Non-Competes (How often do they hold up in Texas)

[Tailgate 2972]

I know there are plenty of lawyers on this site.

A good friend of mine from high school in Austin...so known him 30+ years now ‘resigned’ from his job a couple weeks ago. A girl who worked under him went to HR and showed some texts that were sent a year ago...nothing outrageous but enough for him to not be in a good spot and he decided to resign once the investigation started. She was pissed because he didn’t let her work from home as much as she wanted and he had texts from her that were similar as they had gone out for a couple months. But, never the less...today a woman going into HR is not good news for the guy who also happens to be her boss. Enough of that.

So, he signed a non compete after their company sold a few years ago. He’s read me portions some of which say things like ‘I know by signing this I can support myself knowing I can’t work/start a business in this industry.’ I don’t have the exact language but that was the concept in that portion of the document. It’s in the medical/insurance industry. I’ve never seen a non compete like this but to me it sounded pretty damn tight.

Well, the day after he left he started his own business in the same industry...and signed a few people who worked with his previous company to come with him.

I only post this as I worry about him. Seriously one of my closest friends who is single and recently bought his first house. I had told him for months to brush up his resume as once the company sold...it’s only a matter of time before they possibly shut down the Austin office.

He said he talked with a lawyer who read the non compete and said it’s too broad and they won’t have a case. I’ve also heard as a right-to-work state it’s hard enforcing non competes in Texas.

Sorry for the long story...but is my buddy up shit creek or does he have a fighting chance if they lawyer up? I’m assuming they have counsel in house.

 

Edited July 3, 2018 by Tailgate

[TwiceHorn 30715]

They are more enforceable now than they have probably ever been.  Those signed in conjunction with the sale of a company, rather than simply as a condition of employment, have always been treated more favorably.  In that case, Texas' policy of favoring free employment, often called right to work, is not implicated as strongly as in the context of simply a former employee.

 

Any covenant not to compete must be reasonable as to time, geography, and activity restrained.  Under current law, any provision that is not reasonable may be reformed by the court to something reasonable.  Example: if it's five years and that's unreasonable, the court can rewrite it to two years, but may not award damages for breach, only an injunction.

 

In my experience and observation, most covenant not to compete litigation turns into misappropriation of trade secrets litigation.  Trade secrets in Texas can be very broad and can cause anyone competing with a former employer to incur thousands, hundreds of thousands, or even millions of dollars in attorneys fees, depending on how serious/vengeful the former employer is.  In the context of selling a business, I would imagine the buyer would be royally pissed.

 

I suspect that your friend may be on very thin ice, at least in terms of exposure to significant legal fees, if not actual liability.  You can beat the rap, but you can't beat the ride.

Edited July 3, 2018 by TwiceHorn

[DalTxHornFan 3066]

https://fiveminutelaw.com/

This is an excellent employment law blog done by a good friend of mine.  He works both sides of the street, but it's pretty clear that he thinks that most "trade secrets" really aren't.  Lots of good current (mostly Texas) employment and non-compete law discussed in an accessible way for all of us non-lawyer types. YMMV.

Edited July 3, 2018 by DalTxHornFan

[TwiceHorn 30715]

22 minutes ago, DalTxHornFan said:

https://fiveminutelaw.com/

This is an excellent employment law blog done by a good friend of mine.  He works both sides of the street, but it's pretty clear that he thinks that most "trade secrets" really aren't.  Lots of good current (mostly Texas) employment and non-compete law discussed in an accessible way for all of us non-lawyer types. YMMV.

Oh yeah, a whole lot of trade secrets are utter bullshit, but it can be fairly easy for a company to make threshold proof of trade secrets and very hard for a defendant to prove an origin other than the prior employer.  You hope that judge or jury has some common sense working.

 

Classic example.  A sales-type brings a list of clients or customers to new employment.  They go in his outlook address book, or worse, a CRM program.  Sales-type then knows where to find them, so he deletes or just loses wherever they used to be (say google contacts or something).  Leaves company.  They have evidence that he downloaded contacts from CRM program.  Sales-type then contacts old friends in the business, gets business.  BOOM!  Former employer sues, produces a print from the CRM system showing "our proprietary customers," it's password protected, only sales types have the pw, etc. etc.  Former sales-type is fucked. kinda.

Edited July 3, 2018 by TwiceHorn

[Horn of Gabriel 1570]

Oh yeah, a whole lot of trade secrets are utter bullshit, but it can be fairly easy for a company to make threshold proof of trade secrets and very hard for a defendant to prove an origin other than the prior employer.  You hope that judge or jury has some common sense working.
 
Classic example.  A sales-type brings a list of clients or customers to new employment.  They go in his outlook address book, or worse, a CRM program.  Sales-type then knows where to find them, so he deletes or just loses wherever they used to be (say google contacts or something).  Leaves company.  They have evidence that he downloaded contacts from CRM program.  Sales-type then contacts old friends in the business, gets business.  BOOM!  Former employer sues, produces a print from the CRM system showing "our proprietary customers," it's password protected, only sales types have the pw, etc. etc.  Former sales-type is fucked. kinda.

I remember a similar story from back-in-the-day where the sales guy hired a consultant/lawyer to “clean room” his contact list, e.g. show an alternative path to each. E.g. “No we didn’t steal that client, here is a search we did on LinkedIn for ‘Director of IT in Texas at companies with >500 employees’ and there he is. Anyone could do this!”

[BrazilHorn 6552]

They usually aren't super enforceable unless it was tied to an equity grant of some kind or some type of bonus. Just a signed form with nothing else to it usually isn't enforceable as strongly. (I am not a lawyer, just going off what I have seen/heard in prior roles)

[Cheeseweasel 26437]

15 hours ago, TwiceHorn said:

You can beat the rap, but you can't beat the ride.

Troof. OP's friend may win the war, but he's going to lose so many battles that it will be a Pyrrhic victory at best.

[TwiceHorn 30715]

11 hours ago, Horn of Gabriel said:

 

I remember a similar story from back-in-the-day where the sales guy hired a consultant/lawyer to “clean room” his contact list, e.g. show an alternative path to each. E.g. “No we didn’t steal that client, here is a search we did on LinkedIn for ‘Director of IT in Texas at companies with >500 employees’ and there he is. Anyone could do this!”

Yeah, I was involved in a case about a dozen years ago where people left their former employer and did just about everything right in the departure stage:  didn't take anything, insured that their business related information had an independent source. etc., etc.  Then, their clients, legitimately acquired, asked them to work on projects they had worked on while employed by the prior company and in the process conveyed to them drawings produced by them while employed by the prior company.  The drawings didn't qualify as trade secrets because they weren't maintained internally (freely given to customers and potential customers), so they wound up registering copyright in them.

 

That case went from Covenant Not to Compete>Design Patent>Trade Secret>Copyright infringement, lasted 2-plus years of heavy work and about $8,000,000 in legal fees, only a quarter of which were borne by the defendants.  It settled after voir dire and opening argument when the jury was polled and split 50-50.  The president of the former employer was extremely vengeful over the whole deal, was fired shortly after the litigation settled, and the defendant company survived and thrived.  But they hated every minute of that 2-plus years and $2M in attorneys fees and costs.

[txhorns 2400]

We're going to need pictures of the girl who went to HR.  We know your buddy has them on his phone.

[TwiceHorn 30715]

19 hours ago, Tailgate said:

I know there are plenty of lawyers on this site.

A good friend of mine from high school in Austin...so known him 30+ years now ‘resigned’ from his job a couple weeks ago. A girl who worked under him went to HR and showed some texts that were sent a year ago...nothing outrageous but enough for him to not be in a good spot and he decided to resign once the investigation started. She was pissed because he didn’t let her work from home as much as she wanted and he had texts from her that were similar as they had gone out for a couple months. But, never the less...today a woman going into HR is not good news for the guy who also happens to be her boss. Enough of that.

So, he signed a non compete after their company sold a few years ago. He’s read me portions some of which say things like ‘I know by signing this I can support myself knowing I can’t work/start a business in this industry.’ I don’t have the exact language but that was the concept in that portion of the document. It’s in the medical/insurance industry. I’ve never seen a non compete like this but to me it sounded pretty damn tight.

Well, the day after he left he started his own business in the same industry...and signed a few people who worked with his previous company to come with him.

I only post this as I worry about him. Seriously one of my closest friends who is single and recently bought his first house. I had told him for months to brush up his resume as once the company sold...it’s only a matter of time before they possibly shut down the Austin office.

He said he talked with a lawyer who read the non compete and said it’s too broad and they won’t have a case. I’ve also heard as a right-to-work state it’s hard enforcing non competes in Texas.

Sorry for the long story...but is my buddy up shit creek or does he have a fighting chance if they lawyer up? I’m assuming they have counsel in house.

 

Also, a couple of things here that dont initially make sense.  The covenant was signed in the context of him selling the business, or the business being acquired by a new owner and he was just an employee? If the latter, he has an argument that the covenant fails for lack of consideration, but that argument has gotten harder than it was 10 years ago.

How long has it been since he stopped employment with the old company and started his own?

And addendum to how to evaluate the "reasonableness" of the restrictions:

Time- should bear some connection to the "value life" of the employee's knowledge when leaving the company, really hard to evaluate, but two years is probably reasonable, five probably isnt.  In other words, if everything "turns over" in the business every couple of years and the term is five years, that's unreasonable.  If "turn over" information is available, that's the way to attack this

Geography- where the employee worked, doesn't matter if it's a national or international company, but where the employee (city/county not state) was actually located or had a sales territory or other geographical connection

Activity restrained- can only restrain that activity similar to or closely related to the work done at the prior employer

Edited July 3, 2018 by TwiceHorn

[Tailgate 2972]

40 minutes ago, TwiceHorn said:

Also, a couple of things here that dont initially make sense.  The covenant was signed in the context of him selling the business, or the business being acquired by a new owner and he was just an employee? If the latter, he has an argument that the covenant fails for lack of consideration, but that argument has gotten harder than it was 10 years ago.

How long has it been since he stopped employment with the old company and started his own?

And addendum to how to evaluate the "reasonableness" of the restrictions:

Time- should bear some connection to the "value life" of the employee's knowledge when leaving the company, really hard to evaluate, but two years is probably reasonable, five probably isnt.  In other words, if everything "turns over" in the business every couple of years and the term is five years, that's unreasonable.  If "turn over" information is available, that's the way to attack this

Geography- where the employee worked, doesn't matter if it's a national or international company, but where the employee (city/county not state) was actually located or had a sales territory or other geographical connection

Activity restrained- can only restrain that activity similar to or closely related to the work done at the prior employer

So, it looks like the one he signed where he got consideration for the sale, he was an early employee not a founder, started two years from the date he signed it and ended last Fall. The other one he signed for continued employment, of which I listed in my words some of the language he read me in my original post, is two years from the date he left the company which was about two weeks ago. He formed the new company last week.

Really appreciate all of the thoughts in these posts.

Per comments:

He started company in same city he worked. Austin.

Agreement said he couldn’t do it anywhere in U.S.

He is doing the exact same business model as the company he just left.

He signed four other people who worked with the previous employer to come with him to new company.

New info: He believes he has some strong evidence of ‘over billing’ companies for services that were rendered and then not giving contractors proper percentages from these projects...he thinks this could be his ‘card to play’ if they come after him. Apparently contractors sign contracts saying they get x % from each job done.

He also says it’s illegal to over bill as most of these are insurance companies and he could be a ‘whistle blower’ and gain some type of protection there.

Its crazy and I can’t imagine how lawyers aren’t going to get involved soon.

 

 

Edited July 3, 2018 by Tailgate

[TwiceHorn 30715]

49 minutes ago, Tailgate said:

So, it looks like the one he signed where he got consideration for the sale, he was an early employee not a founder, started two years from the date he signed it and ended last Fall. The other one he signed for continued employment, of which I listed in my words some of the language he read me in my original post, is two years from the date he left the company which was about two weeks ago. He formed the new company last week.

Really appreciate all of the thoughts in these posts.

Per comments:

He started company in same city he worked. Austin.

Agreement said he couldn’t do it anywhere in U.S.

He is doing the exact same business model as the company he just left.

He signed four other people who worked with the previous employer to come with him to new company.

New info: He believes he has some strong evidence of ‘over billing’ companies for services that were rendered and then not giving contractors proper percentages from these projects...he thinks this could be his ‘card to play’ if they come after him. Apparently contractors sign contracts saying they get x % from each job done.

He also says it’s illegal to over bill as most of these are insurance companies and he could be a ‘whistle blower’ and gain some type of protection there.

Its crazy and I can’t imagine how lawyers aren’t going to get involved soon.

 

 

Ah so a bit of both on the sell the company, but continued as an employee until present.

 

Yeah US is just not going to work as a reasonable territory.  But there's that pesky reformation provision in the law, so it might support an injunction.  With reformation of the covenant to Austin or Travis County, he might be in some trouble from a liability standpoint (injunction against further work in the area).  One might think it's virtually certain that he will be sued.  The whistleblower stuff might help, but it isn't guaranteed by any stretch and people have a tendency to overstate this kind of thing when potentially under the gun.

 

Unfortunately, some lawyers are going to advise sort of incompletely hoping that there is a suit and fees to be billed on said suit.  Regardless of any potential defenses, this was an inadvisable course of action.  On the other hand, risk-loving entrepreneurial types are gonna entrepreneur and there was probably no talking him out of this anyway.  Hope it doesn't ruin him.

Edited July 3, 2018 by TwiceHorn

[Tailgate 2972]

6 minutes ago, TwiceHorn said:

Ah so a bit of both on the sell the company, but continued as an employee until present.

 

Yeah US is just not going to work as a reasonable territory.  But there's that pesky reformation provision in the law, so it might support an injunction.  With reformation of the covenant to Austin or Travis County, he might be in some trouble from a liability standpoint (injunction against further work in the area).  One might think it's virtually certain that he will be sued.  The whistleblower stuff might help, but it isn't guaranteed by any stretch and people have a tendency to overstate this kind of thing when potentially under the gun.

 

Unfortunately, some lawyers are going to advise sort of incompletely hoping that there is a suit and fees to be billed on said suit.  Regardless of any potential defenses, this was an inadvisable course of action.  On the other hand, risk-loving entrepreneurial types are gonna entrepreneur and there was probably no talking him out of this anyway.  Hope it doesn't ruin him.

Ya, your comment about you can beat the rap but you can’t beat the ride was a good one. Appreciate your thoughts.

[blacklab 11808]

and let me add from personal experience, if the other guy is willing to spend $500k on lawyers while you spend $50k, and the opposing counsel is on a first name basis with the judge, it doesn't matter what the contract says, you'll probably lose.

[52-80 18962]

On 7/3/2018 at 3:25 AM, Tailgate said:

 A girl who worked under him went to HR

I bet she did.

[ousuxndallas 65]

Until recently, Texas was staunchly pro-employee in non compete lawsuits. However, the Texas Supreme Court ruled in favor of corporations a few years ago, so case law is a little more vague (or non-decisive).

In general, it's best to negotiate something with the former employer, but it looks like that ship has sailed.

If the former employer is not litigious, you can be more aggressive. Either way, hiring former colleagues is no bueno, as it likely violates a non-solicitation clause.

The non-compete is hard to enforce, especially if it's broad in scope and geography.

The trade secret clause is tough to enforce too, especially if your friend already possessed industry knowledge, contacts, etc.

[TwiceHorn 30715]

1 hour ago, ousuxndallas said:

Until recently, Texas was staunchly pro-employee in non compete lawsuits. However, the Texas Supreme Court ruled in favor of corporations a few years ago, so case law is a little more vague (or non-decisive).

In general, it's best to negotiate something with the former employer, but it looks like that ship has sailed.

If the former employer is not litigious, you can be more aggressive. Either way, hiring former colleagues is no bueno, as it likely violates a non-solicitation clause.

The non-compete is hard to enforce, especially if it's broad in scope and geography.

The trade secret clause is tough to enforce too, especially if your friend already possessed industry knowledge, contacts, etc.

All of this is true.  Until the Marsh case from the Texas Supreme Court, there was almost always an "out" that didn't involve actually analyzing the covenant according to the statute, that is, reasonable as to time, geography and scope of activity restrained.  After Marsh, the focus is really now, for the first time ever, I think, on the actual statute, Tex. Business & Commerce Code Sec. 15.50, which is at least facially neutral.  Previously, there was a decided pro-employee bent in the case law.

While it is true that a lot of employer trade secrets are bullshit of the purest ray serene, as noted above, trade secret litigation can be an enormous and expensive pain in the ass.

[Jerry Callo 8626]

I'd be surprised if he didn't sign an non-solicitation agreement as well.  Poaching employees is a sure way of pissing off the previous employer.

[Nice Guy Eddie 13268]

2 hours ago, Jerry Callo said:

I'd be surprised if he didn't sign an non-solicitation agreement as well.  Poaching employees is a sure way of pissing off the previous employer.

OP was vague in terms of whether the new hires were working for the old company when he poached them or was their history there in the past.   I've run across a few firms that treat this more seriously than non-competes.   And they usually just want the practice to end and are not pushing for damages.  Most importantly they want the story to get out among employees (current and former) to not attempt this.   

Personally I always think that if you pay and treat people fairly, then they will stay.   Since some (many?) companies don't do this, they need to scare people.

[TwiceHorn 30715]

6 minutes ago, Nice Guy Eddie said:

OP was vague in terms of whether the new hires were working for the old company when he poached them or was their history there in the past.   I've run across a few firms that treat this more seriously than non-competes.   And they usually just want the practice to end and are not pushing for damages.  Most importantly they want the story to get out among employees (current and former) to not attempt this.   

Personally I always think that if you pay and treat people fairly, then they will stay.   Since some (many?) companies don't do this, they need to scare people.

Good point.  There is such thing as an anti-solicitation provision (geared to existing employees rather than customers), that doesn't get treated as a covenant not to compete (meaning pretty much enforced as written without much question), although it is often included in one.  The ones geared toward customers get scrutinized for reasonableness in the same way as covenants not to compete.

 

And yeah, some companies are just mostly concerned with making a little noise, scaring the ex-employee, and scaring the current ones.  Those are survivable, but can be inconvenient and moderately expensive.  Problem is, until you get pretty deep into it, you can't tell whether the company is one of these, or a psycho, vengeful, pursue it beyond all reason company.

 

Edit: didn't read Callo's post, sorry for the blinding glimpse of the obvious.  Also, I am apparently wrong about employee non-solicitation clauses.  Apparently now they are getting scrutinzed for reasonableness just as are customer non-solicitation clauses.

Edited July 5, 2018 by TwiceHorn

[Tailgate 2972]

Ok, it’s getting real for my buddy.

A high-profile firm has been retained and filed an emergency order against him. He has a court date this week.

He is planning on representing himself and believes the emergency order was only granted because people working with the company lied to save themselves as they were going to join him. He apparently has all the evidence showing this. He’s now been pouring over the net, and with a local attorney who is giving him limited time (he could only afford a few hours for phone consulting as he can’t afford for them to join him in court), proper ways to file motions etc...

Question: do people who represent themselves ever have a chance in court against big firms? 

[Dendox 85]

very very rarely

[Nice Guy Eddie 13268]

Your buddy seems to make one mistake after another.  Fired for cause, started a company that may violate his employment agreement, and then started to poach employees.   Now he's trying to represent himself in a court case.    And his defense is going to be accusing people of lying.   Why do I see a decent chance your friend yells at the judge and ends up behind bars.

Perhaps he should use whatever limited funds he has to retain a lawyer to settle this with his old employer.   Hopefully they will settle for him agreeing to cease all activities.   And he better hope they're not looking for damages or compensation for their attorney costs.

 

[Tailgate 2972]

1 hour ago, Nice Guy Eddie said:

Your buddy seems to make one mistake after another.  Fired for cause, started a company that may violate his employment agreement, and then started to poach employees.   Now he's trying to represent himself in a court case.    And his defense is going to be accusing people of lying.   Why do I see a decent chance your friend yells at the judge and ends up behind bars.

Perhaps he should use whatever limited funds he has to retain a lawyer to settle this with his old employer.   Hopefully they will settle for him agreeing to cease all activities.   And he better hope they're not looking for damages or compensation for their attorney costs.

 

Ya, basically what Ive told him. Old HS buddy so we have been friends for a very long time. He has proven to me the last few years he has zero logic when it comes to business. Tough to see friends go through this...and appreciate the thoughts here...but I am just hoping not to watch someone burn alive.

[Cheeseweasel 26437]

Your friend is going to be selling Scentsy on a street corner soon to make ends meet.

[hrmaddie 48]

Wife signed a non-compete with a medical practice, a few years later the practice was sold to a larger organization held by United Healthcare.  My wife and new management couldn't get along.  Wife got fed up and decided to start her own practice.  We had no idea if her non-compete was still valid due to the sale, but she was either going on her own or have a breakdown.  About four months into her practice she received a letter saying she owed her non-compete.  She hired a medical practice lawyer out of Austin and he said non-competes are mostly valid these days.  Ultimately, he got it knocked down 25% and a one year payment plan.  In the end he said his fees would almost total the non-compete amount if they went to court and it was better just to pay the reduced amount.  

Moral of the story, see if X company will reduce the buyout, because in the end the lawyer fees could cause the new company to go bankrupt.   Never underestimate some scorned idiot with lots of corporate money to burn in lawyer fees.

[Nice Guy Eddie 13268]

Thread is a good reminder about being careful about signing documents just because your employer puts it in front of you.  Now the option may be to sign, or go home.  But if you're a highly valued employee, then they should compensate you for potentially signing away your right to work in the future, even if you're fired for cause.    Now HR may laugh when you ask for compensation now, or if the situation occurs, but they are asking you to take on risk with zero benefit.  and if it means you need to work elsewhere, maybe that is the right deal.

[csb] Once or twice in my career, HR has sent revised employee agreements to everyone.  I usually "forget" to sign it, and one time it wasn't noticed.

 

 

[Tailgate 2972]

Ok, got a late call from buddy who has been pouring over web and options for what to do on Thursday in court.

He just re-read his non-compete for the 100th time and discovered it said something to the extent of ‘all jurisdiction and such and such of this agreement shall be filed in Delaware and that is the location we agree on..’

They filed it in Harris county (Houston).

Does he have anything here?

[FartingMonk 3603]

haha.  the judge says well you guys agreed to file it in delaware and the delaware judge tells them he has no jurisdiction so he files back in harris.  

[Murfdogg21 4394]

Sorry to hear this. I went through something similar a year ago when, after I was forced (after I started working) to sign a two year, geographically broad and applying to the entire “medical device” industry, I was fired without cause out of spite by the company owner and verbally dared me to find another job because he looked forward to suing me (and in his mind send a message to the rest of the company and somehow improve a dying morale). 

I consulted attorneys on Shaggy and another site and ended up paying two attorneys who specialize in Texas employment law. The overall legal advice I was given echoes what was generally said in this thread by Twice and others:

1. To be enforceable the noncompete must be “reasonable” in time, geographical, and industry specifics

2. The old company must have a method to assign or prove damages (eg lost sales or stolen intellectual property)

3. Is the juice worth the squeeze (or your analogy of choice)? You may win, but usually the old company has deeper pockets than you and can afford more legal fees. 

 

In my case, the geography was somewhat broad and the industry was far too broad. My lawyer shot back that their noncompete was weak and their business ethics were terrible, and not only would they lose a lawsuit against me under all the circumstances, it would be a show of weakness to their remaining employees. Of course to me the lawyer advised I should stay out of court to save legal fees. All this led to a reduction of noncompete to 6 months with a 4.5 month severance payment. A year later, I still hear through the grapevine that the owner loves to mumble about me and how he still reserves the right to sue me. I did my time and stayed out of the industry for 6 months, but started consulting for two competitors at 6 months and one day.

In conclusion, your buddy’s situation is different and he got bad advice to start a competitive business in the same town the next day after he initiated his own termination. If the old company can prove damages he is probably screwed.