An employee of a small manufacturing company (“Acme Company”) leaves and starts his own competing company (“Best Company”). Acme Company sues the employee for doing so—because the employee signed a noncompete agreement stating that, if he left Acme Company, he would not start a competing business.
In the lawsuit, the employee argues, “The existence of my new company, Best Company, benefits the public. Having another manufacturing company will force Acme Company to constantly improve the quality of its products and to sell them at reasonable prices. In other words, competition is a good thing.”
In determining whether to enforce the noncompete agreement against the employee (by forcing the employee to shut down Best Company), should the court consider how the public will be affected if the noncompete is enforced? A layperson might answer this question, “Obviously, yes,” but that is not typically how Texas courts have dealt with the issue in the past. But a recent case may change things.
Texas Noncompete Agreements: Basic Requirements
Under Texas law, a noncompete agreement is enforceable if it is supported by sufficient consideration and is reasonable in scope. The Texas noncompete statute does not explicitly state that, to be enforceable, a noncompete agreement must be beneficial (or not harmful) to the public.
Getting an Injunction in Texas State Court
In a noncompete case, the real “trial” of the case often happens 14 days after the lawsuit is filed—at the temporary injunction hearing. At this hearing, the plaintiff asks the court to force the defendant to comply with the noncompete agreement. In our hypothetical example, Acme Company would ask the court to “make my former employee shut down Best Company.”
Under Texas law, in deciding whether to grant the injunction sought by Acme Company, the court would focus on these factors: whether Acme Company has a valid legal claim, whether Acme Company is likely to prevail at the final trial of the case, and whether—without an injunction—Acme Company would suffer irreparable harm. If the court were to answer all of these questions in the affirmative, a temporary injunction should issue.
But, under Texas state law, the court would not be required to co6nsider whether the injunction sought by Acme Company would harm the public.
The Federal Court Difference
Unlike in Texas state court, if a noncompete lawsuit is filed in federal court and a preliminary injunction is sought, a federal judge will grant the injunction only if the injunction would “not disserve the public interest.” In other words, in federal court, unlike in state court, the court must consider whether the requested injunction would harm the public.
The Recent Potentially-Groundbreaking Case in Texas State Court
In a recent case in Texas state court, the court considered how the public would be affected if the requested injunction were entered. The case involved a dispute between two doctors who worked together in the same medical practice. One of the doctors left the practice and started a competing business. The other doctor sued to enforce a noncompete agreement.
In denying the requested temporary injunction, the trial court noted, “We’re a small ccommunity. The public interest would be adversely affected” if the inthejunction were granted. The court added that there was a need for cardiologists in “this small community.” The doctor seeking enforcement of the noncompete agreement appealed.
The court of appeals affirmed the trial court’s decision to consider the effect that the noncompete would have on the public. The court explained:
Whether an agreement will be unenforceable on public policy grounds will be determined by weighing the interest in enforcing agreements versus the public policy interest against such enforcement. On one side of the scale is Texas’ general policy favoring freedom of contract. Courts weighing this interest should consider the reasonable expectations of the parties and the value of certainty and enforcement of contracts generally. On the other side of the scale is the extent to which the agreement frustrates important public policy. It is appropriate to consider whether enforcement of the covenant not to compete would harm the public interest by resulting in inadequate healthcare or continuity of care and depriving the public of access to the physician of its choice.
That this case involved whether residents of a rural community would have adequate access to healthcare certainly may have impacted the ruling in this case. Nevertheless, after a wave pro-enforcement cases in recent years, the possibility that Texas courts might now consider the effect that enforcing a noncompete agreement might have on the public is potentially huge. We will have to see how this plays out in subsequent cases. The Texas Supreme Court’s refusal to hear the case may suggest that it approves of the approach taken in this case.