Enforcability of Texas Non-competition Agreements.

posted by Neil Klingshirn  |  Aug 29, 2009 4:00 PM [EST]  |  applies to Ohio

To be enforceable under Texas law, a non-compete must be:

  • ancillary to or part of an otherwise enforceable agreement at the time the agreement is made;
  • to the extent it contains limitations as to time, geographical area, and scope of activity to be restrained, reasonable, and
  • must not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promise.

Tex. Bus. & Com. Code § 15.50.

Non-competes are not Binding Until the Employer Provides the Promised Benefit

In 2006, the Texas Supreme Court held that non-compete covenants can be considered unilateral contracts, made at the time a non-compete is signed, that become binding once an employer provides the employee confidential information. Sheshunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006). Sheshunoff overruled the prevailing Texas Supreme Court decision interpreting § 15.50 to require that the non-compete covenant must be supported by a valid promise at the time the agreement is made. Light v. Centel Cellular Co., 883 S.W.2d 642 (Tex. 1994).

Interests Protected by Non-competition Agreements.

Business goodwill and confidential or proprietary information are interests worthy of protection by a non-compete. See Sheshunoff, 209 S.W.3d 644 at 649. In addition, knowledge of a unique customer base and knowledge of the equipment or products used by each of the employer's customers are also protectable interests. See Stone v. Griffin Comm. & Security Systems, Inc., 53 S.W.3d 687, 694 (Tex. App.--Tyler 2001, no pet.). Likewise, information concerning acquisition strategies, compensation and benefits formulas, and payment rates may be considered protectable interests. See Teel v. Hospital Partners of America, Inc., No. H-06-cv-3991, 2008 U.S. Dist. LEXIS 8679, 2008 WL 346377, *7 (S.D. Tex. Feb. 6, 2008).

Reasonable Geographic Scope

A reasonable geographic scope is generally considered to be the territory in which the employee worked for the employer. See Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 660 (Tex. App.--Dallas 1992, no writ). If the geographical scope of the non-compete is unreasonably large, the court must reform the contract so that it is enforceable. TEX. Bus. & Comm. CODE § 15.51(c);  Evan's World Travel v. Adams, 978 S.W.2d 225 (Tex. App.--Texarkana 1998, pet. denied) (holding that the agreement was only enforceable in the one county in which employee worked for former employer); Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 661-62 (Tex. App.--Dallas 1992, no pet.) (holding that a non-compete that contained no geographical restriction was unenforceable, but declining to reform because the plaintiff had dropped injunctive relief claim).

Texas courts note that non-compete covenants that contain either an industry-wide exclusion from subsequent employment and/or that prevent contact with clients with whom the employee had no contact are unenforceable. Peat Marwick Main & Co. v. Haas, 818 S.W.2d 381, 386-87 (Tex. 1991) (holding that the accounting firm's protectable business interest was its client base, and the non-solicitation provision was unreasonable under § 15.50 because it applied to customers and territory with which the employer had not had actual contact); Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 263 S.W.3d 232, 250 (Tex. App.--Houston 2007, pet. granted); General Devices, Inc. v. Bacon, 888 S.W.2d 497, 504 (Tex. App.--Dallas 1994, no writ) (non-compete was unreasonable where it contained no geographical or time limitation); John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80, 85 (Tex. App.--Houston 1996, writ denied).

On the other hand, non-compete covenants with restrictions covering a wide geographic area may be reasonable if they are limited in scope to a firm's current or prospective clients such that they do not pose a greater restraint than necessary to protect the firm's goodwill. See:

  • Sheshunoff at 656-57 (holding that the non-compete was reasonable where employee could not contact any clients or prospective clients for one year because he was a high-level employee and could have otherwise capitalized on goodwill that he helped develop);
  • Curtis v. Ziff Energy Group, Ltd., 12 S.W.3d at 119 (holding that six-month non-compete prohibiting a former vice-president from conducting competitive business in Canada and the United States was reasonable because the non-compete was limited to twenty competitors and employee worked within their territory); 
  • Webb v. Hartman Newspapers, Inc., 793 S.W.2d 302, 304-05 (Tex. App.--Houston 1990, no writ) (reforming the contract to prohibit former newspaper employee from soliciting advertising from  clients of his former employer and to prohibit employee from competing in the distribution area of his former employer);
  • Vais Arms, Inc. v. Vais, 383 F.3d 287, 295 (5th Cir. 2004) (upholding a 10-year, national non-compete because former business owner advertised and sold products nationwide);
  • Staples, Inc. v. Sandler, 2008 U.S. Dist. LEXIS 68589, 2008 WL 4107656, *5 (N.D. Tex. 2008) (reforming a non-compete for a salesman to only prevent contact with clients on accounts that he developed at employer rather than all clients, including those he had before he joined the company);
  • American Express Financial Advisors, Inc. v. Scott, 955 F. Supp. 688, 692 (N.D. Tex. 1996) (holding that a non-compete was reasonable, and not a greater restraint than necessary, where there was no explicit territorial limitation, but employee was prohibited from selling services to customers he served at his former employer or to potential customers)
  • W.R. Grace & Co. Dearborn Div. v. Mouyal, 262 Ga. 464, 422 S.E.2d 529, 533 (Ga. 1992) (upholding non-compete covenant that had no geographical restriction but prohibited employee from contacting customers he contacted during the last two years of his tenure at employer).

In contrast, where an employee has no specialized training, has not acquired trade secrets, and does not have access to confidential customer lists, a non-compete is not necessary to protect the employer's business interests. Daytona Group of Texas, Inc. v. Smith, 800 S.W.2d 285, 289-90 (Tex. App.--Corpus Christi, 1990) (holding that non-compete was not necessary where salesperson for radio had no specialized knowledge and radio's customers were public knowledge and she did not solicit them after leaving the station).

Reforming Overly Broad Non-Competition Agreements

Section 15.51 requires a court to reform a non-compete agreement if it is unreasonably  broad in scope. TEX. BUS. & COMM. CODE §15.51(c). Some Texas appeals courts have suggested, but not held, that reformation is appropriate at the temporary injunction stage.

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posted by Neil Klingshirn  |  Aug 29, 2009 4:00 PM [EST]  |  applies to Ohio

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