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You know that confidential information is important, but what is it? Confidential information has no specific definition, and should be outlined in the employment agreement. In general terms, one should think about confidential information as any information not generally known in the industry, or similar industry in which the business is performed. Therefore, this information is not something common or utilized in the industry, but something that your company does that separates itself from others. For instance, budgets, specialized training, marketing plans, customer lists, recipes, source codes, test results, personal information, are all likely confidential in nature. However, these areas change from industry to industry. An employer should be careful to define the areas known to be confidential to the company and ensure a general protection to other activities that might.

This information does not always come from just the company; often the clients or customers of the company have confidential information in need of protection. While other times an employee is responsible for the creation of such sensitive materials. Thus the non-disclosure provision should be broad enough to encompass both the information of the company and its clients as well as the sensitive material created by an employee. However, often these provisions are drafted so broadly that the company attempts to protect the method in which a pancake is flipped. Although often these provisions are not always enforceable, a properly drafted provision can save both the employer and the employee time in negotiation, as well as go a long way to creating a clear understanding of the provision for both parties.

Non-Compete

A non-compete is a provision restricting a former employee from competing with a company. Texas is “right to work” state, so often employees and employers are not sure of the status of a non-compete provision in Texas. Non-competes are enforceable in Texas, but have some limitations. This provision is the most asked about provision in an employment agreement, so going to the statute is the best first step. The law in Texas states:

            “[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise       enforceable agreement at the time the agreement is made to the extent that it contains  limitations as to time, geographical area, and scope of activity to be restrained that are            reasonable and do not impose a greater restraint than is necessary to protect the goodwill       or other business interest of the promisee.”

Ancillary and Otherwise Enforceable Agreement Requirement

So what does that mean? This statute, in conjunction with courts, created a two-part non-compete enforceability test. The first part determines whether the non-compete provision “is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.” This might be clear to some, but it wasn’t to me, so I’ll walk through it best I can. This ancillary and otherwise enforceable requirement has been interpreted to mean that in order for a non-compete to be enforceable:

            1)         the consideration given by the company must give rise to the employer’s interest in                                    restraining the employee from competing, AND

            2)         the non-compete must be designed to enforce the employee’s return promise.

Confused yet? In an attempt to simplify a complex issue, I’ll try to rephrase. If a company wants to have an enforceable non-compete, the company needs to supply an enforceable agreement which would include something that would validate a restraint of trade (confidential information, trade secrets, certain training) AND require the employee to promise not to compete. In a sale of business, these requirements are met more easily. A purchaser of say, an accounting firm, would not want the seller of the firm to stay in Austin and compete. Normally, the seller has established a reputation and a relationship with his clients. A non-compete provision of this kind is generally enforceable by the court. To apply this business purchasing situation to the definition can sometimes help in applying it to an employment agreement. In the example, the purchaser agrees to an enforceable contract to buy an accounting firm (the otherwise enforceable agreement) from the seller in conjunction with a non-compete provision. Going back to the rule for a second, the non-compete would not be enforceable unless it provides the necessary support to the primary activities (ancillary) of the purchase agreement. In this case, the consideration supplied by purchaser (the purchasing of the firm) supplies appropriate reason to restrain the seller of accounting firm from competing. The non-compete supports the purchase agreement, as the sale of the business would likely be a sham if the seller could compete in the same area as the purchaser. In an employment situation, meeting the ancillary element is tougher. If confidential information or trade secrets are revealed to the employee, the employer can argue that the non-compete is necessary because the employee could use this information in the competing business. Even though it is common to have a non-disclosure provision in these agreements as well, the argument of the employer is that the employer would be unable to verify whether the employee leaked this sensitive information. Therefore, the company would argue they must have a non-compete as well. Depending on whether confidential information or a trade secret actually exists, the courts will often uphold the first prong of this test to protect those interests. The second prong requires the non-compete be designed to enforce the employee’s return promise. This is often satisfied by requiring the employee promise not to compete subject to certain reasonable limitations.

Reasonable Limitations

The second prong of non-competes requires a reasonableness of geographic area, time, and the activities to be restrained. Therefore, an employer must be careful in drafting where, how long, and what the former employee would be restricted from performing.

Geographic Limitation

To determine if a geographical restriction is reasonable one would have to look at the facts. If one owns a cleaning company and services Austin homes, it might be unreasonable to restrict the employee from working in the state. If an employee works for a national publishing firm but calls mainly on central Texas, a nationwide restriction might be struck down. The courts view these reasonable factors on a case by case basis, and it would be difficult to nail down what is reasonable without knowing the facts of the case. However, this line becomes blurred when working online. The facts of these online situations would also determine what was reasonable.

Time Limitation

The next factor in the reasonableness prong is time limitation. Texas courts have found 5 years can be acceptable for highly specialized work, but in most cases that number would be found unreasonable. From my research, I have found that one to two years can be acceptable, but it is impossible to really state without the facts of case.

Scope of the Activity

The scope of activity to be restricted should also be reasonable. Therefore, if an employee work as a software engineer, it would likely be too broad to restrict all activities with software and computers. The courts have shown reluctance in enforcing non-compete provisions, therefore one should attempt to limit these factors. As an employee, one should determine that the restrictions on activity should be limited to the actions actually performed by the employee. It is important to cater this provision to each employee. Many times a company applies a broad definition to all employees and forgets to modify making the provision useless. 

Non-Solicitation

A non-solicitation provision protects a company from direct competition with former employees for current and past clients. The scenario is simple enough, a company hires an employee, compensates or enables the employee to perform his job, and through the position the employee establishes a relationship with clients of the company. Upon leaving or after termination the employee tries to “steal” the clients. A non solicitation provision, if drafted properly can restrict an employee from soliciting or actively pursuing the company’s clients. However, what constitutes a client? What is solicitation? What restrictions are enforceable in keeping the former employee from soliciting these clients? 

How a client is defined and the length of time one can solicit should be reasonable and clearly stated in your employment agreement. A client can be defined in several different ways. Is a client a contracted client? Does an actively pursued lead count as a client? What if your industry deals with large products where you sell one unit a year? Defining this term is important and one should take great care to draft this according to the specific industry and in accordance with Texas law.

A reasonable time limitation, as discussed in the non-compete section above, will based on specific facts, but one to two years has been found to be acceptable in certain cases. To ensure reasonableness companies often will establish a limit the number of clients through a time period. For example, let’s say the employer wanted to restrict clients existing one year prior to termination. If termination occurs on August 15, 2010, the employee could go after clients that had ceased doing business with the company prior to August 15, 2009. However, when a company ceases to do business can be tricky business.  

The next element to determine should be defining solicitation. Solicitation itself is more than just social contact. Solicitation is more of an active pursuit or attempt to obtain the business of another. According to a Minnesota case, connecting on linked-in would not be enough to reach solicitation, but a message included on the linked-in invite could and does sometimes reach the level of solicitation.

Hopefully, this post explained some of the parameters of a Texas employment agreement, but each case is unique and these parameters are applied by the courts on a case by case basis. An employment agreement is vital for startups, careful drafting and attention to relevant statutes and case law should be given.