Under Texas law, parties may only be entitled to recover their attorneys’ fees if permitted by statute, by a contract between the parties, or under equity. At times, there may be multiple avenues for a prevailing party to receive attorneys’ fees. However, at other times, a statute may preempt, or override, every other avenue to attorneys’ fees.
Actions for the enforcement of non-compete agreements is one of those times. A recent Houston Court of Appeals decision discusses these conflicting laws and when and who is entitled to attorneys’ fees in non-compete cases.
Case Study: Attempting to Recover Attorneys’ Fees in Noncompete Action
In the Houston Court of Appeals case, two individuals entered into a franchise agreement to become franchisees of a temporary-staffing agency. The franchise agreement contained a two-year noncompete provision that prohibited the franchisees from owning or operating a competing business within a designated market area and from soliciting the staffing company’s clients.
When the franchisees left to form a competing staffing company, the staffing agency filed suit seeking injunctive relief to enforce the noncompete. The staffing company also sought attorneys’ fees pursuant to Section 38.001 of the Texas Civil Practice and Remedies Code, a statute permitting attorneys’ fees to the prevailing party on contract claims. The trial court reformed the noncompete and granted an injunction.
In determining whether to award attorneys’ fees, the court analyzed the non-compete statute, Tex. Bus. & Comm. §§ 15.51-15.52. Section 15.51 states that “the court may not award the promisee damages for a breach of the covenant before its reformation and the relief granted to the promisee shall be limited to injunctive relief.” Section 15.52 states that:
The criteria for enforceability of a covenant not to compete provided by Section 15.50 of this code and the procedures and remedies in an action to enforce a covenant not to compete provided by Section 15.51 of this code are exclusive and preempt any other criteria for enforceability of a covenant not to compete or procedures and remedies in an action to enforce a covenant not to compete under common law or otherwise.
In light of these two provisions, the Houston Court of Appeals determined two things. First, Section 15.52 preempts any law which provides relief and limits the relief available in noncompete cases to what is provided for in Section 15.51. Second, the wording of Section 15.51 clearly states that when the court must reform a noncompete to make it reasonable, the plaintiff’s remedy is limited to injunctive relief. This means that the staffing agency would not be entitled to damages for the franchisee’s breach of the covenant not to compete. It also means that they would not be entitled to attorneys’ fees for having to bring its enforcement action. The staffing company’s Section 38.001 attorneys’ fees claim thus had no bearing.
The Houston Court of Appeals found that in cases involving a noncompete, a plaintiff is no longer entitled to attorneys’ fees through Section 38.001. The court further cited a previous decision in which the court addressed a reformed noncompete agreement which contained a provision allowing the recovery of attorneys’ fees. In that case, the court also found that Section 15.52 preempted the contract. Even if attorneys’ fees are provided for by contract, the reformation of a noncompete can still prevent the plaintiff’s recovery of attorneys’ fees.
Furthermore, the Houston Court of Appeals follows this finding by surmising that there is only one circumstance in which attorneys’ fees may be awarded under Section 15.51. If the person attempting to compete can show, among other things, that the entity enforcing the noncompete agreement knew at the time of the execution of the agreement that the covenant did not contain reasonable limitations as to time, geographical area, and scope of activity and that the restraints were greater than necessary to protect the goodwill or other business interest of that entity, then that person attempting to compete may be awarded attorneys’ fees.
While the courts may find that attorneys’ fees may be available in more than this single circumstance, these recent cases make it more important than ever to seek legal counsel before drafting or entering into a noncompete agreement. It also means having an experienced and knowledgeable attorney in your noncompete enforcement lawsuit could mean the difference between paying or not paying fees.
If you have a question about your non-compete agreement, call us: 469-754-2812.