What is “Knowing Participation” in Breach of Fiduciary Duty?

What is “Knowing Participation” in Breach of Fiduciary Duty?

TexasBarToday_TopTen_Badge_VectorGraphicThe knowing participation in breach of fiduciary duty theory in departing employee litigation

Conspiracy. Cooperation. Participation. “Collusion.” Which of these will get a company in legal trouble when it hires an employee away from a competitor?

A recurring problem in the law is deciding when a third party, let’s call it a “secondary” actor, is liable for the wrongful conduct of a “primary” actor. There are numerous legal theories for this, but in essence they all share two common elements:

(1) some level of knowledge or intent by the secondary actor

(2) some level of action taken by the secondary actor

The arguments usually center around how much knowledge and what level of action.

Let’s apply this to a common legal theory in departing employee litigation: breach of fiduciary duty. When an employee leaves a company to work for a competitor, the first company will often claim that the employee breached her fiduciary duty to the company, and that the subsequent employer “knowingly participated” in the employee’s breach of fiduciary duty.

What kind of evidence is necessary to prove such a claim?

An employee’s “fiduciary” duty

Before we get to that, let’s back up a bit and ask a more fundamental question: does an employee owe her employer a fiduciary duty?

The short answer: “sort of.” In Texas, where I practice law, an employee owes a kind of “fiduciary” duty to her employer, which I call Fiduciary Duty Lite.

I say “kind of” because a true fiduciary duty would include a duty to put the employer’s interests first and to disclose all material facts to the employer, but no one says an employee owes that kind of fiduciary duty.

Texas courts have said that it is not a violation of the employee’s fiduciary duty to make plans to compete with the employer and even to conceal those plans from the employer. See Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 201 (Tex. 2002); Wooters v. Unitech Int’l, Inc., 513 S.W.3d 754, 763 (Tex. App.—Houston [1st Dist.] 2017, pet. denied); Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 510 (Tex. App.—Houston [1st Dist.] 2003, no pet.). This policy recognizes the need for employee mobility.

So what kind of conduct violates an employee’s “fiduciary” duty? There are two key categories:

(1) misappropriating the company’s confidential information or trade secrets*

(2) soliciting the company’s employees or customers while still employed by the company

Why the asterisk on the first category? The problem is that the Uniform Trade Secrets Act expressly preempts common-law civil remedies for misappropriation of trade secrets. See Tex. Civ. Prac. & Rem. Code § 134A.007.

So, despite references to misappropriation of trade secrets in the fiduciary duty cases, in Texas you cannot assert a common-law breach of fiduciary duty claim based on allegations of taking or using trade secrets. Super Starr Int’l, LLC v. Fresh Tex Produce, LLC, 531 S.W.3d 829, 843 (Tex. App.—Corpus Christi 2017, no pet.).

The open question is whether TUTSA also preempts a fiduciary duty claim that is based on alleged misappropriation of information that is confidential but not a trade secret. So far, courts in Texas are split on that question. See Embarcadero Technologies, Inc. v. Redgate Software, Inc., No. 1:17-cv-444-RP, 2018 WL 315753, at *2-4 (W.D. Tex. Jan. 5, 2018).

That means in most cases the fiduciary duty claim is going to focus on allegations of solicitation of employees or customers.

Why does fiduciary duty matter?

But why does this matter when employment agreements often prohibit such solicitation? There are a few reasons.

First, in some cases the employee may not have a contract that prohibits soliciting employees and customers.

Second, even if the employee already has a contractual non-solicitation obligation, a breach of fiduciary duty claim gives the employee a potential remedy that a breach of contract claim typically does not: forfeiture or “disgorgement” of compensation as an alternative to actual damages. For a recent case awarding forfeiture on this theory, see Orbison Case Shows Need for Texas Courts to Limit Employee “Fiduciary” Duties.

Third, the fiduciary duty theory gives the first employer a potential claim against the second employer, who is usually a deeper pocket. The first employer can assert a claim for “knowing participation” in breach of fiduciary duty, which allows recovering damages from the second employer.

Knowing participation in breach of fiduciary duty

That brings us back to my original question: how does the first employer in a departing employee lawsuit prove knowing participation? I glean three essential elements from the case law:

  1. The employee solicited while still employed by the company
  2. The second employer knew about the solicitation
  3. The second employer participated in the solicitation

In practice, the knowledge element is somewhat redundant. If the second employer participates in the solicitation, it will almost always have knowledge of the solicitation. You are rarely going to find a case of “unknowing” participation. So the second employer’s participation is really the key element.

“Participation” sounds simple enough, but like “collusion” it can be more difficult to define in practice. To understand participation better, let’s take a look at a couple recent Texas cases applying knowing participation in breach of fiduciary duty to typical departing employee scenarios.

At the bottom of the deep blue sea . . .

In Wooters v. Unitech International, Inc., 513 S.W.3d 754 (Tex. App.—Houston [1st Dist.] 2017, pet. denied), Unitech operated in the offshore and subsea oil and gas production industry. Two Unitech employees made plans with Wooters, who has not a Unitech employee, to form a competing business called Infinity Subsea.

The jury found that Wooters conspired with the Unitech employees to breach their fiduciary duties, but the Court of Appeals held that the evidence was insufficient to support the jury’s verdict.

In reaching this decision, the court emphasized what is and is not a breach of an employee’s “fiduciary” duty. As we’ve seen already, making secret plans to compete with your employer is not a breach of fiduciary duty, even if it violates a contractual duty. Therefore, even though there was evidence that Wooters communicated with the employees about their plans to compete, that was no evidence that Wooters participated in any breach of fiduciary duty.

What about misappropriation of confidential information and trade secrets? As pointed out earlier, that can be a breach of fiduciary duty (putting aside the preemption problem).

There was evidence that the two employees misappropriated Unitech’s secret design information, and the jury even found that the two employees committed theft. But the jury answered “no” when asked if Wooters conspired with the employees to commit theft. So the jury’s “yes” answer to the conspiracy to breach fiduciary duty question had to be based on something else.

The only thing left was the possibility that Wooters participated in solicitation of Unitech customers or employees. But there was no evidence of this. “[N]othing in the record shows that Wooters possessed knowledge of and was complicit in Pennington and Kutach’s solicitations of employment of any Unitech employees,” and “Infinity Subsea did not hire any Unitech employee.” Id. at 766.

So the Court of Appeals reversed the trial court’s judgment against Wooters and rendered judgment that Unitech take nothing against Wooters. A big win for Wooters, obviously. (And this summary of the case does not do justice to the juicy facts, which included things like video surveillance of an employee and an office break-in.)

The practice tip I derive from Wooters is that if you represent the plaintiff claiming “knowing participation,” you need to tie the secondary actor’s participation to the part of the scheme that breached the employee’s fiduciary duty, not just to the scheme in general.

In other words, it’s not enough to show that the “participator” joined in a plan for the employees to compete with their employer. You’ve got to show he participated in the solicitation of employees or customers, or some other conduct that violated the employees’ fiduciary duties. This was the evidence that was lacking in Wooters.

But what if there had been evidence like that? Let’s say the Unitech employees, while employed by Unitech, had solicited a key Unitech engineer to go to a competing company they planned to join. Generally, that would be a breach of their fiduciary duty. And let’s suppose the new venture, Infinity Subsea, had communicated with the Unitech employees about the solicitation and hired the key engineer away from Unitech.

Surely, that would be sufficient evidence of the second employer’s “participation” in the employees’ breach of fiduciary duty, right?

I went down to the Crossroads . . .

Not necessarily. In Crossroads Hospice, Inc. v. FC Compassus, LLC, __ S.W.3d __, 2020 WL 1264188 (Tex. App.—Houston [1st Dist.] March 17, 2020), the same Court of Appeals held that facts like these were insufficient to prove that the second employer participated in the employee’s solicitation of another employee.

In the Crossroads case, Clement was the executive director of Compassus, a hospice care provider. Clement and several colleagues discussed leaving Compassus, Clement discussed those plans with a competitor, Crossroads, and Crossroads expressed hope that Clement could “bring her whole team.” While still employed by Compassus, Clement emailed Crossroads a list of staff and an introduction to another Compassus employee, Dr. Lee.

Here’s the kicker: when Crossroads later hired Dr. Lee, a Compassus VP asked Clement if she knew what was going on, and Clement pulled a Sargent Schultz: I know nothing.

Those facts were probably sufficient to make a case for breach of fiduciary duty against Clement, but the question was whether those facts established knowing participation by Crossroads. The Court of Appeals said no, for two reasons.

First, every one of the actions cited by Compassus was taken by Clement, not by Crossroads. Id. at *8.

Second, the fact that Crossroads knew what Clement was doing was not evidence that Crossroads participated in what Clement was doing.

“That Crossroads knew about Clement’s actions, and even approved of and benefited from them,” the court reasoned “does not constitute interference in the employment relationship or participation in the solicitation of these employees.” Id. The fact that Crossroads hired employees from Compassus was not “in and of itself” evidence that Crossroads knowingly participated in soliciting those employees. Id.

Thus, the Crossroads opinion sets the bar pretty high for evidence of participation. Perhaps too high. It seems clear from the emails that Clement and Crossroads were cooperating–perhaps even “colluding”?–in a plan for Clement to bring her “team” to Crossroads, with Crossroads at least implicitly encouraging Clement to do so. Is that not “participation”?

Wherever you come down on this, you probably agree that the decision in Crossroads slices the cheese pretty thin on what constitutes “participation.”

Don’t encourage him

That leads to my second practice tip. If you represent Employer 1 in this scenario, you need to try to obtain evidence that Employer 2 contributed to causing Employee 1 to solicit Employee 2. It may not be enough to show that Employee 1 and Employer 2 talked about soliciting Employee 2. Ideally you want to offer evidence that Employee 1 would not have solicited Employee 2 if Employer 2 had not encouraged it.

In a deposition or courtroom cross-examination of Employee 1, it might go something like this:

Screen Shot 2020-05-25 at 5.33.10 PM

It won’t always go this smoothly in practice. But if you can get testimony like this, it may be enough to clear the “participation” hurdle the Crossroads opinion sets up.

On the other hand, if you represent Employer 2, you want to prepare Employee 1 for this kind of questioning.

Of course, there is only so much you can do. If the fact is that Employer 2 caused Employer 1 to solicit Employer 2, there may be no way around that. But if the second employer didn’t encourage the solicitation, you want to make sure the witness doesn’t stumble into saying it did.

Or maybe just tell the witness to repeat “there was no participation” a hundred times. It’s the new “collusion.”

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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. Follow @zachwolfelaw on Instagram to keep up with his latest shenanigans.

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

Recent Case Illustrates Catch-22 for Texas Non-Compete Injunctions

Recent Case Illustrates Catch-22 for Texas Non-Compete Injunctions

They say the early bird gets the worm, but they also say all good things come to those who wait. In Texas non-compete litigation, both things can be true.

Let’s illustrate with a hypothetical. Dawn Davis leaves her sale job at Paula Payne Windows and goes to work for a fierce competitor, Real Cheap Windows. Company president Paula Payne calls her outside counsel and says, “Johnny, you’ve got to do something before Dawn takes her customers with her.”

“Have any of them left yet,” he asks. “No,” Paula says, “but it’s only a matter of time.” (#Hamilton)

“Here’s the problem,” Johnny says. “To get an injunction, I’ve got to show imminent harm, and the mere fact that she joined a competitor may not be enough.”

Paula Payne Windows reluctantly decides to wait. Then, over the next four weeks, half of Dawn’s customers stop ordering from Paula Payne and start buying their windows from Real Cheap.

Desperate to stop the bleeding, Paula Payne assigns a new sales guy, Eric Boonster, to the rest of Dawn’s accounts. But Eric doesn’t have Dawn’s experience, or her personal relationships with the customers. Two more customers jump to Real Cheap.

That’s the last straw. Paula Payne Windows sues Dawn and Real Cheap in Texas state court. Paula Payne asks the judge for a temporary injunction barring Dawn from doing business with any of the customers she serviced while working for Paula Payne.

At the hearing, Paula Payne Windows argues that its new sales guy can service Dawn’s customers, and that the customers will stick with Paula Payne Windows if the court orders Dawn to stop doing business with them. But on cross examination, Paula admits the customers are free to go to any company they want, and that she could quantify the amount of lost profits from any sales the company loses to Real Cheap.

Dawn doesn’t buy it. She gets on the stand and says, “I’ve known most of these customers for years, and there’s no way they will stay with Paula Payne if the court tells them they’re not allowed to keep buying from me.”

So, under Texas law, what is the correct ruling by the trial court judge?

(A) Grant a temporary injunction prohibiting Dawn from doing business with any of her former customers from Paula Payne Windows from that point forward. The loss of sales and customer goodwill establishes irreparable injury.

(B) Grant a temporary injunction prohibiting Dawn from soliciting or doing business with any of her former customers who have not yet left Paula Payne Windows, because there is insufficient evidence the customers who have already left would go back to Paula Payne Windows.

(C) Deny a temporary injunction. There is no evidence the customers at issue will buy from Paula Payne if they can’t buy from Dawn, and any sales Paula Payne loses can be adequately compensated with damages.

Personally, I tend to favor answer C, for reasons I explained in The Problem With Non-Competes. But to be fair, you can make a case for each one of these choices. You can find Texas cases to support any one of them.

In one recent case, the court chose answer B, the intermediate option. There is some logic to that choice, as we will see, but it results in a dilemma for the employer who is trying to enforce the non-compete and hold on to customers.

The Gallagher Case

In Gallagher Benefit Services v. Richardson, No. 6:19-cv-00427, 2020 WL 1435111 (E.D. Tex. March 24, 2020), Richardson admitted she was servicing over 60 former Gallagher insurance clients, despite her two-year non-compete. Gallagher sued Richardson for breach of non-compete and sought a preliminary injunction in federal court.

A preliminary injunction requires proof of a substantial threat of irreparable harm. The judge’s ruling on this element was mixed.

As to clients who were still doing business with Gallagher, the court found that Richardson’s admitted possession of a Gallagher producer report and servicing of former Gallagher clients established a threat of irreparable harm. Id. at *6.

But why would this harm be irreparable if Gallagher could obtain lost profits damages for the loss of client business?

“As to the violation of the noncompete clause,” the court said, “irreparable harm may be shown where future damages would require quantification estimates that can be avoided by an injunction that prevents the damages in the first place.” That harm could be avoided, and the status quo preserved, by enjoining Richardson from recruiting or working for any current Gallagher clients. Id.

If those clients leave Gallagher as a result of Richardon’s competition, the court acknowledged, Gallagher could attempt to quantify its damages. “But that quantification will involve estimates and thus potential undercompensation,” the court said. That irreparable harm can be avoided by an injunction against competition for current Gallagher clients, the court reasoned, noting that courts “routinely” enjoin prohibited competition in these circumstances. Id. (citing federal district court cases).

On the other hand, the court rejected Gallagher’s irreparable harm argument as to clients Richardson was already servicing. The court had specifically asked what evidence supported Gallagher’s argument that Richardson’s current clients would have stayed with Gallagher, id. at *2, and Gallagher argued that the court could “infer” that some of the clients would return to Gallagher if the court enjoined Richardson. Id. at *6. But the court said Gallagher did not prove sufficient facts to support that inference, including its capacity to service those clients.

Therefore, as to clients who had already left Gallagher for Richardson, the court found there was not enough risk to warrant disrupting the status quo with an injunction. Id. at *7.

“Without evidence of how many additional competitors Gallagher faces in the marketplace, or of Gallagher’s ability and realistic prospects of regaining any of the clients now with Richardson,” the court said, “Gallagher has not met its burden of showing more than this minimal extent [of] irreparable injury.” Id. at *8.

The court noted that “other courts have also been hesitant to eliminate a defendant’s book of business where the plaintiff has not offered sufficient evidence that the clients in question would return to the plaintiff.” Id. (citing First W. Capital Mgmt. Co. v. Malmed, No. 16-cv-1961-WJM-MJW, 2016 WL 8358549, at *11-12 (D. Colo. Sep. 30, 2016)).

Based on this reasoning, the court entered a preliminary injunction that prohibited Richardson from doing business with any Gallagher clients she serviced during her last two years at Gallagher, except for accounts she was already servicing as of the date of the injunction. Id. at *7.

The Gallagher Dilemma

Gallagher v. Richardson illustrates a Catch-22 facing an employer who wants to get an injunction to stop a former employee from taking customers with her. If the employer files suit and asks for an injunction before customers have left, it may be difficult to prove imminent harm, because the employee hasn’t violated the non-compete yet. But if the employer waits until after customers have left, the judge may take the Gallagher v. Richardson approach and say it’s too late to get an injunction to stop the employee from doing business with those customers.

So what is the employer with the non-compete to do?

Ideally, the employer would offer testimony that it has the ability to service the customers even without the ex-employee and that the customers are likely to continue doing business with it.

If the employer can get some of the customers to vouch for this, even better, but that’s usually hard to pull off. The last thing you want to do when you’re trying to hold on to customers is drag them into a lawsuit, especially when you’re asking them to testify against the sales person they like. And if the customer already wants to stay with you, why would you need an injunction?

So the employer may have trouble persuading the trial judge the customers will come back, and it may get stuck with the intermediate result of Gallagher v. Richardson. For that reason, some might say the lesson of the Gallagher case is that the employer should immediately file suit when the employee leaves to join a competitor.

That’s a plausible position, but it strikes me as too simplistic. What if you go to the temporary injunction hearing before any customer has left, and the employee testifies that she only plans to go after new customers? How are you going to show imminent harm? This approach strikes me as too hot.

Perhaps the “just right” approach is to monitor the situation closely and file suit as soon as two or three customers jump ship. Then you can point to those defections as evidence of imminent harm, but you can try to get an injunction to stop the employee from taking any other customers.

This still leaves the question of why damages would be inadequate.  But the employer at least has cases it can cite on that issue—as the Gallagher opinion illustrates.

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

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

 

One Weird Trick for Stunning Blog Results

One Weird Trick for Stunning Blog Results

After almost four years of blogging, I want to talk about what I have learned, the hard-won wisdom I have earned. For my 150th blog post I thought it was about time I “gave back” to the community that has so generously enabled my crazy blogging habit. So, here are my top five tips for any lawyer—or really any kind of professional—who is thinking about starting a blog.

Five Minute Law, five tips. See what I did there?

Tip number five is a variation on the Nike slogan: just don’t do it. Blogging will consume your life. Every new judicial opinion you see will become a potential blog post. You’ll start steering every conversation towards your last blog topic. You will become almost as insufferable as appellate lawyers arguing about fonts on Twitter.

And forget about more important things, like spending time with your kids on the weekend, exercising, or catching up on Tiger King. In laboratory testing, nine out of ten mice chose checking their number of blog views over food pellets, until they eventually starved to death.

So take a tip from Nancy Reagan and just say no. As Ronald Reagan famously said, once you start down the dark path, forever will it dominate your destiny. Or maybe that was Yodah. I don’t know, the 80s are kind of a blur to me. Too much crack, I guess.

Anyway, my number four blogging tip is if you must have a law blog, then outsource it. There are plenty of good consultants who will write the blog posts for you. The downside is that they often demand money. But it’s a good deal, because all you do is tell them your practice area, and then they do the work. Just make sure your consultant’s firm is “Fair Blog” certified and doesn’t use child labor from New England prep schools to write the posts.

Speaking of harsh labor conditions, if you’re a partner at a law firm and don’t want to pay a consultant, just make an associate write your blog. You’ll be sure to get at least one post every three months, and associates love non-billable projects that give them free “exposure.”

My number three tip is related to number four. Don’t put too much of your own personality into your blog posts, especially if you’re looking for corporate clients. Studies show that sophisticated clients prefer lawyers who have no children or other personal problems, no sense of humor, and above all, no sense of irony. They also like guys named “Chad” who bought Peloton for their wives last Christmas. So the more generic your posts, the better.

Think of your blog post as the navy suit every law school student wore to on-campus interviews, but with better results.

Oh, and no opinions. Let’s make that tip number two: avoid expressing a view on any controversial issue. For all you know, that next potential client might think injecting people with light and disinfectant is a great idea.

I wouldn’t even give your opinion on a bland legal issue. What if you have to argue that issue in court, and opposing counsel doesn’t even do you the courtesy of reading  your blog post and citing it against you? How embarrassing.

Finally, my number one tip for law bloggers: don’t start your blog until all conditions are ideal. A blog is serious business. Don’t try to start one while you’re still swamped with client work, trying to fit into those pre-pandemic suit pants again, and dealing with surly toddlers or screaming teenagers at home. You must be able to focus.

So first get caught up on all those other things, achieve “In Box Zero,” and complete the Marie Kondo plan. Only then can you devote all your attention to researching the best blog template, choosing the optimal blog name, and constructing the perfect blog distribution list.

What then? Pick up a pen, start writing.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. He’s joking about the crack, of course.

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.

 

Can a Non-Compete Grant an Injunction by Stipulation?

Can a Non-Compete Grant an Injunction by Stipulation?

Listen. Do you want to know a secret? It doesn’t really matter whether a contractual stipulation to an injunction is binding on a court.

Still, most non-competes contain some kind of stipulation that a breach will cause the company irreparable injury, and the company is therefore entitled to an injunction in the event of a breach. Let’s call this an “ipso facto” clause.

There are essentially four ways courts can approach an ipso facto clause:

  1. Find it enforceable and dispositive.
  2. Consider it as a factor favoring an injunction.
  3. Cite it as a factor, but without really giving it any weight.
  4. Disregard it entirely.

In my personal opinion, no. 4 is the correct approach. I don’t think a judge should give this kind of stipulation any weight. We wouldn’t let private parties stipulate to their own rules of evidence or procedure. And it seems especially inappropriate for a temporary injunction, which is both an “extraordinary” remedy and, traditionally, an “equitable” remedy left to the discretion of the judge.

You might cite “freedom of contract.” Ok, but how much weight would you give a clause that says “in the event of any litigation between Company and Employee, the court shall declare Company the winner”?

No, I don’t think this is the kind of decision we let private parties dictate in advance, and that may explain why you won’t find many Texas cases saying an ipso facto clause is dispositive and binding on the court.

In Wright v. Sport Supply Group, Inc., 137 S.W.3d 289, 293-94 (Tex. App.—Beaumont 2004, no pet.), the court said it was unaware of any Texas case holding that an ipso facto clause alone establishes, for injunction purposes, that remedies at law will be inadequate. And in Shoreline Gas, Inc. v. McGaughey, No. 13-07-364-CV, 2008 WL 1747624, *11 (Tex. App.—Corpus Christi 2008, no pet.) (mem. op.), the court, citing Wright, said the employer cited no Texas case holding that an ipso facto clause proves there is irreparable injury or no adequate remedy at law.

Addressing an analogous issue, the court in Forum US, Inc. v. Musselwhite, No. 14-17-00708-CV, 2020 WL 4331442 (Tex. App.–Houston [14th Dist.] July 28, 2020, no pet. h.) (mem. op.), rejected the employer’s argument that the non-compete was reasonable because the agreement recited it was reasonable. “If the rule was otherwise,” the court explained, “every employer could require employees to sign an acknowledgement or reasonableness as a condition of employment and courts would be powerless to hold unreasonable covenants not to compete unenforceable as a violation of Texas public policy.” Id. at *10.

But Texas courts have sometimes cited ipso facto clauses as a factor to consider. In Wright, the court held that an ipso facto clause provided some “substantive and probative evidence” to support the trial court’s temporary injunction, citing the strong public policy of Texas favoring freedom of contract. Wright, 137 S.W.3d at 294.

This kind of “punting” seems to be the most common approach. See South Plains Sno, Inc. v. Eskimo Hut Worldwide, Ltd., No. 07-19-00003-CV, 2019 WL 1591994, at *6 (Tex. App.—Amarillo April 12, 2019, no pet.) (mem. op.) (citing ipso facto clause, in addition to evidence of irreparable injury, in support of affirming trial court’s temporary injunction); Poole v. U.S. Money Reserve, Inc., No. 09-08-137CV, 2008 WL 4735602, at *8 (Tex. App.—Beaumont Oct. 30, 2008, no pet.) (mem. op.) (citing ipso facto clause as “but one consideration in our analysis”).

Citing the ipso facto clause as a non-dispositive factor is kind of an easy way out, so I get why courts would do it. But I wonder. In these cases where courts cited an ipso facto clause as a factor, did the clause actually make a difference? In other words, would the case have come out the same way if the agreement had no such clause?

I suspect the answer is yes, but of course there is no way to be sure.

I do know of at least one Texas case that seemed to find an ipso facto clause conclusive. In Henderson v. KRTS, Inc., 822 S.W.2d 769 (Tex. App.—Houston [1st Dist.] 1992, no writ), the buyer of a radio station obtained a temporary injunction prohibiting the seller from interfering with the buyer’s efforts to move the station. Id. at 771-73. On appeal, the seller argued the temporary injunction was improper because damages would be an adequate remedy. The Court of Appeals disagreed, citing the ipso facto clause. The court held that the seller, “by agreement, stipulated that [the buyer] could seek injunctive relief without the necessity of proof of actual damages.” Id. at 776. But the opinion simply decreed this without any analysis.

In a more recent case, the First Court of Appeals reached the opposite conclusion, without citing Henderson. In Malone v. PLH Group, Inc., No. 01-19-00016-CV, 2020 WL 1680058 (Tex. App.—Houston [1st Dist.] Apr. 7, 2020, no pet. h.) (mem. op.), the court said an ipso clause had no effect.

The employment agreement in Malone contained restrictive covenants prohibiting the employee from competing against the company, soliciting the company’s employees, and using or disclosing the company’s confidential information. Id. at *1. The agreement also contained an ipso facto clause, stating any breach of the restrictive covenants would cause “irreparable damage” to the company, and the company “will be entitled as a matter of right to equitable relief, including temporary or permanent injunction, to restrain such breach.” Id.

After a bench trial, the trial court found that the employee breached the confidentiality clause by forwarding a bid log report to his private email account, but the trial court also found the company failed to prove a “continuing violation” of the confidentiality provision, and it therefore denied equitable relief. Id. at *6.

On appeal, the company argued that it was entitled to an injunction under the ipso facto clause based on the breach of the confidentiality requirement. The Court of Appeals disagreed, for two reasons. First, there was sufficient evidence to support the trial court’s finding that there was no continuing violation. Second, the court said “a contracting party’s acknowledgment that the other contracting party has a right to equitable relief does not bind judicial actors or require a court to grant the equitable relief ultimately requested.” “Trial courts are afforded discretion in granting equitable relief,” the court explained, and the company “cannot remove that discretion by eliciting a contractual term from Malone authorizing injunctive relief.” Id. at *6 (citing Shoreline Gas).

So the same Court of Appeals has reached the opposite conclusion on this issue? What gives?

Here’s a hint. In both cases, the Court of Appeals affirmed the trial court’s ruling. In Henderson, the trial court granted an injunction, and the Court of Appeals affirmed. In Malone, the trial court denied an injunction, and the Court of Appeals affirmed.

Similarly, in Shoreline Gas, the case cited in Malone, the trial court denied a temporary injunction, and the Court of Appeals affirmed.

You might deduce (or is it induce?) that the rule in non-compete injunction cases is that the party who wins in the trial court wins.

That would be pretty close to accurate, but the truth is a little more complicated. Here’s what I think the “real” rules are:

1. If the trial court grants a temporary injunction to enforce a non-compete, and there is some evidence to support it, the Court of Appeals will usually affirm the injunction and might cite the ipso facto clause as a factor supporting it (although it wouldn’t be necessary, because there would be some evidence to support it anyway).

2. If the trial court denies a temporary injunction, and had some reasonable basis to do so, the Court of Appeals will usually affirm the denial and either say the ipso facto clause had no effect (as in Malone), or say that it was just one factor to consider (as in Wright).

These two rules will apply in the vast majority of cases. And in both scenarios, the Court of Appeals can punt because it doesn’t really have to decide whether the ipso facto clause is dispositive.

In the rare case where the trial court grants an injunction and there is really zero evidence of irreparable injury, then the Court of Appeals might have to bite the bullet and decide whether the ipso facto clause establishes irreparable injury, despite the lack of any evidence. But that will be rare.

So should employers continue to include ipso facto clauses in their non-competes? Well, as much as I hate to include language that I personally think should have no effect, I do include an ipso facto clause in my form non-compete. See The Plain-Language Non-Compete.

For one thing, there’s no real harm in including it. And some judges might consider the clause as a factor, or even find it dispositive, although that would be a mistake.

There’s one more reason I like to include an ipso facto clause in my form non-compete. If I later have to go to court to try to get an injunction enforcing that non-compete, the employee’s stipulation to an injunction can be useful. Why?

Sorry, you can’t expect me to give away all my secrets.

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

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

 

Top 10 COVID-19 Employment Law Tips

Top 10 COVID-19 Employment Law Tips

I’ll be honest. I don’t really like employment law.

Wait a minute, Wolfe. Your little profile at the end of these posts says you do non-compete and trade secret litigation. Isn’t that “employment” law?

Not really. I see departing employee litigation as essentially contract and tort law (with a statutory overlay). In contrast, when you say, “employment law,” I think of a 100-page employee manual nobody reads that spells out how sick leave accrues and what happens to it when an employee quits.

Blah, blah, blah . . .

Here’s when it hit me. Years ago, I was leaving a big law firm to go to work for a much smaller firm, and the big firm sent out an email attaching the new office dress code with thanks to the Dress Code Committee.

Dress Code Committee, I thought. Seriously? They had to have a whole committee for this? And the dress code really got down in the weeds. There’s something comical about an official memo from a team of elite lawyers using terms like “spaghetti straps” and “crop top.” Employment lawyers live for stuff like that. Me, not so much.

I think it boils down to two reasons. First, I don’t like authority and nit-picky rules. My employee manual would just say “dress appropriately and be cool to each other.”

Second, I don’t like the whole “paper the file” feel to employment law. Who actually reads that 100-page handbook? It feels like it’s just there for the employer to cite if there’s a problem.

But I get it. Obviously, my attitude isn’t going to cut it in corporate America. Employers are trying to avoid liability, and a vague directive that sounds like something from Bill and Ted’s Excellent Adventure creates too much space for discrimination. If the manager was cool with the white male employee wearing Birkenstocks with wool socks, why did he have a problem when the minority employee did it? A detailed dress code avoids this problem.

The same points apply to all this COVID-19 employment law stuff. Everybody’s got a COVID-19 blog post, a COVID-19 webinar, a COVID-19 client alert. I’m sure there’s a COVID-19 employment law podcast. Everybody’s jumping on the bandwagon, but it just doesn’t excite me.

If I ran the zoo, most office employers would use this crisis as an opportunity to ditch their expensive office leases and have more people work from home. I’ve got a friend in the business world who recently told me that’s exactly what he’s doing with the company he runs. Think how much time and gas money his employees will save.

Plus, as Brett Holubek reports in Remote Work and COVID-19, one comparative study found that working from home resulted in a big boost in productivity and a significant reduction in employee attrition.

But again, I get it. WFH won’t work for everybody. Most employers will eventually need guidance on how to bring employees back to work, and other employment law issues raised by the pandemic.

Fortunately, I don’t have to reinvent the wheel. Instead, I present this curated list of the best COVID-19 employment law tips I’ve gathered from lawyers who actually like employment law.

I remember when “curated” only applied to museums. Here, it means I went through a rigorous process of scrolling through my LinkedIn feed and Googling some employment lawyers I know.

1, 2, 3, 4, 5, 6, 7, 8, 9 . . .

It’s the 10 COVID commandments.

#1 Avoid WARN Act issues

The WARN Act generally applies to employers with 100 or more employees, and it requires giving 60 days’ notice of mass layoffs. If you have a hundred or more employees and laid off 50 or more of them temporarily, you may need to act quickly to bring employees back to avoid violating the WARN Act. Holubek’s Texas Labor Law Blog covers the details at How to Reopen a Business and Recall Employees.

#2 Offer a severance agreement

I often get calls from employees who lost their jobs and want to know if the employer is required to pay severance compensation. The short answer is no. Unless the employee has a contract that says otherwise, the employer can lay off the employee and doesn’t have to pay a dime more than what the employee earned before the layoff.

As my friend Stanley Santire once put it, Texas follows the at-will employment rule like most states, but the difference is that Texas really means it. Generally, you can fire an employee for any reason or no reason.

I say generally, because of course there are exceptions. Certain kinds of discrimination and retaliation are unlawful. For that reason, it’s often in the employer’s interest to get a release from the employee.

The employer should consider offering severance in exchange for a release. This lets the employer do something good—cushioning the blow of a layoff—while getting something in return. In the words of Alexis de Tocqueville, it is intérêt personnel bien compris.

If you require employees to sign a release, be sure your form of release complies with the Age Discrimination in Employment Act (ADEA), including a 21-day notice period and a seven-day revocation period.

#3 Be selective about enforcing non-competes

Speaking of severance agreements, sometimes employers try to include a non-compete in the severance agreement. If the employee didn’t already have a non-compete, this is going to be hard to enforce. I’m not saying it’s impossible, but it’s difficult.

On the other hand, if the employee already had a non-compete, then in theory the fact that the employer laid off the employee does not prevent the employer from enforcing the non-compete. I say “in theory” because if you have to file a lawsuit to enforce it, the judge is going to have a lot of discretion, and most judges will be sympathetic to laid off employees in this crisis, as they should be. I explained this in my recent post Can They Lay Me Off *And* Enforce My Non-Compete?

So think about whether you really need to enforce the non-compete. Do you have evidence the employee has taken truly confidential information? Is the employee trying to divert key customers to a competitor? Then you may have no choice. Otherwise, maybe you’ve got bigger fish to fry.

#4 Protect real trade secrets

There’s always a chance a disgruntled former employee will try to use a company’s confidential information against it. Even if the employee doesn’t have a non-compete, you can use trade secrets law to try to prevent this. See my posts When Is a Customer List a Trade Secret? and The Price Undercutting Theory in Texas Trade Secrets Litigation for guidance on some common scenarios.

#5 Manage remote workers reasonably

Here’s another one where I’m probably not the best guy to ask. My Work From Home policy would be something like “stay in touch and keep doing great work.” My philosophy is if you want employees to act like adults, don’t treat them like children.

But I realize some employers will need a little more than that. So you may need to adopt some specific policies setting out expectations about things like responding to emails, Zoom conference etiquette, and returning phone calls.

Just don’t make the policies too rigid. Don’t be “that guy” who expects his midnight email to be answered immediately, and don’t be that company that requires employees to install webcams so you can keep tabs on them.

There is one work from home issue where employers may need to be more strict: cyber-security. It will be even more important for employees to use secure internet connections, take common-sense precautions with devices containing company data, and be on the lookout for scams like “spear-phishing.”

Pro tip: an early morning email from your managing partner simply stating “can you do me a favor?” may not be what it seems.

And if you’re the managing partner, never send an email like this.

You can learn more about data privacy issues with employees working from home in this episode of the Vorys at Work podcast with Jackie Ford and Lisa Reisz. (I told you there would be a podcast!) And Brett Holubek addresses a host of work from home issues at his blog post, including making sure hourly employees know they are not to work “off the clock.”

#6 Keep employees safe and minimize potential liability

Protecting employees from contracting the virus when they return to work breaks down into two categories: (1) screening, and (2) social distancing.

The challenge with screening is to protect employees from the virus while respecting employee privacy and avoiding discrimination. Haynes & Boone has a helpful checklist with suggestions on how employers can screen applicants and employees for symptoms of COVID-19 the right way:

  • To avoid discrimination, the employer should follow the same screening practice for all employees in the same type of job.
  • For consistency and documentation, consider using a written questionnaire.
  • Keep the results of any screening confidential.

Should screening include temperature checks? This strikes me as a little too much. If you’re still that concerned, maybe it’s a sign you should not be bringing employees back yet. But if you must bring them back, and especially if social distancing is not feasible in your workplace, temperature checks may be a necessary part of your screening.

The checklist cited above has some helpful Do’s and Don’ts for this. It also has good common-sense suggestions for on-site safety and social distancing strategies. Also check out Seyfarth Shaw’s Strategies for Developing a Return to Work Action Plan.

#7 Comply with the Family First Coronavirus Response Act

The Families First Coronavirus Response Act makes certain employees eligible for paid sick leave and expanded family medical leave, and it provides refundable tax credits to small and midsize employers to reimburse them for the costs of leave related to COVID0-19.

I don’t touch tax law, see Most Smug Areas of Law Practice, so I won’t try to interpret the FFCRA, but the IRS has a helpful summary and list of FAQs.

#8 Don’t underreact or overreact to COVID-19 positive employees

Don’t let an employee who tests positive for COVID-19 come to work. That should be obvious. Then again, I thought it would be obvious that injecting yourself with disinfectant is not the optimal treatment.

In theory, you also need to keep an employee’s positive COVID-19 status confidential. I say in theory because, let’s be real, his co-workers are going to know. I suppose the point is that people should hear it from the employee himself, not from management. As explained on the Vorys at Work podcast, employers should prepare managers ahead of time on how to handle this.

For employees who get the virus, the Haynes & Boone checklist recommends following CDC guidelines regarding the appropriate time to return to work, and that makes sense to me.

#9 Avoid disability discrimination

The Americans with Disabilities Act (ADA) and other employment laws still apply, but reasonable employer responses to COVID-19 are likely to be accommodated. The best resource on this topic is probably this EEOC page with FAQs and the updated publication Pandemic Preparedness in the Workplace and the Americans With Disabilities Act.

My main takeaways: employers may screen employees and applicants for COVID-19 because it poses a direct threat to health in the workplace, the ADA does not prevent employers from requiring employees with COVID-19 to leave the workplace, and a medical exam is permitted after a conditional offer of employment.

The EEOC page also addresses reasonable accommodations for employees who, due to an existing disability, are at higher risk from COVID-19. “Reasonable accommodation” is always a difficult and fact-intensive issue, but the bottom line is that employers should be flexible.

#10 Be flexible

Flexibility. That seems to be the theme of the day. We’re all going to have to find new ways to be flexible, especially when more people go back to work.

A Very Special Cinco de Mayo Special

If you want more details, mark your calendar for May 5th. You can’t go to your favorite Tex-Mex joint for margaritas, but you can tune in to a great webcast from TexasBarCLE called Top 10 COVID-19 Employment Law Issues. Hosted by Brett Holubek of the Texas Labor Law blog and Zach Wolfe of Five Minute Law.

Wait a minute. Wolfe? He doesn’t even like employment law.

I know, I know. It’s a dirty job. But someone’s got to do it.

_______________________________

IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. This post is dedicated to all the 80s kids who stayed up too late to watch Late Night with David Letterman.

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.

How to Get Sanctioned for Deleting Facebook Posts

How to Get Sanctioned for Deleting Facebook Posts

I social media. I don’t know how I’d get through this pandemic without it. That live performance by the Rolling Stones that I saw on Twitter last week was just what I needed.

Social media in litigation, on the other hand, can really cause lawyers some headaches. Here are some of the questions it raises:

  • Does the duty to preserve evidence apply to material a client posts on social media?
  • Should lawyers give clients guidance about preservation of social media during a lawsuit?
  • Can a party’s social media posts be used against the party in court?
  • Should lawyers give clients guidance about what they post on social media during a lawsuit?
  • Should lawyers prepare their clients to testify about what they did with social media?
  • If a client deletes relevant social media content during a lawsuit, should the client’s lawyer lie about it?

I’m willing to bet most of my Fivers already know the answers to these questions.

But I bet a smaller number of my lawyer readers regularly do the following:

(1) Specifically advise the client in writing to preserve relevant social media content at the beginning of a litigation matter

(2) Specifically advise the client to avoid posting anything on social media that could be used against the client in the lawsuit.

(3) Specifically prepare the client to answer deposition questions about use and preservation of social media.

This could be a problem. Let me share a couple cautionary tales.

The “Hot Moms” T-Shirt Case

You may have heard about Allied Concrete v. Lester. The case had some funny facts, but it arose from a real tragedy: a concrete truck crossed the center line on the Thomas Jefferson Parkway in Virginia, tipped over, and crushed a vehicle driven by Isaiah Lester, injuring him and killing his wife Jessica. Lester sued the concrete company. Allied Concrete Co. v. Lester, 736 S.E.2d 699, 701 (Va. 2013).

So far, this sounds like a typical, though tragic, personal injury suit. But it had a social media angle. When Lester filed suit in in May 2008, he had an account with Facebook, which had first become available to the public less than two years earlier.

Lester’s lawyer was the managing partner of his firm’s Charlottesville office and had over 30 years of experience. But he was apparently not an “early adopter” of social media. His lack of experience with social media may have contributed to the following chain of events:

1/9/09: Lester sent a Facebook message to Allied Concrete’s lawyer.

3/25/09: Allied Concrete requested production of all pages from Lester’s Facebook page, attaching a photo from Lester’s Facebook page. The photo showed Lester “accompanied by other individuals,” holding a beer can, and wearing a T-shirt emblazoned with “I hot moms.”

3/26/09: Murray instructed his paralegal, Marlina Smith, to tell Lester to “clean up” his Facebook page cause “we don’t want any blow-ups of this stuff at trial.” She emailed Lester about the photo and also said there were “some other pics that should be deleted” from his Facebook page.

4/14/09: Lester told Smith he had deleted his Facebook page.

4/15/09: Lester signed a discovery response stating “I do not have a Facebook page on the date this is signed.”

5/11/09: After Allied Concrete filed a motion to compel, Lester reactivated his Facebook page, the paralegal printed copies of it, and Lester then deleted 16 photos from it.

5/14/09: Murray produced the printouts of the Facebook page to Allied Concrete.

12/16/09: Lester testified in his deposition that he had never deactivated his Facebook page. This resulted in Allied Concrete serving a subpoena on Facebook and hiring an expert who determined that Lester deleted 16 photos. All 16 photos were ultimately produced to Allied Concrete.

9/28/10: Allied Concrete requested production of emails between Lester and Smith between 3/25/09 and 5/15/09.

11/28/10: Murray filed a privilege log that intentionally omitted any reference to his 3/26/09 email to Smith.

Id. at 701-3.

You can see from this chronology that Murray, Smith, and Lester went wrong in several obvious ways:

(1) Lester deleting potentially relevant posts and deactivating his Facebook page.

(2) Lester falsely testifying that he had never deactivated his Facebook page.

(3) Murray filing a privilege log that intentionally omitted the most damning email.

You don’t need to know a lot of details about social media, legal ethics, or the duty to preserve evidence to know that these things were wrong.

And the consequences were severe. As sanctions, the trial court ordered Murray to pay $542,000 and Lester to pay $180,000 to cover Allied Concrete’s attorney’s fees and costs to address the misconduct. Id. at 703. The trial court also allowed the jury to see all the spoliated evidence and twice instructed the jury on Lester’s misconduct. Id. at 705.

And when it was all over, Murray had to agree to a five-year suspension of his law license. You can read the Virginia State Bar Disciplinary Board’s order here.

You might think the lesson is obvious: don’t let your client spoliate evidence and then lie to the court about it.

But there’s a less obvious lesson in the Allied Concrete case. From the start, Lester’s lawyer got off on the wrong foot by issuing the vague directive to “clean up” the Facebook page. He could have avoided later problems by giving the client specific written advice on (1) what he needed to do to comply with the duty to preserve relevant evidence and (2) what to avoid posting.

But I don’t want to be too hard on the lawyer. From his suspension order, you get the feeling that this was his first rodeo as to Facebook. Today we all understand how Facebook works, but did we know that 11 years ago? Today, how many of us know about wickr? Or Whisper? Or confide? Heck, most us probably don’t even know how to post a “story” on Instagram.

Screen Shot 2020-04-19 at 10.42.15 PM.png
Sure, you know Facebook. But do you know all of these?

Yes, the conduct in Allied Concrete was egregious, especially the lying. But my big takeaway is that even now, we’re all just a couple bad decisions away from getting in hot water over social media evidence.

A more recent case really brings this home.

The “I have the right to do whatever I want” case

In Nutrition Distribution LLC v. PEP Research, LLC, No. 16-CV-2328, 2018 WL 3769162 (S.D. Cal. Aug. 9, 2018), the court sanctioned a defendant for deleting relevant social media posts after the case was filed. The case teaches the importance of preserving social media evidence and preparing your client to testify about social media.

Nutrition Distribution was, from what I gather from the pleadings, sort of a “false advertising troll.” In other words, it sounds like it was more in the business of filing lawsuits against other companies for false advertising than marketing its own products. So you know the defendant, an online seller offering a controversial weight-loss supplement called Clenbuterol, was already highly irritated about getting sued in the first place.

This frustration boiled over in the deposition of Brent Reynders, an individual defendant and representative of the corporate defendant. Here’s a taste (I’m paraphrasing some of the questions):

Q: And since the lawsuit was filed in September 2016, have you deleted any posts from your Facebook?

A: Yes.

Q: Did the deleted posts have anything to do with this lawsuit?

A: It’s possible. Actually, it was—I think it had more to do with any copycat companies, law firms like yours trying to file the same frivolous lawsuit.

Q: Did you delete posts related to the marketing of Clenbuterol?

A: I have the right to do whatever I want to do with my Facebook account, regardless of a lawsuit or not. If I wanted to—if I want to delete every single post on my Facebook page, I have the right to do so.

Id. at *16.

I can just picture Mr. Reynders’ lawyer cringing. You’re not fully a litigator until you’ve had to sit quietly while your client gives deposition testimony like this.

And that was just the beginning. Nutrition Strategies filed a motion for sanctions for spoliation of evidence, asking for the dreaded “adverse inference instruction.” That’s an instruction telling the jury that a party failed to preserve evidence and that the jury can presume the evidence would have been unfavorable to that party.

In the Ninth Circuit, the sanction of an adverse inference instruction requires proof that “(1) the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) the records were destroyed with a culpable state of mind; and (3) the evidence was ‘relevant’ to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.” Id. at *15. The standards in other jurisdictions are pretty similar.

The magistrate judge found that each element was met. The defendant deleted relevant social media posts after the case was filed. The posts allegedly contained the very false advertising that the plaintiff was suing for, so there was no question the defendant had a duty to preserve them. The plaintiff showed that the deleted evidence was relevant because it included ads, photos, marketing, and the misleading statements at issue in the suit. Therefore, even if there was no bad faith, the plaintiff established prejudice. Id. at *16.

The defendants argued there was no prejudice because the plaintiff already had copies of the deleted posts, but the magistrate judge disagreed. There was evidence that plaintiff only had some of the posts, which it obtained in its pre-suit investigation. Id.

The magistrate judge therefore recommended an adverse inference instruction that “the social media posts deleted were false advertising of products that compete with Plaintiff.” Id. at *18.

The district court judge largely agreed. See 2018 WL 6323082 (S.D. Cal. Dec. 4, 2018). But he found that the recommended jury instruction went a little too far. Because the plaintiff’s claim was false advertising, the instruction that the deleted social media posts were false advertising that competed with plaintiff’s products was “tantamount to entry of judgment.” Or as we say in Texas, a “death penalty” sanction.

Noting that the plaintiff preserved some social media posts and that defendants offered to stipulate to the content of the posts, the district judge decided to give a less harsh instruction to the jury:

Defendants have failed to preserve social media posts for Plaintiff’s use in this litigation after Defendants’ duty to preserve arose. You may, but are not obligated to, infer that the deleted social media posts were favorable to Plaintiff and unfavorable to Defendants.

Id. at *5-6.

That’s much better for the defendants, but still pretty bad. A jury trial is hard enough. It’s near impossible when the judge gives the jury an instruction like this against your client.

So what did the jury decide? Well, actually it didn’t. There was no jury trial, because the district judge later granted summary judgment that the defendants did not publish any false advertising that competed with the plaintiff. See Order on MSJ.

You can’t always get what you want.

_______________________________

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

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

The Problem With “The Problem With the Elevator Speech”

The Problem With “The Problem With the Elevator Speech”

I don’t get a lot of pushback on my blog posts, which is kind of a bummer. You’d think more people would express their disagreement, especially considering I’m not shy about sharing my personal opinions about hot-button topics, like application of choice-of-law principles to multi-state non-compete disputes.

But one of my posts did generate some criticism, and from people whose opinions I value. Can you guess which post?

Was it the one about the Steak N Shake case that held inappropriate workplace contact can be sexual assault? The one about lessons from Seinfeld about the #MeToo movement? Witness prep tips from the Ken Starr interview about covering up sexual assault allegations at Baylor?

I’m noticing a pattern here.

But no, it wasn’t a post about sex or any kind of controversy. It was my April 2018 post The Problem With the Elevator Speech, which I recently recirculated.

The original critique

That was my critique of the standard business development advice that you should have a short prepared speech or “pitch” about yourself or your business that you’re ready to deliver whenever needed, in about the time it takes to ride an elevator. Or in contemporary terms, the time it takes to figure out how to unmute yourself on Zoom.

So what was the criticism?

I’ll get to that, but first let’s recap the key things I said are wrong about the idea of an elevator speech:

  • I don’t like the popular advice about identifying a prospect’s source of pain and then explaining how you solve it. I find that too abstract. Just tell people what you do in simple, concrete terms.
  • An elevator speech is too likely to sound like a speech. People you meet usually don’t want to hear a rehearsed sales pitch.
  • The whole idea puts too much emphasis on you, rather than the person you’re talking to. I suggested it would be better to focus on listening, rather than explaining why you’re so great.

I concluded by analogizing to dating. If you’re single and meet someone you find attractive, are you going to win them over with a little speech about how you do Peloton at home every morning before sewing masks for healthcare workers?

Brilliant. When I hit “Publish” I couldn’t wait for the accolades to pour in. And there was some positive feedback. One of my loyal Fivers emailed me to say she was reading the post in the office cafeteria and giggling out loud. Must have been the hilarious “good pitching” joke. And later that week, Texas Bar Today named my post to its coveted Top 10 list.

The pushback

But then the backlash. A successful small business owner who follows the blog sent me a message explaining that when you’re networking, it’s important to say something memorable about what you do. The idea was that even if you make a positive impression on someone you meet, it won’t do much good if that person doesn’t remember what you can do for them.

I could dismiss this with an “Ok, Boomer,” but I also received similar criticism from a successful lawyer I know:

Too many lawyers have no concept of branding and fail to differentiate themselves in the marketplace. As a result, when a potential client has legal problem that would be a good fit for the lawyer’s area of expertise, the client never considers that lawyer. Marketing experts tell you the goal is to try to be “top of mind” to clients who will think of you first when the need arises. Without branding and an elevator speech, lawyers are not just not top of mind, they aren’t even considered. The elevator speech is just one tool in the tool kit of branding.

Jeff Bezos has said: “Your brand is what other people say about you when you’re not in the room.” Listening is great, but it won’t get the client to call you if they don’t know and understand what you do. When you are networking and meeting folks for just a few minutes at CLE conferences, local or state bar events, or backyard BBQ’s, the elevator speech is a lot better than just handing someone your business card.

Branding requires a full 360 approach – how to build the brand requires authenticity from the get go, then identifying who needs the services/expertise and, critically, making sure to get that brand shared with those who are in need.

My key takeaways from these dissenting opinions: yes, you have to be authentic, but (1) people won’t think of hiring you or recommending you if you don’t let them know what you do, and (2) the elevator speech is a good branding tool to help people remember what you do.

So did I have it all wrong? Was my critique of the elevator speech misguided?

Validation

I decided to consult with another lawyer I respect who has a knack for business development. I asked him to read my post and share his feedback, especially any conflicting views. Here is part of the response:

I cannot give conflicting views because I agree completely.  Any client will tell you that the first thing that turns them off is being asked for business. They are smart! They know a pitch when they hear it. They know when you are fishing for their business. No one likes it. I have not heard many take your approach (no elevator speech), and that salesman approach is something I avoid. Everyone is different but pretty much all of my business has come through personal relationships—genuine personal relationships. Honesty—it’s ok!  Knowing that I will not connect with everyone, I put myself out there honestly and genuinely. I think that makes folks more comfortable to start.  

This lawyer went on to give specific examples of being honest and genuine even when it might turn some people off.

So, just when I thought I was too hard on the idea of an elevator speech, here’s a successful business developer who seems to agree with my original point. Instead of making a sales pitch, this lawyer says focus on developing genuine personal relationships.

Great. Now what am I supposed to do?

Of course, these seemingly conflicting views can be reconciled, to some extent. Everyone seems to agree it’s best to be honest, genuine, and authentic–like that commercial with Walmart employees singing “Lean On Me.” So, if you’re going to develop an “elevator speech,” you should still be yourself, and don’t make it too “salesy.” I still think my original opinion does point out some real problems with the idea of an elevator speech.

But on further reflection, I must concede are two key problems with my original advice to forego the elevator speech and focus more on listening to other people.

Two problems with “The Problem . . .”

First, even if you don’t have an elevator speech to deliver to other people, you should at least develop one for yourself.

If you can’t clearly tell yourself in 30 seconds what your specialty is and how you’re different from others in your profession, then maybe you haven’t really thought that through. You need some concept of “branding” if you want to get noticed. Either that or a viral Tik-Tok video.

Second, listening is great, but if you want to develop business you’re going to have to talk about yourself at least a little.

Let’s go back to my dating analogy. Sure, if you want to date someone, a PowerPoint presentation on “why you should find me attractive” is probably not the best approach. But on the other hand, if you never give that person any indication that you’re interested, they may just move on to someone else. Just think how many romantic comedies use this very problem as a major plot point.

It doesn’t have to be a “speech,” but at some point you need to let people know what it is you do. And if you do it the right way, you might even want to tell people “I want your business” or “please refer clients to me.”

This reminds me of a story about Bill Clinton’s early years. I may get the details wrong, but that’s not the point. The story is that he carried around a little notebook that he would write people’s names in. When people asked what he was doing, he told them his plan was to move back to Arkansas and run for office, and he wanted to keep track of everyone he met.

Now that’s an elevator speech. Put aside for a moment whether you like Clinton or can’t stand him. What I love about the story is the combination of honesty and self-promotion. He just came right out and said it: I’m going into politics and want you to be part of my network of contacts.

Now, some might recoil from such blatant schmoozing, but I bet people found it refreshing. Instead of pretending to be your friend without letting on he planned to hit you up for money or a favor later, Clinton was transparent about what he was up to. And there’s something else appealing: in a sense, he was inviting you to be part of his project.

So maybe the next time someone asks me what I do, I’ll say “I want to become the best known non-compete litigator in Houston, and I’m trying to hit 30,000 views of my blog Five Minute Law this year, can I add you to my email list?”

Wait. Did I just discover my elevator speech?

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

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

 

Can They Lay Me Off *And* Enforce My Non-Compete?

Can They Lay Me Off *And* Enforce My Non-Compete?

Can a Texas employer lay off an employee and then enforce the employee’s non-compete? As with so many legal issues, I’d bet all my chips there’s a short, simple answer, a longer more complicated answer, and a practical answer.

The short answer is yes, an employer can fire an at-will employee—for a good reason, an unfair reason, or for no reason at all—and then enforce the employee’s non-compete. There is nothing in the Texas non-compete statute that expressly ties enforceability to whether the employee quit, got fired, or got laid off.

You can see this harsh reality in the recent case Amend v. J.C. Penney Corp., No. 05-19-00723-CV, 2020 WL 1528497 (Tex. App.–Dallas Mar. 31, 2020, no pet. h.) (mem. op.). In that case, J.C. Penney eliminated Amend’s position and terminated him. He later found a job at Lowe’s as President of Online. J.C. Penney’s sued Amend for breaching his non-compete, the trial court judge refused to dismiss the suit, and the Court of Appeals upheld the trial court’s decision. The fact that J.C. Penney laid off Amend didn’t stop it from suing to enforce his non-compete.

But the longer answer is that the reason for termination of employment can be a factor that affects how the judge evaluates the reasonableness of the non-compete and whether to grant a temporary injunction enforcing the non-compete. I’ll walk through that answer momentarily.

The practical answer is that if the employer cares enough to spend the time and money to sue the employee to enforce the non-compete, then it’s going to cost the employee around $10,000 in legal fees to fight back, at least initially. If the employee doesn’t have that kind of money, it’s going to be tough sledding. I’ll cover that too.

But first, let’s put these questions in context by understanding some basic principles of Texas non-compete law.

Background on Basics of Texas Non-Compete Law

For about a century, Texas law on non-competes was common law, i.e. law made by judges. I covered some of this history in Jurassic Non-Competes. In 1989, the Texas legislature passed the Covenants Not to Compete Act, found at sections 15.50-52 of the Texas Business and Commerce Code. I just call it the non-compete statute for short. For the most part, it codified the common law principles the courts had developed (with two important exceptions I’ll get to later).

The statute has two basic requirements. First, a non-compete must be “ancillary to an otherwise enforceable agreement.” Second, a non-compete must be reasonably limited in time, geographic area, and scope of activity restrained. We now have three decades of case law applying those requirements.

Bear in mind that even if the non-compete as written fails the reasonableness test, the statute says the court shall reform the non-compete, i.e. rewrite it, to the extent necessary to make it reasonable.

But as a practical matter, true reformation hardly ever happens, because the parties almost never get that far. And strangely enough, the Texas non-compete statute says nothing about the event that is usually most important in a Texas non-compete lawsuit: the temporary injunction hearing.

The statute does talk about “injunctive relief,” but not specifically about a temporary injunction (or preliminary injunction, in federal court). Courts have developed common-law requirements for a temporary injunction, including “imminent harm” and “irreparable injury,” and the statute does not preempt those common-law requirements. See Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 241 (Tex. App.—Houston [1st Dist.] 2003, no pet.) (rejecting argument that proof of irreparable injury is not required in non-compete case).

A temporary injunction hearing usually takes place a few weeks after the lawsuit is filed. At that hearing the judge will decide whether to order the employee to comply with the non-compete while the lawsuit is pending. If the judge thinks the non-compete is overbroad, the judge can enter a temporary injunction that only enforces the non-compete to a reasonable extent.

The losing party can appeal that decision to the Court of Appeals, but the chance of winning the appeal is low. The main reason for that is the standard of review: abuse of discretion. Even if the Court of Appeals thinks the judge got it wrong, it is supposed to uphold the decision as long as the trial court judge didn’t do anything too crazy.

The end result is that non-compete cases often settle after the temporary injunction hearing. If the judge orders the employee to stop competing, in most cases that might as well be a permanent injunction, because usually the employee is going to have to look for some other job. If the judge denies the request for a temporary injunction, the employer may decide to cut a deal with its former employee rather than spending more money on what may be losing lawsuit.

With this background information you are now equipped to understand what I’m going to say about companies laying off employees and then enforcing their non-competes.

Explanation of the Short Answer

You can now see why I say that, in theory, the way employment ended does not impact whether the non-compete is enforceable. As I said, the non-compete has two requirements, “ancillary” and “reasonable.” There’s nothing in the statute that says the employer can’t fire or lay off an at-will employee and then enforce the employee’s non-compete.

Of course, this doesn’t seem fair. It strikes most people as wrong that a company could fire an employee without good cause and then prevent the employee from working for a competitor. That’s probably why there is a common misconception that the employer can only enforce the non-compete if the employee quit, or if the employee was fired for good cause.

Our intuitive sense of fairness also tells us that a company shouldn’t be able to use a non-compete to prevent a former employee from making a living. And for many decades, Texas courts shared this sentiment. This led Texas courts to say that a non-compete must not be “oppressive” to the employee and must not restrain the employee from engaging in a “common calling.” See Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168, 171-72 (Tex. 1987).

But the 1989 statute did not include those two requirements. And the statute says its criteria for enforceability are “exclusive” and preempt any other criteria “under common law or otherwise.” Tex. Bus. & Com. Code § 15.52.

So, arguably, the Texas non-compete statute eliminates the burden on the employee as a factor in deciding enforceability of the non-compete. That means the employee cannot argue it is unfair or oppressive for the company to lay off the employee and then enforce the non-compete, right?

Well that’s the short answer, at least.

The Longer Answer

There are still some ways for the employee to argue it is unfair to enforce the non-compete against an employee who was laid off.

First, remember the reasonableness requirement. The non-compete must be reasonably limited and “not impose a greater restraint than is necessary to protect the goodwill or other business interest” of the employer. Tex. Bus. & Com. Code § 15.50(a).

In deciding what is reasonably necessary to protect the employer’s goodwill, the judge can take into account the circumstances of the employee’s departure. The scope may be more or less reasonable depending on whether the employee had a premeditated plan to quit and take customers to a competitor, as opposed to the employee getting laid off.

Second, keep in mind both the common-law requirements for a temporary injunction and the standard of review that applies to an appeal of a trial court’s decision on a temporary injunction. Put those together, and the result is that the trial court judge has a lot of wiggle room to grant or deny a temporary injunction.

For example, if the judge doesn’t think it would be fair to enforce a non-compete against an employee who got laid off, it’s pretty easy for the judge to say, “sorry, you may have a case for breach of the non-compete, but damages would be adequate to compensate for that, so I don’t see any irreparable injury.” The facts will almost always provide some support for that conclusion. And because of the “abuse of discretion” standard, it is very unlikely that the trial court judge’s denial of a temporary injunction will get reversed by the Court of Appeals.

Third, if the lawsuit is in federal court, then the company trying to enforce the non-compete has the burden to show that “the threatened injury outweighs any prejudice the injunction might cause the defendant.” BMC Software, Inc. v. Int’l Bus. Machines Corp., No. H-17-2254, 2018 WL 4530020, at *2 (S.D. Tex. Sept. 21, 2018) (citing Bluefield Water Ass’n, Inc. v. City of Starkville, 577 F.3d 250, 252-53 (5th Cir. 2009)). That opens the door to the employee arguing that the burden of getting laid off and then prevented from working for a competitor outweighs any loss of revenue to the company.

Fourth, the laid-off employee’s best friend may be the “industry-wide exclusion” rule, which I explain in Burning Down the Haass: The Industry-Wide Exclusion Rule in Texas Non-Compete Law.

That rule is really a subset of the first question of reasonableness, but it’s important enough to deserve its own category. Texas law says a non-compete that prohibits working for a competitor in the industry in any capacity is too broad. Usually, the non-compete must be tied to preventing the employee from taking the company’s customers with her. This is where I get Wolfe’s First Law of Texas Non-Compete Litigation: you can’t take your customers with you.

If you get laid off and want to go to work for a competitor, in most cases Texas law should allow you to do it, as long as you’re not trying to take your customers with you. That means you may have to start from scratch at a new company, at least until the non-compete expires, but at least you can get a job in the same industry.

The Practical Answer

But what if you want to take your customers with you? What if you’ve had those customers for years, even before you joined the company that laid you off? What if you’re mad as hell and you’re just not going to take it anymore?

You can fight, and you may have a shot at winning, but it’s going to cost you. If you have a non-compete, get laid off, and try to take your customers with you to a new company, chances are your former employer is going to file a lawsuit (assuming the dollar amount of lost business is worth fighting over). If you can’t afford to hire a lawyer to defend you, your chance of winning is not good.

So what’s it going to cost to defend yourself? I tackled this question in How Much Does a Texas Non-Compete Lawsuit Cost? at my YouTube channel, That Non-Compete Lawyer. As a rule of thumb, the first stage of the lawsuit through the temporary injunction hearing is going to cost you $10,000.

Of course, it’s just a rule of thumb. As I say in the video, it may be more, it may be less. But that number should give you some sense of what it’s going to take. If $10,000 is a huge amount of money to you, then maybe you shouldn’t be gambling at this table.

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. This post is dedicated to Kenny Rogers.

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.

 

 

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

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

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

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

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

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

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

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

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

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

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

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

Pleading problems in trade secrets cases

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Everything I learned was wrong

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

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

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

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

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

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

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

Why BigLaw likes motions to dismiss

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

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

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

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

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

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

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

The Phazr Case

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

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

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

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

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

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

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

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

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

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

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

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

*Update: In the words of Leslie Knope, the court gave Phazr “one chance to make a third impression,” but Phazr’s Second Amended Petition still failed to allege plausible facts showing that the defendants actually used Phazr’s trade secrets. 2020 WL 5526554, at *4 (N.D. Tex. Sept. 14, 2020). Phazr failed to allege how defendants’ knowledge was incorporated into Mavenir’s 5G products. Id.

The philosophical divide

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

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

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

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

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

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IMG_4571

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

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

Influential Blogger Recommends Tweaking New Texas Ethics Rules

Influential Blogger Recommends Tweaking New Texas Ethics Rules

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

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

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

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

Memo

To:            Texas Committee on Disciplinary Rules and Referenda

From:       Five Minute Law

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

Date:         3/23/20

A. Overview

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

B. My Perspective

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

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

C. Problems with the Current Rules

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

D. Problems Applying the Current Rules to Social Media

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

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

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

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

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

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

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

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

This is an untenable situation.

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

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

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

E. The Problem with Social Media Posts

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

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

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

F. The “Educational or Informational” Solution

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

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

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

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

G. The Proposed New Definition of “Advertisement”

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

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

The proposed definition has three elements:

(1) communication to the public

(2) offers or promotes legal services

(3) substantially motivated by pecuniary gain

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

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

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

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

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

Was my motivation purely educational? Of course not.

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

H. Applying the New Definition of “Advertisement”

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

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

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

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

To mitigate this problem I propose the following modification:

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

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

I. The New Exemption for Resume-Type Information

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

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

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

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

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

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

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

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

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

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

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

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

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

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