What Employers Need to Know About Non-Compete Agreements in Texas (Part II)

imagesIn Part I, I described requirements for non-compete agreements in Texas. In Part II, I describe the common mistakes that employers make when it comes to non-compete agreements: 

1. Not signing non-compete agreements with key employees.  It seems like a no-brainer, but there are still a lot of companies out there that do not require their employees to sign any non-compete agreements. This is a mistake.  A reasonable non-compete agreement can benefit both the company and the employees. A company is more likely to invest into training of its employees if it knows that they will not leave to work for a competitor as soon as the training is completed, and fair geographic restriction will not prevent employees from finding future employment.

2. Having restrictions that are too overbroad. Overreaching in non-compete agreements can backfire in that employees end up feeling like they have no choice but to violate them in order to make a living and courts are less likely to enforce such overbroad non-compete agreements. 

3. Not having a legitimate business interest to protect. A Texas employer must share its confidential information or goodwill with an employee in order to create an enforceable non-compete agreement.  There is no legitimate business interest in tying up employees with non-compete agreements if they perform tasks that do not involve specialized training, confidential information or goodwill of their employer. 

4. Making all employees execute the same non-compete agreement. Requiring the same 2-year / 200-mile non-compete agreement for sales people, secretaries, and C-level executives raises a red flag that the company is simply trying to prevent competition and is not protecting a legitimate business interest.  Employees that perform different tasks or serve a different purpose should have different non-compete restraints depending on what they do in the company.

5. Not providing a proper consideration. Different states require different types of consideration for non-compete agreements. In some states, just a promise of future employment is sufficient. In other states, an employer must pay money to an employee in exchange for the promise not to compete.  Texas companies should make sure that their non-compete agreements are supported by the right type of consideration in the state where they plan to enforce the non-compete agreements.

6. Not providing new consideration.  When asking an already-existing employee to sign a non-compete agreement, employers must provide new consideration for the agreement.  For more information, see my previous post here.

7. Not enforcing non-compete agreements. Once proper non-compete agreements are in place, companies should make it a policy to enforce them.  Otherwise, the agreements lose their effectiveness with employees, who quickly learn from co-workers that the company never enforces its contracts. 

8. Not enforcing non-compete agreements fast enough.  This is one of the gravest mistakes for companies in terms of consequences. The longer a company waits to seek a temporary restraining order against an employee who is violating his or her non-compete agreement, the more likely the court is to deny the restraining order because the company cannot show an “imminent” and “irreparable” injury.   In other words, if the company has not tried to stop the bleeding, how bad could the bleeding really be and does the court really need to enter an emergency order?

9. Not providing confidential information. As mentioned above, a proper consideration for a non-compete agreement in Texas includes a company’s promise to provide confidential information to the employees signing the agreement.  Companies, however, must deliver on that promise and actually provide such confidential information in order to make their non-compete agreements enforceable.

10. Not saving an electronic version of the signed non-compete agreements.  Companies must make sure that they save an electronic signed version of their non-compete agreements in a location where employees cannot access and delete them.  

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice.  Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

A Texas Case Demonstrates Why Using Stock Non-Compete Agreements May Backfire

picLast month, a Texas Court of Appeals denied an insurance agency’s application for a temporary injunction against its former President because it held that the non-compete agreement, as written, did not restrict the President from competing. The agency tried to enforce the non-compete and non-solicitation agreement to prevent the President from soliciting the agency’s clients for the purpose of selling or marketing any products or services that would compete with the agency, and it was able to obtain a temporary restraining order (TRO).  However, the trial court refused to convert the TRO into a temporary injunction.

The reason the company lost at the temporary injunction hearing is because both the non-compete and non-solicitation clauses in the agreement stated that the President could not compete with or solicit the agency’s clients “during the term of CMC Account Development Sub Agent Agreement, and for a period of two (2) years after the termination of the Agreement.”  However, the agency’s representative and the President both testified that he was never a sub agent (i.e. sales person) for the agency and that he did not have a CMC Account Development Sub Agent Agreement.  

Basically, the non-compete and non-solicitation restraints were tied to the length of a non-existent agreement between the agency and the President. In most likelihood, the language was left over from the standard contract form that the agency used for its sales representatives, and was included in the President’s agreement due to oversight.  As the result, the company was unable to stop the President from competing. 

TexasBarToday_TopTen_Badge_VectorGraphicTakeaway:  This case demonstrates why the  companies should conduct an audit of their non-compete and non-solicitation agreements at least once a year to make sure that (1) the agreements are enforceable, (2) they have a legible copy of the agreements signed by both parties, and (3) the agreements will adequately protect the company if they have to be enforced. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete dispute, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

What You Should Know About Non-Compete Agreements in Your Industry

kkAccording to a recent study,* at least one in four workers have signed a non-compete during their work-life, and at least 12% of the U.S. labor force are currently working under one. However, only 10% of the study participants reported bargaining over the terms of their non-compete agreements before signing them.

According to this study, the chances of being bound a non-compete increase with the higher level of education – 9% without college degree v. 27% of those with a graduate degree are bound by a non-compete. They also rise with the increase in salary, with one in three workers making over $100K a year having agreed to a non-compete.  So, if you are an MBA/Ph.D. graduate who makes over $100K, your employment paperwork will most likely have some version of a non-compete clause.

The researchers found that the following occupations tend to have non-compete agreements most frequently:

  • Engineering and architecture (30%)
  • Computer and mathematical occupations (28%)
  • Business and financial (23%)
  • Managers (22%)
  • Life, Physical & Social Sciences (20%)

Not surprisingly, the study also determined that non-compete agreements are more likely to be signed in states with higher non-compete enforcement policies. Texas is one of such states.

Furthermore, according to the study, the biggest predictor of whether an employee will be asked to sign a non-compete is whether he or she will be working with trade secrets.  About 10-20% of those who work with clients or have access to client-specific information sign non-competes, and about 24-30% of those who have access to trade secrets sign non-compete agreements, regardless of income, education, occupation, industry or firm size.

Out of all the participants in the study, 40% reported that they either did not read their employment contract or read it very quickly and only 8% stated that they consulted with a lawyer before signing one.

TAKEAWAY FOR EMPLOYEES: Employees should not blindly sign their employment paperwork, without carefully reading it first. Understanding whether an employment agreement contains a non-compete clause and what its limitations are, can help employees negotiate the reach and length of the clause, negotiate a higher salary, and/or plan exit strategy for when they want to leave their employer.

TAKEAWAY FOR EMPLOYERS:  Explaining to a potential or a new hire their non-compete restraints before they sign an employment agreement can help create a transparent working relationship and set everybody’s expectations, which leads to employees being more productive.   The above study found that, overall, employees who sign non-compete agreements typically get more training and advancement opportunities.  If that is the case in your organization, pointing that out to an employee how is asked to sign a non-compete may help employee understand that the non-compete agreement is mutually beneficial.

Leiza litigates non-compete and trade secrets lawsuits on behalf of EMPLOYERS and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete agreement, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

* The study titled “Noncompetes in the U.S. Labor Force” is authored by Mr. Evan Starr, University of Illinois at Urbana Champaign, School of Labor and Employment Relations and the Department of Economics (estarr@illinois.edu); Mr. Norman Bishara, University of Michigan, Ross School of Business (nbishara@umich.edu); and JJ Prescott, University of Michigan Law School (jprescott@umich.edu).