Texas NonCompete Agreements: Court Rules Explicit Promise Not Required
Almost two years ago, in the Sheshunoff case, the Texas Supreme Court rejected the notion that an employer must provide the employee with confidential information at the precise moment the non-compete agreement is signed for the agreement to be enforceable. According to the court, it is not fatal to the agreement’s enforceability if the information is actually provided sometime later.
But how exactly must the agreement be worded for it to be enforceable? A recent case out of the Corpus Christi Court of Appeals addresses that question. In Shoreline Gas, Inc. v. McGaughey, an at-will employee was bound by an agreement that contained promises by the employee (a) not to disclose the employer’s confidential information and (b) not to engage in post-employment competition.
Significantly, the agreement did not obligate the employer to provide confidential information to the employee. Nevertheless, the court found that the employer had in fact provided such information.
The court first held that the non-compete agreement was an enforceable unilateral contract. The court explained:
McGaughey’s promise not to disclose Shoreline’s confidential information, though not enforceable when made, constituted an offer for a unilateral contract which Shoreline had the option to accept. Shoreline accepted McGaughey’s offer by performing—that is, by supplying McGaughey with confidential information—and so a unilateral contract was formed under which McGaughey became bound by his promise not to disclose that information. . . . Under Sheshunoff, such a unilateral contract constitutes an "otherwise enforceable agreement" sufficient to support an accompanying non-compete covenant.
The court specifically addressed the employee’s contention that the agreement was unenforceable because it did not contain a promise by the employer to provide the employee with confidential information:
McGaughey notes that, unlike in the present case, the Sheshunoff employment contract required the employer to provide to the employee with "access to certain confidential and proprietary information and materials belonging to Employer. . . ." Alex Sheshunoff Mgmt. Serv., L.P. v. Johnson, 209 S.W.3d 644, 647 (Tex. 2006). This promise was illusory, however, because the employer could avoid performance simply by terminating employment. Further, this promise was not of the type that could be considered an offer for a unilateral contract that could be accepted by the performance of the promise. Therefore, it could not have formed the basis of an "otherwise enforceable agreement" capable of sustaining a non-compete covenant. See Id. at 650.
Thus, according to the court of appeals in McGaughey, as long as the employer provides confidential information to the employee (even if the agreement does not contain a promise by the employer to do so), a unilateral contract is formed when the employer does so (with the employee’s promise not to disclose the information constituting the other part of the unilateral contract). According to the court, this unilateral contract is an otherwise enforceable agreement sufficient to support a promise by the employee not to compete.
This holding should be examined in light of the following passages from Sheshunoff (with emphases supplied):
If only one promise is illusory, a unilateral contract can still be formed; the non-illusory promise can serve as an offer, which the promisor who made the illusory promise can accept by performance. For example, suppose an employee promises not to disclose an employer’s trade secrets and other proprietary information, if the employer gives the employee such specialized training and information during the employee’s employment. If the employee merely sought a promise to perform from the employer, such a promise would be illusory because the employer could fire the employee and escape the obligation to perform. If, however, the employer accepts the employee’s offer by performing, in other words by providing the training, a unilateral contract is created in which the employee is now bound by the employee’s promise. The fact that the employer was not bound to perform because he could have fired the employee is irrelevant; if he has performed, he has accepted the employee’s offer and created a binding unilateral contract . . . .
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We agree with Light’s recitation of basic contract law in footnote six that "[i]f only one promise is illusory, a unilateral contract can still be formed; the non-illusory promise can serve as an offer, which the promisor who made the illusory promise can accept by performance." Upon further review of the Act and its history, however, we disagree with footnote six insofar as it precludes a unilateral contract made enforceable by performance from ever complying with the Act because it was not enforceable at the time it was made.
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We now conclude, contrary to Light, that the covenant need only be "ancillary to or part of" the agreement at the time the agreement is made. Accordingly, a unilateral contract formed when the employer performs a promise that was illusory when made can satisfy the requirements of the Act.
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But if, as in the pending case, the employer’s consideration is provided by performance and becomes non-illusory at that point, and the agreement in issue is otherwise enforceable under the Act, we see no reason to hold that the covenant fails.
A few observations:
- Sheshunoff addressed a non-compete agreement containing a promise by the employer to provide confidential information to the employee, and the opinion speaks of the employer’s "promise"—although the promise was "illusory" when made, because the employee could have been fired in the interim—becoming enforceable upon the information being conveyed. Thus, Sheshunoff can be seen as assuming that the employer must promise to provide the confidential information, even if the promise is "illusory" at the time it is made.
- The court in McGaughey construes Sheshunoff as only requiring the employer to provide confidential information; the contract need not contain an explicit promise to provide confidential information.
- Obviously, in drafting new agreements, the safest course remains to include language by which the employer explicitly promises to provide confidential information to the employee.