LABOR & EMPLOYMENT NEWSLETTER - Protecting Confidential Information Without a Noncompete

Most employers worry that former employees will improperly use confidential information and trade secrets that they obtained during their employment, usually by providing it to a competitor or by creating a new competing company. Employers, therefore, want and need the ability to immediately restrain former employees from disclosing, or even simply possessing, the employer’s confidential information. Such immediate recourse is usually possible only through the temporary injunction process, whereby a court orders the former employee to return information or refrain from disclosing it.¹ In order to invoke this process, however, an employer needs to be able to allege that the former employee is in violation of some duty not to disclose or possess the information. Many employers believe that they will not be able to seek injunctive relief without a previously executed, noncompete agreement from the employee. To this end, some employers now routinely require all employees to sign such agreements, regardless of the actual competitive or confidentiality concerns associated with the particular employee or her position. Such global use of noncompetes is not always a prudent employment practice.

Noncompete agreements generally prohibit former employees from working in particular industries within a specific geographic area, or working for or contacting specific clients, for a period of time. As such, the immediate result of a noncompete is to prevent a former employee from working in a particular field, or working for particular entities. While the Texas Supreme Court’s recent Sheshunoff decision has alleviated some of the prior enforceability concerns about valid consideration supporting such agreements, the traditional “public policy” concerns remain because noncompete agreements impair former employees’ employment opportunities. In this regard, even though the Sheshunoff court arguably removed some hurdles to enforcing noncompetes, it nonetheless emphasized that noncompetes should not be taken at face value. The reasonableness of the noncompete’s scope and the burden imposed upon the former employee must be evaluated in each case. To this end, and pursuant to Sheshunoff’s directives, lower courts may delve more deeply into whether a noncompete is even warranted under the particular facts, notwithstanding whether the scope and duration of the noncompete is reasonable. Accordingly, employers should not presume that a noncompete would be upheld in any particular case.

A claim for breach of a noncompete is not, however, the only basis upon which to seek injunctive relief. Several alternative options are found in contract, under statute or in the common law and can provide a basis for seeking injunctive relief against a former employee who is in possession of, and may be disclosing, confidential information:

Contractual obligation to return property/verification of return. The employee agrees in writing that, upon separation from employment, she will return all employer property in her possession and will affirm under oath that all such property has been returned.
Contractual obligation not to disclose confidential information. The employee acknowledges in writing the confidential and proprietary nature of the employer’s information, and further agrees not to disclose such information either during or after his employment. Concerns regarding breadth and duration do not exist as in traditional noncompete agreements.
Common law duty not to disclose confidential information.² Former employees may not use for their own advantage and to the detriment of former employers confidential information or trade secrets acquired by them during employment.
Misappropriation of trade secrets.³ Common law cause of action allowing the employer to seek redress against a former employee who obtained a trade secret and used or disclosed the trade secret in breach of the confidential relationship.
Conversion.⁴ Common law cause of action allowing the employer to seek redress against a former employee who “wrongfully exercised dominion or control” over the employer’s property, including confidential information such as customer lists or trade secrets.
Texas Theft Liability Act (“TTLA”).⁵ Statutory cause of action allowing the employer to seek redress against a former employee for intentionally depriving the employer of its ownership or possession of its trade secrets.

These options can be exercised or enforced without dealing with the consideration and public policy issues prevalent in traditional noncompete agreements. Thus, if an employer does not have a noncompete agreement or is concerned about the enforceability of its noncompete, it can still allege any of the above causes of action as support for a claim for injunctive relief.⁶

Regardless of whether the employer seeks injunctive relief through any of these “alternative” options or through a traditional breach of noncompete case, the employer will still have to support its claim that the information at issue is, in fact, “confidential” and worthy of injunctive protection. In this regard, employers would do well to remember that Texas law defines a trade secret as “any formula, pattern, device or compilation of information which is used in one's business and presents an opportunity to obtain an advantage over competitors who do not know or use it.”⁷ To determine whether information meets this standard, the Texas Supreme Court has found that six nonexclusive factors should be considered: (1) the extent to which the information is known outside the holder's business; (2) the extent to which it is known by employees and others involved in the holder's business; (3) the extent of the measures taken by the holder to guard the secrecy of the information; (4) the value of the information to the holder and its competitors; (5) the amount of effort or money expended by the holder in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.⁸
If employers do not keep these factors in mind and take consistent steps to maintain the confidentiality of the information at issue, their battle to protect the information may be over before it begins.

In short, noncompete agreements are not the sole, and certainly not always the best, means for employers to protect the confidentiality of their information. Other options can provide equally effective protection without the public policy struggles sometimes found in noncompete litigation. However, regardless of the option used, employers must diligently maintain procedures to establish and protect the confidentiality of the subject information so that courts do not undercut attempts to obtain injunctive relief by determining that the information at issue is simply not as confidential as the employer claims.

¹ Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002). To be entitled to a temporary injunction, an employer must file a lawsuit pleading a cause of action, show a probable right to recover on that cause of action and show a probable, imminent, and irreparable injury in the interim. A “probable right of recovery” is shown by alleging a cause of action and presenting evidence tending to sustain it. Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 597 (Tex.App.-Amarillo 1995, no writ). An injury is irreparable if monetary damages would not adequately compensate the injured party or if they cannot be measured by any certain pecuniary standard. Butnaru, 84 S.W.3d at 204.

² While the Texas Supreme Court’s recent Sheshunoff decision has alleviated some of the prior concerns about valid consideration supporting such agreements, “public policy” concerns remain, as do the usual issues regarding the reasonableness of the scope of the noncompete and the burden imposed upon the former employee. To this end, and pursuant to Sheshunoff’s directives, courts may delve more deeply into whether a non-compete is even warranted under the particular facts, notwithstanding whether the scope and duration of the noncompete is reasonable.

³ T-N-T Motor Sports, Inc. v. Hennessey Motor Sports, Inc., 965 S.W.2d 18, 24 (Tex. App. – Houston [1st Dist.] 1988, pet. dismissed). See also Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 859 (Tex.App.--Fort Worth 2003, no writ); Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 600 (Tex.App.--Amarillo 1995, no writ); Rugen v. Interactive Bus. Sys., Inc., 864 S.W.2d 548, 551 (Tex.App.--Dallas 1993, no writ).

⁴ Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex.App.—Austin 2004, pet. denied).

⁵ Green Int’l v. Solis, 951 S.W.2d 384, 391 (Tex. 1997); Apple Imports, Inc. v. Koole, 945 S.W.2d 895, 899 (Tex.App.—Austin 1997, writ denied); Chandler v. Mastercraft Dental Corp., 739 S.W.2d 460, 469 (Tex.App.—Fort Worth 1987, writ denied).

⁶ Tex. Civ. Prac. & Rem. Code §§ 134.001 – 134.005.

⁷See Rugen, 864 S.W.2d at 552; see also T-N-T Motorsports, Inc., 965 S.W.2d at 24 (holding that appellant possessed confidential information of former employer and was in a position to use it; thus, appellant was likely to use information to former employer's detriment).

⁸In re Bass, 113 S.W.3d 735, 739 (Tex. 2003) (quoting Computer Assocs. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996)).

⁹ Fox v. Tropical Warehouses, Inc., 121 S.W.3d 853, 859 (Tex.App.--Fort Worth 2004, no pet.) (citing In re Bass, 113 S.W.3d 735, 739 (Tex. 2003)).