Texas Contract & Noncompete Disputes Blog

Texas Contract & Noncompete Disputes Blog

Texas Non-Compete, Trade Secrets and Contract Law

Texas LLC Law–Breach of Fiduciary Duty

Posted in Uncategorized

Over 70% of all businesses in the United States are sole proprietorships.  A sole proprietorship is an unincorporated business that is owned and operated by a single individual.  As a sole proprietor, you are entitled to 100% of the profits.  However, you are also 100% personally responsible for all debts, losses, and liabilities.

Many people choose to protect themselves from liability by forming limited liability corporations with other members.  This generally limits liability to the LLC and not each individual member.  However, certain legal duties may require members to disclose pertinent information related to the best interest of the LLC.  These duties are known as fiduciary duties.

In Texas, there are two types of fiduciary duties.  One is formal, the other informal.  A formal fiduciary duty arises under relationships such as attorney-client, partnerships, and trustee relationships.  Informal fiduciary relationships develop when the parties have dealt with each other over long periods of time, and a party expects the other to act in its best interests.  In Texas, the law sometimes recognizes informal fiduciary duties between shareholders in a limited liability company.  Texas courts look to the level of trust and confidence between members to determine if an informal fiduciary relationship exists.

The San Antonio Court of Appeals addressed this issue last summer.  In that case, three life-long friends decided to enter the restaurant business.  They formed a three-member LLC.  A non-managing member invested much more money in the LLC than did the other two managing members.  Eventually, the non-managing member learned of double dealing, and outright theft, by the two managing members.  The non-managing member filed suit and alleged, among other things, fraud by nondisclosure.  However, as a general proposition, fraud by nondisclosure requires a duty to disclose information.  This is where the San Antonio Court of Appeals began its fiduciary duty analysis.

The court stated that while Texas law has not yet recognized formal fiduciary duties between majority and minority shareholders in closely held corporations, the nature of relationships between shareholders in LLCs sometimes give rise to informal fiduciary duties.  For example, the court in this case found that the two managing members had a relationship of trust and confidence with the non-managing member.  All three members had been friends since they were in school.  As adults, they vacationed together.  They used the same attorney to develop the company agreement.  The non-managing member invested $80,000.00 in the LLC, substantially more than the managing members.  The non-managing member gave the two managing members complete management control.  And finally, the company agreement did not expressly disavow the formation of fiduciary duties.  Thus, the court of appeals upheld the trial court’s verdict of $120,000.00 in damages for fraud by nondisclosure.

The limited liability corporation has exploded in popularity.  It has many positive aspects for the average businessperson.  However, it is important to be aware of any legal obligations you have to other members so that you can protect yourself.

Limitations in TX Breach of Contract Cases

Posted in Uncategorized

The statute of limitations first appeared in early Roman law.  It later developed into the criminal and civil common law of England.  The purpose of the statute of limitations in a breach of contract context is to limit the time a plaintiff has to bring a lawsuit.  This is because: (1) a plaintiff should pursue its breach claims with reasonable diligence; (2) a defendant might have lost evidence to disprove a stale breach claim; and (3) long dormant breach claims can work an injustice on a defendant.  Essentially, the law will not award a plaintiff for “sandbagging” its breach claims, or failing to exercise reasonable diligence over its contracts.

Each state has its own statute of limitations period.  They range anywhere between 3 to 15 years depending on the particular state’s law.  Thus, knowing what state’s law governs your contract is vital.

In Texas, the statute of limitations for breach of contract is four years.  The period begins from the day the contract was breached.  A breach of contract occurs when a party fails or refuses to do something it has promised to do.  Understanding when the breach occurs is paramount.  It is not necessarily when the other party fails to meet its ultimate obligation on the contract.  Rather, it is a failure to do something it had promised to do under the contract.  A recent case from the Dallas Court of Appeals illustrates this concept.

In this case, a buyer of delinquent car loans sued the seller for breach of contract.  The buyer claimed the breach occurred when the seller did not deliver “account documents” within ten business days of the “effective date.”  The effective date of the contract was June 28, 2007.  Seller had until July 13, 2007 to meet its obligation.  Accordingly, when Seller did not comply on July 13, 2007, the statute of limitations began to run.  Thus, buyer had four years (July 13, 2011) to bring suit for breach of contract.  But, Buyer did not bring suit for breach of contract until January 3, 2012, well after the statute of limitations had passed.  Nevertheless, the trial court awarded over $3 million in damages to buyer.

The Dallas Court of Appeals reversed.  It held that the buyer brought no evidence asserting that its breach of contract claim began to run on any date other than ten days after the “effective date” of the contract.  Therefore, seller conclusively established that all claims for breach of contract were barred by the statute of limitations.  Buyer’s award of $3 million in damages was reversed.

The concept of the statute of limitations is simple.  However, the complexities of modern commercial life are not.  With that in mind, you must be aware that the law expects people to exercise reasonable diligence in bringing actions for breach of contract.  Whether it is two private parties contracting, or sophisticated businesspeople, the law holds both to the same duty, with very few exceptions.  Therefore, procrastinating on a breach of contract action, or simply failing to recognize it, can have serious consequences on your legal rights and remedies.

Trademark Infringement Basics

Posted in Unfair Competition

It is said that imitation is the most sincere form of flattery.  However, imitating a competitor’s trademark can lead to harsh consequences.  Alternatively, allowing a competitor to imitate your trademark can damage your business.  It is important to understand basic concepts of trademark infringement to prevent infringing, or being infringed upon.

It is important to know that an unregistered trademark can receive protection for infringement purposes.  To receive this protection, the symbols or words of the mark must be distinctive, or strong.  In determining distinctiveness, or the strength of a mark, courts classify marks in four categories, from weakest to strongest: generic, descriptive, suggestive, and arbitrary or fanciful.

  • Generic marks receive no protection. Generic marks or terms refer to the basic nature of the product, rather than the more individual characteristics.  For example, aspirin has been held to be generic and unprotected.
  •  Descriptive marks identify a characteristic or quality of the good, such as color, order, and function. For descriptive marks to gain protection, they must develop secondary meaning.  An example of secondary meaning is that the public, over time, begins to identify the mark as reflecting not only the product, but also the source of the product.  An example is Vision Center in reference to a business offering glasses.
  • Suggestive marks do more than describe the good; they suggest some particular characteristic of the good and require the consumer to exercise their imagination to figure out what the good is. An example is Coppertone regarding suntan products.
  • Arbitrary or Fanciful marks bear no relationship to the products and receive full protection. For example, Kodak bears no relationship to cameras, and Ivory bears no relationship to soap.

After classifying a mark, a court will uses the “digits of confusion test” to determine if there is a likelihood of consumer confusion as to the source of the goods.  The test examines (1) the type of mark allegedly infringed; (2) the similarity between the marks; (3) the similarity of the products and services; (4) the identity of retail outlets and purchasers; (5) the identify of media advertising used; (6) the defendant’s intent in using the mark; and (7) any evidence of actual confusion.

This process was explained in a clothing apparel trademark infringement suit.  In the case, Saturdays Surf LLC sued Kate Spade LLC under the Federal Lanham Act, claiming that Kate Spade’s new brand “Kate Spade Saturday” infringed on its federally registered trademark “Saturdays Surf NYC.”  Saturdays Surf LLC also claimed that its unregistered marks “Saturdays” and “Saturdays Surf” were being infringed.

The court found that “Saturdays Surf NYC” was a protected mark.  However, it did take issue with Saturday Surf LLC’s attempt to claim infringement on its unregistered marks “Saturdays” and “Saturdays Surf.”  First, the court found that many other companies were using the word “Saturday” or “Saturdays” to describe their line of clothing.  The court held that the word “Saturdays” is commonly used in the context of apparel, and that the word alone is not protectable under the Lanham Act.

Second, the court ruled that while many consumers refer to “Saturdays Surf NYC” as “Saturdays Surf,” there was no evidence that any of Saturdays Surf’s products bore the name “Saturdays Surf NYC” without the “NYC.”  Thus, Saturdays Surf failed to show that the unregistered mark “Saturdays Surf” warranted protection.  Third, using the “digits of confusion test” the court found that: (1) the house mark Kate Spade in “Kate Spade Saturday” reflected a strong mark entrenched in the fashion industry; (2) “Kate Spade Saturday” and “Saturdays Surf NYC” were not similar marks; (3) the products produced were not similar, as Kate Spade produced exclusively women’s clothing while Saturdays Surf produced unisex apparel; (4) the products were sold in different channels of trade; and (5) the high price of the apparel reflected that they were marketed to sophisticated consumers.  Thus, Saturdays Surf’s counter claim for trademark infringement lacked merit.

In today’s global economy, consumers have more freedom than ever to choose from a variety of goods and services.  Therefore, trademarks serve a valuable purpose in helping a company distinguish its goods from others.  The cost of tolerating trademark infringement can be high, and engaging in activity that infringes upon a competitor’s mark, even unintentionally, can lead to costly litigation.

Computer Fraud and Abuse Act: Broad Scope of Applicability

Posted in Unfair Competition

Many aspects of modern society are dependent upon computers.  And computer fraud and abuse has become prevalent.  For employers, it is important to have an employee computer access policy to protect your sensitive information.  As an employee, knowing the limits of your authorized access is essential to avoiding adverse employment action.

The Computer Fraud and Abuse Act is a federal law that was enacted by Congress in 1984.  It has been amended several times to keep up with technological advances.  It was originally enacted as a criminal statute, but now also allows for civil enforcement.  The Act defines a violator as “[w]hoever knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value…” The Act defines a “protected computer” as a computer that “is used in or affecting interstate or foreign commerce or communication…”  However, the provision “without authorization, or exceeds authorized access” is not defined, and it can be a trap for the unwary.

For example, in a recent case, the Fifth Circuit Court of Appeals held that “the concept of ‘exceeds authorized access’ may include exceeding the purposes for which access is ‘authorized.’”  In this case, the employee had been given access to a large bank’s internal computer system and the customer account information contained within it.  The employee accessed the information with the purpose of making it available to employee’s co-defendant to conduct fraudulent credit card charges.  Employee argued that the Act did not prohibit access to material to which she had authorization, and that the statute only prohibited her from accessing information she was not authorized to retrieve.

However, the Fifth Circuit concluded that the employee had exceeded her authorization, even though she “was authorized to view and print all of the information that [employee] accessed,” because her use of that information “to perpetrate fraud was not an intended use of that system” and was “contrary to [the] employee policies of which [employee] was aware.”

This concept is further seen in a case decided this year by a federal court in Texas.  Shortly before terminating his employment, an employee allegedly removed documents from an employer’s computer.  Employee argued he was authorized to delete files from employer’s computer.  However, the court stated, “An employer may ‘authorize’ employees to utilize computers for any lawful purpose but…only in furtherance of the employer’s business.”  While the authorization agreement did not prohibit the employee from deleting information form employer’s computer, employee may have exceeded the intended use of employer’s computer if it caused harm to employer’s business by deleting files.

As shown above, this statue can serve as a remedy to an employer whose confidential information has been compromised by unauthorized access of their computer.  Additionally, employees need to be aware of the boundaries of their computer authorization agreements.

Fraudulent Inducement and Settlement Agreements Under TX Law

Posted in Uncategorized

Settlement Agreements: Fraudulent Inducement and the Duty to Read Your Contract

Settlement agreements are contracts.  They impose binding obligations on both parties.  Consider the following example.  Employer sues ex-employee for breach of non-compete.  Employee files a counterclaim for unpaid sales commissions.  Eventually, the two parties sign a settlement agreement.  As part of the settlement agreement, the parties agree to release all pending litigation.  The ex-employee and the employer also agrees not to bring suit in the future regarding the dispute at hand.  Although these agreements are typically binding, there are some exceptions.

Specifically, a party cannot be induced by fraud to sign a settlement agreement.  However, a party claiming fraud nonetheless has a duty to exercise ordinary care and reasonable diligence when contracting.  In other words, the defense of “I didn’t know that was in the contract” generally will not work.  Commonly, courts in Texas say, “you should have read it before you signed it.”

The Texas Supreme Court recently dealt with a case of this nature.  In this case, the parties settled their dispute in mediation.  In exchange for the plaintiff’s release of litigation against the defendant, the defendant orally agreed to give to the plaintiff: (1) a partnership share in his company, (2) $1 million in cash, and (3) an interest in future profits from the sale of property in dispute.  Later, a written agreement was signed by both parties.  When the plaintiff never received his other cash, profits, and partnership interest, he read the settlement agreement, for the first time.  To his dismay, the written settlement agreement only required the defendant to tender $500,000 to the plaintiff in exchange for his release of its claims.  The plaintiff brought suit for breach of contract, specifically, fraud in the inducement of a settlement agreement.

At trial the plaintiff admitted he did not read the settlement agreement, and relied solely on the defendant’s oral promise.  However, the court held that the plaintiff could not have relied on the statements by the defendant because the plaintiff did not read the settlement agreement.  The court ruled that it would not save the plaintiff from his contract because he had a “reasonable opportunity to review the written agreement but failed to exercise ordinary care to do so.”

Texas Noncompete Agreements Must Be Reasonable in Scope

Posted in Noncompete Agreements

Hiring employees, training them, and granting them access to industry secrets or client lists exposes employers to the possibility that employees will utilize this valued information against them.  In order to protect themselves, employers will often include a covenant not to compete provision in an employment contract, commonly known as a “non-compete.”  However, it is important for both employers and employees to understand the legal limits of a non-compete.  Drafting a non-compete that is too broad can lead to counterproductive results, while drafting one that is too narrow might be ineffective in protecting your economic interests and business goodwill.

In Texas, a covenant not to compete must state a duration of time, geographical area to be limited, and scope of activity to be restrained that is reasonable to protect goodwill and other business interests of the employer.  It is important to also remember that the non-compete provision must be ancillary or part of an otherwise enforceable agreement or contact.  The “reasonableness” of a non-competition agreement is a question of law that a court must decide.  As a general matter, except for a few unique circumstances, a non-competition agreement that is indefinite or without geographical limitations will be ruled unreasonable and unenforceable.

For example, the Dallas Court of Appeals recently held that independent contractors are subject to covenants not to compete. However, the same “reasonableness” standard applies.  In that case, the plaintiff was an independent contractor selling insurance policies pursuant to an agent agreement with the defendant.  Part of the agent agreement contained a covenant not to compete that prevented the plaintiff, upon termination or resignation, from “attempting to replace business with any policyholder by soliciting or offering competing policies…to which Agent sold any policy of insurance pursuant to this agreement.”  The Dallas Court of Appeals held that this term was unenforceable because there was no duration on time, as policyholders of the defendant could renew their policies indefinitely, thus leading to the plaintiff not being able to solicit or offer policies to them forever.  The result of the holding was that the plaintiff could compete with defendant immediately.

The above case is an example of an employer thinking it had sufficiently protected its economic interests, only to find out that its non-competition agreement was ineffective.  It is important for employers to understand Texas non-compete law so that they can effectively protect their economic interests and business goodwill.  For employees, knowing the limits of covenants not to compete in Texas will prevent them from being unlawfully restricted in offering their unique skills and services.

Oral Promises Enforceable in Texas

Posted in Noncompete Agreements

“An oral contract is as good as the paper it is written on”—this is simply not true.  In fact, a Texas jury awarded $11 billion dollars in damages to Pennzoil when Texaco interfered with an oral contract for the sale of Getty Oil to Pennzoil, one of the largest jury verdicts in U.S. history.  While it is true that some contracts must be in writing, such as the sale of real estate, Texas courts will enforce many oral promises.  To understand the concept of an oral contract, we first need to know the elements of a valid contract.

According to Texas law, a contract is a promise(s) with legal consequences that are formed when an offer is made, the offer is accepted and valuable consideration (money, services, etc.) is exchanged for the promise(s).  In determining the existence of an oral contract, Texas courts look to the communications between the parties and to the acts and circumstances surrounding those communications.  Furthermore, a breach of an oral contract occurs when (1) there is a valid contract, (2) a plaintiff performs its obligation, (3) the defendant breaches his obligation and (4) the plaintiff sustains damages from the breach.

Oral promises can have disastrous consequences.  An example is seen in a case decided by the Houston Court of Appeals in 2012.  In that case, the trial court awarded an employee $42,500.00 in damages for breach of an oral contract promising her an end-of-year bonus.  The court of appeals affirmed the trial court’s ruling.  That court stated that there was sufficient evidence of an oral contract when the vice-president of operations for a family-run business told an employee that she would receive a bonus for work performed during the previous calendar year.  The employer argued that it told the employee she “might” receive a bonus.  However, the court found that a reasonable jury could find that an oral contract was formed from the evidence presented at trial.  The result: The employer was on the hook for $42,500.00 due to the employee.

From oil giants to small business owners, Texas courts have no problem enforcing oral promises if they meet the requirements of a valid contract.  The above case is a cautionary tale to employers, as well as employees in certain circumstances, to choose their words wisely when making oral promises.  The enforcement of an oral promise ultimately turns on the communications between the parties and to the acts and circumstances surrounding those communications.

Choice of Law in Texas Noncompete Litigation

Posted in Noncompete Agreements

When contracting with another party, it is essential to understand which state law will govern your contract in the event you find yourself in a contractual dispute.  What might seem to be a reasonable provision, agreed upon by all parties, can be interpreted radically different depending upon the state law that will govern your contract.  In legalese, choosing a state’s law that will govern your contract is know as a “choice of law” provision.

In Texas, as a general proposition, the rule of “party autonomy” allows for the parties to choose a state’s law to govern their contract as they please.  However, as with most legal rules, this proposition is not absolute, and Texas imposes some limitations on this rule.  First, the state law chosen must bear a “reasonable relation to the state and parties involved.”  Parties cannot choose a state that has no relation whatsoever to their agreement or transaction.  Second, a party cannot choose the application of a state’s law that would be contrary to a fundamental policy of Texas law in which Texas has a “materially greater interest” in the dispute.

An example of the above stated rule is illustrated by way of a recent Texas Supreme Court ruling handed down last summer.  In Exxon v. Drennen, Exxon Mobil, headquartered in Texas, and a resident of Texas, working in Texas, entered into a contract involving what they thought was a non-compete agreement.  However, both parties agreed to New York being the proper “choice of law” to apply to the contract, as Drennen had worked for Exxon in New York in the 1980s, and part of his compensation involved stocks that were traded and regulated on the New York Stock Exchange.  Eventually, litigation broached the issue of which state’s law would apply, New York or Texas.

Drennen appealed arguing that Texas law should apply to the contract because the non-compete agreement was unenforceable as a matter of Texas public policy.  The appellate court held that the trial court improperly applied New York law because Texas had a “materially greater interest” in the dispute due to the entire transaction taking place in Texas.  Second, the court held that the dispute centered on a non-compete agreement, which is a fundamental matter of public policy related to employees and their mobility in the Texas workforce.  Thus, Texas law applied.

On appeal from this discussion, however, the Texas Supreme Court found otherwise.  The court ceded that Texas has the most significant relationship to the transaction, and it had a “materially greater interest” where both the employer and employee are Texas residents.  However, the Court held that the non-compete agreement being disputed was not actually a non-compete agreement under required elements of Texas’ Covenants Not to Compete Act.  Thus holding that applying New York law would not contravene a fundamental policy of Texas related to the mobility of employees in Texas.  In the end, New York law applied.

The above case demonstrates the pitfalls and potential for costly litigation when choosing a choice of law to govern a contract.  The Texas Supreme Court seems to be advancing the proposition that very minimal contacts with other states are required to establish a valid choice of law provision between contracting parties.  However, strict compliance with Texas statutory elements in cases such as non-competes are essential to make an argument that the choice of law provision thwarts a fundamental public policy of Texas.  Simply calling something a non-compete, and intending for it operate as such will not necessarily be legally treated as a non-compete depending on the state law you choose to govern your contract.

A Rare Anti-Noncompete Case in Texas

Posted in Noncompete Agreements

An employee of a small manufacturing company (“Acme Company”) leaves and starts his own competing company (“Best Company”). Acme Company sues the employee for doing so—because the employee signed a noncompete agreement stating that, if he left Acme Company, he would not start a competing business.

In the lawsuit, the employee argues, “The existence of my new company, Best Company, benefits the public. Having another manufacturing company will force Acme Company to constantly improve the quality of its products and to sell them at reasonable prices. In other words, competition is a good thing.”

In determining whether to enforce the noncompete agreement against the employee (by forcing the employee to shut down Best Company), should the court consider how the public will be affected if the noncompete is enforced? A layperson might answer this question, “Obviously, yes,” but that is not typically how Texas courts have dealt with the issue in the past. But a recent case may change things.

Texas Noncompete Agreements: Basic Requirements

Under Texas law, a noncompete agreement is enforceable if it is supported by sufficient consideration and is reasonable in scope. The Texas noncompete statute does not explicitly state that, to be enforceable, a noncompete agreement must be beneficial (or not harmful) to the public.

Getting an Injunction in Texas State Court

In a noncompete case, the real “trial” of the case often happens 14 days after the lawsuit is filed—at the temporary injunction hearing. At this hearing, the plaintiff asks the court to force the defendant to comply with the noncompete agreement. In our hypothetical example, Acme Company would ask the court to “make my former employee shut down Best Company.”

Under Texas law, in deciding whether to grant the injunction sought by Acme Company, the court would focus on these factors: whether Acme Company has a valid legal claim, whether Acme Company is likely to prevail at the final trial of the case, and whether—without an injunction—Acme Company would suffer irreparable harm. If the court were to answer all of these questions in the affirmative, a temporary injunction should issue.

But, under Texas state law, the court would not be required to co6nsider whether the injunction sought by Acme Company would harm the public.

The Federal Court Difference

Unlike in Texas state court, if a noncompete lawsuit is filed in federal court and a preliminary injunction is sought, a federal judge will grant the injunction only if the injunction would “not disserve the public interest.” In other words, in federal court, unlike in state court, the court must consider whether the requested injunction would harm the public.

The Recent Potentially-Groundbreaking Case in Texas State Court

In a recent case in Texas state court, the court considered how the public would be affected if the requested injunction were entered. The case involved a dispute between two doctors who worked together in the same medical practice. One of the doctors left the practice and started a competing business. The other doctor sued to enforce a noncompete agreement.

In denying the requested temporary injunction, the trial court noted, “We’re a small ccommunity. The public interest would be adversely affected” if the inthejunction were granted. The court added that there was a need for cardiologists in “this small community.” The doctor seeking enforcement of the noncompete agreement appealed.

The court of appeals affirmed the trial court’s decision to consider the effect that the noncompete would have on the public. The court explained:

Whether an agreement will be unenforceable on public policy grounds will be determined by weighing the interest in enforcing agreements versus the public policy interest against such enforcement. On one side of the scale is Texas’ general policy favoring freedom of contract. Courts weighing this interest should consider the reasonable expectations of the parties and the value of certainty and enforcement of contracts generally. On the other side of the scale is the extent to which the agreement frustrates important public policy. It is appropriate to consider whether enforcement of the covenant not to compete would harm the public interest by resulting in inadequate healthcare or continuity of care and depriving the public of access to the physician of its choice.

Possible Impact

That this case involved whether residents of a rural community would have adequate access to healthcare certainly may have impacted the ruling in this case. Nevertheless, after a wave pro-enforcement cases in recent years, the possibility that Texas courts might now consider the effect that enforcing a noncompete agreement might have on the public is potentially huge. We will have to see how this plays out in subsequent cases. The Texas Supreme Court’s refusal to hear the case may suggest that it approves of the approach taken in this case.

When is a Nondisclosure Agreement Actually a Noncompete?

Posted in Nondisclosure Agreements

Many wars have been fought in Texas courts over the enforceability of noncompete agreements. But relatively few have been waged over the enforceability of nondisclosure agreements. The reasons for this are many, including the fact that Texas courts have routinely held that, unlike noncompete agreements, nondisclosure agreements do not restrain trade; hence, they are far more enforceable. Also, litigation over nondisclosure agreements has been relatively sparse because these agreements typically only require a departing employee to refrain from using or disclosing his former employer’s trade secrets. Nondisclosure agreements typically do not prohibit an employee from competing.

But what if a nondisclosure agreement goes too far? What if the wording of a nondisclosure agreement is so broad that it is, de facto, a noncompete agreement? In that case, would the usual deference given to nondisclosure agreements apply?

What if, for example, a nondisclosure agreement prohibited an employee not only from using or disclosing his former employer’s trade secrets, but also prohibited him from using or disclosing any of the knowledge he gained while working for the employer? Would a clause like that be as enforceable as a run-of-the-mill NDA?

Nondisclosure Agreement Defined

The first step in answering this question is to examine how courts have defined nondisclosure agreements. As one Texas court put it, “Nondisclosure covenants prevent the disclosure of confidential information and trade secrets.” Another court noted, “Nondisclosure covenants do not necessarily restrict a former employee’s ability to compete with the former employer by using the general knowledge, skill, and experience gained from his or her work experience.” As these cases acknowledge, a nondisclosure agreement is designed to protect a company’s confidential information and trade secrets from being used against it—it is not designed to keep a former employee from competing by using his general knowledge and skills.

Impact of Having Overly Broad Nondisclosure Agreement

If an NDA is so broad that it “has the practical effect of prohibiting the former employee from using, in competition with the former employer, the general knowledge, skill, and experience acquired former employment,” it may be held to be a noncompete agreement. The reason for this is that if a purported nondisclosure agreement goes beyond merely protecting an employer’s trade secrets and confidential information, it may actually restrain trade, just as a noncompete does.

Why Does It Matter?

If a Texas court construes an agreement as a legitimate NDA, it will almost certainly enforce it. Texas courts have consistently held nondisclosure agreements to be enforceable. Conversely, noncompete agreements, to be enforceable, must meet the strict requirements of Tex. Bus. & Comm. Code § 15.50. For example, a noncompete agreement must be reasonable in scope. If an employee convinces a court that a nondisclosure agreement prohibits him from using his “general knowledge and skills,” the court may treat the nondisclosure as a noncompete agreement. Under the statute, an overly broad noncompete agreement must be reformed to make it reasonable.

So what?, an employer might ask. Here’s why it matters: Under the Texas statute, if the court is required to reform a noncompete agreement to make it reasonable in scope, no damages can be recovered (on a breach of contract theory) based upon pre-reformation violations of the agreement. From the perspective of the employee who is being sued, reformation of an overly broad agreement is a “get out of jail free” card—it wipes away what has happened in the past (on a contract theory; obviously, if the employer can make a tort theory, like trade secret theft, that’s a different matter). Thus, if an employer wants to maintain its right to recover damages for breach of a nondisclosure agreement, it should ensure that the agreement is reasonable in scope at the outset. The employer does not want the the court to have to reform its covenants because they are too broad.


In the realm of noncompete and nondisclosure agreements, “more” is not always better. Employers have an incentive to draft reasonable covenants so that the court will not have to reform them. If a court has to reform an overly broad covenant, it can have the effect of absolving the employee of wrongs that occurred before the reformation happened. Therefore, precision in the drafting of these agreements is extremely important.