Texas Contract & Noncompete Disputes Blog

Texas Contract & Noncompete Disputes Blog

Texas Non-Compete, Trade Secrets and Contract Law

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.

Conclusion

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.

Real Estate Disputes–Texas Breach of Fiduciary Duty Law

Posted in Breach of Fiduciary Duty

A recent real estate dispute sheds light on what is required to prove a breach of fiduciary duty claim in Texas. In this case, potential homebuyers contracted to buy a home for $180,000. The seller, the listing agent, the appraisal district, and the real estate agent all indicated that the home’s living area was 2722 square feet.

However, the prospective buyers told the real estate agent that the home looked smaller than 2722 square feet. The agent responded that the home looked smaller because it had an “open floor plan.”

The day before the closing was to occur, the prospective buyers told the agent that they wanted out of the transaction. The agent responded, “You can’t back out or you will get sued.” Thus, the buyers completed the transaction.

After doing so, the buyers had the local appraisal district remeasure the home. It turned out that the buyers’ suspicions were correct: the home was only 1967 square feet in size.

The buyers then sued the real estate agent. Several claims were asserted, including breach of fiduciary duty.

The district court granted summary judgment for the real estate agent, and the appellate court affirmed. The court held that there was no evidence that the real estate agent knew or should have known that the home was smaller. The agent reasonably relied upon all of the other representations, including those made by the appraisal district.

This case is a good reminder that not all “wrongs” can be fixed via the legal process. In this case, the buyers arguably should have done more to test the accuracy of their suspicions before they closed on the purchase. After buying the home, their options were much more limited, and, as the court held, they had no good legal claim against the real estate agent.

To Be Enforceable, Settlement Agreements in Texas Must Be Carefully Worded

Posted in Uncategorized

A recent Texas appellate decision demonstrates the importance of ensuring that settlement agreements are properly worded. In the case, three employees of Company A left and formed Company B. Company A sued the former employees, as well as Company B, for misappropriation of trade secrets and unfair competition.

As often happens in unfair competition cases, the parties entered into a settlement agreement. The settlement agreement provided that Company B and the individual defendants would not “knowingly initiate contact with any individual or entity who was actually known by [Company B] and the Individual Defendants prior to the direct contact . . . to be a client of [Company A].”

The settlement agreement also contained a liquidated damages provision requiring payment of $50,000 in damages merely for knowingly initiating contact.

Company A later sued Company B and its former employees for allegedly contacting two of Company A’s clients. Company A claimed that its former employees had, while they were employed by Company A, worked with these clients and thus knew who they were.

In response, Company B and the individual defendants argued that the alleged clients were actually “former” clients of Company A, and thus were not covered by the settlement agreement. The trial and appellate courts agreed with the defendants.

The potential importance of this case is that if a client is a “former” client, then a prohibition against contacting or doing business with that client may not be effective. This could come into play, for example, with respect to a client which is not currently sending business, but which could be reasonably expected to do so in the future. In other words, if a repeat client is not currently doing business with one of its vendors, does that mean that it is no longer a client of the vendor? The dissent in this case made a similar point. We will have to see the ramifications of this decision in future cases. In the meantime, lawyers who are drafting settlement, noncompete and nonsolicitation agreements meant to protect their clients’ customers should be aware of this opinion, and should perhaps draft restrictions that apply both to current and former customers.

Texas Appeals Court Reverses Denial of Temporary Injunction in Noncompete Case

Posted in Noncompete Agreements

Once again, a Texas appellate court sides with a company suing to enforce a noncompete agreement.  This time, the employer sued a former employee for violating a covenant prohibiting the employee for competing for three years following the termination of his employment.  Significantly, the noncompete covenant contained no geographic restriction.  It did not, for example, prohibit the employee from working only in the state of Texas.

When the employee went to work for a competitor, the employer filed suit, obtained a temporary restraining order, and then sought a temporary injunction.  The request for a temporary injunction was denied.  In denying the request, the trial court held that the noncompete was “unenforceable due to a lack of consideration.”  The court also held that the agreement was unenforceable due to a lack of any geographic restriction.

The Fort Worth Court of Appeals overruled the district court. The court of appeals considered the following points:

Sufficiency of Consideration: Implied Promise to Provide Confidential Information

The noncompete agreement (which was actually called an Employee Technology Agreement) stated that the employee would receive the following consideration: “continuing employment” and “salary or wages.” On appeal, the employee argued that a mere promise for continued employment was legally insufficient.

Rather than specifically address this argument, the court of appeals, citing the Texas Supreme Court’s Mann Frankfort case, held that the agreement contained an implied promise by the employer to provide confidential information. This confidential information was sufficient consideration for the noncompete covenant, the court held.

“But I didn’t really need the confidential information that was given to me,” the employee argued. The court rejected this contention. “The relevant inquiry,” the court held, “is not whether Liss’s job could has been performed without Tranter’s confidential information but whether it was performed without the confidential information.”

The court found it significant that the employee admitted to having received some company confidential information. The court noted, “The consideration requirement was satisfied by Tranter’s performance in disclosing its confidential information to Liss in exchange for Liss’s promise to keep that information confidential.”

Reasonableness of Restrictions

The court agreed with the employee that the noncompete was “unreasonable and unenforceable as written” because it did not contain a geographic restriction, as required by Texas law. However, the court noted that, as a final remedy in the case, the trial court would be required to reform the noncompete (by supplying the missing geographic restriction). Because of this, the court held, the agreement should be reformed on an interim basis, at the TI stage. The appellate court remanded the case to the trial court to do so.

Probable, Imminent and Irreparable Injury

The appellate court reaffirmed the requirement that, to obtain a temporary injunction, the applicant must prove that, without the injunction, it will be irreparably harmed. The court held that a “highly trained employee’s continued breach of a noncompete agreement creates a rebuttable presumption that the employer is suffering an irreparable injury.” Then, in reversing the district court’s denial of the application for temporary injunction, the court noted that (a) the employee was directly competing in the same territory and for the same customers; and (b) even though the employee was not actively trying to use his former employer’s confidential information, “there was no evidence rebutting the presumption that Liss would have extreme difficulty in not indirectly applying some of that confidential knowledge in his position at PMC.”

Conclusion

There are at least a couple of takeaways from this case. First, although we didn’t need anymore reminders that noncompete agreements are enforceable in Texas, this case makes that point once again. But the second point is this: Even with an enforceable noncompete agreement, a district court faced with an application for temporary restraining order or temporary injunction must carefully test the plaintiff’s contention that it needs the injunction to prevent irreparable harm. Even though there may be a rebuttable presumption that violation of a noncompete agreement will result in irreparable harm, as we can see in this case, that is not the end of the story. The plaintiff still must make a particular showing of irreparable harm. A plaintiff must be prepared to make the case that it will be irreparably harmed without an injunction.   

Misconceptions Concerning Noncompete Agreements in Texas

Posted in Noncompete Agreements

On the street, there are many misconceptions about noncompete agreements in Texas.  One myth is that, for a noncompete to be enforceable, the employer must have given the employee a cash payment, or a promotion, or some other monetary benefit.  But this is not the law in Texas. 

Usually, what the employer provides to the employee as consideration for the employee’s promise not to compete is confidential information.  Thus, by allowing the employee access to its confidential customer, pricing, and other information, the employer creates the justification for the employee’s return promise not to compete.  Typically, this confidential information is disseminated to the employee in an informal way (usually, the employee simply accesses the information through his normal job duties).

 

Thus, if you are an employee bound by a noncompete agreement, the agreement can be enforceable even though you have not received a new monetary benefit.  Simply performing your routine job duties (which includes accessing your employer’s confidential databases) may be enough to make your noncompete agreement enforceable.

In Texas, Noncompete Violation Per Se Can Justify Injunction

Posted in Noncompete Agreements

Are noncompete agreements enforceable in Texas? You bet they are—more than ever. You know it’s bad news for the employee who is being sued when a court opinion starts with: “Texas law presumes a party has read and knows the terms of the contract that he has signed.” Ever since the Marsh USA decision, Texas courts have increasingly had a “You signed it, it’s enforceable” mindset.

Of course, that’s not the end of the story. In every case, the court must determine whether the employer actually provided the consideration it promise to provide. And the court must ensure that the scope of the noncompete is reasonable.

And perhaps even more importantly, the court must determine whether the employer suing to enforce a noncompete agreement is entitled to a temporary injunction. To a large extent, the party who wins the temporary injunction hearing wins the case. The reason for this is that, if the employer wins the TI hearing, the employee either cannot work for a competitor or will have other significant restrictions placed upon him. Conversely, if the employee prevails at the TI hearing, he may be able to compete with his employer at least until the final trial on the merits.

A recent federal case from the Southern District of Texas shows how this plays out in practice. In that case, the defendant (a former employee) had allegedly engaged in some very serious misconduct (i.e., use and disclosure of his former employer’s confidential information). The employer sued and sought, among other things, a preliminary injunction to prohibit the defendant from working for a competing company.

In granting the employer the primary injunction it sought, the court held, “In Texas, injury resulting from the breach of non-compete covenants is the epitome of irreparable injury.” The court then cited Texas cases holding, “An employee who possesses trade secrets belonging to a former employer accepts employment with one of its competitors, even if acting in good faith, will have difficulty preventing his knowledge from infiltrating his work.” The court added: “Thus, the courts have recognized the need for injunctive relief in these situations.”

The court held that a second justification for a preliminary injunction was that the employee “has been using Daily’s confidential, proprietary and/or trade secret information unlawfully to compete against Daily, and is sharing that information with Daily’s competitors in violation of the [noncompete and nondisclosure agreement].”

In this case, the defendant allegedly engaged in some egregious conduct (unauthorized use and disclosure of confidential information, breach of fiduciary duty, etc.). This conduct alone would have justified the court in granting the employer’s request for preliminary injunction. However, rather than base the injunction upon this conduct, the court based it in part upon the employee’s mere violation of the noncompete agreement. This case is yet another reminder that the tide has turned in Texas against defendants in these cases.

Hiring At-Will Employees in Texas. Tortious Interference with Contract?

Posted in Tortious Interferance

Is it lawful for a company to hire one of its competitor’s employees? It may seems ludicrous to some to ask this question. But in a recent Texas appellate decision, the court actually considered whether a tortious interference with contract claim to be based upon Company A hiring an at-will employee from Company B.

The court held: “A claim of tortious interference cannot be premised merely on the hiring of an at-will employee, without more.” The court continued: “To hold Homeward liable for tortious interference for merely hiring Ally employees would `grind to a halt . . . the economy in the State of Texas.”

Economic growth depends to some extent upon the free flow of human capital. The court in this case reaffirmed the right of an at-will employee (unencumbered by a noncompete agreement) to move from one company to another. And the case goes a long way towards insulating the hiring company from legal liability. Obviously, if the defendant’s conduct had gone beyond merely hiring an at-will employee, the result might have been indifferent.

In Texas, Nonsolicitation Provisions Must Be Reasonable.

Posted in Nonsolicitation Agreements

Even though noncompete and nonsolicitation provisions generally are enforceable in Texas, they must be reasonable in scope. In a recent case from the Fort Worth Court of Appeals, the court held that a provision prohibiting solicitation of employees was too broad and, therefore, unenforceable.

The provision in question prohibited the employee, for a two-year period, from soliciting or employing “all [Company] employees who work for [Company] or any of [Company's] subsidiaries . . .” It also prohibited solicitation of “all former [Company] employees who worked for [Company] or any of [Company's] subsidiaries between August 14 and October 14, 2011.”

The court held that these provisions were too broad because they applied to all of the Company’s employees. The court noted, “While it might be considered reasonable to limit [Employee's] solicitation of [Company's] employees located in the IT department, which was where [Employee] worked, the non-solicitation covenant . . . was not so limited.”

The court noted that the company had approximately 14,000 employees. The nonsolicitation provision was invalid because it prohibited the employee from soliciting any of these people.

The takeaway from this case is that, just as a noncompete agreement must be reasonable to be enforceable, a nonsolicitation provision must be reasonable as well. Under Texas law, nonsolicitation agreements are subject to the same scrutiny that noncompete agreements are given. Failure to ensure that your nonsolicitation or noncompete provisions are reasonable can result in them not being enforced.

Unreasonable Noncompete Agreement Can Subject Employer to Potentially Huge Liability in Texas

Posted in Noncompete Agreements

Several Texas courts have held that a victorious employer in a noncompete case cannot recover its attorneys’ fees against the losing employee.  This is based upon the fact that the Texas noncompete statute does not explicitly authorize an award of attorneys’ fees to a winning employer.

However, a recent case out of the Houston Court of Appeals shows that an employer who requires its employee to sign an overly broad noncompete agreement, and then seeks to enforce the overly broad agreement, may have to pay the employee’s attorneys’ fees at the end of the litigation.

In this case, there was evidence at trial suggesting that the employer knew that the noncompete agreement it required its employees to sign was overly broad with respect to the scope of activity to be restrained.  Also, there was evidence that the employer attempted to enforce the noncompete agreement to an unreasonable extent.  After a jury entered a take-nothing for in favor of the defendants, the trial court assessed $750,000 in attorneys’ fees against the employer which brought the lawsuit.  This award was largely upheld on appeal.

The important thing to keep in mind from this decision is that, even though the noncompete statute requires the trial court to reform an overly broad covenant, the employer has a strong incentive at the outset to ensure that the covenant is as reasonable as possible.  This can be done by focusing on the company’s legitimate needs and the employee’s duties.  An employer that requires its employees to sign unreasonable noncompete agreements, and then attempts to enforce those agreements in an unreasonable way, can face liability, as the employer in this case found out the hard way.

Lack of Buy-Out Provision Kills Physician Noncompete Agreement

Posted in Noncompete Agreements

The Texas statute governing noncompete agreements contains specific requirements that must be met for a physician noncompete agreement to be enforceable.  One such requirement is that the agreement must contain a provision allowing the physician to "buy out" of the noncompete if he or she wishes to do so.

In a recent case from the Houston Court of Appeals, the employer found out the hard way the impact of not having a buyout provision in a physician noncompete agreement.  In the case, an ophthalmologist who worked for a Lasik clinic in Houston left the clinic and started a competing clinic nearby.  The ophthalmologist’s former employer sued him for violating his noncompete agreement.

However, the noncompete agreement did not contain a provision allowing the ophthalmologist to buy out of the covenant.  On this basis, the trial court denied the employer’s request for temporary injunction.

On appeal, the employer argued that the trial court should have reformed the agreement by adding a buy-out provision.  The Court of Appeals rejected this contention.  In doing so, the court noted that the statutory language authorizing the parties to allow an arbitrator to establish the price of the buyout does not allow an arbitrator to create a buyout provision where one does not exist.

Thus, the trial court’s refusal to grant a temporary injunction was affirmed.

Complying with the statutory requirements for a noncompete agreement is essential.  This is especially true in the context of physician noncompete agreements, as this case illustrates.