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

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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Once an otherwise enforceable agreement has been found to exist, the next question is whether the non-compete provision is "ancillary" to that otherwise enforceable agreement. Texas courts have made it clear that the following must be true for a covenant not to compete to be ancillary to an otherwise enforceable agreement:
 
•The consideration given by the employer [in the otherwise enforceable agreement]
  must give rise to the employer's interest in restraining the employee from competing.

•The covenant not to compete must be designed to enforce the employee's return promise [contained in the otherwise enforceable agreement].

In the typical scenario, the employer contends that confidential information it provided to the employee gives rise to its interest in restraining competition. That contention intuitively makes sense:  if the employer gives the employee the employer's most important secrets (e.g., financial information, customer lists, marketing strategies, research and development plans, etc.), it makes sense that the employer would not want the employee taking those to a competitor. Of course, the employee could always argue, "The non-disclosure agreement I signed prevents me from disclosing those items to a competitor, thus the non-compete is unnecessary." But the employer's obvious rejoinder is, "Once you leave us and begin working for a competitor, our ability to monitor your activities is virtually nonexistent. Thus, we need not only a non-disclosure agreement, but also a covenant not to compete." In some cases, the employer is able to convince the court that the promises it made and the confidential information it gave justifies the non-compete provision. The employee's promise not to disclose the confidential information usually satisfies the
second prong of the test.
 
To be confidential, information must be "secret," and if information is publicly available, it probably will not be deemed confidential. For example, information about customers that is publicly obtainable (e.g., from telephone books, industry journals, or even the employer's website) may be held not to be confidential.

Confidential information is not necessarily the only consideration that can justify a covenant not to compete.  For example, giving an employee ownership in a company, particularly a privately-held business, may support a non-compete. However, confidential information may be the best consideration that can be given, because the connection between the information conveyed and the employer's need to maintain its secrecy via a non-complete agreement makes sense.
 
Some employer promises that satisfy the otherwise enforceable agreement requirement may not satisfy the "ancillary" requirement. For example, an employer may satisfy the otherwise enforceable agreement requirement by giving the employee a term of employment. But a term of employment may be held insufficient to give rise to an interest in restraining competition. To determine whether a particular item of consideration is sufficient to support a non-compete covenant, one might ask, "Is there a logical relationship between the consideration given by the employer and the non-compete covenant the employer seeks to enforce?" If the consideration in question is confidential information, a logical relationship may be found to exist. But other types of consideration—e.g., a signing bonus—may be found lacking by that standard.
 
It is important to emphasize that the "ancillary" requirement is far easier to meet in the context of a purchase of a business than in an employment situation.  Another key difference between a non-compete agreement in a purchase of a business context and an employer/employee context: In the former, the burden is on the promisor (i.e., the person agreeing to be bound by the non-compete) to prove the agreement is unreasonable; in the latter, the promisee (employer) must prove the agreement is reasonable.
 

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In Texas, non-compete agreements are generally disfavored as unlawful restraints on trade. Courts recognize that in our capitalist economic system, workers must be free to compete with each other, work where they wish, etc. However, the law also acknowledges that an employer may have interests that are important enough to warrant restrictions on post-employment competition.

Whether a particular non-compete agreement is enforceable in Texas cannot be known with absolute precision. The law in this area is complex, courts frequently differ with each other, and much depends on preferences of individual judges. However, both the law and experience provide useful guidance.

A non-compete covenant is typically just one provision contained in a larger employment agreement. In Texas, for a non-compete covenant to be enforceable, the following requirements must be met:

•An otherwise enforceable agreement must exist.

•The noncompete covenant must be "ancillary" to the otherwise enforceable agreement at the time the agreement is made.

•The scope of the noncompete covenant must be reasonable in terms of time, geographical area, and scope of activity to be restrained, and must impose restrictions no greater than necessary to protect the employer's goodwill or other business interest.

These requirements are explained in other posts in this Overview section.

 

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