Texas Contract & Noncompete Disputes Blog

Texas Contract & Noncompete Disputes Blog

Texas Non-Compete, Trade Secrets and Contract Law

Six Ways to Make a Trade Secrets Claim in Texas

Posted in Trade Secret Misappropriation, Uncategorized

As an employer, your trade secrets are the heart of your business.  Knowing every manner available to protect those trade secrets could make a big difference in future of your business.  A claim for misappropriation of trade secrets is one way an employer can protect its interests.

Under Texas law, a misappropriation of trade secrets claim not only can be made for the improper acquisition of trade secrets, but it can also be made for unauthorized use in general.

Section 134A of the Texas Civil Practices and Remedies Code defines misappropriation as follows:

(3) “Misappropriation” means:

  • (A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
  • (B) disclosure or use of a trade secret of another without express or implied consent by a person who:
    • (i) used improper means to acquire knowledge of the trade secret;
    • (ii) at the time of disclosure or use, knew or had reason to known that the person’s knowledge of the trade secret was:
      • (a) derived from or through a person who had utilized improper means to acquire it;
      • (b) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
      • (c) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
    • (iii) before a material change of the person’s position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

From the plain reading of the statute, the use of the disjunctive “or” demonstrates that there are six different ways to make a trade secrets misappropriation claim.  These six misappropriation definitions can be separated into three categories based on how the trade secret is acquired.  The first, and most predominate, involves the acquiring of trade secrets by improper means.  This category includes the definitions contained within (3)(A), (3)(B)(i), and (3)(B)(ii)(a).  Each of these involve some type of issue with the manner in which the trade secrets were actually acquired.

The second category of misappropriation deals with the acquisition of the trade secret by mistake or accident.  Under (3)(B)(iii), it is considered misappropriation if the trade secret was acquired by accident or mistake, the person had reason to know that it was a trade secret, and the person used or disclosed the trade secret without consent.

The third category involves misappropriation stemming from the proper and even invited acquisition of trade secrets.  This category contains those definitions within (3)(B)(ii)(b) and (3)(B)(ii)(c).  This category includes claims that arise often in the employment context.  In the context of their employment, employees often receive varying degrees of confidential and propriety information from their employers.  While it is always wise for employers to protect this information through covenants not to compete, non-solicitation agreements, and non-disclosure agreements, this third category provides some degree of protection against the misuse of an employer’s trade secrets by an employee or ex-employee.

Thus, even if an employer’s employees have not signed non-compete or nondisclosure agreements, an employer has various ways under the Texas trade secrets statute to protect itself.

At Lindquist Wood Edwards, LLP, our attorneys have years of experience protecting employers’ confidential information and trade secrets.    Whether or not you have a non-compete or nondisclosure agreement in place, we will use all avenues available to protect your interests.  Our attorneys can also advise and assist you in drafting non-compete and nondisclosure agreements that will better protect you should any employee ever use your confidential information outside of his employment.

What Is A Trade Secret Under New Texas Law?

Posted in Trade Secret Misappropriation, Uncategorized

Every business has some amount of confidential and proprietary information that it does not want its competitors knowing.  When someone uses a business’ confidential information without consent, or threatens to do so, filing a claim for misappropriation of trade secrets is one way for a business to protect its information.  However, in Texas, for this to succeed, the alleged confidential information must fall under the statutory definition of trade secret.  Which information is subject to this classification, however, is not altogether clear.

In 2013, Texas law relating to the misappropriation of trade secrets, and thus the defining of trade secrets, changed.  Adopting, with some changes, the Uniform Trade Secrets Act (which has now been adopted by virtually every state in the U.S.), Texas now defines a trade secret as:

. . . information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, that:

(A)  derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(B)  is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

This new statute explicitly replaces the common law relating to trade secrets and the misappropriation thereof.  Since this statute is still relatively new, there are not many Texas cases providing direction on its meaning.  It is still unclear if the statute will prove itself to be more or less restrictive than the common law which it supplanted.  However, court cases in other states which have adopted the uniform act indicate that the common law will still play a significant role in defining what a trade secret is.

For example, in Illinois, where the uniform trade secret act was adopted years before Texas did so, case law demonstrates the use of the same six-factor test that has been traditionally used in Texas to determine whether information constitutes a trade secret.  These six factors are:

The extent to which the information is known outside of the business seeking to protect it;

  1.  The extent to which it is known to employees and others involved in the business in question;
  2.  The extent of the measures taken by the business to guard the secrecy of the information;
  3.  The value of the information to the business and its competitors;
  4.  The money or effort expended by the business in developing the information; and
  5.  The ease or difficulty with which others might properly acquire or duplicate the information.

Guided by these factors, a business in Texas which has information (such as confidential client information, pricing information, business strategies, etc.) which it believes to be secret, and which gives it a competitive advantage, should ask itself whether, if it has to sue to protect the information, it is likely to prevail.  The above factors show the things that a business should do to ensure the “protectability” of its information.  Also, in addition to assessing the factors listed above, a business which has important confidential information should consider requiring its employees and contractors to sign nondisclosure and noncompete agreements – – these can be even more effective than statutory claims in protecting a business trade secrets.

At Lindquist Wood Edwards, LLP, our attorneys have years of experience protecting business’ confidential information and trade secrets.    If you are concerned that your trade secrets are being used without your authorization, or if you would like to discuss how to better protect your trade secrets, call us today.

Vendor Lists as Trade Secrets in Texas

Posted in Trade Secret Misappropriation

Many businesses have a list of vendors or suppliers they routinely use in the course of business.  This list of vendors is often compiled after years of effort and references the vendors that the business knows to sell high quality products at a good value.  Arguably, this information is a trade secret because it could only have been discovered after many years of trial and error and substantial financial investment.

In an earlier post, we discussed the likely use of common law factors in identifying trade secrets under the Texas Uniform Trade Secrets Act.  Under the common law, Texas courts utilized a six factor test to determine whether something was a trade secret.  Those factors are:

  1.  The extent to which the information is known outside the employer’s business;
  2.  The extent to which it is known to employees and others involved in the employer’s business;
  3.  The extent of 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 money or effort expended by the employer in developing the information; and
  6.  The ease or difficulty with which others might properly acquire or duplicate the information.

While the Texas Uniform Trade Secret Act explicitly replaces the common law, other states’ courts with similar statutes have still drawn from the common law by using these six factors.  Should Texas follow these states, recent Texas case law applying the common law factors indicates that your company’s list of vendors/suppliers may be entitled to trade secret protection.

In a recent Texas Court of Appeals case, the court considered the trade secret status of a company’s vendors in determining whether the vendor information was entitled to protection from discovery under the trade secret privilege.  The company seeking the trade secret protection was part of the salon haircare product diversion industry.  Within that industry, companies divert products outside of their normal, authorized, distribution channels.  Due to the nature of the industry, the product supply is limited and thus the identity of the supplier more valuable.  The company seeking protection established that it had been in the business for 25 years, it had developed its contacts and sources through substantial effort and expertise, its contacts/suppliers were not readily known to the public or the industry itself, its suppliers were the most valuable part of its business, and the suppliers’ identities were only known by a few people within the company.

Viewing this evidence, the court, weighing the six common law factors, found that the company’s supplier information was a trade secrets and thus, protected under the trade secret privilege.  While this case did not involve a misappropriation of trade secrets claim, it did firmly establish that, under the six factor test, a vendor can, in fact, be a trade secret.  However, the protection available for you and your business depends greatly on the efforts you take in protecting that information and the value of the information you wish to protect.

At Lindquist Wood Edwards, LLP, our attorneys are up-to-date on the law pertaining to all avenues available for protecting your business’s confidential information and trade secrets.    Whether or not your business is facing a breach of your confidential and proprietary information or wanting to prevent a future one, our attorneys can counsel you as to the best options for your company.

Worldwide Noncompete Restriction May Be Enforceable in Texas

Posted in Uncategorized

In the past, Texas courts have not fully embraced the ability of a non-compete agreement to restrict an employee from working anywhere in the world.  In several cases, Texas courts have held that the proper geographic scope of a noncompete agreement is the territory in which the employee worked.  Recently, though, a federal district court in Texas was sympathetic to a noncompete agreement with a worldwide scope. 

Under Texas law, a covenant not to compete is enforceable only if it contains reasonable limitations as to duration, geographic area, and scope of activity.  A non-compete agreement may not restrict the employee more than is necessary to protect the goodwill or other business interest of the employer.

In a recent Texas federal case, the employer conducted business within the narrow field of reactor thermometry.  The field has a small customer base and a limited number of licensors.  The employee worked in the sales department.  Within two years, the employee was promoted to Regional Sales Manager for sales territories that included all of Europe, Russia, and parts of the United States and Canada.  The employee also had access to his employer’s confidential worldwide client and sales information.  The employee also attended global conferences for his employer where he developed contacts with customers, prospective customers, and licensors who operate on a global scale.  Further, the employee’s sales efforts reached beyond his sales territories to countries all over the world.    

The non-compete at issue restricted the employee from performing work or accepting employment with any competitor within the United States and any country in which the employer did business.  The court found that because of the employee’s geographical reach in his job, his exposure to employer’s global confidential information, and the fact that he worked within a narrow field, the non-compete agreement was reasonable and did not restrict the employee more than necessary to protect the employer’s legitimate interests.

Businesses are starting to operate on a more global scale.  Ease of travel and the internet are enabling even the smallest companies to reach a worldwide clientele.  With the courts beginning to accept a worldwide restriction as reasonable, the need for an experienced attorney is great.  Our attorneys have years of experience drafting and litigating non-compete agreements.  We can advise you on whether a worldwide restriction is the right thing for your company and draft an agreement that will give your business the greatest protection while minimizing the risk of it containing an unreasonable restriction.  

 

Possible Tort Claim Not Sufficient Consideration for Noncompete in Texas

Posted in Noncompete Agreements, Uncategorized

In recent years, Texas courts have shown support for the employer’s use of non-compete agreements. The courts have done so by finding certain requirements of enforceability implied in non-compete agreements in some circumstances. Despite this trend, in June 2015, the federal appellate court that covers Texas ruled that a duty to keep information confidential cannot be assumed into a contract merely because there may be a common law or statutory duty to keep information confidential. This ruling provides a limit to the courts tendency to find enforceability requirements implied within non-compete agreements.

In order for a non-compete agreement to be enforceable, the law requires that it be ancillary to or part of an otherwise enforceable agreement. In the employment context, the Texas courts have found that the otherwise enforceable agreement requirement may be met if the employer promises to provide confidential information and the employee promises to keep that information confidential. The court may find that an employer’s promise to disclose confidential information is implied if confidential information must be disclosed in order for the employee to perform his job. While a court may imply into a contract either the employee’s or the employer’s promises, a court will not imply in the same contract both the employer’s promise to provide confidential information and the employee’s promise to keep information confidential.

The federal appellate court over Texas recently reviewed a case in which the agreement did not contain any promises by either the employer or the employee relating to confidential information. In an attempt to have the court imply these promises into the contract, the employer argued that a promise by the employee was not needed because “a promise not to disclose confidential information would have been redundant and unnecessary because, as a matter of state law, . . . [the employee] had that obligation without a written contract or express promise.”

The employer was trying to insert a duty that is found in tort actions (the duty of an employee after termination not to use or to disclose to third persons trade secrets or other confidential information) into the contract. The court categorically dismissed this argument stating that a non-compete agreement is a question of contract, not tort. A duty found in tort does not automatically become a contractual duty and thus make an otherwise unenforceable agreement enforceable.

While an employee has a duty not to disclose trade secrets or other confidential information to third parties, this tort action should only be used as a supplement and not a replacement for a quality-drafted non-compete agreement. At Lindquist Wood Edwards LLP, our lawyers use the most up-to-date law to not only draft non-compete agreements to protect your company’s confidential information, but also to litigate your non-compete and provide the strongest arguments for its enforceability.

Money for a Noncompete in Texas?

Posted in Noncompete Agreements

A Texas appellate court recently addressed the question of whether money is sufficient to support a non-compete agreement.  The court ruled that money was not enough and that the non-compete’s purpose must be to protect a legitimate business interest.

The contract at issue was for a company (“Company A”) to provide hospitalist services and to coordinate the hiring of hospitalist physicians for a hospital for a two year period.  Either party could terminate the contract early with a sixty-day notice.  The contract included a non-compete provision that provided that the hospital was not permitted to contract directly or through another hospitalist service provider with the hospitalist physicians that were retained or recruited by the company.

The hospital terminated the contract early with sixty-days’ notice.  After this termination, but within the time period covered by the non-compete, the hospital contracted with another company (“Company B”) to provide hospitalist services.  Company B then signed contracts with two physicians who were retained by Company A for the hospital.  It was unrefuted that this was a violation of the non-compete agreement.  Before the court was whether the non-compete was enforceable.

In order for a non-compete agreement to be enforceable, the law requires that it be ancillary to or part of an otherwise enforceable agreement.  While the otherwise enforceable agreement must be supported by consideration, the court stated that the non-compete “must be based on additional consideration.”  The contract before the court provided that in exchange for Company A’s services, the hospital would make yearly and monthly payments.  This consideration was for the otherwise enforceable agreement.  However, there was no “additional consideration for [the hospital’s] promise not to hire any physicians if the contract between [Company A] and [the hospital] was terminated.”

A non-compete agreement must have additional consideration to support the promise being made.  If money is the consideration, a Texas court will likely find this as insufficient because it does not set apart a different consideration for the non-compete’s promise.

The court also addressed the need for a valid reason for restricting competition.  “Where the object of both parties in making [a non-compete contract] is merely to restrain competition, and enhance or maintain prices, there is no primary and lawful purpose of the relationship to justify or excuse the restrain.”  (internal cites omitted).  The purpose of the restriction must be to protect a business interest such as goodwill or trade secrets.

At Lindquist Wood Edwards LLP, our lawyers have drafted and litigated numerous non-compete agreements.   We can make certain that your agreement is properly supported by consideration and protecting a legitimate interest.

Borrowed Servant Doctrine: Risks Associated with Asserting Control

Posted in Uncategorized

Temporary workers (“temps”) are a part of many businesses.  Some companies use temps to fill a void left while an employee is on leave, others utilize temps in determining whether or not to offer a permanent position, and still others have temps as part of their everyday business functions.  No matter what the reason is, when you bring a temp into your workplace, exerting too much control over him could lead to an increased risk of liability.

Temps are typically hired and made employees of a temp agency.  They are then placed within a business as an independent contractor.  As long as they are employees of the temp agency, the temp agency can potentially be liable for the temp’s actions.  However, if the business in which the temp is placed begins to exert control over that temp, the employer/employee relationship may shift, opening the business up to liability.  This is known as the borrowed servant doctrine. 

In a recent Texas Court of Appeals case, Davis-Lynch, Inc. v. Asgard Technologies, LLC, Davis-Lynch, Inc. (“DLI”) brought suit against its staffing company, Asgard Technologies, LLC (“Asgard”) for negligence, breach of fiduciary duty, and breach of contract.  Asgard placed a temp at DLI as a receptionist.  At all points in time, this temp was an employee of Asgard.  After 2 years, DLI moved the temp to the accounting department and eventually promoted her to head of accounting.  While in the accounting department, the temp allegedly embezzled over $15 million from DLI. 

One claim DLI brought against Asgard was respondeat superior.  This claim would allow DLI to hold Asgard, as the temp’s employer, liable for the actions of its employee.  Had DLI been successful on this claim, it would have allowed it to recover the embezzled $15 million from a company much more likely to be able to pay.  The borrowed servant doctrine prevented this from happening. 

The borrowed servant doctrine states that the employer that has the right to direct and control the actions of the employee is vicariously liable for the employee’s actions. Since the temp had been moved to accounting, she reported directly to DLI for day-to-day work, accounting issues, and personnel issues.  She was also trained by DLI employees.  Asgard had no involvement with the temp’s transfer to accounting, and Asgard personnel in the accounting department did not report to Asgard.  The court held that it was DLI, and not the temp’s employer, Asgard, who had the right to control Moreno.  Therefore, Asgard could not be liable for the temp’s theft under a respondeat superior claim.

This case is a perfect example of why your company should be careful as who it treats as employees.  Drafting employee and independent contractor agreements can be a helpful way to define the business relationship.  If there is a shift in the workplace between positions, titles, or control, seeking out legal advice could save you from unwanted and unexpected liability later on.

Choice of Law in Texas Injunction Hearings

Posted in Uncategorized

Choice Of Law in Injunction Hearings

In a prior post on Choice of Law in Texas Noncompete Litigation, we discussed the need for a well-thought-out choice of law provision in noncompete agreements.  The courts have again highlighted the importance of this, but this time, it is within the context of temporary injunctions.

Cameron International Corporation v. Guillory, a recent Texas Court of Appeals case, approaches the issue of whether to make a choice of law analysis in an injunction hearing.  While working for Cameron International, Guillory entered into a non-compete agreement.  However, Guillory “signed” this agreement by means of an online prompt stating that he read and understood the agreement.  The agreement also stated that it would be governed by Delaware law. On application for a temporary injunction, the trial court applied Texas law to decline enforcement of the non-compete.

The problem was that Texas law does not favor online “click” agreements like Delaware.  On appeal, Cameron International argued that Delaware law should have been applied during the injunction hearing.  Conversely, Guillory contended that choice of law is a merits question, so deciding it at the temporary relief stage was premature and improper.  The Court of Appeals held that choice of law must be established before addressing the propriety of temporary relief.

The court then applied the standard from Exxon v. Drennen—discussed in the abovementioned blog post.  After analyzing the facts in Cameron International, the court determined that the choice of law provision was enforceable, and as a result, it granted the temporary injunction.

A well-drafted choice of law provision can make a big difference when enforcing your non-compete at the critical temporary injunction stage.  In Cameron International, it was the primary factor in the granting of a temporary injunction.  Not only can a well-drafted choice of law provision prevent potential pitfalls and costly litigation, it can help determine the protections afforded at a very early stage.  At Lindquist Wood Edwards LLP, our lawyers take great care when drafting your non-compete agreements to ensure the maximum likelihood of enforceability.

Texas Federal Court Voids Noncompete Agreement

Posted in Noncompete Agreements

As readers of this blog know, noncompete agreements are increasingly enforceable in Texas.  However, even in Texas, not all noncompete agreements comply with the statutory requirements.

In a case decided a few months ago, the United States Court of Appeals for the Fifth Circuit, applying Texas law, held that a particular noncompete agreement was unenforceable.  In that case, the noncompete agreement did not contain an explicit promise by the employer to provide the employee with confidential information (which typically constitutes the consideration given by the employer in exchange for the employee’s promise not to compete).  The employee argued that the lack of such a promise rendered the noncompete invalid.

The employer countered that, under Texas law (as stated by the Texas Supreme Court in the Mann Frankfort case), the employer need not explicitly promise to provide confidential information for a noncompete agreement to be valid.  And the employer was correct that, under Texas law, a noncompete agreement need only contain an implied promise that the employer will provide confidential information.  An implied promise to provide confidential information exists “when the nature of the work the employee is hired to perform requires confidential information to be provided.”

Nevertheless, the noncompete in this case was invalid.  Reason:  Unlike in the Mann Frankfort case, here, there was no mention in the agreement of confidential information.  In Mann Frankfort, the employee had explicitly promised not to disclose confidential information (thus supporting an inference that the employer had implicitly promised to provide it).  Here, though, there was no such promise by the employee.  In this agreement, there was no mention whatsoever of confidential information.  The court held, “This very important distinction cannot be missed.”

This case is a perfect example of why every company that wishes to bind its employees to a valid noncompete agreement should have its agreements reviewed by an experienced practitioner in this area.  It’s much better to spend a little money on the front end, to ensure that you have a valid agreement, than to be severely disappointed when a lawyer tells you after the fact that you can’t enforce the agreement that your employee signed.

 

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.