No Non-Compete? Not Necessarily “No Problem”

Non-competes have been and should remain a key focus in hiring decisions.

When vetting a prospective employee or onboarding a new employee, companies often focus on whether the individual is under an enforceable non-compete with his or her former employer. The conventional wisdom has been that as long as the prospective or new employee is not subject to an enforceable non-compete, the likelihood of running into disputes with the former employer is low.

This focus is understandable, given that it tracks employment litigation over the last several years. Arguments over the existence and enforceability of non-competes have for some time been the “make it or break it” of disputes brought by former employers. As a result, Texas law on the subject has crystallized to some degree. Non-competes are now required to be, among other things, reasonably limited in scope, and supported by adequate consideration. They cannot go on indefinitely, and typically are limited to a year or two. Employees and employers have also become more wary of non-competes—employees are more reluctant to sign them, and hiring employers sometimes avoid them entirely.

However, confidentiality covenants are increasingly becoming a driver of employment lawsuits.

As Texas law on non-competes has taken shape, confidentiality covenants—or covenants by an employee not to disclose or use an employer’s confidential information—have become a new and lesser-known basis for employment lawsuits. More and more, confidentiality covenants are being used as the ground for legal claims brought by companies against their former employees (and the employees’ new employers).

There are a number of reasons why confidentiality covenants should always be taken into account. First, unlike non-competes, everybody in the workforce is subject to confidentiality obligations. Most companies have their mid- to high-level employees sign confidentiality agreements. But even where there is no employment contract whatsoever, employees can still be bound by certain common law duties to guard the secrecy of their former employers’ confidential information.

In addition, unlike non-compete obligations, confidentiality obligations lack time limitations—they endure well after non-compete and other traditional employment obligations burn off. Still further, in Texas, no legal principles have emerged to ensure the time and scope of confidentiality agreements are reasonably narrow.

For these reasons, over the past few years, I have witnessed (and been on both sides of) a rising amount of lawsuits brought by former employers based solely on a former employee’s confidentiality covenants. Bob leaves Company A to work for Company B, a competitor. Despite the fact that Bob has no non-compete with Company A, Company A sues Bob and Company B for violating (or aiding and abetting violations of) Bob’s confidentiality covenants with Company A. Employment disputes based on this very fact set are appearing with some frequency.

The increase in disputes over confidentiality obligations complicates the process of assessing risk with respect to prospective and new employees. This is even more true given the nebulous state of the “inevitable disclosure” doctrine in Texas and other states (which I address in a separate article).

So what can an employer do to fully assess and stave off the risk associated with a new hire? It is no longer enough to simply confirm that an individual is not subject to a non-compete. In my practice, I employ a variety of approaches, depending on the situation, to minimize such risk. I have sent preemptive notices, orchestrated streamlined forensic protocols, and rolled out a variety of other strategies in tackling these issues.

Regardless of the route you chose, it pays to fully vet out the impact and risks associated with prospective or new employees’ confidentiality obligations to their former employers. Talented employees are often a company’s most valuable asset. So, consult with an attorney as you go through the process of vetting and onboarding new talent or searching for your next employer. It is smart business. I cannot tell you how many times I have witnessed costly and disruptive disputes that could have been circumvented with a little time and money on the front end.