Hiring Someone Bound by a Non-Compete: Risks for the New Employer

The new employer's exposure in plain terms

A former employer that wants to enforce a non-compete sues the employee. It often sues the new employer too, for three reasons: the new employer has the money, the new employer controls the employee's assignments, and a claim against the new employer puts pressure on it to reassign or release the hire. The claims available against the hiring company are:

• Tortious interference with an existing contract. The former employer must show a contract subject to interference, a willful and intentional act of interference by the new employer, proximate cause and actual damages. Hiring someone the company knows is bound by a covenant and directing them to do the restricted work is the usual act.
• Trade secret misappropriation. Under the Texas Uniform Trade Secrets Act, Civil Practice and Remedies Code chapter 134A, and the federal Defend Trade Secrets Act, a company that uses or discloses a trade secret it knew or had reason to know was obtained improperly is itself liable. A new hire who arrives with a customer list on a thumb drive creates that exposure.
• Injunctive relief. The former employer can ask the court to enjoin the new employer, not only the employee, from using confidential information and from assisting the breach. Being a named party in an injunction proceeding means legal fees, discovery into the company's own files, and a judge's order governing how it may use an employee it is paying.

The justification defense

Justification is an affirmative defense to tortious interference in Texas, and the new employer carries the burden of proving it. In the non-compete setting it can be shown two ways: by proving the covenant is unenforceable under the Texas Covenants Not to Compete Act, Business and Commerce Code section 15.50, or by proving that the company acted on a good-faith belief, even if mistaken, that it had a legal right to hire, which requires a colorable legal basis rather than a hunch.

Both routes depend on having read the covenant before the hire. A company that never asked for the agreement cannot show it formed a good-faith belief about it. A company whose litigator reviewed the covenant and concluded in writing that it lacked consideration, or that its scope did not reach the new role, has a defense to point to even if a court later disagrees.

Before the offer: what to ask and what to read

1. Ask every candidate in writing whether they are bound by a non-compete, non-solicitation, confidentiality or similar agreement, and ask for copies. Make the representation part of the offer letter.
2. Read all of it. Covenants hide in option grants, bonus plans, severance agreements and commission plans, not only the employment agreement. A candidate who signed a separation agreement on the way out may have refreshed an older covenant.
3. Test enforceability. Did the former employer give the consideration the covenant recites? Is the term, territory and scope reasonable for this person's role? Is the covenant governed by Texas law, or by the law of a state that will not enforce it? Whether the covenant holds up is examined in whether a non-compete is enforceable in Texas.
4. Map the restriction to the role. If the covenant bars soliciting the candidate's former accounts for a year, a role that does not touch those accounts for that year avoids the breach entirely. If it bars any competing work in the region, the company is deciding whether to absorb a probable lawsuit.
5. Decide about indemnity. Candidates sometimes ask the new employer to cover their defense costs if sued. Agreeing is a business decision; it also tends to be read as evidence that the company knew of the covenant and proceeded anyway.

At onboarding: closing the trade secret door

The interference claim depends on the covenant. The trade secret claim depends on what the new hire brings, and that is entirely within the new employer's control. Written instructions at offer and again at start: bring nothing from the former employer, no documents, files, contacts exports, photos of screens, or personal-account copies. Have the hire certify in writing that they have returned or deleted the former employer's materials. Give them a clean device and new accounts. Bar them, for the restricted period, from the former employer's accounts and from pricing decisions involving those accounts. Keep records of all of it.

These steps also build the defense if the former employer sues anyway. The company that can show a written no-information policy, a certification and a role fenced off from the former accounts has answered the trade secret claim before discovery begins. What to do when the accusation nonetheless arrives is covered in defending the company when a new hire is accused of bringing trade secrets.

Example

Suppose a Dallas logistics brokerage wants to hire a sales director from a competitor. She discloses a two-year covenant barring her from soliciting any customer she dealt with in her last eighteen months and from working for a competitor anywhere in Texas. The brokerage's litigator reads it: the former employer did provide confidential rate data, so the consideration element is likely met; the customer non-solicit is probably reasonable; the statewide non-compete is probably broader than her Dallas-Fort Worth territory and would likely be reformed, but a reformed version would still cover North Texas.

The brokerage hires her into a role managing carrier relationships, not customer sales, for the first year, with a written bar on contacting her former accounts and a certification that she brought nothing. The former employer's letter arrives within a week. The brokerage responds with the role description, the certification and the no-contact instruction, and offers to confirm compliance at six months. No suit is filed. Had the brokerage put her straight into selling to her old accounts, it would have been defending an interference claim with no justification to point to.

When the former employer's letter arrives

A letter to the new employer is routine, and its purpose is to establish knowledge for a later interference claim. The response should be prompt, factual and drafted by counsel: what agreements the company has seen, how the role is structured, what instructions were given about information, and an offer of reasonable assurances. Do not ignore it, do not argue the covenant is worthless, and do not let the new hire respond on the company's behalf. A company that wants certainty rather than a standoff can also consider a declaratory judgment action under Civil Practice and Remedies Code chapter 37, asking a court to decide the covenant's enforceability and scope before the former employer chooses the forum and timing.

If the former employer files and seeks a temporary injunction, the new employer should expect to be a party at the hearing and to produce its onboarding records. How that hearing works, from both sides, is in temporary injunctions in Texas non-compete cases.

What the former employer will argue, and the honest answer

• “You knew about the covenant and hired anyway.” True in most cases; the answer is the structure of the role and the enforceability analysis.
• “The hire is inevitably using our information.” Texas has not adopted inevitable disclosure as a stand-alone theory; the former employer needs evidence of actual or threatened use. Clean onboarding records are the answer.
• “The reformed covenant still reaches this role.” Sometimes correct, and the reason to evaluate the covenant as reformed before the offer rather than after the letter.

The decision to hire someone bound by a covenant is a business judgment about talent, exposure and the cost of a fight. A litigator's job is to put a number and a probability on the exposure before the offer goes out. Tina Wysk advises Dallas-area employers on both sides of non-compete disputes and represents them in state and federal court when a hire leads to litigation; see non-compete disputes.