Texas Non-Compete Update: Strategies Businesses Need to Know

Texas businesses rely on non-competes to protect their secret sauce — proprietary data including sensitive information, trade secrets, processes, and client lists that differentiate their company and make it competitive. Typically, these are clauses in a contract that specify that an employee must not enter into competition with an employer after termination.

In order to protect a business, the non-compete must be enforceable. Texas non-competes must meet these requirements:

• The non-compete must be ancillary to an otherwise enforceable agreement

• The non-compete must be reasonable in terms of its geographic scope, duration, and the scope of the activities restricted

• The non-compete must be supported by valid consideration, such as the provision of confidential information, specialized training, or access to customers or trade secrets

• The non-compete must not be against public policy, which means that it must not be designed to restrict competition or harm the public interest

There are several things employers should consider regarding Texas non-compete agreements. First of all, in crafting a non-compete, it is important to be clear and specific, addressing duration and restricted areas and defining the scope of the activity to be restrained. Secondly, keep in mind enforcement. Enforcement of non-competes can be difficult because departing employees (and often their new employers) can challenge the legitimacy of the consideration (i.e., whether the information really was confidential) and the reasonableness of the restrictive covenants.

Helpful Non-Compete Strategies for Employers

Don’t hire a lawsuit. Avoid litigation when hiring. Confirm that potential employees are not bound by restrictive covenants. Get written confirmation from the potential hire.

Take steps to ensure that potential employees do not bring any information from former employers. This can be included in an Offer Letter or Employee Acknowledgment.

These actions benefit the employer by avoiding potential claims by a prior employer for tortious interference with the new employee’s post-employment obligations to his/her prior employer.

Secondly, it provides a basis to terminate the new employee if he/she does not abide by the terms of the Employee Acknowledgment. Lastly, it gives direction to both the new employee and his/her supervisor(s) regarding the scope of (and possible restrictions on) the new employee’s job duties and responsibilities.

If you are going to fight, fight early. Advantages of this strategy include providing a much faster and far less expensive means of seeking guidance from a court at or near the time of hiring a new employee if/when an old employer wants to threaten litigation, including the possibility of injunctive relief. It also avoids the likelihood of protracted – and very expensive – electronic discovery efforts and also limits potential damages. And finally, it creates an opportunity to recover attorneys’ fees under §15.51 of the Texas Business and Commerce Code (Procedures and Remedies in Actions to Enforce Covenants Not to Compete).

Do your due diligence. When hiring a new employee, consider including a contractual right to review and remove company information from an employee’s personal devices at the time of his/her separation from the company. Expressly address ownership of customer contact information stored in an employee’s Outlook or phone contacts.
Finally, stay abreast of important updates such as the FTC announcement of a proposed ban on non-competes. If it passes, the proposed rule would ban the practice of non-compete agreements making it illegal for an employer to enter these agreements with employees.

In Texas, while the proposed ban’s impact would span all industries, the healthcare and oil and gas sectors in particular face unprecedented disruption. As an alternative, companies should consider other methods of protecting intellectual property and confidential information, such as by using non-disclosure or confidentiality agreements.