Dallas Non-compete Lawyer : Non-compete Agreements Texas : Non-compete Contract

Many management attorneys are breathing a huge sigh of relief today.  In a much-anticipated decision (oral argument was almost two years ago), the Texas Supreme Court clarified what it takes to make a non-compete covenant enforceable.  In doing so, the court resurrected many agreements that were previously thought to be unenforceable.

For years, Texas courts have held that, with respect to non-compete agreements, a promise dependent upon continued at-will employment is no promise at all.  Such a promise was "illusory," the courts held.  Thus, a promise to give an at-will employee a raise, a promotion, stock options, or confidential information was "illusory," unless whatever was promised was delivered at the precise moment that the employee signed the agreement (otherwise, the employer could terminate the employee before fulfilling its promise).

Perhaps the most severe application of this rule occurred in the Trilogy case, decided by the Austin Court of Appeals in 2004. There, an at-will employee signed a non-compete agreement at 10:00 a.m.  Four hours later, the employer said, "Here’s the confidential information that we promised to give you in the agreement you signed this morning."  When the employer subsequently tried to enforce the non-compete agreement, the court held that the four-hour gap between the employee’s signing the non-compete and his receipt of the confidential information rendered the non-compete unenforceable (because the employee could have been fired in the interim, even though he wasn’t). The fact that he could have been fired meant that the employer’s promise to convey the confidential information (made at 10:00 a.m.) was dependent upon the [at-will] employee still being employed when he finally received the information.  Because there was no guarantee that the employee would still be employed at 2:00 p.m., the employer’s promise made at 10:00 a.m. was "illusory."   

That decision, even though a logical extension of the law as it existed at the time, is no longer the law in Texas.  In a case decided a few days ago, the court held that even in the case of an at-will employee, a gap between the employee’s signing the agreement and his receipt of the confidential information will not render the agreement unenforceable.  The moment the employee gets the confidential information--whether it occurs four hours, four weeks, or four months after he signs the agreement--the non-compete agreement becomes effective.  

The court has clarified the law, in a much needed way.  Non-compete agreements are now relatively more enforceable.  And I have lost one of the few lines in my typical non-compete speech that ever got a laugh (or at least a grin)--when I demonstrated how an employer should have an employee sign the non-compete agreement with his right hand, while accepting the confidential information with his left.  That’s no longer necessary.  A delay between the employee signing the agreement and getting the information is no longer fatal.

There’s a lot more to the case, and we will be discussing it in depth in the days and weeks ahead. But it’s time to find the non-compete agreements that we thought were dead and see if this decision has resurrected them.

Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, et al., No. 03-1050 (Tex. Oct. 20, 2006).

 

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An employee may be liable for breach of fiduciary duty to his employer—even if his employer suffers no actual damages as a result of the offending conduct.  So learned an employee in a recent case.

In that case, the employee, a Project Manager for a general construction contractor, was responsible for locating potential subcontractors for the project, soliciting bids from them, and directing the work of the subcontractors that were actually hired.

At one point, the Project Manager hired a subcontracting company owned by his mother-in-law and father-in-law.  Unbeknownst to his employer (the general contractor), the Project Manager and his wife personally profited in excess of $300,000 as a result of his wife’s parents being awarded the subcontracting work.  When the general contractor subsequently learned what the Project Manager had done, it sued the Project Manager for breach of fiduciary duty.  A bench trial verdict in the general contractor’s favor was affirmed on appeal.

Lessons:

1.   The court of appeals noted that a “fiduciary” is a person “who occupies a position of peculiar confidence towards another.”  The court added that a fiduciary relationship is characterized by “integrity and fidelity,” and it contemplates “fair dealing and good faith.”  The court concluded that the Project Manager’s duties were sufficiently important to make him a fiduciary of the general contractor.

2.   In a principal/agent fiduciary relationship, the duties owed by the agent include:  the duty to account for profits arising out of his employment, the duty not to act as (or on account of) an adverse party without the principal’s consent, the duty not to compete with the principal on his own account or for another in matters relating to the subject matter of the agency, the duty to deal fairly with the principal in all transactions between them, and the duty to deal openly and to fully disclose to his employer information that affects his employer’s business.

3.   In this case, the Project Manager argued that his use of his mother-in-law and father-in-law’s subcontracting company was for the general contractor’s benefit (and that the general contractor was not in any way harmed).  But the court held that the Project Manager’s failure to inform his employer that he personally benefited from using the subcontractor company constituted a breach of his fiduciary duty, and the Project Manager had to account for all profits he earned as a result of his breach.  The court held that it was “beside the point” that the general contractor may have suffered no damages; the Project Manager’s betrayal of trust warranted the verdict against him.

Daniel v. Falcon Interest Realty Corp., 190 S.W.3d 177 (Tex. App. Houston [1st Dist.] 2005, no pet.).

 

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In tortious interference with contract (or prospective business relations) cases, plaintiffs often contend that their contracts with customers—or employees—have been unlawfully interfered with. In many situations, the contract alleged to have been interfered with is an “at-will” contract (i.e., it is a contract that can be canceled by either party at any time, for any reason).

An at-will employment agreement was the subject of a similar claim in a case decided earlier this year. There, a consulting company (“Consultant”) provided services for a manufacturing company (“Client”). Consultant and Client entered into a “no-hire” agreement that read in part as follows:

Both parties agree to not, directly or indirectly, during the period that Consultant provides services for Client, and for a period of one year thereafter, solicit, employ or hire or induce to hire any person who is or has been an employee of either party unless otherwise consented to in writing.

Consultant provided one of its employees to do some consulting work for Client. Sometime later, the employee resigned from Consultant. Client then asked Consultant whether Consultant would object to Client hiring its former employee. Consultant did not consent to the hiring, but Client hired the employee anyway. Consultant then sued Client for breaching the no-hire agreement.

Consultant contended that it was entitled to recover damages in the amount of $341,000. This amount was derived from estimating what the Consultant would have earned based on the employee continuing to work for it for an additional year (minus expenses, including the employee’s salary). The district court granted the defendant Client’s motion for summary judgment, and the appellate court affirmed.

The court of appeals based its ruling on the fact that the employee was “at-will.” Thus, the court reasoned, Consultant’s damages could not be established with “reasonable certainty.” This language is from the court’s opinion:

The damages request relies on the assumption that [the employee] would continue working for [Consultant], earning consulting fees for the year in question. This type of contingency, created by his at-will status, is impermissible in Texas.

The employee could have resigned from Consultant at any time, for any reason. For example, even if Client had not hired the employee, another company (i.e., one that was not bound by an agreement not to hire) might have done so. Thus, Consultant had no guarantee that the employee would remain employed by it in any event, and the court could not know with “reasonable certainty” what Consultant’s damages [as a result of the Client hiring him] might me.


Things to consider:


1. This is a potentially significant decision because it calls into question whether a tortious interference claim can be based on interference with an at-will contract.

2. Perhaps significantly, this case was decided by the federal Fifth Circuit. Whether the Texas Supreme Court will adopt this holding is unknown at this time. It’s possible, based on its holding in Sterner v. Marathon Oil Co., 767 S.W.2d 686 (Tex. 1989) (holding that one can tortiously interfere with an at-will contract), that the Texas Supreme Court will not do so.

Blasé Industries Corp. v. Anorad Corp., 442 F.3d 235 (5th Cir. 2006).

 

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One of the most frequently-litigated issues involving noncompete agreements is whether the consideration given by the employer was adequate. There are generally two parts to the inquiry: one, whether the consideration given was real (i.e., not “illusory”); and two, whether the consideration given justified the noncompete agreement in question.

Giving a definite term of employment satisfies the first requirement, but it might not satisfy the second (because the court may not perceive a logical relationship between the term of employment given to the employee and the need to keep that employee from engaging in post-employment competition). Conversely, the giving of confidential information can satisfy the second prong, but if the promise to convey the information is not sufficiently definite, it may be held to be illusory.

In a case earlier this year, the consideration for the non-compete agreement consisted of:

        a.    a six-month term of employment;

        b.    employment beyond the initial six-month period for as long as the employer was satisfied with the employee’s work; and

        c.    a promise to convey confidential information.

Sometime later, the employee resigned, began working for a competitor, and was sued on his non-compete agreement. The employee contended that the non-compete was unenforceable. However, the trial and appellate courts disagreed, the latter holding that the employer “was obligated to fulfill its promises [to provide confidential information and specialized training] for at least six months.”  This promise to provide confidential information was held sufficient to make the covenant not to compete enforceable.

Thoughts:

1.  Courts have routinely held that a promise to provide confidential information in an at-will employment situation is not enforceable because there is no guarantee that the employee will get the information before she is fired (i.e., the employer might not get around to providing the information until days, weeks, or months after the agreement is signed).   Of course, if the employer promises to give the information when the agreement is signed, and does so, it might be enforceable.

2.  The facts of this case make the following argument by the employee possible:  "There was no guarantee that I would get the confidential information within the first six months of employment. Thus, my situation is not substantively different from an at-will employee who has no guarantee that he'll ever get the information he was promised." In this case, though, the court treated the above promises, collectively, as a guarantee that the employee would receive confidential information during the first six months of his employment (thereby making it a non-illusory promise).

3.  Belt and suspenders approach is best:  Combining a term of employment with a promise to provide confidential information at the instant the agreement is signed (and then doing it) is a good way to increase the likelihood that the non-competition agreement will be enforced.

4.  This is not to suggest that a term of employment per se makes a non-compete agreement enforceable.  The point of this case is, the court believed that a six-month term of employment meant that the employer's guarantee to provide confidential information (which gave the employer an interest in preventing competition) was not "illusory" (although the promise to provide confidential information might have been illusory in an at-will employment situation).



Pearson v. Visual Innovations Co., Inc., No. 03-04-00563-CV, 2006 WL 903736 (Apr. 6, 2006, no pet.).

 

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In a recent case, the employer's consideration in exchange for the employee's promise not to compete was set forth in the following provision:
 

Employer hereby agrees to provide to Employee any specialized training necessary, in the opinion of Employer, to allow Employee to conduct the duties of employment with Employer. Employer further agrees to provide to Employee any of Employer's proprietary and confidential information necessary to allow Employee to conduct the duties of employment with Employer.

The employee contended that this provision didn't obligate the employer to do anything, because the employer might have concluded that no specialized training (confidential information) was needed for the employee to do her job. The court [of appeals] disagreed:
 

[T]he trial court could have concluded that Rattikin was in fact bound to provide O'Brien with confidential and proprietary information and specialized training. The agreement merely gives Rattikin the option of determining, in its opinion, what confidential and proprietary information and training it should provide O'Brien during the course of her employment.

Observations:

1. The best practice for an employer is to unambiguously promise to provide confidential information at the moment the non-compete agreement is signed, and then do it.

2. This case illustrates the difficulty in predicting with certainty whether a particular non-compete agreement is enforceable. Clearly, the employee in this case had a plausible argument that the employer maintained sole discretion over whether to provide specialized training or confidential information, and that, therefore, the alleged consideration was "illusory." The court disagreed with this interpretation, but the employee (and her attorney) no doubt believed in the correctness of her legal position.



O'Brien v. Rattikin Title Co., No. 2-05-238-CV, 2006 WL 417237 (Tex. App.--Fort Worth Feb. 23, 2006, pet. filed).
 

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In our free market economy, it’s a given that competition is a good thing, right? Theoretically, yes, but courts have made it clear that competition, to be lawful, must also be “fair.”  A Texas case shed some light on the difference between fair and unlawful competition.

Renew Data Corporation ("Renew") provided computer forensic services for corporations. Renew would search its clients’ computer networks to assist them in prosecution and defense of litigation, responding to subpoenas, etc.

Shawn Strickler worked for Renew as a Director of Corporate Sales. Strickler had access to Renew’s customer lists and potential “opportunities,” and was intimately familiar with the services offered and prices charged by Renew.

Renew fired Strickler in November 2003. Shortly thereafter, Strickler became employed by one of Renew’s competitors.

A few weeks later, Strickler sent a letter to a potential customer, Computer Associates (with which neither Strickler nor his new employer had ever done any business). Strickler offered to help Computer Associates in connection with some pending government investigations.  Computer Associates indicated that it was willing to consider using Strickler, but it stated that it would also consider having Renew handle the project.

Over the next few days, Strickler, in an attempt to secure business from Computer Associates, began “subtly pointing out” to Computer Associates things he could offer that Renew could not (and he relied upon his intimate knowledge of Renew to make these distinctions). Computer Associates ultimately retained Strickler, rather than Renew, to handle the project.

Renew sued Strickler for tortiously interfering with its “prospective business relations” with Computer Associates. In response, Strickler contended that Renew could not prove one of the essential elements of the claim—that Renew had enjoyed “a reasonable probability that [it] would have entered into a business relationship” with Computer Associates.  After examining all of the evidence—including Computer Associates’ testimony that (a) it had a previous relationship with Renew and (b) had never heard of Stickler or his new employer before Strickler’s initial contact, the Court concluded that Renew could meet this element.

But, Strickler asked on appeal (after a jury verdict against him), “What is wrong with me contacting a potential customer and telling them that we can do the job better?”  How is that wrongful?

Of course, not all competition is wrongful—only “unfair” competition is wrongful.  To prove a claim for tortious interference with “prospective” business relations, a plaintiff must prove that an independently tortious or wrongful act by the defendant prevented the relationship from occurring.   To meet the “independently tortious or wrongful” standard, the defendant need not have committed a criminal act; rather, his conduct must merely be actionable under a different recognized tort.

The court found that Strickler had committed the tort of breach of fiduciary duty, and that this satisfied the “independently tortious or wrongful” element necessary to also make a tortious interference claim.  Significantly, the court noted that Strickler’s post-termination conduct constituted a breach of his fiduciary duty to his former employer, Renew.  The evidence showed, for example, that Strickler had, after his termination by Renew, used and disclosed the latter’s confidential information (including its pricing information) in an attempt to obtain Computer Associates’ business.  The court held that Strickler’s post-termination breach of his fiduciary duty to Renew (which conduct was committed by Strickler to maximize his chance of getting Computer Associates’ business rather than Renew) satisfied the “independently tortious or wrongful” element of the tortious interference claim.

Lessons learned:

1.  As this case illustrates, former employees who are not bound by enforceable non-compete agreements must nevertheless compete fairly, and they can be liable in tort if they fail to do so.

2.  Strickler’s interference with a “prospective” (not actual) business relationship was actionable because, in the course of seeking to obtain the business (and thereby keep Renew from getting it), he committed an independent wrong (breach of his fiduciary duty to Renew).

3.  One’s fiduciary duty can last even beyond the termination of employment, as Strickler found out here.


Renew Data Corporation v. Strickler, No. 03-05-00273-CV, 2006 WL 504998 (Tex. App.—Austin Mar. 3, 2006, no pet.).


 

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In situations in which an employee leaves one company and goes to work for another, a tortious interference claim may be asserted against the departing employee or the new employer. Tortious interference claims come in two types:  tortious interference with (an existing) contract, and tortious interference with prospective business relations.
 
A tortious interference with contract claim has the following elements: (a) a valid contract; (b) willful and intentional interference with the contract; (c) interference that proximately causes the plaintiff's injury; and (d) actual damage or loss.
 
A tortious interference claim can arise if a third party induces another's employee to breach his contract of employment for the purpose of obtaining the employee as his own or with the intent to injure the former employer. However, it must be shown that the third party's interference was the proximate cause of the breach of the relationship, and there is no actionable wrong if the employee acted on his own initiative.  A plaintiff must show that the defendant knowingly induced the employee or took an active part in persuading the employee to leave his job with the former employer. Courts have held that it is not enough that the new employer reaped the advantages of a broken contract after the contracting party had withdrawn from the commitment on his own volition; it is incumbent upon the plaintiff to show that the new employer actually caused or brought about the interference. Terminable-at-will contracts may be the subject of a tortious interference claim.
 
Another type of tortious interference claim can arise when a third party tortiously interferes with a noncompete agreement between an employer and its employee.  An employer who believes that its ex-employee has violated her noncompete agreement may, in addition to suing the employee to enforce the noncompete agreement, sue the "new" employer for tortious interference.

Another type of claim typically asserted in these situations is tortious interference with prospective business relations.  The elements are (a) there was a reasonable probability that the plaintiff would have entered into a business relationship with a third person; (b) intentional interference with the relationship; (c) the defendant's conduct was independently tortious or unlawful; (d) the interference proximately caused the plaintiff's injury; and (e) the plaintiff suffered actual damage or loss. The plaintiff does not have to prove that the contract would have been made but for the interference. The plaintiff only must show that the formation of a contract was reasonably probable.  These claims often arise with respect to prospective customers or employees.

 

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Even absent an enforceable noncompete agreement, a Texas employer may be able to prevent, or recover damages for, certain forms of unfair competition. For example, an employer may have a claim against a former employee for taking, using or disclosing and wrongfully using the employer's confidential or proprietary information.

In Texas, a claim for misappropriation of trade secrets involves the following elements:  (1) the existence of a trade secret; (2) a breach of a confidential relationship or improper discovery of the trade secret; and (3) use of the trade secret without authorization.  A trade secret is "any formula, pattern, device, or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."  Although employers are entitled not to have their trade secrets misappropriated, former employees are allowed to use the general knowledge, skills, and experience acquired during employment to compete with a former employer.

Texas courts examine the following criteria in determining whether information is entitled to trade secret protection:  (1) the extent to which the information is known outside the employer's business; (2) the extent to which it is known by employees and others involved in the employer's business; (3) the measures taken by the employer to guard the secrecy of the information; (4) the value of the information to the employer and its competitors; (5) the amount of effort or money expended by the employer in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

A frequently-litigated issue involves whether a customer list, or information about a customer, is a trade secret. There is no easy answer to this question, and the particular facts of each case must be examined.  One thing Texas cases are clear about is that, for something to be treated as a trade secret, it must actually be secret. Texas cases routinely consider these factors when determining whether a customer list is a trade secret: (1) what steps, if any, an employer has taken to maintain the confidentiality of a customer list; (2) whether a departing employee acknowledges that the customer list is confidential; and (3) whether the content of the list is readily ascertainable.  The last factor is heavily litigated, as employees often contend that the identities of customers can be found in public sources, such as telephone books.

Regarding the second element-breach of a confidential relationship or improper discovery of the trade secret-a person is liable for disclosure or use of trade secrets if he either (1) discovers the secret by improper means or (2) after properly acquiring knowledge of the secret, he breaches a confidence reposed in him.

If an employer proves that its trade secrets have been misappropriated, it may seek damages and injunctive relief.  Obtaining injunctive relief requires proving that, absent the relief, irreparable harm will occur.  However, courts have held that the threatened disclosure of trade secrets constitutes irreparable injury as a matter of law.
 

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Employees owe various duties to their employers, including a general duty of loyalty. This duty requires employees to act primarily for the benefit of their employer in all matters connected with their employment. Failure to do so may constitute a breach of fiduciary duty, or breach of the duty of loyalty.
 
For example, an employee must deal openly with her employer and fully disclose information about matters affecting the company's business. An employee cannot exploit for her own benefit an asset or opportunity that should belong to the employer. That is, the employee may not divert opportunities from the employer to the employee's own benefit. If an employee, while employed by his employer, uses his position to gain a business opportunity belonging to the employer, such conduct constitutes an actionable wrong. Indeed, an employer may succeed in a claim for diversion of a business opportunity without demonstrating that it would have availed itself of the business opportunity had the employee not diverted it.

While still employed, an employee may not actively compete with his employer without violating the duty of loyalty. However, an at-will employee may plan to compete with his employer, and may take active steps to do so while still employed. The employee has no general duty to disclose his plans and may secretly join with other employees in the endeavor without violating any duty to the employer. Despite the employee's general right to plan to compete, the employee cannot (while still employed) solicit his employer's customers in preparation to complete with the employer.  Further, at lease one Texas court has suggested that an employee's preparation to compete may constitute a breach of the employee's duty of loyalty if the preparation is "significant"--e.g., where a supervisor or manager acts as a "corporate pied piper" and lures all of his employer's personnel away, thus destroying the business.
 
An employee may also violate the duty of loyalty to his employer by accepting a payment or benefit during the course of employment without reporting it to the employer. An employee is required to give her employer a full accounting of anything of value received while on the job, including tips, gratuities, and gifts. Unreported receipt of a payment or benefit is a potential violation of the employee's duty of loyalty, even if the employer suffers no economic harm as a result of the payment.  This general duty to report is intended to ensure that the employee's loyalty to the employer is not diverted.
 

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A provision prohibiting an employee from soliciting his former employer's remaining employees must meet the requirements applicable to noncompete agreements. Trying to attract workers constitutes fair competition (unless it is unfair, as it might be if an employee raiding provision prohibits it, or if doing so constitutes tortious interference). 
 

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A promise not to disclose trade secrets or confidential information is not a covenant not to compete. Thus, the requirements applicable to noncompete covenants do not to apply.  Non-disclosure agreements are enforceable (however, whether the information sought to be protected is actually confidential may be contested).

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Provisions prohibiting the solicitation of customers are treated as covenants not to compete (and thus must meet the requirements applicable to all noncompete agreements). Unlike disclosing the employer's confidential information (which is legally actionable, even without an express agreement by the employee that he will not do so), soliciting the employer's customers constitutes fair competition (unless done via a theft of the employer's trade secrets, a breach of fiduciary duty, etc.), and thus is not actionable unless prohibited by a valid covenant not to compete.  Because the scope of a covenant must be reasonable, a provision prohibiting a salesperson from soliciting any of his former employer's customers might be unreasonable (and might have to be reformed), but a provision restricting the employee from soliciting customers with whom he personally dealt would be relatively more enforceable.

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Practical considerations in this area of the law include the following:
 
For the Former Employer :

1.  In addition to (or in lieu of) a non-compete provision, an employment agreement may contain non-solicitation or employee raiding provisions. A non-solicitation provision typically prohibits a departing employee from soliciting his former employer's customers. The "old" employer should be cognizant of the fact that solicitation
can be very difficult to prove. The departing employee is likely to contend that his new customers contacted him (rather than him soliciting them). Many times, the customers will side with the departing employee. Before filing suit for breach of a non-solicitation agreement, an employer should be confident that it will be able to provide that solicitation occurred.
 
2. Counterclaims are likely. A former employee who is sued for violating a non-compete agreement may file a counterclaim for discrimination, harassment, unpaid wages, or for some other alleged wrong. Before suing a former employee, an employer should try to anticipate possible counterclaims.

3.   One-size-fits-all agreements are not advisable. Every state has its own laws governing non-compete agreements. It is virtually impossible to draft a non-compete agreement that will be enforceable in all 50 states.  Non-compete agreements are particularly difficult to enforce in Texas.  It is important that all employers - and, in particular, non-Texas companies that have employees in
Texas - ensure that their agreements comply with Texas laws.
 
For the Employee:

1. Give everything back. A departing employee should return all of his former employer's property. Taking the former employer's documents or information (including copies thereof) can get the employee sued for conversion, theft of trade secrets, etc. Even in cases where the employee has not signed an agreement requiring her to return company property, she should do so.

2. Beware e-mails. Employees sometimes mistakenly think that e-mails they send from work are "private."  Not so.  By searching computer hard drives and networks, employers can locate e-mails received and sent by former employees, including e-mails that the employee had previously deleted. E-mails sent and received by employees can enable the employer to prove wrongful solicitation of the employer's clients, breach of fiduciary duty, theft, etc.
 
3. Beware phone calls. As with e-mails, employees sometimes erroneously believe that telephone calls they make are undetectable. But telephone records subpoenaed by an employer can yield evidence of wrongful conduct (e.g., solicitation of the employer's customers).  Employees
must be mindful of the fact that telephone calls, like e-mails, are not completely undetectable.

For the "New" Employer:

1. Ensure the new employee is "clean." To the extent possible, the new employer should ensure that its new employee does not possess, use, or disclose to the new employee's other employees any of the former employee's confidential, proprietary or trade secret information.
 
2. The new employer should also get assurance from its new employee that the latter is not a party to a non-compete agreement that prevents the employee from working for the new employee. The new employee obviously needs to protect itself from being sued for tortious interference
with contract, misappropriation of trade secrets, or other wrongful acts.

 

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Texas non-compete agreements often contain various other provisions, including the following:
 
Choice of Law.  Non-compete agreements typically will specify which state's law will decide whether, and the extent to which, a non-compete agreement is enforceable. Even in cases in which the parties have agreed that the law of a state other than Texas will apply, the court will determine which state "has the most significant relationship to the transaction and the parties," and it will apply that state's law.  Usually, if the employee to be bound by the non-compete agreement is working primarily in Texas, Texas law will apply.
 
Venue. Covenants not to compete sometimes contain provisions specifying the venue (e.g., the state and federal courts of Dallas County, Texas) of any action to enforce the covenant. These are generally enforceable. However, a provision making a state other than Texas the venue may not be enforceable if Texas law governs the non-compete agreement and it is shown that the
foreign state likely would not apply Texas law.
 
Arbitration.  Employment agreements, and other agreements containing non-compete provisions, often mandate that any dispute be submitted to binding arbitration rather than court. From the employer's perspective, it is imperative that the arbitration provision permit the employer to seek injunctive relief (including a temporary restraining order or temporary injunction) in
court to prevent a non-compete violation (or disclosure of confidential, proprietary, or trade secret information). To prevent a former employee from violating non-compete or non-disclosure provisions, or from stealing trade secrets, an employer may require more immediate injunctive relief than could be obtained in arbitration. Employers must also be mindful that, to prove a non-compete violation (or theft of trade secrets), they may need more discovery than is typically permitted in arbitration (and they may want to provide for discovery, including expedited discovery, in their employment contracts).
 
Clawback Provisions.  In some cases, the agreement in which the covenant not to compete is contained will state that the employee, in the event he violates the non-compete provision, must return the consideration given by the employer. This might occur, for example, where the employer gives company stock in exchange for the covenant. Provisions requiring the return of the consideration are enforceable if the court finds that the employer would not have given the consideration "but for" the employee's promise not to compete (in which case the promises are said to be "dependent" upon each other). 

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Special requirements must be met for a physician to be bound
by a non-compete agreement in Texas. In addition to the requirements discussed in other posts, the covenant must:
 
• not deny the physician access to a list of his patients whom
he had seen or treated within one year of termination of
the contract or employment

• provide access to medical records of the physician's
patients upon authorization of the patient and any copies
of medical records for a reasonable fee

• state that any access to a list of patients or to patients' medical
records after termination of the contract or employment shall not
require such list or records to be provided in a format different than
that by which such records are maintained except by mutual consent
of the parties to the contract

• provide for a buy out of the covenant by the physician
at a reasonable price or, at the option of either party,
as determined by a mutually agreed upon arbitrator or,
in the case of an inability to agree, an arbitrator of the
court whose decision shall be binding on the parties
 
• state that the physician will not be prohibited from
providing continuing care and treatment to a specific
patient or patients during the course of an acute illness
even after the contract or employment has been
terminated.
 

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An employer may be entitled to injunctive relief to enforce a non-compete agreement in Texas. To obtain permanent injunctive relief, it is not necessary to prove that, without an injunction, the promisee will suffer irreparable harm. But that is not the case with respect to temporary injunctive relief.  Most courts hold that to obtain temporary injunctive relief to enjoin violation of a non-compete provision, one must prove irreparable harm (i.e., that money damages are inadequate).

Irreparable harm may exist if the damages resulting from the breach are hard to quantify, or if the injury cannot be compensated in damages. The threatened disclosure of trade secrets to a competitor can constitute irreparable injury, especially if it would enable a competitor to gain a competitive advantage. Moreover, proof of a continued breach of a non-compete agreement by a highly-trained employee may constitute irreparable harm. In determining whether to grant temporary injunctive relief, the court must balance probable harm to the employer if the injunction is not issued with probable harm to the employee if it is.

In addition to injunctive relief, a court may award damages resulting from breach of a non-compete covenant. Awardable damages might include lost profits resulting from the departing employee's breach of the noncompetition agreement. A non-compete agreement can contain a liquidated damages provision, but the provision must constitute a reasonable forecast of just compensation for the harm caused by the breach.
 
If the court holds that the scope of the non-compete agreement is too broad (e.g., if the court holds that the geographic scope should be limited to Dallas /Fort Worth rather than to all of
Texas), it will reform the scope to make it reasonable. However, if reformation of the scope is required, damages may only be awarded for "post-reformation" violations. For this and other
reasons, an employer has an incentive to ensure that the scope of a non-compete agreement is reasonable.

Attorney's fees and costs may be awarded to the promisor (employee) if he proves that: the scope of the covenant is unreasonable, the employer knew at the time the agreement was signed that it was unreasonable, and the employer has attempted to enforce the covenant to a greater extent than necessary to protect its goodwill or other business interests. Texas cases also hold that an employee who seeks a judicial declaration that a covenant not to compete is unenforceable and void in its entirety may be entitled to recover attorney's fees under the Texas Declaratory Judgment Act.
 
There is no provision in the non-compete statute for an employer who successfully prosecutes an action against an employee to recover attorney's fees.  At least one Texas court of appeals has held that the non-compete statute's silence on this issue precludes an employer from recovering its fees under the statute (or any other applicable law).  However, another Texas court has permitted an employer to recover its fees under the Texas statute allowing the prevailing party in a contract dispute to recoup its attorney's fees.
 

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A non-compete agreement in Texas must not impose upon the employee greater restraints than are necessary to protect the business and goodwill of the employer.  Moreover, the scope must bear some relationship to the activities of the employee.  It is generally permissible to keep an employee from soliciting business from customers with whom he dealt during his employment, and it is likewise generally permissible to restrain the employee from competing in the geographic area in which he worked.  Thus, an employee who works in Dallas might be prevented from post-employment competition in Dallas (but he might be able to complete in Houston). In terms of the appropriate length of the covenant, although covenants typically are 1-2 years in length, courts have upheld restrictions of 2-5 years in length (or longer in the context of a business purchase).  In the event a covenant is too broad, the court will reform it so that it is reasonable.

 

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Once an otherwise enforceable agreement has been found to exist, the next question is whether the non-compete provision is "ancillary" to that otherwise enforceable agreement. Texas courts have made it clear that the following must be true for a covenant not to compete to be ancillary to an otherwise enforceable agreement:
 
•The consideration given by the employer [in the otherwise enforceable agreement]
  must give rise to the employer's interest in restraining the employee from competing.

•The covenant not to compete must be designed to enforce the employee's return promise [contained in the otherwise enforceable agreement].

In the typical scenario, the employer contends that confidential information it provided to the employee gives rise to its interest in restraining competition. That contention intuitively makes sense:  if the employer gives the employee the employer's most important secrets (e.g., financial information, customer lists, marketing strategies, research and development plans, etc.), it makes sense that the employer would not want the employee taking those to a competitor. Of course, the employee could always argue, "The non-disclosure agreement I signed prevents me from disclosing those items to a competitor, thus the non-compete is unnecessary." But the employer's obvious rejoinder is, "Once you leave us and begin working for a competitor, our ability to monitor your activities is virtually nonexistent. Thus, we need not only a non-disclosure agreement, but also a covenant not to compete." In some cases, the employer is able to convince the court that the promises it made and the confidential information it gave justifies the non-compete provision. The employee's promise not to disclose the confidential information usually satisfies the
second prong of the test.
 
To be confidential, information must be "secret," and if information is publicly available, it probably will not be deemed confidential. For example, information about customers that is publicly obtainable (e.g., from telephone books, industry journals, or even the employer's website) may be held not to be confidential.

Confidential information is not necessarily the only consideration that can justify a covenant not to compete.  For example, giving an employee ownership in a company, particularly a privately-held business, may support a non-compete. However, confidential information may be the best consideration that can be given, because the connection between the information conveyed and the employer's need to maintain its secrecy via a non-complete agreement makes sense.
 
Some employer promises that satisfy the otherwise enforceable agreement requirement may not satisfy the "ancillary" requirement. For example, an employer may satisfy the otherwise enforceable agreement requirement by giving the employee a term of employment. But a term of employment may be held insufficient to give rise to an interest in restraining competition. To determine whether a particular item of consideration is sufficient to support a non-compete covenant, one might ask, "Is there a logical relationship between the consideration given by the employer and the non-compete covenant the employer seeks to enforce?" If the consideration in question is confidential information, a logical relationship may be found to exist. But other types of consideration—e.g., a signing bonus—may be found lacking by that standard.
 
It is important to emphasize that the "ancillary" requirement is far easier to meet in the context of a purchase of a business than in an employment situation.  Another key difference between a non-compete agreement in a purchase of a business context and an employer/employee context: In the former, the burden is on the promisor (i.e., the person agreeing to be bound by the non-compete) to prove the agreement is unreasonable; in the latter, the promisee (employer) must prove the agreement is reasonable.
 

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Non-competition covenants are typically contained in written (employment) agreements that contain many other provisions. The first step in determining whether an enforceable non-compete agreement exists is to mentally draw a line through the non-compete provision and examine the remaining provisions. The pertinent question with respect to the remaining provisions is: Have both the employer and the employee made binding promises to each other? Both the employer and the employee must make binding promises for the non-compete covenant to have any chance of being enforced.

Usually, whether the employee has made a binding promise to the employer is not at issue. Employees typically promise not to disclose confidential information, to return company property upon termination, etc. Promises such as these are binding.
 
The issue that gets litigated much more often is whether the employer has made a binding promise to the employee. This question arises most frequently when the employee is employed "at-will." Many Texas courts have held that an employer's offer of at-will employment (i.e., an employment relationship in which the employee can be terminated at any time for any reason) is meaningless (or "illusory," as the courts say). Thus, if the only consideration given by the employer for the non-competition covenant is at-will employment, the employee can have a high confidence level that the covenant is unenforceable.

Another type of consideration that courts routinely have rejected is past consideration. Many times, with respect to an incumbent employee, an employer will hearken back to consideration previously given. For example, a non-compete provision may be supported by "confidential information received by the employee in the past." Courts have held that past consideration is no consideration at all. Thus, if an incumbent employee is to be bound by an enforceable non-compete covenant, the employer must give new consideration.
 
So what consideration can the employer give to satisfy the "otherwise enforceable agreement" requirement? Clearly, a definite term of employment (e.g., a one-year term) would be sufficient. Likewise, an at-will employee who, despite his "at-will" designation, is entitled to thirty days' written notice before being terminated has been given good consideration (i.e., he has, in effect, a thirty-day employment contract).
 
One of the most-litigated issues involves the extent to which a provision stating that an employee will receive confidential information (or specialized training) constitutes a binding promise by the employer. Often, the agreement merely recites that the employee "acknowledges" she will receive confidential information. Particularly where the employee is at-will, an acknowledgment may be insufficient because the employer may be held not to have actually promised to do anything. The employee may contend that her "acknowledgment" does not actually guarantee that the employer will provide confidential information. Because only the employer's promise can guarantee that confidential information will be given, so the argument goes, no promise by the employer equals no consideration. This contention has found favor with some courts.
 
An employer's promise to provide confidential information is probably good consideration, as long as the employer actually does so.
 
As noted above, the existence of an "otherwise enforceable agreement' is a prerequisite to a non-compete provision being enforceable. But it is not sufficient to make the covenant enforceable.  If this threshold requirement is met, the next question is whether the non-compete provision (which is not even relevant in assessing whether an otherwise enforceable agreement exists) is "ancillary to the other enforceable agreement at the time the agreement was made."  That requirement will be discussed in another post.

 

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In Texas, non-compete agreements are generally disfavored as unlawful restraints on trade. Courts recognize that in our capitalist economic system, workers must be free to compete with each other, work where they wish, etc. However, the law also acknowledges that an employer may have interests that are important enough to warrant restrictions on post-employment competition.

Whether a particular non-compete agreement is enforceable in Texas cannot be known with absolute precision. The law in this area is complex, courts frequently differ with each other, and much depends on preferences of individual judges. However, both the law and experience provide useful guidance.

A non-compete covenant is typically just one provision contained in a larger employment agreement. In Texas, for a non-compete covenant to be enforceable, the following requirements must be met:

•An otherwise enforceable agreement must exist.

•The noncompete covenant must be "ancillary" to the otherwise enforceable agreement at the time the agreement is made.

•The scope of the noncompete covenant must be reasonable in terms of time, geographical area, and scope of activity to be restrained, and must impose restrictions no greater than necessary to protect the employer's goodwill or other business interest.

These requirements are explained in other posts in this Overview section.

 

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