Texas Covenants Not to Compete: Trial Courts Must Strike Proper Balance

January 7, 2012 / By Robert Wood

Justice Don Willett’s concurrence in the Marsh USA contains a lot of economic theory and literary allusions that one typically does not see in a court opinion. For example, Justice Willett has this advice for trial court judges who handle disputes involving restrictive covenants in Texas:

“Restrictions on employee mobility that exist only to squelch competition are per se illegal in Texas, and for good reason. Economic dynamism in the 21st century require speed, knowledge, and innovation– imperatives that must inform judicial review of efforts to sideline skilled talent. Courts must critically examine non-competes in light of our contemporary, knowledge-based economy that prices ingenuity and intellectual talent. This much is clear: Courts cannot countenance covenants to contemptuous of competition.”

With respect to the primary issue in the Marsh USA case—i.e., whether a Texas covenant not to compete could be justified by the employer’s professed need to protect its goodwill, Justice Willett had this to say:

“[U]ttering the word goodwill is not enough; magic words do not boast auto-enforceability. Marsh must demonstrate that it is not invoking goodwill to camouflage a less noble interest: escaping future competition from Cook. . . . More to the point, while ‘goodwill’ is a bona fide business interest under the Act, it is not enough merely to monitor the word. You cannot simply by a covenant not to compete.”

Justice Willett continued:  

“Judges must divine when competition becomes unfair competition and when a restraint becomes an unreasonable or unnecessarily restrictive restraint. To be sure, the standard has a certain eye-of-the-beholder flavor—a vagueness that inexorably produces the case-by-case unpredictability that haunts this area of employment law.”

Justice Willett notes that the noncompete statute requires that restrictions be both “reasonable,” and that they “not impose a greater restraint than is necessary.” Justice Willett questions whether these are separate requirements. In other words, must a restriction be both reasonable in the abstract sense and also narrowly tailored to be no more restrictive than what the particular employer needs? Justice Willett observes that, “Many courts implicitly subsume everything under an overarching banner of reasonableness, while others treat them as separate prongs.” “Either way,” he says, “this is a question the Texas Supreme Court does not reach”him him in Marsh USA.

Justice Willett cautions trial courts to realize that they “must strike down restrictions that are unreasonable or more severe than necessary.” He explains why:

“The Lone Star State lauds economic dynamism. And while it is perhaps natural for a profit-maximizing company to bend toward collusive or monopolistic restriction, Texas law is hostile to such noncompetitive impulses. Nor can it be doubted that some companies try to tilt the playing field via dubious noncompete covenants, even facially unenforceable ones, knowing that even the specter of enforcement action will chill employees (and their potential employers) into preemptive capitulation.”

He continues:

“A court cannot uphold a noncompete on goodwill grounds absent a record that demonstrates the limitations are reasonable and is not burdensome as possible. Every company has customer relationships and attended goodwill it wants to cultivate by incentivizing employees to stay, but merely asserting goodwill is not enough. . . . The evidentiary record must demonstrate special circumstances beyond the bruises of ordinary competition such that, absent the covenant, [the employee] would possess a grossly unfair competitive advantage. And even then the restrictions imposed must be as light as possible and not restrict [the employee’s] mobility to an extent greater than [the employer’s] legitimate need.”

Justice Willett wrote a great concurring opinion in Marsh USA.   It should be read by all Texas trial court judges who work in this area.  His opinion suggests that practitioners who believe that "noncompete law is dead in Texas," and that "noncompete agreements are per se enforceable in Texas" may have spoken too soon.  Justice Willett reminds us that trial courts have an important duty to ensure that the agreements sought to be enforced in their courts are reasonable and necessary.

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood