Protection of Business Interests

• Author: John G. Browning
• Pages: 631-664

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CHAPTER 32

PROTECTION OF BUSINESS

INTERESTS

BY JOHN G. BROWNING

32:1. COMPARISON OF STATUTORY AND COMMON LAW PROTECTIONS

32:2. STATUTORY PROTECTIONS—COVENANTS NOT TO COMPETE ACT

A. Development of Noncompete Act

B. Elements of Enforceable Noncompetition Agreement

1. Ancillary to Otherwise Enforceable Agreement When Made

2. Legitimate Business Interest

3. Scope of Activity Restrained

4. Geographic Scope

5. Duration

C. Supported by Adequate Consideration

D. Enforcement and Remedies

1. Burden of Proof on Employer

2. Injunctive Relief

3. Parties

4. Damages

5. Reformation

6. Attorneys’ Fees and Costs

7 Venue Considerations

8. Choice of Law Considerations

9. The Role of Texas Rule 202

10. Arbitration

11.. Discovery and the Use of Social Media Evidence

12. Special Considerations With Physicians’ Agreements

13. Nonsolicitation in the Digital Age

E. Alternatives to Non-Compete Agreements

32:3. COMMON LAW PROTECTION OF TRADE SECRETS AND GOODWILL

A. Confidential Information and Trade Secrets

1. Definitions

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2. Protecting Confidential Information and Trade Secrets

3. Remedies for Disclosure

B. Inventions and Creative Works

1. Protecting Inventions and Creative Works

2. Remedies for Unauthorized Use

C. The Duty of Loyalty and Employees’ Preparation for Post-Employment Business

D. Federal Statutory Trade Secret Claims

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32:1. COMPARISON OF STATUTORY AND COMMON LAW PROTECTIONS

Texas employers have two avenues for protecting business interests, such as customer goodwill, trade secrets,

and other confidential information. The most effective tool for protecting business interests is the employment

contract. See Appendices 2-1 and 2-2 (Chapter 2, Written Employment Contracts). As described below, employers

can require their employees to enter into contractual restrictions that protect the employer’s business interests and

preclude unfair competition (covenants not to compete). Although contractual in nature, covenants not to compete

are governed by statute. See Tex. Bus. & Com. Code Ann. §15.50.

Texas common law is a second tool an employer can use to protect its business interests and prohibit interference

with the employment relationship. See DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 681 (Tex. 1990) (acknowledging

the possibility of reasonable agreements not to compete). In addition, Texas has long recognized both a common

law duty of loyalty of an employee to an employer, as well as a duty of a former employee to refrain from use of

confidential information or trade secrets acquired during the course of employment. American Derringer Corp.

v. Bond, 924 S.W. 2d 773, 777 (Tex. App.—Waco 1996, no writ). Employers may rely on common law rights in

the absence of contractual rights, but the common law rights alone provide far less protection than contractual

restrictions. For example, Texas common law does not prohibit an employee from using general knowledge, skill,

and experience acquired during employment to compete with his or her employer after the employment relationship

has terminated, nor does it prohibit former employees from doing business with the employer’s customers. See

Numed, Inc. v. McNutt, 724 S.W.2d 432, 434 (Tex. App.—Fort Worth 1987, no writ); Executive Tele-Communication

Sys., Inc. v. Buchbaum, 669 S.W.2d 400, 403 (Tex. App.—Dallas 1984, no writ).

PRACTICE NOTE

Because common law rights are limited, employers should obtain written noncompetition and non-

disclosure agreements from employees who present a high risk of unfair competition. The common

law rights, coupled with contractual restrictions, will provide the maximum protection in the event the

employee misappropriates employer trade secrets and goodwill.

32:2. STATUTORY PROTECTIONS—COVENANTS NOT TO COMPETE ACT

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A noncompetition agreement, or covenant not to compete, is the primary contractual restriction available to

Texas employers to protect their business interests. A noncompetition agreement typically restrains the employee

from engaging in a competing business with his or her former employer, in a certain geographic area, for a limited

period of time after the termination of the employment relationship. Noncompetition agreements are governed by

the Covenants Not to Compete Act. Tex. Bus. & Com. Code Ann. §15.50 (the “Act” or “section 15.50”).

In 1989, the Texas Legislature passed the Act in an effort to bring certainty to the law of noncompetition

agreements after several rulings from the courts had diminished employers’ rights to enforce these agreements.

See Diversified Human Resources Group, Inc. v. Levinson-Polakoff, 752 S.W.2d 8 (Tex. App.—Dallas 1988, no

writ) (striking employer’s noncompetition agreement as overly broad).

Since 1989, the Texas Legislature and the Texas Supreme Court have been locked in a struggle over the

enforceability of noncompetition agreements. In response to the Act, the Texas Supreme Court issued several

decisions limiting its effectiveness. See Juliette Fowler Homes v. Welch Assoc., 793 S.W.2d 660 (Tex. 1990)

(striking down noncompetition clause for lack of any limits on geographic area or scope of activity); Martin v.

Credit Protection Assoc., Inc., 793 S.W.2d 667 (Tex. 1990) (refusing to enforce covenant not to compete because

it was not ancillary to an otherwise enforceable agreement); DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 683-

84 (Tex. 1990) (finding noncompetition clause invalid because it was not shown to be necessary to protect any

legitimate business interest).

In 1993, the Texas Legislature responded to these Supreme Court rulings by amending the Act. As amended,

section 15.50 provides a covenant not to compete is enforceable