In-house counsel should keep their eyes peeled for other market players’ noncompetition agreements. Understanding how noncompetes work can bolster the company’s efforts to recruit the skilled, experienced employees that other companies in the industry can’t retain. A shrewd legal department develops a company’s reputation for respecting competitors’ legitimate noncompetes while aggressively fending off attempts to overreach.
Noncompete agreements come in a million flavors. Some have global restrictions that last for years. Others are narrow and short. Some nonsolicitation agreements only protect a competitor’s existing client base, leaving the rest of the market wide open. There’s no telling what a candidate’s employment agreement says until in-house counsel reads it.
The first step is to educate managers about timing. They generally shouldn’t ask to see any job candidate’s employment agreements until late in the screening process, shortly before making an employment offer. Then, they should ask for all noncompete, nonsolicit and confidentiality agreements that the candidate signed for any company where he or she worked over the past several years.
Don’t be surprised if job applicants fail to turn over agreements they signed previously. Many people have a way of forgetting, intentionally or not, the noncompete they signed in the stack of standard paperwork the first day on a new job.
That’s why some companies document their request to see all the agreements and list what the job candidate showed them. They also require the candidate to sign a disclosure statement that lists and attaches all the relevant agreements. If the candidate doesn’t disclose any agreements, he signs a statement saying he signed none.
The due diligence pays off if a competitor shows up later with a signed noncompete that the candidate didn’t disclose. The competitor will accuse the company of tortiously interfering in its ex-employee’s noncompete obligations. But the company cannot interfere with a noncompete that it took reasonable steps to discover but never saw. The clean disclosure statement helps.
Let’s say the candidate turns over a noncompete. In-house counsel must read it carefully, because the company may be hiring into litigation. With an open mind, the legal department needs to evaluate the risk and reward of hiring the candidate. The best advice may be for the hiring manager to find someone else to fill the job.
Here are some key questions to ask.
• Is the company hiring for a position where the candidate will violate his agreement? A noncompete might have expired, or it might cover a different territory than the open position’s. The company also might modify the open position temporarily, while the candidate lives out the agreement’s term. For example, the company could tell the newly hired candidate in writing that he cannot call on or work with any of his former employer’s customers for the duration of the nonsolicitation agreement.
• Did the candidate sign the noncompete very near the end of employment? Although the Texas Supreme Court is beginning to warm up to enforcing noncompete and nonsolicit agreements, an employer that has an employee sign a noncompete late in his tenure might be on shaky ground.
Generally speaking, courts will enforce a noncompete to protect an employer’s trade secrets, confidential information or goodwill that the company shared with its employees as consideration for the restriction. But from Light v. Centel Cellular Co. in 1994 to Marsh USA Inc. v. Cook in 2012, the Texas Supreme Court has required an employer to give new consideration for a noncompete after the employee signs it.
Business secrets or goodwill shared on the job before then are not enough. A longtime employee may not meet new clients or learn new business secrets after signing a noncompete during his last couple months on the job. If so, the noncompete won’t hold water in court.
• Is the noncompete unreasonable? A noncompete must be reasonable in time, scope and geographic area. Some competitors use noncompete agreements with more onerous restrictions than needed to protect their business secrets and goodwill. That’s unreasonable. Restrictions that overreach are vulnerable, so long as the hiring company is willing to comply with a reasonable restriction and run the risk of litigation.
A company can press the issue by hiring the candidate into a position that complies with a reasonable restriction (in the hiring company’s eyes). The former employer may still bring an enforcement action. If a Texas court agrees that the noncompete is unreasonable, the judge can reform the agreement to make it reasonable.
But the hiring company has an advantage: The former employer can’t recover money damages on the noncompete before the court reforms it. An injunction would be the only remedy available. Raising enough doubt about how the court should reform the noncompete might convince a judge to shy away from granting a temporary injunction that hurts the hiring company. Those two advantages may give the company enough leverage to broker an early settlement of any enforcement action.
A green light to hire on the noncompete front is a good start, but in-house counsel also should keep an eye on trade secrets. They can mess up a hire whether there’s a noncompete or not.
In Texas, employees have a fiduciary duty not to use or disclose their employer’s trade secrets and confidential information — no written confidentiality agreement needed.
In-house counsel can’t eliminate the possibility that a new hire will use an ex-employer’s trade secrets on the job. An employee may download a jump drive full of proprietary data onto the company’s server. Or the employee may use what he can remember. Either scenario could trigger a trade secret enforcement suit.
In-house counsel can manage the risk. The legal department can make it clear that the company has no interest in using its competitors’ trade secrets. Attorneys can draft a standard confidentiality agreement requiring new hires to promise that they will not bring a third party’s trade secrets onto company property or use or disclose them while working for the company. Orientation training also should cover the types of information that may constitute trade secrets.
A smart legal department takes steps to respect competitors’ legitimate trade secrets and noncompetes. Chances are, a judge or jury will return the favor.