Labor & Employment Law

Ancillary to Otherwise Enforceable Agreement Requirement

By Robert Wood

For a non-compete agreement to be enforceable in Texas, the consideration given by the employer to the employee must 'give rise' to its interest in restraining competition.  In other words, the employer should be able to go into court and say, 'Because we gave our former employee x, he should be precluded from competing against us.'  Over the years, employers have tried to justify non-compete agreements based upon many different forms of consideration—e.g., providing the employee with a term of employment, or stock options, or severance, etc.

However, the only type of consideration that Texas courts have consistently believed sufficient to justify non-compete agreements in the employment context has been the employer's providing of confidential information to the employee.  Texas courts have believed the employer's argument—'We gave him confidential information; thus, he shouldn't be allowed to compete with us'—to be convincing.

However, in the Sheshunoff case, the Texas Supreme Court warned against 'overly technical disputes' involving noncompete agreements.  The court warned that lower courts should not get bogged down in questions about 'the amount of information an employee has received, its importance, its true degree of confidentiality, and the time period over which it is received.'

This warning arguably reflects the court's growing impatience with disputes involving non-compete agreements.  Prior to Sheshunoff, the striking down of noncompete covenants, on what some people might refer to as 'technical' grounds, was fairly routine.  The supreme court may be signaling its desire for a simpler test to determine whether noncompete agreements are enforceable in Texas.

However, this warning has not kept some Texas courts from continuing to insist that non-compete covenants be supported by adequate consideration.   For example, in a recent Dallas Court of Appeals case, the court held:

Sheshunoff did not purport to replace the requirement that there be consideration for a non-compete agreement. Instead, the sufficiency of the consideration may become part of the reasonableness test after the court first determines there was some consideration.

OBSERVATION:

The Texas Supreme Court's warning against 'overly technical disputes' must be squared with the requirement that the employer's consideration must 'give rise' to its interest in restraining competition.  One potential way of harmonizing these competing concerns is to consider the true confidentiality of the information provided by the employer at the 'scope' stage if the analysis.  In other words, an employee bound by a non-compete agreement could challenge whether the alleged confidential information conveyed by the employer truly justifies the restrictive covenant in question.

Full post as published by Texas Non-Compete Law Blog on April 16, 2010 (boomark / email).