Texas Appeals Court Reverses Denial of Temporary Injunction in Noncompete Case

Once again, a Texas appellate court sides with a company suing to enforce a noncompete agreement.  This time, the employer sued a former employee for violating a covenant prohibiting the employee for competing for three years following the termination of his employment.  Significantly, the noncompete covenant contained no geographic restriction.  It did not, for example, prohibit the employee from working only in the state of Texas.

When the employee went to work for a competitor, the employer filed suit, obtained a temporary restraining order, and then sought a temporary injunction.  The request for a temporary injunction was denied.  In denying the request, the trial court held that the noncompete was “unenforceable due to a lack of consideration.”  The court also held that the agreement was unenforceable due to a lack of any geographic restriction.

The Fort Worth Court of Appeals overruled the district court. The court of appeals considered the following points:

Sufficiency of Consideration: Implied Promise to Provide Confidential Information

The noncompete agreement (which was actually called an Employee Technology Agreement) stated that the employee would receive the following consideration: “continuing employment” and “salary or wages.” On appeal, the employee argued that a mere promise for continued employment was legally insufficient.

Rather than specifically address this argument, the court of appeals, citing the Texas Supreme Court's Mann Frankfort case, held that the agreement contained an implied promise by the employer to provide confidential information. This confidential information was sufficient consideration for the noncompete covenant, the court held.

“But I didn't really need the confidential information that was given to me,” the employee argued. The court rejected this contention. “The relevant inquiry,” the court held, “is not whether Liss's job could has been performed without Tranter's confidential information but whether it was performed without the confidential information.”

The court found it significant that the employee admitted to having received some company confidential information. The court noted, “The consideration requirement was satisfied by Tranter's performance in disclosing its confidential information to Liss in exchange for Liss's promise to keep that information confidential.”

Reasonableness of Restrictions

The court agreed with the employee that the noncompete was “unreasonable and unenforceable as written” because it did not contain a geographic restriction, as required by Texas law. However, the court noted that, as a final remedy in the case, the trial court would be required to reform the noncompete (by supplying the missing geographic restriction). Because of this, the court held, the agreement should be reformed on an interim basis, at the TI stage. The appellate court remanded the case to the trial court to do so.

Probable, Imminent and Irreparable Injury

The appellate court reaffirmed the requirement that, to obtain a temporary injunction, the applicant must prove that, without the injunction, it will be irreparably harmed. The court held that a “highly trained employee's continued breach of a noncompete agreement creates a rebuttable presumption that the employer is suffering an irreparable injury.” Then, in reversing the district court's denial of the application for temporary injunction, the court noted that (a) the employee was directly competing in the same territory and for the same customers; and (b) even though the employee was not actively trying to use his former employer's confidential information, “there was no evidence rebutting the presumption that Liss would have extreme difficulty in not indirectly applying some of that confidential knowledge in his position at PMC.”

Conclusion

There are at least a couple of takeaways from this case. First, although we didn't need anymore reminders that noncompete agreements are enforceable in Texas, this case makes that point once again. But the second point is this: Even with an enforceable noncompete agreement, a district court faced with an application for temporary restraining order or temporary injunction must carefully test the plaintiff's contention that it needs the injunction to prevent irreparable harm. Even though there may be a rebuttable presumption that violation of a noncompete agreement will result in irreparable harm, as we can see in this case, that is not the end of the story. The plaintiff still must make a particular showing of irreparable harm. A plaintiff must be prepared to make the case that it will be irreparably harmed without an injunction.   

Misconceptions Concerning Noncompete Agreements in Texas

On the street, there are many misconceptions about noncompete agreements in Texas.  One myth is that, for a noncompete to be enforceable, the employer must have given the employee a cash payment, or a promotion, or some other monetary benefit.  But this is not the law in Texas. 

Usually, what the employer provides to the employee as consideration for the employee’s promise not to compete is confidential information.  Thus, by allowing the employee access to its confidential customer, pricing, and other information, the employer creates the justification for the employee’s return promise not to compete.  Typically, this confidential information is disseminated to the employee in an informal way (usually, the employee simply accesses the information through his normal job duties).

 

Thus, if you are an employee bound by a noncompete agreement, the agreement can be enforceable even though you have not received a new monetary benefit.  Simply performing your routine job duties (which includes accessing your employer’s confidential databases) may be enough to make your noncompete agreement enforceable.

In Texas, Noncompete Violation Per Se Can Justify Injunction

Are noncompete agreements enforceable in Texas? You bet they are—more than ever. You know it's bad news for the employee who is being sued when a court opinion starts with: “Texas law presumes a party has read and knows the terms of the contract that he has signed.” Ever since the Marsh USA decision, Texas courts have increasingly had a “You signed it, it's enforceable” mindset.

Of course, that's not the end of the story. In every case, the court must determine whether the employer actually provided the consideration it promise to provide. And the court must ensure that the scope of the noncompete is reasonable.

And perhaps even more importantly, the court must determine whether the employer suing to enforce a noncompete agreement is entitled to a temporary injunction. To a large extent, the party who wins the temporary injunction hearing wins the case. The reason for this is that, if the employer wins the TI hearing, the employee either cannot work for a competitor or will have other significant restrictions placed upon him. Conversely, if the employee prevails at the TI hearing, he may be able to compete with his employer at least until the final trial on the merits.

A recent federal case from the Southern District of Texas shows how this plays out in practice. In that case, the defendant (a former employee) had allegedly engaged in some very serious misconduct (i.e., use and disclosure of his former employer's confidential information). The employer sued and sought, among other things, a preliminary injunction to prohibit the defendant from working for a competing company.

In granting the employer the primary injunction it sought, the court held, “In Texas, injury resulting from the breach of non-compete covenants is the epitome of irreparable injury.” The court then cited Texas cases holding, “An employee who possesses trade secrets belonging to a former employer accepts employment with one of its competitors, even if acting in good faith, will have difficulty preventing his knowledge from infiltrating his work.” The court added: “Thus, the courts have recognized the need for injunctive relief in these situations.”

The court held that a second justification for a preliminary injunction was that the employee “has been using Daily's confidential, proprietary and/or trade secret information unlawfully to compete against Daily, and is sharing that information with Daily's competitors in violation of the [noncompete and nondisclosure agreement].”

In this case, the defendant allegedly engaged in some egregious conduct (unauthorized use and disclosure of confidential information, breach of fiduciary duty, etc.). This conduct alone would have justified the court in granting the employer's request for preliminary injunction. However, rather than base the injunction upon this conduct, the court based it in part upon the employee's mere violation of the noncompete agreement. This case is yet another reminder that the tide has turned in Texas against defendants in these cases.

Hiring At-Will Employees in Texas. Tortious Interference with Contract?

Is it lawful for a company to hire one of its competitor's employees? It may seems ludicrous to some to ask this question. But in a recent Texas appellate decision, the court actually considered whether a tortious interference with contract claim to be based upon Company A hiring an at-will employee from Company B.

The court held: “A claim of tortious interference cannot be premised merely on the hiring of an at-will employee, without more.” The court continued: “To hold Homeward liable for tortious interference for merely hiring Ally employees would `grind to a halt . . . the economy in the State of Texas.”

Economic growth depends to some extent upon the free flow of human capital. The court in this case reaffirmed the right of an at-will employee (unencumbered by a noncompete agreement) to move from one company to another. And the case goes a long way towards insulating the hiring company from legal liability. Obviously, if the defendant's conduct had gone beyond merely hiring an at-will employee, the result might have been indifferent.

In Texas, Nonsolicitation Provisions Must Be Reasonable.

Even though noncompete and nonsolicitation provisions generally are enforceable in Texas, they must be reasonable in scope. In a recent case from the Fort Worth Court of Appeals, the court held that a provision prohibiting solicitation of employees was too broad and, therefore, unenforceable.

The provision in question prohibited the employee, for a two-year period, from soliciting or employing “all [Company] employees who work for [Company] or any of [Company's] subsidiaries . . .” It also prohibited solicitation of “all former [Company] employees who worked for [Company] or any of [Company's] subsidiaries between August 14 and October 14, 2011.”

The court held that these provisions were too broad because they applied to all of the Company's employees. The court noted, “While it might be considered reasonable to limit [Employee's] solicitation of [Company's] employees located in the IT department, which was where [Employee] worked, the non-solicitation covenant . . . was not so limited.”

The court noted that the company had approximately 14,000 employees. The nonsolicitation provision was invalid because it prohibited the employee from soliciting any of these people.

The takeaway from this case is that, just as a noncompete agreement must be reasonable to be enforceable, a nonsolicitation provision must be reasonable as well. Under Texas law, nonsolicitation agreements are subject to the same scrutiny that noncompete agreements are given. Failure to ensure that your nonsolicitation or noncompete provisions are reasonable can result in them not being enforced.

Unreasonable Noncompete Agreement Can Subject Employer to Potentially Huge Liability in Texas

Several Texas courts have held that a victorious employer in a noncompete case cannot recover its attorneys’ fees against the losing employee.  This is based upon the fact that the Texas noncompete statute does not explicitly authorize an award of attorneys’ fees to a winning employer.

However, a recent case out of the Houston Court of Appeals shows that an employer who requires its employee to sign an overly broad noncompete agreement, and then seeks to enforce the overly broad agreement, may have to pay the employee's attorneys’ fees at the end of the litigation.

In this case, there was evidence at trial suggesting that the employer knew that the noncompete agreement it required its employees to sign was overly broad with respect to the scope of activity to be restrained.  Also, there was evidence that the employer attempted to enforce the noncompete agreement to an unreasonable extent.  After a jury entered a take-nothing for in favor of the defendants, the trial court assessed $750,000 in attorneys’ fees against the employer which brought the lawsuit.  This award was largely upheld on appeal.

The important thing to keep in mind from this decision is that, even though the noncompete statute requires the trial court to reform an overly broad covenant, the employer has a strong incentive at the outset to ensure that the covenant is as reasonable as possible.  This can be done by focusing on the company’s legitimate needs and the employee’s duties.  An employer that requires its employees to sign unreasonable noncompete agreements, and then attempts to enforce those agreements in an unreasonable way, can face liability, as the employer in this case found out the hard way.

Lack of Buy-Out Provision Kills Physician Noncompete Agreement

The Texas statute governing noncompete agreements contains specific requirements that must be met for a physician noncompete agreement to be enforceable.  One such requirement is that the agreement must contain a provision allowing the physician to "buy out" of the noncompete if he or she wishes to do so.

In a recent case from the Houston Court of Appeals, the employer found out the hard way the impact of not having a buyout provision in a physician noncompete agreement.  In the case, an ophthalmologist who worked for a Lasik clinic in Houston left the clinic and started a competing clinic nearby.  The ophthalmologist's former employer sued him for violating his noncompete agreement.

However, the noncompete agreement did not contain a provision allowing the ophthalmologist to buy out of the covenant.  On this basis, the trial court denied the employer's request for temporary injunction.

On appeal, the employer argued that the trial court should have reformed the agreement by adding a buy-out provision.  The Court of Appeals rejected this contention.  In doing so, the court noted that the statutory language authorizing the parties to allow an arbitrator to establish the price of the buyout does not allow an arbitrator to create a buyout provision where one does not exist.

Thus, the trial court's refusal to grant a temporary injunction was affirmed.

Complying with the statutory requirements for a noncompete agreement is essential.  This is especially true in the context of physician noncompete agreements, as this case illustrates.

Misappropriation of Trade Secret Injunctive Relief

             Misappropriation of trade secrets is a proper basis for a court to order a temporary injunction; however the language in the injunction must be limited to prevent it from becoming blanket prohibition on competition.

            In Reliant Hosp. Partners, LLC v. Cornerstone Healthcare Group Holdings, Inc., 374 S.W.3d 488 (Tex. App.—Dallas 2012, pet. filed), Cornerstone Healthcare Group (“Cornerstone”) brought suit  for misappropriation of trade secrets, breach of fiduciary duty, and tortuous interference against a group of former executives who left Cornerstone to purchase its competitor Reliant Hospital Partners, LCC (“Reliant”).  The former executives (“the Group”) contacted a private equity firm, Nautic Partners, LLC (“Nautic”) and suggested Nautic purchase Reliant and hire the Group to run Reliant's operations.  Nautic did just that.

            Cornerstone subsequently filed suit and applied for a temporary injunction against Nautic, Reliant, and all of the members of the Group (collectively as “Defendants”).  As a basis for the temporary injunction, Cornerstone alleged various causes of action, to include misappropriation of trade secrets, tortuous interference, and Theft Liability Act violations.  Id at 493.  After a hearing, the district court issued a temporary injunction with various terms against the defendants.  As for Nautic and the Group, the injunction prohibited them from: 

(1) retaining any [trade secrets] obtained by any of [the Group] during their employment with Cornerstone, and such documents must be immediately returned to Plaintiff Cornerstone;

 

(2) using or disclosing Plaintiff Cornerstone's confidential and/or proprietary information, including, but not limited to, [materials] developed by any of [the Group] during their respective periods of employment with Cornerstone; and

 

(3) engaging in, or attempting to engage in, the development, acquisition, merger, partnership, or joint or shared service with any post-acute care facility, information about which was presented or disclosed to [the Group] while employed at Cornerstone.” 

Reliant Hosp. Partners, LLC, 374 S.W.3d at 493-94.  Likewise, Reliant's CEO and his personal contact at Nautic were prohibited from:

                            (1) retaining any [materials] obtained by any of [the Group] during their employment with Cornerstone, and such documents must be immediately returned to Plaintiff Cornerstone; and

(2) using or disclosing Plaintiff Cornerstone's confidential and/or proprietary information, including, but not limited to, [materials] developed by any of [the Group] during their respective periods of employment with Cornerstone.

 

Id. at 494.  Finally, Reliant's owner was prohibited from: 

(1) retaining any electronic documents, originals, or hard copies of materials, property, documents, data and any other information obtained by any of [the Group] during their employment with Cornerstone, and such documents must be immediately returned to Plaintiff Cornerstone, if any; and

(2) using or disclosing Plaintiff Cornerstone's confidential information, limited to marketing materials and strategic planning information developed by [the Group] during their respective periods of employment with Cornerstone.

 

Id.  The Defendants subsequently appealed the temporary injunction, arguing Cornerstone (1) had not demonstrated a probable right to relief, (2) failed to show any irreparable harm and the injunction was overbroad and (3) the Court did not balance the equities between the parties and the public in issuing the injunction.  Finally, Reliant's owner individually appealed on the basis that there was no evidence to issue an injunction against him.

 

The Court addressed the issue first that Reliant's owner argued in his appeal.  The court agreed that, while there were valid acts to enjoin the other Defendants from, there was no nexus between Reliant's owner and any act to be restrained or the irreparable harm Cornerstone faced.  As such the court voided the injunction against Reliant's owner.

 Before turning to the merits of the other Defendants' issues, the Court addressed an argument by Cornerstone that the Defendants attempt to destroy the confidential information in their possession was prima facie evidence of Defendants' liability in the case, thus warranting a presumption in favor of the  injunction.  The Court disagreed, rejecting the argument as not having a basis in Texas law.

 The Court then addressed the underlying issue regarding the trade secret misappropriation and related torts.  The Court first described the applicable law governing the parties arguments, to include discussing the fluid nature of determining what constitutes a trade secret.  See, e.g., In re Bass, 113 S.W.3d at 739 (listing factors in finding trade secret status).  Based on the law, the Court concluded that the trial court did not abuse its discretion as to warrant reversing the injunction whole-cloth.  Cornerstone's information such as its market statistics, financial information, structure, and ownership, and bed need analysis contained in the materials met the tests for trade secret status.  Cornerstone also faced irreparable harm required in granting a temporary injunction because the Defendants' possession of the documents put them at a competitive disadvantage that could not be compensated by money damages.

 The Court next turned to the Defendants' argument that the injunction was overbroad because it prohibited Defendants from “trying to develop or pursue any acquisitions or other opportunities.”  Id. at 502.  (emphasis in original).  The paragraph in question contained no language limiting the enjoined acts to those in connection with Defendants' use of Cornerstone's trade secrets.  Id.  The Court agreed that it was overbroad.  Rule 683 of the Texas Rules of Civil Procedure require an injunction be narrowly tailored to fit the improper acts.  The language of the injunction instead prohibited competition altogether.  Accordingly, the Dallas Court of Appeals modified the language to enjoin Defendants only from competing using Cornerstone's trade secrets, and deleted the overbroad paragraph at issue.  Cornerstone's appeal is currently pending on merits briefs at the Texas Supreme Court.

Enforceability and entitlement to injunction are separate inquiries

                 While an employer may draft an enforceable non-compete covenant, it does not automatically follow that courts will enforce it with injunctive relief.  Such was the case in Welsco, Inc. v. Brace, 2012 WL 4087224 (E.D. Ark. 2012).  There, although the employment agreement was considered reasonable in both scope and duration, the court held that there was an adequate money damages remedy that precluded enjoining the defendant from competing with his former employer.  Welsco, Inc., 2012 WL 4087224, at *28.

                In Welsco, Mike Brace (“Brace”) was employed from March 15, 2005 to April 30, 2012 as the manager of a Welsco, Inc. (“Welsco”) store in Tulsa, Oklahoma. As a manager with the welding and industrial gas supply business, Brace gained access to extensive confidential information that included lists of clients, their needs, finances, product specifications, and cost information. Additionally, Brace developed extensive relationships with Tulsa area clients, including the highly lucrative and profitable contacts he maintained with the Local 798 pipefitters and welders union (“union”). In fact, the union increasingly represented a large part of the revenue that Brace brought to Welsco during his tenure with the company. By Welsco’s estimate, Brace’s monthly sales through the union was approximately $60,000 per month. After Brace’s resignation from Welsco, however, the company’s sales with the union dwindled to around $400 per month.  Further, Brace allegedly offered to hire two Welsco employees to work with him at his new employer, Gas & Supply, although they ultimately chose not to make the move.

                When Brace accepted his position with Welsco, he traveled numerous times to Arkansas to both interview and receive training in the welding and industrial gas business. After being hired on with Welsco, Brace also received, via mail, a non-compete agreement. Although there were conflicting claims between the parties as to whether this agreement was brought up during his interview process, the court ultimately held that Brace’s claim that he was unaware of the agreement before signing it was not credible. Nevertheless, Brace signed the agreement, without any negotiation or questioning.

                The agreement itself sought to prohibit Brace from “solicit[ing] or procur[ing] any of Welsco’s customers whom or which he had dealt with on behalf of Wesco in an effort to obtain or retain their business other than on behalf of Welsco for a period of one year following the end of his employment with Welsco.” Id. at *21-22. Moreover, the non-compete agreement was restricted solely to the counties that Brace did business for Welsco in his last six months of employment. Id. at *23. Finally, the duration of the agreement was only for one year following the end of his employment with the company. Id. at *22.

                After determining that choice of law required the court to apply Arkansas substantive law, the court held that the agreement was valid and enforceable under Arkansas law. Id. at *21. First, the agreement restricted Brace to a geographic area that was smaller than the Welsco’s trade area. Under Arkansas law, if the geographic restriction is broader than the trade area of the former employer, it is invalid as unreasonable. The court also determined, citing several Arkansas decisions, that the one year duration for the agreement was reasonable. Finally, the court found that Welsco had a legitimate interest to protect, namely the loss of customers and personal relationships with them, with Brace’s non-compete agreement. Ultimately, looking to all the facts and interests, the court held that the agreement sought to prevent more than just ordinary competition on Brace’s part. Id. at *25.

                The court, however, determined that a preliminary injunction was not warranted in this case. In order to impose a preliminary injunction that would prohibit Brace from engaging conduct that agreement prohibited, Welsco would have to show that there was a threat of irreparable harm, the harm was greater to Welsco than the harm it would cause Brace, that enforcing the agreement did not harm the public interest, and that Welsco had a likelihood of succeeding on the merits. First, the court determined that the recitation in the agreement that Welsco was automatically entitled to injunctive relieve had no effect on the court’s decision-making. Instead, the court determined that, as a matter of jurisdiction, it could only provide injunctive relief if money damages were inadequate. And, in fact, the court determined that money damages were adequate to provide relief to Welsco. The court was unpersuaded by testimony by Welsco executives that it was impossible to calculate. Because Welsco was able to determine that it suffered around $60,000 in sales losses when Brace departed, and the non-compete agreement was limited to one year, damages would ultimately be ascertainable and injunctive relief would be inappropriate.

                Comment:

                Just because a noncompete agreement is vaild does not mean that an injunction will automatically be entered.  Under Texas law, a court makes independent assessments of enforceability and entitlement to injunctive relief.

Not all waivers of noncompete agreements are effective

             Employees seeking to avoid a non-compete agreement when ending an employment relationship should ensure that their former employer explicitly releases them from the agreement. Such was the case in Try Hours, Inc. v. Douville, 2013 WL 139584 (Ohio App. 2013). In Try Hours, Inc., the Sixth Appellate District of the Ohio Court of Appeals held that an integration clause within a termination agreement only excluded prior oral agreements and did not supersede a valid, enforceable covenant not to compete.

Try Hours, Inc. (“Try Hours”), an expedited freight company, hired Bryan Douville (“Douville”) as its director of operations on February 24th, 2010. Douville’s employment agreement included, among other provisions, a covenant promising:

For a period of one year after the termination of employment, employee [would] agree that he/she [would] not engage either directly or indirectly, as an employee, investor, shareholder, officer, director or agent of any company which competes with Try Hours…

Try Hours, Inc., 2013 WL 139584, at *2. The agreement went on to define compete as “any company which provides transportation services for hire on an expedited basis as that term is generally understood in the transportation industry.” Id. at *2. The agreement further prohibited Douville from soliciting the employees and customers of Try Hours. Id.

            Ultimately, Try Hours decided to terminate Douville’s employment on the basis that he did not fit with the organization. Upon termination, Douville executed a termination agreement that gave him, among other things, back pay for some time and health benefits. The termination agreement also included an integration clause that made null and void any prior oral agreements between the parties about the subject matter of the termination agreement. The termination agreement did not, however, mention the non-compete covenant.

            Douville proceeded to work for Premium Freight Management (“PFM”), a competitor, on the assumption that the integration clause of his termination agreement voided the non-compete clause. Upon learning that Douville was employed by PFM, Try Hours filed a lawsuit against both PFM and Douville. Try Hours filed and the trial court later granted a motion for a preliminary injunction seeking to prohibit Douville from violating the non-compete agreement. The court granted the motion on the basis that that the integration clause did not supersede the non-compete clause, and that the non-compete agreement was reasonable and enforceable.

            Appealing to Ohio’s Sixth District Court of Appeals, Douville argued that the trial court had erred because the integration clause voided the non-compete agreement, the preliminary injunction was improperly granted, and the non-compete clause was unreasonable and unenforceable. The court, however, did not accept any of the points of error. First, looking to the plain language of the termination agreement, it was clear that the agreement only superseded prior oral agreements, and not the written non-compete agreement. Second, the court was not convinced by the argument advanced by Douvile that because it had not enforced a non-compete agreement against one employee, Try Hours had waived enforcement with respect to him. This reliance on waiver was not appropriate because there was no evidence that a one-time exception to enforcing another agreement mislead Douville into believing Try Hours had waived enforcing the non-compete clause against him.

Finally, the court disagreed with Douville’s argument that the non-compete agreement was unduly harsh. The Court flatly determined that Douville had not shown any evidence that the agreement would prevent him from seeking alternative employment. Douville could, the Court reasoned, find employment with a trucking company outside of the expedited shipping industry. As such, the agreement was reasonable because of the specialized niche that expedited shipping fell under. Prohibiting Douville from working in the expedited shipping industry simply sought to prevent unfair competition that could happen. For example, working for PFM, Douville could utilize his knowledge of Try Hour’s contracted drivers to try to poach them—a legitimate concern in an industry that had a consistent shortage of capable expedited deliver truckers. Accordingly, preventing Douville for a period of one year, as the agreement provided, was not unduly harsh, nor did it harm third-parties or the public interest.

In sum, the court determined that the duration and scope of the non-compete clause was reasonable because it was limited to one year and only applied nationally in the expedited shipping industry. Nothing prevented Douville from finding alternative employment with non-expedited shipping companies. Because Douville only signed an agreement that canceled prior oral agreements, nothing prevented the written non-compete agreement from being enforced.