The Before, During, and After of Non-Compete Agreements (updated October 2015) Presented by: Matt Veech and Andrew Pearce BoyarMiller October 21, 2015

TOPICS Considerations when drafting a non- compete agreement Considerations when beginning or terminating employment Considerations when filing suit

Considerations when drafting a non-compete agreement 1. Contractual venue provisions can be ineffective when seeking injunctive relief Section Place for Trial. (a) Except as provided by Subsection (b), a writ of injunction against a party who is a resident of this state shall be tried in a district or county court in the county in which the party is domiciled. If the writ is granted against more than one party, it may be tried in the proper court of the county in which either party is domiciled. Venue selection clauses Choice of law provisions

2.Prevailing party provisions are counter-productive with regard to non-competes Section – Preemption of Other Law. The criteria for enforceability of a covenant not to compete provided by Section of this code and the procedures and remedies in an action to enforce a covenant not to compete provided by Section of this code are exclusive and preempt any other criteria for enforceability of a covenant not to compete or procedures and remedies in an action to enforce a covenant not to compete under common law or otherwise. An employer enforcing a covenant will not be entitled to an award of attorneys’ fees. Considerations when drafting a non-compete agreement

In Glattly v. Air Starter Components, Inc., the Houston First Court of Appeals upheld the trial court’s decision refusing to award attorneys’ fees in favor of the employer enforcing the non-compete even where the employment agreement at issue contained a prevailing party provision. The First Court of Appeals made three important conclusions regarding Section 15.52: It does not contain a provision that allows employers to recover attorneys’ fees, It expressly states the remedies in the Act are the exclusive remedies, and It expressly states that it preempts any other remedies in an action to enforce a covenant not to compete. Considerations when drafting a non-compete agreement

However, an employee defending against enforcement of a covenant may be entitled to an award of attorneys’ fees if successful in such defense in three ways: Under the statute, if the employee shows that the employer knew at the time of execution of the agreement that the covenant did not contain restrictions that were reasonable and the employer sought to enforce the covenant to a greater extent than was necessary to protect the goodwill or other business interest of the employer; or Pursuant to a declaratory judgment action seeking a declaration that the covenant is not enforceable. Potentially, in defending against an action to enforce a covenant, where the agreement itself has a prevailing party provision. Considerations when drafting a non-compete agreement

3. Reformation clauses can hurt you Section provides, in part, that “[i]f the covenant is found to be ancillary to or part of an otherwise enforceable agreement but contains limitations as to time, geographical area, or scope of activity to be restrained that are not reasonable and impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee, the court shall reform the covenant to the extent necessary to cause the limitations contained in the covenant as to time, geographical area, and scope of activity to be restrained to be reasonable...” However… In Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc., the Houston First Court of Appeals found that such a “right to reform” provision served as evidence that the employer knew the covenant was overly broad at the time it was written and allowed the award of attorneys’ fees to the former employee. Considerations when drafting a non-compete agreement

4. Liquidated damages can negate your request for injunctive relief An applicant must prove there is no adequate remedy at law, meaning damages cannot be calculated. vs. Liquidated damages that specify the amount of damages that one party will receive if the other party breaches the agreement. Considerations when drafting a non-compete agreement

5.Alternatives to Non-Compete Agreements Exxon-Mobil v. Drennen, Texas Supreme Court (August 2014) Loyalty incentive plan New York choice of law provision Texas employee In Cameron Int’l Corp. v. Guillory, Houston First Court of Appeals (September 2014) Restricted stock agreement with non-compete Former employee did not ead the restricted stock agreement Delaware choice of law Colorado employee Considerations when drafting a non-compete agreement

1.Example letter when hiring new employees We are pleased to offer you the opportunity to work for [EMPLOYER] as set forth in the attached offer letter. However, we are requiring that you provide certain assurances prior to accepting employment with us. Specifically, [EMPLOYER] requires you to agree and sign this document prior to employment, affirming that: You do not have any agreement with your current and/or former employer that would limit your ability to work for [EMPLOYER]. You will not rely upon, use, or disclose any non-public information acquired from your current employer or from any other prior employers, whether or not formally designated as by such current or former employer as trade secrets, proprietary, confidential, or private. You have not taken and do not have in your possession any non-public information acquired from your current employer or from any prior employers, and you will not bring nor use any such non-public information in your employment with [EMPLOYER]. If you have any further questions regarding the content of this requirement, I will be happy to discuss them with you. If not, we would appreciate your acknowledgement of and agreement with the above information by signing below. Considerations when beginning or terminating employment

2.Example of Contract Provision Regarding the Return of Confidential Information Upon termination of Employee’s employment, Employee shall surrender to the Company all property belonging to the Company, including, without limitation, any copies of the Confidential Information. If Employee has stored Confidential Information or other information of the Company, with or without the Company’s consent, on a computer, storage device, or media not belonging to the Company, then at the request of the Company Employee will provide such computer, storage device, or media to the Company for the Company to retrieve such Confidential Information or other information of the Company and to otherwise irretrievably destroy the Confidential Information or other information of the Company. Considerations when beginning or terminating employment

2.Is your injunctive relief sufficiently specific? The First Court of Appeals, in Lasser v. Amistco Separation Products, Inc., dissolved a temporary injunction order that sought to enforce contractual non-compete and non- solicitation obligations because the order was both not specific enough and overbroad. -The order failed to “identify, define, explain, or otherwise describe” what constituted “confidential information” that Lasser was prohibited from disclosing. Thus, these provisions did not provide adequate notice to Lasser as to what conduct he was restrained from performing and left him to speculate what conduct might satisfy or violate the order. -The Court also found that Part (c) was impermissibly overbroad under Rule 683 because it enjoined activities that Lasser had a legal right to perform, such as deleting electronic records and files unrelated to the subject of the lawsuit. Considerations when filing suit

Questions? Matt Veech BoyarMiller