Monday, May 18, 2015

Copyrights, Trade Secrets & Protecting your IT Space


You are a business owner, you have vested time and energy into your R&D sector and you serendipitously discover that your team of engineers have developed what they think will be the next Linkedin.  What do you do to protect this new software technology and maintain a competitive edge against potential market infringers?

Software protection is an evolving area of law, namely because the market has changed so drastically in the past thirty years.  Software starts with a computer programmer transforming an idea into an algorithm and then turning this algorithm into a functional program.  In the prehistoric days of computing, these algorithms were incorporated into machine code, commonly referred to as object code, nonsensical to the human eye.  This early software was tied to hardware and was unable to exist independently so the need for software protection was unnecessary… think IBM. 

However, sometime in the 1970’s software and hardware were uncoupled and each developed independently of the other.  With the advent of the personal computer less than ten years later, the demand for portable and compact software grew exponentially where programs could be loaded from a floppy disk. Remember those? 

After years of evolution, the computer programs began to walk and talk and higher order programming languages, called source code, developed.   Source code provided programmers an easier way read and write software but did not replace object code.  Source code must still be translated by a compiler into object code for a computer to run the program. So now there are three components of software: algorithms, source code and object code to protect.   

 

The computer age emerged way too rapidly for the law to adapt and soon important battles between Word and Word Perfect, Internet Explorer and Netscape, Microsoft and Apple were waged, carving out exceptions and extensions to current IP protections to encompass the computer generation. 

Today, computer programs are very unique creatures and often demand all three areas of intellectual property, patent, copyright and trade secret, working in unison to best protect the owner from future imitators and infringers. Trade secrets were the initial method used to protect software and are still commonly used, but have the adverse effect of locking programmers down.  While copyright protection is the most common and utilized way to protect software, the functional implications of the software are patentable subject matter as well.  So what do you do when you need to protect your software?  The best option is to start with registering the code for a copyright.  If there are unique functional components in the code, the application may be protected by applying for a patent as well.  However, registering a copyright is much easier and a good place to begin the process as it provides protection for all three components of software. 

The traditional quid pro quo of copyright of publication for protection does not apply to software.  While the latest Erik Larson thriller obtains protection after registering and presenting a best and complete version of his work to be publically available at the Library of Congress, publishing the complete version of source code would be against the author’s intent.   

The method for applying for a protecting computer programs starts with the programmer to format a complete version of the best edition of a “closed source model” and then submit a limited disclosure to the Library of Congress.  The limited disclosure requires “identifying portions” of the source code be submitted, which is usually the first and last twenty-five pages.  According to the Code of Federal Regulations[1], the author or programmer may block out work that contains trade secret information within the submitted pages so long as the blocked out portions be proportionally less than the disclosed portions and reveals an appreciable amount of source code.  These terms “proportionally” and “appreciable” were intentionally written to include variations on what is considered an “identifiable portion.” Therefore, the source code must be carefully reviewed, to ensure sufficient disclosure to reap full copyright protection without disclosing so much as to compromise secret components.  In order to best protect your software, you will need to consult with an attorney familiar with these limited disclosure requirements.


 



[1] 37 C.F.R. 202.20

Friday, May 8, 2015

A Few Start-up Mistakes: Five of the Biggest Whammies to Address and to Avoid


Business owners are successful by implementing their ideas through hard work, while finding ways to save money. This is how the smart, the diligent and the prudent make money and build enduring wealth. However, when a starting business feels undercapitalized and attempts to be penny wise, unexpected costs can destroy everything that has been built, and invested. 

A business owner must put basic legal planning into his or her business plan, and have this planning fit the goals and needs of the business.  Too many businesses are crippled, or fail, by not thinking through their relationships and operations in terms of the legal structures that will govern them.  No matter where a business is, or what it does, there are very large risks that it can avoid or significantly reduce at very low expenditure of time and money. 

In two decades of representing businesses, we have seen hundreds of the same mistakes. Too many strong businesses and their leaders seek our help when it is too late, and there is an expensive lawsuit that compromises the resources of a successful business.  Here are just a few of the biggest mistakes for a business to consider:

Mistake Number 1:  Thinking the Honeymoon will Last Forever

Your partners are your friends, your family members, or other people whom you trust, respect, or even love. Nothing will ever come between you.  No.  Eventually you will disagree, and your disagreement will probably involve money or operations.  Usually this happens when a business has crossed its first hurdles and has become stable and successful.  Other times people with longstanding relationships have fallings out. Work (and hope) for the best, but how do you prepare for the worst?  Start by avoiding mistake number two.

Mistake Number 2:  Expecting Your Business to Fit Any Mold or Not Incorporating Your Business

Articles of incorporation, certificates of formation…just a form and a filing fee?  No.  It is the power structure of your business’ life. There are all types of business structures that can be used protect the most knowledgeable, active, or financially at-risk, investor or simply the investor who is most prepared for the worst.  What is your position?  What are the positions of your colleagues and teammates? How do you establish the rules and expectations from the beginning and provide a means to manage the problems that will arise?  Whether you should have protection in place to keep the passive investor passive – or to protect that investors’ right to be active – the business owner must think through the power structure of the business.

At a more basic level, some business owners are slow to incorporate or never incorporate.  Your corporate entity is a separate person under the law.  This legal fiction allows you and other investors to take risks and to grow.  It protects you from liability, and from losing your personal property in litigation – property that has nothing to do with your business, except that it is yours. Most business owners know that they should incorporate. A surprising number do not incorporate until after they have started their business, and a few face the perils of never incorporating at all.

Mistake Number 3:  Not Protecting Your Rights with Key Vendors and Suppliers

You can build and maintain the best relationships in every vertical.  You can negotiate anything.  Get it in writing.  Get an expert to review or draft your contracts to make sure that the words you choose have the effect that you think they have. Consider all of your procedures in this contracting process, in terms of all parties’ expectations and risks, just as you would value and consider customer service and loyalty. You will have a better deal, with the relationship underlying the deal protected, while knowing that you are protected if (or when) there is a serious problem.

Mistake Number 4:  Cutting Corners Defining Employee Expectations and Responsibilities

The cliché is usually true. Your people are your best assets.  How do you protect your business from unnecessary hardships caused by the mistakes, habits or poor choices of your employees?  The short answer is to have an employee handbook crafted to address your expectations in a way that will protect you if (or when) there is a serious dispute with an employee. 

For key employees, whom you may choose not to be at-will employees, consider all aspects of the employee’s roles and responsibilities in the employment contract. The pre-printed contracts widely available will not protect your specific needs. Get an expert to review or draft your contracts to make sure that it fits the contingencies you consider (or have not considered).

For all employees, define their roles and responsibilities in writing. This can help to protect you from claims that you have underpaid employees under the federal employment law. Discuss these roles and responsibilities with an expert to ensure that you have minimized liability against expensive wage and hour lawsuits that can bankrupt a company.

Do not call employees independent contractors unless they are truly independent. Otherwise, the IRS, the Department of Labor, and other powerful agencies will have an added tool to apply against your business through rules and regulations that govern or rely upon employer - employee relationships. 

Mistake Number 5: Not Protecting your Trade Secrets and Other Intellectual Property Rights

Your business’ procedures make it efficient and unique.  Every day, the most basic collection of ideas and information provide an edge that allows a business to surpass its competition.  Every employment contract and every employee handbook must protect your business’ manners and means of conducting its business.  Texas law is very complex in protecting these rights, and in recent years has shifted to protect businesses that are prepared to take advantage of it.  Consult an expert.

An amazing number of businesses never protect their trademarks and other important pieces of intellectual property that allow a business to stand out and grow.  Protect your business early by simply following the procedures that protect your name and its likeness.

The Vethan Law Firm, P.C.

At the Vethan Law Firm, P.C. we are focused on businesses.  We work only with businesses and business people to protect their needs.  Most of our clients seek our help early.  Most of our time, however, is spent helping businesses and business owners who did not prepare for avoidable problems, and face litigation.  From our offices in Houston and San Antonio, we help all types businesses from all over the United States and countries across the world save money and grow.

We serve our business clientele by asking the right questions and by aggressively attacking the challenges posed to business owners.

We look forward to meeting with you, and discussing how we can help your business.  Visit our website at www.vethanlaw.com to learn more about how we can assist you today.

Wednesday, April 22, 2015

GETTING TEXAS CONTRACTORS PAID ON SLOW PROJECTS


PART 1:  The Mechanic’s Lien
At the construction management meeting, the General Contractor tells everyone that the project is behind schedule, and penalty provisions may apply.  Translation:  you will not get paid on time.
The bane of every person in the contracting business is getting paid.  That simple task – payment for labor and services rendered – requires contractors, subs, and owners to navigate constant and tedious paperwork.  The stress is built into how the process works.  First, the contractor must determine where it is in the scope of work.  Is the work done?  Has the contractor been terminated, or is it merely a delay in payment?  Does the General / Owner have a right to delay payment – as in the case of an unsigned work order, etc.  - or require an outside party to rectify problems with the work rendered by the contractor.  Next, the contractor must determine if there is a legal basis to preserve the right to payment.  If there is a legal basis, is a lien appropriate, and should you file for arbitration?
The first discussion in this series is the Mechanic and Materialman’s Lien – or the M  & M Lien.
Mechanic and Materialman’s Lien- Getting Security for Your Work
Contractors who provide labor and materials to worksites in Texas are entitled to powerful lien positions that provide security for their work. The Texas Constitution and Texas Property Code both provide remedies for a subcontractor not being paid for their work. Because contractors and materialman’s work occurs prior to mortgage deeds of trust, even small debts hold great leverage over owners and general contractors. However, failure to know how to perfect these liens leaves many contractors out in the cold.
 Under Texas law there are three categories of contractors entitled to liens. The first step any contractor needs to take is to determine where they fit in the chain.
Original Contractor - An original contractor, or “General Contractor,” is a person contracting directly with a property owner. This also includes anyone acting as an agent for a property owner (such as an employee or someone acting on behalf of the property owner). Any trade or contractor can be considered an Original Contractor as long as they are directly contracting with the owner of the property.
A subcontractor is a person who furnishes labor or materials to fulfill an obligation to an Original Contractor.
First Tier Subcontractors - There are two tiers of contractors under Texas law. A First Tier subcontractor is a subcontractor that has an agreement with an Original Contractor but not the Property Owner. An electrician hired by the General Contractor is an easy example of this.
Second Tier Subcontractors -A Second Tier subcontractor does not have an agreement directly with either the General Contractor or the Property Owner, such as a material supplier or tradesman hired by a First Tier Subcontractor. An easy example of this is a subcontractor hired by the concrete subcontractor to place the reinforcement for the foundation.
All three categories are entitled to liens under Texas Law, however, the law requires that additional notices be sent by First and Second Tier subcontractors.
PERFECTING A LIEN - NOTICE
Original Contractor – An Original Contractor may file a Mechanic’s and Materialman’s lien without sending any prior notice to the Property Owner. This is because there is a direct contract between the property owner and the Original Contractor. However, once a lien is filed, an Original Contractor must send notice of the filing of the lien within a very small window.
First Tier Subcontractor – A First Tier subcontractor is required to send what is known as the “third month notice” or the “fund trapping” notice before a lien can be perfected. The letter must be sent by certified mail, return receipt requested, to both the Property Owner and the Original Contractor related to unpaid amounts. The letter must be send by the 15th day of the third calendar month “following each month in which labor was performed or material delivered.”
A copy of the invoice or billing statement is considered sufficient under the Property Code, however, it is recommended that the owner be specifically notified of the terms of the Texas Property Code 53.056 which provides if the claim remains unpaid the Property Owner may be personally liable and the property is subject to a lien unless the Property owner withholds payments from the Original Contractor for payment of the claim or the claim is otherwise paid or settled.
The sooner a “funds trapping” notice is received by a property owner, the more the Property Owner will be personally liable if they do not withhold such funds from the Original Contractor.
Second Tier Subcontractor – A Second Tier subcontractor is required to send one additional notice known as the “second month notice” to the Original Contractor no later than the 15th day of the second month “following each month in which the Second Tier subcontractor has supplied labor or materials.” This notice puts the Original Contractor on notice of the Second Tier subcontractor’s claim.
Additionally, the same “third month” and “fund trapping notice” as stated above for First Tier subcontractors must still be sent by the 15th day of the third calendar month to the Original Contractor and Property Owner.
Failure to send any notice as required under Texas law will mean that a subcontractor will lose the ability to perfect a lien and gain security for the work performed.
FILING THE LIEN
Once any required notice has been sent as described above, the next step is to perfect a Mechanic’s and Materialman’s Lien. To properly perfect the Lien a claimant must file an Affidavit in the property records of the county where the property is located “not later than the 15th day of the fourth calendar month after: the month in which the original contract was material breach or terminated, or last day of the month in which the original contract is completed, finally settled, or abandoned.”
Once a claimant perfects their lien, a copy of the affidavit must be sent certified or registered mail to the Property Owner and Original Contractor (if applicable) at their last known address no later than five (5) calendar days after the affidavit is filed in the property records. It is generally recommended that notice of the lien be sent on the same day so that the lien is filed.
The above deadlines refer to commercial projects and the deadlines related to residential properties are generally shortened. It is important that if you perform work on a property, either as a general contractor or subcontractor, that you get security for your work. While the steps to perfecting a lien are not difficult, the deadlines are unforgiving.
Do not delay. If you are faced with a property owner or General Contractor who refuses to pay for services rendered, we hope you will speak with a construction lawyer at the Vethan Law Firm, PC to help secure your rights.
 
To learn more about how the Vethan Law Firm, P.C. can assist you visit us at www.texasbizlaw.com

Monday, February 23, 2015

Customer Demanded Discounts may be a Litigation Set Up

Whether it is because of your customer's current financial constraints or a claim that your business has delivered a nonconforming product or made a mistake in the item delivered, businesses are facing increasing requests to discount outstanding invoices. This may not be an issue for small items, but for large ticket items, this request directly affects the business’s bottom line. In this predicament, a business should consult with its business lawyer to determine whether a concession is warranted and, if so, how it should be structured.
 
When structuring any agreements, either upstream or downstream, with vendors or clients, it is imperative to work with your Houston business attorneys to ensure that any concession resolves every dispute between the parties.

Many times, a concession is requested only for financial reasons. At other times, a concession is requested or sought because issues have been raised about the quality or conformity of the product. Many businesses, on a large ticket item, will allow for a reduction in price to keep a customer happy without consulting with their business lawyers. The problem with this quick fix method is that there may have been underlying disputes that led to a request for the concession or discount in the first place.

Without obtaining a full, fair, and final resolution of the dispute, a business may very well wind up paying for the same mistake several times. For example, the business would initially pay because it has allowed for a discount on its invoice. It pays again if the customer decides to initiate a lawsuit over the mistake or non-conformity; specifically in the form of paying attorneys to defend against the claim. Third, if a business is found liable or settles with its customer over the alleged a mistake or nonconformity, the business winds up paying, in cash or credit, for its mistake or nonconformity. Fourth, if the claim is brought as a breach of contract or a Deceptive Trade Practices Act (“DTPA”) claim, the business may also be forced to pay its customer’s attorney fees and costs, and may be subject to a trebling of damages under the DTPA.

A Houston business lawyer, such as those in the Vethan Law Firm, PC's Business Litigation Group, will be able to advise businesses about  claims for concession and explore the potential downside of such claims. In any event, if a business decides to settle out a dispute early, a business lawyer should be structuring a resolution that protects the business against further liability.

It's an old but true adage that an ounce of prevention is worth a pound of cure. When faced with a request from your customer for a discount due to a mistake or nonconformity in a deliverable, we hope you speak with a business lawyer, such as those in the Vethan Law Firm, PC's business litigation group in Houston.

To learn more about our law firm, visit www.vethanlaw.com
 

Friday, December 19, 2014

Gone to Texas


During the first half of the nineteenth century, “Gone to Texas” was a popular phrase used by Americans immigrating to Texas for economic opportunity and hope to make a fortune.  As the Americans came west, en masse, they brought money to invest, and built wealth that circulated to the furthest Texas frontiers.

During the first half of the twenty first century, Texas remains a place for economic opportunity and hope to make a fortune. Today, Texas is a place where the rule of law allows anyone to manifest their greatest potential and fulfill their dreams. Texas attracts business by maintaining predictable regulation, an expanding consumer base, low tax rates, and a legal system that allows the mitigation of legal risks. Anybody from anywhere can come to Texas and seek their fortune.

Texas has the highest volume and concentration of new business investment in the United States, and maintains a rate of economic growth of over twice the national average.  En masse, Americans are coming from California and every other U.S. state to enjoy the business-friendly environment to build businesses and new ideas, to move up in their careers, or simply to get a job or to get out of debt. It is not just Americans flooding Texas with wealth.  Texas has more immigrants from Asia and Latin America starting businesses than any other state.  Texas has more individuals receiving investors’ visas than any other state.

Mexico is no exception. Texas has a long history of being attractive to Mexican investors due to the overlap of physical infrastructure with Mexico and established cultural ties among hundreds of thousands of families and businesses.  Today, recent legal and tax reforms in Mexico are leaving huge amounts of money uninvested in the Mexican economy.  As the regulations to implement reforms are slowly established, Mexican corporations and business owners are establishing growth strategies.  Much of the money has gone to Texas, and is generating new wealth.

Despite the welcoming business environment of the State of Texas, there are pitfalls, and very expensive costs for unwary businesses without corporate counsel. Fortunately, a business can avoid substantial risks and costs, and effectively compete with proper planning catered to its operations, relationships and goals. However, commercial and corporate governance is a fairly specialized area, and new businesses must select and work with business attorneys who are experienced in commercial, employment and intellectual property law matters.

At the Vethan Law Firm, we are business lawyers who serve entrepreneurs and growing businesses from dozens of states of the United States and foreign countries, from Florida to California, from Pakistan to Peru, and from across Mexico.  The Vethan Law Firm, P.C., is an AV Preeminent rated law firm, is within the top two percent (2%) of law firms in the United States, experienced in the boardroom and the courtroom, and with regulatory agencies. 

With officers in Houston and San Antonio, and licenses in Texas, California and North Dakota, the Vethan Law firm serves Texas’ high technology sector and service industries, businesses serving the Eagleford Shale, and the historic business centers in the energy industry.  In any industry, a business’ or entrepreneur’s first steps into Texas should be carefully measured, lest the phrase “Gone to Texas” lose its popularity.  At the Vethan Law Firm we welcome the opportunity to serve businesses as they expand or relocate to Texas.  It is our pride and our passion.

¡Bienvenidos a todos! ¡Bienvenidos a Texas! Welcome to everyone! Welcome to Texas!
 
And don't forget to visit us at www.vethanlaw.com

Tuesday, November 25, 2014

Sovereign Economic Espionage and Why Dr. Strangelove was Prescient

In addressing secrets, Dr. Strangelove exclaimed that “the whole point of a Doomsday Machine is lost if you keep it a “secret!”  Why don’t you tell the world, eh?” to which Ambassador de Sadesky replied “it was to be announced at the Party Congress on Monday.  As you know, the Premier loves surprises.” 

Secrets, of a political or corporate nature are of value, and to be guarded by its owners.  What happens, however, when American companies start developing intellectual property in parts of the world that treats secrets as party favors, to be liberally distributed?

Losing valuable intellectual capital to the competition is akin to facing a doomsday scenario for most American businesses.  What are the weapons your business has to keep? What does it develop and how does it keep out those who would take it?  What happens if the theft of industrial trade secrets is tacitly approved by a country which has state owned companies in the same business?

In 1996 the United States Legislature enacted the Economic Espionage Act. Economic espionage is (1) whoever knowingly performs targeting or acquisition of trade secrets to (2) knowingly benefit any foreign government, foreign instrumentality, or foreign agent. The teeth of the Act make stealing economic information for the benefit of another state a federal crime punishable by up to 10 years confinement. In addition to criminal liability, the Department of Justice can initiate a civil action to enjoin the perpetrators from disclosing the trade secrets. Unmentioned in the Act is compensation for the victim - American business.

The mention of “agents” or “espionage” gives off the aroma of a Tom Clancy novel, but economic espionage is far from fiction. A recent study estimated that such economic espionage accounted for the loss of between one and six million jobs and billions of American dollars. Predictably, China and Russia have been the most egregious when it comes to economic espionage; their “agents” having siphoned off protected information from GM, Intel, Lockheed Martin, and Hughes Aircraft to name a few. This stolen information is not only comprised of new developments within an industry, but these agents have targeted customer data, development data, pricing schemes, marketing plans, production costs, and sales strategies.

Despite the steps that the U.S. government has taken to protect American business, the hounds of civil justice remain leashed. Domestically, the civil courts redress wrongs like the theft and misappropriation of trade secrets committed by individuals within U.S. borders. Unfortunately, for many years foreign states have operated with relative impunity while gorging themselves on our economic viability. Sadly, foreign relations have trumped economic security.

There could be a thin glimmer of hope for American business. A New York Federal Court has claimed jurisdiction over a lawsuit seeking to hold a state sponsor of terrorism civilly responsible for its wrongful acts. In Sokolow v. PLO, the Palestinian Liberation Organization is being sued in the amount of 3 billion dollars for the wrongful death of numerous Israeli and United States citizens that were killed or injured as a result of PLO terrorist activities during the Second Intifada. The Anti-terrorism Act of 1991 made this lawsuit possible and imposes civil liability on state sponsors of terrorism.

Although this case has not come to a final judgment, this case could be ushering in a new era. One that holds foreign states responsible for the damages suffered by individuals, or companies, as a result of a state’s wrongful act. American businesses can only hope for a similar bill that would impose civil liability on countries responsible for economic espionage. Until that day, American businesses remain vulnerable.

To end with another Dr. Strangelove reference; Colonel “Bat” Guano, in responding to an order to shoot the lock off the Coca Cola machine to retrieve some change to call the President, reflects that “Okay. I’m gonna get your money for ya.  But if you don’t get the President of the United States on that phone, . . . you’re gonna have to answer to the Coca-Cola company.”
 
Don't forget to visit our website at www.vethanlaw.com

 

Monday, November 17, 2014

Simplifying Non-Compete Agreements (Three Simple Rules for Drafting Non-Compete Agreements)


This blog post started as a simple idea: distill drafting a valid non-competition agreement down to three simple rules. “Simplifying” Texas non-compete law however is akin to domesticating a rampaging beast.

Few areas of Texas law have as turbulent a history as the enforcement of covenants not to compete in employment relationships. All too often employers find themselves with an unenforceable non-compete agreement on their hands, and no protection from competition by former trusted employees who know their former employer’s secrets. And all too often, the primary reason employers find themselves in this situation is because they tried to overreach when drafting the non-competition agreement – by either making restrictions last too long, cover too much territory, or apply to too many competing activities.

Every lawyer who practices in this area should know the magic language enshrined in the Texas Covenants Not to Compete Act:

… a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

Tex. Bus. & Com. Code Ann. § 15.50(a).

And while the courts and legislature have struggled over the meaning of that language ever since the Act went into effect in 1989, ultimately, it boils down to three simple rules:

First, the covenant not to compete must part of or related to an enforceable agreement.

Second, the restrictions placed on the employee’s ability to compete must be reasonable.

Third, the restrictions must not be greater than necessary to protect the employer’s business interest.

First Rule. If the employer has a written employment contract with his employee, the written contract may include the covenant not to compete. In the case of a written contract, the covenant is “part of” an “otherwise enforceable agreement.” If there is no written employment contract, then a separate written covenant not to compete will do so long as the covenant is related to employment. The written non-compete is “ancillary to” an otherwise enforceable agreement.

But, there must be a little something extra, something given by the employer in exchange for the employee’s promise not to compete. The promise of employment standing alone, whether written or not, is never enough to make a covenant not to compete valid. There must be something more. Courts have held that a promise to provide the employee with access to confidential information, or specialized training, is enough to make a covenant not to compete valid. The confidential information or specialized training must relate to the employee’s work. That is because what the employer is seeking to protect—its confidential information or specialized training it provides—is reasonably related to an interest worthy of protection. Stock options have also been held to be adequate to support a covenant not to compete, because they are related to a business’ interest in protecting its goodwill.  However, a promise merely of extra money, such as a raise or bonus, is most likely not enough to make a covenant not to compete valid.

When drafting a covenant not to compete, it is not necessary that it state that it is ancillary to or part of an otherwise enforceable agreement, but the covenant should state what consideration, such as access to confidential information or specialized training, or stock or equity interest, is being given in exchange for the employee’s promise not to compete, and further that the consideration is related to the employer’s business interests and goodwill.

Rule 2. When it comes to restrictions on an employee’s ability to compete, the restrictions must be reasonable. Reasonable as to how long promise not to compete will last, where the promise not shall be effective, and as to what the promise prevents the employee from doing.

How Long? Texas courts generally have no trouble enforcing covenants not to compete that last 6-months, one year or even two years post-employment.  The longer a covenant not to compete lasts post-employment, however, the more closely a court will scrutinize it. Though non-competes of three and five years have been upheld, unless a business has a compelling reason for a covenant not to compete to last for longer than one or two years, it is best to play it safe and stay within the latter time frames.

Where? The geographic scope of a covenant not to compete must also be reasonable. A restriction that prohibits a national sales representative from competing anywhere in the United States stands a good chance of being found to be reasonable.  Likewise, a restriction that prohibits a sales representative working only in Harris County, Texas from competing in Harris County, Texas will also most likely be held to be reasonable.  

However, a restriction that prohibits a sales representative working only in Harris County from competing anywhere in the United States stands a high chance of being found to unreasonable because the salesman did not work anywhere other than in Harris County. Additionally, a restriction that prohibits that same Harris County salesman from competing anywhere in Texas may also be held to be unreasonable.  On the other hand, restricting that salesman from competing in Harris and adjacent counties stands a much better chance of being found to be reasonable. Additionally, geographic restrictions that prohibit an employee from working within ten, fifteen, or twenty-five miles of an employer’s place of business are generally upheld by Texas courts and are a viable alternative to count-wide restrictions.  

Another viable alternative is a prohibition on soliciting customers of the employer for whom the employee has done work. Several Texas courts have rules such a restriction is an acceptable alternative to a geographic restriction because the customers can be identified. General rules of thumb:

1.      Restricted to a limited area, e.g. 5, 10, 20 mile radius of employer’s business – high likelihood of being upheld.

 

2.      Restricted from competing in County where employer does business – high likelihood of being upheld.

 

3.      Restricted from competing in County where employer does business and adjacent counties –better than fair likelihood of being upheld.

 

4.      Restricted from competing statewide – likely to be upheld only if employee’s duties take him statewide, and dependent upon the scope of those duties.

 

5.      Restricted from competing nationwide – may be upheld only if employee’s duties take him nationwide, and dependent upon the scope of those duties.

 

6.      Restricted from soliciting customers of the employer, good likelihood of being upheld if the employee provided services to or worked with those customers, and the customers can be identified.

What? The type of activity that can be restrained generally takes three forms: (1) soliciting the employer’s clients or customers, (2) soliciting the employer’s other employees, and (3) engaging in competing activities.

Restrictions that prevent a former employee from soliciting his former employer’s clients and customers are generally upheld by Texas courts. On the other hand, restrictions that prohibit a former employee from soliciting his former employer’s future clients or customers, or clients or customers with whom the former employee had no contact, or soliciting clients or customers from areas where the former employer plans to expand have generally not been upheld by Texas courts.

Likewise, restrictions that prevent a former employee from soliciting his former employer’s current employees are also generally upheld by Texas courts, but not restrictions that prohibit a former employee from soliciting other former employees.

Restrictions that prohibit an employee from engaging in competing activities, such as selling widgets if the employer sells widgets, are generally upheld by Texas court, especially if the competing activities are identified. “Employee shall not sell widgets” is more likely to be upheld than “Employee will not compete with employer.”

Rule 3. The restrictions must not be greater than necessary to protect the employer’s business interest. Though the Act speaks of goodwill, I would suggest that goodwill is, in and of itself, a “business interest.” What is meant by “necessary to protect the [employer’s] goodwill or other business interest?” One way of looking at the formula is that the restrictions must be related to protecting the employer’s business. For example, a highly placed employee, say a vice-president or director of marketing, may have access to his employer’s marketing or pricing strategies, financial data or forecasts, or customer lists. A covenant not to compete that effectively restricts the employee from using that information to the employee’s advantage and to the employer’s detriment is a business interest that would be protected, and meet the requirements of the Act. A covenant not to compete for an employee who has access to trade secrets, such as a manufacturing process or formula, also serves to protect the business’ interest by protecting a valuable asset. Finally, equity ownership in the employer’s business, such as stock options, incentive employees to put forward their best efforts on the employer’s behalf, thus contributing to increasing the employer’s goodwill. All of the foregoing have been recognized by Texas courts as business interests worthy of protection.

Not all businesses are equal, as they do not have the same kinds of business interests and goodwill to protect. Each business is unique, as are the jobs held by their employees. A covenant not to compete is not a “one-sized-fits-all” solution to protecting an employer’s goodwill or business interest. The penalty for poorly drafted covenant not to compete can be that it is declared entirely unenforceable, or that it is re-written by a court that is not as familiar with the needs of the employer in their particular industry. In a worst case scenario, and employer can even find himself paying the former employee’s legal fees. For that reason, the employer should also seek the advice of legal professionals when drafting covenants not to compete.
 
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