A Reminder from the Dallas Court of Appeals That Non-Compete Agreements Without Time Limit Are Unenforceable

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Earlier this week, the Dallas Courts of Appeals sided with an employee in Richard P. Dale, Jr., d/b/a Senior Healthcare Consultants v. Hoschar in ruling that her non-competition agreement was unenforceable because it did not contain a reasonable time limitation.

Hoschar, who worked as an insurance sales agent for SHR had the following clause in her independent contractor agreement:

Upon Termination of the Agreement, the Agent shall return to General Agent any and all information and supplies provided to Agent including any and all information and agrees to take no action either directly or indirectly, as an agent, employees, principal, or consultant of any third party or to utilize and [sic] third party, to attempt to replace business with any policyholder by soliciting or offering competing policies of insurance to any policyholder to which Agent sold any policy of insurance pursuant to the terms of this Agreement.  During the bench trial, the trial court held that the non-competition agreement was unenforceable as a matter of law because it did not contain reasonable time and geographic limitations.

SCR argued that the covenant not to compete was reasonable. Hoschar argued the opposite. No other arguments were raised, and the Court of Appeals sided with Hoschar.  It explained that in Texas, Tex. Bus. Com. Code §15.50(a) requires that a covenant not to compete must contain limitations as to time, geographical area, and scope of activity to be retsrained that are reasonable.  The Dallas Court of Appeals and many other Texas courts have previously interpeted Section 15.50 and ruled that a covenant not to compete in an employment agreement that is indefinite in its time limitation is unreasonable and therefore unenforceable as a matter of law.  Neither party challenged the application of Section 15.50 to independent contractors, and, therefore the Court of Appeals applied it to the covenant not to compete at hand here.

At the oral argument, SCR argued that the phrase, “attempt to replace business . . . by soliciting or offering competing policies of insurance,” reasonably limits the restrain on Hoschar to the duration of the current policy held by the insured. Thus, the “replace business” restriction was limited to the current policy held by each policyholder and did not restrict Hoschar from soliciting policyholders after they renewed their coverage.  Hoschar argued that the language of the non-compete agreement did not contain an express exclusion of renewal policies, which policy holders could renew repeatedly for decades, and, therefore, was indefinite as to time and unenforceable.

Having decided that the covenant not to compete was unenforceable because it did not contain a time limitation, the Court of Appeals did not consider whether it also failed to contain reasonable geographic limits.

TAKEAWAY: Non-competition agreements are enforceable only if they contain reasonable time, scope, and geographic limitations (and meet a few other requirements).  A vague, sloppy, one-size-fits-all, or simply an overreaching non-compete, can backfire on an employer when it comes to enforcing the agreement in court.   A non-compete covenant may be clear when the company first begins its business, but it can become less than clear as the company expands or begins to operate new businesses. Updating agreements to make sure that time limits, geographic limits, and the scope of activities restricted under the agreement are clear and reasonable is key to maintaining competitive advantage.

For more information on drafting, enforcing or fighting the enforcement of non-compete and non-solicitation agreements please contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com.

 

An Employee Claiming Unlawful Discharge Based on Religious Beliefs Must Show That the Management and not Coworkers Knew About Such Beliefs – Explains the Fifth Circuit

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

The Fifth Circuit Court of Appeals is notorious for being pro-business and pro-employer, and its last week’s ruling in Nobach v. Woodland Village Nursing Center, Inc., et al. does little to change that reputation.

In this case, Kelsey Nobach, a nursing home activities aide was discharged by Woodland Village Nursing Center after she refused to pray the Rosary with a resident, which was a regularly scheduled activity when requested.  She sued Woodland for violating Title VII of Civil Rights Act of 1964 by unlawfully discharging her because of her religion. The jury found in Nobach’s favor and awarded her $69,584 with $55,200 being for emotional distress and mental anguish, but the Fifth Circuit Court of Appeals reversed.

On September 19, 2009, a certified nurse assistant (“CNA”), a non-supervisory employee with no responsibilities over Nobach, told Nobach that a resident requested that the Rosary be read to her. Nobach told the CNA that she could not read it because it was against her religion.

The resident complained to management, and five days later, the Woodland’s activities director called Nobach into her office and told her she was fired for failing to assist a resident with a prayer.  She told Nobach: “I don’t care if it’s your fifth write-up or not. I would have fired you for this instance alone.” Nobach—for the first time—then informed the director that performing the Rosary was against her religion, stating: “Well, I can’t pray the Rosary. It’s against my religion.” The director’s response was: “I don’t care if it is against your religion or not. If you don’t do it, it’s insubordination.” After Nobach was fired, she explained that she was a former Jehovah’s Witness and still adhered to many of their beliefs.

The Court explained that Title VII makes it unlawful for an employer to discharge an individual “because of such individual’s . . . religion.” 42 U.S.C. § 2000e-2(a)(1). An employee may prove intentional discrimination “through either direct or circumstantial evidence.” Nobach argued that she offered direct evidence of Woodland’s discriminatory animus that motivated her discharge, which was evidenced by Woodland’s acknowledgement that she was fired for not praying the Rosary with the resident, and the Woodland’s director’s statement that she did not care if performing the Rosary was against Nobach’s religion, she still would have been fired because to refuse to perform the Rosary was insubordination.

The Fifth Circuit, however, found that Nobach failed to provide even one piece of evidence that showed that Nobach ever advised anyone involved in her discharge that praying the Rosary was against her religion. Nor did she claim that the CNA told any of Nobach’s supervisors that her refusal was based on her religion. The only time that Nobach actually advised her supervisor that her refusal to perform a job duty was motivated by her religious beliefs, was after she had already been discharged. As the Court said, “[i]n sum, she has offered no evidence that Woodland came to know of her bona-fide religious beliefs until after she was actually discharged.”

TAKEAWAY FOR EMPLOYEES:  When requesting a religious accommodation such as a deviation from a job duty that would violate their religious beliefs, employees must convey their request to their supervisors or the management and not just other coworkers.

TAKEAWAY FOR EMPLOYERS: When firing or letting go an employee, saying less is almost always better. It is possible that if the director who discharged Nobach used less inflammatory language instead of telling Nobach that she didn’t care if reading the Rosary was against her religion, Nobach would have been less likely to file a lawsuit. Firing an employee can get emotional, especially if there is a troubled history with the employee, however, it is important to remain cool and collected and not make any statements that the employee can later use as an ammunition to bring an unlawful discharge claim.

Leiza Dolghih frequently advises employers on how to handle troublesome employees, assists with responding to E.E.O.C. charges, and litigates employment disputes. For more information, e-mail Leiza.Dolghih@GodwinLewis.com.

When Can a Franchisor Be Liable for Overtime and Minimum Wage Violations at a Franchisee’s Business?

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Earlier this month, the Fifth Circuit Court of Appeals addressed when a franchisor might be liable for its franchisee’s overtime and minimum wage violations as a “joint employer” under the Fair Labor Standards Act (FLSA).  Given the recent rise in the FLSA litigation and rather sizable penalties and damages awards assessed against the violators, Orozco v. Plackis serves as a reminder to franchisors that the more control they retain over their franchisees’ employees the more likely they are to share liability under the FLSA.

In this case, Craig Plackis owned several Craig O’s restaurants around Austin, Texas. In 2005, he entered into a franchise agreement with the Entjers to open a location in San Marcos. In 2011, Ben Orozco, a cook at the San Marcos location, filed a lawsuit against the Entjers and their company alleging that he was not paid overtime or minimum wages as required under the FLSA. After the Entjers settled, Orozco added Craig Plackis as a defendant alleging that the franchisor was also his employer.  The jury agreed with Orozco, but the Fifth Circuit reversed after finding that there was legally insufficient evidence for a reasonable jury to find that Plackis was Orozco’s employer.

Under the FLSA, covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009, and overtime pay at a rate not less than one and one-half times the regular rate of pay for hours worked above 40 hours in a workweek. The FLSA defines an employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. §203(d).

Often, when an employee works for a subsidiary, a franchise, or a professional employer organization (PEO), the question arises which entity is considered the employer for purposes of the FLSA. The courts, therefore, use the “economic reality test” to answer that question.  They look at “whether the alleged employer: (1) possessed the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.” A party need not establish every element in every case, and the dominant theme in the case law is that those who have operating control over employees within companies may be individually liable for the FLSA violations committed by the companies. In joint employer contexts, each employer must meet the economic reality test.

Did the franchisor possess the power to hire and fire employees? 

Orozco testified that the Entjers, and not Plackis, hired him and had the authority to fire him.  He also failed to introduce any evidence showing that Plackis ordered the Entjers to pay Orozco a particular amount or work for a specific number of hours.  Furthermore, Orozco’s attorney admitted during oral argument that there was no direct evidence to support that Plackis had authority to hire or fire Orozco.

Regardless, Orozco argued that the following indirect evidence could have supported the jury’s finding that Plackis was the employer:  (1) several employees worked at both the San Marcos location and the location owned by Plackis; (2) Plackis provided advice to the Entjers regarding how to improve the profitability of the San Marcos location, which resulted in the Entjers adjusting the schedule of their employees.  The Fifth Circuit found such indirect evidence legally insufficient to show “power to hire and fire” on behalf of the franchisor.

Did the franchisor supervise and control employees’ work schedule and conditions? 

Orozco argued that because the Entjers changed their employees’ schedule after a meeting with Plackis, the original franchisor had the authority to supervise or control employees’ work schedule and conditions at the San Marcos location. However, aside from the temporal connection between the meeting and the changes in the schedule, Orozco failed to introduce any other evidence of control.  To the contrary, both the Entjers and Plackis testified that the franchisor’s advice to the franchisee was non-binding, and Orozco himself admitted that Plackis did not set his schedule and never discussed his responsibility or position.

Importantly, the Fifth Circuit explained that the mere fact that the franchisor trained the owners of a particular franchise or reviewed their employees’ schedule in order to increase the franchisee’s profitability, or met with the franchisees and their shift managers frequently, did not mean that the franchisor controlled employees’ work schedule and conditions.

The Fifth Circuit also found that the franchise agreement stating that the Entjers had to follow “policies and procedures promulgated by the franchisor for ‘selection, supervision, or training of personnel,” was insufficient to support a finding that Plackis fired or hired employees or supervised or controlled their work scheduled or employment conditions.

Did the franchisor determine the rate and method of payment? 

Orozco testified that Plackis did not control his rate of pay and the Entjers set his rate and method of payment.

Did the franchisor maintain the employment records? 

Orozco conceded that Plackis did not maintain his employment records.

CONCLUSION:  Things worked out well for the franchisor in this case, but consider the following statement by the Fifth Circuit: “We do not suggest that franchisors can never qualify as the FLSA employer for a franchisee’s employees; rather, we hold that Orozco failed to produced legally sufficient evidence to satisfy the economic reality test and thus failed to prove that Plackis was his employer under the FLSA.”  Had Plackis maintained the employment records for the San Marcos location or directed the Entjers regarding how much they should pay their employees or what work schedule they should implement at their franchise location, the outcome of this case could have been different.

Thus, to avoid a potential exposure under the FLSA as a “joint employer” with its franchisees, a franchisor should make sure that the franchise agreement makes it clear that the franchisees and not the franchisor control the hiring and firing process, employees’ work schedule and conditions, determine the rate and method of payment, and maintain the employment records for their operations. Also, the franchisor should make it absolutely clear that any type of training, advice or guidance that it provides to the franchisees is non-binding and cannot be interpreted as an expression of control over their employees.

For more information regarding minimum and overtime wage requirements, contact Leiza Dolghih.

The Texas Supreme Court Pays Lip Service to Minority Shareholders While Nixing the Common Law Minority Shareholder Oppression Claims

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

In a surprising move last month, the Texas Supreme Court overturned 25 years of legal precedent when it ruled[1] that Texas does not recognize a common-law cause of action for minority shareholder oppression, leaving the appointment of a rehabilitative receiver as the only remedy for oppressive actions by corporate management.

In Ritchie v. Rupe, Rupe, a minority shareholder in a closely held corporation alleged that the corporation’s other shareholders, who were also on the board of directors, engaged in “oppressive” actions and breached fiduciary duties by, among other things, refusing to buy her shares for fair value or meet with prospective outside buyers. The directors essentially admitted to this conduct but insisted that they were simply doing what was best for the corporation. For the most part, the jury sided with the minority shareholder, and the trial court ordered the corporation to buy out her shares for $7.3 million. The Dallas Court of Appeals agreed that the directors’ refusal to meet with prospective purchasers was “oppressive” and upheld the buy-out order.

The Supreme Court reversed and held that the directors’ conduct was not “oppressive” under the Texas Business Organizations Code §11.404, but even if it was, the statute did not authorize courts to order a corporation to buy out a minority shareholder’s interest. Moreover, the Court “decline[d] to recognize or create a Texas common-law cause of action for ‘minority shareholder oppression.'” Whereas before Ritchie, a minority shareholder could use a threat of a court-ordered buyout to force the majority to buy him or her out a certain price, now the minority shareholders’ only relief for “oppressive” conduct by the company is to seek an appointment of a rehabilitative receiver under Section 11.404.

In addition to abrogating the common law claims for minority shareholder oppression, the Supreme Court also narrowed the definition of “oppressive” conduct, which is not defined in the statute, to include only those instances where the majority “abuse[s] their authority with intent to harm the interests of one or more shareholders in a manner that does not comport with the honest exercise of their business judgment.”  Thus, to obtain an appointment of a receiver under Section 11.404, a minority shareholder must show that the majority intended to harm him or her through their actions, and courts must apply the “business judgment” rule instead of the “fair dealing” and “reasonable expectations” tests to determine whether any oppression occurred.  Furthermore, because the appointment of a receiver is a “harsh” remedy and is meant to be used only in “exigent circumstances,” a minority shareholder seeking such appointment must show that all other lesser available remedies based on other claims or other provisions of the statute are not adequate.

In reviewing the various forms of conduct that minority shareholders have often alleged as giving rise to a common-law oppression claims, including the denial of access to books and records, the withholding of dividends, termination of employment, misapplication of funds, diversion of corporate opportunities, and manipulation of stock price, the Supreme Court concluded that other available causes of actions adequately addressed such wrongdoing and, therefore, a common law oppression cause of action was not necessary.  A minority shareholder, for example, can bring derivative lawsuits on behalf of the corporation, and claims for accounting, breach of fiduciary duty, breach of contract, fraud, constructive fraud, conversion, fraudulent transfer, conspiracy, unjust enrichment, and quantum meruit.

BOTTOM LINE: The Texas Supreme Court recognized that there is a gap in protection afforded to minority shareholders in Texas, but refused to create a new common law cause of action that would address this gap because the standard for what constitutes “oppressive” conduct outside of the statute is “so vague and subject to so many different meanings in different circumstances,” that creating an independent legal remedy for “oppressive” actions would be “bad jurisprudence” and would only “foster litigation.”

[1] Justices Guzman, Willett and Brown dissented from the majority opinion.

For more information regarding business litigation in Texas, contact Leiza Dolghih.

A Houston Court of Appeals’ Opinion Highlights What Evidence an Employer Might Need to Defend its Non-Competition Agreements in Court

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Last week, the Fourteenth Court of Appeals issued a ruling in a case involving a non-compete agreement between a legal services company in Texas and its former marketing director. While the facts and arguments made by the parties were pretty ordinary, the Court’s opinion was instructive regarding what evidence employers and employees might need in these types of cases to sway the court in their favor.

Rodriguez worked as a marketing director for Republic Services- a court reporting, process services, and record retrieval services firm – for six years before she went to work for a competitor. While at Republic Services, her duties included making calls to existing and prospective customers, assisting in the pricing of jobs, and assisting other employees in providing customer service.

Rodriguez’s employment agreement with Republic Services contained the following rather standard non-solicitation and non-competitions clauses:

For a period of twelve (12) months after termination of her employment under and pursuant to this Agreement, whether with or without cause, the Employee will not . . . (ii) approach, contact, cause to be contacted, or communicate with any customer or account, for whom Company performed services at any office where Employee performed any duties during the two years immediately preceding Employee’s termination of employment with Company.

* * *

For a period of twelve (12) months after termination of her employment, under and pursuant to this Agreement, whether with or without cause, the Employee will not (i) solicit, divert, or accept orders for record retrieval, court reporting, and other related services for or on behalf of any individual or firm, from any customer for whom Company performed services at any office where Employee performed any duties for two years immediately preceding Employee’s termination of employment with Company or (ii) own any interest in, be an employee of, be an officer or director of, be a consultant to, or be associated in any way with a competitor of the Company within the county, or counties, where Employee worked while employed hereunder. . . .

After Rodriguez went to work for Cornerstone Reporting, Republic Services sued her and her new employer for breach of employment agreement, tortious interference with prospective business relationships, civil conspiracy, and tortious interference with Rodriguez’s employment relationship (against Cornerstone only).

Rodriguez and Cornerstone filed a partial summary judgment motion and argued that the non-compete covenant was unenforceable as a matter of law for two reasons: (1) it contained an industry-wide restriction, which imposed a greater restraint than necessary to protect the business interests and goodwill of Republic Services; and (2) Republic Services failed to provide adequate consideration to make the non-compete enforceable. The trial court agreed with Rodriguez that the non-compete covenant was unenforceable and dismissed all the claims, but the Court of Appeals reversed.

First, the Court of Appeals reasoned that although Rodriguez claimed that the covenant imposed an industry-wide restriction on her, she “offered no evidence about the industry at issue.” In contrast, Republic Services provided evidence regarding specific companies in Harris County that were not its competitors within the “legal services” or “legal support services” industry and for whom, presumably, Rodriguez could have worked despite the covenant not to compete. Thus, Rodriguez failed to conclusively establish that the covenant was an industry-wide prohibition.

Second, the Court of Appeals found that Republic Services provided evidence of adequate consideration to make the non-compete enforceable. It showed that it gave Rodriguez customer and pricing information, trained her on how to use RB8 software, and gave her access to Republic Services’ goodwill. Interestingly, even though RB8 software is not proprietary to Republic Services and can be bought by any company, the fact that Republic Services trained Rodriguez on such software via webinars was sufficient to support the non-compete covenant. This poses an interesting question of whether providing training on Microsoft Suite, for example, or any number of software programs that are not proprietary to the employer who provided the training, is sufficient in itself to establish an adequate consideration for an enforceable non-compete.

Also interesting is the fact that the Court specifically emphasized that Rodriguez often invited her contacts at various law firms to lunches with her boss at Republic Services, which, according to the Court of Appeals, showed that she was provided and took advantage of the company’s goodwill. The natural question here is whether allowing an employee to use the company’s suite or an expense account to entertain potential clients creates sufficient consideration to support a non-compete restriction.

CONCLUSION: An employer should always be able to explain why and how its geographic restrictions, time restrictions and restrictions on the scope of activity of its former employees are necessary to protect its business interests and goodwill. It should also be able to show why such restrictions are reasonable. Documenting what sort of confidential information, training or goodwill has been shared with a particular employee is key to enforcing non-compete agreements. Also, being able to provide evidence about the industry in which the employer operates, its competitors, and companies that are not in competition, can be crucial to defending non-compete restraints.

For more information regarding non-competition agreements in Texas, contact Leiza Dolghih.

 

How Not to Draft a Non-Competition Agreement – A Lesson for Employers from a Texas Court of Appeals

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Earlier this month, the First Texas Court of Appeals found on a summary judgment that a non-competition agreement that covered all of Texas was unenforceable when a company failed to provide evidence that it conducted business in all of Texas or that the employee in question worked in the entire state. Morrell Masonry Supply, Inc. v. Coddou is a good example of how an overly-aggressive non-compete agreement can backfire on an employer.

In this case, MMS, a Houston-based masonry and exterior insulation finishing system (EIFS) supplier, sued Coddou, its former plaster salesman, for breach of the following covenant not to compete, which was included in Caddou’s profit sharing plan:

Employee recognizes and acknowledges that as a participant in employer’s profit sharing program employee will have access to all of employer’s corporate records. . . Employee further recognizes and acknowledges that the information contained in employer[’]s corporate records could be used to its competitive disadvantage. Therefore, employee specifically agrees that for a period of one year following the termination of employment, however caused, the employee will not within he geographical limits of the State of Texas directly or indirectly for himself, or on behalf of, or as an employee of any other merchant, firm, association, corporation, or other entity engaged in or be employed by any stucco and/or EIFS supplier business or any other business that is competitive with employer.

MMS subsequently fired Coddou, and when he went to work for a competitor, sued him for breach of the non-compete covenant.  Coddou filed a motion for summary judgment, arguing that the geographic restriction on the entire State of Texas was unreasonable and, therefore, unenforceable, as a matter of law.  Both the trial court and the Court of Appeals agreed.

The Court of Appeals explained that under the Texas Covenant Not to Compete Act, the burden was on the employer to show than the non-compete covenant was reasonable and did not “impose a greater restraint that is necessary to protect [its] goodwill or other business interest.” Typically, the territory in which an employee worked for an employer is considered to be the benchmark of a reasonable geographic restriction.

Following that same logic, Coddou provided a sworn affidavit in trial court stating that he “had a specific sales territory that encompassed Houston, Beaumont, and the surrounding areas,” and that he never did any sales outside of Houston or Beaumont.

Instead of providing evidence that showed otherwise, such as records of specific sales transactions outside of Houston or Beaumont, MMS’ president and CEO made only conclusory statements that the company did “significant business throughout the entire State of Texas” and Coddou “was responsible for sales throughout the State of Texas.”  The Court of Appeals found that such general assertions were conclusory, self-serving, and not proper summary-judgment evidence.

The Court of Appeals concluded that the “statewide restriction in the covenant not to compete in that instant case [was] too broad to be enforceable because it far exceede[d] the two cities in which Coddou worked on behalf of [MMS], even if MMS’ business extended beyond the area assigned to Coddou.” Furthermore, MMS failed to introduce any evidence to show that its business extended beyond Houston, San Antonio, and Beaumont – far short of the entire state.  Thus, the covenant not to compete restricting activity throughout the entire state was broader than necessary to protect MMS’ business interests.

CONCLUSION:  When determining how far the geographic scope of a non-compete covenant should extend, employers should consider what territory will the employee work in.  A clause that covers the entire state could be reasonable if the employee makes sales calls around the state. At the same time, a clause that covers just one city might not be reasonable if the employee’s territory is much smaller.

While it is easier and, certainly, more tempting, to set restraints on the entire state, entire County, or even entire country, such approach can backfire in Texas courts.  Thus, employers should set reasonable restraints that they could defend in court as being related to their business and employees’ duties.

For more information regarding non-competition agreements in Texas, contact Leiza Dolghih.

Update (8/5/14): Interestingly, in 2011, Morrell sued another of its employees, Juan Perez, for violating his covenant non to compete, claiming that Perez went to work for a competing business and asking for $100 a day in liquidated damages for each day he had worked for a competitor. See Morrell Masonry Supply, Inc. v. Juan Perez.  The trial court granted Perez’ motion for summary judgment, in which he argued that Morrell was collaterally estopped from asserting a claim for a breach of covenant not to compete based on Morrell Masonry Supply, Inc. v. Coddouthe covenant was overbroad, and his new employer was not a competitor of Morrell’s.

In an attempt to salvage its case against Perez after Coddou decision, Morrell dropped its breach of covenant not to compete claim and instead argued that the trial court committed an error when it failed to address the breach of confidentiality clause in Perez’s contract.  The Court of Appeals, however, rejected this argument after finding that Morrell had never alleged a breach of the confidentiality clause in any of its pleadings.

The takeaway for employers is that once a court finds that a non-competition agreement unenforceable as a matter of law in one case, the employer is usually prevented from enforcing the agreement against other employees.

A 10-Step Guide to Protecting Your Company’s Trade Secrets

Dallas Business Litigation Attorney

Leiza Dolghih
Attorney, Godwin Lewis PC

Under the Texas Uniform Trade Secrets Act (TUTSA), information is not considered a trade secret unless its owner took “reasonable efforts under circumstances to maintain its secrecy.”  So, what efforts should a business be taking to protect its proprietary and confidential information and trade secrets? Here’s a quick step by step checklist.

1. Identify Your Trade Secrets and Proprietary Information.  Before you start implementing any security measures, you need to identify what information you are trying to protect. Ask yourself two questions:  (1) what information do I have that gives my business a competitive advantage? and (2) is this information publicly available? By way of example, under TUTSA, a trade secret can include: “formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.”  This information, however, is not likely to qualify as proprietary if it is “commonly known” or if it is available in the public domain.

2. Implement Access System on the “Need to Know Basis.” If the information you are seeking to protect is stored on paper, make sure your documents are stored in a secure cabinet or a room, which only few key employees can access. If the information is stored electronically, make sure that each employee has a separate log in account and that you keep track of who accessed the information, when, for how long, and what changes were made to such information. If possible, a company should consider having a pop-up window or a reminder that notifies its employees each time they access the program or the database that contains confidential information that such information is proprietary and may not be shared with third parties.

3. Require Key Employees to Sign Non-Disclosure Agreements (NDAs). Employees with access to confidential and proprietary information should be required to execute NDAs prior to receiving access to such information. A typical NDA will require an employee (a) not to disclosure the company’s confidential information to third parties; and (b) to assign all “rights, title, and interest” in the employee’s inventions to the company if they are developed in the scope of his or her employment. The NDA can be part of an offer letter or employment agreement or it can be a free-standing NDA contract.  Make sure that the NDAs are filled out correctly, are current, are consistently being executed by each key employee, and are stored in safe location.

4. Require Third Parties to Sign Non-Disclosure Agreements.  If you are sharing your business’s proprietary information with another party, such as your supplier, marketing agent, insurance company, etc., make sure that they execute a NDA as well.  Ideally, you should not be sharing your proprietary information with anybody who has not executed a NDA.

5. Have a Written Confidentiality Policy. Your employee handbook and/or company policy should contain a statement regarding what information the company considers to be confidential, prohibition of disclosure of such information, description of the consequences of such disclosure, such as disciplinary action, and a requirement that all key employees execute a NDA.

6. Provide Training Regarding the Confidentiality Policy. Among other things, such training can serve to remind employees not to discuss the confidential information in public, not to access such information from public computers, and alert them regarding various ways of inadvertent disclosure that they can encounter in their day-to-day lives.

7. Enforce the Confidentiality Policy.  It is not enough to have NDAs and confidentiality policies, but the employer should monitor employees’ compliance and conduct periodic audits. The rules and contracts are worthless unless the employer consistently enforces them.

8. When Key Employees Leave, Have Them Sign A Non-Disclosure Confirmation Form, Obtain Information About Their New Company, and Conduct Forensic Imaging of Their Computers.  When key employees leave, during the exit interview have them sign a statement in which they acknowledge that they have not taken any of your confidential information.  You should also ask them about where they are going, what duties they will be performing there and other information that will help you assess the likelihood of them using the company’s confidential information at their new company.  Finally, it is worth paying a few hundred dollars to have their computers, iPads, etc., forensically examined to make sure that they have not printed, emailed themselves or otherwise took any of the company’s proprietary information.

9. If You Suspect That an Employee Is Stealing or Has Stolen Your Trade Secrets, Act Quickly. The more time passes between you discovering that your employee has taken or is using your confidential information and your actions, the less likely a court is to find that the information was a “trade secret.” In other words, if you are not trying to prevent other parties from using your information, then why should the court do so?  I have previously written about the typical enforcement actions for violation of non-competition agreements by departing employees here.  A similar analysis will apply to trade secret misappropriations.

10. Be Proactive, Not Reactive in Protecting The Information That Is at The Heart of Your Business.  Many businesses make sure that they protect their tangible assets such as office furniture, equipment, computers, etc., but they often fail to put security measures in place to protect the intangible assets – the information, knowledge, and skills that make their business successful.  Do not wait until an unscrupulous employee, a subcontractor, or a business associate decides to take your proprietary information – protect yourself by implementing the above-described measures.

CONCLUSION:  While following the above steps does not guarantee that your trade secrets will remain confidential, it does provide two advantages. First, from a business stand point, implementing the measures on this list will make it less likely that your employees or third-parties will be successful in stealing your business’s trade secrets. Second, from the legal standpoint, if you end up in court, proving that misappropriated information was a “trade secret” under the TUTSA will be easier.

This list is general guide.  Consider consulting with an attorney to come up with a specific security framework that adequately protects your particular business.  For more information regarding trade secret misappropriation claims in Texas and protection against such misappropriation, contact Leiza Dolghih.

 

One Sunny Morning

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