Understanding Non-compete Agreements & Trade Secrets

What Are Non-compete Agreements?

Non-compete agreements act to protect an employer’s business by securing trade secrets developed by the employer. This protects against an employee taking a job with a direct competitor. Because of the inside knowledge of a business and its operations, this situation creates a risk of information disclosure to a competing business.

Once used only for high-level executives and sales personnel, non-compete agreements are now being implemented for mid-level managers, technicians, and all other employees who could create a competitive edge if they leave. Businesses are increasingly taking precautions to protect themselves from competitive threats from ex-employees.

At Galo Law Firm we can assess your case to distinguish if your rights have been violated and what legal options you are entitled to. If you are concerned about how to protect trade secrets, intellectual property, or other confidential information, we can craft a tailored strategy to assist.

Contact us today to speak with one of our experienced employment attorneys at 210-361-8043.

What is the Purpose Behind Non-compete Agreements?

A former employer’s trade secrets and business practices can be used to enhance the current practices of a company where the employee has taken a new job, which is why states have implemented these non-compete agreements. Not only unethical, but the disclosure of a company’s confidential information can have quite a financial consequence. While there may be no monetary value, a company’s trade secrets should still be treated as valuable assets.

How Is Protection Implemented?

Because most non-compete agreements are implemented by state law, the criteria can vary. Typically, under state laws, non-compete agreements must consider time, geographic location/territory, and scope of work. With this, employers are protected from unfair competition that would not exist otherwise. The transfer of information only exists in the circumstance that it was taken, or unethically shared.

Who Implements Non-compete Agreements?

Each state has its own set of laws and regulations around the enforcement of non-compete agreements. While it is understandable that a company would want to protect any confidential information or trade secrets, a company may not unreasonably restrict an individual from finding employment as punishment for leaving the company. The protection against confidentiality is valid, however, the duration of the agreement and nature of the agreement is important to consider.

If a former employee possesses confidential information, there are a number of ways this information can be used for future benefit. Due to this risk, it is imperative that there are policies in place to protect against such exploitation. To avoid this, many employers now require new employees to sign documents stating any conflicts during their onboarding.

While a non-compete agreement can vary from state to state, it is important to consider the limitations of the state you reside in before considering the pursuit of legal action.

What are Trade Secrets?

A trade secret is any information with economic value that is unknown to the public or hard to obtain. This can include various formulas, patterns, software programs, devices, methods, techniques, and processes. Keeping such information a secret can be beneficial for any business.

Courts have identified various elements as trade secrets, including machining processes, blueprints, stock-picking formulae, customer lists, pricing data, and financial details that are not publicly disclosed. However, certain critical data such as overhead rates and expected profit margins used for calculating prices can’t be shared and are thus considered trade secrets – even if the final price itself is public knowledge.

The Defend Trade Secrets Act

The Defend Trade Secrets Act (DTSA) of 2016 was implemented to enforce agreements and to help preserve trade secrets in business. The DTSA protects against a wide range of proprietary information and provides a form of defense against intellectual property that a company would not otherwise have access to. This creates unfair competition in the sense that one company has access to multiple sources of trade secrets, whereas one does not. The departing employee and the information they bring, give one company a competitive advantage over a direct competitor. A company may require employees to sign nondisclosure agreements in addition to protecting against any unfavorable disclosure or disloyal employees.

What Exactly Does the DTSA Protect Against?

The DTSA gives specific and definitive examples of trade secrets. The definition is as followed:

“All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”

Examples of Non-compete Agreement Cases

Restrictive Covenants

Restrictive covenants are contractual arrangements that limit an employee’s right to compete with their employer for a specific period of time after their employment has ended. Some agreements are more limited, only prohibiting contact with clients. This type of agreement is commonly known as a non-solicitation agreement. Employers can use non-compete, non-solicitation, and non-disclosure agreements to ensure that their employees do not share the information they gained while working for the organization.

What Do Restrictive Covenants Shield?

Covenants are useful for stopping ex-employees from taking customers with them or releasing trade secrets and private information acquired by the previous employer from the business.

However, when it comes to professionals such as doctors and accountants, where a personal relationship has been formed, courts usually don’t enforce non-compete agreements. This can lead to patients not being able to stick with their preferred doctor or clients not being able to continue using the accountant they are familiar with.

Employers can protect their information from competitors and ex-employees who want to start their own businesses by executing restrictive covenants. This helps them to maintain healthy competition with former staff and other companies in the market. The courts usually backup such measures if they are reasonable and have been signed off by the employee in question.

A distinct legal provision is required for employers to keep certain information confidential that may not be eligible as a trade secret. To demonstrate this, the employer must prove that they had treated the info in question as confidential.

Constraints on Non-compete Agreements

Companies should consider all relevant aspects before implementing a non-compete or other employment agreements, as thoughtful deliberation can help create a more practical and feasible agreement.

Non-competition agreements are typically not favored in the court system, and many states take steps to limit or prohibit them. This attitude is largely due to the desire to give individuals the right to pursue whatever job they choose and make a living. Laws permit the possibility of having a contract adjusted or completely scrapped if it is deemed too broad. Such agreements should be specifically tailored to reduce the likelihood of them being rewritten by a judge.

Factors Influencing Restrictive Covenants

When deciding if a restrictive covenant should be enforced, courts usually take into account the following factors:

  • Legitimate Reason

Does the employer have a legitimate reason for wanting protection from this employee’s potential competition? In certain cases, the court may deny enforcing a restriction imposed upon an employee if it’s too vague or overreaching; despite the employer’s showing of the legitimate business interest that necessitates protection.

  • Reasonable Restrictions

According to the courts, in order for an agreement to be considered “reasonable”, it must not be overly restrictive and should only be used to protect the employer’s legitimate interests. Additionally, a reasonable amount of time should be set out in the agreement to help with transitioning. This would involve factoring in how long it takes to train an employee, as well as allowing customers to get used to the new staff and no longer associate them with the business. The geographical boundaries of the restriction should only cover areas that are necessary to protect the employer’s interests.

  • Effect on Public Interest or Public Policy

This factor is often the hardest to judge. In the event that an employee is subject to a restrictive covenant or limited agreements that restricts them from providing a unique service in a regional area, it can negatively affect the public’s access to that service.

  • Reasonable Compensation

It is essential to determine if the person signing a restrictive covenant has been fairly compensated in return for their agreement. In order for a non-competition restriction to be legally binding, most states mandate that the employee must receive something of value in return – such as their initial job offer, a pay raise or promotion, or additional benefits when leaving the organization.

  • Timeline of Non-compete Agreement

Certain agreements apply regardless of the employee’s termination cause, while some only affect those that resign or are terminated for a specific reason. Thus, it is important to be aware of which agreements are applicable in each case. For certain contracts, the period of restricted activity lasts only as long as severance benefits are being paid out. If termination payments are declined, the employee can then start a new job without any restrictions.

Implementation Of Non-compete Agreements

Non-compete agreements need to be carefully crafted to suit an organization’s needs and only used with employees in key roles. Once signed, they should be strongly enforced when broken. Having a non-compete agreement in place serves as a deterrent for employees from exiting the organization and working for the competition. In the event of an employee leaving, these agreements give the employer some control over when and how it happens.

Companies should make sure they are actively protecting their non-compete agreements. If there is a real possibility of harm, it is necessary to take action if that agreement is broken. Otherwise, the company could suffer significant consequences. Disregarding non-compete contracts can result in serious repercussions, beyond just financial damages. Such as revealing confidential data and intellectual property of a business.

Organizations not proactively enforcing non-compete agreements can find it difficult to defend such restrictions in the future, since their lack of vigilance in the past may be interpreted as negating the necessity of such an agreement. Subsequently, former employees’ lawyers may argue that no restriction was needed.

In certain situations, non-compete agreements may be unjust to the employee. It is recommended that a lawyer be consulted to evaluate a non-compete if there are any doubts about its legitimacy.

Speak With a Texas Employment Lawyer Today

The Galo Law Firm has a range of experts who can help employers and employees to comprehend the extent of their respective legal rights and obligations when it comes to non-compete agreements and trade secrets.

Attorneys at The Galo Law Firm are experts in Texas employment law and have a wealth of experience in navigating the complexities of contract disputes. Having operated for three decades, our law firm is fully experienced in the practice of law. The hard work and commitment of our lawyers allow us to make a complicated legal process as smooth and hassle-free as possible for our clients.

The Galo Law Firm boasts a reputable success rate when it comes to representing clients in the Texas area. Our employment lawyers are knowledgeable and proficient in managing the judicial system, local judges, and labor organizations.

The Galo Law Firm can serve as your trusted legal advisor in cases of non-compete agreements and trade secrets in Texas. Reach out to us today for an initial  case evaluation. Give us a call at 210-361-8043.

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