To Recover Attorneys’ Fees While Enforcing a Non-Compete Agreement, Employers Should Now Consider Pleading the Texas Uniform Trade Secrets Act

Employers have several things to consider when deciding whether to pursue an employee for violating her non-compete agreement. Among the legal considerations is whether the employer will be able to recover its attorneys’ fees. When an employee breaches her written employment agreement, most employers and their general counsel believe that they are entitled to attorneys’ fees for breach of contract under the Texas Civil Practice and Remedies Code. While the Texas Supreme Court has not expressly ruled on the issue as of yet, if you practice in San Antonio, Houston or those counties under the purview of the First, Fourth, and Fourteenth Court of Appeals, you may be surprised to learn that the Covenants Not to Compete Chapter of the Texas Competition and Trade Practices statute has preempted the Texas Civil Practice and Remedies Code and these courts have expressly held that this statute does not allow an employer to recover its attorneys’ fees in connection with enforcing its non-compete agreement. While these holdings have not spread to all of the Texas appellate courts, the holdings are persuasive precedent and should be considered by any employer in its decision calculus.

So what is an employer to do? Enter the Texas Uniform Trade Secrets Act (“Trade Secrets Act”). Effective September 1, 2013, employers enforcing a non-compete agreement may plead that a former employee and her new current employer have misappropriated trade secrets. As with all allegations, there must be a factual, good faith, basis. Assuming a scenario in which a former employee left with her former employer’s trade secrets and it appeared that she was utilizing them to benefit her new employer, the former employer could sue the former employee for misappropriation of trade secrets. If the new employer knew or should have known that the subject employee possessed and was utilizing these trade secrets, then the former employer could also sue the new employer for misappropriation. Under either scenario, pleading misappropriation under the Trade Secrets Act could entitle the employer to attorneys’ fees.

The Trade Secrets Act does not guarantee an employer will receive attorneys’ fees. Under the Trade Secrets Act, the court may award a prevailing employer with attorneys’ fees if the employer establishes “wilful and malicious” misappropriation. While the statute does not define the phrase, and there are not any current Texas published opinions specifically addressing the issue, other states that have long enacted the Uniform Trade Secrets Act provide some guidance as to the meaning of the phrase.

In several states, “wilful” means “intentional, wrongful conduct, done either with knowledge that serious injury to another probably will result or with a wanton and reckless disregard of the possible results.” Malice is defined in some states, and in the Black’s Law Dictionary to mean “(1) the intent without justification or excuse, to commit a wrongful act; (2) reckless disregard of the law or of a person’s legal rights; or (3) ill will or wickedness of heart.” To meet this standard, the employer will need to prevail on its misappropriation claim and establish that the misappropriation was intentional and the intent was to harm the former employer.

To be clear, pleading the Trade Secrets Act is no panacea for employers looking to obtain attorneys’ fees. Pleading in bad faith is fraught with peril. Per the statute, attorneys’ fees may be awarded to the prevailing party. As such, if an employer acting in bad faith raises a claim of misappropriation or resists a motion to terminate an injunction obtained under the guise of the Trade Secrets Act, the court could require the employer to pay a prevailing former employee’s attorneys’ fees.

For the employer looking to obtain its attorneys’ fees to enforce its non-compete agreements or to simply prevent misappropriation of its trade secrets, obtaining attorneys’ fees via the Trade Secrets Act is not “a given.” Having a realistic understanding of the risks and hurdles will better equip an employer in its decision making process.