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Why Businesses Need Non-Competition, Non-Solicitation, and Nondisclosure Agreements

Adair Myers Graves Stevenson has handled a number of litigation matters in recent years with a similar fact pattern: a business owner hires an employee and gives them training and promotions, often to a high level within the company, then the employee leaves after a few years to start a competing business. From what we have seen, the parting is never pretty. The business owner is almost always blind-sided when an apparently happy and loyal employee takes a complete turn and abandons their employer and begins actively competing against them. There is usually a lot of anger and a sense of betrayal on the part of the business owner when this happens, but there is also a serious financial cost. A newly competing business, sometimes literally across the street, is never good for business. And former employees who have had access to all of the business information and resources get an unfair head start by forgoing startup costs and operating in the exact same way. The former employee can further damage the business by taking customers and other key employees with them.

Once this happens, business owners are left to pick up the pieces. They usually discover over time just how deep the betrayal went and how long it was planned. That is a tough situation for a business owner to handle. Oftentimes there is recourse to sue the former employee. We have sued on behalf of business owners in this situation for copyright infringement when the former employee has taken business materials created by the business owner. We have also brought claims for unfair competition, trade secret misappropriation, conversion, breach of fiduciary duty, violation of the Texas Theft Liability Act, conspiracy, and other claims depending on the facts of each case. Fortunately, we have been successful litigating these types of claims and have been able to get positive outcomes for our business clients.

Even though we have done well for our clients, parties in litigation are never winners, in a sense. Litigation is a stressful grind for the parties, often lasting for years, and it is expensive. Because we want what is best for our clients, we like to keep them out of litigation, if possible. We know it is far better to take appropriate steps in advance to prevent the litigation in the first place. As they say, “An ounce of prevention is worth a pound of cure.” And fortunately, there are some very effective and relatively simple tools businesses can use to prevent employees from leaving and harming the business by starting a competing venture.

How to Prevent Employees from Leaving and Harming Your Business

The first tool is a non-compete agreement. A non-compete agreement can be a stand-alone contract or it can be part of a larger employment agreement. We can do both. Essentially, a non-compete agreement does exactly what the title says – it disallows an employee from competing with the employer’s business. Of course, as ever in the law, it is not that simple. The law in Texas disfavors contracts that restrict commerce, including competition and employee mobility. But Texas also recognizes that employers have valid interests in protecting their proprietary information and materials. Balancing these interests, Texas law allows for non-compete agreements that are properly limited in scope.

Non-solicitation agreements are another effective tool employers can use to prevent their employees from harming the employer’s business. Non-solicitation agreements basically disallow a former employee from soliciting the employer’s customers, hiring away the employer’s employees and sometimes prevent them from doing business with the employer’s vendors. Texas courts generally treat non-solicitation agreements in the same way they treat non-competition agreements and they must contain the same limitations to be valid.

There has been a lot of litigation in Texas over non-compete and non-solicitation agreements, most often when former employees, partners or joint venturers challenge the validity of the agreements. One good thing about a lot of litigation over a particular subject is the law becomes relatively well refined. And when the law is well refined in an area it is more easily understood and less likely to change dramatically. So the risks of employing a tool based on that well-refined law is low.

The law surrounding non-compete and non-solicitation agreements has created limits on the scope of the restrictions in the agreement. Understanding and including these limits is key to their effectiveness. A valid non-competition or non-solicitation agreement must be part of an otherwise enforceable agreement, must contain reasonable limitations as to time, geographical area, and scope of activity. If validity is challenged, then the employer will have to prove that if the agreement is not enforced then the business will be harmed and if the agreement is enforced it would not place an undue burden on the employee’s right to practice a profession or trade or otherwise make a living.

Finally, along with non-compete and non-solicitation agreements business should also utilize nondisclosure agreements to provide full protection. Nondisclosure agreements disallow employees from disclosing valuable information of the business including its trade secrets, which include things like customer lists, pricing, and proprietary formulas. Texas courts have found that nondisclosure agreements do not restrain trade, so they are more enforceable than non-compete or non-solicitation agreements. But it is possible to go too far. Nondisclosure agreements should exclude the general knowledge, skill, and experience acquired while working for the employer.

These are the basics of non-competition, non-solicitation and nondisclosure agreements in Texas, but is not a comprehensive restatement of the law. The bottom line is that almost every business has confidential trade secret information to protect and the potential for former employees to openly compete once they leave. Businesses should protect themselves by using these three relatively simple tools.