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.