Employment Law Commentary for the Houston Business Journal's "Business Survival Guide"

May 18, 2001

QUESTION: How do you protect your company's trade secrets with employee confidentiality and non-competition agreements? 

How to Protect Your Company's Trade Secrets with Employee Confidentiality and Non-Competition Agreements

In our modern technological age, information is king. Many companies have learned that protecting their proprietary business information and trade secrets is critical to their continued success. How can you do this for your company? From an employment law standpoint, two standard vehicles for protecting an employer's confidential information are: (a) confidentiality agreements; and (b) non-competition agreements.

Confidentiality Agreements

Confidentiality agreements are not just for high-tech companies conducting cutting-edge research or developing patentable technologies. Almost all companies have proprietary information to protect, whether it consists of customer lists, pricing information, profit margins, bidding strategies, or other information that allows a company to maintain its competitive advantage. Companies can protect this information by having their employees sign a confidentiality agreement.

Ideally, an employer should have its employees sign a confidentiality agreement at the inception of their employment. This is not necessary for the enforceability of the agreement, but it eliminates confusion by defining the company's expectations from the start and helps ensure that all employees sign the agreement.

At a minimum, confidentiality agreements should: (a) describe the types of confidential information to which the employee will have access; (b) restrict the employee's disclosure of this information, both during and after employment, except when disclosed in furtherance of the company's business or with the company's permission; and (c) require the employee to return any company documents or other confidential information before the employment relationship ends. The duration of the agreement need not be limited. Moreover, companies do not have to pay employees any special compensation for entering into this agreement -- their access to the confidential information and their continued employment are sufficient to support the agreement.

Some companies only have certain "key" employees sign confidentiality agreements. Nevertheless, because any company employee may be exposed to information that the company does not want to reveal, the best practice is to have all employees sign confidentiality agreements.

Non-Competition Agreements

The non-competition agreement is one of the more controversial employee agreements. Non-competition agreements, and their cousins, non-solicitation agreements, either prevent the employee from going to work for a competitor or restrain the employee from soliciting the company's customers after leaving employment. With the expansion of the information age, these agreements have become increasingly popular among employers seeking to prevent employees with knowledge of company secrets from using them against the company. Nevertheless, because these agreements restrain trade, Texas courts generally disfavor them and require that they meet stringent criteria before enforcing them. This has led to a great deal of litigation in which both employers and employees have incurred substantial litigation expenses with often disappointing results for both sides.

To be enforceable, an employee non-competition agreement will generally have to be "ancillary to or part of" an enforceable employment agreement containing the employer's promise to provide confidential information and the employee's promise to keep it confidential. In short, this is because Texas courts have concluded that an employer's promise to provide the employee with trade secrets or confidential information can be sufficient consideration to support an employee's promise not to compete. One caveat -- Texas courts will likely consider the employer's promise to provide confidential information illusory, and the non-competition agreement invalid, unless the employee signs the non-competition agreement at the inception of the employment relationship or at the inception of a change in the employee's duties that will expose the employee to new confidential information.

Texas courts also require that non-competition agreements contain reasonable limitations as to time, geographic area, and scope of activity to be restrained. The limitations should not impose a greater restraint than necessary to protect the goodwill or other business interest of the employer. In most circumstances, it is difficult to enforce a non-competition agreement that prevents an employee from working for a competitor or soliciting the company's clients for more than two years after leaving employment. Regarding geographic area, while many companies would like to prevent employees from competing against them anywhere, the smaller the geographical restriction in the non-competition agreement, such as a restriction tailored to where the employee actually worked, the more likely a court will enforce it. Finally, regarding the scope of activity to be restricted, the non-competition agreement should only restrict the employee from performing work similar to that performed for the employer.

Conclusion

Confidentiality and non-competition agreements can be invaluable tools to protect an employer's trade secrets and confidential information. Nonetheless, with the complex legal requirements for an enforceable non-competition agreement, employers should consult with employment law counsel before drafting and implementing these agreements.

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