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

Texas courts routinely hold that at-will employment is "illusory" consideration.  Because the employer is free to terminate the employee at any time, the courts reason, giving an at-will job to someone is, legally speaking, meaningless.  Thus, non-compete agreements in Texas based upon that consideration are unenforceable.

Not all states agree.  While researching a noncompete matter in Illinois the other day, I came across this passage from a case there:
 

To be enforceable, a covenant not to compete must be ancillary to either a transaction (an otherwise valid contract), or a valid relationship.  Although an at-will employment agreement, whether written or oral, might not be considered "enforceable" in the strictest sense of the term, it is nonetheless an agreement and relationship with numerous legal consequences, imposing rights and obligation son both parties.  Therefore, a noncompetition covenant entered into by an at-will employee, whether the employee is employed under a written or oral agreement, complies with the requirement of ancillarity.  This is because a covenant in such a situation is not a "naked" restraint on trade, but instead is merely ancillary to the primary purpose of the relationship: an employer-employee relationship.  Thus, noncompetition covenants occurring in at at-will employment relationship are not enforceable per se.

According to this court, hiring an at-will employee subjects an employer to potential legal risk.  For example, the employee, even though she is at-will, is entitled to all protections under Title VII, the ADA, the ADEA, workers' compensation laws, the FMLA, and other laws.   The Illinois court held that at-will employment, therefore, is good consideration, not "illusory" consideration.  Although Texas courts disagree, it's interesting to examine foreign law holding otherwise.

www.felllawfirm.com

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In July 2001, Sysco, a distributor of food service products, issued a Request for Proposal (“RFP”). Among the companies that received the RFP were Mark III and BI.

Mark III and BI had a business relationship that involved them sharing information and customers.  Unbeknownst to Sysco, their relationship was formalized in a written contract. 

Mark III and BI submitted a joint response to the Sysco RFP.  Sysco accepted their proposal, awarding Mark III one function and BI a different function.

Sometime later, a BI employee left BI and became a Sysco manager.  The new Sysco manager then terminated several Sysco employees and replaced them with BI employees.  The manager then informed Mark III that it would no longer perform the functions awarded it under the RFP (and that BI would perform them).  BI informed Mark III that it would perform work for Sysco without Mark III’s help.

Mark III filed suit against Sysco for breach of contract, tortious interference with contracts and relationships, and aiding and abetting BI’s breach of fiduciary duty.

In support of its contract claim, Mark III pointed to language in Sysco’s letter awarding the RFP stating that “if there were any issues with either company that could not be resolved to Sysco’s satisfaction, it would be grounds for both companies to lose Sysco’s business.”  However, the court held that this language imposed no legal obligation upon Sysco to keep Mark III as one of the companies performing the work.

With respect to Mark III’s tortious interference claim, the court found that Sysco was unaware of the contractual relationship between Mark III and BI.  Thus, an essential element of a tortious interference claim could not be met.

The court also declined to accept Mark III’s invitation to recognize a claim for Sysco’s alleged “participating and assisting” BI’s breach of fiduciary duty.

From Mark III’s perspective, this case illustrates the importance of proper documentation of a business deal so that, if the deal falls through, the damaged party enjoys necessary legal protections.  Here, Mark III needed a more definite written contract with Sysco, to prevent work from being taken from Mark III and its partner in responding to the RFP, BI.

Mark III Systems, Inc. v. Sysco Corp., 2007 WL 529960 (Tex. App.—Houston [1^st Dist.] 2007).

www.felllawfirm.com

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Texas courts have long held that Texas law should determine whether non-compete agreements affecting Texas residents are enforceable.  As a result, Texas courts generally will not enforce out-of-state choice of law provisions.  However, as a recent Texas Supreme Court case illustrates, contractual forum selection provisions can alter that result.

In Re AutoNation, Inc. involved a suit filed in Broward County, Florida, by a Florida corporation (AutoNation) against one of its former employees for allegedly violating a non-compete agreement.  A forum selection provision in the agreement mandated that suit be filed there. 

Shortly thereafter, the former employee--who lived and had worked for AutoNation in Texas--filed suit in Texas state court, seeking a declaration that the non-compete agreement was unenforceable under Texas law, and seeking to prevent the Florida suit from going forward.  The ex-employee, citing some Florida case law, contended that a Florida court likely would apply Florida law to the contract.  Given Texas’ strong public policy favoring the application of Texas law to the contract, the ex-employee argued, a Florida court should not be permitted to adjudicate the dispute. The Texas trial court agreed and enjoined AutoNation from taking further legal action against the ex-employee outside of Texas.  The trial court held, "Texas public policy will likely be thwarted if AutoNation is permitted to litigate enforceability of the restrictive covenants solely in Florida and solely under Florida law."  The court of appeals affirmed.

The Texas Supreme Court reversed.  In doing so, the court held that forum selection clauses--unless procured through fraud or overreaching--are enforceable.  The court also acknowledged Florida's interest in the dispute (given that AutoNation's headquarters were located there).  The court then refused "to presume to tell the forty-nine other states that they cannot hear a non-compete case involving a Texas resident-employee and decide what law applies, particularly where the parties voluntarily agree to litigate enforceability disputes there and not here."

In a concurring opinion, Justice O'Neill wrote:

What is not apparent . . . is that enforcement of the forum-selection clause in this case will result in application of the contractual forum's law in a manner that will undermine Texas public policy. Had there been a clear showing to this effect, I might agree with the court of appeals' analysis, or at least would consider the trial court justified had it decided to abate the Texas declaratory judgment action pending the Florida court's decision. But a mere indication that the Florida court intends to apply Florida law does not, without more, justify a Texas court's interference with the parties' chosen forum.

Time will tell whether Justice O'Neill's concurrence takes some of the bite out of this decision.  Based upon her concurrence, the next Texas resident who's sued in a foreign jurisdiction for allegedly violating a non-compete agreement may contend: (a) the foreign jurisdiction is likely to apply its law and (b) that law is contrary to Texas public policy.  The latter point might be made, for example, if the foreign state’s law is that at-will employment is sufficient consideration for a non-compete agreement (as opposed to Texas law, which states that such consideration is “illusory”).  Whether a stronger showing on the public policy issue than was made in this case could change the result is unknown.

In the meantime, given Texas’ relative hostility to non-compete agreements, out-of-state companies who have employees here should consider adding non-Texas forum selection provisions to their non-compete agreements.  Based upon this decision, they may be enforceable.

www.felllawfirm.com

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Non-compete agreements routinely provide for the employer to get injunctive relief in the event the employee engages in post-employment competition. In a recent case, the agreement in question subjected the employee to potentially harsher penalties. 

The non-compete in question contained the following provisions:

14.     Restrictive Covenant. In consideration of the benefits being provided to the Employee pursuant to this Agreement as outlined in Section 12 and elsewhere, and the unique nature of the Firm's Clients and their business with the Firm as outlined in Section 12, the Employee shall neither call nor solicit, either for himself or for any other Person any of the clients of the firm for a period of twenty-four (24) months immediately following the Employee's period of active employment (the "Post Termination Period")….

15.     Payments to firm. …[T]he Firm and the Employee agree that should any Client of the Firm retain the services of Employee or any Person with whom Employee is associated at any time during the "post Termination Period", regardless of whether or not solicited by the Employee or such Person, the Employee shall pay to the firm an amount equal to 150% of the fees billed and accepted by such client during the twelve month period preceding the time when the client retains the services of the Employee or any Person with whom Employee is associated….

The court refused to uphold these provisions on the following grounds:

First, the court held that the monetary penalty was unreasonable. The court explained it in this way:  “[I]f Hardy prepared a $500 tax return for a client, and if the same client paid $50,000 during the previous year for accounting services provided by Mann Frankfort, Hardy would have to pay $75,000 to Mann Frankfort."

The court believed this to be excessive.

Second, the court objected to the “Restrictive Covenant” provision:

Hardy's restrictive covenant is not limited to the clients that he served. The agreement states that he may not call or solicit "any of the Clients of the Firm" for 24 months. The client-purchase provision similarly refers to "any Client of the Firm."  This type of restrictive covenant that does not require a connection between the clients and the person who is restricted by the covenant is overbroad. 

The court continued:

The agreement contains no geographical restrictions, no restrictions to clients that were actually served by Hardy while he was employed by Mann Frankfort, and an exorbitant fee for Hardy's service to clients that did business with Mann Frankfort.  We hold the restrictive covenant is unenforceable due to its failure to comply with the requirements of the Texas Business Code.  Because Hardy's agreement fails to comply with the Covenants Not to Compete Act, it is unenforceable, as written. (citation omitted)

In all cases involving non-compete agreements, the non-compete restrictions must be reasonable to be enforceable. In this case, the court held that the restrictions were unreasonable.

Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 2007 WL 1299661 (Tex. App.—Houston [1^st Dist.] May 3, 2007).

www.felllawfirm.com

• Email This
• Print
• Comments
• Trackbacks
• Share Link