Friday, March 16, 2007
Good News For Texas Employers
The October 2006 decision by the
Supreme Court of Texas in Alex Sheshunoff Management Services, L.P. v.
Johnson should end much of the confusion and uncertainty that has
surrounded employee covenants not to compete in Texas ever since the court
decided Light v. Centel Cellular Co. in 1994. Sheshunoff
resolves the split of authority that Light fostered among the courts of
appeals and overrules those cases holding that an employer’s promise to provide
specialized training and/or confidential information in the course of
employment can never support enforcement of a covenant not to compete. Sheshunoff
also acknowledges that the Texas statute concerning covenants not to compete
“was passed to expand the enforceability of covenants not to compete” and “was
amended . . . to make clear that covenants not to compete [are] applicable to
at-will employment situations . . .”
Agreements by employees not to
compete with their employers for a specified period of time after termination
were a common feature of business in Texas for many years, and until 1987 such
agreements were enforced if shown to be reasonably necessary to protect the
goodwill or other business interest of the employer. A series of decisions by
the supreme court beginning in 1987, however, rendered enforcement of employee
non-competes progressively more difficult and uncertain. The pro-business
Texas Legislature responded by enacting a statute governing enforcement of
covenants not to compete that essentially codified pre-1987 Texas case law.
But when the supreme court explained what the new statute meant and how to
apply it in Light, the court found requirements that were not expressly
stated in the statute and that had not previously been required in the case
law.
The supreme court’s confusing
opinion in Light led to a split of authority among the courts of
appeals. Some courts held (based on a footnote in Light) that an
employer’s promise to disclose confidential information to an at-will employee
at some point in the future was not sufficient to support enforcement of a
non-compete, because the employer could terminate the employee before making
any disclosure. In those courts’ view, the wording in the statute requiring
that a covenant not to compete be “ancillary to or part of an otherwise
enforceable agreement at the time the agreement is made” requires an
employer to disclose its confidential information at the same instant an
employee executes an agreement promising to keep the information confidential
and not to compete after termination. Because such theoretical simultaneity is
not possible in the real world, an at-will employee’s covenant not to compete
would never be enforceable. Sheshunoff overrules these cases and
expressly rejects a hyper-technical construction of the non-compete statute.
Enforcing Non-Competes Under Sheshunoff
Sheshunoff does not clear
up all the uncertainty created by Light, but it clarifies what is
required for an at-will employee’s covenant not to compete to be enforceable in
Texas today. First, the restrictions on the employee must satisfy the
requirements now codified in the non-compete statute. The length of time the
covenant is to be in effect, the geographical area to which it applies, and the
scope of the employee’s activity that is to be restrained must each be
reasonable in light of all the circumstances, and the covenant must not impose
a greater restraint on the employee than is necessary to protect the employer’s
goodwill or other business interest.
Second, there must be legally
sufficient consideration for the covenant. Under Sheshunoff, an
employer’s promise to provide an at-will employee specialized training and/or
confidential information in exchange for the employee’s return promise not to
use the training and/or information for any purpose other than to benefit the
employer becomes an enforceable agreement, and sufficient consideration for a
non-compete, as soon as the employer performs its promise.
Third, the consideration for the
covenant must be new. An employer cannot rely on past employment, past
disclosures, or past training as consideration for a new agreement from an
employee not to compete. That does not mean an existing employee cannot enter
into a new covenant not to compete; for example, the employee in Sheshunoff
was an existing employee. It does mean, however, that something new must flow
from the employer to the employee as consideration for the employee’s new
promise not to compete.
Fourth, an employer should not
delay unreasonably in making promised disclosures or providing promised
specialized training to an employee, because three of the justices who
concurred in the Sheshunoff decision would require an employer to
perform its promise to an employee “within a reasonable time after the
agreement is made.” If an employee is terminated or resigns before receiving
promised training or confidential information, a covenant not to compete by the
employee is not likely to be enforced.
Lastly, employers should be aware
that Sheshunoff did not overrule all of Light’s court-made
requirements for enforcement of non-competes. For instance, Light’s
requirement that the consideration given by an employer “must give rise to the
employer’s interest in restraining the employee from competing” was not disturbed
by the holdings in Sheshunoff. Until this vestige of Light is
eliminated, cash payments or bonuses, stock options, enhanced retirement
benefits, and job promotions will rarely, if ever, be legally sufficient
consideration for an employee’s covenant not to compete.
The requirements for an
enforceable covenant not to compete in Texas are clearer today than at any time
in the past twenty years. All employers, particularly those whose businesses
involve confidential information or specialized training, should review their
employment practices and forms of agreement in light of Sheshunoff.
For more information, please contact Andrew Wooley at awooley@liskow.com, or Thomas J. McGoey II at
tjmcgoey@liskow.com or go to www.liskow.com.
