On January 5, 2023, the Federal Trade Commission (FTC) issued Notice of Proposed Rulemaking announcing that it was proposing an administrative rule that would end the use of all noncompetition agreements in employment relationships outside the context of the sale of a business. The proposed rule, among other things, labels the following as unfair methods
El Paso Court of Appeals Clarifies Fiduciary Duty At-Will Employees Owe to Employers
In Texas, absent a valid noncompete, an at-will employee is generally free to compete with the former employer so long as the employee does not take or use the company’s confidential information or trade secrets. Notwithstanding this general rule, employees also have common law fiduciary duties that limit what activities they can engage in prior to resigning employment. The level of fiduciary duty owed to the company will depend on the duties and responsibilities of the employee and the position within the company. Employees may generally make preparations to compete while still employed by a company but cannot actively compete while still employed. What constitutes preparing to compete versus actively competing can often be a blurry line. A recent case from the El Paso Court of Appeals helps to bring the line into focus.
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Congress Federalizes Trade Secret Cause of Action
Congress passed, and the President indicates he will sign, the Defend Trade Secrets Act of 2016 (“DTSA”) creating a federal cause of action for the misappropriation of trade secrets. Until now, misappropriation of trade secret claims have been litigated under state or common law theories of recover and usually in state courts unless the parties…
When Does Preparing to Compete Become Unlawful Competition?
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…
BREAKING NEWS: Texas Supreme Court Issues Opinion Enforcing Non-Compete Supported by Stock Options and Goodwill
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…
Does Texas Law Recognize a Claim against Competitor’s Poaching of Employee?
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…
San Antonio Court of Appeals Holds Doctrine of Unclean Hands Doesn’t Invalidate Noncompetition Agreement
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).
Reports of Corporate Espionage Between Competitors on the Rise
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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