Texas Non-Compete Law Blog : Texas Non-Compete Lawyer & Attorney : Robert Wood of Fell & Wood Law Firm : Trade Secrets Law in Denton, TX

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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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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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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