Many companies in Texas utilize employee non-compete agreements to protect their business interests and keep trade secrets from spreading through their industry. Recently, an executive order released by the White House on July 9, 2021 targets non-compete agreements and clauses in an alleged attempt to create a more open and competitive economy for workers. Many states outlaw or severely restrict non-competes, but allow lawsuits for theft of trade or proprietary information. Currently, Texas law generally upholds non-compete agreements that are considered “reasonable” in scope and are supported by valid consideration. To be considered reasonable, a Texas non-compete agreement must have clauses that are directly related to the business’s interests. A non-compete may prohibit an employee from working for a direct business competitor for a certain amount of time or within a certain geographic range, sharing trade secrets or proprietary information with a new employer, and/or taking customer information from a previous employer to a new one. Unfortunately, not all employees adhere to their contractual obligations under non-compete agreements. Businesses must consider how to react to potential employee non-compete violations and what actions to take.
The majority of non-compete agreements do not become active until the employee-employer relationship ends. This may be through employee termination or the employee choosing to leave the business. At the time the employment relationship terminates for any reason, employers may remind the employee of their continuing non-compete obligations. The best time for this to take place is during an exit interview or other conversation regarding ending the employment relationship. Employers can then begin to gauge whether they should be concerned about any potential non-compete violations. An employer may learn that the employee is leaving to work for a direct competitor or is planning to open a competing business nearby that would directly violate the non-compete agreement. At that time, employers may explain the ramifications of such actions. If an employee omits that they are choosing to leave the business to work for a direct competitor during the exit interview, that omission may also be used in future litigation. Exit interviews also serve as the best opportunity to ensure the former employee does not have access to trade secrets, client lists, other employee data, or other proprietary information.
What Steps Should a Business Take If an Employee Violates a Non-Compete Agreement?
If an employee who has signed a non-compete leaves the business and violates that agreement, the business owner and/or managers must be ready to pursue legal action. The first step to take that has the potential to stop the former employee’s behavior quickly is to send a cease and desist letter. This should be done with the help of experienced legal counsel, having an employment lawyer who routinely represents businesses send a cease and desist letter stating that the employee is currently violating the non-compete agreement and is ordered to stop. Cease and desist letters can include a summary of the non-compete agreement, the former employee’s obligations under this agreement, and the legal ramifications of continuing to breach it. The cease and desist letter may also spell out in very clear terms the damages the business intends to seek if the former employee continues to breach the agreement. Another option for resolution when an employee violates a non-compete agreement is to go through alternative dispute resolution before beginning the litigation process. This may involve arbitration or mediation and the process is often governed by the terms of the non-compete itself. Either process can limit the amount of information that may be exposed in court and to the public. These methods may also be required before litigation if they were written into the non-compete agreement.
While litigation is the most complicated and time-consuming solution to an employee’s violation of a non-compete agreement, it is often the most effective. Seeking experienced employment litigation counsel will be incredibly beneficial to any business owner pursuing litigation against a former employee for breach of a non-compete. In Texas, a non-compete must be deemed enforceable for the business to pursue damages; this means it must be reasonable in active duration, geographic area, and line of business. The Texas Supreme Court has historically upheld the reasonableness requirement which has a number of factors to keep in mind.
To be considered “reasonable” in scope and thus enforceable in the state, a non-compete cannot unreasonably limit:
- The former employee’s work for an extended period,
- The geographic area in which the former employee would do business, and/or
- The scope of the former employee’s work.
These restrictions mean a Texas court will take into consideration what a reasonable person would do in these situations. For example, if a business attempts to limit a former employee’s business practices for 30 years, that would likely be considered unreasonable by the average person. Texas courts have made clear that the geographic restrictions permitted in a non-compete agreement must be confined to the area in which the former employee worked and where the employer has business relationships.
Texas law allows courts to enforce non-compete agreements by appropriate and effective remedies. The most common of these remedies is injunctive relief that will order the employee to stop the conduct that is breaching the agreement. A business owner may also seek monetary damages, but these damages will be difficult to prove without experienced legal counsel. It is wise for all Texas business owners to seek the advice of an experienced business employment attorney who can evaluate their current non-compete agreements for enforceability and address any potential future concerns.