Despite the disastrous effects COVID-19 has wreaked on our economy, unemployment rates are steadily declining in Texas. As businesses reopen, they are presented with a much larger pool of qualified candidates to draw from than in previous years. However, there is also an increased chance they are subject to agreements and other legal duties arising out of their former employment (e.g., noncompetition agreements and duties of nondisclosure of trade secrets). To avoid potential liability, and unnecessary legal expense, prospective employers should take some basic precautions to ensure they are protected from claims by a former employer.
What risks does a prospective employer face? The biggest and most common risk presented is if the prospective employee is in possession of trade secrets or other confidential, proprietary information belonging to their former employer. This can include customer lists, customer contact information, pricing data and other information that the former employer would typically not want disclosed and took steps to protect.
If the employee comes to work for you and uses or discloses protectable trade secrets and other proprietary information to further your business, you can expect a nasty letter from the former employer’s attorney alleging that you have violated the Texas Uniform Trade Secrets Act relating to misappropriation of trade secrets, threatening to sue you to stop any further use or disclosure via an injunction and demanding damages, including lost profits, reasonable royalties, attorney’s fees and exemplary damages.
A less common, but equally real, threat is if the job applicant has a noncompete agreement preventing the applicant from performing services for a competitor that are the same or similar as those that they performed for their former employer within a reasonable geographical area for a reasonable period of time (typically, under five years). Covenants not to compete are governed by the Texas Business & Commerce Code. If the statute is violated, a former employer can obtain an injunction barring the prohibited conduct and recover damages, including actual damages and attorney’s fees.
You should not think that noncompete agreements are unenforceable in Texas. They are. Furthermore, even if an agreement is unenforceable as written, judges are required by law to reform such agreements, if possible, and enforce them as rewritten. While damages and attorney’s fees are not recoverable in such instances, the former employer can still get an injunction preventing future violations.
A third risk presented to potential employers is a claim for tortious interference, including interference with an existing contract. If the former employer can establish a valid contract with its former employee, you could be held liable if you willfully or intentionally interfered with that contract, causing damages.
So how do you avoid being blindsided with a nasty letter from a former employer? Ask questions in the interview process. Include in your employment application specific questions about whether they have a written noncompetition agreement. If they do, ask for a copy and read it. Have your attorney read it, as well. If there is any hint that there could be a potential claim, ask your lawyer if you should get the applicant’s permission to contact the former employer to obtain a written waiver.
Additionally, ask the applicant if they have a written nondisclosure agreement. If they do, follow the advice set forth above relating to noncompetition agreements. Also, consider including in the application a question requiring them to represent expressly that they do not have any confidential or proprietary information that could or will be used in their employment with you (if they are hired).
Lastly, besides the job application, talk with your attorney and consider having them draft a written agreement that each new hire would be required to sign. Basically, your lawyer would include numerous affirmations by the applicant that would help you establish various defenses recognized by Texas law to defeat claims by former employers (e.g., “I have not signed a noncompetition agreement with any former employer that is currently in effect”; “I agree that I have not provided any information that would cause employer to know, believe or suspect that an enforceable noncompetition or nondisclosure agreement exists between myself and any other person or entity”; etc.).
While a deep pool of potential employees is a net positive for anybody, employers need to be careful and consult with a qualified lawyer to develop a game plan to hire good employees while avoiding those who could embroil them in costly litigation as result of hidden traps.