Texas Employment Law Update : Texas Employment Lawyer & Attorney : Russell D. Cawyer : Kelly Hart & Hallman Law Firm : Dallas TX Labor Updates

In Texas, at-will employees can prepare to compete against their current employers without violating the common law duty of loyalty.  Determining whether the line between lawful preparation to compete and unlawful competition begins is sometimes gray.  (See post).  A recent case from the Houston Court of Appeals provides a good summary of what an at-will employee can and cannot due within the bounds of a common law fiduciary duty of loyalty.  As the court summarized,

The Texas Supreme Court has recognized that fiduciary employees owe duties of loyalty to their employers and, if a fiduciary employee "takes any gift, gratuity, or benefit in violation of his duty, or acquires any interest adverse to his principal without a full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has received." But an employer's right to demand and receive loyalty from a fiduciary employee must be tempered by society's interest in encouraging competition. Thus, in general, an at-will employee--even a fiduciary one--may plan to compete with his employer and take certain steps toward that goal without disclosing his plans to the employer, but he may not "appropriate his employer's trade secrets," "solicit his employer's customers while still working for his employer," "carry away certain information, such as lists of customers," or "act for his future interests at the expense of his employer by using the employer's funds or employees for personal gain or by a course of conduct designed to hurt the employer."

Whether Engel had a fiduciary duty to disclose the creation of the competing business Caputech and his plans to associate with Matrikon depends on what his job responsibilities were at PAS. If the fact-finder determines that his job responsibilities were those of a fiduciary, in dealing with his principal on a matter involving his own self-interest that would limit his employer's contractual rights, he owed a duty of full disclosure of all material facts.  If so, he could not legally put his interests above that of PAS "by a course of conduct designed to hurt [PAS]."

(Citations omitted).  If you are an employee considering leaving your current employer to start a venture that competes with your current employer, you should contact competent counsel to ensure that you do not cross the line from lawful preparations to compete to unlawful, unfair competition.

You can download a full copy of PAS, Inc. v. Engel here.

Follow me on Twitter @RussellCawyer.

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The Texas Supreme Court has issued an opinion this morning holding that noncompetition agreements supported by stock options and good will are not unenforceable as a matter of law.  I previewed this case here.  As I have time to digest the majority, concurring and dissenting opinions, I'll provide more thoughts on this case.

You can download the majority opinion here.

Concurring opinion here.

Dissenting opinion here.

Follow me on Twitter @RussellCawyer.

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Many times one competitor sues another competitor over the hiring or two or more employees (whether over allegations of a breach of contract or misappropriation of trade secrets), the Complaint will make allegations of employee "poaching".  This gives rise to the question about whether Texas recognizes a cause of action for one competitor's poaching of another competitor's employees.  The answer is "yes" and "no." 

While there is no recognized cause of action called "poaching" for a competitor's targeting, soliciting and hiring groups of its competitor's employees (remember, Texas is a right to work state and restraints of trade are highly disfavored), there are recognized causes of action, remedies and tools available to employers who find their workforce the target of a competitor's poaching.  These include use of and enforcement of covenant not to competes; investigating and bringing claims for misappropriation of confidential information; theft of trade secrets; claims for unfair competition; breach of the duty of loyalty and fiduciary duty; tortious interference with contract; computer fraud and abuse; and conspiracy to tie together all the defendants acting in concert together.  

So while there may be no claim titled "poaching" under state law, there are recognized claims that can allow for an employer remedy against a competitor that has unlawfully targeted another competitor's employees.

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In an unpublished opinion, the San Antonio Court of Appeals held that a former employee cannot avoid the effects of a noncompetition agreement under the doctrine of unclean hands, as a matter of law, when the inequitable conduct the employee complains of is separate from the issue in dispute.  (Opinion available here). 

In Central Texas Orthopedic Products, Inc. v. Espinoza, CTOP sued Espinoza after he resigned his employment and went to work for a direct competitor in violation of a noncompetition agreement he signed with CTOP.  Espinoza contended that the noncompetition agreement could not be enforced against him because CTOP had violated a separate Compensation Agreement by failing to pay all wages and commissions owed to him.  The trial court agreed and granted summary judgment for Espinoza.

The San Antonio Court of Appeals reversed the judgment for Espinoza and held that since CTOP's alleged failure to pay Espinoza did not grow out of the obligations outlined in the Noncompetition Agreement, the alleged breaches of the separate Compensation Agreement could not, as a matter of law, constitute an unclean hands defense to the noncompetition agreement.

Employees frequently try to avoid the effects of restrictive covenants claiming that the employer violated some obligation to the employees; thereby precluding the enforcement of the restrictive covenant under the doctrine of unclean hands.  CTOP continues the Texas judiciaries' trend of making it easier to enforce noncompetition agreements in the state of Texas.

Earlier:   Texas Supreme Court holds that Covenants Not to Compete that Contain Implicit Promises to Provide Confidential Information are Enforceable.

Texas Appellate Court Continues Trend of Enforcing Noncompetition Agreements.

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Reports of corporate espionage appear to be on the rise.  According to U.S.A Today, Starwood Hotels recently sued the Hilton Hotel chain accusing it of stealing trade secrets to help it launch a rival luxury chain quickly and cheaply.  The WSJ.com reports that the lawsuit accuses the Starwood executives "smuggled more than 100,000 documents and electronic files out of Starwood — and that Hilton used the information to create a new luxury hotel brand, called Denizen."

The NY Times reports that Hilton received a federal grand jury subpoena from the U.S. Attorney’s Office for the Southern District of New York asking for documents relating to the two former Starwood executives indicating a criminal investigation is underway.

While the allegations in Starwood/Hilton, if true, are extreme, there has been a dramatic increase in litigation between competitors over the theft of confidential, proprietary and trade secret information.  According to a recent survey conducted by Symantec and the Ponemon Institute, more than 59 percent of ex-employees admitted to stealing former employer's confidential information such as employee records, customer information, and contact lists. The ease that employees can quickly and covertly appropriate large volumes of electronic data using portable storage devices or web-based personal e-mail accounts should cause all employers with confidential, proprietary or trade secret information and intellectual property great concern.

The large percentage of ex-employees that appear to be taking their employers information without permission can expose their next employer to expensive litigation and potential damages.  Whether the new employer will be liable will depend on a number of factors such as whether (and when) the new employer learns of the theft; how the new employer responds to that knowledge; and how the appropriated information was used. 

Employers that hire employees from competitors should take steps to ensure that they do not inadvertently end up in a civil suit or criminal investigation because of the hiring of those employees. Some measures employers can take in hiring employees from competitors include: ensuring that those employees are not under enforceable noncompetion agreements or restrictive covenants that prohibit the contemplated employment; ensure that employees are advised to and heed the warning not to bring any information (confidential or not) from their previous employer; and advising new hires not to use or disclose any their former employers confidential, proprietary or trade secret information.

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