Dallas Non-compete Lawyer

Other employees did not sign noncompete agreements. Legal effect in Texas?

Robert Wood — Fri, 27 Jan 2012 09:08:53 -0600

"Others in the company were not is required to sign covenants not to compete. Does that mean that my covenant is not valid?"

I get this question a lot. The short answer is, No, the fact that the employer did not require all of its employees to sign noncompete agreements does not, by itself, mean that the restrictive covenant signed by a particular Texas employee is unenforceable.

That said, an employer's failure to have all of its employees sign noncompete agreements (or, at the very least, nondisclosure agreements) might be relevant to the enforceability of a particular noncompete agreement. It would all depend upon the facts of the case.

What if employee is forced to sign noncompete agreement?

Robert Wood — Fri, 27 Jan 2012 09:01:02 -0600

I am frequently asked by employees about whether their covenants not to compete are enforceable, given that they had no choice but to sign them. Often, an employer will say to a newly-hired employee, "You need to sign this covenant not to compete if you want to continue working here." If the employee does so, can he or she later argue that the employer really didn't allow the employee to make a free choice?

Quite frankly, this is likely to be a difficult argument to make in Texas. There is very little case law on this point. However, the notion that an employee can avoid a covenant not to compete because it was signed under duress (or because it is what the courts sometimes call an "adhesion contract") may not be very viable here.

Over and over, Texas courts have affirmed the enforceability of noncompete agreements. Most of these agreements are required by the employer to be signed, if the employee wishes to continue employment. Based upon Texas case law as it exists today, there is little reason for optimism that a Texas court would invalidate a covenant not to compete because the employer made signing the covenant a condition of continued employment. Of course, in a particular case the court might do so, but it is probably an uphill battle.

Is Texas a Right to Work State?

Robert Wood — Fri, 27 Jan 2012 08:52:46 -0600

Not infrequently, an employee who has signed a covenant not to compete will confidently explain to me that, "Noncompete agreements are not enforceable in Texas, because Texas is a 'right to work' state." Often, the employee's conviction has been confirmed by a family member or friend, and sometimes even by a lawyer who should know better.

The truth is, Texas is a right to work state. However, "right to work" means that a person can work in Texas without having to belong to a labor union. It has absolutely nothing to do with the enforceability of noncompete agreements.

As is pointed out throughout this blog, Texas courts in recent years have become increasingly pro--enforcement when it comes to covenants not to compete. The test for the enforceability of a noncompete agreement (i.e., that the covenant not to compete be "ancillary to an otherwise enforceable agreement") has lost much of its meaning in recent years. Thus, not only does the fact that Texas is a right to work state not insulate from liability a person who has signed a covenant not to compete, the legal landscape in Texas with respect to noncompete agreements is more dangerous than ever for employees.

So, the next time someone tells you that because Texas is a right to work state, you have nothing to fear from the noncompete agreement that you signed, you need a second opinion.

Do Texas Courts Blue Pencil Noncompete Agreements?

Robert Wood — Fri, 27 Jan 2012 08:43:48 -0600

Frequently in cases involving noncompete agreements, the issue arises as to whether an overly broad covenant not to compete will be held to be completely unenforceable, or whether it will be modified to make it enforceable. In some states, if a noncompetition agreement is overly broad, the entire agreement will be unenforceable. In other states, in response to an overly broad covenant not to compete, the court will engage in what is known as "blue penciling," which means that the court will draw a line through the offending portions of the agreement and enforce whatever remains.

In Texas, if a covenant is overly broad, the court will simply not throw it in the garbage can. Moreover, Texas courts are not confined to merely striking through offending portions. Rather, in response to an overly broad covenant not to compete, a Texas court will judicially reform the agreement to make it enforceable.

Thus, if a noncompete agreement contained no geographic restriction, there is a good chance that a Texas court would add a geographic restriction (the court might, for example, hold that the proper geographic restriction consisted of every state in which the employee worked for the employer). Conversely, in a strict blue-pencil-only state, a court would not add a geographic restriction; rather, the lack of any geographic restriction might result in the entire agreement being voided.

Below is a link to a website which attempts to give a state-by-state summary of how courts deal with overly broad covenants not to compete. I certainly have not confirmed the accuracy of the information contained in this website, and it seems to have been drafted in 2009. Nevertheless, it might be a useful resource for you.

http://www.non-competes.com/2009/01/quick-state-by-state-guide-on-blue.html

Economic Costs of Noncompete Agreements

Robert Wood — Sat, 07 Jan 2012 12:13:27 -0600

In his excellent concurrence in the Marsh USA case, Texas Supreme Court Justice Don Willett observed something that practitioners and trial court judges often forget or gloss over, namely, the adverse effect that unfair noncompete agreements can have on society at large. Justice Willett noted:

“Restrictive covenants are not costless, and even a mutually acceptable noncompete can impose a deadweight loss on broader society. Courts should not confuse a noncompete's impact on the employee with its impact on competition. A restraint may be perfectly agreeable to both parties today but still harm consumers tomorrow. . . . It remains the job of courts to be vigilant for practices that tend to servility, that deprive the public of desired services, and that quash rivals the enforced restriction rather than forceful competition.”

He continued:

“Noncompetes tailored to protectable business interests have their lawful place, but they should be used sparingly and drafted narrowly. And employers must demonstrate special fax that legitimized the noncompete agreement. Squelching competition for its own sake is an enemy unworthy of protection. Competition by a former employee may well rile an employer, but companies do not have free reign to, by contract, indenture an employee or dampen everyday competition that benefits Texas and Texans.”

Obviously, noncompete agreements that serve legitimate interests are enforceable in Texas, as the Texas Supreme Court has confirmed on several occasions, most recently in the Marsh USA case itself. Justice Willett urges trial courts to ensure that covenants not to compete are fair and reasonable, including from a societal standpoint.

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

Robert Wood — Sat, 07 Jan 2012 11:49:29 -0600

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 21^st 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.

Free Market Capitalism in Texas and Marsh USA

Robert Wood — Sat, 07 Jan 2012 10:50:08 -0600

I re-read (again) the Marsh USA case this morning, including the concurring and dissenting opinions. The concurring opinion by Justice Willett is one of the most articulate and thoughtful opinions I have read in a long time. He tries to strike a balance between the pro-enforcement majority opinion and the dissenting opinion which fears that the majority has gone too far in stifling competition. Justice Willett's opinion should be required reading for every Texas trial court judge who hears disputes involving covenants not to compete.

The majority opinion quotes this language from a 1947 Texas Supreme Court case: “A person's right to use his own labor in any lawful employment is . . . one of the first and highest of civil rights.”

The Court then reminds us: “The Texas Constitution protects the freedom to contract.”

How are these potentially conflicting values to be reconciled? On the one hand, Texas presumably favors the right of a person to work where he wishes. On the other hand, Texas favors the right of that same person to contract away his right to do so. The various opinions handed down in the Marsh USA case depict a philosophical war going on at the Texas Supreme Court. It is not simply a legal dispute. Rather, it is a dispute over the type of economy we want to have in Texas.

Do we, for example, want an economy in which virtually everyone (other than lawyers, of course) is bound to a restrictive covenant? Or, do we expect courts to closely scrutinize these agreements so that only competition which is “unfair” is prohibited?

Unfortunately, although the Marsh USA case unambiguously informs us that the Texas Supreme Court is wary of disputes involving non-compete agreements, and that it has decided to adopt a far more pro-enforcement position, there are many unanswered questions. As the dissent notes, if protecting goodwill is an interest that can support a covenant not to compete, what happens to the long-standing rule in Texas that an employer cannot simply “buy” a noncompete agreement? Is it now the case that a Texas employer can simply give an employee a raise, or a signing bonus, or a promotion, or even continued employment, and have an enforceable covenant not to compete? After all, wouldn't providing these to an employee might motivate the employee to develop goodwill for the employer.

Perhaps recognizing the possibility that its opinion might be interpreted too broadly, the majority in Marsh USA emphasizes that the employee was an “owner” and “managing director” of the company, and that he was a “valuable employee who had successfully performed at his position . . . and had been successful with attracting and retaining business for Marsh.” In other words, the Court may be saying, the rule we hand down today may not be as expansive and pro-enforcement as it appears to be.

All we know for sure is that the continued viability of any portion of the Light case decided in 1994 is dubious at best. As practitioners in this area know, the Court in Light imposed a two-part test to determine whether a covenant not to compete was “ancillary” to an “otherwise enforceable agreement.” The court in Marsh USA goes to great lengths to explain why the Light Court misinterpreted the meaning of “ancillary.” In doing so, Marsh USA does away with, or at least significantly changes, the “give rise” requirement. The opinion does not seem to explicitly abolish the second prong of the Light test (i.e., that the covenant be designed to enforce the employee's “reciprocal” promise contained in the otherwise enforceable agreement), but it arguably impliedly done so, because the Court calls into question Light's entire definition of “ancillary.”

Obviously, for laypeople, this post is, as the Texas Supreme Court might say, “overly technical.” The bottom line is, the pendulum has definitely swung in Texas. Employees who are bound by noncompete agreements in Texas have much to be concerned about.

Happy New Year.

No Industry-Wide Texas Non-Compete Agreements

Robert Wood — Tue, 13 Dec 2011 12:32:01 -0600

Texas cases dealing with the enforceability of noncompete agreements have long held that “industry-wide” restrictions are overly broad. In a recent case from the Waco Court of Appeals, the court applied that rule to a concrete situation.

The covenant not to compete applied to the “pet supply manufacturing and distribution industry.” The employee contended that this restriction was so broad as to constitute an invalid industry-wide exclusion. The court of appeals disagreed, holding: “[B]ased on the terms of the Agreement, [the employee] would not be precluded from working as a dog handler and groomer, as he did prior to being employed by [the employer]. We conclude that the terms of the Agreement do not amount to an industry-wide employment exclusion and are not unreasonably broad in scope of activity.”

The prohibition against industry-wide exclusions is well known. This case sheds a little light on what would not constitute such a restriction.

Texas' Pro-Enforcement Trend Continues

Robert Wood — Tue, 13 Dec 2011 12:12:32 -0600

The Marsh USA case was perhaps the most important non-compete case coming out of the Texas Supreme Court since the Light case in 1994. And that's saying a lot, given the Sheshunoff (2006) and Mann Frankfort (2009) opinions which made non-competes more enforceable in Texas.

After Marsh USA, Texas restrictive covenant attorneys will have to monitor decisions coming from the Texas Court of Appeals to see whether the pro-enforcement trend continues. A recent case from the Waco Court of Appeals suggests that Texas courts will continue to look with favor upon covenants not to compete.

In the case out of Waco, the court upheld a customer solicitation provision prohibiting the employee from “directly or indirectly interfer[ing] with, or endeavor[ing] to entice away from the Company any clients or account with whom the Employee had direct contact at any time during his or her employment at Company, or for or with any other person, firm, corporation, partnership, joint venture, association, or other entity whatsoever, which is or intends to be engaged in providing or manufacturing pet supplies and related products manufactured and distributed by Company.” In upholding this provision, the court noted that, “Courts have upheld similar provisions prohibiting a former employee from soliciting the employer's customers or disclosing the employer's confidential information.”

The court also addressed the employee's contention that the noncompete agreement contained no geographic limitation. The court noted the Texas rule that “limiting the applicability of the covenant to particular client bases is an acceptable substitute for a geographic limitation in a noncompete agreement.”

Finally, the court held that a five-year restraint was not unreasonable. The court noted that Texas courts have held that restraints of two to five years can be reasonable.

Yet again, a Texas court has come down squarely in favor of enforcing covenants not to compete. This appears to be the first reported case handed down since the Marsh USA decision. Texas courts seem to be accepting that we live in a legal environment that is much friendlier to non-competes than the one in which we lived just a few years ago. Employees who are bound by non-compete agreements in Texas must be wary of this trend.

Reformation of Texas Noncompete Agreements

Robert Wood — Mon, 29 Aug 2011 07:28:25 -0600

Often in litigation involving noncompete agreeents, an employee bound by a noncompete agreement will contend that the scope of the restrictions contained in the agreement are overly broad. The employee may, for example, argue that an agreement prohibiting customer solicitation is too broad. Or, an employee may argue that a covenant not to compete is too restrictive; e.g., the employee may allege that the restrictions last too many months or years, or that the geographic restrictions are unreasonable.

A recent Texas appellate case concerned a noncompete agreement that contained no geographic restriction. Rather, the agreement stated that the employee would “not work for a competing third party for the term of one year.” The agreement further stated that the employee would “not start a publication outside of [his employer] for a term of one year.”

The Texas appeals court refused to invalidate the agreement. Instead, the court—although it found that the agreement was “overbroad and unenforceable”—reformed the agreement. The court noted that the Texas noncompete statute requires a court to “reform . . . [an overly broad] covenant to the extent necessary to cause the limitations to be reasonable and to impose a restraint that is not greater than necessary to protect the goodwill or other business interest of the promisee and enforce the covenant as reformed.”

In this case, rather than invalidating the covenant because it contained no geographic limitation, the court reformed the agreement to prevent the employee from competing in the same territory in which he worked while he was with his former employer. While with his former employer, the employee had been a salesperson in Johnson County; the appellate court held that the employee could be prohibited from competing there.

However, the court refused to preclude the employee from competing in areas into which his former employee had planned to expand. The court held that such a restriction would be unreasonable.

The takeaway from this case is: Don't assume that just because a noncompete is too broad, a court is likely to invalidate it. Texas courts often reform overly broad noncompete covenants by making them reasonable.

Marsh USA: Texas Noncompete Agreements More Enforceable

Robert Wood — Mon, 01 Aug 2011 06:00:25 -0600

The Marsh USA decision, which was handed down by the Texas Supreme Court earlier this month, sent shock waves through the community of lawyers who handle matters involving noncompete agreements. The decision creates danger for employees bound by noncompete agreements here. Hopefully, the word about this and other pro-enforcement decisions will get out, so that laypeople can stop referring to Texas as a "right to work" state.

When you read a court opinion, the first few pages often give you a hint about how it's going to turn out. This opinion was no different. Early on, the court noted that "The Texas Constitution protects the freedon to contract. Entering a noncompete is a matter of consent; it is a voluntary act for both parties." The court went on to overturn several Texas appellate court decisions that had held that certain types of noncompete agreements were unenforceable--i.e., those in which the consideration given involved the payment of money.

In Marsh USA, the issue was not whether the payment of money, per se, was valid consideration for a noncompete. Rather, the issue was whether a particular form of considerattion--stock options--was sufficient. In this case, the court held that the options were sufficient because they were designed to protect a valid business interest--business goodwill. Whether the simple payment of money, such as a signing bonus, would be sufficient remains to be seen. As is often the case in this area of law, no matter how clear the courts try to make things, there are always many things left for the lawyers to argue about.

For example, even if a noncompete agreement is enforceable to some extent, the scope of the agreement may be too broad. The employee may have other legal defenses as well. But the bottom line of the opinion is this: Those who think that Texas' status as a "right to work state" (which has nothing to do with noncompete agreements anyway) invalidates no compete agreements in Texas are sadly mistaken. In a lot of ways, employees are under more danger from these agreements than ever before.

Texas Non-Compete Contract: Non-Compete Agreements in Texas More Enforceable

Robert Wood — Wed, 13 Jul 2011 11:07:34 -0600

The Texas Supreme Court's long-awaited opinion in the Marsh USA case was released on June 24, 2011. As readers of this blog know, in recent years, Texas has gone from being a very anti-noncompete-agreement state to a relatively pro-enforcement state. In the Sheshunoff and Mann Frankfort cases, the court had eliminated arguments that employees had previously used to defeat covenants not to compete in Texas. By accepting the Marsh USA case for review, the Supreme Court suggested that it might further restrict anti-enforcement arguments. And indeed it did.

Prior to Marsh USA, Texas courts had consistently held that in the employment context (as opposed to the sale of a business context), the only consideration that would justify a restrictive covenant was the employer's providing of confidential information and specialized training. Texas appellate courts had held that an employer's giving of money to an employee was insufficient to justify a noncompete agreement.

Thus, giving an employee a signing bonus when he signed the no compete agreement, or having him sign the covenant in conjunction with receiving a promotion was not enough. Rather, to have an enforceable noncompete agreement, a Texas employer had to provide its employees with trade secrets, confidential information, or specialized training.

The issue in Marsh USA was whether an employer who had given stock options to its employee could enforce a noncompete agreement against him. The Texas Supreme Court held in the affirmative.

We will have several more blog posts on this important case and its implications. But the main take away from the case is this: The Texas legal landscape pertaining to noncompete agreements is constantly evolving (or devolving, depending upon your point of view). The bottom line is, covenants not to compete are far more enforceable in Texas now than they were just a few years ago. As a result of the holding in Marsh USA, monetary compensation (at least in the form of company stock) may be sufficient to support an employee's noncompete obligations. This is a major change in Texas employment law.

Tortious Interference Dallas Lawyer: Texas Unfair Competition Claims Can Be Asserted Even Without Enforceable Noncompete Agreement

Robert Wood — Fri, 01 Apr 2011 09:43:08 -0600

Earlier this year, the Austin Court of Appeals handed down a very interesting opinion in a Texas misappropriation of trade secrets case. This case demonstrates that even without an enforceable noncompete agreement, a Texas employer may be able to inhibit a former employee's ability to unfairly compete or use or disclose the employer's trade secrets.

In this case, a wholesale grocery distributor provided goods and services to customers including grocery and convenience store vendors. The distributor had a contract with one of its vendors. The contract allowed the vendor to audit the distributor's books.

The vendor informed the distributor that it wished to audit the latter's books. The distributor learned that three of its former employees were going to be involved in the audit. These former employees had been given access to the distributor's confidential information, including its confidential customer, vendor, and pricing information. The distributor sued its former employees for misappropriation of trade secrets, breach of fiduciary duty, conspiracy, and tortious interference. The distributor obtained a temporary restraining order and then a temporary injunction, to keep its former employees from using or disclosing the distributor's confidential information.

The court of appeals affirmed the trial court's injunction. In doing so, the court noted, "It is well established that even without an enforceable contractual restriction, `a former employee is precluded from using for his own advantage, and to the detriment of his former employer, confidential information or trade secrets acquired by or imparted to him in the course of his employment.'" The court observed that the employees had agreed to abide by a "confidentiality agreement that restricted disclosure" of their former employer's confidential information.

In upholding the injunction, the court explained that the distributorship could prove irreparable harm: "It is a reasonable inference that if Hill and McKinney were to impermissibly use McLane's trade secrets to perform an audit, the resulting damages would be difficult to calculate. Because the very purpose of the injunction is to prevent disclosure of trade secrets pending trial, plaintiffs need not demonstrate prior to a trial on the merits that a trade secret has actually been misappropriated. Instead, `harm to the trade secret owner may be presumed when a defendant possesses trade secrets and is in a position to use them."

OBSERVATION:

Often, an employer will not have its former employee bound by an enforceable noncompete agreement. In such instances, the employer may have to assert tort theories--such as tortious interference, breach of fiduciary duty, or theft of trade secrets--and seek injunctive relief and damages. The key point is, an employer is not necessarily powerless against employees who are unfairly competing with it, even if there is no noncompete agreement in place.

Texas Law Noncompete Agreements: Right to Work Myth

Robert Wood — Fri, 11 Feb 2011 17:04:47 -0600

Texas courts continue to confirm the enforceability of some noncompete agreements here. I routinely here from people that "Texas is a right to work state, and noncompete agreements are not enforceable here." Five years ago, Texas courts were extremely unsympathetic to noncompete agreements. But ever since the Sheshunoff and Mann Frankfort cases were decided, Texas courts have been more willing to enforce restrictive covenants against employees.

A recent case from the federal Northern District of Texas proves this point. There, the employee was trained on the employer's "processes and requirements." "She also became familiar" with the employer's "price schedule" for one of its customer contracts. This kind of confidential information is routinely conveyed by employers to employees.

After the employee resigned, became employed by a competitor, and began doing work for one of her ex-employer's customers, her former employer sued her for violating her noncompete agreement.

The court enforced the agreement, based upon the confidential information that was conveyed. In doing so, the court noted, "Two to five years has repeatedly been held as a reasonable time limitation, and the restraint here only lasts six months. And Texas courts have upheld geographical limitations preventing competition within a metropolitan area, as the 50-mile limitation essentially does here."

OBSERVATION:

Once again, a Texas court dispels the "right to work" myth. In Texas, noncompete agreements can indeed be enforceable.

Temporary Injunction Denied in Texas Noncompete Case

Robert Wood — Tue, 09 Nov 2010 15:29:21 -0600

A recent case from the Beaumont Court of Appeals highlighted the difficulty that employers sometimes face in enforcing noncompete agreements in Texas. In this case, a physician practice group sued one of its former physicians for violating a noncompete agreement. The physician had left the practice and started his own practice within the proscribed 22-mile radius. The trial court denied the practice's request for a temporary injunction.

The court of appeals affirmed. In doing so, the court emphasized that when the noncompete was signed, and the 22-mile radius agreed to, the population of the city in question was roughly half what it was years later when the practice sought to enforce the covenant. The court also noted that the practice had failed to prove that the physician had disseminated any of the practice's confidential information, or that the practice had suffered a loss of revenue due to the physician's actions. In short, the practice had failed to prove irreparable harm--which is a prerequisite to obtaining a temporary injunction in Texas.

OBSERVATION:

The court also noted that the result at the final trial might be very different. At the permanent injunction stage, the employer need not prove irreparable harm.

Scope of Noncompete Agreements. Texas Noncompete Lawyer

Robert Wood — Mon, 08 Nov 2010 13:43:25 -0600

The Fort Worth Court of Appeals recently issued a very interesting opinion on the geographic scope of noncompete agreements in Texas. In this case, a publishing company did business in Johnson County, Texas. The company hired the defendant to sell advertising for it. The defendant's job duties were performed in Johnson County.

The defendant resigned and began competing in nearby Parker County. The company sued him for violating his noncompete agreement. The company contended, "We were planning on expanding into Parker County, and you knew that. Thus, you should not be allowed to compete with us there."

The Fort Worth Court of Appeals rejected the company's argument. In doing so, the court noted Texas' long-standing rule that the proper scope of a noncompete agreement is the territory in which the employee worked. The court noted, "The parties have not cited, and we have not found, a case in which a geographical limitation including areas where an employer does not currently operated but has targeted for futur expansion, standing alone, is reasonable."

The court of appeals reversed the trial court's ruling in favor of the company.

OBSERVATION:

When analyzing the proper scope of a noncompete agreement, Texas courts usually focus primarily upon the activites of the person bound by the covenant. In this case, the company tried to expand the scope of the covenant to counties in which it planned to do business. But the court of appeals held that this went too far.

Labor Lawyer Dallas Texas. Tortious Interference and Prior Restraint.

Robert Wood — Thu, 19 Aug 2010 12:49:03 -0600

In Texas, when can a court enjoin speech in order to prevent tortious interference from occurring? There is no easy answer to this question. However, courts generaly disfavor "prior restraint"--i.e., forbidding speech even before it occurs. Thus, Texas courts have held that even speech that is false or defamatory cannot be prohibited by court order. Of course, a person who has been defamed can always sue for damages, but Texas courts have been very reluctant to prevent the alleged defamatory speech from being spoken in the first instance.

In one case in the Austin Court of Appeals, some homeowners believed that the home they had purchaesed was defective. They began participating in demonstrations organized by Homeowners for Better Building. These demonstrations occurred in neighborhoods of homes built by the homebuilder, at the homebuilder's main office, and at rallies in support of a home “lemon” law at the state capitol and city council meetings. The homebuyers also gave a television interview about the defective features of their home.

The homebuilder sued the homebuyers for (a) breach of contract, because they had violated a non-disparagement agreement; (b) tortious interference with contract; and (c) slander, libel and business disparagement. The homebuilder sought an injunction to enjoin the homebuyers "from engaging in these activities for the purpose of slandering, defaming, or publicly disparaging" the homeowner's business and from "increasing damage to its reputation daily, including loss of customers and loss of goodwill.” The trial court granted a temporary restraining order and then a temporary injunction. The court of appeals reversed the content-based restrictions contained in the trial court's order. The court explained that the homebuilder:

contends that the Brammers' speech is not entitled to constitutional protection because it is misleading or false commercial speech. . . . We disagree. . . . This case, like Hajek, involves dissatisfied customers who are not engaged in any competing commercial activity but rather are attempting to inform the community that a business is profiting from defective products. Regardless of the veracity of such disparagement, the criticism of the business can be reasonably related to social views that are strongly held by the speakers. . . .

OBSERVATION:

Speech may be unlawful, in the sense that it can subject someone to being sued for damages, but not be subject to being enjoined. The same court that approve a damages award may be unwilling to enter an injunction, beause of the constitutional prohibition unpon prior restraint.

Texas Trial Court Abused Discretion By Denying Temporary Injunction

Robert Wood — Tue, 18 May 2010 09:43:15 -0600

In a recent case in Houston, a state trial court's denial of an application for a temporary injunction was overturned. In denying the requested temporary injunction, the court had failed to receive any testimony that might have supported the issuing of an injunction. The court of appeals held that failing to receive testimnony necessitated reversal of the trial court's ruling, for the following reasons:

First, the trial court found that the noncompete provision was not "ancillary to an otherwise enforceable agreement." The court based this finding on the fact that the agreement did not contain an explicit promise by the employer to provide confidential information. However, the court of appeals noted that, as a result of the Supreme Court's decision in the Mann Frankfort case, a promise to provide confidential information can be implied. The trial court erred by not receiving testimony on whether the circumstances of the defendant's employment "necessarily involved the provision of confidential information."

Second, the trial court erred in holding that the agreement's restriction on solicitation of customers was overly broad. The trial court based its ruling on the fact that the restriction applied to all of the employer's customers, and not merely the particular customers with which the defendant dealt. However, as the court of appeals noted, without hearing any testimony, the trial court could not have known whether the defendant dealt with all of the employer's customers--it is possible that he did so.

The trial court's denial of the application for temporary injunction was reversed and remanded.

www.felllawfirm.com

Does Constructive Discharge Affect Enforceability of Texas Noncompete Agreement?

Robert Wood — Tue, 18 May 2010 09:04:52 -0600

In a recent case in a federal district court in Texas, the defendants--individuals who had signed non-compete agreements with their previous employer--contended that their agreements should not be enforceable because they were "constructively discharged" (i.e., forced to resign).

The federal district court rejected this contention. In doing so, the court noted that "termination of at-will employment does not invalidate a restrictive covenant and it does not give rise to a claim for constructive discharge." The court then analyzed the facts proffered by the defendants in support of their constructive discharge claim (e.g., that their former employer had been fined by the Justice Department) and found them wanting. The court stated that this "in no way indicates that Defendants' work conditions were so altered that a reasonable person would have felt compelled to resign."

OBSERVATION:

Although the district court rejected the defendants' constructive discharge contention in this case, it cannot be said with certainty that such an argument would fail in all cases. The court might have viewed things differently, for example, if the defendants had quit because they had been asked to participate in criminal activity. Or, if the employees had been employed for a definite term, rather than at will, the result theoretically might have been different. That said, this opinion definitely supports the proposition that termination of an at-will employee does not invalidate a restrictive covenant in Texas.

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Enforceability of Clawback Provisions in Texas

Robert Wood — Fri, 16 Apr 2010 20:15:34 -0600

What happens when an employer gives an employee stock in exchange for a non-compete agreement, but the non-compete agreement is held to be unenforceable. Does the employee still get to keep the stock? This question was raised in a case in which the employer gave a ten percent ownership interest in the company to one of its employees. The employer prepared a stock certificate in the employee’s name, but it retained possession of the stock certificate.

Approximately four years after executing the agreement, the employee left the employer and took a job with a competing company. The employer claimed that because the employee breached the non-compete agreement, he was not entitled to the stock. The employee filed suit seeking a declaratory judgment that the stock issued in his name should be delivered to him.

The trial court ruled that the noncompete agreement amounted to an unenforceable restraint of trade and awarded the employee the stock. The court of appeals agreed that the noncompete agreement was unenforceable, because it was unlimited as to time and extended to customers with whom the employee had no association with while working for the employer.

However, the court also held that the employee should not receive the stock. In reaching this conclusion, the court considered whether the promise not to compete and the promise of stock were mutually dependent promises. That is, but for the employee’s promise not to compete, the employer would not have promised to give him stock. Because the employer did not get what it bargained for (i.e., the employee’s noncompetition), the employee was not entitled to the consideration promised by the employer (i.e., the stock). Therefore, the employee was allowed to work for the new employer, but he lost the stock.

As we can see from this case, an employee who challenges the enforceability of a non-compete agreement may, if he or she prevails, forfeit the consideration (in this case, stock) that was given for the non-compete.

John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80 (Tex. App.—Houston [14^th Dist.] 1996, writ denied).