News & Announcements (Part 2)

Texas Supreme Court Gives Employers a Boost in Protecting Customer Relationships Through Noncompete Agreements

On June 24, 2011, the Texas Supreme Court broadened noncompete enforceability in its decision in Marsh USA, Inc. v. Cook. The Court held that a covenant not to compete executed in connection with an employee stock option agreement is valid under Texas' Covenants Not to Compete Act (the Act) when the stock options are reasonably related to the employer's interest in protecting its goodwill.

Marsh USA offered the defendant employee stock options pursuant to a program designed to "provide valuable select employees with the opportunity to become part owners of the company". In order to exercise the stock option, the employee was required to sign a noncompete agreement that prohibited the employee from working for Marsh's competitors or soliciting its employees in the event the employee no longer worked for Marsh. Less than three years later, the employee resigned and began working for a direct competitor of Marsh. Marsh filed suit alleging breach of contract.

The Texas Supreme Court's decision turned on whether a company's goodwill can support a noncompete agreement under the Act. The Court first determined that the contract at issue was "an otherwise enforceable agreement between the parties" and next turned to the issue of whether the covenant not to compete was "ancillary to or part of that agreement." "Requiring that a covenant not to compete be ancillary to an otherwise enforceable agreement or relationship ensures that noncompete agreements that are naked restraints of trade will not be enforceable under the Act." The Court noted that "Texas law has long recognized that goodwill, although intangible, is property and is an integral part of the business just as its physical assets are determined that the employer sought the non compete covenant at issue in order "to protect its goodwill namely, the relationships it developed with customers and employees and their identities." The Court held that the noncompete provision was ancillary to an enforceable agreement and was, therefore, valid and enforceable when "the business interest being protected (goodwill) is reasonably related to the consideration given (stock options)."


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Fifth Circuit Overturns Arbitration Award Against Corporate Officers

In DK Joint Venture 1 v. Wayland, the Fifth Circuit held that corporate officers were not personally bound by arbitration provisions in agreements executed on behalf of the corporation. In Wayland, the plaintiff businesses filed arbitration demands against fifteen corporations and individual corporate officers, asserting claims for fraud, breach of contract, and breach of fiduciary duty. The arbitration clauses were contained in contracts relating to a purported oil and gas venture and granted authority to the arbitration panel to determine its own jurisdiction.

The United States District Court for the Northern District of Texas issued an order stating that all defendants, including the corporate officers in their individual capacity, were bound by the arbitration agreement. The arbitration panel awarded the plaintiffs over $13.5 million in damages and fees for their claims against the chief financial officer and chief executive officer of the defendant corporations in their personal capacity. The federal district court later granted the plaintiffs' motion seeking confirmation of the arbitration award and the defendants appealed.

The Fifth Circuit addressed the issue of whether the corporate officers, "in their personal capacities, [were] bound by the arbitration agreements that were entered into by the defendant corporations, of which they were the CEO and CFO." The Court explained that the individual corporate officers did not become personally bound by the terms of a contract, including the arbitration clause, by signing the contracts as the agent of a disclosed principal. As non-signatories or parties to the contracts at issue, the CEO and CFO never personally agreed to arbitrate and, therefore, could not be compelled to do so. The Court held that "under ordinary principles of contract and agency law, [the corporate officers] were not personally bound by the arbitration agreements that their corporations entered into and therefore the arbitration panel lacked jurisdiction to render an award against them."


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Employment Law Update: The Ada's Pre-2008 Amendment Definition Of "Disability" Will Still Apply In Some Instances.

In an opinion issued on March 22, 2010--Carmona v. Southwest Airlines Co.--the Fifth Circuit ruled that the 2008 amendments to the Americans with Disabilities Act's (ADA) broad definition of "disability" will not be afforded special consideration when interpreting the pre-amendment definition of "disability." Effective January 1, 2009, the ADA Amendments Act of 2008 (ADAAA), was enacted to correct what Congress viewed was an overly restrictive interpretation of the ADA's definition of "disability" that had been adopted by the U.S. Supreme Court. Not long after its enactment, the Fifth Circuit ruled that it would not apply retroactively. EEOC v. Agro Distribution, LLC, 555 F.3d 462, 469 n. 8 (5th Cir. 2009). In Carmona, the district court found that the plaintiff--who filed suit long before the ADAAA became effective--was not disabled under the pre-ADAAA definition of "disability." On appeal, the plaintiff argued not for retroactive application of the more lenient ADAAA definition, but that the ADAAA as legislation subsequent to the Supreme Court's restrictive interpretation of the term was entitled to great weight in the Fifth Circuit's analysis. The Fifth Circuit rejected this argument, holding that in order for it to depart from the Supreme Court's settled interpretation, it would need to find that Congress intended the ADAAA to apply retroactively, which it had already declined to do.

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Employment Law Update: The Fifth Circuit Refuses To Make Inroads Into Texas' Well-Established Employment-At-Will Doctrine.

In a March 15, 2010 opinion--Sullivan v. Leor Energy--the Fifth Circuit declined to enforce an unsigned employment contract. There, the plaintiff, Sullivan, was in the process of negotiating an employment contract with Leor when he began work as an executive. He was terminated shortly after he began and before the employment contract was ever signed. Nevertheless, Sullivan filed suit against Leor for breach of the unsigned employment agreement. It was undisputed that the agreement could be terminated "at-will," (even though it had a stated term), so Sullivan sought certain amounts in salary and benefits under the agreement. The district court granted Leor's motion to dismiss for failure to state a claim upon which relief could be granted. The Fifth Circuit affirmed holding that, under Texas law, a contract for a stated term longer than one year is not taken out of the statute of frauds when there is a mere possibility of termination within one year due to contingent events set forth in the contract, including termination by a party and that payment of a salary for services rendered was insufficient to take the alleged agreement out of the statute of frauds because the services were fully explained by the salary without supposing any additional consideration.

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Employment Law Update: The Fifth Circuit Discusses "Direct Evidence" Of Age Discrimination.

In a March 3, 2010 opinion--Jackson v. Cal-Western Packaging Corp.--the Fifth Circuit held that alleged discriminatory statements must be proximate in time to the employment decision to qualify as direct evidence of discrimination. The court gave the following summary of the relevant facts: "Jackson brought suit against Cal-Western for age discrimination. His claim primarily relied on a remark [his supervisor] allegedly made to another coworker in 2006 that Jackson was an "old, gray-haired fart" and that the coworker would be in charge when Jackson retired. Cal-Western moved for summary judgment. The district court ruled that Jackson had alleged a prima facie case of discrimination and that Cal-Western had offered a legitimate, nondiscriminatory reason for firing him, but that Jackson had failed to show that there was a fact issue as to whether Cal-Western's reason for firing him was pretextual." The Fifth Circuit went on to affirm the trial court's decision. Specifically, it held that Jackson had not shown that the comment to the coworker was sufficiently proximate in time to the employment decision which occurred years later, and thus the comment could not qualify as direct evidence.

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Toxic Tort Law News: Supreme Court Rejects Petition for Additional Damages in Exxon Valdez Case

On March 1, 2010, the United States Supreme Court rejected a petition from two seafood processors, Polar Equipment, Inc. and Nautilus Marine Enterprises, attempting to recover additional sums from the Exxon Valdez oil spill after they split from a class of plaintiffs which was ultimately awarded more than $1 billion in punitive damages, an award subsequently reduced to $507.5 million by the Supreme Court, using a one-to-one ratio between punitive and compensatory damages in Exxon Shipping Co. v. Baker, 128 S.Ct. 2605 (2008). The two processors split off from the class in 2003, settled their claims for $8 million in 2006, and then sought additional compensation from the lofty punitive damages awarded to the class. When the processors split from the class in 2003 to pursue their own claims, they agreed with the class to release their rights to share in punitive damages recovery awarded and collected by the class. Accordingly, the Ninth Circuit held that the processors settled their Exxon Valdez Claims in 2006 for $8 million and were not entitled to recover a share in the punitive damages collected by the rest of the class plaintiffs. The United States Supreme Court rejected the processors appeal without providing reasons for its refusal.


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Toxic Tort Law News: Second Circuit Rules EPA Settlement Approval is Unnecessary to Trigger Contribution Right

On February 24, 2010, in Niagara Mohawk Power Corp. v. Chevron U.S.A., Inc., No. 08-3843, the United States Second Circuit ruled that a superfund consent decree between a state and a private party does not require EPA approval for the settling party to pursue a contribution action based on the settlement. In so ruling, the Second Circuit reinstated a company's Section 113 contribution claims against several other alleged polluters over cleanup of a contaminated industrial site in Troy, New York, after determining that a lower court erred in dismissing Niagara Mohawk's contribution claims. In reinstating Niagara Mohawk's 113 contribution claims, the Second Circuit held that CERCLA "does not require that the United States acquiesce in the administrative settlement ... nor does Section 113(f)(3)(B) require that there be a federal delegation of settlement authority to a state...." Judge Richard C. Wesley, writing for the circuit, noted that it is "consistent with the state's power to settle CERCLA liability without the express approval of the EPA" and that "[i]t would be bizarre indeed if a PRP's settlement with a state entitled it to seek contribution under [Section 113], but its action taken in executing that settlement disqualified the settler from employing the statute to recoup a portion of its expenses."


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Environmental Law News: Fifth Circuit to Revisit Ruling Climate Change Suit

On February 26, 2010, in Comer v. Murphy Oil Co., 5th Cir. No. 07-60756, rehearing granted 2/26/10, the United States Fifth Circuit agreed to reconsider a decision allowing Mississippi property owners to sue a group of energy companies and the Tennessee Valley Authority in federal court for alleged climate change-related damages. Claimants alleged that the energy companies' carbon dioxide and pollutant emissions collectively contributed to climate changes, thereby intensifying the severity of Hurricane Katrina, which caused damage to claimants' coastal property. The suit was dismissed by the district court on the grounds that it did not raise a justiciable dispute, but political and policy questions. The Fifth Circuit panel disagreed, ruling that until Congress and the president act on climate change, Mississippi common-law questions raised by the plaintiffs are "justiciable". The Fifth Circuit's agreement to rehear this ruling has been well received by industries plagued by group liability, climate-related claims and may impact the Second Circuit's decision as to whether to grant rehearing in its similar September 21, 2009 ruling, Connecticut v. American Electric Power Co., 2d Cir., No. 05-5104-cv, wherein it held that a federal public nuisance action brought by several states and environmental groups against major power providers for alleged climate change damage could proceed in federal court despite political-question or standing challenges.


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Procedural Law News: Supreme Court Adopts Nerve Center Test

On February 23, 2010, in Hertz Corp. v. Friend, No. 08-1107 (U.S. Feb. 23, 2010), the United States unanimously adopted a "nerve center" test for purposes of determining a corporation's principal place of business. Under the federal diversity jurisdiction statute, "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business." 28 U.S.C. S 1332(c)(1). Justice Breyer, writing for the unanimous court, recognized that the circuits have developed different and sometimes conflicting tests for determining a company's "principal place of business." For example, there is the "nerve center" test of the Seventh Circuit, the "center of activity" test applied by the Third Circuit and the "totality of corporate activity" test used by the Fifth, Sixth, Eighth, Ninth, Tenth and Eleventh Circuits.

In adopting the nerve center test, the Court recognized that the nerve center would normally be the place where the corporation maintains its headquarters, but the Court declined to adopt a rule that would strictly rely on the location of a company's headquarters, noting that empty headquarter buildings will not suffice if the opposing party can show that decisions are made elsewhere. Instead, the Court ruled that a court should look where the company's "high level officers direct, control, and coordinate the corporation's activities." As the Seventh Circuit is presently the only circuit applying the "nerve center" test, this decision should fundamentally change the manner in which courts determine a company's "principal place of business" for purposes of applying the federal diversity jurisdiction statute.


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Insurance Law News: Payment of Ransom Not Contrary to Public Policy

The ruling of Masefield AG v. Amlin Corp. Member Ltd., 2010, EWHC 280 (Comm) by Mr. Justice Steel, delivered in the English Commercial Court on February 18, 2010, addressed the issue of whether the hijacking of the tanker Bunga Melati Dua by Somali pirates justified a claim under an open cover marine insurance policy for the actual total loss (ATL) of cargo, or alternatively its constructive total loss (CTL), notwithstanding that the cargo was eventually recovered. This matter arose out of the hijacking of the tanker in the Gulf of Aden on August 19, 2008 while on route from Sumatra to Rotterdam. The owners negotiated a ransom payment and the vessel, with surviving crew members and cargo, were released on September 29, 2008. Steel held that there had not been a CTL, as the cargo had not been abandoned within the meaning of the Marine Insurance Act of 1906 because "the shipowners and the cargo owners had every intention of recovery their property..." and, in light of the history of Somali hijackings, the ship owners had good reason to believe they would be successful in achieving recovery, precluding a finding that an ATL was unavoidable.

Steel further rejected claimant's argument that the recovery of the ship, by way of payment of ransom, should be ignored because the payment of ransom, while not illegal under British law, is contrary to public policy. Steel expressed that payment of ransom was an appropriate action for the ship owners as there was no other feasible method available to rescue the surviving crew members. Refusing to categorically rule ransom payment as being against public policy, Steel reflected that such a qualification would have a catastrophic effect upon the kidnap and ransom insurance market.


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Maritime and Admiralty Law News: The United States Fifth Circuit Opts for the Focus-of-the-Contract Test to Determine What Law Applies to a Contractual Dispute Spawned by an Underlying Tort

In an en banc decision, the United States Fifth Circuit Court of Appeals has ruled that the focus of the contract at issue, as opposed to the situs of the underlying tort, determines the situs of the controversy, and therefore, the body of law applicable to the dispute. Grand Isle Shipyard, Inc. v. Seacor Marine, L.L.C., No. 07-31019, WL 4597975 (5th Cir. December 8, 2009). Grand Isle Shipyards, Inc. ("Grand Isle") and Seacor Marine, L.L.C. ("Seacor") were both contractors of BP American Production Company ("BP"). Grand Isle repaired and maintained BP's offshore platforms while Seacor provided transportation for BP and its contractors. Plaintiff Denny Neil ("Neil"), an employee of Grand Isle, was being transported from a work platform to a residential platform (each located in federal waters adjacent to Louisiana) by a Seacor vessel when he was injured in a fall while the vessel was in federal waters.

Neil filed suit against Seacor in the United States District Court for the Southern District of Texas alleging vessel negligence under &sect 905(b) of the Longshore Harbor Worker's Compensation Act ("LHWCA"). Seacor then tendered its defense and indemnity to Grand Isle pursuant to an indemnity provision which required Grand Isle to indemnify Seacor for bodily harm to its employees, even if caused by Seacor's negligence. Grand Isle and its insurer filed suit in the Eastern District of Louisiana seeking declaratory judgment that: (1) Grand Isle is not contractually obligated to defend and indemnify Seacor, and (2) Seacor is not entitled to insurance coverage from Grand Isle's insurer. Grand Isle and its insurer then filed a motion for summary judgment in which it argued that the contractual indemnity provision at issue is invalid under the Louisiana Oilfield Indemnity Act ("LOIA") which applies through the Outer Continental Shelf Land Act ("OCSLA") which adopts the adjacent state's law as surrogate federal law. Seacor filed a cross motion for summary judgment averring that, because the injury occurred on navigable water as opposed to an OCSLA situs, general maritime law applies which does not prohibit the indemnity provision.

To determine whether OCSLA required the application of state law, the Court relied on the three-pronged test the Supreme Court developed in Rodrigue v. Aetna Casualty & Surety Co., 395 U.S. 352 (1969) and applied by the Fifth Circuit in Union Texas Petroleum Corp. v. PLT Engineering, Inc., 895 F.2d 1043, 1047 (5th Cir. 1990). Under that framework, state law will apply through OCSLA if: (1) the controversy arises on a situs covered by OCSLA, (2) federal maritime law does not apply of its own force, and (3) the state law must not be inconsistent with federal law. Id. The case turned on the first prong. The en banc panel held that the contract at issue, and not the situs of the injury, determines that situs of the controversy. It then held that since the contract called for the majority of the work to be done on BP's platforms, and because these were OCSLA situses, state law, and therefore the LOIA, applies. As such, the indemnity provision is invalid and Grand Isle is not required to indemnify and defend Seacor.


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Maritime and Admiralty Law News: Customs Withdraws Proposed Modification to the Jones Act

On October 1, 2009, the U.S. Customs and Border Protection (CBP) withdrew its Proposed Modifications and Revocation of Ruling Letters Relating to the Customs Position on the Application of the Jones Act to the Transportation of Certain Merchandise and Equipment Between Coastwise Points ("Proposed Modifications"), published on July 17, 2009. Thus, U.S. law on this subject remains unchanged for the time being. However, the CBP has stated that "a new notice which will set forth CBP's proposed action relating to [this issue] will be published in the Customs Bulletin in the near future." See Customs Bulletin and Decisions, Vol. 43, No. 40, October 1, 2009.



The Jones Act prohibits the transportation of "merchandise" between points in the United States embraced within the coastwise laws in any vessel other than a vessel built in, documented under the laws of, and owned by citizens of the United States. See 46 U.S.C. S 55102 and 46 U.S.C. App. 883. However, "equipment," which is defined by the CBP as "portable articles necessary and appropriate for the navigation, operation or maintenance of the vessel and for the comfort and safety of the persons on board" may be freely transported by foreign-flagged (non-coastwise qualified) vessels. See 19 U.S.C. S 1309 (emphasis added). In addition to satisfying the foregoing definition, the CBP has also required the articles being transported to be "necessary to the accomplishment of the mission of the vessel" in order to qualify as equipment. See, e.g., HQ 115487 (Nov. 20, 2001) (emphasis added).

Over time, however, the CBP began to rely solely on the latter italicized language in determining what "equipment" may be transported by non-coastwise qualified vessels. Simply put, if the article was "necessary to the accomplishment of the mission of the vessel" it would be considered equipment, without regard to whether the article was also necessary to the navigation, operation and maintenance or comfort and safety of the individuals aboard the vessel itself.

In its July 17, 2009 Proposed Modifications, the CBP formally asserted its position that allowing foreign-flagged (non-coastwise qualified) vessels to transport articles that are not needed to navigate, operate, or maintain that vessel or for the safety and comfort of the persons on board that vessel, but rather to solely accomplish an activity for which that vessel would be engaged, would be contrary to the legislative intent on the Jones Act. Accordingly, the CBP sought to revoke all past CBP rulings relying solely on whether the article is "necessary to the accomplishment of the mission of the vessel" and, in the future, limit the definition of equipment to "articles necessary and appropriate for the navigation, operation or maintenance of the vessel and for the comfort and safety of the persons on board." See Customs Bulletin and Decisions, Vol. 43, No. 28, July 17, 2009.

After receiving 141 comments in response to the Proposed Modifications, both in support and opposition, the CBP has apparently decided that its proposed action should be "reconsidered."


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Maritime and Admiralty Law News: Rule B Decision Applies Retroactively

On November 13, 2009, in the case of Hawknet, Ltd. v. Overseas Shipping Agencies, the U.S. Court of Appeals for the Second Circuit ruled that its recent decision in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte. Ltd., where it held that an electronic funds transfer (EFT) is not properly attachable under a maritime attachment order in the federal district courts of New York pursuant to Rule B of the Supplemental Rules for Admiralty, applies retroactively. Hawknet, Ltd. v. Overseas Shipping Agencies , No. 09-2128-cv, 2009 WL 3790654 (2nd Cir. November 13, 2009). The Hawknet case was in active litigation and a Rule B attachment of defendant's EFT was in effect prior to the Jaldhi decision. The Hawknet court ruled that, since the Rule B attachment related to the jurisdiction of the court, it should be applied retroactively. Id. at *2. Failure to raise the defense of lack of personal jurisdiction before the federal district court did not constitute waiver because this particular defense did not exist until the appellate court's recent ruling. Id.


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Maritime and Admiralty Law News: The End of Electronic Fund Transfer Attachments in New York

Supplemental Rule B for Certain Admiralty and Maritime Claims ("Rule B") provides "If a defendant is not found within the district..., a verified complaint may contain a prayer for process to attach the defendant's tangible or intangible personal property - up to the amount sued for - in the hands of garnishees named in the process." The remedy had traditionally been used to attach any property of a defendant such as bunkers, real property, and funds held in bank accounts.

In 2002 the United States Court of Appeals for the Second Circuit, in the case of Winter Storm Shipping, Ltd. v. TPI, held that electronic fund transfers (EFTs) could be seized under Federal Supplemental Admiralty Rule B as the funds momentarily pass through intermediary banks on the way to their final destination. 310 F.3d 263 (2d Cir. 2002). Since the Second Circuit's jurisdiction includes New York, and since a majority of EFTs involving international dollar transactions pass through New York intermediary banks, this ruling meant that a vast array of payments could be seized as they electronically passed through New York, even though the parties and transactions had no relationship with New York or with the intermediary banks. The Winter Storm decision led to an explosion in Rule B cases in New York, and gave rise to a cottage industry of attorneys and others specializing in Rule B collection. Banks have been forced to spend significant time and money responding to Rule B writs and monitoring their transfers. Banks and commercial interests have also argued that this permissive mechanism for seizing EFTs has discouraged international companies from engaging in U.S. dollar transactions or using New York banks for international agreements. Despite criticism of the Winter Storm rule from many quarters the Second Circuit has rejected repeated requests to reverse this ruling, most recently doing so in its 2008 decision of Consub Delaware, LLC v. Schahin Engenharia Limitada, 543 F.3d 104 (2nd Cir. 2008).

However, on October 16, 2009, the Second Circuit issued a decision in The Shipping Corporation of India Ltd. v. Jaldhi Overseas Pte. Ltd., overruling Winter Storm, and finding that EFTs are not the "property" of the defendant while they pass through intermediary banks and are therefore not subject to Rule B attachment while in the hands of those banks. 2009 WL 3319675 (2nd Cir. Oct. 16, 2009). In essence, the Court based its ruling on two grounds: (1) the Winter. Storm court had incorrectly concluded that prior case law supported the finding that EFTs were attachable property and (2) in the absence of controlling admiralty law precedent, the court should have looked to New York state law, which says that EFTs are not the property of the transferor or transferee while in transit. This in effect means that the much used Rule B attachment of funds in New York is over. While this decision in effect ends the common practice of filing Rule B attachments against EFTs in New York, the traditional use of Rule B attachment to attach property still exists.


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