NON-COMPETE, NON-SOLICITATION & NON-DISCLOSURE AGREEMENTS …. LOOK BEFORE YOU LEAP!
By Michael J. Smith and Laura Fowler
Pledges not to compete are often found in employment contracts when the employee has access to sensitive information about a business or that business’ client base. Texas is different than many other states when it comes to non-compete, non-disclosure and non-solicitation agreements. What you may have read generally or learned about the laws of another state is largely irrelevant. Texas, like most states, has enacted statutes that prohibit restraint of trade.
The Texas courts very consistently announce decisions that favor properly drawn employment or independent contractor agreements that contain non-compete, non-solicitation and non-disclosure clauses forbidding an employee or contractor from competing against the business both during and after employment, soliciting employees from that business, or disclosing sensitive information about the business. These clauses are generally valid and enforceable as long as they are “ancillary to an otherwise enforceable agreement,” supported by consideration and reasonably drawn in light of the specific operations of the business.
Those who violate a reasonably drawn and enforceable non-compete, non-solicitation or non-disclosure agreement subject themselves and the businesses they later engage with to serious consequences which may be imposed both upon the employee and those who collaborate with the employee. In some instances, the violation carries criminal consequences and gives the aggrieved business owner the right to obtain an injunction, money damages and attorney’s fees.
Some agreements are determined to be unenforceable because they are poorly drawn, badly worded, and not specific to Texas. To be enforceable, these agreements must be reasonable in scope, specifically the length of time, the restricted activities and the geographic boundaries. As second problem can arise when these agreements are not accompanied by something of value transferred to the employee or contractor. If you transfer an employee to a different position but don’t give the employee any more money or other benefits of value, but require for the first time a non-compete, non-solicitation or non-disclosure, some or all of that agreement could be unenforceable because the employee was required to limit her or his rights severely without any benefit conferred. But the consideration does not need to be a direct economic benefit to the employee. For example, consideration could be specialized training or access to confidential or trade secret information. A safer practice in many situations may be to require all prospective employees to sign a noncompete, non-solicitation and non-disclosure as a part of their acceptance of an initial employment offer.
Texas Supreme Court Justice Willett, in a concurring opinion from the Marsh USA case cautioned judges to “divine when competition becomes unfair competition and when a restraint becomes an unreasonable or unnecessarily restrictive restraint.” He went on to succinctly state that Texas law, “does not allow protectionism,” and that non-competes cannot protect against “the bruises of ordinary competition.” Marsh USA, Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011).
The following are a few basic suggestions, all drawn from unfortunate mistakes by employers, employees and contractors in the Texas state and federal courts:
Narrowly define the length of time the non-compete runs, the geographic areas in which the employee or independent contractor may not compete and the specific activities or areas of industry and commerce. True, many businesses market over the internet so their business theoretically is worldwide. But if the business never has sold anything outside of Travis and Williamson County, Texas, its ability to limit an employee or contractor from competing in Minnesota is going to be difficult.
Be realistic about what your business entity does. If you sell burritos and plan to expand your menu and service, limit your non-compete to a reasonable number of culinary products and your agreement will likely be enforceable. But if you attempt to restrict to all food and beverage service, probably your restriction will not be enforced.
Above all else, have a reasonable limit on the time the noncompete is enforceable. These are the most typical reasons non-competes are set aside. What is reasonable depends entirely upon the industry.
Define the categories of information that truly are sensitive and may not be disclosed. Where you eat lunch every day probably is not important enough to try and restrict. Who you eat lunch with and why may well be as sensitive as anything you do.
Your financial information, client and customer lists, your successful and unsuccessful marketing programs, the markets in which your advertising appears and why, clearly are sensitive. Defining what is sensitive with thought and care, then having that information defined in the employee contract or independent contractor agreement, is very important.
Non-solicitation of clients, customers and employees:
The courts typically enforce these clauses; some even remark that solicitation of customers and employees is a subtle form of theft. It is very costly to develop and maintain a client relationship or to train a new employee.
It is common for eager start up owners who want to compete against their current employer or an employee or contractor looking to take her or his skills to a competitor to seek legal advice. Many insist they have never signed anything that limits their ability to compete. However, upon closer review of their employment agreement and/or employee handbook, they find otherwise. They are not dishonest; they just didn’t read their employment contract and handbook carefully before signing them.
Sophisticated employers obtain legal advice in order to write their contracts of employment narrowly and thoughtfully so that the truly damaging actions by departing employees and contractors are prohibited. Then, when they learn the departing employee or contractor is working with their competition, their legal team picks up the phone or drafts a Cease and Desist Demand to the competitor who is benefiting from the departing employee’s violation of the non-compete, non-solicitation or non-disclosure. Cease and desist letters point out in painful terms just how expensive such a violation is going to be in the form of attorney’s fees, damages and prejudgment interest, awarded against the competitor.
Meanwhile, savvy Human Resources and procurement administrators will ask potential employees and vendors if they are under any non-competes or nondisclosure agreements; then don’t offer any opportunities to those who are and tell them to come back when they get things sorted out with their former employer.
The answer for employees and contractors is to approach their employer and have a transparent conversation about their goals and vision. Often, their employer will support them, or even agree to refer them business! Employees who plan to leave and compete directly against an employer gain nothing from operating in stealth. Having an honorable discussion with the employer before departing is always best, not only because it is the right and honorable thing to do, but because the employer is forced to disclose what they intend to do if the departing employee attempts to compete.
The employer ought to at least consider working something out to help the employee succeed, offering a subcontractor agreement or some other thing of value that allows the employer to gain some benefit from all that time spent training the employee.
No matter which side of these kinds of agreements you are on, it is recommended that you consult a competent and experienced attorney before you draft or sign such documents.
The preceding is part of a series of articles being offered in the coming weeks by The Fowler Law Firm called Employment Law Summer School. These articles are designed to help you avoid costly legal mistakes. If you would like to attend Employment Law Summer School, email us at firstname.lastname@example.org for a list of conference sites, dates and times.
About your authors:
Michael Smith is The Fowler Law Firm PC Section Chief for Civil Trials and IP. Michael never met a lawsuit he didn’t like to try! Click here to learn more about Michael.
Laura Fowler is the Managing Shareholder of The Fowler Law Firm PC. She is a regular speaker on a variety of business related topics. Email her at email@example.com to receive updates on dates, topics and sponsors of upcoming discussions at various locations around Central Texas and Austin.
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