One of a company’s most valuable assets is the information database used to compete in its marketplace. That information can take many forms – customer lists, strategic plans, pricing strategies, material sources, production costs, supply chains, technical information, formulas, etc. In the hands of a competitor, that information could give it an unfair competitive advantage that impacts your sales, market share, relationships and profits. The loss or unplanned sharing of that information is often an expensive set back for any business. Guarding that information judiciously is an investment that can help avoid those losses.
Business information that a company does not want shared with competitors is considered trade secret information or confidential information. Texas common law, like that of most states, provides protections to companies that take steps to maintain the confidentiality of that information. For example, the law allows a business to obtain a court order prohibiting a person (typically a former employee) from improperly using or disclosing confidential information to others. In most cases, however, such an order does not afford an effective remedy as they do not prevent a departing employee from working for a competitor and secretly sharing information.
A business that obtains an injunction prohibiting disclosure against the former employee will see that it merely prohibits the former employee from using or disclosing the information to a third party. The problem is that the injunction has little, if any, bite. It is often extremely difficult, if not impossible, to prove that the former employee used or gave confidential information to a new employer or business partner. After all, what happens in Vegas stays in Vegas. Because of that, a business wishing to protect its valuable information must take other steps to do so rather than just relying on the common law, the most effective being the implementation of protective systems that include the use of non-compete agreements.
Misuse and disclosure of confidential information comes in many forms, and the casebooks of Texas court opinions are full of cases describing the various schemes through which employees misuse and disseminate confidential information. The two most common situations are:
an employee accepts a job with a competitor and takes their former employer’s confidential information with them (particularly true with sales people and their “Rolodex”), or
an employee decides to form a competing company and take their former employer’s confidential information with them to jump start their new business.
Most often those plans involve taking the “book” of business that the employee considers his own or the business he or she can twist off to the new venture in order to increase his or her personal profits from it. They also involve the employee downloading valuable information from the employer’s computer system while still employed. The key to preventing those schemes is to have systems in place that prevent that type of action or, at the least, make it more difficult to accomplish.
With that in mind, there are recommended best practices every business owner should follow to minimize the risk of losing confidential information to a current or new competitor:
Define what information is considered confidential and educate all employees as to its permissible use and the need to maintain its confidentiality;
Maintained information on a segmented server with the segments password protected so only those employees having a need to know the information have access to it;
Have an employee handbook describing the information that the company considers confidential, and clearly stating that employees are expected to maintain its confidentiality for the benefit of the company;
Clearly state in the handbook that any unauthorized use or disclosure of confidential information is a violation of company policy that will result in discipline up to and including termination;
Require each employee having access to confidential information to sign a confidentiality or non-disclosure agreement;
Use monitoring software that provides a log of the people who have accessed confidential information and the times in which they accessed it (not surprisingly, most unauthorized downloading and copying of confidential information occurs at night and on weekends when the office is empty and often while the employee is at home), and conduct audits that may reveal a red flag;
Important customer and vendor relationships should not be “owned” or controlled by any one employee, and should be treated like other valuable company property;
Never store confidential information on any device that is not owned by the company (for example, BYOD);
Never share business information with a consultant or other outsider (other than the company’s lawyers and accountants who are bound to confidence) unless a non-disclosure agreement is obtained; and
Implement non-compete agreements for all employees who have access to valuable information.
Non-compete agreements provide the most effective way of preventing unauthorized use and disclosure of confidential information. A properly prepared non-compete agreement will stop the departing employee in his or her tracks when they decide to move to a competing company or start their own competing company. Moreover, prospective employers are often very reluctant to hire an employee subject to a non-compete, especially when the new position puts the employee in competition with the former employer. They are the best way to prevent a segment of your business from simply walking out the door.
Over the last twenty years, the Texas courts have become more employer friendly and have eased the requirements for enforcing non-compete agreements. While they must be carefully written, and must be reasonable in a number of ways, Texas courts are very willing to issue injunctions preventing former employees from working for competitors or forming their own competing company when the new employer or business might benefit from the former’s confidential information. Non-compete agreements are a very powerful tool in protecting a business’ market share and profitability. In other words, they can provide a lot of bang for the buck.
When it comes to protecting a company’s confidential information, the courts will only help those who help themselves. It is vitally important that companies take a proactive approach to protecting their information and have systems in place to do so. If, as a business owner, you do not care if you lose five of your top ten customers, then you need do nothing. If you do care, and you should, and do not have appropriate safety measures in place, then it is time to consider implementing appropriate systems before your customers find a new home down the street.