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Texas Gym Tests the Limits of Unfair Competition feat. Leiza Dolghih [e254]

Nasir and Matt welcome Leiza Dolghih to discuss a former vice president of Life Time Fitness that used company resources to open a competing gym. Check out Leiza Dolghih’s blog here at www.northtexaslegalnews.com.

Transcript:

NASIR: Welcome to our podcast where we cover business in the news and add our legal twist.
My name’s Nasir Pasha.
MATT: And I’m Matt Staub.
NASIR: Matthew Staub, and today we are covering non-competes again for the second time this week. Well, the first time wasn’t really non-compete related but it was tangentially related.
MATT: Yeah, Monday’s episode, I guess it fell under the non-compete umbrella.
We have a guest today – first time having a guess in a while – Leiza Dolghih. She is a litigation attorney out of Dallas, specializing in a few areas here – one which being unfair competition, trade secrets, and non-competes.
The reason we’re having her on today is she specializes in this area and we’re talking about a non-compete agreement that was actually held to be enforceable here in Texas and I think it’s going to be a real help to have her on the episode today and discuss.
NASIR: It’s one thing for us to talk about transactional work of actually drafting these non-competes but litigating is a whole different issue. So, she’s actually an employment litigation attorney.
Leiza, welcome to our podcast!
LEIZA: Thank you, guys! Thank you for inviting me.
NASIR: I know this is a hard question to start out with, and we’re going to get to our topic, specifically what’s going on, but you’re in Texas, our firm’s based out of California. Non-competes in California are just you just don’t see them and, when you do see them, you know there’s going to be a problem because the court’s not going to enforce it. What is going on in Texas? Why do they tolerate these non-competes?
LEIZA: Well, you know, as we say, it’s not that they tolerate. Actually, for most non-competes, we have a non-compete statute that says that non-compete agreements are allowed as long as they’re reasonable and there are a few other requirements that you have to meet. I feel fairly recently the way that courts interpreted the statutes is they made it very hard for employers to enforce their agreements. Well, that changed about five years ago. The courts came out with a new interpretation and it’s slowly catching on. The employers are now realizing that they can actually use the agreement to tie up their employees. A lot of employees are still under the impression that these agreements are not enforceable so they sign them, you know, without giving it a second thought. Of course, when they part ways, it becomes a big issue. So, I’m seeing disagreements constantly. I’m seeing them across all industries and I’m seeing all kinds of language ranging from something very ridiculous – you know, five years you can’t work anywhere in the country – to very specific limitations and everything in-between. So, Texas, I mean, they have a very good – or we have a very good – body of law on this issue.
NASIR: Yeah, but you’re right about those year terms. I mean, you get a wide range of what people do and we’ll talk about what we find reasonable and how to actually determine that which I have a feeling we’re not going to get a straight answer from you on that but let’s talk about what’s going on. Actually, it’s a Houston case, right? What’s going on with this? What is it? Global Gym?
LEIZA: Right. Well, it actually involves Life Time Fitness. Are you guys aware of that chain?
NASIR: No, I’m just trying to think, I just joined Equinox but I talked about that in another episode. I’ve never heard of that.
LEIZA: It’s a higher-end gym that also has a spa built in. In this case, it’s in Houston. A vice-president and his wife were working for a Life Time Fitness location that was very profitable and the VP was interested in opening his own competing spa which is, you know, it’s okay, it’s allowed. You can do that as long as he doesn’t violate his non-compete. But the problem in this case was that while he was still working for Life Time, he was using all the confidential information that Life Time had about its customers, profits, pricing – you know, all this information that is highly confidential to their business model – even using his position as the vice-president to gain access to that information and use it to plan his competing business. That’s a big no-no. That’s usually how most of the employees in Texas get in trouble regardless of whether they have a non-compete or not – if they’re taking confidential information that belongs to the employer.
MATT: You know, I was reading through kind of what happened. He entered into this non-compete agreement which, on the face of things, looked fine. I believe it was three years after employment, couldn’t solicit clients, some other protections in there as well. But I think it’s how he went about it. Like you were just saying, he was not only doing things while he was working for Life Time Fitness still, but he was doing things using the resources of Life Time Fitness while on the clock – using their computers, I believe they were able to trace email, he was using his assistant while he was at Life Time in order to kind of build this competing gym, leaves the company. I think he might have been terminated, I can’t recall, but he puts this new gym in place a few miles from where he worked. So, I think it was the non-compete on its face was fine – from what I can understand – but it’s really how he went about the whole process.
LEIZA: Right, I agree with you, absolutely. I mean, he was saving a lot of the documents that he was creating for his new business. He was saving it on Life Time Fitness computer systems which not only is he competing at this point with Life Time but it also creates evidence that he can’t control anymore. Life Time terminates him and now they can go into his work email and pull all that information and find all that evidence and build a very solid case against him.
NASIR: I’m sure all three of us have experienced this with our clients before. It’s not uncommon for employees, bad actors that they start planning this way before they are let go. They start using company resources and trade secrets, and I think that’s what’s unique about this case because, in California, exact same facts, maybe the non-compete wouldn’t hold water, but the trade secrets aspect, that’s something that California does care about and they would actually enforce with that. If they’re able to show that they breached confidentiality and used these trade secrets to basically start a competing business – especially during the employment, let alone after the employment – then that’s definitely going to be an issue.
LEIZA: Right, and I don’t know if you guys saw it or not, but the damages that they want him to pay is they want him to give back all the profits that his new location makes.
NASIR: Oh, yeah.
LEIZA: Not only were they able to shut it down with an injunction but he’s now going to have to give up whatever his new business earns.
NASIR: Interesting. In Texas, we can be pretty aggressive here. Again, in California, when it comes to injunctions against former employees, even with trade secret stuff, man, it’s tough. But, anyway, enough of the comparisons. Let’s talk about non-competes in Texas for a little bit here for a second and really boil it down. They have to be reasonable, right? You said. But how the heck does an employer determine what’s reasonable?
LEIZA: Well, I mean, term-wise, usually anything under two years is going to be looked at favorably by the court. It’s going to be acceptable. Anything over two years is going to kind of raise an eyebrow. The employer would have to have a really good reason for why it’s more than two years.
NASIR: Okay. Well, what if it’s two years and a non-compete for the entire state of Texas?
LEIZA: The geographic area has to be tied to the area where the person is working. For example, it’s very common for sales people to have non-compete agreements. It can only cover the areas that’s assigned to them in which they actually worked. If they were assigned the whole state of Texas and they travel in Texas and they have clients all over the state, then the geographic area would probably be reasonable. As an alternative, a lot of companies, instead of doing a geographic area, what is reasonable depends on how you look at it. They will do a non-solicitation clause. They’ll say, “You know, you can’t solicit certain clients,” and not mention geographic area at all.
NASIR: I’ll mention to our California clients and listeners that a non-solicitation clause is basically the same thing as far as California’s concerned that it’s still a restricted clause that is prohibited, basically. We’re basically trying to convince all the California employers to move to Texas.
LEIZA: Well, you know, we had an influx of a lot of businesses that are moving here from California. I think Toyota just made a big move, I think. There are a few other companies that are moving here. It’s a huge change for the employees that are coming from the states where non-competes are not enforceable and they move to Texas and all of a sudden they’re being asked to sign a non-compete.
MATT: So, Leiza, let me ask you this question, and I feel bad for putting you on the spot but just kind of your take. Let’s say this same example – leaves the company, starts this competing gym, the same couple of miles away or however it was, but he wouldn’t have used the company resources while he was working the hours he was working at Life Time Fitness. Let’s say he still kind of uses his know-how of the business, maybe even stuff that could be considered trade secrets, but he didn’t do it all on company time using company resources. Do you think they still would have been able to get that injunction at that point then?
LEIZA: They would have a much harder case. I mean, it would be a lot harder for them to get the injunction against them because at that point you end up arguing in court about what general knowledge of the industry, general knowledge of the business versus the trade secrets. They would have to establish that somehow he had access to trade secrets, that somehow he’s using it at his new business. I mean, all these things that here were basically handed on a plate to them. They just went into his email account and saw that he emailed himself financial performance documents.
NASIR: Oh.
LEIZA: It was all you’d have to attach to the exhibit.
NASIR: That’s a smoking gun so to speak.
LEIZA: Right. I mean, he really left them a lot. I don’t know if you looked at the complaint or not. I mean, it’s pretty detailed and he gave them a lot of evidence. Even one or two pieces of that information would have been enough to get an injunction against him.
NASIR: Yeah. I mean, the clients we have in Texas that end up going after employees, rarely do we have these sets of facts. I mean, this is pretty good, right? Usually, maybe we have a text message or an email or we find out they were working somewhere else that’s within a certain radius. But, to that same question, I mean, you’re in litigation, you’re on the enforcement side of things, what do you say to an employer that is like, “Well, we have a non-compete but it’s really just to kind of scare them. We don’t really do much about it.”
LEIZA: Well, I mean, I’ve actually dealt with situations like this. If you have a non-compete then you don’t enforce it when you know that somebody is violating it, you’re going to waive your right to enforce it with a future employee.
NASIR: Wow.
LEIZA: If your CFO leaves and you decide, “Well, I’m going to waive his non-compete,” then your CEO leaves and now you want to enforce the same non-compete, you’re going to have a very hard time defending that position.
NASIR: Wow. I might email you later for some case law on that. That’s interesting.
My approach has been a little bit different from a non-legal perspective but something very similar. I mean, if you have a non-compete and you don’t enforce it, that gets around, you know? And so, no one’s going to take it seriously and people are going to leave and then compete with you without care. If you’re kind of selective here and there, then forget about the legal issues of waiving. People aren’t going to take it seriously and it loses its force anyway. But you bring up a great point that, if you’re actually legally waiving it, that’s troublesome.
LEIZA: Oh, absolutely. When I interview clients – and, you know, I represent both employers and employees on both sides on these types of disputes – I always ask, “What’s the litigation history of the company that is threatening with the enforcement of the non-compete?” If they tell me, “Well, two other people in the same position I had in that company left a year ago and nobody enforced their non-compete,” well, to me, that makes the case much easier.
NASIR: I wonder if that person is of a certain protected class, there might be some discrimination arguments as well. Like, “Why are you treating me differently than these other two you haven’t?”
LEIZA: Right, that too.
NASIR: To end with this, I was interested because, you know, in Texas, healthcare is pretty big but physicians are treated a little bit differently with non-competes and I thought that would be interesting to kind of just talk about for a second.
LEIZA: Right, it’s an exception that’s actually part of the statute and it’s the only exception that exists in the state. It only applies to physicians. No other profession gets a special treatment. The doctors actually get an opportunity or the right to be able to buy out their restrictive covenants. In other words, if they enter in a covenant not to compete with a practice and they decide they want to leave and they decide they don’t want to abide or follow the restrictions, they can pay a certain amount of money to the practice to get out of those restrictions. Any non-compete agreement with physicians that doesn’t have this buy-out provision is automatically unenforceable and I haven’t come across the agreements that didn’t have the clause but I’ve seen cases involving such agreements and the courts immediately just find the agreement not enforceable.
NASIR: And that still requires the reasonableness for the actual non-compete itself, correct?
LEIZA: Well, yes, it does, and it also requires the buy-out amount has to be reasonable. The practice only earns $100,000 a year and the buy-out clause says that the physician can buy himself out for $500,000. That’s not going to make the non-compete enforceable. That amount has to be reasonable.
NASIR: Matt’s in California, I’m in Texas. Matt, have I convinced you to move to Texas yet – just for the non-compete issue?
MATT: Solely based on the non-compete? No, well, I guess you have pretty nice weather where you’re at, too. I was going to say today was 80 degrees. It’s actually a little bit warm for here in San Diego but it’s pretty ideal. I think the weather is what keeps me here.
NASIR: I’d be happy to pay the non-compete prohibition tax to live in Southern California.
LEIZA: I don’t blame you guys. I think it’s 35 degrees here right now.
NASIR: Did you say 35?
LEIZA: 35, maybe 40.
NASIR: Oh, okay.
MATT: Wow.
LEIZA: Not even close to 80.
NASIR: Umm, end on the sad note, I think, of bad weather in Dallas, Texas.
But, no, thanks for joining us. I think that was a nice angle to get kind of the litigation side of things because, to make fun of ourselves a little bit, a lot of the things we work with are very theoretical as far as what we’re drafting and I hope that what we’re writing has never appeared in a courtroom at all.
LEIZA: Yeah, that’s their idea. The agreements that I end up dealing with usually have problems.
MATT: Well, Leiza, thank you for your time. We’ll go ahead and put your name in the show notes, link your firm, and have a way for people to contact you as well. Again, thank you for your time.
LEIZA: Thank you for inviting me.
MATT: Keep it sound and keep it smart.

Nasir Pasha & Matt Staub

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The Podcast Where Nasir Pasha and Matthew Staub cover business in the news with their legal twist and answer business legal questions that you the listener can send it to ask@legallysoundsmartbusiness.com.

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