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

A recent appellate case from Houston demonstrates that, in determining whether non-solicitation agreements are enforceable, Texas courts treat them as non-compete agreements.

In the case, an insurance broker was bound by an employment agreement that contained the following provision:

Accordingly, the Executive understands and agrees that for a period of two (2) years following the termination of his employment for any reason whatsoever, he will not, directly or indirectly, solicit, place, market, accept, aid, counsel or consult in the renewal, discontinuance or replacement of any insurance (including self-insurance) by, or handle self-insurance programs, insurance claims, risk management services or other insurance administrative or service functions for, any AJG or Corporation account for which he performed any of the foregoing functions during the two-year period immediately preceding such termination.

The broker left his employer and began working for a competitor. Shortly thereafter, the broker was sued by his former employer.

Obviously, the above provision is broader than a simple non-solicitation provision, because rather than prohibiting mere solicitation, it also prohibits the insurance broker from doing business with his former customers. Given how broad this provision is, the broker is deprived of one of the best arguments that defendants in non-solicitation cases usually have—i.e., “I didn’t solicit the customers—they contacted me!” This provision is so broad that it doesn’t matter who initiated the contact.

The court in this case enforced the above provision against the former employee. In doing so, the court examined the provision just as it would examine a non-compete agreement. That is, the court held the non-solicitation provision to the same rigorous enforcement standards to which it would have held a non-compete agreement. The court required the non-solicitation provision to be “ancillary to an otherwise enforceable agreement.” In other posts, we will explain what that means. 

But the takeaway from this post is this: Non-solicitation provisions are essentially non-compete provisions. Unlike non-disclosure agreements, which are enforceable in most all circumstances because they simply keep employees from doing what they shouldn’t do anyway (i.e., they prohibit use and disclosure of the former employer’s trade secrets), non-solicitation provisions restrain competition. Because they do so, they must be put under the same microscope that is used to assess the enforceability of a non-compete agreement.

 

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A recent case from the federal court in Dallas sheds some light on various issues involving the enforceability of non-compete agreements.

In Staples, Inc. v. Sandler, No. 3:07-CV-0928-K, 2008 WL 4107656 (N.D. Tex. Aug. 29, 2008), the employee, Sandler, upon joining Staples, Inc., signed a “Proprietary and Confidential Information Agreement” and a separate “Non-Compete and Non-Solicitation Agreement” (“Non-Compete Agreement”).

In the “Recitals” section of the Non-Compete Agreement, the employer recited that it “has and will entrust Employee with proprietary information, strategies, knowledge, customer relationships and know-how which would be detrimental to the Company if disclosed.” The court held that, under Sheshunoff, this recital was a “unilateral contract conditioned upon performance.” The court added: “Further, the confidentiality agreement signed contemporaneously with the noncompete provided a promise of confidential information. Thus, Staples promised to provide Sandler with confidential information that would give rise to its interest in restraining Sadler from competing.”

The court confirmed that the confidential information given by Staples to Sandler was sufficient consideration for the non-compete: “Staples has established that it provided Sandler with access to cost margins, pricing lists, sales figures, and assorted business information, including customer information. Although not necessarily trade secrets of the highest order, these may be confidential in the sense that they are not readily available to the public.”

The restrictions contained in the noncompete agreement prohibited Sandler from doing business not only with Staples’ customers, but also with “customers or prospective customers” that he “knew, serviced, or was familiar with prior to joining the Company."

The court held that this restriction was overly broad:

“Here, it is apparent that the restraint on competition is not justified to the extent contemplated in the covenant not to compete given Sandler's relatively short employment, the minimal amount of confidential information he received, and Staples' legitimate interest in protecting the confidential information it provided him during his tenure. Thus, the Court finds that Staples' legitimate interest in confidentiality gives rise only to a restraint on Sandler that prevents him from competing by doing business with customers he gained during his eleven-month tenure with the company. A restraint that prevents him from continuing long-standing relationships that he brought with him to Staples is overbroad, unrelated to Staples; legitimate interest in confidentiality, and would further unreasonably burden these third-party customers.”

OBSERVATIONS:

1. The court emphasized the need for the employer to promise to convey confidential information. However, the court located part of the promise in a different [but contemporaneously signed] document (the Proprietary and Confidential Information Agreement).
2.  The Court confirmed that confidential information necessary to justify a non-compete agreement does not have to rise to the level of a trade secret. The Court was skeptical of an argument that employers routinely make to prove that their information is confidential (i.e., “The fact that our information is password protected proves it’s confidential”).
3.  The Court found the non-compete restriction overly broad because it applied to customers with whom Sandler worked before he became employed by Staples. It would be interesting to know whether the result might have been different had Staples given Sandler confidential information about these customers. Arguably, if Staples entrusted Sandler with new confidential information (i.e., information that he didn’t previously know) about these customers, the conveying of that information by Staples would have justified the non-compete restrictions.
4.  The Court notes the challenge inherent in binding relatively new employees (11 months, in this case) to non-competes (because they may not yet have been exposed to enough confidential information to justify the restrictions). 

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It's commonly believed--and rightly so--that the Texas Supreme Court's recent decision in the Sheshunoff case makes non-compete agreements relatively more enforceable.  However, let's keep in mind a couple of things that didn't change [even if these are obvious points].

Number one, even after Sheshunoff, if the consideration given for the non-compete agreement is confidential information, the employer must still promise to give it.  Sheshunoff rejects the notion that the confidential information must be provided at the moment the agreement is signed.  However, in that case, the employer did promise to convey the information.  Conversely, if the agreement in that case merely had the employee "acknowledge" that he might receive the information, the non-compete agreement likely would not have been enforced.  Thus, this element of Texas non-compete law has not changed.

On a related note, the confidential information must actually be confidential.  That's an obvious point, perhaps, but the bigger point is this:  the holding in Sheshunoff was not, "Non-compete agreements are now enforceable in Texas."  It was a lot more nuanced than that, and there are still many other requirements that must be met.
 

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