Head First Into the Abbiss: Temporary Injunction Rulings in Recent Texas Non-Compete Cases

Head First Into the Abbiss: Temporary Injunction Rulings in Recent Texas Non-Compete Cases

Offer evidence of “imminent harm” and “irreparable injury,” even if judges don’t always require it

In a non-compete lawsuit, the temporary injunction hearing is often the key event, for two reasons.  First, a reasonable time limit for the non-compete is usually around the same time that the case takes to go to trial. So, if the judge enters a temporary injunction enforcing the non-compete until trial, it can be practically the same as a permanent injunction.

Second, a temporary injunction puts the company in the driver’s seat in settlement negotiations. Most employees will have to make a deal with the company, because otherwise they won’t be able to make a living.

Conversely, if the judge denies a temporary injunction, then the company is probably never going to get any injunction. That means the company is limited to seeking damages. This is significant in a Texas non-compete case, because if the non-compete is overbroad as written, the company can’t get damages either.[1]

So the stakes are high at the temporary injunction hearing. That means the lawyers better be prepared to address the enforceability of the non-compete and the traditional requirements for a temporary injunction, because some judges still care about those things.

1. A temporary injunction should be denied if the employee has not competed in the geographic area he was responsible for at the first company

In Cameron International v. Abbiss, the judge denied a temporary injunction because the employee had not breached the non-compete as limited to a reasonable geographic area.[2]

Abbiss signed a one-year non-compete with his employer, Cameron. He later went to work for a competitor, FMC, as its General Manager for the Middle East. Cameron sued Abbiss in federal court and sought a preliminary injunction.

The court found the non-compete as written was overbroad. A reasonable geographic limit would be Oman and Yemen, the court said, because (1) those were the countries Abbiss was responsible for during his last two years of employment, and (2) the evidence did not support Cameron’s claim that Abbiss received confidential Cameron information regarding the entire Middle East. The court found that much of the information Abbiss received at the meeting at issue was either publicly available or was available to employees who did not have non-competes.

The question, then, was whether to enter a preliminary injunction barring Abiss from competing in Oman and Yemen, the reasonable geographic area. The court said no, because (1) there was no evidence Abbiss had competed or intended to compete in Oman or Yemen, and (2) the confidential information Abbiss obtained regarding bids in other Middle East countries was more than six months old and likely stale.

In short, the court in Abbiss denied a temporary injunction because there was no evidence the employee breached or intended to breach the non-compete within the geographic area the court found was reasonable.

2. Judges are not always strict about the “irreparable injury” requirement

In Fantastic Sams v. Mosley, Mosley opened a competing hair salon in violation of his two-year non-compete, which covered a five-mile radius from a Fantastic Sams franchise in Cypress (the Houston suburb, not the Mediterranean island).[3]  After finding the non-compete was reasonable, the judge found that Mosley’s violation of the non-compete was likely to cause irreparable injury:

Fantastic Sams . . . argued the existence of Mosley’s nearby salon, which offers nearly identical hair care services to Fantastic Sams, prevents Fantastic Sams from licensing a new franchise in the area. The court also notes that the Agreement actually contains a provision that requires Mosley to concede that violations of the Agreement constitute irreparable harm to Fantastic Sams. The court agrees with Fantastic Sams that Mosley’s continued operations of a nearby salon, in violation of the Agreement, hurts other franchisees, poses a risk of loss of goodwill, and inhibits the opening of new Fantastic Sams franchises in the area. All of these injuries cause irreparable harm to Fantastic Sams as a whole, and that harm cannot be fully remedied with damages.

“Identical hair care services.” I love that part. I can only assume there was testimony that both salons offered a unique proprietary combination of shampooing, cutting, and blow drying. But I digress.

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Does this look like “irreparable injury”?

The passage above from Fantastic Sams is typical of cases granting a temporary injunction to enforce a non-compete. Judges often apply the “irreparable injury” requirement loosely, especially when there is a clear violation of the non-compete.

Yes, there was a contractual stipulation to irreparable harm, but surely that can’t be dispositive. Almost every non-compete has a clause like this, so allowing it to substitute for actual evidence of irreparable injury would effectively abolish the irreparable injury requirement in non-compete cases.

And I don’t read Fantastic Sams as saying that a contractual stipulation, by itself, is sufficient. My practical takeaway from the case, and others like it, is that it’s easier to clear the “irreparable injury” hurdle when the judge sees that the defendant is behaving badly by blatantly breaching a reasonably limited non-compete.

3. Companies should present evidence of imminent harm, not just an argument about “inevitable disclosure”

While courts don’t always apply the “irreparable injury” requirement strictly, DGM Services v. Figueroa shows that the company trying to obtain a temporary injunction still needs to offer evidence that harm has already happened or is about to happen.[4]

In that case, DGM’s president, Petillon, testified that Figueroa received confidential financial information on budgets, revenues, and costs while working for DGM. He expressed concern that Figueroa would use his knowledge to undercut DGM’s prices and gain an unfair advantage. But Petillon did not know if Figueroa had actually provided confidential information to his new employer, GCC, or whether DGM had lost any customers to GCC since Figueroa had left.

The trial court denied a temporary injunction, stating that DGM did not prove imminent harm. On appeal, DGM argued that proof of violation of a non-compete creates a presumption of probable, imminent, and irreparable harm.

The Houston Court of Appeals disagreed. Under recent Texas Supreme Court cases, the applicant for a temporary injunction has the burden to prove these elements to obtain a temporary injunction. Therefore, the Court of Appeals declined to hold that breach of a non-compete creates a presumption of harm that relieves the plaintiff of its burden to offer evidence. DGM only established a “fear of possible injury,” so the trial court was within its discretion to deny the injunction.

DGM also argued that the “inevitable disclosure doctrine” relieved it of the burden of offering evidence of imminent harm, citing state and federal cases applying various versions of it. The Court of Appeals disagreed, finding that Texas courts have not adopted the doctrine, and that it is not a blanket rule applicable to all nondisclosure agreements. DGM was still required to offer evidence of imminent harm.

You can find a lot of articles (like this one) on the inevitable disclosure doctrine, so I won’t go into great detail. Essentially, it is the idea that a court can enjoin a company’s former employee from working for a competitor, even if the employee hasn’t done anything wrong yet, on the theory that the employee will “inevitably” disclose his knowledge of the company’s confidential information to the competitor.

I don’t like the idea of an inevitable disclosure “doctrine.” These are fact-intensive cases that should be decided based on the evidence in each case. Talking about some general “doctrine” distracts from the real issues, which should be imminent harm and irreparable injury.

If the inevitable disclosure doctrine is merely the common-sense notion that a former employee who is working for a competitor is in a position to use the company’s confidential information, then it’s fine. But if the inevitable disclosure doctrine means that the company doesn’t have to offer any evidence of imminent harm, then it is wrong. The DGM case got this point right.

The recent BM Medical case was similar.[5] BM Medical argued that its former employee, Turner, had access to its confidential information such as client lists and prices, and that Turner would be able to use his knowledge to “undersell” BM Medical. But Turner testified that he did not access any confidential information after his termination, that he did not solicit any BM Medical clients, and that the only BM Medical client who became a client of his new company was a friend he knew before going to work for BM Medical.

Like the plaintiff in DGM Services, BM Medical argued that Turner had its confidential information, was working for a direct competitor, and intended to use the information. But like the court in DGM Services, the court in BM Medical disagreed. It held that the trial court was within its discretion to deny a temporary injunction based on the evidence that Turner had not used any confidential information and was not soliciting BM Medical clients.

Lessons from these recent Texas non-compete injunction cases

If you represent the company asking for a temporary injunction to enforce a non-compete, you can cite the contract’s stipulation that irreparable injury is presumed. You can cite the “inevitable disclosure” doctrine. You can cite cases that get confused and say that evidence of imminent harm shows that the injury is “irreparable.”

But ideally, you should come to the hearing prepared to offer actual evidence that the employee has already caused harm to the company or is about to do so, and that the harm cannot be adequately compensated by damages. That way, you don’t have to rely on debatable legal arguments the judge might not find persuasive.

The best way to show imminent harm in a non-compete case is to show that your client has already lost customers to the competitor the former employee is now working for. The best way to prove irreparable injury is to hope the judge doesn’t take the irreparable injury requirement too seriously.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands.

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] See Tex. Bus. & Com. Code 15.51(c) (stating that if the non-compete is not reasonably limited in time period, geographic area, and scope, then the court must reform the non-compete but may not award damages occurring prior to reformation).

[2] Cameron Int’l Corp. v. Abbiss, No. H-16-2117, 2016 WL 6216667 (S.D. Tex. Oct. 25, 2016).

[3] Fantastic Sams Franchise Corp. v. Mosley, No. H-16-2318, 2016 WL 7426403 (S.D. Tex. Dec. 23, 2016).

[4] DGM Servs., Inc. v. Figueroa, No. 01-16-00186-CV, 2016 WL 7473947 (Tex. App.—Houston [1st Dist.] Dec. 29, 2016, no pet.) (mem. op.).

[5] BM Med. Mgmt. Serv., LLC v. Turner, No. 05-16-00670-CV, 2017 WL 85423 (Tex. App.—Dallas Jan. 10, 2017, no pet. h.).

7 Things Physical Fitness Teaches You About Professional Success

7 Things Physical Fitness Teaches You About Professional Success

It turns out people can change

I’m sure you’ve seen those articles about the health benefits of physical fitness. They have headlines like “Researchers Find That People Who Exercise Live Longer.” You wonder if the study was commissioned by the University of the Obvious.

This is not one of those articles.

I’m not here to convince you that you need to exercise to be healthy, or to make you feel bad if you don’t get up at 4:30 every morning to go for a 10-mile run.  You already know exercising is good for your health, even if you have one of those bumper stickers that says “0.0.”

The point I want to make is that you can learn a lot about professional improvement by making a serious effort to improve your physical fitness. You could also “learn” these things from reading some self-help articles, but sticking to a serious physical fitness regimen teaches these lessons in a more concrete way that will stick.

So what will you learn?

1. Discipline isn’t always rational

You know it will take discipline to go from struggling to jog around the blog to running a seven-minute mile, but people often misunderstand the nature of discipline.

The problem is that we tend to think of reason and discipline as allies. After work, you would rather sit on the couch and watch Fresh Prince reruns than go for your daily run. You try to overcome your laziness by reasoning that you won’t reach your goal by the end of the year if you don’t go on that run.

Swimmer

But here’s the problem: you’re reasoning is wrong. From a purely rational perspective, skipping that one run will not materially affect your long-term goal. If you’re trusting your rational mind to get you to run, it will fail you.

You need to enlist passion on the side of discipline. Emotion says, “get off that couch, lazy!” You need an ethos of discipline fueled by pride, not by logic.

Make a schedule for when you’re going to exercise and get almost fanatical about staying on the schedule. Your friends, family, and co-workers may think you’ve joined a cult, but your new schedule will become a habit. And habit is stronger than reason, whether the goal is doing handstand pushups or getting more clients.

2. If it’s not fun you won’t stick with it

Unfortunately, your new obsession with discipline will only take you so far. If running isn’t fun for you, then you’re not going to do it consistently. I don’t mean it needs to be fun every time you do it, or that it should be easy and care-free. But at some level you have to enjoy the kind of exercise you do, or you won’t keep doing it.

baby in air

So if you don’t like running, then find some other kind of exercise you enjoy. Lift weights, do Pilates, play basketball, ride a bike, whatever.

The same thing is true in your professional life. Let’s say your goal is doing more public speaking, but after several attempts you still just hate it. Stop and reconsider. Maybe you don’t really need to do that. Perhaps there is some other professional goal you could pursue instead. Like learning to clear a paper jam.

3. Improvement is gradual

So now you’ve found a “fun” exercise program you follow like your life depended on it. In six weeks you’re sure to look like a fitness magazine cover model, right? Well no, of course not. You probably will notice some difference within six weeks, but reaching your goals will take longer.

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Don’t get frustrated when you don’t see the results you want immediately. Celebrate the small victories and stick to the plan. Your fitness level will improve. It just takes time.

Professional improvement usually works the same way. If you have no management experience, for example, don’t expect to become a great manager overnight. Focus on improving your skills a little each day.

4. Don’t skip rest day

Once your fitness activity has become a habit and you start to see results, you may get a little greedy. You’ll tell yourself, “I lifted weights three times a week for two months and got stronger, so if I do it six times a week my results will be twice as good, right?”

Don’t get caught in that trap. Most good exercise programs have rest days. Lately I’ve been following the daily workouts posted by crossfit.com. It’s three days on, one day off. Sometimes I’m tempted to exercise on the rest day because I’m impatient to improve my results. But skipping the rest day is a mistake.

Koala sleeping

In physical fitness, the rest day has both physical and mental benefits. The physical benefit is obvious. Your muscles need that rest time to rebuild. But the mental benefit is even more important. When you take a day off, you come back the next day with greater mental sharpness.

Taking the “rest day” is just as important in our careers. We think that if we work more nights and weekends, we’ll get ahead faster. Sometimes putting in that extra time does pay off, or it’s just something we have to do. But don’t think your job performance will improve simply by working more. Routinely skipping your time off will cause you to lose mental focus, which will undermine your performance, not improve it.

5. Learn to deal with setbacks

Injuries suck. Not only does an injury physically hurt, it delivers a mental blow. It would be less psychologically damaging if injuries resulted from skipping a workout and taking it easy. But exercise injuries are the opposite. They are especially demoralizing because you feel like you did something to get stronger, and instead it made you weaker. And it may take you weeks or months just to get back to where you started.

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Hmm. Has anything like that ever happened in your professional life? Maybe you took a new job hoping it would improve your career, but you got laid off six months later. Or you took on a new responsibility at work, only to be thrown under the bus when it went south.

Coming back from an injury teaches you something about overcoming setbacks. You learn that it takes even more discipline and determination to recover from an injury. But if you stick to the plan, you will come back stronger than before.

6. You’re not too old

First the bad news. If you are an NFL running back, you are probably “over the hill” by your 30th birthday. Your body has taken such a pounding that it just can’t do what it used to do. Having “lost a step,” you can’t burst around the edge for a first down the way you used to.

Unless you’re Emmitt Smith, who ran for an incredible 18,355 yards over a 15-year career.

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But the good news is that most of us are not NFL running backs, or any kind of professional athlete. Unless you were an elite athlete in college, you can probably get in the best physical shape of your adult life in your 40s, 50s, and beyond. Yes, it gets harder, but it can be done.

And if age doesn’t prevent you from improving your physical fitness, then you know it can’t prevent you from improving your other skills. There is no reason getting older should stop you from becoming a better public speaker, a better salesman, a better manager, etc. You can even learn how Twitter and Periscope work.

Which leads me to . . .

7. People can change

If you have a daughter in the 10-18 year age range, you probably know the line “we aren’t saying you can change him, ‘cause people don’t really change.” And if not, you’ve still encountered the sort of pop psychology that says after a certain age people don’t really change.

By around 25 years old, most people have a hard-wired worldview that shapes their views on controversial issues. This is of course a big topic in politics. It’s also a big issue for people like me in the litigation business, where jury views are important. And there is a lot of truth to the idea that people don’t change their fundamental views past a certain age.

runners

But physical fitness teaches you this isn’t necessarily true about skills and talents.

Recently I had the honor to co-chair a charity fun run for the Houston Bar Association. After all the preparations were done and the starting gun sounded, I decided at the last minute to run the five-mile race. I quickly safety-pinned my number on my shirt, and off I went. I didn’t win any awards, but as I ran the course, I realized running five miles without doing any specific training for it was pretty easy for me. (This is what the kids call a “humble brag”).

Here’s the cool thing. Ten years earlier, it was a challenge just to run three miles without stopping. But since then I had done a lot of running, biking, strength training, you name it.

That’s when it really hit me. People can change. And they can learn a lot in the process.

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head-shot-photo-of-zach-wolfe

Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands.

Rumors that he recently injured himself attempting to clean and jerk his own body weight are exaggerated.

Book Review: The New Texas Pattern Jury Charge on Trade Secrets

Book Review: The New Texas Pattern Jury Charge on Trade Secrets

How well does the new Texas Pattern Jury Charge perform in a typical soft trade secrets case?

I recently received a mysterious package in the mail. After tearing open the cardboard, I saw a shiny new paperback in plastic shrink-wrap: the new Texas Pattern Jury Charges – Business, Consumer, Insurance & Employment (2016).

My heart raced. Yes, I already had the 2014 edition, but the 2016 edition has something new: questions and instructions on trade secret misappropriation. In the words of Joe Biden, this is a big f**ng deal!

You see, when I last tried a trade secret case to a jury, there were no Pattern Jury Charge questions for trade secrets, so we had to make up our own. That case was a typical “soft” trade secrets case.

“It’s a dirty story of a dirty man”

Soft trade secrets? Well, there are two paradigmatic types of “hard” trade secrets: secret technology and “secret sauce.” If your company develops new technology that allows you to drill for oil sideways at half the cost of your competitors, and you keep it secret, that’s a trade secret. If you have the secret formula for Coke, or the Colonel’s secret herbs and spices, those are trade secrets. Understanding why these things are trade secrets is not rocket science.

Soft trade secrets, on the other hand, are the type of information almost every business has: names and contact information for customers, information on what the customers buy, prices charged to the customers, names and contact information for vendors, prices charged by vendors, etc. The king of the soft trade secrets is the customer list, which may or may not be a trade secret, depending on the facts (see Customer List Confusion).

In the typical soft trade secrets case involving a departing employee, there are usually four key issues:

  1. Did the employee take information from the former employer?
  1. Was the information actually “trade secrets”?
  1. Did the employee actually use the information to compete with the former employer?
  1. What amount of damages did the employee cause the former employer by using the information to compete?

Experts on good writing may cringe at my repeated use of the intensifier “actually,” but it’s appropriate here. It’s a reminder to approach trade secrets claims with a healthy skepticism. As one federal judge said in a recent opinion, “Many plaintiffs allege trade secret misappropriation, but few prove it.”[1]

So how do the new Pattern Jury Charge (PJC) questions compare to these key issues in a typical soft trade secrets case?

“It took me years to write, would you take a look?”

Like other PJC sections, most of the new section on trade secrets consists of commentary on the applicable statute and case law. The questions themselves are quite short. They boil down to this:

  1. Did Paul Payne own a trade secret in the ___ listed below? [the jury answers separately for each thing alleged to be a trade secret]
  1. Did Don Davis misappropriate Paul Payne’s trade secret?
  1. What amount of damages . . . etc. [the standard damages question that applies to all kinds of claims]

This would be simple for a jury to understand but for one problem: How does the jury know what “trade secret” and “misappropriate” mean?

The PJC solves this problem with instructions. The question on ownership of a trade secret is followed by the statutory definition of a trade secret from the Texas Uniform Trade Secrets Act (affectionately known as “TUTSA”). The question on misappropriation is followed by the statutory definition of misappropriation.[2]

This sticks to the basic template for most PJC questions: ask a really simple question, then give detailed instructions that define the terms used in the question. The detailed instructions are, in effect, a mini-tutorial on the area of law at issue.

The questions tend to be broad, rather than focusing on specific facts. For example, in a breach of contract case, the PJC is going to ask “did Don Davis fail to perform the contract?” rather than “did Don Davis fail to deliver the truckload of bricks to the green house on Pecan Street on the date stated in the contract?”

Similarly, the PJC question on trade secret misappropriation asks “did Don Davis misappropriate Paul Payne’s trade secret?” rather than “did Don Davis email himself Paul Payne’s confidential customer list and use it to sell bricks to Paul Payne’s customers?”

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For my non-lawyer readers, this is part of what we call “broad-form” submission. Historically, the main reason for broad-form submission was to reduce the likelihood that the jury’s verdict would be reversed on appeal. There is a mountain of case law and articles on what broad-form submission means. It will suffice to say that the rule in Texas is this: broad-form submission is required, except when it isn’t.

“It could make a million for you overnight”

So what’s the alternative to the broadly stated trade secrets questions in the PJC? In the jury trial I mentioned above, we handled it differently. We submitted these questions (I’ve changed the names and the product):

  1. Was any of the information Dawn Davis obtained from Paula Payne trade secrets?
  1. Did Dawn Davis use Paula Payne’s trade secrets to make window sales at Real Cheap Windows?
  1. What sum of money . . . would fairly and reasonably compensate Paula Payne for her damages, if any, proximately caused by Dawn Davis’s use of Paula Payne’s trade secrets at Real Cheap Windows?

Like the PJC, the instructions included the statutory definition of “trade secret” taken straight from TUTSA.

Unlike the PJC, there was no question about “misappropriation,” because it was undisputed my clients had taken the information at issue. My argument was (1) the information wasn’t trade secrets, and (2) my clients didn’t use the information to make the sales. Those were the real issues in dispute, so I argued for submitting those specific questions, and the judge agreed.

I like my questions better than the PJC questions. They get right to the point and are easier for the jury to understand. They don’t require a jury to puzzle over a definition of “misappropriation.” But I admit the form of my questions won’t work in every case.

Why?

First, in my case there was no real dispute about what information was taken. I had asked the plaintiff in discovery to identify the alleged trade secrets, and it identified a specific stack of documents my clients admitted taking. The question was whether the information in those documents was trade secrets.

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Second, there was no dispute that my clients had sold products to customers of the first employer after leaving. The dispute was whether they made those sales by using the alleged trade secrets.

So the format we used for the trade secrets questions in that case may not work in your case. But that only proves my point. The PJC should only be a starting point. Judges and lawyers should not be afraid to adapt it to the specific facts of their case.

“It’s a thousand pages, give or take a few”

The new questions and instructions on trade secret misappropriation do what the Pattern Jury Charge is supposed to do. They provide a template for submitting trade secrets misappropriation questions that is consistent with Texas law and broad enough to apply to different kinds of cases.

But that’s all they do. There is a danger of rote use of the PJC questions when more specific questions tied to the facts of the case would be more appropriate and more understandable to the jury.

If the real issue is whether a customer list was a trade secret or not, then why not just ask the jury that? Or if the dispute is about whether the former employee used the employer’s customer list, why not just ask “did Don Davis use Paul Payne’s customer list?”

Of course, the problem is that there is usually a fight between the lawyers over the wording of the jury questions. When the parties don’t agree, the safer thing for the judge to do is to follow the PJC and submit a broad question, rather than a question tied to the specific facts in dispute. This is “safe” in the sense that it reduces the judge’s chance of getting reversed on appeal.

But the safe thing is not always the best thing. Actually.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. It’s a steady job, but he wants to be a paperback writer.

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] Kuryakyn Holdings, LLC v. Ciro, LLC, No. 15-cv-703-jdp, 2017 WL 1026025, at *7 (W.D. Wis. Mar. 15, 2017).

[2] The definitions are in Section 134A.002 of the Texas Civil Practice and Remedies Code.

Agree on These Litigation Rules to Level the Playing Field

Agree on These Litigation Rules to Level the Playing Field

TexasBarToday_TopTen_Badge_VectorGraphicThe “Fiver Rules” Recognize the Reality of Modern Litigation Practice

WARNING: Typically, I try to write posts that will interest lawyers and non-lawyers alike. But this post is for attorneys only, particularly Texas attorneys. If you don’t have a “JD” or an “Esq.” after your name, DO NOT READ THIS. It is “inside baseball” exclusively for us lawyers.

The high-powered litigation firm Susman Godfrey popularized the practice of “Trial by Agreement,” a process where lawyers on both sides of a lawsuit agree on certain procedures up front to minimize gamesmanship and unnecessary discovery disputes.

This was an admirable goal, but as a practicing Texas litigator, I find that the suggested stipulations on “Trial by Agreement” don’t always match the reality of modern litigation practice. Having closely observed the way Texas lawyers actually handle lawsuits, I propose that readers of Five Minute Law agree on the following “Fiver Rules” for Texas litigation.

  1. Every response to a written discovery request must begin with three pages of detailed “general” objections. If the responding law firm is from California or New York, the requirement is increased to five pages. These general objections must state that they apply to every request, but most of them must not actually apply to every request.
  1. In state court, the response to each request for production must include an objection that the documents are privileged. Texas Rule of Civil Procedure 193.2(f) says that the responding party should withhold privileged documents, not object to the request, but the parties will be required to ignore this rule.
  1. Contention interrogatories must ask for “all facts” supporting the responding party’s contentions. Texas Rule of Civil Procedure 197 is clear that phrasing a contention interrogatory this way is objectionable, but the requesting party must ignore this rule. Conversely, an interrogatory asking for the basic factual grounds for a claim in a party’s pleading must be met with the objection that it improperly requires “marshaling evidence.”
  1. The “conference” requirement for discovery disputes may be satisfied by stating to opposing counsel in writing that all of his objections are unfounded. The statement must be in the form of a letter attached to an email to emphasize its seriousness. Alternatively, the procedure for resolving discovery disputes will be a conference call with at least three participants on each side. The lead lawyers are expected to use the conference call to train their associates on how to show the lawyers on the other side how tough and smart they are.
  1. Motions for summary judgment will be decided based on which side brings a larger binder of documents for the judge. If the binders are the same size, the tie-breaker will be which side has more PowerPoint slides.
  1. Every document produced in discovery must be designated “Confidential – Attorneys’ Eyes Only,” regardless of actual confidentiality. This includes documents found on the internet and copies of pleadings from publicly available court files.
  1. No one is allowed to smirk or make a sarcastic comment when a lawyer interrupts a difficult deposition question to “confer on a privilege issue.” If there is no plausible reason the question would raise any privilege issue, the remedy for the questioning lawyer will be limited to resuming the deposition with a snarky comment like “now that you’ve had a chance to confer with your lawyer . . .”
  1. The parties stipulate that every witness met with his lawyer five times for a total of 20 hours to prepare for the deposition. How many hours of your life have you spent listening to detailed deposition questions about who the witness met with, where, and for how long to prepare for the deposition? How many times has this questioning resulted in discovering a fact that will make any difference whatsoever at trial? This stipulation will save time for everyone.
  1. Each side’s first request for production will include a request for every document generated by the other side’s expert witness. Never mind that the “new” Texas discovery rules (which are now almost 20 years old) provide for only two exclusive methods of obtaining discovery about testifying experts (read Rule 195.1 if you don’t believe me). Why waste those forms your firm has been saving since the Reagan administration?
  1. In federal court, the defendant must file a motion to dismiss raising every possible factual defense to the plaintiff’s claims. A lot of court opinions say the judge should decide a motion to dismiss based only on the facts alleged in the plaintiff’s complaint. Those courts obviously do not appreciate the number of billable hours that a thorough motion to dismiss can generate for the benefit of both sides.

Agreeing on these rules up front will level the playing field for everyone. Nerds who take the Rules of Civil Procedure seriously will no longer be at a disadvantage. If the judge reprimands a lawyer for following one of the Fiver Rules, it will be socially acceptable for that lawyer to point at opposing counsel and say “he started it!”

And if you are a non-lawyer who has gotten this far and is now saying, “I wish I had that five minutes of my life back,” all I can say is, “you were warned.”

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands.

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.

Track These Changes: Ethics of Inadvertent Disclosure of Metadata

Track These Changes: Ethics of Inadvertent Disclosure of Metadata

Texas Ethics Opinion 665 says lawyers have an ethical duty to avoid inadvertently disclosing confidential metadata, but not an ethical duty to disclose they received inadvertently-sent metadata

Does a lawyer have an ethical duty to avoid sending opposing counsel a document containing metadata that reveals confidential client information? Does the receiving lawyer have a duty to inform the sending lawyer of the receipt of confidential metadata and to refrain from using the information obtained therefrom?

Did I really just use the word “therefrom” in Five Minute Law? Please don’t report me to Bryan Garner.

In any case, the Professional Ethics Committee for the State Bar of Texas recently addressed these questions in Opinion No. 665, which appeared in the January 2017 Texas Bar Journal. The Committee said yes, a Texas lawyer generally has an ethical duty to avoid transmission of confidential metadata, and no, a Texas lawyer generally does not have an ethical duty to notify opposing counsel of the inadvertent receipt of confidential metadata.

In short, you could say the Texas rule on inadvertent disclosure of metadata is don’t disclose. If you’re the sending lawyer, don’t disclose confidential metadata. If you’re the receiving lawyer, you don’t have to disclose that you received it.

The Committee included this important qualification: the opinion applies only to the “voluntary transmission of electronic documents outside the normal course of discovery.” Disclosure of metadata in discovery—an issue currently before the Texas Supreme Court in the State Farm case—is an entirely different subject.

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 I read these things on the weekend so you don’t have to

The second part of Opinion 665 is consistent with Opinion 664, which I covered here. Opinion 664 said generally Texas lawyers do not have an ethical duty to notify opposing counsel they have inadvertently received confidential information. You might even say Opinion 665 simply applies Opinion 664 to metadata.

Once again, this puts Texas at odds with the ABA’s Model Rule of Professional Conduct 4.4(b), which  requires a lawyer to promptly notify the sender of the receipt of inadvertently-sent electronically stored information. This is Texas, the home of rugged individualism. If the other guy inadvertently sends you confidential information, that’s his problem.

But there is a limit. Would you believe the Texas ethics rules require lawyers to be honest? It’s right there in Rule 8.04(a)(3), which says a lawyer shall not “engage in conduct involving dishonesty, fraud, deceit or misrepresentation,” and Rule 3.03(a)(1), which requires that a lawyer shall not knowingly “make a false statement of material fact or law to a tribunal.” You can use confidential metadata opposing counsel inadvertently sent you; you just can’t lie about it.

In the Committee’s words:

[A]lthough the Texas Disciplinary Rules do not prohibit a lawyer from searching for, extracting, or using metadata and do not require a lawyer to notify any person concerning metadata obtained from a document received, a lawyer who has reviewed metadata must not, through action or inaction, convey to any person or adjudicative body information that is misleading or false because the information conveyed does not take into account what the lawyer has learned from such metadata.

That sounds reasonable. But it’s so abstract. What does it really mean?

Application of the Texas “don’t disclose” rule to metadata in a settlement agreement

Let’s make this concrete with my favorite hypothetical non-compete lawsuit, Paula Payne Windows v. Dawn Davis. Suppose Dawn’s lawyer sends Dawn Paula Payne’s proposed settlement agreement in Microsoft Word. Dawn revises it and inserts some confidential comments, such as “change this to a one-year non-compete, but I’ll agree to two years if that’s what it takes—I just want this nightmare to be over!”

Dawn’s lawyer emails Paula Payne’s lawyer, Sam Sneaky, a Word document containing metadata that allows Sam to recover and review Dawn’s comments, including the comment about the length of the non-compete. Sam decides not to tell Dawn’s lawyer about the inadvertent disclosure. Knowing that Dawn is desperate to settle and will cave on the non-compete, Sam sends back a demand for more money and a two-year non-compete.

So has anyone broken any ethical rules under Opinion No. 665?

Dawn’s lawyer probably failed to meet his duties of competent representation (see Rule 1.01) and maintaining confidentiality of client information (Rule 1.05).  According to Opinion 665:

Lawyers . . . have a duty to take reasonable measures to avoid the transmission of confidential information embedded in electronic documents, including the employment of reasonably available technical means to remove such metadata before sending such documents to persons to whom such confidential information is not to be revealed pursuant to the provisions of Rule 1.05.

Let’s assume Dawn’s lawyer knew the original Word document had sensitive client communications in it and should have known those communications could be recovered from the metadata in the new document. In that case, Dawn’s lawyer should have taken reasonable measures such as using a common metadata-scrubbing program when emailing the document to opposing counsel.

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Be careful what you send opposing counsel

On the other hand, Dawn’s lawyer only has to take reasonable measures. “Not every inadvertent disclosure of confidential information in metadata will violate Rule 1.05.”

What about Sam Sneaky? Under the ABA Rule, you could argue Sam had a duty to promptly notify Dawn’s lawyer that the confidential metadata was inadvertently sent. But under Opinion 665, he’s fine in Texas.

That is, unless he conveys information that is false or misleading because it doesn’t take into account what he learned from the metadata. For example, after reviewing the confidential metadata, Sam couldn’t say to Dawn’s lawyer, “I have no idea what length of non-compete your client is willing to agree to, but my client insists on two years.” That would be dishonest. It’s a statement Sam could truthfully make before seeing the confidential metadata, but not after.

Admittedly, this hypothetical is pretty contrived. Who talks like that?

Let’s imagine something more subtle and realistic. Can Sam say to Dawn’s lawyer, “we have to insist on a two-year non-compete because anything less than that won’t adequately protect my client”? That statement is misleading, you could argue, because it omits the material fact that Sam is insisting on the two-year non-compete because he knows from the inadvertently-disclosed metadata that Dawn will agree to it.

The bottom line seems to be this: when Texas lawyers receive confidential metadata from opposing counsel, they don’t have to disclose they received it, and they can use it to their advantage. They just have to be careful what they say after receiving it.

Is this the Cowboy Way?

I’ll be honest. I don’t like this. Ethics Opinion 665, like Opinion 664 before it, seems to make Texas an outlier, and in the wrong direction. I prefer the approach of the ABA Model Rule.

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Let’s rustle up some metadata

Yes, Texas is the Lone Star State, where the legacy of Old West rugged individualism is strong. But we should also remember “Tejas” means “friendship.” And last I checked, Texas was still part of the Bible Belt. The Bible says “do unto others as you would have them do unto you.” If you inadvertently sent a document containing confidential metadata and opposing counsel discovered it, wouldn’t you want him to tell you?

I’m not saying Ethics Opinion 665 is wrong. It’s a reasonable interpretation of the existing disciplinary rules. But using confidential information that opposing counsel inadvertently sends you just doesn’t feel like the Cowboy Way. If your neighbor’s cattle wander onto your ranch because he wasn’t careful, you don’t keep them and say “that’s his problem.”

Perhaps this comes down to the difference between “professionalism” and “ethics.” Ethics, in this context, means complying with a specific set of rules. Professionalism, on the other hand, is a higher—and admittedly fuzzier—standard. Telling a lawyer he accidentally sent you something you know he didn’t mean to send you is good professional courtesy, even if the Rules of Professional Conduct don’t require it.

It’s just following the Golden Rule. And the principles derived therefrom.

Texas lawyers: register for my March 22 webcast covering this very issue here.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Austin, Houston, and The Woodlands. You can probably tell from this week’s image that his son is into Lamborghinis.  

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.

Horizon Case Addresses Causation Conundrum in Departing-Employee Litigation

Horizon Case Addresses Causation Conundrum in Departing-Employee Litigation

Oral argument in Horizon Health v. Acadia Healthcare illustrates difficulties with proving lost profits damages when employment is at-will

Last week I wrote about a new Texas Supreme Court opinion that had to draw the line between sexual harassment and sexual assault. Just days later, the Texas Supreme Court confronted an even more difficult issue in oral argument in Horizon Health v. Acadia Healthcare: how to draw the line between reasonable assumption and speculation when an expert witness testifies about lost profits damages in a departing-employee case.

This is a difficult issue, because the typical departing-employee case involves at-will employment. Let’s assume a group of employees does all kinds of bad things before leaving to go to work for a competitor. And let’s assume the employer lost sales after the group left. Those facts are relatively easy for a jury to understand.

But this leaves out a critical issue that is harder for the average person to grasp: causation.  It’s not enough to prove the defendants did bad things and the plaintiffs were damaged. You have to prove that the bad things caused the damage. And you have to quantify the damage.

Let’s say the bad conduct is soliciting a key employee to join a competitor, and the damage is the loss of sales the key employee would have made for the company if she had not been solicited. The problem for the plaintiff is obvious: if the key employee is an at-will employee, she could have left the company at any time regardless of whether she was solicited. How do you quantify the amount of lost profits caused by the wrongful solicitation?

That, in simplified form, is the problem confronting the Texas Supreme Court in Horizon Health v. Acadia Healthcare. I call this the Causation Conundrum for departing-employee cases.

Facts of Horizon v. Acadia: the distilled version

Horizon was a somewhat complex case with multiple defendants, numerous causes of action, and a 55-page jury charge (see Court of Appeals opinion here). But the basic facts, in simplified form, follow a familiar pattern:

  • Horizon managed mental-health programs for hospitals.
  • Four of Horizon’s executives, the Saul group, began negotiating to join a Horizon competitor, Acadia, while they were still working for Horizon.
  • While still employed by Horizon, the Saul group solicited John Piechocki, a successful Horizon salesman, to work for the competitor.
  • The Saul group and Piechocki left Horizon to work for Acadia.
  • Before leaving Horizon, the Saul group said things in their emails that must have made their trial lawyers cringe later. Our departures will leave Horizon “dead,” they said, and our business strategy at Acadia will be “hurting Horizon early and often.”
  • The Saul group also did things that would not look good to the jury. Saul, for example, copied a massive amount of Horizon files from his work computer to an external hard drive before leaving Horizon.[1]

Given these facts, Horizon’s lawyers had a lot to work with on liability. But how could they prove the Saul group caused damage to Horizon by bringing Piechocki to the new company? And how could they quantify that damage?

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Emails about “hurting Horizon early and often” certainly didn’t help the defendants at trial

These challenges were compounded by a couple pesky facts. First, Horizon’s profits continued to go up after the employees departed, even exceeding Horizon’s own targets. Second, there was no evidence that any existing Horizon customer left and went to Acadia.

How could Horizon prove lost profits given all these difficulties? The answer is that Horizon tried to prove causation and damages the old-fashioned way: they hired an expert.

Horizon’s expert dares to pose hypotheticals and make assumptions

Horizon designated Jeff Balcombe, a qualified CPA, to testify on damages. Balcombe’s assignment was to quantify Horizon’s future lost profits resulting from the loss of Piechocki. In the words of the Court of Appeals:

Balcombe testified as to the “lost production” damages Horizon suffered as a result of the individual defendants’ wrongful actions. In doing so, he attempted to determine what would have happened but for the wrongful actions—as opposed to what actually happened—by considering (1) how long Piechocki would have remained an employee of Horizon but for the alleged wrongful conduct, (2) how many contracts Piechocki would have sold “but for being an employee of Horizon,” and (3) what the average profit for each of those contracts would have been had he remained with Horizon.[2]

The court’s interjection “as opposed to what actually happened” is dripping with skepticism. But in fairness to Horizon, let’s pause here to consider the nature of causation and damages in a lost profits case involving departing employees.

Proving lost profits damages necessarily requires entering a hypothetical world. To prove how the defendants caused your company to lose profits, you must ask the hypothetical question “what amount of profits would we have made but for the defendants’ wrongful conduct?” There is no other way to do it. So when Horizon’s expert tried to figure out what would have happened, he was doing his job.

The harder part for the damages expert is deciding what assumptions to make. Balcombe based his lost profits analysis on three assumptions:

  1. “Balcombe analyzed the average amount of time Horizon retained its higher-level employees and ‘conservatively elected to assume’ that Piechocki would have stayed at Horizon two or four more years but for the alleged wrongful conduct.”
  1. “Piechocki would have sold six contracts in each year he stayed, up to four years, but for the wrongful conduct because other Horizon salespeople sold four contracts per year.”
  1. “He concluded that $247,000 per year for each contract was ‘a conservative and reliable figure for a mature contract price.’”[3]

This is where the Court of Appeals thought the damages expert went wrong. “We conclude that Balcombe’s opinion was too speculative based on an analytical gap between the data and his opinion; thus, it was no evidence of lost profits suffered by Horizon.” For example, the assumption that Piechocki, an at-will employee, would have stayed employed by Horizon was “nothing more than speculation.” Experts are allowed to make assumptions, but the Court of Appeals found that Balcombe’s factual assumptions were “unsupported” and “not admitted into evidence.”[4]

Wait a minute. Does this mean lost profits damages are never recoverable in a case based on solicitation of an at-will employee? Is the Court of Appeals saying a damages expert is never allowed to make assumptions about how long an at-will employee would have stayed at a company? And does the plaintiff have to offer evidence during the trial to support every factual assumption made by the damages expert?

Surely the Court of Appeals did not mean to go that far. But where to draw the line? That is what the Texas Supreme Court will have to decide.

Fortunately I have the answers to these difficult questions

Does the fact that a wrongfully-solicited employee was also an at-will employee legally bar the company from obtaining lost profits damages? The answer has to be no. That the employee could have left at any time is certainly a relevant fact for the jury to consider, but it can’t mean that lost profits damages are never recoverable in such a case.

So, if lost profits damages are available in such cases, is it legally impermissible for a damages expert to make assumptions about how long a solicited employee would have stayed at the company?

Some might argue that making an assumption about how long an employee would have worked for the company is always speculative, and therefore impermissible. How can an expert know with absolute certainty how long an at-will employee would have stayed?

The answer, of course, is that he can’t. But absolute certainty is not required. The Texas Pattern Jury Charge asks the jury to decide the amount of lost profits “that, in reasonable probability, will be sustained in the future.” Reasonable probability is the standard.

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There is always some hypothetical element to the calculation of lost profits damages

So, even if the employment is at-will, a damages expert can make assumptions based on reasonable probability. That much is clear. But what assumptions?

Again, the question almost answers itself. The assumptions must be reasonable and must be supported by some evidence. No one would argue that an expert can base a damage calculation on unreasonable assumptions. And a damages expert should not be allowed to assume facts that have no evidence to support them.

A harder question is whether the facts assumed by the expert must be offered in evidence at trial. Texas Rule of Evidence 703, like the corresponding Federal Rule, allows an expert to reasonably rely on facts he has been made aware of, even if those facts are not admissible. But the Court of Appeals in Horizon was troubled by the fact Balcombe’s underlying information was not admitted into evidence.

The Texas Supreme Court also seemed troubled. In oral argument, one of the justices asked whether there was any evidence other than the expert testimony to support the amount of damages found by the jury. The Court of Appeals assumed the answer was no. But Horizon’s counsel argued to the Supreme Court that the answer was yes.

So perhaps the Texas Supreme Court will sidestep the entire expert testimony issue and find that there was other evidence sufficient to sustain the damages verdict.

It’s hard to predict what this Texas Supreme Court will do in a departing-employee lawsuit. This is a court that likes defendants and doesn’t like big speculative damage awards (see Southwestern Energy for example). But this is also a court that likes employers and non-competes.

If I had to predict, I would bet that the court’s aversion to speculative damage awards will outweigh its warm fuzzy feelings for employers, meaning a win for the defendants on the lost profits damages issue.

But it is a conundrum.

*UPDATE: The Texas Supreme Court issued its opinion on May 26, 2017, ruling that the evidence was legally insufficient to support any award of lost profits. Stay tuned for analysis in an upcoming post.

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head-shot-photo-of-zach-wolfeZach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands. He can’t remember the last time he wrote a post with as many rhetorical questions as this one.

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] Acadia Healthcare Co. v. Horizon Health Corp., 472 S.W.3d 74, 79-82 (Tex. App.—Fort Worth 2015, pet. filed).

[2] Id. at 88.

[3] Id. at 88-89.

[4] Id. at 89-90 (emphasis added).