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Houston Business Lawyers Recommend Noncompete Agreements in Texas

September 16, 2010 by David Fettner Leave a Comment

In Texas, employment relationships are at will.  Unless governed by a specific law or a contract, the business or the employee may terminate the relationship at any time. But what if the business wants to prevent the employee from using the information and/or skills obtained during the employment relationship, to compete with the former employer.  In employment relationships, employers will often require or request a covenant not to compete, or noncompete clause in the employment contract to ensure that an employee, during employment and after, will not compete with his or her former employer.  The employee is generally foreclosed from engaging in similar or competitive businesses, either for himself or herself or another, for a specified time period within a specified geographic location. In Texas, noncompete agreements are enforcable, but must be limited in time and scope or the agreement may be considered a restraint of trade and may not be enforced.

In Texas, the reasonableness and scope of a noncompete agreement is analyzed using three factors: (1) whether the restriction is greater than necessary to protect the business and goodwill of the employer; (2) whether the employer’s need for protection outweighs the economic hardship which the covenant imposes on the employee that is leaving; and (3) whether the restriction adversely affects the interests of the public.  Additionally, the noncompete agreement must be related to the activities of the employee.  The agreement will not be enforceable if it attempts to keep the employee from doing work that is unrelated to his or her activities with the employer.

A reasonable geographic area for a noncompete agreement is usually considered to be the territory in which the employee worked while in the employment of the employer.  Noncompete agreements that are not limited in time are considered unreasonable.  The agreement must be limited to a reaonsable amount of time that will protect the business and goodwill of the employer without imposing undue economic hardship on the employee.  If an agreement contains a territory or time restraint that is unreasonable, courts do not necessarily consider them void.  A court may instead enforce the contract by modifying the contract as to time and an area that is reasonable under the circumstances.

It can be advantageous for employers to have a noncompete agreement with employees who have particular knowledge of the employer’s techniques, practices, customer base and/or trade secrets.  Implementation of a noncompete agreement can be tricky.  Texas courts will not enforce noncompete agreements unless they are formed under certain circumstances.  Factors that courts review when considering whether the formation was reasonable include: whether the employee was already employed at the time of the formation of the noncompete, what consideration was given by the employer and whether the employee was employed for a term or at will. You should seek advice from a licensed attorney if you have employees and are considering a noncompete agreement.

Filed Under: Recent Posts

Red Flag Law

August 19, 2010 by David Fettner Leave a Comment

We are attorneys representing businesses in Houston, Texas.  Clients of ours have asked about “red flag” regulations relating to identity theft.  Recently, federal authorities created regulations governing consumer “accounts.”  Section 114 of the Fair and Accurate Credit Transactions Act directed several government agencies to prescribe joint regulations requiring each financial institution and creditor to establish reasonable policies and procedures for implementing the guidelines, to identify possible risks to account holder or customers or to the safety and soundness of the institution or customer.  Financial institutions and creditors must periodically determine whether they offer covered accounts.  A “creditor” is a person who arranges for the extension, renewal or continuation of credit, which in some cases could include third-party debt collectors.  A “financial institution” is a State or National bank, a State or Federal savings and loan association, a mutual savings bank, a State or Federal credit union, or any other person that, directly or indirectly, holds a transaction account  belonging to a consumer.

A “covered account” is (1) an account primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions, or (2) any other account for which there is a reasonably foreseeable risk to customers or the safety and soundness of the financial institution or creditor from identity theft.  Five factors that help determine whether an account is a “covered account” are (1) the methods the financial institution or creditor provides to open its accounts; (2) the methods it provides to access its accounts; and (3) its previous experiences with identity theft; (4) which of the accounts are subject to a risk of identity theft; and (5) the size, location and customer base of the financial institution or creditor.

The agencies determined that only those financial institutions and creditors that offer or maintain “covered accounts” must develop and implement a written program.     The written program must contain reasonable policies and procedures to:
(1)    Identify relevant Red Flags (pattern, practice, or specific activity that indicated the possible risk of identity theft) for covered accounts and incorporate those Red Flags into the program;
(2)    Detect Red Flags that have been incorporated into the program;
(3)    Respond appropriately to any Red Flags that are detected to prevent and mitigate identity theft; and
(4)    Ensue the program is updated periodically, to reflect changes in risks to customers or to the safety and soundness of the financial institution or creditor from identity theft.

To allow smaller financial institutions and creditors to tailor their programs to their operations, the program must also be appropriate to the size and complexity of the financial institution or creditor and the nature and scope of its activities.  If your business transacts business with consumers and uses or contains sensitive personal information, you may be subject to “red flag” regulations.  Consult a qualified attorney to determine if your business is subject to the new regulations.

Filed Under: Archives, Recent Posts

Condemnation Issues in Commercial Leases in Houston, Texas

August 7, 2010 by David Fettner 1 Comment

As lawyers who assist clients in documenting transactions, we are often asked to review commercial real property leases. Commercial leases can take many forms and can address many aspects of a real estate transaction.  Common elements to commercial leases are the conveyance of the right of possession, the lease term, rental amount and the rights of the tenant as well as the rights of the landlord.  This blog is not intended to cover all of the possible terms in a lease.  It is important to have an attorney with experience in commercial real estate transactions review the lease and give you advice before signing any lease.

One common issue which parties fail to address in commercial leases is condemnation.    Condemnation refers to the taking by a government entity of the leased premises or the common area near or adjacent to the leased premise.   The government entity could be a city, county, town, state or department of a county, city, town or state.  Some of the most common source of takings are hospital districts and transportation departments.  However a taking can be initiated by economic development zones and other entities.  When negotiating the terms of your lease, it is important to include provisions for what happens in the event of a taking.  Will the lease terminate?  If so, automatically or at one or more party’s option?  If the lease is not terminated, will there be an adjustment in the rent?  What if the taking is of parking lot space adjacent to the leased premises that is used by customers and clients of the tenant?  Will there be a rent adjustment?  How much?  What if the taking includes part of the leased premises?  What if the tenant’s business can continue, but at a reduced volume?  Will the tenant have the option to terminate?  If not, will rent be adjusted?  If so, by what formula?  These are some of the issues that a commercial lease can address with respect to a taking.

Generally, a total taking will require the lease to terminate.  If the lease is terminated, is the tenant compensated for having to move?  Can the tenant move to other space within the same building or complex?  At what price?  Is the government entity that is condemning the property paying the landlord?  How much?  For what?  Can the tenant receive some of the money?  Can the tenant make its own claim against the government entity doing the taking?

What if there is a partial taking of the leased premises?  If the only part of the leased premises is taken, can the tenant continue it’s business?  How much of the leased premises can be taken before the space is no longer suitable for the tenant? If not, can the tenant terminate?  If the leased premises is no longer suitable, can the tenant still terminate?  Who determines suitability?  Does the lease prevent the tenant from sharing in payment for the taking?

Is the landlord aware of any impending condemnations proceedings?  What duties does the landlord have if it becomes aware of possible condemnation proceedings?

The answers to all these questions and more should be addressed in the terms of a long term commercial lease.    A business contemplating leasing commercial space to operate from, should consult professionals that can help the business identify as many potential issues as possible and get advice on the possible ramifications of such issues.

Filed Under: Archives, Recent Posts

Business Entity – What Houston Lawyers Recommend

May 21, 2010 by David Fettner Leave a Comment

As business lawyers we are often asked about the differences between “C” Corporations and “S” Corporations.  A “C” Corporation is the default choice for business corporations.  Publicly traded corporations are “C” Corporations.  Corporations provide shareholders protection from being held personally liable for a corporation’s debts in many situations.  If the corporation is sued or files for bankruptcy, the shareholders are not held personally liable for the debts of the corporation (unless there are guarantees or extenuating circumstances).  This is true whether you choose “C” or “S” tax treatment.

The difference between “C” and “S” Corporations is how they are treated for tax purposes.  “C” Corporations are  subject to the corporate income tax.  If the “C” Corporation passes on some of its profits to shareholders in the form of a dividend, the shareholders are required to pay tax on that dividend.  Therefore, any profits that are distributed to shareholders are taxed twice, once as income to the corporation and once as income for the individual shareholder.

“S” Corporations, on the other hand, are structured so that profits and losses “pass through” to the shareholders.  Profits and losses in an “S” Corporation are not taxed at the corporate level, and instead are taxed only once as income or a loss for each individual shareholder.  For example, shareholder #1 owns 50% of an “S” Corporation that has $50,000.00 profit this year.  Shareholder #1 must declare $25,000.00 income on his personal income tax return.  However, there are tax risks involved for shareholders of “S” Corporations in certain circumstances.  If an “S” Corporation earns profits but does not distribute those profits to the shareholders, the shareholders are still required to report those profits on their personal income tax returns even though they did not receive any money.   The time to choose “C” or “S” designation is when you incorporate.  However, the IRS will sometimes allow late designations or changes in designation.

If you are considering starting a new business or are incorporating an existing business, consult a business lawyer in your jurisdiction about what business entity would be best for your business.

Filed Under: Archives, Recent Posts

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