5 Things Your Company Should Consider When Deciding Whether to Enforce a Covenant Not To Compete

Should your company enforce a non-compete provision when an employee leaves to work for a competitor?  I can’t really answer that question beyond saying in typical attorney fashion that, “It depends.”  What I can do is discuss some of the factors your company should consider when making that decision and some of the questions it should answer.

Importance of the Interest Your Company Seeks to Protect

This is the single most important factor.  The purpose of a covenant not to compete or any other restrictive covenant is to protect a legitimate business interest. The most common scenario involves preventing the disclosure of confidential or proprietary information.

So how important is the information your company is concerned about?  Is there a significant risk of exposure?  Did the former employee actually have access to the types of information your company seeks to protect?  Is that information included within the scope of the non-compete provision?

The Employee’s Position With and Value To His New Employer.

What is the former employee’s position at his new employer?  What are his duties in that position? Is there any connection between the types of information the employee had access to at your company and the duties or responsibilities of his new position?  Is there a likelihood that the former employee will use your company’s confidential information in performing his duties for his new employer?

And how valuable is the employee (and the position) to his new employer?  The answer to this question is important because it will provide some insight into how the new employer may respond to an attempt to enforce a non-compete agreement.  If the employee is critical to the company’s business then his new employer is more likely to defend his position.  On the other hand, some lower level positions may not be worth the effort and expense of litigation.

Effects of Not Enforcing the Non-Compete Agreement.

This is another important factor.  What happens if you do not enforce the non-compete agreement?  Employees gossip.  No doubt they will notice if an employee leaves to work for a competitor and your company does not enforce the non-compete agreement.  Not enforcing the non-compete provision may cause other employees to ignore it under the assumption that your company will not enforce it.

The decision to not enforce a non-compete may also come up in subsequent litigation.  If another employee with access to similar information leaves for a similar position with a new company, then your company may have difficulty enforcing the non-compete agreement if you did not try to enforce it the first time.  At the very least you will likely have to answer the question of why you chose not to enforce the non-compete in the first instance.

Impact of Litigation On Business Operations.

You should always consider the impact of potential litigation on your company.  Understand that the former employee’s managers and other high-level employees could become witnesses during the litigation.  Have you given thought about the disruption to your company’s business that would be caused by them having to take the time to prepare for and sit through depositions?  What about testifying at trial?  Have you considered the type of questions your managers and employees may have to answer during a deposition?  Could you end up exposing more information to the other party through litigation than you risk by not enforcing the non-compete provision?

History Between Your Company and the New Employer.

What about the history between your company and the new employer?  Have you hired any employees from the new employer recently?  Were they subject to a non-compete agreement at the time?  Are there any other pending disputes between the companies?

It is certainly worth considering whether an attempt to enforce this non-compete provision could lead to more complicated litigation.

This list is by no means exhaustive and every circumstance will require its own evaluation, but hopefully this provides you with some guidance on the factors your company should consider when deciding whether or not to enforce a non-compete agreement.

Notices of Forfeiture of Right to Transact Business Mailing this Week

From the Comptroller’s Office:

On Aug. 8, the Comptroller will mail the “Texas Notice of Intent to Forfeit Right to Transact Business” form to taxable entities that failed to file the 2014 Franchise Tax report that was due May 15, 2014, if an extension of time to file was not requested and granted. The Comptroller will also send this notice to companies that failed to file a complete report or to pay the full amount due.

By law, the right to transact business cannot be forfeited before 45 days from the date the Comptroller mails the notice. During this period, when the company has received the notice of intent to forfeit, but the forfeiture has not yet occurred, the company’s status on the Comptroller’s Taxable Entity Search will remain as “active.”

http://www.window.state.tx.us/taxinfo/taxpnw/tpn2014/tpn1408.html

 

It’s time to confirm your company filed its annual franchise tax reports and keep an eye on your mailbox.  The excerpt above is from the Comptroller’s office which is mailing these notices this week.   If you receive a notice of intent to forfeit your company’s right to transact business you should take action immediately.

After the 45 day period the Comptroller’s may forfeit a taxable entity’s right to transact business.  This creates personal liability for each director, officer, or manager of the taxable entity for any debts incurred by the taxable entity after the date of forfeiture.  Obviously this is a scenario your company will want to avoid.

Cybersecurity: Understanding a Texas Business’s Exposure to Liability (Part I)

With a number of recent cyber security events making the headlines, businesses across Texas are wondering what type of liability they could be subject to if such an event were to strike their business as well as what type of liability they may be subject to for inappropriately accessing electronic data.  This is the first in a two-part series that will help answer those questions.

In general, there are three potential types of liability that a Texas business is exposed to under either of these scenarios: statutory liability; contractual liability; and tort liability.  This post will focus on statutory liability with a subsequent post addressing contractual and tort liability issues.

There are both federal and state statutes regulating access to and use of electronic information.

The Federal Cybersecurity Laws

At the federal level, business owners and managers should be familiar with the Stored Communications Act (“SCA”), the Electronic Communications and Privacy Act (“ECPA”), as well as the Computer Fraud and Abuse Act (“CFAA”).

Stored Communications Act.  The Stored Communications Act prohibits an individual from willfully or intentionally accessing, without authorization, a facility through which an electronic communication services is provided or exceeding its authority to access that facility and thereby obtaining, altering, or preventing authorized access to an electronic communication while it is in electronic storage in such system.  The SCA most often impacts employers when accessing communications stored on company owned electronic devices or third-party service providers if the company is not a party to that communication.  For example, reading an employees personal email stored on his or her company issued phone.  There is a developing body of case law interpreting the SCA that identifies the circumstances under which  an employer may access these (and other) types of communications on an electronic device or a service provider’s server when the company is not a party to the communication.

Electronic Communications and Privacy Act. The Electronic Communications and Privacy Act prohibits the interception of electronic communications as well as the use or disclosure of intercepted communications without authorization.  The  ECPA also impacts employers attempting to monitor or investigate the activities of their employees.  This ECPA differs from the SCA in that it prohibits the interception of an electronic communication while the SCA prohibits accessing a communication in storage.  Companies should consider the ECPA’s prohibitions any time it considers implementing a monitoring program that will intercept emails or other electronic communications.

Computer Fraud and Abuse Act.  The Computer Fraud and Abuse Act makes the unauthorized access of a private computer system a criminal offense and allows an individual (or business) affected by such activity to bring a private cause of action.  For employers, the CFAA most often comes into play when an employee or former employee is found to have accessed information on the company’s computer system without authorization.  The CFAA clearly applies to the activities of former employees or other outsiders, however, the interpretation and application of the CFAA to current employees has varied widely across federal circuits.  In Texas, the focus in determining whether the CFAA applies to an employee’s activity generally looks at whether the access violated the company’s terms of use policies and whether the employee knew of that policy.

Texas Cybersecurity Law

At the state level, the Texas Business & Commerce Code imposes a duty upon businesses to implement reasonable procedures, including taking any appropriate corrective action, to protect the unlawful use or disclosure of any sensitive personal information collected or maintained by a company in the regular course of business.  This applies to information collected or maintained about customers as well as employees.  The TBCC also mandates specific procedures for the destruction of records that contain sensitive personal information.

The TBCC imposes a number of notification requirements and procedures upon businesses that are subject to a breach of system security if the breach is reasonably believed to have resulted in the disclosure of sensitive personal information.  Texas recently expanded the breach notification requirements to include notification to any individual whose information was potentially exposed, regardless of that person’s state of residency.

 

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