Common Misconceptions About Enforcing Non-Competition Agreements in Texas (Part 2)

Andrew Pearce, Colby Hodges

August 9, 2017

Non-competition agreements in Texas have become an increasingly contentious area of litigation over the past decade and stand as a routinely confusing area of law for both employers and employees. Part 2 of this two-part series reviews three of the most common employer misconceptions about enforcing non-competition agreements. See Part 1 for a review of misconceptions among employees.

1. My employee’s non-competition agreement stated “confidential information” would be protected. What information are they talking about?

As one might guess, “confidential information” can mean many things to many people and can vary widely by industry, and even among the people you ask within those industries. Moreover, routinely in lawsuits, the question of whether certain information is truly “confidential” is hotly contested. Therefore, to protect information that is confidential and propriety to their businesses, employers should strive to be as specific as possible in defining what truly is “confidential information,” while still allowing for the inclusion of a proper breadth of proprietary material. These goals can often conflict.

For example, we recently represented a company in a lawsuit brought by a competitor involving claims of misappropriation of trade secrets by a former employee whom our client hired. The trial court granted the competitor’s request for a temporary injunction, which included a lengthy, two-page definition of “confidential information” that the former employee and his new employer were prohibited from using. The Texas Fourteenth Court of Appeals reversed the challenged sections of the trial court’s temporary injunction, holding that a vague, two-page definition of “confidential information” failed to give adequate notice of the specific acts prohibited and prevented the former employee and his new employer from using information that the evidence conclusively established was not confidential information or trade secrets.

Ultimately, if a company uses a tailored and specific definition of what constitutes “confidential information,” then it can avoid disagreement with a departing employee over what is intended to be protected and, often times, a court is more likely to help it protect against the wrongful use or disclosure of such information.

Employers should also implement procedures that help to safeguard confidential information, both prior to and after an employee leaves. These procedures should be discussed with and agreed to by new employees at the start of their employment so everyone is on the same page when the employment ends.

Given the explosion of mobile technology and cloud-based computing, these procedures must be carefully crafted. For instance, if an employee is given a company-issued laptop or cell phone, does the employer allow him or her to connect the device to personal cloud accounts such as iCloud, DropBox, or Google? Who has the right to keep and use the customer contact information that may be stored on the employee’s phone?

When an employee departs, the business should have stringent protocols in place to effectively terminate an employee’s access to key electronic data, log the employee’s movement within or access to computer-based systems, and outline the return of company-issued devices in a manner that preserves the status quo.

Finally, in recent years, employers have begun to ask departing employees to confirm in writing that all confidential and propriety business information has been returned prior to leaving the job.

2. If I pay severance to a terminated employee, can I receive a post-employment non-competition agreement?

Under Texas law, the consideration given by an employer in exchange for a non-competition agreement must possess a “reasonable relationship” to the employer’s interest in restraining the employee’s competition against the employer’s business. Though Texas courts have significantly reduced the legal threshold for what form valid consideration can take, a lump sum payment of money at the time of termination is presently unlikely to pass muster as being reasonably related to the employer’s interest.

Even so, an employer can still protect its interests by discouraging competition or solicitation through contractual termination agreements. Under this structure, an employee may enter into a separation and termination agreement that provides for severance payments to the former employee in exchange for the employee’s covenant not to compete against his or her former employer. If the employee breaches the covenant, he or she can be sued for breach of contract, may forfeit receipt of any remaining payments due, and the employer may seek to recoup any severance payments made under the agreement. Thus, while having fewer legal teeth than a typical non-competition agreement entered at the beginning of an employment relationship, post-termination agreements of this nature can certainly be used to economically discourage employees who may pose a potential competitive threat to a business.

3. Is my employee’s non-competition agreement enforceable from state to state?

What constitutes “the law” is not the same from state to state and, in fact, can vary widely on any particular issue. This is certainly true when it comes to the enforcement of non-competition agreements. For instance, given Texas’ general reputation as being a pro-business state, it is not surprising to find that non-competition agreements are routinely enforced as a protection of free enterprise within the Lone Star State. On the other hand, California generally does not allow for the enforcement of non-competition agreements. Other states will vigorously reform a subject non-competition agreement, or take a “blue pencil” to the agreement and find objectionable provisions as void or unenforceable.

So, when thinking about employment agreements, businesses should be aware of the law in the states in which they are operating. Taking steps to incorporate choice of law and choice of venue provisions in the non-competition agreement can also be helpful in avoiding attempted enforcement of a covenant in a state that is less-than-sympathetic to a business’ goal to protect against undesired competition.