1. When hiring a new employee (especially in management or sales), consider including language in the offer letter affirming that the employee has disclosed any restrictive covenants in effect from prior employers, and acknowledging that he/she will not bring any confidential documents, data, or information from previous employers to the company. Such language may protect the company from being sued if a new employee fails to disclose a restrictive covenant, or otherwise engages in a breach of duties owed to a prior employer.
2. If you are considering hiring a group of employees from a competitor, negotiate with each one separately wherever possible. In many states, employees (especially managers) owe a duty of loyalty to their employer. Acting as a go between or actively soliciting for a competitor while still employed with the prior company could raise legal issues. If you are looking to hire a team or group, it is best to hire the point person first, then once aboard that person can set out to recruit the remaining employees to come to your company (assuming that employee has no contractual restrictions on solicitation).
3. Develop a protocol for ensuring that high level departing employees do not download or otherwise misappropriate proprietary information. When notified of a resignation: (1) Conduct a review of work email for transmittal of information to personal email accounts; (2) Identify any suspicious use of removable USB devices; and (3) Conduct an exit interview that consists of asking the employee to affirm that all property has been returned, including all electronic devices and passwords.
4. Handbook policies on confidentiality and the return of company property are appropriate, but a breach of a policy is not actionable, and does not entitle the company to injunctive relief (i.e. an order requiring compliance). Consider requiring a confidentiality agreement for any employees who have access to important company data or property that could be harmful if disclosed to a competitor, and you may want back if not returned.
5. For key personnel, you may need more than a confidentiality agreement to protect the company’s interests. In those cases, consider the use of a non-compete and/or non-solicitation agreement (which can be coupled with the confidentiality portion into one document). A non-compete provision restricts the employee from working for a competitor for a certain period of time in a defined geographic area. Such covenants must be reasonable, and narrowly tailored to protect the client’s interests. A non-solicitation provision does not restrict the employee from working for a competitor, but restricts certain activities for that competitor, usually soliciting company customers or employees for a period of time. Like a non-compete provision, a non-solicitation covenant must be reasonable. For example, the restriction should only apply to customers with whom the employee actually had contact or access to confidential information, as opposed to a restriction from contacting all of the company’s customers.

Non-compete litigation is state specific and the laws can vary widely from state to state. For example, Texas allows reasonable restraints on competition, while California (and recently Massachusetts) outlaw such agreements. It is advisable to have any agreements reviewed for enforceability in the states where such agreements are likely to be enforced.

To address this threat, gig companies can take some relatively easy steps to prevent contractors and departing employees from taking confidential information in the first place, and to protect that information from use by competitors.

Defending Trade Secrets

Businesses in the gig economy create and retain a trove of information that could be valuable in the hands of competitors: customer lists, purchase histories, customer preferences, and all kinds of financial information. And that’s just scratching the surface. Most gig employers have policies restricting employee or contractor use of and access to such information, and most states have laws to protect employers against trade secret theft.

As of 2016, federal law also provides a civil cause of action for trade secret misappropriation.  However, in order to recover punitive damages or attorneys’ fees under the law, the Defend Trade Secrets Act (DTSA) requires employees or contractors to be given notice of whistleblower immunities in all agreements dealing with trade secrets and confidential information. Gig businesses should take advantage of the trade secret protections afforded by this new law by reviewing policies and agreements to ensure they comply with the DTSA’s various provisions.

Protecting Relationships

A gig business’s relationships with its customers, contractors, and vendors are among its most valuable assets. Some employees and contractors are expected to develop lasting relationships on behalf of the company. Well-drafted agreements with these individuals should include a provision prohibiting them from soliciting customers, contractors, and vendors – especially those with whom they interact directly ­– for a reasonable period of time. State laws regarding the validity of non-solicit agreements can vary and can be complicated. That said, an enforceable agreement can be a potent tool to prevent individuals from poaching customers, contractors, or vendors on behalf of a competitor.

Non-Competition Agreements

One of the more sweeping measures a business can take to protect its relationships and confidential information is to ask workers to sign a non-competition agreement. These agreements generally prohibit departing workers from joining a businesses that competes with the company in a specified geographic area for a limited amount of time after their tenure with the company ends. Though a handful of businesses use non-competition agreements liberally, we generally recommend that companies limit these restrictive covenants to higher-level positions. As with the non-solicitation agreements discussed above, state laws vary widely regarding the enforceability of non-competition agreements, so well-tailored agreements are crucial.

Conclusion

With the deluge of stories about data security, now is an opportune time to review and update employment and independent contractor agreements and policies to protect trade secrets, confidential information, and relationships. On this front, an ounce of effort on the front end can save a ton of headaches in the event that an employee or contractor decides to take the company’s valuable information or relationships to a competitor.

For example, a franchisor’s manual may set out the formula for its secret recipes or the procedures for successfully running the day-to-day operations of the business. Gaining access to a franchisor’s confidential information is what motivates franchisees to buy into the franchisor’s system. Without becoming a franchisee, interested persons cannot tap into the franchisor’s valuable sources of information. Therefore, when a franchisor’s confidential information is stolen, the value of the brand is put at risk. To protect their trade secrets and confidential information, franchisors in Texas should be familiar with the Texas Uniform Trade Secrets Act.

Pre-emption under the Texas Uniform Trade Secrets Act
In September 2013 Texas became the 48th state to adopt the Uniform Trade Secrets Act, a uniform law prohibiting the theft of trade secrets. Before the enactment of the Texas Uniform Trade Secrets Act, (1) franchisors – and any owners of confidential information – could pursue various common law tort, restitutionary, or contract theories under Texas law to recover for a misappropriation of trade secrets or confidential information.

In 360 Mortgage Group, LLC v Homebridge Financial Services, Inc, (2) the US District Court for the Western District of Texas held that the Texas Uniform Trade Secrets Act pre-empts many such theories. Under Texas law, franchisors must generally bring claims relating to misappropriation of a trade secret under the Texas Uniform Trade Secrets Act. The act expressly “displaces conflicting tort, restitutionary, and other laws of [Texas] providing civil remedies for misappropriation of trade secret”. (3) Accordingly, the court held that the act pre-empts claims – except for contract claims – that seek civil remedies for misappropriation of trade secrets. By contrast, a claim is not pre-empted if the plaintiff can show that the claim is based on facts that are unrelated to the misappropriation of the trade secret.

Impact of the Texas Uniform Trade Secrets Act on franchisors
It is common for a franchisor to initiate litigation when a former franchisee uses the franchisor’s confidential information or trade secrets in connection with a competing business or otherwise fails to return such information following the expiration or earlier termination of the franchise agreement. As 360 Mortgage makes clear, franchisors in Texas must pursue any tort claims relating to a franchisee’s improper use of the franchisor’s trade secrets or confidential information under the Texas Uniform Trade Secrets Act.

Furthermore, franchisors should continue to rely on their franchise agreements to protect trade secrets and confidential information. The act does not affect contractual remedies. (4) As long as the franchise agreement obligates the franchisee to protect the confidential information and return the confidential information when the relationship ends, a franchisor can sue a franchisee for breach of contract if the franchisee fails to return or otherwise misuses the franchisor’s trade secrets or confidential information.

Comment
Below is a list of recommendations for how franchisors can use the franchise agreement to further protect their trade secrets and confidential information:

• Incorporate confidentiality obligations into the franchise agreement for the franchisee and its employees, including a process for returning all confidential information upon expiration or earlier termination of the agreement.
• Describe and define all confidential information as property of the franchisor (eg, operations manuals, trade secrets, customer information, business policies and procedures, financial information, sales information and marketing plans).
• Use expressed acknowledgements in the franchise agreement, whereby the franchisee acknowledges the value of the confidential information, acknowledges that such information constitutes trade secrets and agrees to maintain it as confidential both during and after the franchise relationship.
• Provide contractual remedies for breaches of the confidentiality agreement.

S.L. Owens is an associate in the corporate practice group and a member of the ’s global supply network industry team. Her practice is dedicated to representing national and global brands. She advises clients on creating efficient supply chain systems, building strong franchise, distribution and supply chain networks, and complying with international sales laws.

For further information on this topic please contact S.L. at Gardere at 720.437.2000 or email
s.l.owens@gardere.com. The Gardere website can be accessed at www.gardere.com.

Endnotes
(1) Tex Civ Prac & Rem Code § 134A.007.
(2) 360 Mortgage Group, LLC v Homebridge Financial Services, Inc, Case No A-14-CA-00847-SS, 2016 WL 900577, at *8 (WD Tex March 2, 2016).
(3) Tex Civ Prac & Rem Code § 134A.007(a).
(4) Id § 134A.007(b)(1).

This article was first published in the Franchising Newsletter of the International Law Office – www.internationallawoffice.com.

The various issues created by Facebook, LinkedIn, and other similar platforms lead to constant requests for input by management-side employment lawyers. Likewise, employers – especially those in industries with a heavy emphasis on relationships for research and development – are also focused on protection of their trade secrets and other confidential information. But the intersection between social media and trade-secret protection represents a new frontier – one with relatively little case law, but with substantial implications.

It’s Just A Customer List By Another Name

The most notable area in which social media can affect a company’s protection of its confidential information comes with the most common form of a trade secret: a customer list. Employers often encourage their sales personnel to use LinkedIn or other social media platforms to establish and strengthen relationships with actual and potential customers. Social media can be a great way to stay on a customer’s mind, update a customer on what the salesperson and the company are doing, and project an image of success. That said, what happens to that social-media account when salespeople leave and go to a rival company? They are walking out the door with a de facto customer list. It is likely that the names and contact information of some or all of a salesperson’s key client relationships will reside on that social-media account.

Make It Clear That The Company Owns The Social Media Account

This can be accomplished either by agreement or by a written policy, preferably one that employees sign. Even better, have your salespeople set up new social-media accounts when they commence employment so the company can deactivate or transfer the accounts when the employee leaves. Of course, many employees bring existing accounts with them when they start employment and prefer to add to their existing accounts. In that case, have the employees agree that at the end of employment, they will delete any business contacts that they established over the course of employment.

Insist On Privacy Settings

One good employee defense in a trade-secret action concerning a customer list is that the employer did not take reasonable means to protect its trade secret because anyone can look at the contacts of the company’s salespeople on LinkedIn and find the relevant contents of the customer list. In other words, the information is not a secret. The solution to this problem is simple: require employees to make their contact lists private on any social-media account that they use for business.

Address The Issue Of Status Updates

Employers frequently use restrictive-covenant agreements to prevent their employees from competing for a certain period after employment. One common provision in such an agreement is a non-compete provision, which prevents an employee from performing certain competitive acts in a given territory or a stretch of time after employment. But employees often pushback against such provisions and judges can be reticent to enforce them because of the view that they prevent an individual from making a living. Thus, employers will frequently use non-solicitation-of-customers covenants in place of (or sometimes in addition to) non-compete restrictions. Non-solicitation provisions prevent an employee from soliciting customers after the conclusion of an employment relationship. These restrictions are especially useful with salespeople and other categories of employees who have significant customer contact and relationships. Non-solicitation provisions are less onerous than non-compete restrictions and are usually easier to enforce. However, non-solicitation restrictions create proof problems that non-compete provisions do not. It is usually straight forward to show that a former employee is competing in a given territory. It can be harder to show that an employee solicited a customer because the question “what is solicitation?” is sometimes hard to answer. This is especially true in the social-media context. Say you have a salesperson named Pete who has agreed not to solicit actual or potential customers with whom he had contact for one year after the termination of employment. Pete resigns and then immediately posts a status update on LinkedIn or Facebook that he has left your company and joined a rival outfit. Or maybe Pete is really subtle and simply changes his employment information on those websites, meaning that his customers get an automatic update regarding the identity of his new employer. Assuming that Pete has connections to customers on LinkedIn and Facebook, has Pete violated his agreement? There is no definitive answer to that question, so it is up to a forward-thinking employer to plan ahead when drafting and revising restrictive covenant agreements. While no one can contract for every contingency, the status-update problem is one that can be solved by addressing that scenario in a non-solicitation covenant. Pete’s agreement should say that providing information on a new employer through social media will be considered to be a solicitation.

Originally published on Monday, 29 July 2013