Common Misconceptions About the Settlement Communications Rule

Common Misconceptions About the Settlement Communications Rule

Nobody likes it when the other party to a confidential settlement communication spills the beans in public. Like they say, snitches get stitches.

Lawyers try to avoid this problem by putting something like this at the top of their letters and emails about settlement:

*CONFIDENTIAL SETTLEMENT COMMUNICATION SUBJECT TO FRE 408*

Why do lawyers do this?

The answer is that if you put this at the top of your email or letter, then the party who receives it is not allowed to use your statements against you for any purpose. This is federal law.

I’m just kidding. That’s not what the law is. Cue the “Bad Legal Takes” account on Twitter.

But there are some common misconceptions about the settlement communications rule, even among lawyers.

Before I get to those, let’s take a look at the rule itself.

Federal Rule of Evidence 408 says this:

Most states have a similar rule. Texas, where I practice, has its own version of Rule 408, which is similar to—but not identical to—the Federal Rule:

For simplicity, let’s put aside for now the part of the federal rule about certain criminal cases. We can then see, based on the text alone, that both the Texas rule and the federal rule make a statement inadmissible if:

(1) there is a “disputed claim”

(2) the statements is “made during compromise negotiations about the claim”

(3) the statement is offered for the purpose of proving or disproving “the validity or amount of a disputed claim.”

The “exceptions” in part (b) are not exceptions per se; they really just clarify that the rule does not bar admission of a settlement communication offered for some other purpose.

Seems simple enough, but what does this really mean, and why do we have this rule?

Let’s take a very basic example. Suppose you get in a car accident with Dave Driver and there’s a lawsuit. During a discussion of settling the case, Dave says “ok, I ran the red light, but the damages you’re asking for are just too much.”

Under Rule 408, you can’t offer Dave’s statement “I ran the red light” as evidence in court. As the federal version of the rule makes clear, you can’t even offer the statement as impeachment evidence if Dave testifies in court “that light was green.”

At first, this doesn’t seem fair. How can Dave get away with admitting he ran the red light and then say the opposite in court?

But if you think about it, if you could use Dave’s statement against him in court, his lawyer might never let Dave say a word in settlement discussions. Why chance it?

No, we want to encourage people to speak candidly and freely in settlement negotiations. We don’t want them to think anything they say can and will be used against them. That would have a “chilling effect” on attempts to compromise disputed claims. That’s why we have Rule 408.

On the other hand, we don’t want people to use the rule to block admission of evidence that is relevant for some other purpose. Suppose Dave’s insurance company offers Pam Passenger money in exchange for an agreement not to testify that Dave ran the red light. Part (b) of the rule clarifies that evidence offered for some other relevant purpose—such as showing Pam’s bias—could still be admissible.

And keep in mind, the statement has to be part of a communication about a compromise. A statement that simply asserts a party’s position or makes a demand may not be a “compromise” communication.

Now that we understand the elements of the rule and its purpose, let’s look at some common misconceptions about the rule.

1. Thinking that labeling something a “Rule 408 settlement communication” makes it so

This one seems pretty obvious, but some lawyers still seem to think that if they put this kind of label at the top of a letter, the letter can never be offered as evidence. Some will even get bent out of shape and accuse you of being unprofessional if you try.

Whether this is unprofessional will of course depend on the circumstances, but of course, just because one lawyer labeled something a Rule 408 communication does not make it inadmissible. If you’re going to object to the admission of the statement in the courtroom, you will still have to meet each of the elements I outlined earlier.

On the other hand, putting the “Rule 408” label on your letter isn’t a total waste of time. It does at least provide some evidence that at least one party intended the communication as a “statement made during compromise negotiations about the claim,” and that doesn’t hurt.

Conversely, leaving out the Rule 408 label does not mean that Rule 408 does not apply, but again, it probably doesn’t hurt to use the label—if you’re concerned about the communication being used against your client later in court.

2. Thinking that Rule 408 bars admission of a settlement communication for any purpose

This one also seems fairly obvious if you read the rule. But it’s not uncommon for lawyers to object to any evidence of a statement made during a settlement negotiation, even when the evidence is offered for some other purpose. And if the judge doesn’t grasp the distinction, the objection may even be sustained.

But still, lawyers should not think that the rule will keep out evidence of settlement communications, regardless of the purpose. Several times in preparing for a trial I have pulled case law applying Rule 408 to support or respond to an anticipated objection, and I can tell you that most of the cases you run across say that Rule 408 did not bar admission of the evidence, because the evidence was offered for some other purpose.

3. Thinking that Rule 408 bars admission of evidence that a party to a dispute committed a crime in a settlement communication

This is really a corollary to misconception no. 2. If a party’s settlement communication itself is evidence of commission of a crime, then Rule 408 would not bar offering that communication for the “other purpose” of proving that the party committed a crime.

Suppose a mob boss is a party to a contentious civil lawsuit about a restaurant lease. During a conference call to discuss settlement, he says “this is really a reasonable offer, and if you don’t take it, bad things could happen to your nice restaurant.”

In that case, Rule 408 would not prevent the government from offering the mob boss’s statement as evidence in a prosecution for extortion. The statement would meet the first two elements of Rule 408—it was made during compromise negotiations of a disputed claim—but it would not be offered for the purpose of proving or disproving the validity or amount of a disputed claim. Rather, the evidence would be offered for the purpose of proving that the mob boss committed a crime by making the statement.

4. Thinking that Rule 408 establishes a privilege

This is a somewhat subtle distinction, especially for non-lawyers, but it’s an important one.

Rule 408 on its face talks about whether evidence is “admissible.” It doesn’t say that the evidence is “privileged.”

This is an important distinction. To illustrate, let’s consider the attorney-client privilege rule in contrast. That rule governs both admissibility and privilege. If I have a confidential communication with my lawyer for the purpose of obtaining legal advice, that communication is generally privileged.

Privileged means both that I can’t be required to disclose the communication in a lawsuit, and that the opposing party cannot offer the statement as evidence in court.

Rule 408 doesn’t work like that. It says nothing about making the statement privileged from disclosure. Generally, if a settlement communication is relevant to disputed issue in a lawsuit, then Rule 408 doesn’t prevent a party to the lawsuit from demanding disclosure of the communication, such as in a pretrial deposition or in a request for production of documents.

So, while I can object to the opposing party attempting to offer the settlement communication as evidence, that doesn’t mean the statement is exempt from disclosure.

5. Thinking that Rule 408 bars disclosure to third parties

This one is similar to no. 4. Rule 408 is a rule of admissibility, not a rule of confidentiality. The rule says nothing about disclosing an opposing party’s settlement communication to a third party, or to the general public.

So if Dave Driver says “I ran the red light” during a settlement discussion, there is nothing to stop the other party from going to the press and saying “Driver admitted he ran the red light!”

That is, unless the parties agreed to keep the settlement communications confidential. But that would be a contract law issue, not a Rule 408 issue. Dave would have to prove the existence of an agreement to keep the settlement communications, a breach of the agreement, and damages resulting from the breach. Of course, in some cases there could be public policy issues with enforcement of the agreement.

Practice Tips

This leads to my settlement communication practice tips for lawyers:

1. If you’re concerned about sensitive statements your client might make during a settlement negotiation, consider entering into a written agreement up front providing that both sides will keep the settlement communications confidential and not offer them as evidence for any purpose. (This would be broader than Rule 408.)

2. Understand that, as a practical matter, your client’s only recourse in the event of public disclosure will be a claim for damages, which will probably be difficult to prove and won’t really undo the reputational damage.

3. Suggest your client try to avoid making any statements that could be considered a crime.

Like they say, don’t do the crime if you can’t do the time.

_____________________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas Super Lawyer® for Business Litigation. He hereby designates this entire blog post confidential under FRE 408.

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.

The Most Common–and Easily Fixable–Mistake in Texas Noncompete Litigation

The Most Common–and Easily Fixable–Mistake in Texas Noncompete Litigation

I made a big mistake last Friday. I opened my Twitter feed before watching the season finale of The Mandalorian with my kids. Y’all can guess what happened.

Speaking of spoilers, here’s a SPOILER ALERT: If you would rather learn for yourself the most common and easily fixable mistake in Texas non-compete litigation, I recommend first litigating a bunch of non-compete cases in Texas and getting them wrong. But if you just want the answer, read on.

And if you’ve watched my YouTube video The Reasonable Time Period Requirement for a Texas Non-Compete, you probably already know the answer.

As that video hints, the most common and easily fixable mistake lawyers make in Texas non-compete litigation is failing to offer evidence—not just argument—regarding the reasonableness of the non-compete’s time period.

Fortunately, this is easily corrected. Just offer testimony from your client explaining why the time period is or is not longer than necessary to protect the company’s confidential information and/or goodwill with customers (depending on which side you’re on). And make sure the testimony is specific, not conclusory.

Even better, offer expert testimony on this issue. In most cases, your client or client representative probably has enough experience in the industry to qualify as an expert, so you won’t need to hire one. For example, if you represent a former employee who has a two-year non-compete, offer expert testimony that the employer’s confidential information becomes stale within a year, or that goodwill with customers is likely to dissipate in a year.

This is sure to draw an objection, but if the witness has significant experience in the industry and gives specific reasons for the opinion, what’s the objection?

You may also draw an objection that reasonableness is a question of law, but that’s wrong (sort of), as I explained in Blown Call: The Thing Texas Courts Get Wrong About Non-Competes.

Anyway, fact or opinion testimony should, at a minimum, create a fact issue regarding the reasonableness of the time period, and thus, the enforceability of the non-compete.

And yet, lawyers in Texas non-compete litigation hardly ever do this.

(Reminder: This is not legal advice for your case. Every case is different, and there may be valid strategic reasons not to offer such evidence in a particular case.)

I’ve handled a lot of non-compete disputes, and in my experience, lawyers on both sides rarely offer evidence about the reasonableness of the non-compete’s time period. And expert testimony on the issue is even more rare.

Most of the time, reasonableness of the time period is an afterthought. At most, the lawyers will offer argument about it, rather than evidence, and cite a few cases.

Why is that?

Let’s back up a bit to put this problem in context.

Enforceability is almost always a key issue in a non-compete lawsuit. In the typical case where an employer sues a former employee to enforce a non-compete, the employer has the burden to prove that the non-compete is enforceable. See Tex. Bus. & Com. Code § 15.51(b). That includes proving that the non-compete is reasonable in time period, geographic area, and scope of activity restrained. Tex. Bus. & Com. Code § 15.50(a).

One caveat: in a temporary injunction hearing, it is debatable whether the judge should address enforceability of the non-compete. On the one hand, likelihood of success on the merits is one of the elements required for a temporary injunction. See, e.g., Tom James of Dallas, Inc. v. Cobb, 109 S.W.3d 877, 884 (Tex. App.—Dallas 2003, no pet.).  On the other hand, the court does not decide the “ultimate issue” of enforceability at the temporary injunction stage. Id.

Let’s put that complication aside and assume that enforceability of the non-compete is somehow an issue before the court, whether it’s a TCPA motion to dismiss, a temporary injunction, a summary judgment motion, or at trial.

In that case, the employer needs to offer evidence that the time period is reasonable. Otherwise, the court may rule that the employer failed to meet its burden of proof. And if you represent the employee, you should offer evidence that the time period is unreasonable, even if you don’t have the burden of proof.

So, for example, even if the time period is only one year, evidence that one year is longer than necessary to protect the employer’s confidential information or goodwill may be enough to prove that the non-compete is unenforceable.

That’s what happened in CDX Holdings, Inc. v. Heddon, No. 3:12-CV-126-N, 2012 WL 11019355 (N.D. Tex. March 2, 2012). In that case, the court held that the plaintiffs failed to meet their burden to show one-year limitation was reasonable, where there was testimony that the information was confidential and would be valuable to competitors, but there was also testimony that the information was “continually changing and updated” and had a “short shelf life.” Id. at *9.

I don’t know if that was the right factual determination, but the approach in CDX Holdings was correct. The court should look at the evidence to decide whether the time period is reasonable.

That is not what usually happens. Here’s the typical scenario. The time period of the non-compete will be less than five years. The employer’s counsel will cite Texas cases for the “Five-Year Rule,” which says that Texas courts have repeatedly upheld non-competes with time periods of two to five years. The employee’s counsel will then make some argument—but not offer any evidence—that this case is different for some reason. In most cases, if the issue goes up on appeal, the Court of Appeals will cite the Five-Year Rule and say the time period was reasonable.

Funny thing about the Five-Year Rule, though: when you investigate its origins, you find that the first Texas case that cited it basically just made it up. I explained this in What is a Reasonable Time Period for a Texas Non-Compete? But the rule has now been repeated so many times that it has become a sort of self-fulfilling prophecy.

Here’s another funny thing about the Five-Year Rule: if you look at the opinions that cite it, very few—if any—are cases where there was conflicting evidence about the reasonableness of the time period. (Or if there was conflicting evidence, the opinion ignores it.)

Let’s look at a recent example.

In Reilly v. Premier Polymers, LLC, No. 14-19-00336-CV, 2020 WL 7074253, at *1-2 (Tex. App.—Houston [14th Dist.] Dec. 3, 2020, no pet. h.) (mem. op.), a commodity polymers company sued a former sales manager and his new employer, claiming breach of contract, tortious interference, and misappropriation of trade secrets. The court held that the 18-month period of the manager’s non-solicitation covenant was reasonable, citing the usual suspects for the Five-Year Rule. Id. at *10-11.

Curiously, the opinion did not cite any evidence from the record about whether 18 months was longer than necessary to protect the employer’s confidential information, goodwill, or other business interest.

So I looked at the Appellants’ Brief (at pp. 41-43) and the Appellee’s Brief (at pp. 35-36) to see if the parties cited any evidence about whether 18 months was reasonable. Nope.

Instead, the defendants argued that the 18-month period was punitive, and therefore unreasonable, because the agreement also provided that employees terminated for reasons other than for “cause” were only subject to a one-year non-solicitation restriction. 2020 WL 7074253 at *11. In effect, the agreement imposed an additional six months of non-solicitation as a punishment for employees who quit, the defendants argued.

That sounds like a plausible argument to me, but the defendants cited no case law to support it, and the plaintiff attacked it as a “made-up rule.” The Court of Appeals sided with the plaintiff, declining to adopt the defendants’ proposed standard, “particularly where the 18-month period at issue is well-within what other courts have deemed reasonable.” Id.

Thus, as in most Texas non-compete lawsuits, it appears neither side offered any evidence about whether 18 months was longer than necessary, and the Court of Appeals decided the case based purely on argument and case law, without considering any evidence in the record.

But what if the defendants had offered evidence?

Let’s say Reilly, who worked as a salesperson and regional manager for the polymers company for seven years, testified as an expert that a one-year non-solicitation covenant would be sufficient to protect the company’s confidential information (if any) and customer goodwill, giving specific reasons based on his familiarity with the company, its customers, and the industry. Would that have been sufficient evidence that 18 months was unreasonable, and the restriction therefore unenforceable?

We may never know, but you should try it. This is the way.

_______________________

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

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.

Why Is Discovery So Expensive?

Why Is Discovery So Expensive?

Changes to the Texas discovery rules go into effect January 1, 2021. I wrote about some of these proposed changes in Proposed Changes to Texas Discovery Rules Threaten Law Firm Revenue. The new Texas Rules will now have initial disclosures and other features more like the Federal Rules.

The changes are partly intended to address an obvious problem: the discovery process is too expensive.

If you’re a lawyer who litigates, or just a business person who has been involved in litigation, you know that civil litigation is very expensive. And most of that expense is for document discovery, depositions, and other pretrial discovery.

So why is this process so expensive?

One possible answer: emails. Today most discovery is about emails and other documents that exist in electronic form.

This is a change so big we sometimes don’t even notice it. When I started practicing law in Texas 23 years ago, most of the discovery was about old-fashioned paper. In the first big case I worked on, would you believe there were zero emails produced in discovery? Now, most of the documents produced in a lawsuit are emails and other documents found in electronic form. And this has made discovery more expensive.

On the other hand, you could make a case that e-discovery hasn’t fundamentally changed discovery. It was already expensive. The term “Rambo tactics” emerged from discovery battles in the 1980s, before e-discovery was even a thing. You could argue that email just exacerbated a problem that already existed.

So aside from email, why is discovery so expensive?

Results of my scientific survey

There’s no single answer, but in my experience, it comes down to three key things.

First, I hate to say it, but there are some bad lawyers out there, and all else being equal, bad lawyers tend to be more obstructive.

Second, even good lawyers often engage in obstructive tactics in discovery.

Third, judges don’t like to get their hands dirty dealing with discovery disputes.

Notice what I left out. I didn’t say discovery is too expensive because the Texas Rules of Civil Procedure need to be changed.

That’s why I don’t expect changes to those Rules to have much impact on the cost of discovery. It’s not like discovery is going to be too expensive if you get 25 interrogatories, but suddenly manageable if you only get 15. Limits on the number of depositions could have more of an impact, but even there, I think fights over written discovery are the bigger culprit, and I don’t see how limits on the amount of discovery will have much impact on that problem.

To understand better, let’s drill down on the three things that make discovery expensive, using my favorite hypothetical lawsuit, Paula Payne Windows v. Dawn Davis, to illustrate.

Suppose Paula Payne Windows sues Dawn Davis and her new employer, Real Cheap Windows, claiming that Dawn breached her non-compete and misappropriated trade secrets. Let’s say the lawyers on both sides are less than top notch.

If the lawyers are not so good, you are likely to get two things in discovery: discovery requests that are overbroad and poorly written, and discovery responses that simply repeat a bunch of formulaic objections. And even with good lawyers, you may still get some of this.

Let’s look at some examples.

Example 1: the overbroad request for production

Paula Payne Windows serves a request for production that seeks “all documents relating to sales of windows to customers of Paula Payne Windows.”

You see this kind of request a lot, in all kinds of litigation, and it is usually objectionable, for two reasons.

First, it is too indefinite. What the heck does “relating to” mean? I mean, I know what it means generally, but it’s such a broad and vague term. How do I decide whether a particular document “relates to” sales of windows? It’s just too fuzzy to provide meaningful guidance.

Second, the request is overbroad. In other words, it is not reasonably tailored to obtain relevant documents, while excluding irrelevant documents. It doesn’t even have a date range. And even if it was limited to a relevant time period, there are likely hundreds of documents, if not more, that “relate to” sales of windows to Real Cheap Windows, and most of those documents will have little or no relevance to the issues in dispute. That also means the request is probably “unduly burdensome,” another common objection.

Put it this way: If Paula Payne Windows gets the invoices identifying the sales, does it really need every single email with every customer about the sales?

Example 2: boilerplate objections to a reasonable request for production

Lest you think that obstructive tactics are limited to requesting too much discovery, let me assure you, there are plenty of obstructive responses as well.

Suppose Paula Payne Windows serves this request for production instead: “Your invoices reflecting sales of windows to customers of Paula Payne Windows from the time you hired Dawn Davis to the present.”

Is this proper? Of course, it depends on the circumstances, and every case is different, but in a typical non-compete lawsuit, this would usually be a proper, reasonably tailored request. So let’s assume this is a well-drafted request.

Will the response be “please see attached invoices”? [Litigators laugh here.]

Not likely. First, you’re probably going to get a bunch of “general” objections that supposedly apply to every request for production. Sometimes these go on for pages. They may include objections like, “Defendants object to each request to the extent that it exceeds the permissible scope of discovery.” I joked about this sort of thing in Agree on These Litigation Rules to Level the Playing Field.

Usually, most of these general objections are, pardon my French, bullshit.

Now, don’t get me wrong, there are some “general” responses that I typically include in my responses, but I keep it to a minimum, and I try to include only general responses that really do apply to each request.

In contrast, most “general objections” I see don’t legitimately apply to every request, which makes them obstructive and unnecessary.

But that’s not all. In response to your specific request, you are likely to get something like this:

These are representative examples of “boilerplate” objections. By boilerplate, I mean the lawyer probably just did a cut and paste of a bunch of objections, rather than narrowly tailoring the objections to fit the requests.

This is usually the result of laziness, or sharp tactics, or both.

It’s lazy because it’s easier to just cut and paste the same objections over and over, rather than really thinking through what is objectionable about the request.

But it can also be a deliberate tactic. Even a good lawyer might choose to include a bunch of objections in every response. One rationale is that you don’t want to fall into the trap of waiving an objection that you might later need to argue to the judge. Another, more cynical rationale is that everybody does this, and you don’t want to make it too easy on the other side to get the documents they need. Why should you unilaterally disarm?

You see the same thing with another type of discovery request, the interrogatory.

Example 3: boilerplate objections to a reasonable interrogatory

An interrogatory is a written question that the responding party has to answer in writing, signed under oath by the responding party or its representative.

Here’s how I might draft an interrogatory if I represent Dawn Davis: “Please describe in reasonable detail the alleged trade secrets you contend Dawn Davis misappropriated.”

This is exactly the kind of question that interrogatories were designed for. So is the lawyer for Paula Payne Windows likely to respond with, “Dawn Davis misappropriated the following trade secrets . . .”?

That would be a pleasant surprise. No, the response is more likely to look like this:

It’s hard to see how these objections are warranted. The interrogatory expressly asked for reasonable detail. So the objection that the interrogatory improperly requires the responding party to “marshal evidence” just doesn’t apply here.

Rule 197 of the Texas Rules of Civil Procedure expressly provides that an interrogatory “may ask the responding party to state the legal theories and to describe in general the factual bases for the party’s claims or defenses.” In other words, the rule allows reasonable “contention” interrogatories.

In fairness, maybe the objections were made like that because the responding attorney is so accustomed to poorly drafted interrogatories. Let’s look at an example of that.

Example 4: the unduly burdensome interrogatory

Litigators have all seen this kind of interrogatory: “Please state all facts supporting your contention that Dawn Davis misappropriated trade secrets from Paula Payne Windows.”

Here, the problem is not so much that the request is irrelevant or overbroad. On the contrary, it is expressly limited to relevant facts supporting a specific claim made by one of the parties to the lawsuit.

The problem is that requiring the responding party to state all facts supporting the contention would just be too burdensome.

That’s why Texas Rule 197 specifically says “interrogatories may not be used to require the responding party to marshal all of its available proof.”

I’ll repeat: interrogatories are not for requiring the other side to marshal all its evidence. That’s what a “no evidence” motion for summary judgment is for. [rim shot]

But seriously, Rule 197 couldn’t be more clear about this. The comment to the rule says that “interrogatories that ask a party to state all legal and factual assertions are improper.” So an interrogatory that asks for “all facts” is almost always objectionable.

Yet people still draft interrogatories that way. Why? Especially when you know the responding party is just going to object.

Again, I think laziness is the main reason. And maybe also a cynical view that says it doesn’t matter that much how you draft it, because the other side is just going to object anyway. Plus, even if you have to file a motion to compel, it’s unlikely the judge will get down into the weeds of how the interrogatory was worded.

Ah, judges. The other piece of the puzzle.

How judges typically respond to obstructive discovery tactics

How do judges usually respond to requests that are too broad, or objections that are too obstructive?

I can tell you exactly how most judges respond. Picture a summer vacation in the family station wagon, let’s say in the 1970s. You’re one of three kids, sitting in the middle, bare legs sticking to the vinyl seat. Cigarette burning in the ash tray up front. Your brother in his shorts and tube socks keeps invading your space. “Mommy, Johnny keeps touching me!” “That’s a lie, I did not!” “Yes, you did!”

What would Mommy or Daddy say? “If you kids don’t shut up and behave, I swear to God, I’m going to pull this car over right now and give you both a spanking!” (I mean back in the day, of course.)

Did Mommy and Daddy care who started it? Did they care who was right and who was wrong? No, they just didn’t want to be bothered.

And that, my friends, is why discovery is so expensive.

_________________________

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

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.

Imagine There’s No Lawyers

Imagine There’s No Lawyers

I was telling my 11YO son about a new client, and he says “you know, Daddy, when you think about it, you really make money off the misfortune of others.”

Ouch. I could respond by saying that we live in a world where people have disputes, and lawyers serve a necessary function by helping people resolve disputes under the rule of law.

But what if we lived in a world where there was no crime, and people didn’t fight over money? Lawyers like to think they serve justice, but wouldn’t we be better off in a more just world where disputes disappear, making lawyers unnecessary?

Perhaps we should consult the greatest book about justice, which—sorry, John Rawls—was written over two thousand years ago.

Let me take you down . . .

In Plato’s Republic, Socrates went down to the Piraeus and made a bold claim: justice requires that the city’s children be raised in common, not by individual families.[1]

His audience is shocked, but there is a certain logic to the claim. There is perhaps no greater source of inequality than the family. The children of rich parents have all the advantages, while the children of poor parents have it much harder. That was just as true in ancient Athens as it is today. If there is to be real justice—i.e. fairness—then the traditional family must be abolished, Socrates suggests.

And while we’re at it, we’d better get rid of private property too.[2] That’s another source of injustice.

Then, with women, children, and property shared in common among the city’s elite “guardian” class, “lawsuits and complaints against one another [will] vanish from among them thanks to their possessing nothing private but the body, while the rest is common.”[3]

Thus, Socrates suggests that a just society requires a sort of “communism,” although that term would be an anachronism in ancient Greece.

This sounds dangerous, of course, especially to us moderns who have seen the catastrophic results of 20th-century totalitarianism. It starts with lofty talk of remaking culture and society and ends with “reeducation” camps.  Is that really what Plato—through his character Socrates—thought justice requires?

That question is subject to interpretation and debate. One interpretation is to take Socrates at face value. When he says that justice requires a sort of communism, he really means it. He’s advocating that kind of society.

Another interpretation says that Socrates is serious, in a sense, when he says that justice requires abolishing the family and private property. But it’s one thing to say what justice demands, it’s another to say what should be done. Justice, after all, is not the only human good. Perhaps the lesson of Plato’s Republic is that a utopia of justice would actually be a kind of dystopia.

That’s a sober lesson. It means that even the best society will have to make tradeoffs between justice and other values, and that’s a messy proposition. By asking us to imagine what a perfectly just city would look like, Plato forces us to confront that tension.

He’s a real nowhere man

This reminds me of another famous guy who asked us to imagine what a utopian world would look like. John Lennon released the album Imagine in 1971. Surprisingly, the iconic title track never reached no. 1 on the US charts, peaking at no. 3 that year. But since then, “Imagine” has become Lennon’s greatest post-Beatles hit.

Musically, it is an almost perfect pop song. That piano lick with the reverb and just a hint of the blues, Phil Spector’s ethereal but not too-syrupy strings, the tasty drum fills, and of course, John’s incomparable vocal. It’s no wonder millions of people, young and old, have downloaded the song from iTunes.

But not everyone is a fan. Behind that majestic music are some lyrics that are, let’s face it, kind of dark when you think about it.

I imagine Lennon himself would be bemused to see his provocative song embraced as a classic by middle America, to the point where you might hear it at a kid’s ballet recital. It’s how Bruce Springsteen must feel when “Born in the USA” is played at political rallies. What countercultural revolutionary wants to see his musical manifesto turned into something like the soundtrack for a Coke commercial? It’s supposed to make people uncomfortable, not teach the world to sing.

“Imagine” is especially jarring if you’re religious. Right off the bat, Lennon hits you with “imagine there’s no heaven.” Then, later, just in case you missed it, he comes back with “and no religion too.”

Granted, he never says “imagine there’s no God,” but he comes pretty close.

Then Lennon goes after two more things most Americans hold dear: patriotism and capitalism. “Imagine there’s no countries,” he sings in the second verse, “it isn’t hard to do.” And in the third verse he takes aim at private property. “Imagine no possessions, I wonder if you can.”

Not just equal possessions, no possessions. That is hard to imagine, and not very appealing.

(The common objection that it’s hypocritical for a rich rock star to sing about “no possessions,” while understandable, has always struck me as pretty weak sauce. Would the line suddenly become valid if sung by a poor person?)

But for me, the lyric in “Imagine” that everyone, regardless of political or religious beliefs, should have a real problem with is the line “nothing to kill or die for.”

That line is in the context of nationalism, coming right after “imagine there’s no countries,” and let’s remember, this was in the middle of the Vietnam War, which Lennon despised. So maybe the point was to criticize excessive militarism.

But still, if you take that line literally, it paints a picture of a world that would be pretty bland and joyless.

Nothing to kill or die for? Think about all the great literature, poetry, and cinema that would make no sense if there were nothing worth dying for. No Odyssey, no Les Miserables, not even Saving Private Ryan. And Shakespeare? Forget about it. His tragedies and histories are all about people dying for things they love more than life itself.

Getting rid of those things might make the world more just, but a lot less interesting.

Not only that, but nothing to kill or die for suggests no loved ones. Think about the things in your own life that you would lay down your life for. Yes, of course, God and country and justice and all that, but most of you probably thought about family members first. Is Lennon really saying that a world without family would be a utopia?

Better free your mind instead

Maybe we have it all wrong. Maybe John Lennon wrote “Imagine” to make us see that a world without countries, religion, possessions, and things worth dying for would actually be a dystopia. Perhaps it’s an ironic anthem.

That’s an interpretation, but an unlikely one. Just considering the face of the lyrics, the final line of the song is “I hope someday you’ll join us, and the world will live as one.” That sounds like a fairly earnest call to action. Then when we look outside the lyrics, the extrinsic evidence tells us that the song’s critique of religion, nationalism, and materialism aligns pretty well with the beliefs Lennon espoused in interviews.

In short, the ironic interpretation of “Imagine” doesn’t seem very plausible.

On the other hand, John Lennon was fond of ambiguity. This is the guy who sang “I’d rather see you dead, little girl, than to see you with another man” before he wrote the hippie anthem “All You Need Is Love.”

Even more famously, his song “Revolution” reads like a critique of 60s radicals who embraced the idea of violent Marxist rebellion. “But when you talk about destruction,” he sang on the original single version (the fast one), “don’t you know that you can count me out.” He was all about giving peace a chance.

Or so we thought. Later, when the Beatles released the slower, doo-wop version of “Revolution” (the one on the White album), John sang “don’t you know that you can count me out . . . in.”

Out . . . in. What was that all about?

This ambiguity suggests we need to consider Lennon’s whole body of work, and when we do that, a more complex picture emerges.

Just like starting over

Nine years after Imagine, John Lennon released a comeback album called Double Fantasy. I consider it his best solo album, but strangely, there’s nothing on it about politics. Instead, the songs were all about relationships. (“Woman, I can hardly express, my mixed emotions at my thoughtlessness.”)

What happened? Did John go soft?

One thing that happened is that John’s son Sean was born in 1975. At that point, Lennon did something almost unimaginable for a rock star who stood at the top of the world. He quit making music, became a house husband, and stayed home with his kid, changing diapers and watching Sesame Street.

This eventually led to another song with a memorable piano riff: “Watching the Wheels.” It responds to the questions people kept asking John during his self-imposed exile from show business. “Don’t you miss the big time, boy, you’re no longer on the ball?”

But the song on Double Fantasy that has really resonated with people is “Beautiful Boy,” a musical love letter to John’s son. Even if you don’t know the song, you probably recognize its signature line: “life is what happens to you while you’re busy making other plans.”

Everyone can relate to that, especially if you have children. We all have big plans when we’re young. Some want to get rich, or famous, or both. Others want to make the world a better place.

Raising children has a way of bringing us back to reality. This is precisely why Socrates thought the family would stand in the way of complete justice.

And the hard truth is, sometimes having a family gets in the way of those big plans you had. But you learn that the best stuff in life is what happens along the way. You’d think that people would have had enough of silly love songs, but you look around you and you see it isn’t so.

I think this points to a third possible interpretation of “Imagine.” Maybe we need to pay more attention to the title.

Perchance the point is not to get rid of everything we care about and fight over. “Imagine” suggests that the things human beings love the most can also be the very things that make us behave the worst. But by imagining a more just world, we can at least remind ourselves not to let our selfish concerns for our own families, possessions, and beliefs feed into greed, intolerance, and violence.

If that means less work for lawyers, I can live with that. Maybe I can have a second career as a rock star.

__________________________

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

These are his opinions, not the opinions of his firm or clients.


[1] “All these women are to belong to all these men in common, and no woman is to live privately with any man. And the children, in their turn, will be in common, and neither will a parent know his own offspring, nor a child his parent.” The Republic (On the Just), Book V, 457d (Basic Books 2d ed. 1991, trans. Bloom).

[2] “There mustn’t be private houses for them, nor land, nor any possession.” Id. at 463c.

[3] Id. at 464e.

What Is a Reasonable Time Period for a Texas Non-Compete?

What Is a Reasonable Time Period for a Texas Non-Compete?

Baseball legend Yogi Berra reportedly said “I usually take a two-hour nap from one to four.” He also said “the future ain’t what it used to be.” Obviously the guy had a unique sense of time.

Time is on my mind because of this week’s blog topic: What is a reasonable time period for a Texas non-compete?

For almost a century, Texas case law has required that a non-compete be limited to a reasonable time period, and in 1989 the legislature codified this requirement in the Texas Covenants Not to Compete Act. The time period must be no longer than necessary to protect the employer’s goodwill or other business interest (usually confidential information). See Tex. Bus. & Com. Code § 15.50(a). And in the typical context of an employment contract, the burden is on the employer to prove the time period is reasonable. See Tex. Bus. & Com. Code § 15.51(b).

The time period of a Texas non-compete must be reasonable. That much is clear. But what does “reasonable” mean in practice? Is there any rule we can discern from the decades of case law?

Unfortunately, the Texas case law applying the reasonable time period is remarkably unsatisfying. You’re just not going to find much analysis defining what makes a time period reasonable or not. The best I can do to synthesize a “rule” from the cases is the “Five-Year Rule.”

The Five-Year Rule says that when addressing the reasonable time period requirement, the court will declare that Texas cases have upheld non-competes of two to five years, and if the time period at issue is five years or less, the court will then find the time period reasonable, without discussing any specific evidence.

I don’t find the Five-Year Rule very helpful or persuasive. As the statute indicates, the question is whether a shorter time period would be sufficient to protect the interest at issue, which is usually the employer’s confidential information and/or goodwill.

I propose an alternate rule, the Wolfe Rule. The Wolfe Rule says that when there is conflicting evidence about whether the time period of a non-compete is reasonable, it presents a fact issue for the jury.

Now, you’re not going to find the Wolfe Rule stated explicitly in any Texas cases, but it is the correct rule. I would even go as far as saying it is obviously the correct rule, and the fact that Texas courts have not expressly stated it presents something of a mystery. And one more thing: the Wolfe Rule does not necessarily conflict with the Five-Year Rule.

How can all of this be true?

To understand, first we need some historical perspective.

We’ll start in the Ice Age. I call it that because you could write the early history of Texas non-compete law based on cases involving the ice delivery business. I wrote about one of these cases, City Ice Delivery Co. v. Evans, 275 S.W. 88 (Tex. App.—Dallas 1925, no writ), in Jurassic Non-Competes.

There were at least four more Texas non-compete cases about ice delivery in the 1920s alone. Oak Cliff Ice Delivery Co. v. Peterson, 300 S.W. 107 (Tex. Civ. App.—Dallas 1927, no writ); Carpenter v. Southern Properties, Inc., 299 S.W. 440 (Tex. Civ. App.—Dallas 1927, writ ref’d); Texas Ice & Cold Storage Co. v. McGoldrick, 284 S.W.615 (Tex. Civ. App.—San Antonio 1926, writ ref’d); Bettinger v. North Fort Worth Ice Co., 278 S.W. 466 (Tex. Civ. App.—Fort Worth 1925, no writ).  

You can find in these cases many of the principles that still apply in Texas non-compete law today, including the requirement that the non-compete must have a reasonable time period. For example, in Carpenter v. Southern Properties the court said a non-compete can only prohibit competition “for a reasonable space of time” after employment, and the employer has the burden to prove that the non-compete is reasonable “in its duration of time.” 299 S.W. at 443.

The non-compete in Carpenter had a two-year time period. Id. at 442. Was this reasonable? “[T]he trial court has found that the negative covenant sought to be enforced was both reasonable and necessary,” the court said, “and we are not prepared to say that there is not substantial evidence sustaining such finding.” Id. at 444.

That was it. Nothing about what the evidence regarding the time period was. Nothing about why the evidence established that two years was reasonable. And the depth of analysis of the reasonable time period requirement in the next century of Texas case law would not significantly improve.

By 1960, it was well established that a non-compete should be limited “for such a time as is reasonably necessary to protect the employer’s business and good will,” and that the “burden of proof is on the former employer” to establish “by satisfactory evidence” the reasonableness of the non-compete. Weber v. Hesse Envelope Co., 342 S.W.2d 652, 654-55 (Tex. Civ. App.—Dallas 1960, no writ).

And by that time Texas courts had moved from ice delivery to a more fascinating business: envelope sales. Yes, Weber was about a two-year non-compete signed by an envelope salesman. No word on whether Weber also owned a beet farm.

This battle in the great Metroplex envelope wars was tried to the bench, the salesman was the only witness, and the trial court declared the non-compete enforceable. Id. at 653. As to the two-year time period, the Court of Appeals said only that there was “ample support in the evidence” for the trial court’s implied finding that the two-year period of the non-compete was reasonable. Id. at 655.

That was it. The court didn’t cite any of the “ample” evidence or explain how the evidence established that two years was reasonable.

Are you detecting a pattern?

About 20 years later, the superficial treatment of the reasonable time period requirement got worse in AMF Tuboscope v. McBryde, 618 S.W.2d 105 (Tex. App.—Corpus Christi 1981, writ ref’d n.r.e.). That case addressed another two-year non-compete, this one involving the oilfield pipe inspection business. On an application for temporary injunction, the trial court found the time period unreasonable. Id. at 108.

The Corpus Christi Court of Appeals disagreed. The court did not cite any evidence from the record on the reasonableness of the time period, but it stated that the employees had cited no case authority for the proposition that two years is unreasonable. Id. The court then declared: “Two to five years has repeatedly been held a reasonable time in a noncompetition agreement.” Id.

This appears to be the earliest statement of the Five-Year Rule.

AMF Tuboscope cited three cases in support of the Five-Year Rule, but curiously, none of those cases supported the rule:

  • In Arevalo v. Velvet Door, Inc., 508 S.W.2d 184, 185 (Tex. Civ. App.—El Paso 1974, writ ref’d n.r.e.), there was a three-year non-compete but “no contention that the time or space limitation is unreasonable.”
  • In Electronic Data Systems Corp. v. Powell, 508 S.W.2d 137, 138-40 (Tex. Civ. App.—Dallas 1974, writ ref’d n.r.e.), the court upheld the limited scope of the trial court’s temporary injunction. The non-compete at issue had a three-year period, but the reasonableness of that time period was not one of the issues raised in the case.
  • As we have seen, in Weber v. Hesse Envelope, the court said there was ample evidence to support finding the two-year period reasonable, but the opinion said nothing about five years.

You read that right. None of these cases involved a five-year non-compete. And only one of them even addressed whether the time period at issue was reasonable.

So, while I hate to be harsh, the fact is, the statement of the Five-Year Rule in AMF Tuboscope wast at best inaccurate, and at worst dishonest.

Almost 30 years later, the Houston Court of Appeals repeated this error verbatim in Gallagher Healthcare Insurance Services v. Vogelsang, 312 S.W.3d 640 (Tex. App.—Houston [1st Dist.] 2009, pet. denied), a case involving a two-year non-compete in the insurance brokerage business. The trial court granted summary judgment that the non-compete was unenforceable, but the Court of Appeals reversed. Id. at 642-43.

Gallagher reasoned that the two-year period was “not unreasonable” because the evidence showed that insurance contracts lasted for a year. Id. at 655. That at least reflected some analysis based on the evidence.

But then the court declared, “Two to five years has repeatedly been held as a reasonable time in a noncompetition agreement,” citing the same three cases cited in AMF Tuboscope. Id.

Thus, not only did Gallagher repeat the same error made in AMF Tuboscope, it did so while addressing a two-year non-compete.

But once the Five-Year Rule was expressly stated in at least two opinions, Texas courts started to invoke it almost routinely, and not just for two-year non-competes.

For example, in Salas v. Chris Christensen Systems, Inc., No. 10-11-00107-CV, 2011 WL 4089999 (Tex. App.—Waco Sept. 14, 2011, no pet.), the court considered the reasonableness of a five-year non-compete in the dog grooming products industry.

Salas did not cite any evidence about the reasonableness of the time period. Instead, it simply said “Texas courts have held that two to five years is a reasonable time restriction in a non-competition agreement,” citing Gallagher and the same three cases cited by Gallagher and AMF Tuboscope. Id. at *19. “Given this,” the court said, “we cannot say that the Agreement’s five-year restraint is per se unreasonable.” Id.

This, of course, misstated the issue. The question should have been whether the employer met its burden to prove that the five-year period was reasonable, not whether a five-year period was “per se” unreasonable.

But the damage has been done. Since Salas, both state and federal courts in Texas have continued to cite the Five-Year Rule, even when the non-compete at issue has a time period of just one or two years:

All of these cases cite the Five-Year Rule uncritically, perhaps without realizing that AMF Tuboscope pretty much just made up the rule, almost 40 years ago.

But in a sense, the Five-Year Rule has become a self-fulfilling prophecy. Now that so many Texas courts have cited and applied it, it has effectively become true.

So that solves the mystery of how Texas courts came to adopt the Five-Year Rule, at least in part.

But is it the right rule?

I’ll cover that in Part 2. It ain’t over til it’s over.

__________________________

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

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.

Ethical Issues in Departing Employee Litigation

Ethical Issues in Departing Employee Litigation

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

Let’s use a hypothetical to find them.

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

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

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

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

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

1. Conflict of Interest and Communications Seeking Representation

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

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

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

So what should you do?

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

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

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

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

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

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

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

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

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

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

2. Lawyer as Witness

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

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

“What’s going on?”

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

“Wow, ok, does Dawn know about this?”

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

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

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

A. Accept the representation and file the lawsuit

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

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

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

Obviously, the best answer is D.

Kidding. I’m just kidding.

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

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

3. Duty of Candor

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

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

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

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

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

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

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

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

Now let’s apply that.

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

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

Have you violated Rule 4.01?

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

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

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

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

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

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

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

4. Meritorious Claims and Contentions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5. Conflict of Interest and Joint Representation

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

Can you represent both of these defendants?

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

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

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

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

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

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

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

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

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

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

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

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

__________________________

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

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.

Harris County Voting Lawsuit Provides Latest Test for Textualism

Harris County Voting Lawsuit Provides Latest Test for Textualism

I kept having this recurring dream where first I was a teepee, and then I was a wigwam. Night after night, it was the same thing. First a teepee, then a wigwam. Teepee. Wigwam.

I asked my doctor about this, and he said, “I think I see the problem, you’re two tents.”

Two tents. Too tense. Get it? A teepee and . . .

Oh, never mind.

The Hotze challenge to Harris County drive-through voting

Tents are on my mind this week because of a little lawsuit that happened in my neck of the woods down here in H-Town. You might have heard about it. Less than a week before Election Day, a handful of Texas Republicans filed a lawsuit in federal court in Houston, trying to block the Harris County Clerk Chris Hollins from continuing to offer the option of “drive-through” voting.

Dr. Steven Hotze, a prominent white nationalist activist in Houston, was the lead plaintiff. You might have heard of Hotze. He’s the dude who, in the wake of the George Floyd protests, left Governor Gregg Abbott a voice mail urging him to send the National Guard into Houston to “shoot to kill” any violent rioters. “That’s the only way you restore order,” he reportedly said. “Kill ‘em.”

He sounds nice.

But I’m not going to get into the politics of the lawsuit, other than to point out that even a lot of Republicans were against it. Harris County may have gone blue, but it’s not like every one of the 127,000 drive-through voters was a Democrat. Joe Straus, the former Republican Speaker of the Texas House, even joined an amicus brief in support of the Harris County Clerk.

No, I just want to focus on one of the narrow legal issues in the case, and what it teaches us about the theory of adjudication known as “textualism.”

The legal issue, in a nutshell, was whether a tent is a “building.”

See, the Hotze plaintiffs argued that the use of temporary tents for voting violated the Texas Election Code, which provides for voting in a “building.” They asked the court to enter an injunction against further drive-through voting and to “reject” the 127,000 drive-through ballots already cast. They filed the federal lawsuit on October 28, shortly after the all-Republican Texas Supreme Court rebuffed their bid to obtain similar relief in Texas state court.

The case was assigned to U.S. District Judge Andrew Hanen. This caused Democrats a little discomfort, considering some press reports characterizing Judge Hanen as a highly partisan Republican appointee.

I did not share their concern. I made this prediction on Twitter:

I just knew a federal judge was not about to tell 127,000 Houstonians “sorry, the County Clerk messed up, so your votes just don’t count.”

And I was right. Judge Hanen denied the request to “reject” the drive-through votes already cast. In fact, he dismissed the whole lawsuit on the procedural ground of lack of standing.

(There were several strong procedural grounds for rejecting the request for an injunction, including the plaintiffs’ delay in seeking relief and the fact that, even when there is a violation of the Election Code, “rejecting” votes is rarely the warranted remedy.)

But just to cover his bases—knowing the ruling would be appealed—Judge Hanen issued an order stating how he would have ruled if the plaintiffs had standing. And he said he would have sided with the Hotze plaintiffs on at least one issue: a tent is not a “building.” He cited dictionary definition of “building” to support this conclusion. Thus, he applied the theory of textualism to decide the issue.

And that was the most interesting part of the case to me.

Another Test Case for Textualism

My loyal Fivers already know about my interest in textualism. I wrote about it in Bostock Opinion Shows That Strict Textualism Fails to Deliver on its Central Promise.

My thesis: In Bostock, the phrase “because of sex” was ambiguous as applied, i.e. subject to more than one reasonable interpretation, so the application of strict textualism did not yield one determinate answer, contrary to the textualist arguments offered by both the majority and the dissenters.

For me, the lesson of Bostock was that strict textualism failed to deliver on its central promise of determinacy and legitimacy. The text of the statute by itself just wasn’t enough; the Court had to look to something else to decide the question, even if it pretended like it didn’t. Not only did textualism fail to deliver on its promise, I wrote, it failed spectacularly.

But maybe the Hotze case would give textualism a chance to redeem itself.

Perhaps it was unfair to treat Bostock as a test case. You could not get a more “hot button” political issue than the question in Bostock: whether federal law prohibits discrimination against homosexual and trans-sexual employees. You might argue it’s going to be hard to find any neutral theory of adjudication that’s going to satisfy everyone on such an issue.

Maybe textualism would fare better when the issue was less incendiary, mundane even.

Granted, the issue came up in the context of a hotly contested presidential election. But the issue itself had hardly any political valence. It’s not like there’s a “liberal” or “conservative” position in the abstract on whether a tent is a building. Ask some of your friends and family. Unless they’re familiar with the issue in the Hotze case, it’s not like all the MAGA people are going to say one thing and all the libs the opposite.

Just like there’s no “Republican” or “Democrat” position on whether Batman is a superhero. (Or is there?)

Anyway, the point is that when the legal issue isn’t a contested battle in the culture wars, you might expect textualism to do a better job of delivering on its central promise. So let’s see how it did in Hotze.

Application of Textualism in Hotze v. Hollins

The first thing we find when we look closer at Hotze is that the statutory interpretation question was slightly more complicated than we thought. It turns out there were two different statutory sections at issue in Hotze, one for early voting, and another for Election Day voting.

As for the early voting statute, the Hotze plaintiffs just didn’t have a strong argument. The statute on early voting referred to a “movable structure” rather than a “building.” This is an issue where textualism is probably adequate. I just don’t see a reasonable argument that a tent is not a “movable structure.”

Judge Hanen didn’t either. To decide whether a tent is a structure, he looked to Black’s Law Dictionary:

Applying the dictionary definition, Judge Hanen found that a tent was a structure. Thus, he did not think that the use of drive-through tents for early voting violated the statute.

But the section on Election Day voting was different. It provided that each polling place on Election day “shall be located inside a building.” Tex. Elec. Code § 43.031(b). Most people would probably agree a tent is a “movable structure,” but is it a “building”?

Let’s pause here and just reflect on the fact that there are different ways you could approach this question. Before textualism became fashionable, I think most Texas judges—liberal or conservative—would have approached the issue pragmatically. “I don’t see anything wrong with drive-through voting, so sure, for this purpose I can say a tent is a building” would be the typical thought process.

But the Harris County Clerk, probably considering the audience, took a different approach, the textualist approach. This applies the “plain meaning” of a statute’s words, and as a recent textualist opinion in Texas said, “[d]etermining a word’s plain meaning is a dictionary-driven process.” Kawcak v. Antero Resources Corp., 582 S.W.3d 566, 573 (Tex. App.—Fort Worth 2019, pet. denied).

So, notably, both the lawyers for Hollins and Judge Hanen looked to Black’s Law Dictionary for the meaning of “building.”

Here are excerpts from the brief filed by Hollins (top) and Judge Hanen’s order (bottom):

Notice any discrepancy?

Yes, of course. They cite different editions of Black’s Law Dictionary that have slightly different definitions.

I think this exercise in dueling dictionaries teaches us some things about “dictionary-driven” textualism.

Textualism fails to deliver determinacy, again

First, and perhaps most obvious, dictionaries will have multiple definitions of a word, and different dictionaries will define words differently. This is a problem for textualists, but one they are aware of. In the Kawcak opinion, for example, the court painstakingly parsed multiple definitions of the word “common” from three different dictionaries, even getting down into the order of the different definitions.

The problem is that multiple definitions and multiple dictionaries can create ambiguity. If one definition leads to one result and another definition leads to the opposite result, then the dictionary exercise doesn’t answer the question.

And that seems to be exactly what happened in Hotze. The only thing the dueling definitions seemed to agree on is that a building has walls.

But it was even worse than that. Not only were the two dictionary definitions of “building” different, neither definition definitively answered whether a tent is a building.

The definition cited by Hollins focused on the purpose of a building, i.e. what it is designed for, but none of the examples it cited included voting. So you could argue it either way.

Same for the definition cited by Judge Hanen. That definition said “especially a permanent structure,” but it didn’t say a building has to be permanent. So again, you could make a reasonable argument either way.

This is a problem. If the point of dictionary-driven textualism is to apply an objective method of statutory interpretation that provides a single determinate answer, then it failed in Hotze, just like it failed in Bostock.

But even aside from the determinacy problem, which I explained in the Bostock post, I think the Hotze example shows how misguided the whole dictionary-driven enterprise is in the first place.

The problem with “dictionary-driven” textualism

The basic problem is the nature of language itself. Most words, even simple ones like “common” or “building,” are inherently fuzzy. When the authors of Black’s Law Dictionary—or any dictionary—try to define a word like “building,” they are just trying to capture the gist of the meaning. Their purpose is not to draw sharp lines between what things the definition embraces and what things it doesn’t.

In other words, when the authors of Black’s Law Dictionary wrote a definition of “building,” they were not thinking about defining the word in a way that would determine whether a tent is a building. If they had been thinking about that question, they might have drafted the definitions differently.

For this reason, the dictionary approach strikes me as misguided from the start, even before we get to the indeterminacy problem. It’s like looking at a dictionary to determine if a hot dog is a “sandwich.”

Granted, there is precedent for this approach. When Stephen Colbert asked Ruth Bader Ginsburg whether a hot dog is a sandwich, she gave a classic textualist answer her late friend Antonin Scalia would have loved: “you tell me what a sandwich is, and then I’ll tell you if a hot dog is a sandwich.”

With much respect for the late great Notorious RBG, I think that’s the wrong approach.

Here’s the thing. We all know what a “sandwich” is; we don’t need to look at a dictionary. The problem is that in some ways a hot dog is like the things that we all agree are sandwiches, and in other ways it is not. So, even if the dictionary definition of “sandwich” provides a single determinate answer, the dictionary exercise just doesn’t seem that valuable to me. The authors of the dictionary wrote the definition for a general purpose, not for the purpose of either including or excluding a hot dog.

(There is actually some legal precedent about whether a hot dog is a sandwich, as one of my son’s favorite YouTubers explains in Food Theory: What Makes a Sandwich a Sandwich?)

If dictionary-driven textualism is all wrong for the internet parlor game of asking whether a hot dog is a sandwich, then surely it is even more misguided for serious questions of justice and public policy.

Judges aren’t playing some game of Scrabble. They are deciding real disputes that have serious consequences for the parties. And in some cases, like the Hotze lawsuit, they are deciding issues that impact major matters of public concern. Do we really want such momentous decisions to turn on some kind of word game?

No, playing the dictionary game is not how they should do it.

I’m not saying dictionary definitions are totally irrelevant. But framing the question as “is a tent a building?” strikes me as looking through the wrong end of the telescope. The question should not be whether a tent is a building in the abstract, but whether for the purpose of this particular statute, in this particular dispute, the court should construe “building” to include a tent, considering the consequences of the decision and the special circumstances, i.e. the COVID-19 pandemic.

When you frame the question that way, it practically answers itself.

We’ve got you surrounded, textualism

But don’t take my word for it. I’m not the only one who says judges should look to the purpose of a disputed term, the surrounding circumstances, and the consequences of a particular construction.

For one thing, you can find support for my view in Texas contract law. The Texas Supreme Court has recognized that “surrounding circumstances” can bear on the meaning of a contractual term, even when the term is not ambiguous on its face. See Nat’l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 521-22 (Tex. 1995).

I think this contract principle provides an important lesson for statutory interpretation.

In theory, it’s fine to say that courts should apply the plain meaning of an unambiguous statutory term, without looking to extrinsic evidence. But to determine whether a term is ambiguous, we must first ask if it has more than one reasonable interpretation, and it’s hard to say if an interpretation is reasonable without looking to the surrounding circumstances. See CBI Industries, 907 S.W.2d at 521 (“The ambiguity must become evidence when the contract is read in context of the surrounding circumstances”). That’s why contract law allows judges to look at surrounding circumstances.

Now let’s apply that idea to the election statute.

Suppose there was an election where drive-through voting on Election Day resulted in numerous problems, leading to a public outcry and demand for reform. As a result, a state representative sponsored legislation to require all voting to take place “inside a building,” with the aim of putting a stop to drive-through voting in future elections.

That’s not what actually happened. There’s no indication that the definition of “building” in the Texas Election Code had anything to do with tents. The section at issue is mainly concerned with distinguishing between public and non-public buildings and addressing what kind of non-public buildings can be used. The provision requiring voting in a “building” seems incidental to that other purpose.

But what if the definition of “building” did result from the hypothetical public outcry described above. Wouldn’t that surrounding circumstance have some bearing on whether construing building to include a tent was a reasonable construction or not? Wouldn’t that be the most logical place to start?

But the strict textualist says no, unless the undefined statutory term is ambiguous, you look to the dictionaries and no further.

Ok, but let’s consider another hypothetical. Imagine the legislature itself, while not providing a definition of “building,” did provide express guidance to the courts on how to interpret the statute.

Let’s say the legislature, rather than restricting judges to the dictionary definition of a statutory term, instructed judges that when construing a statute they can look to the purpose of the statute, the circumstances surrounding its enactment, the legislative history, and the consequences of a particular construction, even if the statute is not ambiguous. In other words, suppose the legislature expressly told courts they are not required to apply strict textualism.

What if I told you that is exactly what the Texas legislature did? Here is Section 311.023 of the Texas Code Construction Act:

As you can see, the legislature has invited Texas courts to consider extrinsic sources when construing a statute, even when the statute is not ambiguous.

But Judge Hanen’s order in the Hotze case said nothing about Section 311.023. He didn’t look at the purpose of the statutory provision or its surrounding circumstances. Instead, he just quoted from one of the Black’s Law Dictionary definitions and then said a tent isn’t a building. Was this a mistake?

The Tex-tualists strike back

To be fair, Hollins did not argue Section 311.023. Plus, the Texas Supreme Court has expressly declined the legislature’s invitation in Section 311.023 to consider extrinsic factors to construe a statute. See Texas Health Presbyterian Hospital of Denton v. D.A., 569 S.W.3d 126, 136 (Tex. 2018).

Texas Health was a medical malpractice case involving a classic statutory interpretation problem: whether a modifying phrase at the end of a clause applies to all the terms of the clause, or only the last term.

The statutory clause at issue was: “in a hospital emergency department or obstetrical unit or in a surgical suite immediately following the evaluation or treatment of a patient in a hospital emergency department.” The question was whether “following the evaluation or treatment of a patient in a hospital emergency department” applied to “in a hospital emergency department.” The outcome of the case turned on this question.

The plaintiffs urged the court to consider extrinsic evidence, including legislative history, citing Section 311.023. But the Texas Supreme Court refused. “Although this section may grant us legal permission,” Justice Boyd wrote, “not all that is lawful is beneficial.” Id. at 136.

Instead, Texas Health cited Scalia & Garner’s Reading Law: The Interpretation of Legal Texts (available to Amazon Prime members for $47.45), a book that is big on textualism and kind of down on legislative history, to put it mildly.  Finding the statute unambiguous, the court refused to consider any extrinsic aids to interpreting it.

That’s not how I would have done it. I might have reached the same result in Texas Health, but more on common sense grounds than textualist grounds.

And I have to say, I’m bothered that the Texas Supreme Court gave more weight to a privately-authored treatise—which only expresses the opinion of its authors—than it did to the legislature. That’s a strange sort of deference, and I don’t like it.

But maybe I’m just too tense.

______________________________________

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

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.

Election Edition: Publius vs. Tocqueville

Election Edition: Publius vs. Tocqueville

Two spots at the top of the charts

This is my third “Election Edition” post. The first was in 2016, the second in 2018. I figure every two years is often enough for Five Minute Law to weigh in on politics.

In the last one I repeated the assertion by one of my college professors that Alexis de Tocqueville’s Democracy In America is the second-best book on American politics.

That means the best one must be the Federalist Papers, which are now enjoying a renaissance, due partly to the prominence of “Originalism” in debates over Supreme Court nominees, but mostly—let’s be honest—because of the smash Broadway musical Hamilton.

Thanks to Hamilton, hip schoolkids around the country now know that the Federalist Papers were not really a book, but a series of 75 essays defending the new federal Constitution to the public, written by John Jay (until he got sick), James Madison, and of course, Alexander Hamilton, who wrote “the other 51!”

Still, we’ll call it a book for simplicity.

Of course, not everyone is a fan. The progressive left is uneasy with the Federalist Papers (at best), considering they were written by three wealthy white men to justify a Constitution that treated enslaved African-Americans as three-fifths of a person and denied political rights to women. Two of the authors even owned slaves!

Conservatives, on the other hand, seem to love the Federalist Papers, but they may not like everything they find in them. It is ironic that “populist” movements like the Tea Party like to invoke the rhetoric and imagery of the founders, when many of the founding thinkers—including Madison, and certainly Hamilton—were decidedly un-populist or even anti-populist.

So, the marriage of the arguably elitist political thought of the Federalist Papers with the “populist” strain of contemporary American conservatism was always an uneasy one (even before Trump).

Still, the Federalist Papers remain at the top of the charts when it comes to books about American politics. It’s like even if you think the Beatles are overrated, you have to grudgingly admit they are the most important rock band.

On the other hand, just as some people will make a case for the band in the number two spot (that would be Led Zeppelin, with due respect to the number three Rolling Stones), there is a case to be made for putting ADT (that’s what I call my man Tocqueville) ahead of Publius.

I mean, ADT should at least get extra points for correctly predicting the rise of the United States and Russia as the world’s major powers, over a century before it happened.

But I’m getting ahead of myself. Before we reevaluate which book really deserves the number one spot, perhaps we should step back and ask ourselves what problem the authors were trying to solve.

The problem, in a word, was democracy.

The problem with democracy

To say that democracy was the problem is a little jarring for contemporary ears, on both sides of the spectrum. Almost everyone today—Republican or Democrat—says they are on the side of the people. You’re not going to find any mainstream politicians openly advocating for some kind of aristocracy or dictatorship.

But democracy was the problem both Publius and ADT were trying to solve. Granted, in both cases they were also concerned with the more pragmatic issue of effective government, but the chief philosophical question was how to prevent democracy from destroying liberty, and itself.

This made the project of the American founders unique. Previously, there were pro- and anti-democratic thinkers, but the founders—at least Madison and Hamilton—were different: pro-democratic statesmen grappling with how to save democracy from itself.

The problem from their perspective was that the American Revolution had set loose egalitarian passions that threatened to consume life, liberty, and property like a wildfire. The founders’ proposed U.S. Constitution was designed to implement democratic principles—it is not as if they were proposing some return to monarchy or aristocracy—but it was also designed to constrain them.

Madison made this clear in Federalist No. 10, perhaps the most “philosophical” of the Papers. The problem, he said, was “faction,” by which he meant a group of citizens united by devotion to some passion or cause opposed to the general welfare. Today we would call it an “interest group.” Madison seemed to view factions as the greatest threat to stability and freedom in a democracy.

James Madison

Federalist No. 10 tells us several things about these factions.

First, Madison said factions are unavoidable in a free country. When people are free to form opinions and to express them through politics, there will necessarily be conflicting opinions. The only way to avoid that would be to take away the freedom, a cure that would be worse than disease. There are no factions under communism, for example.

Second, under a democratic form of government, majority factions are more to be feared than minority factions. That’s because the “republican principle”—essentially majority rule through representative democracy—takes care of minority factions.

The problem of a majority faction, on the other hand, cannot be solved with majority rule. That’s true almost by definition. Something else is needed.

This is where contemporary political scientists—especially progressives—are going to object. Isn’t the very idea of a “majority faction” an oxymoron? If a faction is defined as a group pursuing its own interest as opposed to the general welfare, how can a majority be a faction? In a democracy, we decide what is good for the whole based on what the majority says. There’s no other objective standard.

This is where the elitism comes in, both in abstract and concrete terms. In the abstract, Madison believes the majority can be a faction because the majority can be wrong about what is good for the country.

But in concrete terms, who is Madison talking about when he refers to a majority faction? To put it bluntly, he’s talking about the poor.

For the first time, I feel wicked

Yes, the poor. That’s who the majority is, or was at the time (and throughout most of history).

Madison makes this clear in two ways. First, he identifies “those who hold and those who are without property” as two competing factions. Same for creditors and debtors, he says.

Then he makes it even more plain when he names the evils he is most worried about a majority faction enacting: “A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project” (emphasis added).

A-ha! Now we’ve got him. You don’t have to be a Marxist to question whether all this talk about “factions” is really just an excuse–an ideological superstructure, you might say–for preventing the poor from oppressing the rich, protecting creditors from debtors, and stopping those without property from overrunning those with property. It’s about the “haves” and the “have-nots.”

The materialist view is that Madison, a wealthy landowner, was merely concerned with protecting himself and his rich friends and family. And perhaps he was, at least in part.

But that cynical view misses something important. I think Madison was not just concerned with protecting the rich from the poor, but with protecting democracy itself.

You see, allowing the poor to oppress the rich poses two problems. First, the rich are not just going to sit there and take it. They are going to push back, even if that means seizing power through undemocratic means. Second, there is the ever-present tendency of the people—i.e. the poor, less educated people—to support a certain kind of leader: the demagogue.

The problem with demagogues

Here we can look to Hamilton, Madison’s famous frenemy, for guidance. In a later letter to George Washington, Hamilton offered this striking portrait of the demagogue:

When a man unprincipled in private life desperate in his fortune, bold in his temper, possessed of considerable talents, having the advantage of military habits — despotic in his ordinary demeanour — known to have scoffed in private at the principles of liberty — when such a man is seen to mount the hobby horse of popularity — to join in the cry of danger to liberty — to take every opportunity of embarrassing the General Government & bringing it under suspicion — to flatter and fall in with all the non sense of the zealots of the day — It may justly be suspected that his object is to throw things into confusion that he may “ride the storm and direct the whirlwind.

Hamilton’s description teaches us something valuable: the demagogue is a uniquely democratic threat to democracy. This kind of despot would not come to power by restoring the institutions of monarchy or aristocracy, but by mounting the “hobby horse of popularity” and riding the democratic storm.

In other words, the demagogue draws his support from the majority faction.

When we put this together with the reasoning of Federalist No. 10, we see that democracy itself does not give us the solution for the demagogue problem. That’s because the demagogue’s MO is to appeal to the common man, the “silent majority,” the “real Americans.”

So what can we do? Madison’s answer in Federalist No. 10 has essentially two parts: republicanism, meaning representative democracy, and “enlarging the sphere.”

Enlarging the sphere meant combining the 13 colonies into one nation with a representative democracy to rule it. You can read Federalist No. 10 yourself to see how Madison thought these two principles would solve the problem of faction.

In the simplest terms, Madison’s solution to factions was more factions. In a larger nation, competition between factions would keep any one faction from gaining too much power. And this healthy jockeying between rival factions—combined with the institutions of a representative democracy—would make it more difficult for a demagogue to ride a wave of popular passion to power.

The prospect of a demagogue mounting the hobby horse of popularity was no philosophical abstraction at the time. Soon a democratic revolution would come to France as well, leading to chaos, instability, and eventually, Napoleon Bonaparte.

Ah, France. That brings us back to Tocqueville.

You down with ADT?

Alexis de Tocqueville was a young French aristocrat who wrote his two-volume masterpiece De La Démocratie en Amérique in the 1830s after a nine-month trip to America with his BFF, Gustave de Beaumont.

I explained the project of Democracy In America in my last Election Edition, so I won’t repeat all of that here. Suffice to say that Tocqueville viewed democracy—by which he meant a social condition of equality as opposed to a landed aristocracy—as inevitable, and his chief concern, much like Madison and Hamilton, was how to prevent democracy from extinguishing freedom. He hoped to learn lessons from America, a relatively healthy democracy, that could be applied to his own post-revolutionary France, a troubled democracy.

Alexis de Tocqueville

In short, like Madison in Federalist No. 10, ADT was concerned with preventing or tempering the “tyranny of the majority.”

He answered this question largely by observing and describing. He praised the U.S. Constitution and the founding generation that created it, but he opined that there was something more important that maintains a democratic republic in America: “mores,” or what today we might call norms. I wrote about this last time in It’s The Norm: French Lessons on the Limits of Law.

ADT’s analysis of mores gives his book deeper insight into what restrains the tyranny of the majority than the Federalist Papers. In fairness, this was because ADT gave himself a broader assignment. Publius wrote for the narrower purpose of persuading Americans to support the proposed Constitution. Still, I give Democracy In America extra points for its broader perspective.

But regardless of scope or perspective, who got it right? Who predicted better?

Interest groups, money, and oligarchy

Let’s start with the question of minority factions. Here, I think we must dock Madison some points for his assumption that the “republican principle” would prevent minority factions from imposing their will.

It hasn’t really turned out that way, has it? You might even characterize the American form of government as rule by special interest groups. The problem is that a well-organized interest group that intensely cares about an issue will usually win out over a more diffuse public interest.

And that’s true even before you add money to the equation.

Of course, money was a factor at the time of the founding too, but I’m not sure the founders foresaw just how important money would be to politics in the American form of government. Money—mainly in the form of campaign contributions—is the very oxygen American politicians breathe. A well-funded and intensely supported minority interest group will wield disproportionate influence over the laws, violating Madison’s republican principle.

Worse yet, the influence of money is not spread evenly among the factions. Sure, the little guys can band together to raise money—especially now with social media—but overall the politicians’ dependence on campaign cash skews the process in favor of one particular minority faction: the rich.

And it has gotten worse for the poor, who are no longer the majority. Today, the middle class is the majority, which explains why politicians on both sides speak its name with such reverence. Even the Democrats rarely talk about the “poor”—that’s so passé. It’s always the “middle class.”

In short, I think Madison underestimated the oligarchic element in American politics.

“Oligarchy” comes from the Greek oligarkhia, which combines oligoi (“few”) with arkhein (“to rule”). So let’s consult a Greek on its meaning. Aristotle classified political regimes based on two factors: who rules, and in whose interest they rule. Thus, an “aristocracy” was the rule of the few in the interest of the whole city, while oligarchy was the rule of the few in their own interest.

I think if Aristotle were to view American government today, he would see it as a mixed regime, with elements of democracy, oligarchy, and—if he’s being charitable—aristocracy.

Madison and friends hoped that their constitutional system would encourage a sort of “natural aristocracy” where the democratic process would put the best people in charge. Thankfully, through much of U.S. history we have been luckier than we deserve on that score. But overall, I fear that Federalist No. 10 was too optimistic in its expectation that the principle of majority rule would prevent oligarchic factions from holding sway.

ADT, on the other hand, saw that the industrial age could produce a kind of oligarchy within American democracy.

An industrial oligarchy?

His prediction came in Volume Two of Democracy In America, in a short chapter titled “How Aristocracy Could Issue From Industry.”

ADT begins by noting how modern industry degrades the worker: “As the principle of the division of labor is more completely applied, the worker becomes weaker, more limited, and more dependent.” As a result, “at the same time that industrial science constantly lowers the class of workers, it elevates that of masters.” The conclusion: “What is this if not aristocracy?”

This new industrial aristocracy—really an oligarchy in Aristotelian terms, because ADT clearly expected it to pursue its own narrow interests—would be less noble than the old landed aristocracy but also less dangerous, ADT says.

It would be less dangerous primarily because of class mobility. Industrialization could lead to “some very opulent men and a very miserable multitude,” ADT explains, but “although there are rich, the class of the rich does not exist.”

By this he means no “class” of the rich comparable to the aristocrats of old. Membership in the new industrial aristocracy would be based on money, not land or family lineage, and money comes and goes.

“An aristocracy thus constituted cannot have a great hold on those it employs,” ADT says, “and, should it come to seize them for a moment, they will soon escape it.” For this reason, while ADT predicted the manufacturing aristocracy would be “the hardest that has appeared on earth,” he thought it would be the “least dangerous.”

Of course, the Industrial Revolution and the Gilded Age would produce precisely the kind of “opulent” industrial oligarchs ADT predicted. And just as he anticipated, the workers would push back. We would see the American working class assert itself in the Progressive era and the New Deal, and by the 1950s and 1960s the balance of power had shifted.

“Still,” ADT warned about the emerging industrial aristocracy, “the friends of democracy ought constantly to turn their regard with anxiety in this direction; for if ever permanent inequality of conditions and aristocracy are introduced anew into the world, one can predict they will enter by this door.”

This warning of an undemocratic threat to democracy is music to our modern democratic ears. And its prescience is one of the reasons I’m giving Democracy In America a slight edge over the Federalist Papers.

And yet . . .

Democratic versus anti-democratic threats to democracy

The greatest value in both the Federalist Papers and Democracy In America is that they fill in our modern blind spot. All of us today—Democrat or Republican—are small “d” democrats, in the sense that nobody today seriously believes that one class of people is by nature more entitled to rule than anyone else. And as democrats, we have a blind spot for democratic threats to democracy.

As I once learned from Prof. Arthur Melzer, in a democracy you have essentially two kinds of dangers: democratic dangers and undemocratic dangers.

We have no difficulty seeing the undemocratic dangers, the ways that we fall short of the democratic ideal. Through our democratic lens, these threats stand out in red against a grey background.

The ten-dollar founding father

We have more trouble seeing the democratic threats to democracy. It’s as if they were red but we can’t see them clearly because we’re wearing red-tinted glasses.

This makes the insights of Madison and Hamilton all the more valuable because, while they supported representative democracy, they were basically—let’s face it—elitists. The same is true of Tocqueville. And while we may not like elitists, they have some important things to teach us.

(If you want to take this idea even further, try the aforementioned Aristotle, who didn’t think democracy was the best form of government, and even seemed to defend slavery.)

On the other hand, perhaps these elitists have their own blind spots, as we have seen. In Federalist No. 10, Madison displays great insight into the dangers of a majority faction, but perhaps he failed to fully appreciate the dangers posed by special interest groups generally, and by an oligarchic minority faction specifically.

And then there is another glaring blind spot in the Federalist Papers, one we have yet to mention despite its enormous importance in American history and politics. I’m talking of course about the question of race. How can we talk about “tyranny of the majority” in America without addressing the tyranny of white over black?

Race in American politics

Madison does refer a couple times to banning importation of slaves (in Federalist No. 38 and No. 42), and he addresses the Three-Fifths Compromise in Federalist No. 54. But the Federalist Papers didn’t tackle the hard questions about how a system of slavery can exist within a democracy in the long term.

One assumes the subject was simply too sensitive, and outside the scope of the assignment. The point was to persuade people to support the new Constitution, and even Hamilton was not about to antagonize the touchy Southern slave states by attacking slavery. So perhaps we can forgive the Federalist Papers for not taking on the thorny subject.

America’s favorite philosophizin’ Frenchman, on the other hand, had no such qualms.

Near the end of Volume One of Democracy In America, there is a long chapter titled “On the Principal Causes Tending to Maintain a Democratic Republic in the United States.” That is the chapter that includes the discussion of mores referenced earlier.

At the conclusion of that chapter, you feel ready to defend freedom from the tyranny of the majority, armed with ADT’s wisdom. But then he throws you a curve ball. There’s one more chapter: “Some Considerations on the Present State and the Probable Future of the Three Races That Inhabit the Territory of the United States.” (He’s referring to whites, African-Americans, and Native Americans.)

It’s as if to say, “oh, by the way, before we finish up, there’s just this wee little issue of race that we need to talk about.” And then he hits you with the longest chapter of Volume One.

I recently heard someone say racism is a central part of the American story, but so is overcoming racism. Either way, if you’re going to write the best book about American politics, you’re going to have to tackle the topic.

So what does ADT have to say about race in America?

I’ll tell you in two years.

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

These are his opinions, not the opinions of his firm or clients.

Does “Misappropriation” of Trade Secrets Require “Use” or “Disclosure”?

Does “Misappropriation” of Trade Secrets Require “Use” or “Disclosure”?

If a windmill kills a bird in the forest, and there is no one there to hear it, does it make a sound?

That has always struck my literal mind as a silly question. Of course it makes a sound. It doesn’t make a difference whether someone is there to hear it or not.

But obviously there is more to it than that. There are more philosophical points embedded in the question. Is our reality determined by our experience of reality? Does it matter whether something happens, if no one experiences it?

The same kind of point comes up in trade secrets litigation. I see it a lot. (But disclaimer: my hypothetical is not based on any particular case; if it seems similar to your case, that’s just because the same kind of thing tends to happen in a lot of cases.)

Let’s say our favorite hardworking sales person, Dawn Davis, gets frustrated with her employer, Paula Payne Windows, and decides to quit to join a competitor, Real Cheap Windows.

During her last week on the job, Dawn logs into the Paula Payne computer system using her password and opens six months of sales reports. She downloads them to her personal laptop (which she uses for work), or transfers them to a USB drive, or emails them to her personal Gmail account. This kind of thing happens a lot.

Dawn goes to work for Real Cheap the next week. When Paula Payne finds out that Dawn joined a competitor, she has Fred, her “IT guy,” investigate. Fred discovers that Dawn downloaded the sales reports. Paula Payne Windows sues Dawn and Real Cheap, claiming misappropriation of trade secrets and asking for an injunction to stop Dawn from working for Real Cheap.

Let’s assume for the sake of argument that the sales reports contain trade secrets, although this is usually a contested issue. See When Is a Customer List a Trade Secret. Let’s also assume that Dawn had authorization to access the computer system but was not authorized to access the particular sales reports at issue.

“Yes, I told Real Cheap’s President I had the sales reports,” Dawn says, “and we discussed generally what kind of information they contained.” But Dawn claims she never provided any of the Paula Payne Windows documents to Real Cheap, and that she never used them for any purpose.

Of course, Paula Payne Windows is skeptical. Paula Payne suspects that Dawn provided the documents to Real Cheap and used the confidential pricing information in the sales reports to undercut Paula Payne and poach some of its customers. But Paula Payne Windows has no evidence to prove this.

This fact pattern is similar to the scenario in the Waymo v. Uber case, one of the biggest trade secrets trials in recent years.

Variations on this theme are common. Employee behaves badly and takes confidential documents, Employer sues, and Employee denies using or disclosing the documents.

It raises several key practical and legal issues.

1. If the defendant wrongfully acquired the trade secrets but did not use or disclose them, is there “misappropriation”?

Let’s start with acquisition of the trade secrets. If the defendant wrongfully acquired the trade secrets, does the plaintiff have to prove the defendant also used or disclosed them?

The short answer is no. Here is the definition of “misappropriation” in the Texas Uniform Trade Secrets Act:

Tex. Civ. Prac. & Rem. Code § 134A.002(3). The federal Defend Trade Secrets Act has the same definition. 18 U.S.C. § 1839(5).

In short, TUTSA “provides six theories under which a plaintiff can establish misappropriation of trade secrets.” Six Dimensions, Inc. v. Perficient, Inc., 969 F.3d 219, 230 (5th Cir. 2020). These six theories can be grouped under two categories: (1) “acquisition of a trade secret” and (2) “disclosure or use of a trade secret.” Id.

So there you have it. “Acquisition” can be misappropriation, even without use or disclosure, if it meets the definition of misappropriation in the statute.

Yet courts have struggled with this question. In StoneCoat of Texas, LLC v. ProCal Stone Design, LLC, 426 F. Supp. 3d 311 (E.D. Tex. 2019), Judge Mazzant carefully surveyed Texas case law on whether “use” is an essential element of a trade secrets claim. He noted that some Texas cases say use is required, while others say it is not. Id. at 340-44. But ultimately, it was unnecessary to resolve that question because there was sufficient evidence to raise a fact issue on whether two defendants used the secret “French formula” at issue. Id. at 344-45.

Judge Mazzant returned to this issue in Accresa Health LLC v. Hint Health Inc., No. 4:18-cv-00536, 2020 WL 3637801, at *8-11 (E.D. Tex. July 6, 2020), discussing the StoneCoat opinion and other Texas opinions in detail. Again, he found that even assuming “use” is required, there was sufficient evidence to create a fact issue on whether the defendant used the alleged trade secrets. Id. at *11.

The cases stating that “use” is an element of a trade secret claim should be taken with a grain of salt. You have to start with the plaintiff’s theory of the case. If the plaintiff’s theory is that the defendant used or disclosed the trade secrets, then it will be accurate for the court to say evidence of “use” or “disclosure” is required. If, on the other hand, the plaintiff relies on an “acquisition by improper means” theory, then evidence of use may not be required.

In short, under the plain language of the statute’s definition of “misappropriation,” the “acquisition” theory is still a potentially viable theory.

But persuading a judge that “use” of the trade secrets is not required may be an empty victory. Because there is an obvious follow-up question: if the defendant didn’t use the trade secrets, how was the plaintiff damaged? Isn’t it the proverbial tree falling in the forest that no one hears?

2. If the evidence proves that Real Cheap Windows acquired the trade secrets from Dawn Davis but did not use them, what are the actual damages?

In theory, it may be possible to prove that Dawn Davis’s acquisition of the trade secrets—without any use or disclosure—caused actual damages to Paula Payne Windows. But in practice it will be difficult. Let’s say Paula Payne Windows cannot show that it lost any customer sales as a result of Dawn downloading the confidential sales reports. In that case it may have no actual damages.

But wait, Paula Payne, will protest. How can you say we were not damaged? Suppose our IT guy had to spend many hours investigating Dawn’s computer activity, and then we had to pay a forensic expert to investigate further. Then we had to pay our lawyer a huge amount of fees to send Dawn a demand letter, file a lawsuit, seek a Temporary Restraining Order, etc. How can you say we were not damaged?

Paula would have a point, but there’s a threshold problem with her argument. Generally, under Texas law a plaintiff cannot recover attorneys’ fees as actual damages. Worldwide Asset Purchasing, L.L.C. v. Rent-A-Center East, Inc., 290 S.W.3d 554, 570 (Tex. App.—Dallas 2009, no pet.). There are some exceptions, but none that fit the typical trade secrets dispute.

What about the forensic expert fees? Could Paula Payne Windows recover those expert fees as actual damages? The argument would be that but for the acquisition by improper means, the forensic investigation would not have been necessary.

If there is evidence that the employee’s misconduct naturally led to the company needing to hire a forensic expert to investigate, the fees may be recoverable as actual damages. See Sandberg v. STMicroelectronics, Inc., 600 S.W.3d 511, 528-29 (Tex. App—Dallas 2020, pet. filed) (forensic expert fees were recoverable as actual damages where they resulted from employee taking laptop computer with confidential information on it home after termination and not returning it for four days).

But whether the misappropriation caused those fees will depend on the specific facts. Was the forensic investigation caused by Dawn’s improper acquisition of the trade secrets, or did the forensic investigation cause the company to discover the improper acquisition? If it’s the latter, that may not be a viable actual damages theory. Similarly, if the internal IT guy is on salary, it’s probably an uphill battle to claim damages for time spent on the investigation.

So, when the misappropriation theory is acquisition by improper means, rather than use or disclosure, there may be some viable arguments for recovering actual damages, but usually those damages will be relatively minor. (I say “relatively,” because forensic expert fees, like attorneys’ fees, can add up quickly, easily reaching six figures or more in some cases.)

That’s good news for the employee, but it doesn’t lessen the sting of attorneys’ fees the employee will have to pay to defend a lawsuit.

Most of my trade secrets cases are not Google vs. Uber. They’re more like Jim Bob’s Oilfield Supply vs. Vince’s Valves. That means the cost of defense is sometimes a bigger factor than the amount of actual damages.

In many cases, that’s exactly what the plaintiff is counting on. If the company suing my client has more money and more determination, it may try to use the cost of litigation to bully my client into submission.

That brings up the next question.

3. If Dawn really didn’t use or disclose the information in the documents, how can she get the lawsuit dismissed without spending a small fortune on attorneys’ fees?

I encounter this practical problem a lot. There are several procedural options, but most of them have a low success rate.

a. Rule 12(b)(6) Motion in Federal Court

If Paula Payne Windows sues Dawn Davis in federal court and doesn’t allege specific facts establishing that Dawn used or disclosed the trade secrets, Dawn’s lawyer can file a Rule 12(b)(6) motion to dismiss. I cover this in Set Phazrs to Stun: Motions to Dismiss in Texas Trade Secrets Litigation.

(Practice Tip: This is one factor that favors filing your trade secrets suit in state court. But of course there are many factors.)

As I wrote in the Phazr post, I’m usually not a big fan of filing a motion to dismiss, but in this scenario it makes some sense. If the plaintiff does not allege specific facts establishing that the defendant used or disclosed the trade secrets, there is a decent chance the court will grant the motion. See, e.g., Phazr, Inc. v. Ramakrishna, No. 3:19-CV-01188-X, 2019 WL 5578578, at *1-2 (N.D. Tex. Oct. 28, 2019).

On the other hand, all the plaintiff has to do is allege facts sufficient to make a plausible case that the defendant used or disclosed the trade secrets. See, e.g., Computer Sciences Corp. v. Tata Consultancy Servs., Ltd., No. 3:19-cv-970-X(BH), 2020 WL 2487057, at *6 (N.D. Tex. Feb. 7, 2020) (denying motion to dismiss where plaintiff alleged facts sufficient to plausibly allege misappropriation by unauthorized disclosure and use to develop a competing software platform).

So, even in federal court it’s usually difficult to get a motion to dismiss granted.

In Texas state court? Forget about it. At least, that’s what people used to say.

b. Rule 91a Motion in Texas State Court

Times have changed. Texas now has Rule 91a, which allows you to file a motion to dismiss a cause of action on the grounds that it has “no basis in law or fact.” A cause of action has no basis in law “if the allegations, taken as true, together with inferences reasonably drawn from them, do not entitle the claimant to the relief sought.” That’s pretty similar to the federal standard, so even if Dawn Davis gets sued in state court, her lawyer could give it a try.

But it’s probably an uphill battle. It’s not clear that Rule 91a incorporates the “Twiqbal” plausibility standard that applies in federal court. See Reaves v. City of Corpus Christi, 518 S.W.3d 594, 610 n.10 (Tex. App.—Corpus Christi 2017, no pet.) (“this Court has rejected the argument that rule 91a replaced Texas’s notice-pleading standards with federal fact-pleading standards”). And if the court denies Dawn’s motion to dismiss, it could order her to pay Paula Payne’s attorneys’ fees. Tex. R. Civ. P. 91a.7.

c. TCPA Motion in Texas State Court

There was a brief, exhilirating era when you could file a motion to dismiss a trade secrets claim under the Texas Citizens Participation Act (TCPA), the Texas “anti-SLAPP” statute, but those days are over. Texas courts have been steadily narrowing the scope of the TCPA, and the legislature has now carved trade secrets claims out of the TCPA. See my post Shrinkage: TX Legislature and 5th Circuit Cut the TCPA Down to Size. Or if you want something more scholarly, see Targeting the Texas Citizen Participation Act: The 2019 Texas Legislature’s Amendments to a Most Consequential Law.

d. Special Exceptions in Texas State Court

If you were a defense lawyer in Beaumont in 1979, you probably loved special exceptions. They’re delightfully old-fashioned. A special exception usually asks the court to order the plaintiff to plead a vague claim more specifically, or else to go hence without day.

Special exceptions are something of a throwback. These days, when there is so much pretrial discovery, judges tend to say that the better way for the defendant to pin down the plaintiff on specifics is through discovery devices like interrogatories, Rule 194 disclosures, and depositions.

But in this case, special exceptions may be just what the doctor ordered. If the plaintiff has no specific evidence of use or disclosure and just relies on broad conclusory allegations, I’ll file a special exception that asks the court to order the plaintiff to plead the specific facts supporting the allegation and, if the plaintiff cannot do so, to dismiss the trade secrets claim. If nothing else, it sets me up to try to spike the ball with a later motion to dismiss or motion for summary judgment.

e. Motion for Summary Judgment

This is the grand-daddy. If Paula Payne Windows has no real evidence that Dawn Davis used or disclosed the alleged trade secrets, then a motion for summary judgment is the most direct way to attack that defect.

The problem, in a word, is discovery.

If Dawn’s lawyer files a motion for summary judgment at the start of the case, the lawyer for Paula Payne Windows is going to object that discovery has to come first. That means serving and responding to requests for production of documents, scheduling and taking depositions, and fighting over discovery disputes in pretrial hearings. All of that takes a lot of time and money. So it usually defeats the purpose of trying to get an unfounded claim dismissed quickly and inexpensively.

This is a problem in all kinds of litigation, not just trade secrets litigation. The Texas legislature and Texas courts have tried to do something about it—such as passing the TCPA—but there’s no easy answer. Unless you’re going to cut off a plaintiff’s right to seek discovery to support its claim, litigation is just going to be expensive. There’s no way around it.

Kind of like a forest.

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

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.

Drafting the Bullet-Proof Non-Compete: Part 3

Drafting the Bullet-Proof Non-Compete: Part 3

This series has focused on drafting an enforceable Texas non-compete, because that’s where I practice, but if you’re drafting a non-compete for a company in the oil and gas industry, you may need to consider other states, especially Louisiana. Check out Drafting Enforceable Non-Competes in the Energy Industry for some good tips.

But back to Texas.

In Part 1 we saw how to draft a Texas non-compete to meet the once-elusive “ancillary to an otherwise enforceable agreement” requirement.

In Part 2 we saw how to meet the “reasonableness” requirement.

You could stop there and have a pretty decent Texas non-compete, but do you need a separate non-solicitation agreement? And what about all that additional boilerplate you often see in non-competes? Do you need that?

I’ll answer those questions in this third and final installment.

10. Does the agreement need to restrict both competition and solicitation?

This is kind of a trick question, because a restriction on soliciting customers is a restriction on competition. See Is a Non-Solicitation Agreement a Non-Compete? In other words, a “non-solicit” is subject to the same statutory requirements as a “non-compete,” at least in Texas.

Still, many non-competes have one section for restrictions on competition and another section restricting solicitation. This format is often unnecessarily duplicative. I think it is simpler to combine the two in one section.

But the substantive question remains, should the agreement restrict competition generally and solicitation specifically?

There is a case to be made for restricting competition and not getting into the messier issue of solicitation. The problem with a restriction on solicitation is that it almost always leads to factual disputes.

Suppose Dawn Davis leaves her sales position at Paula Payne Windows and goes to work for Real Cheap Windows. The next week, her friend and customer Bob Builder calls her up:

“Hey Dawn, how’s it going?”

“Pretty good, Bob, it’s been a busy week.”

“Oh really?”

 “Yeah, you may not have heard yet, but I left Paula Payne and went to Real Cheap.”

“Wow, I didn’t know that.”

“Well, Bob, I really like the value they provide for their customers.”

“That’s great. You know, I was going to order some more storm windows for that new subdivision project, can Real Cheap give me a good price on those?”

Did Dawn just “solicit” business from Bob? Would it make a difference if Dawn had made the call to Bob, just to chat? Would it make a difference if Dawn had not volunteered that she changed companies?

You can see how “solicitation” creates questions and uncertainty.

In contrast, it’s pretty easy to determine if an employee violates a restriction on “doing business” with a certain customer. If Dawn goes to Real Cheap and Bob then starts buying windows from Real Cheap, that’s “doing business.” We don’t have to get into the whole “solicitation” issue.

Given the kind of factual disputes that often come up, I don’t use the word “solicit” in my form. But I do include a restriction on “urging or causing” a customer to become a customer of the new company.

That, of course, does not entirely solve the problem, because you could have the same kind of factual disputes about “urging” or “causing.” But I think those terms are easier to apply than “soliciting.”

And I think there is some advantage to including a restriction on “urging or causing” in addition to the more general restriction on “doing business.”

11. Should the non-compete state that it is an “independent covenant”?

Yes. The employee will sometimes argue that she is excused from complying with the non-compete because the employer breached the employment agreement first.

To avoid or at least reduce the risk of this argument being successful, I include this clause in my form:

Even without such a clause, the employer could argue that the non-compete is an independent covenant because the employer’s breach of another clause—such as the obligation to pay a bonus or commission—could be separately compensated by damages. But expressly stating the parties’ intent to treat the non-compete as an independent covenant should remove any doubt. See Chambers v. Hunt Petroleum Corp., 320 S.W.3d 578, 584 (Tex. App.—Tyler 2010, no pet.) (clause should be treated as an independent covenant if “a breach may be compensated for in damages . . . unless this is contrary to the expressed intent of the parties”) (citing Centex Corp. v. Dalton, 840 S.W.2d 952, 956 (Tex.1992)). 

12. Should you have the employee stipulate that the non-compete is reasonable and can be reformed?

This is probably ineffective and unnecessary, but it doesn’t hurt, and it may carry some weight with a judge who is not sophisticated about non-competes.

Most non-competes contain some kind of stipulation that the restrictions are reasonable. In my personal opinion, courts should give these stipulations no weight, especially considering limitations on non-competes are a matter of public policy. But some judges might give some weight to the stipulation, and you might be able to use the stipulation to get the employee to admit the scope of the non-compete is reasonable.

It also doesn’t hurt to include a reformation and severability clause. This is probably unnecessary, because the Texas statute already says the court shall reform an overbroad non-compete. But again, it doesn’t hurt to include it.

So, my form includes the following:

13. Should the non-compete include an “ipso facto” clause granting an injunction?

This is a close call for me. Most non-competes contain stipulations designed to support the employer’s request for an injunction. I call this an “ipso facto” clause. Texas courts vary on whether an ipso facto clause has any effect. See Can a Non-Compete Grant an Injunction by Stipulation?

Personally, I don’t give any weight to a non-compete ipso facto clause. But not everybody agrees with me, and it probably doesn’t hurt to include one. Mine looks like this:

Again, my own view is that this kind of stipulation should have no legal effect, but if the non-compete has an ipso facto clause, I might cite it as at least one of my grounds for an injunction.

14. Should the non-compete include “non-circumvention” language?

Employees often try to “get around” non-competes. “Technically I’m not competing with my former employer,” you can imagine an employee arguing, “I’m just providing consulting services to an LLC that my cousin owns.”

That’s just one example, but you get the idea.

This kind of gambit to circumvent a non-compete is usually not persuasive. If the judge applies the plain, common-sense meaning of the non-compete, this type of argument by the employee should usually fail.

But of course judges don’t always do that, and in fairness to the employee, if the employer drafts the non-compete poorly and its plain language does not prohibit the thing the employee is doing, then that’s the employer’s problem. See, e.g., East Texas Copy Sys., Inc. v. Player, 528 S.W.3d 562, 567-68 (Tex. App.—Texarkana 2016, no pet.) (enforcing plain meaning that allowed employee to avoid non-compete by terminating his own employment without cause).

I try to head off any cleverly contrived arguments by the employee by including the following in my form:

The idea is to avoid any hyper-technical interpretation intended to get around the non-compete. I haven’t had occasion to test it in court yet, but I would rather have it than not.

15. Should the non-compete prohibit making plans to compete?

Hey, why not? My form includes the following:

This is something I came up with that, somewhat surprisingly, I have not seen in other non-competes.

It is common for an employee to make plans to compete while still employed by the employer. And Texas courts have said that making such plans—and even concealing them from the employer—is not a breach of the employee’s quasi-fiduciary duty to the employer. See Fiduciary Duty Lite: What Employees Can and Can’t Do Before Leaving.

The rationale of the employee fiduciary duty cases is employee mobility. But those cases don’t necessarily stop the employer from creating a contractual duty not to make plans or preparations to compete. So I include that commitment in my form.

It’s such a clever idea, I almost feel guilty.

Like I said at the start, I don’t even like non-competes. I think most employers would be better off focusing on keeping their best employees happy, rather than trying to keep their employees from running off with customers. See The Most Effective Form of Non-Compete in Texas (or Anywhere).            

But if you’re going to make an employee sign a non-compete, you might as well draft it as effectively as possible.

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC.

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