Proving the employee received confidential information is not the only way to enforce a non-compete
A lawyer called me for some free advice on non-competes. It came down to a question of how to make an employee non-compete enforceable when the information the employee would receive was not all that confidential. This presents a problem because, as I explained here, the typical way to make a Texas non-compete enforceable is to tie it to an agreement to provide the employee confidential information.
This experience presented some interesting questions. First, how am I going to maintain a profitable law practice by giving out free advice? Maybe I can follow the philosophy of First CitiWide Change Bank, a bank that specializes in making change: “All the time, our customers ask us, ‘How do you make money doing this?’ The answer is simple: Volume.”
Second, what is the best way to make an employee non-compete enforceable in Texas other than a confidentiality agreement? The answer is a non-compete tied to specialized training, the important but sometimes neglected stepchild of the typical non-compete tied to a confidentiality agreement.
Neurodiagnostic Tex v. Pierce found a non-compete enforceable where the employee received specialized training
Neurodiagnostic Tex v. Pierce shows that an employer’s agreement to provide an employee specialized training—like an agreement to provide confidential information—can also be used to make a non-compete enforceable.
The Tyler Court of Appeals held in Neurodiagnostic that an agreement to provide specialized training met the statutory requirement of an “otherwise enforceable agreement” where:
1. The employer actually provided the promised training (paying for in-house and third party training).
2. There was evidence that the training was specialized (the employee obtained two new board certifications relating to surgical assistance).
506 S.W.3d 153, 164-65 (Tex. App.—Tyler 2016, no pet.).
This holding should not be controversial. Texas courts have already cited specialized training as an example of an interest worthy of protection by a non-compete. See, e.g., Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 655 (Tex. 2006) (non-compete became enforceable once the employer provided the promised confidential information and specialized training). But tying enforceability of a non-compete to specialized training raises some unanswered questions.
Questions raised by tying a non-compete to specialized training
1. Can an agreement to provide ordinary training support a non-compete, or does it have to be specialized training? A non-compete must be “designed to enforce the employee’s consideration or return promise in the agreement.” The Neurodiagnostic court reasoned that there was a “clear nexus” between investing in the specialized training and preventing the employee from using the specialized training to benefit a subsequent employer. But if the training is not specialized, enforcing the non-compete would arguably offend the longstanding Texas principle that an employee is free to use her “general know-how” in competing with a former employer. See, e.g., Evan’s World Travel, Inc. v. Adams, 978 S.W.2d 225, 231 (Tex. App.—Texarkana 1998, no pet.) (“General skills and knowledge developed through the course of employment are not the type of interest which justifies protection under a restrictive covenant”).
2. Is it enough for the employer simply to recite in the agreement that the training is specialized? Especially after Neurodiagnostic, smart lawyers who draft non-competes will include a statement that the training is specialized. Is that enough, or does the judge need to look behind the agreement at the facts? There was sufficient evidence in Neurodiagnostic that the training was specialized, so the court did not have to confront this issue.
3. Does it matter whether the training was actually specialized? The employer will always think the training is “specialized,” and the agreement will usually say the training is specialized, but does it matter what the evidence shows? The Neurodiagnostic opinion implies the answer is yes: The reason the court found the employer’s interest “worthy of protection” was that there was at least some evidence that the training really was specialized.
4. Who decides whether the evidence proves the training was specialized, the judge or the jury? If there is conflicting evidence, does the issue go to the jury? These procedural questions get less attention, but as a lawyer who litigates non-competes, I find them the most interesting. In Neurodiagnostic, it was undisputed that the employee received certain training and certifications, and the Court of Appeals found that the evidence conclusively satisfied the “otherwise enforceable agreement” requirement. But what if the evidence had been conflicting? If the trial court denies summary judgment on enforceability of the non-compete, doesn’t the underlying fact issue need to be submitted to the jury?
These questions about specialized training are, of course, analogous to the questions that arise when a non-compete is tied to a confidentiality agreement. Is it conclusive that the agreement recites that the information is confidential? Does it matter whether the information was actually confidential? Can this present a fact issue that must go to the jury?
At press time, Texas courts had not definitively answered these questions.
Employers: enforceability is nice, but don’t forget damages
Enforceability is not the only issue in non-compete litigation. Even if the non-compete is enforceable, and even if the employee violates the non-compete, the employer suing to enforce the non-compete still has to prove the breach of the non-compete caused damages. As in most kinds of litigation, there is a danger that proof of damages can become an afterthought in non-compete litigation.
In Neurodiagnostic, the court found there was no evidence that the employee (Pierce) and the second employer (Synergy) caused any damage to the first employer (Neurodiagnostic) because:
- The mere fact that Synergy hired Pierce and competed with Neurodiagnostic was not evidence of damages, where the evidence did not show that Pierce was the technician on any case Neurodiagnostic lost.
- Evidence of the profits that Synergy made was not evidence that the breach caused damage to Neurodiagnostic.
Neurodiagnostic, 506 S.W.3d at 171.
Wait a minute, you say. What was the point of the court spending all that time deciding whether the non-compete was enforceable, if there was no evidence of damages? Why didn’t the court just cut to the chase and say “no damages, case dismissed”?
Keep in mind that damages are not the only remedy for breach of a non-compete. The employer can also obtain an injunction barring the employee from competing. So, the fact that there was no evidence of damages was not the end of the story. The Court of Appeals sent the case back to the trial court to determine the reasonable scope of the non-compete and whether to enter an injunction.
So what does Neurodiagnostic teach Texas lawyers who handle non-compete litigation? If you represent the employer trying to enforce a non-compete that is tied to confidential information or specialized training, be sure to find and offer evidence that:
- The employer actually provided the promised confidential information and/or specialized training to the employee
- The information was actually confidential, or the training was actually specialized;
- The employee competed with the employer and caused damage by taking business that would have gone to the employer.
If you want some ideas on how to prove (or disprove) these points, give me a call. I may even tell you for free.
Zach Wolfe (firstname.lastname@example.org) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.