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

In a recent case in Houston, the First District Court of Appeals upheld a trial court’s failure to reform an overly broad covenant not to compete. The covenant was overly broad in three respects: (a) there was no geographical limitation; (b) the covenant prohibited the employee from contacting all of his former employer’s customers, not merely the customers with whom the employee personally dealt; and (c) the employee was required to pay a harsh financial penalty if any customer continued doing business with him (whether or not the employee solicited the customer).

Tex. Bus. & Com. Code § 15.51(c) states in part:

[T]he court shall reform the covenant to the extent necessary to cause the limitations contained in the covenant as to time, geographical area, and scope of activity to be restrained to be reasonable and to impose a restraint that is not greater than necessary to protect the goodwill or other business interest of the promise and enforce the covenant as reformed, except that the court may not award the promise damages for a breach of the covenant before its reformation and the relief granted to the promise shall be limited to injunctive relief. (emphasis supplied)

Despite this provision’s seemingly mandatory requirement that an overly broad covenant be modified, the trial court failed to do so, for two reasons. First, the employer did not plead for reformation. Second, the employer only sought damages. The latter point was significant, the court believed, “because the only relief available under a reformed covenant—injunctive relief—was not sought by [the employer].” 

Practice pointer: In cases in which you believe the covenant may be too broad (which may be true in some respect in most cases), plead for reformation. Also, seek injunctive relief, even if you don’t think you’re entitled to a temporary restraining order, to increase the likelihood that the court will view reformation as something that is warranted.
 

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As this article indicates, trade secret theft annually costs American businesses billions of dollars.  And, as the author notes, the theft can take years to discover.
 

http://taosecurity.blogspot.com/2007/05/latest-plane-reading.html

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Interesting piece on increasing pervasiveness of non-compete agreements throughout the United States:
 

http://minnesota.publicradio.org/display/web/2007/04/24/noncompete/

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As we noted last week, how strongly an employer must promise to provide confidential information to have an enforceable non-compete agreement remains unclear, even after Sheshunoff.  Interestingly, though, there appears to be some divergence on the issue between the Dallas and Houston courts of appeal.  And the Austin court seems to be sympathetic to the Dallas court’s position.

Before Sheshunoff, the Dallas court, in three cases (C.S.C.S., Strickland, and Tom James), appeared skeptical that language such as “may reveal,” “Employee will become familiar with,” and “this Agreement is intended to recognize that Employer provides Employee with confidential information,” obligated the employer to provide such information.  However, in two of the cases, the fact that the alleged promises depended upon continued at-will employment were key factors in the decisions.  And the third case—C.S.C.S.—involved the weakest language (“may reveal”). 
 

However, the Houston court—or, at least, the First District of that court—held that an employee’s acknowledgement that she would get confidential information constituted an implied promise by the employer to give the information.

In the well-known Trilogy case out of the Austin Court of Appeals, the court seemed skeptical of the employee’s contention that his “acknowledgement” that he’d get information meant that the employer had impliedly promised to give it.  But the decision there hinged on the gap in time between the employee’s signing the agreement and receipt of the information.

Now that Sheshunoff has decided that a basis upon which several Texas courts had earlier voided non-compete agreements was--i.e., that a gap in time existed between  the employee's signing of the agreement and receipt of the information--was invalid, we can expect  further clarification on other disputed points, including how definite the employer's promise to provide the information must be.
 

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In the context of one company purchasing another company, a non-compete agreement is far more enforceable than it would be in an employer/employee situation.  That's hornbook law.  A good explanation for this was given in a Texas Supreme Court case:
 

In the case of covenants not to compete incident to the sale of a business, the seller's promise not to compete with the buyer increases the value of the business to the buyer.  Without such a covenant the value of the business would be reduced, lessening the likelihood that businesses would be purchased.  In employee covenants, the special training or knowledge acquired by the employee through his employer is valuable consideration and often enhances the value of the employee to other firms.  To allow employees to use or sell this valuable training or knowledge upon leaving a firm would create a disincentive for employers to train or educate employees.

Thus, in buy/sell situations, covenants not to compete are understandably easier to enforce, and their scope can be much broader than employer/employee covenants can be.

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In several states, an employer may--via a non-compete agreement--prevent a departing employee from taking advantage of the relationships the employee developed with the former employer's customers.  This is true whether or not the identities of the former employer's customers are "confidential."

In those states, therefore, the former employer can successfully contend, "We introduced you to our customers and you've developed good relationships with them, but you can't compete with us by taking advantage of those relationships."

There are actually a couple of Texas Supreme Court cases that stand for the proposition that protecting customer relationships is an interest sufficient to justify a non-compete agreement.  However, those cases have been largely ignored in recent years.

In Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 387 (Tex. 1991), the court noted:

 

The fundamental legitimate business interest that may be protected by such covenants is in preventing employees or departing partners from using the business contacts and rapport established during the relationship of representing the accounting firm to take the firm's customers with him.

In an earlier case, Henshaw v. Kroenecke, 656 S.W.2d 416, 418 (Tex. 1983), the court had stated:

 

Henshaw had a right to protect himself from the possibility that Kroenecke would establish a rapport with the clients of the business and upon termination take a segment of that clientele with him.

Today, whenever an employee leaves and begins "stealing" his former employer's customers, courts focus on whether the identities of those customers are "confidential."  Usually, they are not.

To determine whether customer identities are confidential, courts ask questions such as, "Can the information be easily located (e.g., in telephone books or trade journals)?, and "Did the employer take reasonable steps to keep the information confidential?"  These standards are difficult to meet.

But in several other states, the employer need not prove that the information is confidential.  Rather, protection of the employer's relationship with its customer--whether or not the customer's identity is secret--is sufficient to support a non-compete agreement.  A few Texas cases used to speak in those terms as well.
 

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Even after Sheshunoff clarified the law governing non-compete agreements, we continue to see agreements that cause us to scratch our heads and wonder whether they are enforceable. Sheshunoff made clear that, even in an at-will employment situation, a delay between the employee signing the non-compete agreement and receiving the information is not fatal to the agreement’s enforceability.

However, “How strong must the promise be?” is a question that remains somewhat unanswered. Prior to Sheshunoff, several appellate court decisions considered agreements in which (a) the employee “acknowledged” that he would receive confidential information; (b) the employer expressed its “intent” to provide such information; (c) the employer promised to provide information to the employee that the employee “needed” to do the job, and so on.

In those cases, the employee routinely contended that the employer really didn’t promise anything (because the employer could decide not to provide information). Thus, the employee argued, the employer couldn’t rely upon an alleged promise to provide confidential information to justify the employee’s promise not to compete.

Unfortunately, many, if not most, of the pre-Sheshunoff appellate cases that dealt with these issues invalidated the non-compete agreements in question because the alleged employer promises were “illusory”—because they depended upon continued at-will employment.  Before Sheshunoff, a promise dependent upon continued at-will employment was meaningless.  After Sheshunoff, such a promise is enforceable.

Again, though, what is a “promise”?  Must the word “promise” appear in the agreement? Probably not. Terms such as “shall provide” or “agrees to provide” should suffice. But whether a simple “acknowledgement” by the employee that he will receive confidential information is enough is unclear. Some of the pre-Sheshunoff cases opined that terms like these might constituted “implied” promises on the part of the employer to provide information, but a lot of that language was dicta (because the cases were decided on the issue noted above). Now that Sheshunoff has held that the conveying of information need not occur at the moment of signing the agreement, we can expect to get some appellate decisions that squarely define how strong the employer’s promise must be.

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Very often, a departing employee won't take customer lists or other confidential documents with him, but a lot of the information he has memorized will be considered by his former employer to be confidential.  Customer names and contact information, for example, are routinely memorized by sales representatives.  Nevertheless, the sales representative's employer typically contends that such information is confidential.

Some states have adopted the so-called "memory rule," according to which the departing employee may use anything that's in his head to memory.  Thus, as long as the employee didn't take the customer list with him, he may use the information from that list that he has committed to memory.

In Texas, though, authority exists for the proposition that whether the information is contained on a document the employee has taken or in the employee's head, trade secret protection may attach to the information.  The key inquiries are:  (a) whether the information is really secret (e.g., whether it is widely known in the industry); and (b) what steps did the employer take to keep the information secret?

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In trade secret cases, the parties routinely produce confidential and proprietary information to each other.  Typically, a protective order is entered that permits the parties to designate information as confidential (which means, inter alia, that it can only be used in the litigation) and states how the information is to be treated. 

Super-sensitive information can be designated as "Attorneys Eyes Only," which means that the attorneys, but not their clients, may review the information.

But what about in-house counsel?  Are they permitted to see the information?  As the attached article indicates, the answer to this question is not always obvious.
 

http://www.hartfordbusiness.com/news1383.html

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