Reformation of Texas Noncompete Agreements

Posted on August 29, 2011 by Robert Wood

Often in litigation involving noncompete agreeents, an employee bound by a noncompete agreement will contend that the scope of the restrictions contained in the agreement are overly broad. The employee may, for example, argue that an agreement prohibiting customer solicitation is too broad. Or, an employee may argue that a covenant not to compete is too restrictive; e.g., the employee may allege that the restrictions last too many months or years, or that the geographic restrictions are unreasonable.

A recent Texas appellate case concerned a noncompete agreement that contained no geographic restriction. Rather, the agreement stated that the employee would “not work for a competing third party for the term of one year.” The agreement further stated that the employee would “not start a publication outside of [his employer] for a term of one year.”

The Texas appeals court refused to invalidate the agreement. Instead, the court—although it found that the agreement was “overbroad and unenforceable”—reformed the agreement. The court noted that the Texas noncompete statute requires a court to “reform . . . [an overly broad] covenant to the extent necessary to cause the limitations to be reasonable and to impose a restraint that is not greater than necessary to protect the goodwill or other business interest of the promisee and enforce the covenant as reformed.”

In this case, rather than invalidating the covenant because it contained no geographic limitation, the court reformed the agreement to prevent the employee from competing in the same territory in which he worked while he was with his former employer. While with his former employer, the employee had been a salesperson in Johnson County; the appellate court held that the employee could be prohibited from competing there.

However, the court refused to preclude the employee from competing in areas into which his former employee had planned to expand. The court held that such a restriction would be unreasonable.

The takeaway from this case is: Don't assume that just because a noncompete is too broad, a court is likely to invalidate it. Texas courts often reform overly broad noncompete covenants by making them reasonable.

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Marsh USA: Texas Noncompete Agreements More Enforceable

Posted on August 1, 2011 by Robert Wood

The Marsh USA decision, which was handed down by the Texas Supreme Court earlier this month, sent shock waves through the community of lawyers who handle matters involving noncompete agreements.  The decision creates danger for employees bound by noncompete agreements here.  Hopefully, the word about this and other pro-enforcement decisions will get out, so that laypeople can stop referring to Texas as a "right to work" state.

 
When you read a court opinion, the first few pages often give you a hint about how it's going to turn out.  This opinion was no different.  Early on, the court noted that "The Texas Constitution protects the freedon to contract.  Entering a noncompete is a matter of consent; it is a voluntary act for both parties."  The court went on to overturn several Texas appellate court decisions that had held that certain types of noncompete agreements were unenforceable--i.e., those in which the consideration given involved the payment of money.
 
In Marsh USA, the issue was not whether the payment of money, per se, was valid consideration for a noncompete.  Rather, the issue was whether a particular form of considerattion--stock options--was sufficient.  In this case, the court held that the options were sufficient because they were designed to protect a valid business interest--business goodwill.  Whether the simple payment of money, such as a signing bonus, would be sufficient remains to be seen.  As is often the case in this area of law, no matter how clear the courts try to make things, there are always many things left for the lawyers to argue about.
 
For example, even if a noncompete agreement is enforceable to some extent, the scope of the agreement may be too broad.  The employee may have other legal defenses as well.  But the bottom line of the opinion is this:  Those who think that Texas' status as a "right to work state" (which has nothing to do with noncompete agreements anyway) invalidates no compete agreements in Texas are sadly mistaken.  In a lot of ways, employees are under more danger from these agreements than ever before.
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