Preventing Unfair Competition in Texas with Employee Agreements

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Our employment law attorneys at Murray Lobb routinely advise clients on unfair competition issues, including how to prevent unfair competition issues from arising and how to take legal action to protect your company’s interests.

Below, we will go over some of the basics of how to prevent competition issues with former employees and how to protect your business interests through litigation, including:

  • Using appropriate employee agreements to prevent unfair competition issues before they arise, and
  • Legal actions to protect our clients’ interests against former employees and others who engage in unfair competition through misappropriation of trade secrets, trademark and copyright infringement, or other methods.

Preventing Unfair Competition Issues with Former Employees

For many businesses, it is necessary to preemptively address the potential for unfair competition by former employees by requiring your employees to sign contracts prohibiting them from using your proprietary information, trade secrets, and intellectual property and prohibiting them from engaging in conduct that would be harmful to your company.

Non-compete Agreements

An agreement not to compete will prevent your employees from using what they learned while employed with you to unfairly compete with your business once they are no longer employed.

Depending on the nature of your business, this may be necessary to protect your trade secrets, customer lists, intellectual property rights, and other confidential information that a former employee could use to harm your business.

Non-compete agreements are enforceable in Texas, provided:

  • The contract is supported by valid consideration given by the employer in exchange for the promise not to compete (consideration could be employee training or access to the company’s confidential information),
  • The restrictions are reasonably related to the need to restrain competition (for example, specialized training or access to the company’s confidential information), and
  • The restrictions are reasonable in scope.

Non-solicitation Agreements

A non-solicitation agreement is similar to a covenant not to compete in Texas. Texas law treats a non-solicitation agreement the same as a non-compete agreement – they must meet the requirements listed above to be enforceable.

A non-solicitation agreement prevents an employee, both during employment and for a set time after employment, from soliciting the employer’s clients or other employees. Non-solicitation is often a clause that we include in a broader agreement not to compete or severance agreement.

Non-disparagement Agreements

A non-disparagement clause may also be included in the covenant not to compete or in a severance agreement, preventing the employee from publicly disparaging the employer.

Is a non-disparagement agreement a violation of the employee’s First Amendment rights?

No.

The First Amendment protects you from punishment by the government for expressing yourself, but it does not apply to a private company. If your employees enter a non-disparagement agreement with your company and then violate the agreement, it can be enforced in court.

Confidentiality Agreements

Your employees have a common-law duty not to disclose your company’s trade secrets and proprietary information, but it is still a good idea to reinforce this with a formal non-disclosure agreement (NDA).

Non-disclosure agreements are enforceable, even if an accompanying agreement not to compete, not to solicit, or other agreement is found unenforceable.

Severance and Release Agreements

Employees in Texas are not entitled to severance pay unless it was promised to them in a prior written agreement.

When negotiating an employee’s departure, however, it can be a good idea to spell out the terms of the departure and the employee’s obligations going forward, including an agreement not to compete, a non-solicitation agreement, a non-disparagement agreement, and a non-disclosure agreement, with severance pay as consideration.

Unfair Competition: Taking Legal Action to Protect Your Company’s Interests

What is unfair competition?

There is no official legal definition of unfair competition in Texas, but the term covers several business torts including “passing off,” misappropriation of trade secrets, and common law misappropriation.

When all else fails and someone’s unfair competition is hurting your business, what can you do? In some cases, when negotiation and demand letters fail, your only option may be to file suit against the infringer.

Enforcement of Employee Agreements

When it is necessary, your company can ask the courts to enforce your employee agreements, including covenants not to compete, non-solicitation agreements, non-disparagement agreements, non-disclosure agreements (NDAs), or provisions of the employee’s severance agreement.

Passing Off and Reverse Passing Off

When an individual or company misrepresents that its product is someone else’s (passing off) or that another company’s product is their own (reverse passing off), the company who is harmed can file suit, recover damages, and ask the court for an injunction to prevent further harm.

Passing off is covered by Texas law on unfair competition, and it may also be covered by federal trademark or copyright infringement law, depending on the circumstances.

Misappropriation of Trade Secrets

Texas law also recognizes a cause of action for misappropriation of trade secrets when the plaintiff can prove:

  • There was a trade secret,
  • The defendant obtained the trade secret due to improper discovery or the breach of a confidential relationship (whether there was an NDA in place or not),
  • The defendant used the trade secret, and
  • The defendant’s use of the trade secret resulted in damages to the plaintiff.

Common-Law Misappropriation

In some situations, a business can sue for misappropriation even when the product was not a secret, if:

  • The plaintiff used their “extensive time, labor, skill, and money” to create the product,
  • The defendant uses that product to directly compete with the plaintiff, and
  • The plaintiff suffers commercial damage as a result of the defendant’s conduct.

Copyright and Trademark Infringement

When an individual or business uses your company’s copyrights or trademarks without consent, you may also be able to 1) enforce your intellectual property rights and 2) recover damages through the courts.

Please feel free to contact one of our Murray Lobb attorneys for advice on unfair competition, including employee agreements to prevent unfair competition issues and legal action that can be taken to protect your company’s business interests.

We also remain available to help you with all your general business, corporate, and estate planning needs.