Tuesday, November 25, 2014

Sovereign Economic Espionage and Why Dr. Strangelove was Prescient

In addressing secrets, Dr. Strangelove exclaimed that “the whole point of a Doomsday Machine is lost if you keep it a “secret!”  Why don’t you tell the world, eh?” to which Ambassador de Sadesky replied “it was to be announced at the Party Congress on Monday.  As you know, the Premier loves surprises.” 

Secrets, of a political or corporate nature are of value, and to be guarded by its owners.  What happens, however, when American companies start developing intellectual property in parts of the world that treats secrets as party favors, to be liberally distributed?

Losing valuable intellectual capital to the competition is akin to facing a doomsday scenario for most American businesses.  What are the weapons your business has to keep? What does it develop and how does it keep out those who would take it?  What happens if the theft of industrial trade secrets is tacitly approved by a country which has state owned companies in the same business?

In 1996 the United States Legislature enacted the Economic Espionage Act. Economic espionage is (1) whoever knowingly performs targeting or acquisition of trade secrets to (2) knowingly benefit any foreign government, foreign instrumentality, or foreign agent. The teeth of the Act make stealing economic information for the benefit of another state a federal crime punishable by up to 10 years confinement. In addition to criminal liability, the Department of Justice can initiate a civil action to enjoin the perpetrators from disclosing the trade secrets. Unmentioned in the Act is compensation for the victim - American business.

The mention of “agents” or “espionage” gives off the aroma of a Tom Clancy novel, but economic espionage is far from fiction. A recent study estimated that such economic espionage accounted for the loss of between one and six million jobs and billions of American dollars. Predictably, China and Russia have been the most egregious when it comes to economic espionage; their “agents” having siphoned off protected information from GM, Intel, Lockheed Martin, and Hughes Aircraft to name a few. This stolen information is not only comprised of new developments within an industry, but these agents have targeted customer data, development data, pricing schemes, marketing plans, production costs, and sales strategies.

Despite the steps that the U.S. government has taken to protect American business, the hounds of civil justice remain leashed. Domestically, the civil courts redress wrongs like the theft and misappropriation of trade secrets committed by individuals within U.S. borders. Unfortunately, for many years foreign states have operated with relative impunity while gorging themselves on our economic viability. Sadly, foreign relations have trumped economic security.

There could be a thin glimmer of hope for American business. A New York Federal Court has claimed jurisdiction over a lawsuit seeking to hold a state sponsor of terrorism civilly responsible for its wrongful acts. In Sokolow v. PLO, the Palestinian Liberation Organization is being sued in the amount of 3 billion dollars for the wrongful death of numerous Israeli and United States citizens that were killed or injured as a result of PLO terrorist activities during the Second Intifada. The Anti-terrorism Act of 1991 made this lawsuit possible and imposes civil liability on state sponsors of terrorism.

Although this case has not come to a final judgment, this case could be ushering in a new era. One that holds foreign states responsible for the damages suffered by individuals, or companies, as a result of a state’s wrongful act. American businesses can only hope for a similar bill that would impose civil liability on countries responsible for economic espionage. Until that day, American businesses remain vulnerable.

To end with another Dr. Strangelove reference; Colonel “Bat” Guano, in responding to an order to shoot the lock off the Coca Cola machine to retrieve some change to call the President, reflects that “Okay. I’m gonna get your money for ya.  But if you don’t get the President of the United States on that phone, . . . you’re gonna have to answer to the Coca-Cola company.”
 
Don't forget to visit our website at www.vethanlaw.com

 

Monday, November 17, 2014

Simplifying Non-Compete Agreements (Three Simple Rules for Drafting Non-Compete Agreements)


This blog post started as a simple idea: distill drafting a valid non-competition agreement down to three simple rules. “Simplifying” Texas non-compete law however is akin to domesticating a rampaging beast.

Few areas of Texas law have as turbulent a history as the enforcement of covenants not to compete in employment relationships. All too often employers find themselves with an unenforceable non-compete agreement on their hands, and no protection from competition by former trusted employees who know their former employer’s secrets. And all too often, the primary reason employers find themselves in this situation is because they tried to overreach when drafting the non-competition agreement – by either making restrictions last too long, cover too much territory, or apply to too many competing activities.

Every lawyer who practices in this area should know the magic language enshrined in the Texas Covenants Not to Compete Act:

… a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

Tex. Bus. & Com. Code Ann. § 15.50(a).

And while the courts and legislature have struggled over the meaning of that language ever since the Act went into effect in 1989, ultimately, it boils down to three simple rules:

First, the covenant not to compete must part of or related to an enforceable agreement.

Second, the restrictions placed on the employee’s ability to compete must be reasonable.

Third, the restrictions must not be greater than necessary to protect the employer’s business interest.

First Rule. If the employer has a written employment contract with his employee, the written contract may include the covenant not to compete. In the case of a written contract, the covenant is “part of” an “otherwise enforceable agreement.” If there is no written employment contract, then a separate written covenant not to compete will do so long as the covenant is related to employment. The written non-compete is “ancillary to” an otherwise enforceable agreement.

But, there must be a little something extra, something given by the employer in exchange for the employee’s promise not to compete. The promise of employment standing alone, whether written or not, is never enough to make a covenant not to compete valid. There must be something more. Courts have held that a promise to provide the employee with access to confidential information, or specialized training, is enough to make a covenant not to compete valid. The confidential information or specialized training must relate to the employee’s work. That is because what the employer is seeking to protect—its confidential information or specialized training it provides—is reasonably related to an interest worthy of protection. Stock options have also been held to be adequate to support a covenant not to compete, because they are related to a business’ interest in protecting its goodwill.  However, a promise merely of extra money, such as a raise or bonus, is most likely not enough to make a covenant not to compete valid.

When drafting a covenant not to compete, it is not necessary that it state that it is ancillary to or part of an otherwise enforceable agreement, but the covenant should state what consideration, such as access to confidential information or specialized training, or stock or equity interest, is being given in exchange for the employee’s promise not to compete, and further that the consideration is related to the employer’s business interests and goodwill.

Rule 2. When it comes to restrictions on an employee’s ability to compete, the restrictions must be reasonable. Reasonable as to how long promise not to compete will last, where the promise not shall be effective, and as to what the promise prevents the employee from doing.

How Long? Texas courts generally have no trouble enforcing covenants not to compete that last 6-months, one year or even two years post-employment.  The longer a covenant not to compete lasts post-employment, however, the more closely a court will scrutinize it. Though non-competes of three and five years have been upheld, unless a business has a compelling reason for a covenant not to compete to last for longer than one or two years, it is best to play it safe and stay within the latter time frames.

Where? The geographic scope of a covenant not to compete must also be reasonable. A restriction that prohibits a national sales representative from competing anywhere in the United States stands a good chance of being found to be reasonable.  Likewise, a restriction that prohibits a sales representative working only in Harris County, Texas from competing in Harris County, Texas will also most likely be held to be reasonable.  

However, a restriction that prohibits a sales representative working only in Harris County from competing anywhere in the United States stands a high chance of being found to unreasonable because the salesman did not work anywhere other than in Harris County. Additionally, a restriction that prohibits that same Harris County salesman from competing anywhere in Texas may also be held to be unreasonable.  On the other hand, restricting that salesman from competing in Harris and adjacent counties stands a much better chance of being found to be reasonable. Additionally, geographic restrictions that prohibit an employee from working within ten, fifteen, or twenty-five miles of an employer’s place of business are generally upheld by Texas courts and are a viable alternative to count-wide restrictions.  

Another viable alternative is a prohibition on soliciting customers of the employer for whom the employee has done work. Several Texas courts have rules such a restriction is an acceptable alternative to a geographic restriction because the customers can be identified. General rules of thumb:

1.      Restricted to a limited area, e.g. 5, 10, 20 mile radius of employer’s business – high likelihood of being upheld.

 

2.      Restricted from competing in County where employer does business – high likelihood of being upheld.

 

3.      Restricted from competing in County where employer does business and adjacent counties –better than fair likelihood of being upheld.

 

4.      Restricted from competing statewide – likely to be upheld only if employee’s duties take him statewide, and dependent upon the scope of those duties.

 

5.      Restricted from competing nationwide – may be upheld only if employee’s duties take him nationwide, and dependent upon the scope of those duties.

 

6.      Restricted from soliciting customers of the employer, good likelihood of being upheld if the employee provided services to or worked with those customers, and the customers can be identified.

What? The type of activity that can be restrained generally takes three forms: (1) soliciting the employer’s clients or customers, (2) soliciting the employer’s other employees, and (3) engaging in competing activities.

Restrictions that prevent a former employee from soliciting his former employer’s clients and customers are generally upheld by Texas courts. On the other hand, restrictions that prohibit a former employee from soliciting his former employer’s future clients or customers, or clients or customers with whom the former employee had no contact, or soliciting clients or customers from areas where the former employer plans to expand have generally not been upheld by Texas courts.

Likewise, restrictions that prevent a former employee from soliciting his former employer’s current employees are also generally upheld by Texas courts, but not restrictions that prohibit a former employee from soliciting other former employees.

Restrictions that prohibit an employee from engaging in competing activities, such as selling widgets if the employer sells widgets, are generally upheld by Texas court, especially if the competing activities are identified. “Employee shall not sell widgets” is more likely to be upheld than “Employee will not compete with employer.”

Rule 3. The restrictions must not be greater than necessary to protect the employer’s business interest. Though the Act speaks of goodwill, I would suggest that goodwill is, in and of itself, a “business interest.” What is meant by “necessary to protect the [employer’s] goodwill or other business interest?” One way of looking at the formula is that the restrictions must be related to protecting the employer’s business. For example, a highly placed employee, say a vice-president or director of marketing, may have access to his employer’s marketing or pricing strategies, financial data or forecasts, or customer lists. A covenant not to compete that effectively restricts the employee from using that information to the employee’s advantage and to the employer’s detriment is a business interest that would be protected, and meet the requirements of the Act. A covenant not to compete for an employee who has access to trade secrets, such as a manufacturing process or formula, also serves to protect the business’ interest by protecting a valuable asset. Finally, equity ownership in the employer’s business, such as stock options, incentive employees to put forward their best efforts on the employer’s behalf, thus contributing to increasing the employer’s goodwill. All of the foregoing have been recognized by Texas courts as business interests worthy of protection.

Not all businesses are equal, as they do not have the same kinds of business interests and goodwill to protect. Each business is unique, as are the jobs held by their employees. A covenant not to compete is not a “one-sized-fits-all” solution to protecting an employer’s goodwill or business interest. The penalty for poorly drafted covenant not to compete can be that it is declared entirely unenforceable, or that it is re-written by a court that is not as familiar with the needs of the employer in their particular industry. In a worst case scenario, and employer can even find himself paying the former employee’s legal fees. For that reason, the employer should also seek the advice of legal professionals when drafting covenants not to compete.
 
To learn more about this issue and other topics go to our website at www.vethanlaw.com

Thursday, September 25, 2014

TEXAS’ NEW PARTNERSHIP PARADIGM: “GONNA MAKE YOU AN OFFER YOU CAN’T REFUSE.”

In line with the strict contract construction in The Godfather, the Texas Supreme Court recently issued a ruling in Ritchie v. Rupe, 57 Tex. Sup. J. 771 (Tex. 2014), which eliminates an equitable cause of action against a controlling shareholder who freezes out minority interest shareholders in the company. In blindly relying on the notion that every contract is a result of an arms-length, bargained for negotiation, the Texas Supreme Court held that if a minority shareholder signs a shareholder agreement that vests one of the shareholders with majority interest – and thus controlling interest, the majority shareholder has considerable sway over the direction of the company. While a controlling shareholder does, and should, have control of business matters at the company, the Rupe ruling does not consider situations where the controlling shareholder takes steps to shut out minority shareholders from management and operational decisions, including decisions that differentially benefit the majority shareholder. Essentially, with the ruling, a majority shareholder is free to act with near impunity, and the minority shareholder may not complain about the dismissive and freeze-out actions of the majority shareholder, if those actions have an ostensible business justification.

The problem with Rupe is that it ignores the reality of a closely held Texas corporation. The shareholders of a close corporation are typically involved and not passive investors. They are employees or managers of the corporation, which also provides them with their livelihood. The decision of a majority shareholder affects both the growth of the company and the livelihood of the minority shareholders. Allowing the majority shareholder to make decisions that differentially benefit him or her, prevents timely distribution of profits to all shareholders, or implements a roughshod management strategy, effectively freezes out minority shareholders. Under Rupe, there is no longer any realistic remedy for a minority shareholder.

So the takeaway from this decision is that the initial structure of the corporation, including allocation of interests and decision making powers must be fully negotiated. Settle all matters at the time the shareholder agreement is crafted, and carefully delineate rights and responsibilities. Yes, this should be done even though the company is little more than a hope or aspiration at the time the shareholders agreement is first crafted. Unfortunately this forces a minority shareholder to presuppose that his or her business partner, and fellow shareholder, will not act in a manner consistent with the minority shareholder’s best interest. Or, as Michael Corleone would state “Today I settled all Family business, so don’t tell me you’re innocent, Carlo.”

Tuesday, September 16, 2014

Getting What You're Owed Part IV: When Is It Time To Contact an Overtime Pay Attorney?

Getting what you’re owed isn’t greedy or demanding. Getting the pay you deserve is not only fair, it’s required by law. Part of getting what you are owed is receiving any compensation you deserve for putting in overtime.

The Fair Labor Standards Act states that after 40 hours of work in a workweek, employee’s are to be paid at a rate of one and one-half times their regular rate. So if you happen to work 42 hours in a workweek, the two hours extra you put in should pay out at one and one half times your regular hourly pay rate.

This overtime pay applies to any covered, nonexempt employees. So if you’re paid on an hourly basis, overtime usually applies. For salary workers, overtime pay does not apply.

Knowing how overtime pay works is important so that you know what pay you deserve.

So when should you contact an attorney about overtime pay? Anytime you feel that you feel that you have worked overtime but are not being paid for it. Overtime pay is usually included in your standard check, sometimes a different line item in the breakdown. If you worked overtime in the last pay period and it is not showing up on your check, it is definitely the time to reach out to an attorney.

Some employers may even try and sneak their way out of paying overtime. They might classify you as “exempt” or have you work “off the clock” for cash. This “off the clock” work is often a side deal made between you and your employer where they offer cash or tips to continue work after you have reached the 40 hours in the work week.

Under the Fair Labor Standards Act employees cannot waive their right to overtime pay. This means that even though your employer has made a side deal with you, they are still required to pay wages fitting of the work. Therefore you are still entitled to overtime pay if the side deal puts you at over 40 hours within the workweek.

Understanding your rights to overtime pay is the first step to getting what you’re owed. The next step is to contact an overtime pay attorney if you are having pay withheld.

For more information about overtime pay, contact Vethan Law Firm online or call our Houston office at 713-526-2222 or our San Antonio office at 210-824-2220Visit overtime-legal.com for more information

Getting What You're Owed Part III: Are Illegal Deductions Being Made From Your Paycheck?


When getting your first paycheck it may seem like your employer deducted a sizeable portion. Unfortunately this is somewhat true with the various taxes and deductions they are legally required to take out.

Your take home pay will be much less than your gross income, however your employer’s are not allowed to deduct whatever they feel like. As an employee it is in your best interest to know if your employer is taking illegal deductions out of your paycheck.

First, let’s take a look at what your employer is legally require to and legally allowed to take out of your paycheck.

Required Deductions

Your employer is legally required to take out State and Federal income taxes from your paycheck. They are also required to deduct Social Security and Medicare contributions These make up the bulk of all employee’s wage paycheck deductions.

Optional Deductions

Your employer is allowed to make additional deductions to your paycheck with your consent. These optional deductions are for things such as insurance premiums, credit union payments, pension contributions, charitable contributions, and employer sponsored retirement contributions.

Gross Negligence

If your employer finds that you damaged company property or purposefully stole from them they can request that the cost come out of your paycheck or they can take you to court.

Property damage is a fine line for an employer to walk. Without proof of negligence it is hard for an employer to state that you damaged the property with intent. General wear and tear to the company property does not constitute the need for a paycheck deduction.

All Other Deductions

If you begin finding deductions on your paycheck that don’t fall into one of the categories above, ask your employer for an explanation. There could be an explanation for them but more than likely the deduction is illegal. If it’s not legally required or consented to by you, it is most likely illegal.

If illegal deductions are being made from your paycheck, it is recommended that you hire a labor lawyer to dispute these deductions and get you what you’re owed.

For any questions regarding your paycheck or to seek help, contact Vethan Law Firm by calling our Houston office at 713-526-2222 or our San Antonio office at 210-824-2220.

 
Visit Overtime-legal.com for more information

WITH THE STROKE OF A PEN - THE TEXAS SUPREME COURTS UPENDS FOUR DECADES OF NON COMPETE POLICY


The script could not have been written better, whether as political theater or a jaunty summer read. On the Friday before the labor-day weekend, the Texas Supreme Court laid the groundwork to dispense with anti restraint of trade labor law policy that has stood in Texas for almost four decades. In a stunning decision in Exxon Mobil Corp. v. William Drennen, III, the Texas Supreme Court openly stated its policy shift to accommodate for the changing Texas market, affected by the presence of global players. With Texas now home to more fortune 500 companies than any other state, even New York and Delaware, this decision is an ominous wind across Texas’ pro competitive landscape.

The facts in Drennen are as follows: a long time employee (31 years) of Exxon Mobil was told in 2006 that he was going to be replaced, but that they were looking for another position for him. Thereafter, rather than be let go, Mr. Drennen found a new position at Hess and gave his notice. Exxon Mobil then informed him that if he left for Hess, they would terminate his unvested incentive awards. Mr. Drennen ignored the warning and Exxon Mobil revoked his unvested shares. Thereafter, Mr. Drennen instituted a lawsuit to recover his shares. He lost at the trial court, which was reversed by the Court of Appeals, and now reversed against by the Texas Supreme Court, which also alters this state’s public policy.

Any discussion regarding non-competes must start with what Texas courts have routinely held, and what lawyers in the non-compete arena spout as their mantra: Texas courts disfavor restraints on trade, and restraints on trade are viewed under the same filter as the rules applicable to covenants not to compete.

The contract in Drennen was governed under New York law. The lower appellate courts in Texas held that even if it was governed by the laws of a foreign jurisdiction, Texas will not abrogate its public policy favoring employees’ right to work. The Texas Supreme Court went out of its way to hold that Texas has to move away from its patriarchal approach in this area of the law. The Texas Supreme Court never states why upholding this state’s public policy is patriarchal, but that’s a topic for another post.

The rationale for the decision was that with Texas now hosting many of the world’s largest corporations, our public policy has shifted from a patriarchal one in which we valued uniform treatment of Texas employees from one employer to the next above all else, to one in which we also value the ability of a company to maintain uniformity in its employment contracts across all employees, whether the individual employees reside in Texas or New York. This prevents the “disruption of orderly employer-employee relations” within those multistate companies and avoids disruption to “competition in the marketplace.”

Signing a decision in which two of the justices sat out, the high Court held that freedom of contract should, would and now does trump even our stated public policy.

Thursday, September 4, 2014

Texas Supreme Court holds Forfeiture Provision is not a Covenant Not to Compete; Enforces Governing Law Provision


On August 29, 2014, the Texas Supreme Court handed down its decision on Exxon Mobil Corp. v. William Drennen, III Case No. 12-0621.  The essential facts are these: a long time (31 years) employee of Exxon Mobil was told in 2006 that he was going to be replaced, but that they were looking for another position for him.  Thereafter, rather than be let go, Mr. Drennen found a new position at Hess and gave his notice.  Exxon Mobil then informed him that if he left for Hess, they would terminate his unvested incentive awards. Mr. Drennen ignored the warning and Exxon Mobil revoked his unvested shares.  Thereafter, Mr. Drennen instituted a lawsuit to recover his shares.

While restraints on trade are generally held to be subject to the same rules as noncompetes the Court interestingly held that:

While we ultimately determined that the provision in Haass was an unreasonable restraint of trade, notably, we never concluded that the damage provision was, itself, a covenant not to compete. See id. at 385–87. Further, we did not provide a definition of a covenant not to compete. See generally id. at 385–88. The Covenants Not to Compete Act likewise does not define what it is to be a covenant not to compete. See TEX. BUS. & COM. CODE §§ 15.50–.52.
 
The Court based its reasoning on the practical reality that “[f]orfeiture provisions [are] conditioned on loyalty, [but] do not restrict or prohibit the employees’ future employment opportunities. Instead, they reward employees for continued employment and loyalty.  Further, the Court explained, “[t]here is a distinction between a covenant not to compete and a forfeiture provision in a non-contributory profit-sharing plan because such plans do not restrict the employee’s right to future employment; rather, these plans force the employee to choose between competing with the former employer without restraint from the former employer and accepting benefits of the retirement plan to which the employee contributed nothing.”

This holding, combined with the Court’s holding that a Governing Law clause (which stated that New York law applied) meant the employee was out of luck and the employer with careful forethought and a properly drafted contract could skirt what would most likely contravene Texas law (though ultimately the Court left that question open).

The takeaway from Drennan that both employers and employees should keep in mind is the Court’s musings on Texas public policy.  As the Court states:

With Texas now hosting many of the world’s largest corporations, our public policy has shifted from a patriarchal one in which we valued uniform treatment of Texas employees from one employer to the next above all else, to one in which we also value the ability of a company to maintain uniformity in its employment contracts across all employees, whether the individual employees reside in Texas or New York. This prevents the “disruption of orderly employer-employee relations” within those multistate companies and avoids disruption to “competition in the marketplace.” Citing DeSantis v. Wackenhut, 793 S.W.2d 670 (Tex. 1990).

The Court decided last Friday that freedom of contract trumps protecting employees.  This echoes of another recent Supreme Court decision Ritchie v. Rupe wherein the Court held shareholders should protect themselves in contracts and not depend on equitable litigation claims.

http://thevethanlawfirm.blogspot.com/2014/07/texas-supreme-court-removes-shareholder.html

It will be interesting to see if the Texas Supreme Court shakes up any other areas of law based on this “shifting public policy.”