Category: TCPA

Turn Out the Lights, the Party’s Over: Texas Legislature Takes All the Fun Out of the TCPA

Turn Out the Lights, the Party’s Over: Texas Legislature Takes All the Fun Out of the TCPA

Back in my day, there was only one night when you could watch NFL action: Monday. Once Don Meredith started signing “Turn Out the Lights . . .” that was all the pro football you were going to get until the next Sunday. There was no “Thursday Night Football,” or even “Football Night in America.” And we liked it.

The other thing we did back in the good old days, meaning roughly 2017 until now, was file a TCPA motion to dismiss in a lawsuit that wasn’t really about “freedom of speech” or “freedom of association,” at least not in the First Amendment sense. Like a non-compete or trade secrets case.

That was fun, but business lobbies and the Texas legislature were not so amused. They mobilized to pass House Bill 2730 which, like the proverbial Federal Reserve raising interest rates, takes away the punch bowl just when the party gets going.

In broad terms, the amendment to the TCPA does three things:

First, it exempts certain types of claims from the TCPA, most notably non-compete and trade secrets claims. I may be biased, considering that is the focus of my litigation practice, but I see this as the most significant change.

Second, the amendment changes the TCPA’s broad definitions of the right of association and the right of free speech that led to such widespread use of the statute. It does not go so far as making those definitions synonymous with constitutional rights. But the previous definition of the key term “matter of public concern,” which was broad and vague, has been replaced with a definition that is significantly different—but still broad and vague.

Third, HB2730 changes the procedures for TCPA motions. For example, the statute now requires 21 days’ notice of a hearing on a TCPA motion, establishes a response deadline seven days before the hearing, and tweaks the rules for awarding attorney’s fees and sanctions. These changes will be important for practicing Texas litigators to note but probably won’t have any significant public policy impact.

The amendments take effect September 1, 2019 and are not retroactive. The previous statute will continue to apply to suits filed before September 1.

You can view the text of HB2730 here, and I have created a handy redlined version of the changes to the TCPA’s definitions that you can view here.

That’s all I’m going to say about the specific changes to the TCPA, because they are relatively self-explanatory, and I’m sure there will be no shortage of articles exploring the nooks and crannies of the textual changes.

I want to focus on some larger questions, like these:

Does the amended TCPA now do a better job of solving the problem it was intended to solve? (Sort of.)

Would it have been better for the legislature to scrap the whole statute? (Probably.)

Is the new exemption for non-compete and trade secrets claims a good idea? (It depends.)

What does this change mean for Texas non-compete and trade secrets law more generally? (Perhaps the time has come for “non-compete reform” in Texas.)

At the risk using a trendy corporate buzzword, let’s “drill down.”

The Empire SLAPPs Back

First, does the TCPA now solve the problem it was intended to solve?

To answer that question, we have to figure out what the problem was. People call the TCPA an “anti-SLAPP” statute. SLAPP stands for Strategic Lawsuit Against Public Participation. So, apparently there was a Strategic-Lawsuit-Against-Public-Participation crisis in Texas before the TCPA.

Funny thing is, in over 20 years of Texas litigation practice, I’ve never seen a SLAPP in my practice. I don’t think I know anybody who has handled one. I probably know more people who have spotted Sasquatch than people who have seen a true SLAPP.

Don’t get me wrong, I’m sure SLAPPs exist, just like Bigfoot. But here’s the odd thing. Think back to 2010, the year before the TCPA was passed. To jog your memory, the no. 1 song that year was by Ke$ha, who was still using that dollar symbol in her name. Remember how in 2010 Texans across the state were terrified to speak their minds about issues of public concern? Remember how business in Texas courthouses ground to a halt under an avalanche of SLAPP lawsuits?

Yeah, I don’t remember that either. I’m just not convinced that SLAPPs were ever really “a thing.”

But obviously someone was concerned about SLAPPs. Legislators don’t just pass new laws without getting something in return.

I would bet that big media companies had something to do with it. That’s just a guess, but an educated guess.

It would fit a familiar pattern. When doctors and their insurance companies got tired of nuisance medical malpractice suits, they pushed the legislature to pass the Texas Medical Liability Act. When builders got tired of nuisance homeowner lawsuits, they pushed for passage of the Texas Residential Construction Liability Act. You get the idea.

I’d bet that media companies got tired of nuisance lawsuits claiming defamation and wanted the legislature to do something about it. And because the ostensible purpose of the statute was to protect First Amendment rights, they got free speech groups on board.

Don’t get me wrong, I’m all about the First Amendment. In my younger, wilder days I was even labeled the “free speech extremist” in a college seminar. But I always thought the best legal defense to an attack on First Amendment rights was, you know, the First Amendment.

Call me old-fashioned, but I like the notion that the rules of the civil litigation system ought to be the same for all kinds of lawsuits. And if you take that idea seriously, it means sometimes saying no to special-interest exceptions, even when the special interest seems like a deserving one.

Otherwise, you get civil litigation rules that look like the US Tax Code: encrusted with the barnacles of special-interest exemptions.

Hey, I get it. That’s how politics works. Special-interest protections are just the way the game is played and the sausage gets made. But us practicing litigators don’t have to like it, or pretend like it’s a good thing.

And then there’s the more practical problem with special-interest legislation: the unintended consequences. The TCPA’s definitions were so broad that people started filing TCPA motions in cases the legislature probably never intended, like trade secrets cases. See A SLAPP in the Face to Texas Trade Secrets Lawsuits – Part 1.

This did not sit well with Chamber of Commerce types. Business groups were fine with the TCPA in theory, because most businesses have better things to do than filing SLAPPs against defenseless consumers. But businesses do like to file lawsuits when their employees leave to join competitors. So when defendants started filing TCPA motions in non-compete and trade secrets lawsuits, you knew the “pro-business” groups and politicians would not be happy campers.

I put “pro-business” in quotes to question whether favoring lawsuits against employees who join competing companies is really pro-business. Usually there are two businesses involved in such a dispute: the business the employee left, and the business the employee joined. What is the real “pro-business” position in such a case, a government decree prohibiting the employee from working for a competitor, or letting the employee go where the market demands?

It would be an interesting experiment to see what would happen to business in a state if non-competes for at-will employees were generally prohibited. Would companies in that state stop investing in innovation and human resources, fearful that their investments would be wasted?

Ideally, the experiment would involve a a state that has no political or ideological baggage, like California, the world’s fifth-largest economy.

Alas, the real world is not a laboratory, so there’s no way to know for sure. But here’s a hypothesis: if Texas really wanted to favor competition and innovation, it would prohibit non-competes except in narrow circumstances like the sale of a business.

Politically, that doesn’t seem to be in the cards. For whatever reason, business groups tend to take a short-sighted, conventional view of their interests, so they like enforcement of non-competes. Carving non-compete suits out of the TCPA is the latest proof of that.

Two Wrongs Don’t Make a Right

So now we have a special-interest statute, the TCPA, with a special-interest exception, non-compete and trade secrets claims. Which one was the mistake, the original statute, or the exception?

I think you can make a case that the legislature went wrong both times. The original TCPA was ill-conceived and had language going far beyond the purported basis for the statute. You could make a good case for just scrapping the whole thing.

But if we’re going to have an anti-SLAPP statute, I don’t see why it shouldn’t apply to departing employee lawsuits. Granted, that’s probably not the kind of lawsuit legislators had in mind when they voted for the TCPA. But a non-compete or trade secrets suit is just as likely to raise “SLAPP” concerns as any other kind of lawsuit.

Mind you, I’m not bashing plaintiffs in departing employee lawsuits—I’ve represented them and will continue to do so. But any lawyer who handles non-compete cases knows there are plenty of cases of non-compete abuse.

Here’s a common scenario: a high-performing salesperson gets fed up with her job and decides to make a fresh start working for a competitor. She’s careful not to poach any customers from her first employer, but the first employer is still angry. So even though her non-compete is too broad to hold up in court and her industry doesn’t have any real secrets, the first employer sues her for breach of non-compete and misappropriation of trade secrets. They have deeper pockets and want to “send a message.”

Texas already has procedures for dismissing groundless lawsuits, but that won’t do this employee much good, because the employer’s claims are not entirely groundless.

No, what the employee needs in this situation is some way to contest the merits of the employer’s claims early in the lawsuit, before getting buried under a mountain of legal fees. Maybe a procedure where the employee files a motion that requires the employer to offer evidence to support its claims before the employee has to endure the expensive discovery process?

Ok, never mind. That would be crazy. Kind of like pro football on Thursday nights.

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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 has the original Monday Night Football theme on his iTunes. 

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.

 

Metroplex Courts Push Back on Broad Application of TCPA

Metroplex Courts Push Back on Broad Application of TCPA

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

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

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

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

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

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

You see a theme here?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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IMG_4571Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. His first law job was in that big building with the green lights. 

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

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

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

[3] Id. at *5.

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

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

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

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

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

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

The bill would make these fundamental changes:

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

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

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

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

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

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

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

How the Sausage Gets Made

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

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

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

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

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

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

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

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

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

If I Ran the Zoo . . .

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

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

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

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

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

The Preemption Predicament

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

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

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

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

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

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

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

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

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

 

Can You “Plead Around” the TCPA?

Can You “Plead Around” the TCPA?

Does the First Amendment protect the right to burn the American flag? Well, it depends. Consider three scenarios:

  1. A Boy Scout troop burns a worn-out American flag because that is the proper and respectful way to dispose of it. See 4 U.S.C. § 8(k) (“The flag, when it is in such condition that it is no longer a fitting emblem for display, should be destroyed in a dignified way, preferably by burning.”)
  2. A radical burns the flag at a lawful protest while yelling “down with American imperialism” (which tells you the radical is probably old enough to qualify for Medicare).
  3. A teenager lights an American flag in the school gym as a prank, setting off the sprinkler system and fire alarm.

One of these things is not like the other. The first two examples arguably involve some expressive component. Burning the flag is intended to express a certain viewpoint. But in the third example, there is no real communication, just conduct. Thus, the teenager would be hard pressed to argue that his flag-burning was a communication protected by the First Amendment.

But of course, communication is conduct, so we shouldn’t overstate the distinction. The point is that some conduct does not involve communication.

Conduct vs. communication in TCPA litigation

This point is important in other areas of law, too. Like, oh I don’t know, the Texas Citizens Participation Act (TCPA).

Coincidentally, I may be arguing about the TCPA in court today, and I will give a presentation on it tomorrow for the Houston Bar Association.

The conduct vs. communication distinction can be critical in TCPA litigation. How? First, let’s back up and review what we’ve learned before:

  • The TCPA is an “anti-SLAPP” statute that allows a defendant to file a motion to dismiss that requires the plaintiff to offer evidence to support all elements of its claim.
  • The TCPA applies to any lawsuit that is based on a communication about a “matter of public concern,” which can be just about anything.
  • The TCPA is not limited to its stated purpose of protecting constitutional rights; Texas courts have interpreted the TCPA’s definitions broadly to apply to just about any type of lawsuit.

As a result, the TCPA has fundamentally changed Texas litigation, including departing employee litigation, which I often handle. It has also produced some of Five Minute Law’s greatest hits, like A SLAPP in the Face to Texas Trade Secrets Lawsuits, How to Kill a TCPA Motion, and Houston Judge Calls Out Texas Supreme Court’s Simplistic “Textualist” Approach to TCPA.

As the promotional announcement for my presentation says, the TCPA has “swept through the Texas litigation world like a prairie fire.” Now that’s good marketing.

But sooner or later, you know the Empire is going to strike back. Companies that want to enforce their non-competes and protect their (alleged) trade secrets are going to push back on broad application of the TCPA. But what can they do?

One option is to try to “plead around” the TCPA. I touched on this in Much Ado About Nothing? The TCPA broadly applies to claims that are based on communications. So maybe you can avoid the TCPA by alleging conduct, not communication.

Does the TCPA apply to securities litigation?

This approach was successful in a recent case that involved yet another type of lawsuit, Texas Securities Act litigation. I also have some experience with that, having co-authored Claims and Defenses Under the Texas Securities Act, which critics have praised as the longest Texas Securities Act paper they have ever seen. But I digress.

The case was Smith v. Crestview.[1] It involved a failed investment in a scheme to develop a vaginal rejuvenation product derived from human amniotic cells.

This reminds me of the sage advice my grandpappy gave me before he passed: “Put your money into real estate. They can’t make any more of it. Oh, and one more thing. Don’t ever invest in an unproven vaginal rejuvenation product derived from human amniotic cells.”

But seriously, while the product was unusual, the basic fact pattern was all too familiar. The crucial conversation went something like this:[2]

Armstrong: Hi, Mr. Crestview Managing Partner. I’m Mary Armstrong. I’ve got a great investment opportunity for your company.

Crestview: Well, that sounds interesting, but we adhere to a conservative investment strategy, so I’ll need a lot of information.

Armstrong: No problem. I own a startup called NuVivo Bioscience Solutions. We’ve got a novel product derived from human amniotic cells.

Crestview: That sounds like a pretty speculative investment. How do I know we’ll get a good return?

Armstrong: Let me tell you what we’ve already done. We’ve manufactured prototypes. We’ve hired doctors at Stanford to test it. We have a sales force ready to go. Several surgeons have verbally committed to using the product, and we should be ready to sell it in less than 120 days.

Crestview: 120 days? What about FDA approval?

Armstrong: That’s the beauty of it. It’s a human-cellular or tissue-based product, so it’s not subject to federal testing, approval, and labeling regulations.

Crestview: Ok, that sounds good, but what if it doesn’t work?

Armstrong: Oh, I know it works. I had myself injected with the product, and it worked just like we expected.

Crestview: I’m glad to hear that but still, you’re just one person. I don’t think I can risk our partners’ money on something this risky.

Armstrong: Wait, did I mention that Dr. Jesse Smith has agreed to provide the product? We even have his name on our proposed website design.

Crestview: Dr. Smith, the renowned Fort Worth plastic surgeon? Why didn’t you say so?

Crestview then decided to invest and wired $500,000 to Armstrong’s company.

Let’s just pause here for a moment. Those of you who have experience with securities litigation probably know where this is going.

The rest of you will be shocked to learn that:

  • After receiving the half-million-dollar investment, Armstrong stopped communicating with Crestview.
  • Armstrong spent almost half of the 500 grand, mostly on personal expenses, including a trip to Vegas where she met Dr. Smith. [I will omit the joke my wife cracked when I shared this fact from the case.]
  • Armstrong’s company made no sales of the product.

If these allegations are true, then Crestview probably has a pretty good case against Armstrong. But do you think Armstrong is good for a judgment in excess of $500,000? Probably not.

Does aiding and abetting require a communication?

So, Crestview did what investors often do in these cases. It found a deeper pocket, suing Dr. Smith for aiding and abetting Armstrong’s securities fraud.[3]

Dr. Smith’s lawyers apparently read Five Minute Law, because they knew that Texas courts have broadly applied the TCPA. They filed a TCPA motion to dismiss, contending that the Texas Securities Act claim was “designed to chill Dr. Smith’s First Amendment rights of free speech and association.” The trial court denied the motion, and Dr. Smith appealed.

Crestview’s lawyers, no doubt remembering the flag-burning case from their Con Law course, responded with the conduct vs. communications distinction. They argued that the securities claim was based on Smith’s conduct, not his communications, and the Fort Worth Court of Appeals agreed.

The Court of Appeals relied heavily on Crestview’s pleading:

In this case, Crestview specifically and narrowly alleged that Smith’s actions aided Armstrong in her violations of the TSA, not his communications. None of the allegations leveled against Smith referred to communications with Armstrong. Rather, Crestview focused on Smith’s actions and inactions . . .

Aha! So you can plead around the TCPA. Just be sure to allege only conduct, not communication, by the defendant. For example, in a trade secrets case just allege that the former employee used the employer’s trade secrets after going to work for the competitor, rather than pleading that the employee disclosed the trade secrets to the competitor.

Not so fast. The Crestview court was careful to “recognize that artful pleading cannot be a detour around the TCPA.” Still, the court rejected Smith’s argument that the “actual, yet unpleaded” nature of Crestview’s claim was based on communications with Armstrong.

It appears two factors were important to the court. First, while Smith testified at his deposition that he had discussions with Armstrong about the product, “these discussions are not the basis of Crestview’s narrow claim against him.”

Second, the court did not want to open the floodgates: “The practical effect of Smith’s position—any action he took as an aider under the TSA necessarily involved communications—would seem to extend the definition of communication, and thus the reach of the TCPA, to noncommunications.”

So, Crestview teaches us that the TCPA does not apply to a claim for aiding and abetting liability that is not expressly based on communications between the “aider” and the primary actor.

We can build, a beautiful city . . .

The Crestview holding does not strike me as unreasonable. But it’s a little unsatisfying.

The first problem with the Crestview approach is that communication is implicit in just about any conduct someone can get sued for, but the case doesn’t really tell us how to distinguish between a claim that is based on the communication and one that isn’t. Perhaps the test is whether the cause of action could survive without proof of the communication. Or is it whether the communication was a factor that motivated the plaintiff to sue? We don’t know.

The second problem is more practical. The Crestview holding seems to open the door to plaintiffs “pleading around” the TCPA through “artful pleading.”

Imagine that I burn an American flag outside the Houston City Hall to protest the City’s rules against food trucks parking on downtown streets. To retaliate, the City charges me with burning property without a permit and, to try to get around the First Amendment, the City doesn’t say anything about any communication. Would that legal action be based on communication, or conduct?

As much as I like taco trucks, let’s not test 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. The only time he was part of any flag-burning was in Boy Scouts.

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

[1] Smith v. Crestview NuV LLC, __ S.W.3d __, No. 02-18-00220-CV, 2018 WL 6215763 (Tex. App.—Fort Worth Nov. 29, 2018, no pet. h.).

[2] Obviously I’m making up this dialog and have no knowledge of how the discussion actually went. But this does give you the gist of the facts recited in the court’s opinion.

[3] The Texas Securities Act does not actually use the words “aiding and abetting,” but the traditional phrase just has a nice ring to it.

Houston Judge Calls Out Texas Supreme Court’s Simplistic “Textualist” Approach to TCPA

Houston Judge Calls Out Texas Supreme Court’s Simplistic “Textualist” Approach to TCPA

I don’t know if Justice Terry Jennings is one of my Fivers, but apparently he agrees with a lot of Five Minute Law’s past propaganda regarding textualist application of the Texas Citizens Participation Act (TCPA).

In a concurring opinion issued just before Christmas 2018, Justice Jennings criticized the Texas Supreme Court’s overly broad and literal interpretation of the TCPA, urging both the legislature and the Texas Supreme Court to fix the problem. His opinion echoes some of the points I made in past hits like It’s Alive, It’s ALIVE! How to Kill a TCPA Motion in a Trade Secrets Lawsuit.

But what’s the problem? First let’s back up a little and recap:

  • The TCPA was intended as an “anti-SLAPP” statute, i.e. to discourage a litigation bully from filing a lawsuit against a “little guy” in retaliation for the little guy exercising his free speech rights.
  • When the TCPA applies, it gives the defendant the valuable procedural right to file a motion to dismiss that puts the burden on the plaintiff to support its claims with evidence, before the plaintiff has had any opportunity to take discovery.
  • The TCPA applies when the plaintiff’s claim “is based on, relates to, or is in response to” the defendant’s exercise of the “right of free speech” or the “right of association.”
  • The statute defines the “exercise of the right of free speech” broadly as a “communication made in connection with a matter of public concern,” with “matter of public concern” also defined broadly to include an issue related to “a good, product, or service in the marketplace.”[1]
  • The statute defines the “exercise of the right of association” broadly as “a communication between individuals who join together to collectively express, promote, pursue, or defend common interests.”[2]

You can see from this language how the TCPA could lead to good results. A neighborhood group forms to stop a nearby refinery from releasing toxic gases. Global Oil Conglomerate instructs its BigLaw minions to sue the group for defamation based on posts on its Facebook page. Rather than buckling under the weight of enormous legal fees, the plucky neighborhood group hires a small town lawyer to file a TCPA motion to dismiss. The judge grants the motion, orders Global to pay the group’s legal fees, and Matthew McConaughey wins an Oscar for his portrayal of the lawyer.

Everyone’s happy. Alright, alright, alright.

But you can also see how the broad language of the TCPA could apply to lawsuits the legislature never had in mind. Imagine a porn star sues the President for defamation. The judge dismisses the case and orders the porn star to pay the President’s legal fees. It could happen.

That was at least a defamation case, which is clearly the type of case the legislature had in mind when it passed the TCPA. It seems much less likely that the legislature intended to fundamentally change the way departing employee cases are litigated.

Departing employee litigation is near and dear to my heart because it’s the kind of lawsuit I often handle. This is the type of case where an employee or group of employees leaves a company and either forms a competing company or goes to work for a competitor. Usually the first company asserts claims like breach of a non-compete and misappropriation of trade secrets.

These cases usually don’t raise any true “free speech” or “free association” issues. The “right of association” is not a defense to enforcement of a non-compete (provided the non-compete is reasonable and enforceable), and there is no First Amendment right to communicate your employer’s trade secrets to a competitor.

So what should the judge do in a departing employee case where the defendant files a TCPA motion to dismiss? On the one hand, the TCPA applies when a claim is based on “a communication between individuals who join together to collectively express, promote, pursue, or defend common interests.” Construed literally, that language applies to the allegation that an employee joined a competitor and disclosed his former company’s trade secrets.

On the other hand, the purpose of the statute is to protect constitutional rights, and a claim of trade secret misappropriation really doesn’t implicate such rights. Should the judge apply the statute literally, even though the result is not what the legislature intended?

Enter textualism.

We are all textualists now

Textualism is somewhat controversial. In part this is because in practice textualism is popular with one particular political party and ideology. But everyone who works in the law—at least everyone who is serious—is a textualist to some extent. No one seriously argues that the text of a statute—or a Constitution—should be ignored.

The fact that we are all textualists to some extent is apparent in the absence of any real “-ism” that is the opposite of “textualism.” No group identifies itself as the “Non-Textualists” or the “Anti-Textualists.” (The same point applies to “originalism,” but I won’t open that can of worms here.)

No, we all agree that when you interpret a text, the starting point is, duh, the text. You might find some radical academic types who question that premise, but no one who works in the law would seriously say “the text of the statute is totally irrelevant to me.”

On the other side of the spectrum, even the most committed textualist will concede that sometimes a judge should look to extrinsic sources to interpret the text. For example, if a statute is ambiguous, even after applying canons of statutory construction, then just about everyone would agree you can look to the purpose of the statute, or some other extrinsic source, to  decide which of two reasonable constructions of the statute makes more sense.

Similarly, even the strict textualist camp would concede the principle—recognized in many court decisions—that extrinsic sources should be consulted when the literal application of a statute would produce a truly absurd result.

So if we all agree on these basic principles, what’s all the controversy about?

Here’s where it gets hard: when literal application of a statute would produce a result that, while not rising to the level of absurd, is contrary to the intended purpose of the statute. That’s where I think the dividing line is.

In this scenario, the true textualist bites the bullet and says “no, the judge should not look outside the text of the statute just because the result doesn’t make sense to the judge.”[3]

This is where textualism loses me, and I’m not the only one. When the literal application of a statute would produce a result at odds with the intended purpose of a statute, I tend to side with the non-textualists who say “no, in this case we’re not going to apply the literal meaning of the statute.” As I’ve written before, following the literal text in this situation “thwarts the intent of the legislature in the name of deference to the legislature.” See A SLAPP in the Face to Texas Trade Secrets Lawsuits – Part 2.

And I’ll give you a good example: application of the TCPA to departing employee litigation.

Application of the TCPA to departing employee litigation

Step one was the Texas Supreme Court holding in Coleman that the plain meaning of the TCPA’s broad definitions must be applied.[4] The Texas Supreme Court reaffirmed this plain meaning approach in Adams.[5]

Step two was the Austin Court of Appeals holding in Elite Auto Body that the TCPA applies to a claim that a departing employee disclosed trade secrets to his new employer. The court reasoned that a literal reading of the statute’s definition of “communication” would clearly include alleged communications among the departing employees and their new enterprise through which they allegedly shared or used the confidential information at issue.[6]

Elite Auto Body acknowledged that it would be reasonable to limit the statute to its stated purpose of protecting constitutional rights, but it found that argument foreclosed by Coleman’s plain meaning approach.[7]

One more note about Elite Auto Body: the court did not address the argument that the claims fell under the TCPA’s “commercial speech” exemption because it found that issue had been waived.[8] More about this exemption later.

Application of the TCPA to departing employee cases has since expanded. In Craig v. Tejas Promotions, the Austin Court of Appeals held that the TCPA applies to a claim of conspiracy to misappropriate trade secrets. The court reasoned that the claim rested on allegations that included “communications” between the alleged co-conspirators.[9]

In Morgan v. Clements Fluids, the Tyler Court of Appeals held that the TCPA applies to a claim based on departing employees’ communications among themselves and within the competitors, through which they share or utilize the alleged trade secrets.[10]

And that brings us to Gaskamp.

Gaskamp applies the TCPA to departing employee claims

In Gaskamp v. WSP, the WSP companies sued a group of former employees for allegedly starting a competing company while employed by WSP and then taking WSP’s trade secrets to the new company. WSP alleged that the former employees violated the Texas Uniform Trade Secrets Act (TUTSA) by using and disclosing WSP’s trade secrets, including proprietary design software used to create architectural designs.[11]

WSP argued that the TCPA did not apply. First, WSP said its lawsuit was based on theft and use of its trade secrets, not the employee’s right to freely associate or right of free speech as required by the TCPA. Second, WSP argued that the TCPA’s commercial-speech exemption applied.

The Court of Appeals rejected the first argument. The court cited WSP’s allegations that the employees used and disclosed WSP’s trade secrets to establish a competing engineering firm called Infinity MEP. The court reasoned that the alleged “transfer and disclosure” of WSP’s trade secrets to Infinity MEP “required a communication.” In addition, the allegation of inducing customers to reduce their business with WSP would “necessarily involve communications as defined by the TCPA.” And the allegation that the employees conspired among themselves to misappropriate trade secrets and interfere with WSP’s business also necessarily involved a communication.[12]

“All these communications were made by individuals who ‘join[ed] together to collectively express, promote, pursue, or defend common interests,” the court said, “the common interest being the business of Infinity MEP, operating as WSP’s competitor.” The alleged interference with customers involved communication “made in connection with a matter of public concern.” Thus, the claims related to the employees’ exercise of their rights of association and free speech, respectively, as broadly defined by the TCPA.[13]

This part of Gaskamp is important because the same reasoning would apply in almost any suit against departing employees that involves misappropriation of trade secrets. A plaintiff might be able to avoid this part of Gaskamp by alleging use of the trade secrets without any allegation of disclosure or communication of the trade secrets, but even in that case the employee could argue that the allegation necessarily relates to communications with the customers. The argument that the TCPA does not apply to trade secret misappropriation seems unlikely to succeed.

But the second argument in Gaskamp may be more promising for plaintiffs in departing employee cases. WSP argued that the statute’s commercial-speech exemption applied. That exemption states that the TCPA does not apply to a suit against “a person primarily engaged in the business of selling or leasing goods or services, if the statement or conduct arises out of the sale or lease of goods, services, or an insurance product, insurance services, or a commercial transaction in which the intended audience is an actual or potential buyer or customer.”

The Court of Appeals agreed with this argument (although for narrow procedural reasons).[14] Thus, the commercial-speech exemption applied, and the trial court was correct to deny the employees’ motion to dismiss under the TCPA as to two of the WSP plaintiffs.

This was no consolation for a third WSP plaintiff that failed to file a response to the TCPA motion (believing it had already been non-suited from the case). As to that entity, the Court of Appeals held that the motion to dismiss should have been granted.[15]

But at least one justice thought this result was “manifestly unjust.”

Justice Jennings questions the “textualist” approach to the TCPA

Justice Jennings wrote a concurring opinion. He joined in the majority opinion but wrote separately “to warn of the inherent dangers to Texas Jurisprudence posed by a rigid adherence to the ideological doctrine of so-called ‘textualism’ in construing our Constitution and statutes.”[16]

By applying the literal text of the TCPA’s definitions without considering the purpose of the statute, Justice Jennings said, the Texas Supreme Court has interpreted the TCPA “much more broadly than the Texas Legislature ever intended.” Applying the Texas Supreme Court’s literal interpretation of the statutes definitions necessarily led to a “manifestly unjust and absurd result,” but he and his colleagues were required to apply the definitions as instructed by the higher court.[17]

Still, Justice Jennings wanted to make his own view clear:

I respectfully disagree with the Texas Supreme Court’s unnecessarily broad interpretation and application of the TCPA to matters that exceed its expressly stated purpose to protect only the constitutional rights of free speech, to petition, and of association. A reasonable interpretation of the TCPA, when read in its entirety, reveals that it was never intended to apply to any of the claims at issue in this case. It should go without saying that communications allegedly made in furtherance of a conspiracy to commit theft of trade secrets and breaches of fiduciary duties do not implicate “citizen participation.”[18]

Justice Jennings went on cite the statute’s stated purpose “to encourage and safeguard the constitutional rights of persons to petition, speak freely, associate freely, and otherwise participate in government,” language indicating “the legislature intended to protect only constitutionally-protected freedoms that rise to such a level that they can be considered participation in government.”[19]

He acknowledged that the statute’s “awkward” definitions, standing alone, appear to include communications that are not constitutionally protected but said “we cannot read these definitions in isolation.” While the plain meaning is the best expression of legislative intent, that is not the case when “a different meaning is apparent from the context or the plain meaning leads to absurd or nonsensical results.”[20]

In Justice Jennings’ view, the broad definitions in the TCPA should be limited by the statute’s expressly-stated purpose of safeguarding constitutional rights. “Here, unfortunately, the Texas Supreme Court, in construing the TCPA by focusing like a laser on the literalness of the bare words of its pertinent definitions, has effectively strangled the real meaning and purpose of the statute.”[21]

But again, Justice Jennings was careful to concede that the Court of Appeals is bound by the decisions of the Texas Supreme Court. That’s why he wrote a concurring opinion rather than a dissent.

So what is to be done? Justice Jennings urged two potential solutions: (1) the legislature should revise the TCPA’s definitions to include qualifying language repeating the stated purpose of the TCPA to protect constitutional rights, and (2) the Texas Supreme Court should “revisit and correct is overly-broad interpretation of the TCPA.”[22]

Those sound like reasonable suggestions. But convincing the Texas Supreme Court to change its approach sounds like an uphill battle. And the legislature? Who knows. I’m not sure there’s any powerful interest group that has enough of a stake in reigning in the TCPA. Maybe business groups who want to make it easier to protect trade secrets and stop employees from competing?

But in the meantime, as we’ve already seen, the Gaskamp opinion suggest a simpler way to limit the application of the TCPA to departing employee litigation.

A textualist solution to the TCPA problem?

The solution I have in mind is right out of Shakespeare. The Merchant of Venice teaches us that when the bad guy goes textualist, the way to beat him is to go hyper-textualist. When Shylock insists on enforcing the plain meaning of a “pound of flesh,” Portia responds that his contract means exactly a pound—no more, no less. And only a pound of “flesh”—nothing else.

The commercial-speech exemption applied in Gaskamp could offer plaintiffs in departing employee cases a similar way out of the TCPA. The exemption applies when the defendant’s “statement or conduct” arises out of the sale or lease of goods or services.

What if we apply that definition literally? One could argue that a departing employee’s use or disclosure of the employer’s trade secrets always arises from the sale or lease of goods or services. What the TCPA giveth as “communication,” it taketh away as “commercial speech.”

Maybe that could work. But strangely enough, the Texas Supreme Court has not construed the commercial speech exception literally, instead adopting a four-part test based on the “context” of the exemption. See Castleman v. Internet Money Ltd., 546 S.W.3d 684, 688 (Tex. 2018).

What’s up with that?

___________________________________________________________________

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. So far no videos of him dancing on a rooftop in college have surfaced.

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

[1] Tex. Civ. Prac. & Rem. Code § 27.001(3), (7).

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

[3] The realists—another camp!—might question how many “textualists” actually do this in practice when applying the literal text would yield a result they don’t like. But in theory this is what the true textualist is supposed to do.

[4] ExxonMobil Pipeline Co. v. Coleman, 512 S.W.3d 895, 901 (Tex. 2017).

[5] Adams v. Starside Custom Builders, LLC, 547 S.W.3d 890, 894-97 (Tex. 2018).

[6] Elite Auto Body LLC v. Autocraft Boywerks, Inc., 520 S.W.3d 191, 205 (Tex. App.—Austin 2017, pet dism’d).

[7] Id. at 204.

[8] Id. at 206 n.75.

[9] Craig v. Tejas Promotions, LLC, 550 S.W.3d 287, 296-97 (Tex. App.—Austin 2018, pet. filed). See also Grant v. Pivot Tech. Solutions, Ltd., 556 S.W.3d 865, 881 (Tex. App.–Austin 2018, pet. filed) (TCPA applied to claims similar to those in Elite Auto Body based on hiring of competitor’s employees and alleged sharing and use of confidential information).

[10] Morgan v. Clements Fluids South Texas, Ltd., No. 12-18-00055-CV 2018 WL 5796994, at *3 (Tex. App.—Tyler Nov. 5, 2018, no pet. h.).

[11] Gaskamp v. WSP USA, Inc., No. 01-18-00079-CV, at *1-3 (Tex. App.—Houston [1st Dist.] Dec. 20, 2018).

[12] Id. at *11.

[13] Id. at *12 (citing Tex. Civ. Prac. & Rem. Code §§ 27.001(2), (3), 27.003(a)).

[14] Id. at *9.

[15] Id. at *13.

[16] Id.

[17] Id.

[18] Id. at *14 (citation omitted).

[19] Id.

[20] Id. at *15 (citing Molinet v. Kimbrell, 356 S.W.3d 407, 411 (Tex. 2011)).

[21] Id. at *16.

[22] Id.

It’s Alive, It’s ALIVE! How to Kill a TCPA Motion in a Trade Secrets Lawsuit

It’s Alive, It’s ALIVE! How to Kill a TCPA Motion in a Trade Secrets Lawsuit

It’s Franken-steen

First let’s get something out of the way. The Texas Citizens Participation Act (TCPA) is a Frankenstein’s monster that the legislature created and now needs to reign in (not that they listen to me).

As I explained in a three-part series back in the summer of 2017, the TCPA grants defendants in certain cases the unusual right to require the plaintiff to prove its case before taking any discovery. In litigator jargon, it effectively lets the defendant file a “no-evidence” motion for summary judgment without first requiring an adequate time for discovery.

The statute was intended to curtail “SLAPP” lawsuits, e.g. where a big company sues a “little guy” in retaliation for exercising his right to publicly criticize the company. The idea was to stop litigation bullies from using groundless lawsuits to grind ordinary people into submission under the weight of crushing legal fees.

But the legislature in its wisdom used broad language in the TCPA, and the Texas Supreme Court applies the plain meaning of statutes (in theory). So the TCPA has taken on a bizarre life of its own. It can apply to just about any kind of lawsuit, including “departing employee” lawsuits where a company claims its former employees misappropriated trade secrets or other confidential information.

This really makes no sense. There is no compelling public policy reason why some defendants should have a right to file a motion to dismiss before any discovery takes place and others should not, depending on whether the lawsuit falls under the byzantine definitions in the TCPA.

Might this have been avoided by construing the statute “liberally”–rather than literally–as the statute itself tells courts to do?[1]

Maybe. But that ship has sailed. As Justice Pemberton wrote in a recent dissent, Texas courts now apply the TCPA as written, even when the implications “sound crazy.” As he noted, unintended consequences are likely when courts interpret statutes “superficially in a mistaken perception of plain-meaning textualism.”[2] So here we are.

The bottom line is that the TCPA will apply to most trade secrets lawsuits in Texas state court. And maybe in federal court too.

This raises several strategic questions in a Texas trade secrets lawsuit:

1. Can the plaintiff avoid the TCPA by filing the trade secrets lawsuit in federal court under the federal trade secrets statute?

2. Can the plaintiff in a trade secrets suit avoid the TCPA by “pleading around” it?

3. When should the defendant in a trade secrets case file a TCPA motion to dismiss?

4. What evidence does a trade secrets plaintiff need to offer to defeat a TCPA motion to dismiss?

In the words of MC Hammer, let’s “break it down.”

Some trade secrets strategery

First, it’s possible that the plaintiff may be able to avoid the TCPA by filing the trade secrets lawsuit in federal court rather than state court. The federal Defend Trade Secrets Act (DTSA) allows a plaintiff to file a trade secrets lawsuit in federal court as long as the case has some connection to interstate or foreign commerce, which means virtually every case.

Courts are divided about whether the TCPA applies in a federal case, and the Fifth Circuit has not yet resolved the issue.[3] It turns on whether the TCPA is considered “procedural” or “substantive,”[4] which is kind of like asking whether the Beatles were a rock band or a pop band.

Law professors and people who were on law review love this kind of question. Personally, I’m less intrigued. I initially assumed the TCPA was procedural and would not apply in federal court, but there are people smarter than me who argue it is substantive, and I’ll concede you can make a reasonable case for that. (If you want more details on this issue see the good summary in this Law360 article by April Farris and Matthew Zorn.)

If I had to predict, I’d say the Fifth Circuit will hold that the TCPA does not apply in federal court. But for now it remains an open question.

That means that filing your trade secrets lawsuit in federal court won’t necessarily get you out of the TCPA woods. Your choice of state or federal court will likely depend on other considerations, i.e. whether you prefer a judge appointed for life who can do whatever the *#$% he wants, or a judge with no experience who got swept into office because he picked the right political party.

Regardless of where you file your trade secrets suit, you can try to avoid a TCPA motion by pleading around the TCPA. Without getting too much into the weeds, the TCPA applies to claims that relate to “communications” about a matter of public concern. So one theory is that the plaintiff in a departing employee case can avoid the TCPA by pleading only use of the trade secrets rather than disclosure of the trade secrets. Disclosing a trade secret to the new employer is obviously “communicating” the information, so just don’t say anything about disclosure.

That’s what I mean by “pleading around” the TCPA. But this may be easier said than done. Even if the plaintiff does not expressly plead that the employee disclosed the trade secrets to the new employer, that allegation will often be implied.

Plus, the mere allegation that the employee has joined another company and used the plaintiff’s trade secrets may be enough to ensnare the plaintiff in the TCPA’s definitional web. The TCPA covers “a communication between individuals who join together to collectively express, promote, pursue, or defend common interests.”[5] Arguably, any time an employee goes to work for a competitor, there is necessarily going to be communication between employee and employer to “collectively . . . pursue . . . common interests.”

So, omitting allegations of trade secrets disclosure from your pleadings may not be sufficient to avoid the TCPA.

Defense wins championships

Now let’s look at it from the other side. If you represent the defendant in a trade secrets case, should you file a motion to dismiss under the TCPA? I see three potential benefits:

(1) obviously, the potential early dismissal of the lawsuit;

(2) smoking out the plaintiff and making him put his cards on the table (talk about mixed metaphors); and

(3) slowing down the plaintiff’s momentum.

Also, if you win the motion you have the right to recover legal expenses “as justice and equity may require.”[6]

The potential downside of filing a TCPA motion in a trade secrets case is that, if the court finds your motion was “frivolous or solely intended to delay,” you will lose the motion and be ordered to pay the plaintiff’s attorneys’ fees for responding to the motion.[7] That’s a momentum shift like throwing a pick-six in the first quarter.

So, deciding whether to file a motion to dismiss a trade secrets case will likely come down to whether you think the plaintiff has enough evidence to prove the claim.

This gets us to the last question: if the defendant files a motion to dismiss, what evidence does the plaintiff need to offer to defeat the motion?

As a threshold matter, the plaintiff can try to prove the TCPA does not apply to the lawsuit. But if the TCPA applies, the plaintiff will need to offer evidence of three essential elements:

(1) the information at issue is a “trade secret”;

(2) the defendant “misappropriated” the trade secret; and

(3) the misappropriation caused some injury to the plaintiff.

I cover the key points of these elements in my Trade Secrets 101 memo (soon to be updated and published in the Texas Journal of Business Law). And a recent opinion from the Tyler Court of Appeals provides a roadmap for offering evidence to support these elements.

But if that salt has lost its flavor . . .

In Morgan v. Clements Fluids South Texas, three employees left Clements, an oil and gas services company, to work for two competitors. Clements claimed it trained the employees on its proprietary system for well completion and production called “salt systems.” It sued the former employees in state court for breach of their NDAs and misappropriation of trade secrets, and the employees filed a motion to dismiss under the TCPA.[8]

The defendant employees met their initial burden to show that the trade secrets claim was factually predicated on conduct that falls within either the “exercise of the right of association” or the “exercise of free speech,” as defined by the TCPA. The court reasoned that the claim was “based on, relates to, or is in response to,” at least in part, the employees’ communications among themselves and within the competitors through which they allegedly “shared or utilized” the alleged trade secrets.[9]

The court then turned to the plaintiff’s burden to establish by “clear and specific” evidence a prima facie case for each element of its trade secrets claim. The TCPA “does not impose an elevated evidentiary standard,” the court said, “and circumstantial evidence and rational inferences may be considered.”[10]

To prove the information at issue was a trade secret, Clements claimed it had a confidential method for salt systems that gave it a competitive advantage. Its vice president signed an affidavit stating that Clements invested millions of dollars for almost 33 years on research, development, training, and testing of its salt systems, that its system was not available through any outside source, that the system was not available outside the company, and that the system had made Clements the industry leader. The Court of Appeals concluded this was sufficient “clear and specific” evidence of a trade secret.[11]

Whether the employees misappropriated the trade secrets was a closer call. The defendants argued that Clements failed to prove misappropriation because it did not show the employees actually used the trade secrets. The employees signed affidavits denying that Clements provided them with any training they did not have before working for Clements, and denying they shared any Clements information with any third party.[12]

But the court found that Clements offered sufficient evidence of misappropriation to avoid dismissal. Specifically, Clements established:

(1) The employees had no experience in salt systems before working for Clements.

(2) Clements trained the employees to perform salt systems and disclosed its proprietary formula to them.

(3) The employees left Clements to go to a company, Greenwall, that was not doing salt systems.

(4) Shortly after that, Greenwell launched a salt systems business, announcing it in a website post authored by one of the employees.

(5) Greenwell then performed a salt systems job for Pioneer, one of Clements’ customers.

“Given Clements’ description of the time, money, and effort dedicated to the development of its salt systems,” the court said, “it is reasonable to conclude from the totality of the circumstantial evidence that [the employees] used Clements’ proprietary and confidential information in concert with Greenwell to launch its salt systems business.”[13]

Finally, Clements had to offer evidence it was injured by the trade secrets misappropriation. “The burden of proof on damages for misappropriation of trade secrets is liberal,” the court said, “and is satisfied by showing the misappropriation, the defendant’s subsequent commercial use, and evidence by which the jury can value the rights the defendant obtained.” The Texas Supreme Court does not require the plaintiff to establish a specific amount of damages in response to a TCPA motion. Clements was only required to offer evidence supporting a “rational inference as the existence of damages, not their amount or constituent parts.”[14]

The defendants argued that Clements failed to link its loss of the Pioneer job to the alleged misappropriation of trade secrets, but the court disagreed. Greenwell did not previously do salt systems jobs, it performed a salt systems job for Pioneer shortly after the Clements employees joined, and Clements had previously performed all of Pioneer’s salt systems jobs. This was sufficient circumstantial evidence to link the alleged misappropriation to Clements’ loss of Pioneer’s business, establishing an injury to Clements.[15]

The Morgan case teaches us that, while speculation and assumption are not evidence of trade secret misappropriation, you don’t need surveillance camera footage of the employee handing over the secret formula either. It’s enough to offer circumstantial evidence creating a reasonable inference that an employee has used the information to help a competitor take business from the plaintiff.

But Morgan was somewhat unusual. The plaintiff had actual evidence of a secret method that other competitors (allegedly) did not know or practice.

Most trade secrets cases don’t have this. The typical case involves “soft” trade secrets like customer lists, prices, and customer information. And usually the two competitors both do the same kind of non-confidential business before and after the employee changes jobs. In these cases, the fact that a customer follows an employee from one company to another doesn’t necessarily prove the employee used any confidential information. It could just mean the employee has a good relationship with the customer.

So plaintiffs in soft trade secrets cases beware. You will probably need “something more” than losing a customer to defeat a TCPA motion. At least until the legislature fixes the monster it created.

*Update: See also McDonald Oilfield Operations, LLC v. 3B Inspection, LLC, No. 01-18-00118-CV, 2018 WL 6377432 (Tex. App.–Houston [1st Dist.] Dec. 6, 2018) (reversing trial court’s denial of TCPA motion to dismiss in departing employee case involving competitors in the pipeline monitoring business). 

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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. Most of his posts don’t have so many footnotes.

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

[1] Tex. Civ. Prac. & Rem. Code § 27.011(b) (“This chapter shall be construed liberally to effectuate its purpose and intent fully”).

[2] Hawxhurst v. Austin’s Boat Tours, 550 S.W.3d 220, 233-35 (Tex. App.—Austin 2018, no pet.).

[3] Thoroughbred Ventures, LLC v. Disman, No. 4:18-CV-00318, 2018 WL 3472717, at *3 (E.D. Tex. July 19, 2018).

[4] Even if the TCPA is substantive, it may not apply in federal court because it conflicts with Federal Rules of Civil Procedure 12 and 56. Id. at *3.

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

[6] See Tex. Civ. Prac. & Rem. Code § 27.009(a)(1). A successful movant also has the right to recover sanctions sufficient to deter the plaintiff from filing similar lawsuits, see § 27.009(a)(2), but it will probably be a rare trade secrets case where the court finds such sanctions are needed in addition to attorneys’ fees.

[7] See Tex. Civ. Prac. & Rem. Code § 27.009(b) (“If the court finds that a motion to dismiss filed under this chapter is frivolous or solely intended to delay, the court may award court costs and reasonable attorney’s fees to the responding party”).

[8] Morgan v. Clements Fluids South Texas, Ltd., No. 12-18-00055-CV, 2018 WL 5796994, at *1 (Tex. App.—Tyler Nov. 5, 2018, no pet. h.).

[9] Id. at *3.

[10] Id. at *4 (citing In re Lipsky, 460 S.W.3d 579, 586 (Tex. 2015)).

[11] Id. at *5-6.

[12] Id. at *7.

[13] Id. at *8. However, as to a third employee, Laney, the court held that Clements did not meet its burden. Unlike the evidence concerning the first two employees, Clements offered no evidence, circumstantial or otherwise, that Laney disclosed or used the trade secrets at his subsequent employer, ChemCo. And there was no evidence of whether Chemco had performed salt systems before, or that Laney performed any salt systems jobs with ChemCo. Id.

[14] Id.

[15] Id. at *8-9.

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

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

Part 3 of 3 in my series

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But that’s a big “if.”

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

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

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

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

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

*Update: The Austin Court of Appeals returned to applying the TCPA to a trade secrets claim in Craig v. Tejas Promotions, LLC, No. 03-16-00611-CV, 2018 WL 2050213 (Tex. App.–Austin May 3, 2018), holding that the TCPA applied to a claims for conspiracy to misappropriate trade secrets. This case suggests that, as I predicted, some plaintiffs will continue to plead communication of the alleged trade secrets, which invites a TCPA motion to dismiss.

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

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

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

Or just make a federal case of it

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

Or would it? I will let the appellate lawyers and former law review editors discuss among themselves. (Narrator: whether you can file a TCPA motion in federal court would actually become a hot issue and even be raised in a suit involving the President.)

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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. 

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

[1] Elite Auto Body LLC v. Autocraft Bodywerks, Inc., No. 03-15-00064-CV, 2017 WL 1833495, 520 S.W.3d 191 (Tex. App.—Austin 2017, pet dism’d).

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

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

[4] See my disclaimer about forms above.

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

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

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

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