Non-competition covenants are typically contained in written (employment) agreements that contain many other provisions. The first step in determining whether an enforceable non-compete agreement exists is to mentally draw a line through the non-compete provision and examine the remaining provisions. The pertinent question with respect to the remaining provisions is: Have both the employer and the employee made binding promises to each other? Both the employer and the employee must make binding promises for the non-compete covenant to have any chance of being enforced.
Usually, whether the employee has made a binding promise to the employer is not at issue. Employees typically promise not to disclose confidential information, to return company property upon termination, etc. Promises such as these are binding.
The issue that gets litigated much more often is whether the employer has made a binding promise to the employee. This question arises most frequently when the employee is employed "at-will." Many Texas courts have held that an employer’s offer of at-will employment (i.e., an employment relationship in which the employee can be terminated at any time for any reason) is meaningless (or "illusory," as the courts say). Thus, if the only consideration given by the employer for the non-competition covenant is at-will employment, the employee can have a high confidence level that the covenant is unenforceable.
Another type of consideration that courts routinely have rejected is past consideration. Many times, with respect to an incumbent employee, an employer will hearken back to consideration previously given. For example, a non-compete provision may be supported by "confidential information received by the employee in the past." Courts have held that past consideration is no consideration at all. Thus, if an incumbent employee is to be bound by an enforceable non-compete covenant, the employer must give new consideration.
So what consideration can the employer give to satisfy the "otherwise enforceable agreement" requirement? Clearly, a definite term of employment (e.g., a one-year term) would be sufficient. Likewise, an at-will employee who, despite his "at-will" designation, is entitled to thirty days’ written notice before being terminated has been given good consideration (i.e., he has, in effect, a thirty-day employment contract).
One of the most-litigated issues involves the extent to which a provision stating that an employee will receive confidential information (or specialized training) constitutes a binding promise by the employer. Often, the agreement merely recites that the employee "acknowledges" she will receive confidential information. Particularly where the employee is at-will, an acknowledgment may be insufficient because the employer may be held not to have actually promised to do anything. The employee may contend that her "acknowledgment" does not actually guarantee that the employer will provide confidential information. Because only the employer’s promise can guarantee that confidential information will be given, so the argument goes, no promise by the employer equals no consideration. This contention has found favor with some courts.
An employer’s promise to provide confidential information is probably good consideration, as long as the employer actually does so.
As noted above, the existence of an "otherwise enforceable agreement’ is a prerequisite to a non-compete provision being enforceable. But it is not sufficient to make the covenant enforceable. If this threshold requirement is met, the next question is whether the non-compete provision (which is not even relevant in assessing whether an otherwise enforceable agreement exists) is "ancillary to the other enforceable agreement at the time the agreement was made." That requirement will be discussed in another post.