if you’re going to handle the takedown notice, you will need some understanding of the difference between copyright and trademark. This is important because the standards for copyright infringement and trademark infringement are entirely different, and because you need to select the right portal to submit your notice.

Copyright vs. Trademark

Copyright protects original works of expression. Think novels, poems, movies, TV shows, paintings, sculptures, music recordings, blog posts, just to name a few. For example, if you write and record a song and someone posts a copy of your recording on YouTube, that’s copyright infringement (potentially).

Trademark law, in contrast, protects words, short phrases, logos, and other things that function as source identifiers for goods or services. MCDONALD’S—and the golden arches—are trademarks for fast food restaurants. APPLE is a trademark for smartphones and computers. FIVE MINUTE LAW is a trademark for law blogs.

As with all things in the law, there are borderline cases. Does copying a seven-second clip from an iPhone commercial raise copyright or trademark issues? Law school professors love that kind of stuff.

But most of the time, if someone is using your content, it will be pretty obvious which one it is. Are they using your name or logo in a way that suggests they have some connection to you? Probably trademark. Are they copying some significant portion of a work of expression you created? Probably copyright.

This is an important distinction to figure out up front, because copyright law and trademark law are significantly different. But they do have one thing in common: you don’t have to register to have a valid copyright or trademark, but registration does give you certain additional rights that can be important. More about that later.

Let’s start with copyright, because it’s simpler.

Copyright Infringement on Social Media

The paradigmatic case of copyright infringement on social media is a copy of a recorded song posted on YouTube. This is so ubiquitous, I understand the young people don’t even buy music anymore. Why buy when you can just go to YouTube?

Let’s say I post a copy of “Honky Tonk Bodankadonk” on my YouTube channel, That Non-Compete Lawyer. Did I just infringe Trace Adkins’ copyright? The short answer is yes.

And by the way, it doesn’t matter if I include one of those disclaimers like “I do not own the rights to this recording . . .”

I don’t know why this kind of disclaimer became so popular. It has virtually zero legal effect. It’s like robbing a bank but carrying a sign that says “NO THEFT INTENDED.” If anything, it’s evidence that you knew you were infringing the author’s copyright.

But did YouTube infringe Trace’s copyright?

That’s a little more complicated. It’s one thing to hold a small-time litigator liable for copyright infringement. It’s another to hold a multi-billion-dollar social media company responsible. We can’t have that!

Fortunately, we have lobbyists and Congress to thank for passing the Digital Millennium Copyright Act (DMCA) in 1998. Its main purpose is to protect Internet service providers from copyright infringement claims.

The DMCA establishes a “notice-and-takedown” regime that applies to copyright infringement on social media. A social media platform can avoid liability if, “upon notification of claimed infringement,” it “responds expeditiously to remove, or disable access to, the material that is claimed to be infringing or to be the subject of infringing activity.” 17 U.S.C. § 512(c). See also Jon M. Garon, Tidying Up the Internet: Takedown of Unauthorized Content Under Copyright, Trademark, and Defamation Law, 41 Cap. U. L. Rev. 513 (2013).

Naturally, to avail themselves of the protections of the DMCA, all the major social media platforms have dedicated online portals where you can give notice of alleged copyright infringement (if you can successfully identify all the crosswalks in a photo).

For example, this is YouTube’s copyright infringement notice page:

Screen Shot 2020-02-09 at 3.28.06 PM

Of course, that’s not the only way YouTube and other sites police copyright infringement. There is also automated copyright infringement detection. YouTube, for example, has a system called “Content ID” that automatically scans uploaded videos to compare them to its massive database of files submitted by content owners. If people copying and posting your stuff is a recurring issue, consider using the Content ID system to nip infringement in the bud.

Otherwise, you will need to submit a takedown notice. If it’s an obvious case of copying, that will probably be enough to get the infringing copy removed.

In contrast, I doubt that submitting a notice through a routine portal is going to work in less obvious cases. It’s not like YouTube employs a staff of musicologists to sit around trying to figure out if Robin Thicke’s “Blurred Lines” is substantially similar to Marvin Gaye’s “Got To Give It Up” or just has the same basic style.

But for most content creators, the issue is blatant copying, not borderline cases. And in those cases, the notice-and-takedown approach encouraged by the DMCA probably works pretty well.

If anything, notice and takedown may work too well in copyright cases. That’s because not all copying is unlawful. You might have noticed a reference to “fair use” on the YouTube page shown earlier. Fair use is an exception to copyright infringement.

Copyright “Fair Use”

It’s important to understand what fair use is and what it isn’t. It’s not a magic wand to be waved any time someone claims copyright infringement. Rather, fair use refers to various types of copying that the law allows because of their purpose.

And it’s a fuzzy term. That’s because the statute that codifies the fair use doctrine refers to fair use of a copyrighted work “for purposes such as . . .” 17 U.S.C. § 107. Then it lists some non-exclusive examples of fair use: “criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research.” Id.

The statute goes on to provide a list of non-exclusive factors determining whether a particular use of a work is fair use:

  1. the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
  2. the nature of the copyrighted work;
  3. the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
  4. the effect of the use upon the potential market for or value of the copyrighted work.

So let’s say I have a YouTube channel where I review country music albums. If I play 10 seconds of “You Ain’t Much Fun (Since I Quit Drinking)” as part of my review of Toby Keith’s album Boomtown, that’s probably fair use.

I can only say “probably” because, again, fair use is a fuzzy concept in copyright law.

If that bothers you, then you really won’t like trademark law. It’s even fuzzier.

Trademark Infringement on Social Media

It’s not that hard to understand what a trademark is. I gave some obvious examples earlier. It’s harder to understand whether someone else’s use of your trademark is infringing or not. And it can be even more difficult to get a social media site to remove someone’s infringing use of your trademark.

Why is it relatively easy to get a social media platform to remove copyrighted material, but harder to get trademarked content taken down?

Let’s start with the DMCA. It applies to copyright infringement, not trademark infringement. There is no equivalent statute for trademarks. So the legal framework is not as clear when it comes to trademarks.

Still, just as they do for copyright infringement, the major social media platforms have specific portals for owners of trademarks to submit takedown notices. For a helpful list with links to the takedown pages for the biggest players, see How to Protect Your Trademarks on the Top 6 Social Media Platforms.

The thing that really makes trademark harder than copyright is deciding whether the use of a trademark is infringing. Just copying someone’s trademark is not necessarily infringing. Trademark infringement happens when someone uses your trademark—or something similar to it—in a way that creates a likelihood of confusion regarding the source of goods or services.

Remember, the key thing about a trademark is that it is a source identifier.

Let’s consider some simple examples. If I use the word APPLE to sell actual apples, that’s not trademark infringement. That’s a “generic,” non-infringing use of the mark. Similarly, if I tell a new client “don’t worry, you’re in good hands,” I probably haven’t infringed Allstate’s trademark, because I’m just using the phrase in a descriptive sense. In contrast, if I use APPLE to refer to my company’s knockoff laptops, I will probably get a nastygram from some lawyer in Cupertino. That’s trademark infringement.

Screen Shot 2020-02-09 at 11.11.55 PM
My use of the Apple logo in a blog post is an example of “fair use”

But what if I use the famous APPLE computer logo in a blog post about computers? Is that infringement?

This is where it gets harder. It depends on how I use it. If I use the trademark in a way that does not cause source confusion, that is “non-infringing” use. To make this even more complicated, trademark law also refers to some kinds of non-infringing use as “fair use,” which is not the same thing as copyright fair use. And then there are two kinds of trademark fair use, “traditional” and “nominative.”

But let’s not go down that rabbit hole now. Let’s focus on the practical. Assume someone is improperly using your company’s trademark in a way that suggests some sponsorship, affiliation, endorsement, or approval by your company. That creates a “likelihood of confusion,” which equals infringement. What can you do?

Trademark Takedown Notices

As with trademarks, the major social media platforms make it fairly convenient to submit a notice that someone’s content infringes your trademark. See the links in the “Top 6” article cited above.

This is where registration, also mentioned earlier, can be helpful.

Keep in mind, it is the use of a trademark, not registration, that creates trademark rights, and you don’t have to register a trademark to have trademark rights. But as a practical matter, your takedown notice will have a better chance of success if your trademark is registered.

Shannon Montgomery, a lawyer who represents social media influencers, explains this point here. See, social media sites are just not that into evaluating the strength of your claim to an unregistered, “common law” trademark. So check out this video by attorney Aiden Durham to educate yourself on trademark registration.

Unfortunately, even if your trademark is registered, social media platforms are still not that interested in adjudicating trademark disputes. And they make no bones about it. YouTube, for example, says the following on its trademark policy page:

If you are a trademark owner and you believe your trademark is being infringed, please note that YouTube is not in a position to mediate trademark disputes between users and trademark owners. As a result, we strongly encourage trademark owners to resolve their disputes directly with the user who posted the content in question.

Let me translate: don’t bother us with your trademark claim, bother the person who used your trademark.

But there’s good news. YouTube adds this: “Contacting the uploader may resolve things more quickly in a way that is more beneficial to you, the uploader, and the YouTube community.”

Just contact the uploader. That’s easy enough, right? For one thing, every YouTube post includes the name and contact information of the uploader, right? And when you contact the uploader and tell them they need to stop using your trademark, they’re sure to be reasonable and cooperate. What could possibly go wrong?

I’m jk, of course. It never goes like this.

At best you’ll get someone who means well but doesn’t understand trademark law. At worst you’ll get a troublemaker who is openly hostile to your client. So getting people to take down content that infringes your client’s trademark is not simple or easy. And even if you succeed, the same guy may do it again next week. I think the arcade game “Whack-A-Mole” was created just to give trademark lawyers a metaphor to overuse.

No, contacting the infringer is usually not an attractive option. So you submit your trademark complaint through the online portal. What are the chances of success? Let’s use YouTube as an example again.

To YouTube’s credit, when you submit a trademark takedown notice by email, you promptly receive a personalized note from “The YouTube Team.” It looks something like this:

 

Screen Shot 2020-02-09 at 4.44.16 PM.png

In case you missed it on the policy page, this note provides a friendly reminder that “YouTube is not in a position to mediate trademark disputes between users and trademark owners.” You can see where this is going.

Tell your lawyer to prepare the demand letter.

________________________________________

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

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