Texas Non-Compete Law Blog : Texas Non-Compete Agreements Lawyer & Attorney : K&L Gates : Trade Secret Litigation : Serving Austin, Dallas, San Antonio

As all employment lawyers know, courts will enforce non-compete agreements only to the extent necessary to protect an employer’s legitimate interests in restraining competition.  However, courts sometimes view a provision restricting solicitation of customers much differently than a blanket non-compete restriction.

Non-compete agreements typically contain provisions prohibiting an employee from “soliciting or calling on” the employer’s customers after the employee is terminated.  Employers who have been parties to non-compete litigation know that proving solicitation can be difficult (in part, because the customers who have been “stolen” tend to take the side of the former employee).

But what does it mean to “solicit”? A Washington court defined it this way:

“`Solicit’ . . . means: `To appeal to (for something); to apply to for obtaining something; to ask earnestly; to ask for the purpose of receiving . . . .’”  By contrast, “[m]erely informing customers of one’s former employer of a change in employment, without more, is not solicitation.”

Thus, under this definition, informing your former employer’s customer that you have changed companies (which allows the customer to suggest continuing to do business with you) arguably does not constitute solicitation.  Conversely, calling the customer and urging him to do business with your new company arguably would.

Of course, there is no guarantee that every court will view solicitation in that way, and every case must be decided on its own merits, but this definition is helpful in understanding the difference between actively soliciting a customer and merely providing him with information.

• Email This
• Print
• Trackbacks

As all users of YouTube know, you can find there excerpts from movies, TV shows, musical performances, and just about anything else you could possibly want to see.  Users are free to post videos to the site, and, unless the content is objectionable (or unless the owner of a copyright objects), the videos will remain there.

Viacom recently filed suit against Google (from which, obviously, one can find YouTube) and YouTube for copyright infringement.  Viacom contends that these sites should  be enjoined from showing Viacom's copyrighted materials.  Viacom also seeks substantial damages.

As the attached article indicates, Google is evidently in the process of installing a filter to prevent copyrighted works from appearing on YouTube.  Also discussed is whether YouTube qualifies for safe harbor protection as a "service provider."

http://www.mediaweek.com/mw/current/article_display.jsp?vnu_content_id=1003577917

• Email This
• Print
• Trackbacks

Recently, the Austin Court of Appeals showed the heavy burden on an employer who attempts to use pre-suit depositions to investigate possible misappropriation of trade secrets by former employees. In the case, the former employer sought to take pre-suit depositions of former employees based on suspicions that the former employees were misappropriating trade secrets for the benefit of a competitor that hired the former employees. The former employer had each of the former employees sign an employment agreement which limited their disclosure of confidential information during and after their employment.

At the hearing on the issue, the trial court granted the former employer’s request, based on a finding that the likely benefit of allowing the former employer to take the depositions to investigate potential claims outweighed the burden or expense of taking the depositions. The former employer argued that if there was a misappropriation of trade secrets, then the depositions were worth taking, and if it turned out that the depositions revealed a legitimate explanation, then there would have been no waste because it saved the time and energy of dealing with a lawsuit.

On appeal, the Austin Court of Appeals conditionally granted mandamus relief in order to stop the depositions. The court considered the burden to the deponent and stated that requiring an individual to sit for a deposition and disclose information to a former employer, under oath, as to why the person left their former employer, as well as what the person was doing for the competitor, was a substantial burden. The court also stated that allowing a company to conduct pre-suit depositions based solely on the possibility that a lawsuit might be avoided would allow companies to use pre-suit depositions to gain access to the trade secrets of competitors under the pretext of investigating suspected, but unknown, claims.

In addition, the court recognized that trade secrets receive heightened protection during discovery. The requesting party must establish that the information is necessary for a fair adjudication of its claims. Here, the former employer was unsure whether a valid claim even exists. By its very nature, a Rule 202 proceeding to investigate claims does not involve the adjudication of any claim or defense; it involves only the investigation of potential claims.

Observation:

When the issue of discovery of trade secrets arises in the context of a Rule 202 deposition request, it may be difficult for the petitioner to show the information is necessary for a fair adjudication of its claims. At any rate, based upon the holding in this case, getting the deposition will not be automatic.


In re Hewlett Packard, No. 03-06-00028-CV, 2006 WL 1295502, (Tex. App.—Austin, May 12, 2006).

• Email This
• Print
• Trackbacks

In situations in which an employee leaves one company and goes to work for another, a tortious interference claim may be asserted against the departing employee or the new employer. Tortious interference claims come in two types:  tortious interference with (an existing) contract, and tortious interference with prospective business relations.
 
A tortious interference with contract claim has the following elements: (a) a valid contract; (b) willful and intentional interference with the contract; (c) interference that proximately causes the plaintiff's injury; and (d) actual damage or loss.
 
A tortious interference claim can arise if a third party induces another's employee to breach his contract of employment for the purpose of obtaining the employee as his own or with the intent to injure the former employer. However, it must be shown that the third party's interference was the proximate cause of the breach of the relationship, and there is no actionable wrong if the employee acted on his own initiative.  A plaintiff must show that the defendant knowingly induced the employee or took an active part in persuading the employee to leave his job with the former employer. Courts have held that it is not enough that the new employer reaped the advantages of a broken contract after the contracting party had withdrawn from the commitment on his own volition; it is incumbent upon the plaintiff to show that the new employer actually caused or brought about the interference. Terminable-at-will contracts may be the subject of a tortious interference claim.
 
Another type of tortious interference claim can arise when a third party tortiously interferes with a noncompete agreement between an employer and its employee.  An employer who believes that its ex-employee has violated her noncompete agreement may, in addition to suing the employee to enforce the noncompete agreement, sue the "new" employer for tortious interference.

Another type of claim typically asserted in these situations is tortious interference with prospective business relations.  The elements are (a) there was a reasonable probability that the plaintiff would have entered into a business relationship with a third person; (b) intentional interference with the relationship; (c) the defendant's conduct was independently tortious or unlawful; (d) the interference proximately caused the plaintiff's injury; and (e) the plaintiff suffered actual damage or loss. The plaintiff does not have to prove that the contract would have been made but for the interference. The plaintiff only must show that the formation of a contract was reasonably probable.  These claims often arise with respect to prospective customers or employees.

• Email This
• Print
• Trackbacks

Even absent an enforceable noncompete agreement, a Texas employer may be able to prevent, or recover damages for, certain forms of unfair competition. For example, an employer may have a claim against a former employee for taking, using or disclosing and wrongfully using the employer's confidential or proprietary information.

In Texas, a claim for misappropriation of trade secrets involves the following elements:  (1) the existence of a trade secret; (2) a breach of a confidential relationship or improper discovery of the trade secret; and (3) use of the trade secret without authorization.  A trade secret is "any formula, pattern, device, or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."  Although employers are entitled not to have their trade secrets misappropriated, former employees are allowed to use the general knowledge, skills, and experience acquired during employment to compete with a former employer.

Texas courts examine the following criteria in determining whether information is entitled to trade secret protection:  (1) the extent to which the information is known outside the employer's business; (2) the extent to which it is known by employees and others involved in the employer's business; (3) the measures taken by the employer to guard the secrecy of the information; (4) the value of the information to the employer and its competitors; (5) the amount of effort or money expended by the employer in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

A frequently-litigated issue involves whether a customer list, or information about a customer, is a trade secret. There is no easy answer to this question, and the particular facts of each case must be examined.  One thing Texas cases are clear about is that, for something to be treated as a trade secret, it must actually be secret. Texas cases routinely consider these factors when determining whether a customer list is a trade secret: (1) what steps, if any, an employer has taken to maintain the confidentiality of a customer list; (2) whether a departing employee acknowledges that the customer list is confidential; and (3) whether the content of the list is readily ascertainable.  The last factor is heavily litigated, as employees often contend that the identities of customers can be found in public sources, such as telephone books.

Regarding the second element-breach of a confidential relationship or improper discovery of the trade secret-a person is liable for disclosure or use of trade secrets if he either (1) discovers the secret by improper means or (2) after properly acquiring knowledge of the secret, he breaches a confidence reposed in him.

If an employer proves that its trade secrets have been misappropriated, it may seek damages and injunctive relief.  Obtaining injunctive relief requires proving that, absent the relief, irreparable harm will occur.  However, courts have held that the threatened disclosure of trade secrets constitutes irreparable injury as a matter of law.

• Email This
• Print
• Trackbacks

A provision prohibiting an employee from soliciting his former employer's remaining employees must meet the requirements applicable to noncompete agreements. Trying to attract workers constitutes fair competition (unless it is unfair, as it might be if an employee raiding provision prohibits it, or if doing so constitutes tortious interference).

• Email This
• Print
• Trackbacks

A promise not to disclose trade secrets or confidential information is not a covenant not to compete. Thus, the requirements applicable to noncompete covenants do not to apply.  Non-disclosure agreements are enforceable (however, whether the information sought to be protected is actually confidential may be contested).

• Email This
• Print
• Trackbacks

Provisions prohibiting the solicitation of customers are treated as covenants not to compete (and thus must meet the requirements applicable to all noncompete agreements). Unlike disclosing the employer's confidential information (which is legally actionable, even without an express agreement by the employee that he will not do so), soliciting the employer's customers constitutes fair competition (unless done via a theft of the employer's trade secrets, a breach of fiduciary duty, etc.), and thus is not actionable unless prohibited by a valid covenant not to compete.  Because the scope of a covenant must be reasonable, a provision prohibiting a salesperson from soliciting any of his former employer's customers might be unreasonable (and might have to be reformed), but a provision restricting the employee from soliciting customers with whom he personally dealt would be relatively more enforceable.

• Email This
• Print
• Trackbacks

Practical considerations in this area of the law include the following:
 
For the Former Employer :

1.  In addition to (or in lieu of) a non-compete provision, an employment agreement may contain non-solicitation or employee raiding provisions. A non-solicitation provision typically prohibits a departing employee from soliciting his former employer's customers. The "old" employer should be cognizant of the fact that solicitation
can be very difficult to prove. The departing employee is likely to contend that his new customers contacted him (rather than him soliciting them). Many times, the customers will side with the departing employee. Before filing suit for breach of a non-solicitation agreement, an employer should be confident that it will be able to provide that solicitation occurred.
 
2. Counterclaims are likely. A former employee who is sued for violating a non-compete agreement may file a counterclaim for discrimination, harassment, unpaid wages, or for some other alleged wrong. Before suing a former employee, an employer should try to anticipate possible counterclaims.

3.   One-size-fits-all agreements are not advisable. Every state has its own laws governing non-compete agreements. It is virtually impossible to draft a non-compete agreement that will be enforceable in all 50 states.  Non-compete agreements are particularly difficult to enforce in Texas.  It is important that all employers - and, in particular, non-Texas companies that have employees in
Texas - ensure that their agreements comply with Texas laws.
 
For the Employee:

1. Give everything back. A departing employee should return all of his former employer's property. Taking the former employer's documents or information (including copies thereof) can get the employee sued for conversion, theft of trade secrets, etc. Even in cases where the employee has not signed an agreement requiring her to return company property, she should do so.

2. Beware e-mails. Employees sometimes mistakenly think that e-mails they send from work are "private."  Not so.  By searching computer hard drives and networks, employers can locate e-mails received and sent by former employees, including e-mails that the employee had previously deleted. E-mails sent and received by employees can enable the employer to prove wrongful solicitation of the employer's clients, breach of fiduciary duty, theft, etc.
 
3. Beware phone calls. As with e-mails, employees sometimes erroneously believe that telephone calls they make are undetectable. But telephone records subpoenaed by an employer can yield evidence of wrongful conduct (e.g., solicitation of the employer's customers).  Employees
must be mindful of the fact that telephone calls, like e-mails, are not completely undetectable.

For the "New" Employer:

1. Ensure the new employee is "clean." To the extent possible, the new employer should ensure that its new employee does not possess, use, or disclose to the new employee's other employees any of the former employee's confidential, proprietary or trade secret information.
 
2. The new employer should also get assurance from its new employee that the latter is not a party to a non-compete agreement that prevents the employee from working for the new employee. The new employee obviously needs to protect itself from being sued for tortious interference
with contract, misappropriation of trade secrets, or other wrongful acts.

• Email This
• Print
• Trackbacks

Texas non-compete agreements often contain various other provisions, including the following:
 
Choice of Law.  Non-compete agreements typically will specify which state's law will decide whether, and the extent to which, a non-compete agreement is enforceable. Even in cases in which the parties have agreed that the law of a state other than Texas will apply, the court will determine which state "has the most significant relationship to the transaction and the parties," and it will apply that state's law.  Usually, if the employee to be bound by the non-compete agreement is working primarily in Texas, Texas law will apply.
 
Venue. Covenants not to compete sometimes contain provisions specifying the venue (e.g., the state and federal courts of Dallas County, Texas) of any action to enforce the covenant. These are generally enforceable. However, a provision making a state other than Texas the venue may not be enforceable if Texas law governs the non-compete agreement and it is shown that the
foreign state likely would not apply Texas law.
 
Arbitration.  Employment agreements, and other agreements containing non-compete provisions, often mandate that any dispute be submitted to binding arbitration rather than court. From the employer's perspective, it is imperative that the arbitration provision permit the employer to seek injunctive relief (including a temporary restraining order or temporary injunction) in
court to prevent a non-compete violation (or disclosure of confidential, proprietary, or trade secret information). To prevent a former employee from violating non-compete or non-disclosure provisions, or from stealing trade secrets, an employer may require more immediate injunctive relief than could be obtained in arbitration. Employers must also be mindful that, to prove a non-compete violation (or theft of trade secrets), they may need more discovery than is typically permitted in arbitration (and they may want to provide for discovery, including expedited discovery, in their employment contracts).
 
Clawback Provisions.  In some cases, the agreement in which the covenant not to compete is contained will state that the employee, in the event he violates the non-compete provision, must return the consideration given by the employer. This might occur, for example, where the employer gives company stock in exchange for the covenant. Provisions requiring the return of the consideration are enforceable if the court finds that the employer would not have given the consideration "but for" the employee's promise not to compete (in which case the promises are said to be "dependent" upon each other).

• Email This
• Print
• Trackbacks

Special requirements must be met for a physician to be bound
by a non-compete agreement in Texas. In addition to the requirements discussed in other posts, the covenant must:
 
• not deny the physician access to a list of his patients whom
he had seen or treated within one year of termination of
the contract or employment

• provide access to medical records of the physician's
patients upon authorization of the patient and any copies
of medical records for a reasonable fee

• state that any access to a list of patients or to patients' medical
records after termination of the contract or employment shall not
require such list or records to be provided in a format different than
that by which such records are maintained except by mutual consent
of the parties to the contract

• provide for a buy out of the covenant by the physician
at a reasonable price or, at the option of either party,
as determined by a mutually agreed upon arbitrator or,
in the case of an inability to agree, an arbitrator of the
court whose decision shall be binding on the parties
 
• state that the physician will not be prohibited from
providing continuing care and treatment to a specific
patient or patients during the course of an acute illness
even after the contract or employment has been
terminated.

• Email This
• Print
• Trackbacks

An employer may be entitled to injunctive relief to enforce a non-compete agreement in Texas. To obtain permanent injunctive relief, it is not necessary to prove that, without an injunction, the promisee will suffer irreparable harm. But that is not the case with respect to temporary injunctive relief.  Most courts hold that to obtain temporary injunctive relief to enjoin violation of a non-compete provision, one must prove irreparable harm (i.e., that money damages are inadequate).

Irreparable harm may exist if the damages resulting from the breach are hard to quantify, or if the injury cannot be compensated in damages. The threatened disclosure of trade secrets to a competitor can constitute irreparable injury, especially if it would enable a competitor to gain a competitive advantage. Moreover, proof of a continued breach of a non-compete agreement by a highly-trained employee may constitute irreparable harm. In determining whether to grant temporary injunctive relief, the court must balance probable harm to the employer if the injunction is not issued with probable harm to the employee if it is.

In addition to injunctive relief, a court may award damages resulting from breach of a non-compete covenant. Awardable damages might include lost profits resulting from the departing employee's breach of the noncompetition agreement. A non-compete agreement can contain a liquidated damages provision, but the provision must constitute a reasonable forecast of just compensation for the harm caused by the breach.
 
If the court holds that the scope of the non-compete agreement is too broad (e.g., if the court holds that the geographic scope should be limited to Dallas /Fort Worth rather than to all of
Texas), it will reform the scope to make it reasonable. However, if reformation of the scope is required, damages may only be awarded for "post-reformation" violations. For this and other
reasons, an employer has an incentive to ensure that the scope of a non-compete agreement is reasonable.

Attorney's fees and costs may be awarded to the promisor (employee) if he proves that: the scope of the covenant is unreasonable, the employer knew at the time the agreement was signed that it was unreasonable, and the employer has attempted to enforce the covenant to a greater extent than necessary to protect its goodwill or other business interests. Texas cases also hold that an employee who seeks a judicial declaration that a covenant not to compete is unenforceable and void in its entirety may be entitled to recover attorney's fees under the Texas Declaratory Judgment Act.
 
There is no provision in the non-compete statute for an employer who successfully prosecutes an action against an employee to recover attorney's fees.  At least one Texas court of appeals has held that the non-compete statute's silence on this issue precludes an employer from recovering its fees under the statute (or any other applicable law).  However, another Texas court has permitted an employer to recover its fees under the Texas statute allowing the prevailing party in a contract dispute to recoup its attorney's fees.

• Email This
• Print
• Trackbacks

A non-compete agreement in Texas must not impose upon the employee greater restraints than are necessary to protect the business and goodwill of the employer.  Moreover, the scope must bear some relationship to the activities of the employee.  It is generally permissible to keep an employee from soliciting business from customers with whom he dealt during his employment, and it is likewise generally permissible to restrain the employee from competing in the geographic area in which he worked.  Thus, an employee who works in Dallas might be prevented from post-employment competition in Dallas (but he might be able to complete in Houston). In terms of the appropriate length of the covenant, although covenants typically are 1-2 years in length, courts have upheld restrictions of 2-5 years in length (or longer in the context of a business purchase).  In the event a covenant is too broad, the court will reform it so that it is reasonable.

• Email This
• Print
• Trackbacks

Once an otherwise enforceable agreement has been found to exist, the next question is whether the non-compete provision is "ancillary" to that otherwise enforceable agreement. Texas courts have made it clear that the following must be true for a covenant not to compete to be ancillary to an otherwise enforceable agreement:
 
•The consideration given by the employer [in the otherwise enforceable agreement]
  must give rise to the employer's interest in restraining the employee from competing.

•The covenant not to compete must be designed to enforce the employee's return promise [contained in the otherwise enforceable agreement].

In the typical scenario, the employer contends that confidential information it provided to the employee gives rise to its interest in restraining competition. That contention intuitively makes sense:  if the employer gives the employee the employer's most important secrets (e.g., financial information, customer lists, marketing strategies, research and development plans, etc.), it makes sense that the employer would not want the employee taking those to a competitor. Of course, the employee could always argue, "The non-disclosure agreement I signed prevents me from disclosing those items to a competitor, thus the non-compete is unnecessary." But the employer's obvious rejoinder is, "Once you leave us and begin working for a competitor, our ability to monitor your activities is virtually nonexistent. Thus, we need not only a non-disclosure agreement, but also a covenant not to compete." In some cases, the employer is able to convince the court that the promises it made and the confidential information it gave justifies the non-compete provision. The employee's promise not to disclose the confidential information usually satisfies the
second prong of the test.
 
To be confidential, information must be "secret," and if information is publicly available, it probably will not be deemed confidential. For example, information about customers that is publicly obtainable (e.g., from telephone books, industry journals, or even the employer's website) may be held not to be confidential.

Confidential information is not necessarily the only consideration that can justify a covenant not to compete.  For example, giving an employee ownership in a company, particularly a privately-held business, may support a non-compete. However, confidential information may be the best consideration that can be given, because the connection between the information conveyed and the employer's need to maintain its secrecy via a non-complete agreement makes sense.
 
Some employer promises that satisfy the otherwise enforceable agreement requirement may not satisfy the "ancillary" requirement. For example, an employer may satisfy the otherwise enforceable agreement requirement by giving the employee a term of employment. But a term of employment may be held insufficient to give rise to an interest in restraining competition. To determine whether a particular item of consideration is sufficient to support a non-compete covenant, one might ask, "Is there a logical relationship between the consideration given by the employer and the non-compete covenant the employer seeks to enforce?" If the consideration in question is confidential information, a logical relationship may be found to exist. But other types of consideration—e.g., a signing bonus—may be found lacking by that standard.
 
It is important to emphasize that the "ancillary" requirement is far easier to meet in the context of a purchase of a business than in an employment situation.  Another key difference between a non-compete agreement in a purchase of a business context and an employer/employee context: In the former, the burden is on the promisor (i.e., the person agreeing to be bound by the non-compete) to prove the agreement is unreasonable; in the latter, the promisee (employer) must prove the agreement is reasonable.

• Email This
• Print
• Trackbacks

Non-competition covenants are typically contained in written (employment) agreements that contain many other provisions. The first step in determining whether an enforceable non-compete agreement exists is to mentally draw a line through the non-compete provision and examine the remaining provisions. The pertinent question with respect to the remaining provisions is: Have both the employer and the employee made binding promises to each other? Both the employer and the employee must make binding promises for the non-compete covenant to have any chance of being enforced.

Usually, whether the employee has made a binding promise to the employer is not at issue. Employees typically promise not to disclose confidential information, to return company property upon termination, etc. Promises such as these are binding.
 
The issue that gets litigated much more often is whether the employer has made a binding promise to the employee. This question arises most frequently when the employee is employed "at-will." Many Texas courts have held that an employer's offer of at-will employment (i.e., an employment relationship in which the employee can be terminated at any time for any reason) is meaningless (or "illusory," as the courts say). Thus, if the only consideration given by the employer for the non-competition covenant is at-will employment, the employee can have a high confidence level that the covenant is unenforceable.

Another type of consideration that courts routinely have rejected is past consideration. Many times, with respect to an incumbent employee, an employer will hearken back to consideration previously given. For example, a non-compete provision may be supported by "confidential information received by the employee in the past." Courts have held that past consideration is no consideration at all. Thus, if an incumbent employee is to be bound by an enforceable non-compete covenant, the employer must give new consideration.
 
So what consideration can the employer give to satisfy the "otherwise enforceable agreement" requirement? Clearly, a definite term of employment (e.g., a one-year term) would be sufficient. Likewise, an at-will employee who, despite his "at-will" designation, is entitled to thirty days' written notice before being terminated has been given good consideration (i.e., he has, in effect, a thirty-day employment contract).
 
One of the most-litigated issues involves the extent to which a provision stating that an employee will receive confidential information (or specialized training) constitutes a binding promise by the employer. Often, the agreement merely recites that the employee "acknowledges" she will receive confidential information. Particularly where the employee is at-will, an acknowledgment may be insufficient because the employer may be held not to have actually promised to do anything. The employee may contend that her "acknowledgment" does not actually guarantee that the employer will provide confidential information. Because only the employer's promise can guarantee that confidential information will be given, so the argument goes, no promise by the employer equals no consideration. This contention has found favor with some courts.
 
An employer's promise to provide confidential information is probably good consideration, as long as the employer actually does so.
 
As noted above, the existence of an "otherwise enforceable agreement' is a prerequisite to a non-compete provision being enforceable. But it is not sufficient to make the covenant enforceable.  If this threshold requirement is met, the next question is whether the non-compete provision (which is not even relevant in assessing whether an otherwise enforceable agreement exists) is "ancillary to the other enforceable agreement at the time the agreement was made."  That requirement will be discussed in another post.

• Email This
• Print
• Trackbacks

In Texas, non-compete agreements are generally disfavored as unlawful restraints on trade. Courts recognize that in our capitalist economic system, workers must be free to compete with each other, work where they wish, etc. However, the law also acknowledges that an employer may have interests that are important enough to warrant restrictions on post-employment competition.

Whether a particular non-compete agreement is enforceable in Texas cannot be known with absolute precision. The law in this area is complex, courts frequently differ with each other, and much depends on preferences of individual judges. However, both the law and experience provide useful guidance.

A non-compete covenant is typically just one provision contained in a larger employment agreement. In Texas, for a non-compete covenant to be enforceable, the following requirements must be met:

•An otherwise enforceable agreement must exist.

•The noncompete covenant must be "ancillary" to the otherwise enforceable agreement at the time the agreement is made.

•The scope of the noncompete covenant must be reasonable in terms of time, geographical area, and scope of activity to be restrained, and must impose restrictions no greater than necessary to protect the employer's goodwill or other business interest.

These requirements are explained in other posts in this Overview section.

• Email This
• Print
• Trackbacks