In a long-awaited decision, the Texas Supreme Court today drastically altered the landscape for the enforcement of covenants not to compete. In Alex Sheshunoff Management Services, L.P. v. Kenneth Johnson and Strunk & Associates, L.P., the Court modified its earlier holding in Light v. Centel Cellular Co., so that a unilateral contract can support a covenant not to compete. This means employers that promise to provide confidential information in return for a covenant not to compete can enforce the agreement so long as they provide the confidential information to the employee before he or she departs. It also suggests that employers may successfully require current at-will employees to sign non-compete provisions, even if they have already provided confidential information to those employees in the past.
Justice Don Willett in his opening paragraph lays out the change: “In this case we revisit the Court’s 1994 decision in Light v. Centel Cellular Co. and again consider the enforceability of covenants not to compete in the context of at-will employment. The question today is whether an at-will employee who signs a non-compete covenant is bound by that agreement if, at the time the agreement is made, the employer has no corresponding enforceable obligation. Under Light, the answer to that question was always ‘no.’ Today we modify our holding in Light and hold that an at-will employee’s non-compete covenant becomes enforceable when the employer performs the promises it made in exchange for the covenant. In so holding, we disagree with language in Light stating that the Covenants Not to Compete Act requires the agreement containing the covenant to be enforceable the instant the agreement is made.”
The Court made clear that not all of Light was being abandoned. Still in place are these requirements:
- The covenant must be ancillary to an otherwise enforceable agreement;
- The consideration given by the employer must give rise to the need to restrain the employee; and
- The covenant must be designed to enforce the employee’s return promise in the otherwise enforceable agreement.
The Court acknowledged that its prior decision in Light had led to “overly technical disputes” rather than where it now expects the focus to be – what it calls the “core inquiry” of such litigation – whether the covenant “contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest” of the employer.
After changing its reading of Light, the Court provided its first indication of how it views such issues by holding that the covenant signed by the employee in this case was reasonable. The employee’s argument that he had received a similar type of marketing information before signing the agreement was not successful as the Court found there was nothing to keep the employer from seeking the greater protection of a covenant when it continued to give the employee that information.
According to Ron Chapman, Jr. a shareholder in Ogletree Deakins’ Dallas office: “While this ruling is a clear victory for companies trying to enforce non-compete agreements, it also creates an extra burden for companies that want to hire an applicant who has a non-compete agreement, as the threat of the prior employer being able to enforce the non-compete agreement is now quite valid. Hiring companies should evaluate their candidates’ non-compete agreements on the front-end, before a hiring decision is made. Also, because this decision affects every non-compete agreement in the state, whether that agreement was signed before or after the Court’s ruling, all employers should examine their form non-compete agreement to determine whether it complies with the Court’s directives.”
Mike Fox, a shareholder in the firm’s Austin office, adds: “While there can be no question that this decision places Texas squarely in the camp of states that will enforce covenants not to compete, it does not mean that all covenants will be enforceable. Instead, employers can anticipate more litigation as trial courts decide questions of reasonableness of the restrictions and whether the restraint is necessary to protect the goodwill or other business interest of the employer. The Court expressly indicated the latter question will involve the ‘amount of information an employee has received, its importance, its true degree of confidentiality, and the time period over which it is received’.”
Should you have any questions about this ruling or its ramifications, contact the Ogletree Deakins attorney with whom you normally work or the Client Services Department at 866-287-2576 or via e-mail at firstname.lastname@example.org.
Note: This article was published in the October 20, 2006 issue of the Texas eAuthority.