Common Questions Of Corporate Counsel Concerning Texas Employment Contracts

Tuesday, September 1, 2009 - 00:00

Editor: Tell us about Cozen O'Connor and the firm's capability in Texas.

Sweeney: Cozen O'Connor was established in 1970, is ranked among the 100 largest law firms in the country, and provides a broad array of legal services to a wide variety of individuals and businesses. We have more than 550 attorneys currently in 24 cities, including Dallas and Houston. Cozen O'Connor has been established in Texas since 1993 and its Texas offices have always maintained a commercial practice that has consistently included a concentration in employment contracts, and the litigation of those contracts.

Editor: Based on your experience, what are some of the common concerns that corporate counsel have regarding Texas employment contracts?

Sweeney: Texas is a "right to work" state, which basically means that its employees are employees "at will" and can be terminated without cause at any time. As such, Texas is somewhat different from other states. Corporate counsel often have questions about Texas employment contracts and their available employment protections in this "right to work" environment. Fortunately, the Texas Supreme Court clarified some of those questions this year. ( Mann Frankfort Stein & Lipp Advisors, Inc., MFSL GP, L.L.C., 2009 WL 1028051 (Tex. 2009)). In the Mann opinion, the Texas Supreme Court reiterated and expounded upon its answers in its previous 2006 landmark decision on Texas employment contracts ( Alex Sheshunoff Management Services, L.P. v. Johnson , 209 S.W. 3d 644 (Tex. 2006). Both decisions clarified the controlling Texas statute on trade secret clauses in Texas employment contracts, §15.50(a) of the Texas Business and Commerce Code.

Editor: For Texas employment contracts, what constitutes a trade secret?

Sweeney: The same definition used in the Texas common law, which is then tested by the six factors in the Restatement of Torts §757, comment B (1939). "[A] trade secret is '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. " ( In Re Bass , 113 S.W.3d 735, 739 (Tex. 2003) (citing Computer Assocs. Intern v. Altai , 918 S.W.2d 453, 455 (Tex. 1994)). Fundamentally, any information that provides a competitive edge to an employer (such as formulas, software code, customer information, etc.) and which is kept secret by the employer, is a trade secret.

Editor: What are the six factors that determine a Texas trade secret from the Restatement of Torts?

Haggard: The six factors are: ( 1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of the measures taken by him to guard the secrecy of the information (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. ( Restatement of Torts § 757 cmt. B 1939; Restatement (Third) of Unfair Competition § 39 reporter's n. cmt.d. )

Editor: Does an employer need an employment contract in Texas to protect its trade secret information?

Sweeney: No, Texas common law protects trade secret information without requiring an employment contract. Further, if it is a valid trade secret under this common law, the protection lasts as long as the trade secret lasts. Nevertheless, we suggest that an employment contract be used for clarity and for ease of enforcement.

Editor: Can proprietary or confidential information that does not qualify as a trade secret still be protected in a Texas employment contract?

Haggard: Yes, Texas opinions have addressed this question, and one of the opinions, for instance, held specifically that: " Examples of legitimate, protectable interests include business goodwill . . . and other confidential or proprietary information. " ( DeSantis v. Wackenhut Corp., 793 S.W. 2d 670, 682 (Tex. 1990) ). So, if a Texas employer uses information to its benefit, and keeps it confidential, it is protectable in a Texas employment contract.

Editor: Are employment contracts enforceable in Texas for "at-will" employees and officers?

Sweeney: Yes they are, but they do require certain types of consideration and reasonable restrictions, particularly if they contain what are commonly called "covenants not to compete," clauses with non-competition time and geographic limitations on ex-employees.

Editor: What are the Texas requirements on Texas employment contracts that contain "covenants not to compete"?

Sweeney: The consideration must be "ancillary to," or part of that agreement, and the covenant must be designed to protect the trade secret or other proprietary information. This means that the consideration for trade secret or other proprietary information has to be the actual trade secret(s) or other proprietary information, and it must be given to the employee at the time of or during the agreement.

Editor: Can bonuses, severance payments, or stock be used as consideration for Texas employment contracts and their covenants not to compete.

Sweeney: No, only the information that is sought to be protected will serve as proper consideration for the covenant not to compete clause, which is usually the trade secret or other proprietary information that the employer seeks to protect. As a result, bonuses, severance payments, stock, etc. have been held by Texas courts to be inadequate, or improper, consideration.

Editor: How long can covenants not to compete last in Texas?

Sweeney: It depends. The above statute dictates that the length must be a reasonable time limitation and the Texas courts have interpreted the statute to permit covenants to last anywhere from one to five years. However, there may be certain circumstances where the court could permit the time period to be longer.

Editor: What businesses can an employee be prevented from entering by their employment contract's non-compete clause, after they leave their employment?

Haggard: The covenant must bear some relationship to the activities of the employee, and it cannot include an industry or line of work for which the employee never performed services while employed.

Editor: Are there geographical limitations on Texas non-competes?

Haggard: Less and less. The same section of the aforementioned controlling statute ( §15.50(a) of the Texas Business and Commerce Code ) requires that the geographical limitation be a reasonable limitation and the limitation cannot impose a greater restraint than is necessary. The Texas Fort Worth Court of Appeals determined since 2001, and reconfirmed in 2008, that "the territory within which the employee worked during his employment" is a reasonable geographical restriction under the statute. Goodin v. Jolliff , 257 S.W. 3d 341, 352 (Tex. App. - Ft. Worth 2008, no pet.). Conversely, where there is no geographical limitation, the employment contract will be unenforceable. Butler v. Arrow Mirror & Glass, Inc. 51 S.W. 3d 787, 793 (Tex. App. - Houston [1st Dist.] 2001, no pet.). Editor: Based on these cases, what is a "reasonable" geographical restriction?

Haggard: An example of a "reasonable" geographical restriction, as provided in case law, is where an employee has worked physically in a location or territory, or has performed services over a geographic area, those areas can be protected by a covenant not to compete. Texas case law also verifies that these geographical restrictions can be as small as a county or as large as North America. A global geographic area has not yet been upheld to my knowledge, but is nevertheless not inconceivable.

Editor: Previously you mentioned that an "ancillary agreement" is needed in Texas to protect the trade secrets or other proprietary information of the employer. What is that "ancillary agreement"?

Sweeney: It usually is, according to most Texas cases, the agreement by the employer to give the confidential information to the employee for use in his employment, and it can be implied, because it does not have to be expressly set out in the employment contract ( Sheshunoff and Mann ). In fact, Mann set forth the standard: " When the nature of the work the employee is hired to perform requires confidential information to be provided for the work to be performed by the employee, the employer impliedly promises confidential information will be provided." Mann at 5. This obviously means that the employer's transfer of the confidential information to the employee does not have to be expressly stated in the Texas employment contract, so long as the confidential information is provided to the employee at or during their employment.

Editor: How would you briefly summarize Texas employment contracts and their covenants not to compete protection to a client?

Sweeney: Texas employment contracts can protect the employers' trade secret or other confidential information by containing a provision requiring non-disclosure along with a non-compete clause that is enforced when the employee leaves the company. This non-compete protection should cover the industry in which the employee previously performed his services and specify the prior geographical area of those services. The non-compete can last for a "reasonable" period of time, which means it must be designed to protect the confidential information's life-span; which is usually one to five years.

Editor: Do you see any trends concerning Texas employment contracts?

Sweeney: Yes, certain trends are evident from the Texas Supreme Court opinions in 2006 ( Sheshunoff ) and this year ( Mann ). The most noticeable trends are the courts being more receptive to expanding the time period and the geographic area of the non-competes. The Texas Supreme Court opinions may be part of the momentum for these trends. However, the expansion of these time and geographic protections may also be due to the tacit admission by the courts that our Texas economy is now largely service and information based, making the preservation of the trade secret or confidential information tantamount to the very existence of the employer.

Marty Sweeney has more than 20 years experience in litigation, and has concentrated his practice on commercial litigation since 1986. In this capacity, he has represented corporations, partnerships and individuals in lawsuits involving complex business, intellectual property, and employment issues. In that regard, he has had numerous cases involving the enforcement of Texas employment contracts, including the protection of trade secrets by covenants not to compete. Tim Haggard concentrates his practice on products liability and commercial litigation. Tim has been litigating trade secret cases since 1997 and has been successful in protecting trade secrets by obtaining injunctions enforcing covenants not to compete in Texas employment contracts.

Please email the interviewees at msweeney@cozen.com or thaggard@cozen.com with questions about this article.