A Texas appellate court recently addressed the question of whether money is sufficient to support a non-compete agreement. The court ruled that money was not enough and that the non-compete’s purpose must be to protect a legitimate business interest.
The contract at issue was for a company (“Company A”) to provide hospitalist services and to coordinate the hiring of hospitalist physicians for a hospital for a two year period. Either party could terminate the contract early with a sixty-day notice. The contract included a non-compete provision that provided that the hospital was not permitted to contract directly or through another hospitalist service provider with the hospitalist physicians that were retained or recruited by the company.
The hospital terminated the contract early with sixty-days’ notice. After this termination, but within the time period covered by the non-compete, the hospital contracted with another company (“Company B”) to provide hospitalist services. Company B then signed contracts with two physicians who were retained by Company A for the hospital. It was unrefuted that this was a violation of the non-compete agreement. Before the court was whether the non-compete was enforceable.
In order for a non-compete agreement to be enforceable, the law requires that it be ancillary to or part of an otherwise enforceable agreement. While the otherwise enforceable agreement must be supported by consideration, the court stated that the non-compete “must be based on additional consideration.” The contract before the court provided that in exchange for Company A’s services, the hospital would make yearly and monthly payments. This consideration was for the otherwise enforceable agreement. However, there was no “additional consideration for [the hospital’s] promise not to hire any physicians if the contract between [Company A] and [the hospital] was terminated.”
A non-compete agreement must have additional consideration to support the promise being made. If money is the consideration, a Texas court will likely find this as insufficient because it does not set apart a different consideration for the non-compete’s promise.
The court also addressed the need for a valid reason for restricting competition. “Where the object of both parties in making [a non-compete contract] is merely to restrain competition, and enhance or maintain prices, there is no primary and lawful purpose of the relationship to justify or excuse the restrain.” (internal cites omitted). The purpose of the restriction must be to protect a business interest such as goodwill or trade secrets.
At Lindquist Wood Edwards LLP, our lawyers have drafted and litigated numerous non-compete agreements. We can make certain that your agreement is properly supported by consideration and protecting a legitimate interest.