Texas Supreme Court Decides Sheshunoff Case: Non Compete Agreements Now More Enforceable in Texas
Many management attorneys are breathing a huge sigh of relief today. In a much-anticipated decision (oral argument was almost two years ago), the Texas Supreme Court clarified what it takes to make a non-compete covenant enforceable. In doing so, the court resurrected many agreements that were previously thought to be unenforceable.
For years, Texas courts have held that, with respect to non-compete agreements, a promise dependent upon continued at-will employment is no promise at all. Such a promise was "illusory," the courts held. Thus, a promise to give an at-will employee a raise, a promotion, stock options, or confidential information was "illusory," unless whatever was promised was delivered at the precise moment that the employee signed the agreement (otherwise, the employer could terminate the employee before fulfilling its promise).
Perhaps the most severe application of this rule occurred in the Trilogy case, decided by the Austin Court of Appeals in 2004. There, an at-will employee signed a non-compete agreement at 10:00 a.m. Four hours later, the employer said, "Here’s the confidential information that we promised to give you in the agreement you signed this morning." When the employer subsequently tried to enforce the non-compete agreement, the court held that the four-hour gap between the employee’s signing the non-compete and his receipt of the confidential information rendered the non-compete unenforceable (because the employee could have been fired in the interim, even though he wasn’t). The fact that he could have been fired meant that the employer’s promise to convey the confidential information (made at 10:00 a.m.) was dependent upon the [at-will] employee still being employed when he finally received the information. Because there was no guarantee that the employee would still be employed at 2:00 p.m., the employer’s promise made at 10:00 a.m. was "illusory."
That decision, even though a logical extension of the law as it existed at the time, is no longer the law in Texas. In a case decided a few days ago, the court held that even in the case of an at-will employee, a gap between the employee’s signing the agreement and his receipt of the confidential information will not render the agreement unenforceable. The moment the employee gets the confidential information–whether it occurs four hours, four weeks, or four months after he signs the agreement–the non-compete agreement becomes effective.
The court has clarified the law, in a much needed way. Non-compete agreements are now relatively more enforceable. And I have lost one of the few lines in my typical non-compete speech that ever got a laugh (or at least a grin)–when I demonstrated how an employer should have an employee sign the non-compete agreement with his right hand, while accepting the confidential information with his left. That’s no longer necessary. A delay between the employee signing the agreement and getting the information is no longer fatal.
There’s a lot more to the case, and we will be discussing it in depth in the days and weeks ahead. But it’s time to find the non-compete agreements that we thought were dead and see if this decision has resurrected them.
Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, et al., No. 03-1050 (Tex. Oct. 20, 2006).