Texas

July 2012

State of Texas Non-Competes

Good News for Texas Employers
By Rob Radcliff

Non-compete and non-solicitation agreements are now easier to enforce in Texas thanks to several recent rulings from the Texas Supreme Court. Non-compete agreements generally prevent an employee from working for another employer in a competing business. Non-solicitation agreements prevent an employee from calling upon the former employers customers or clients. Both are governed by Section 15.50 of the Texas Business and Commerce Code. A non-compete agreement, by its very nature, is an unlawful restraint of trade. The noncompete statute carves out certain agreements that are acceptable. To be enforceable, the agreement must be reasonable in time and scope and ancillary to an otherwise enforceable agreement. The reasonable portion deals with (1) how long the non-compete will last; (2) what geographic area it covers; and (3) the type of activity it covers. There is no hard and fast rule for acceptable noncompete terms. Generally, they are seen in the 1-2 year period. The term must be reasonable based upon the type of business done and interest protected. In terms of scope, the geographic area can range from the area where the former employee worked to the area where the company does business to some other standard. Finally, the activity restrained should be similar to the type of work the employee did for the former employer. The most often litigated provision is whether the agreement is ancillary to an otherwise enforceable agreement. A variety of arguments are made by former employees trying to fight off a non-compete agreement. An opening was created in 1994 with

the Texas Supreme Courts opinion in Light v. Centel Celluar Co. of Texas, 883 S.W.2d 642 (Tex. 1994). The Court ruled that in order to be ancillary to an otherwise enforceable agreement, the other agreement must give rise to the actual non-compete. The practical effect of this was inclusion of language wherein an employer promised to provide some type of trade secret, proprietary information, or spe-

cialized training to the employer. In exchange for that information, the employee would agree not to compete. What resulted, was significant litigation over what was promised, what was provided, and whether agreement was enforceable. In 2006, the Texas Supreme Court began making this prong of the non-compete statute easier to understand and easier to enforce. In Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, the Court ruled that consideration or value provided to the employee did not have to be provided at the time the non-compete was

entered into. 209 S.W.3d 644 (Tex. 2006). In 2009, the Court followed Sheshunoff with Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009). In Mann, the Court held that an obligation to provide confidential information to an employee could be implicit and did not have to be stated in the agreement. In 2011, the Texas Supreme Court reversed Light and essentially said that ancillary to did not mean give rise to. Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011). Put another way, the other agreement does not have to give rise to the noncompete. In that opinion, the Court held for the first time that a stock option agreement could serve the basis for a noncompete agreement. This left open the question of what other type of consideration could be provided to employees that would comply with the Courts new standard in Marsh? Since Marsh, lower courts have provided little guidance on this issue. The question still remains: could a signing bonus, a retention bonus, or some other type of monetary consideration be ancillary to the noncompete? This is an unresolved issue. Nevertheless, the trend has been to enforce, not restrict, non-compete agreements. That is good news for Texas employers. Texas employers should continue to use non-compete agreements and non-solicit agreements where there is really an interest worth protecting and they are willing to dedicate the time and money necessary to enforce the non-compete.

Rob Radcliff is a partner at Langley Weinstein LLP and may be contacted at rradcliff@lwllp.com.
This publication is for information purposes only and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without consulting a lawyer.