Watch Your Language: Texas Court Highlights the Importance of Language in Noncompetes
Author: Lawrence D. Smith (San Antonio)
Published Date: January 26, 2017
Texas law permits businesses to utilize noncompetition agreements to protect their legitimate business interests in certain circumstances. Companies, attorneys, and the courts generally focus on the consideration that must be exchanged in order for the parties to create a legal, enforceable noncompetition agreement. However, since courts analyze noncompetition agreements under standard contract interpretation principles, the language beyond the exchange of consideration can also be critical to the enforceability of a noncompetition agreement. A recent case from the Court of Appeals of Texas in Texarkana highlights this importance.
In East Texas Copy Systems, Inc. v. Player, the court of appeals in Texarkana evaluated a noncompete contained in an asset purchase agreement. As part of the sale of the business, the seller agreed not to compete with the buyer within a specified geographic area for a period of two years. The agreement provided that the buyer would employ the seller for four years. The noncompete clause contained in the asset purchase agreement specifically provided that if the seller’s employment with the buyer was terminated prior to two years from the date of the agreement “for any reason other than a for cause termination, this Non-Compete clause will no longer be binding.” The parties also entered into a separate noncompetition agreement, which contained the identical language cited above rendering the noncompete clause nonbinding if the seller’s employment with the buyer terminated for any reason other than for cause.
Within two years of entering into the agreement, the seller voluntarily resigned his employment and began competing with the buyer. The seller filed suit seeking a declaration that the noncomplete clauses did not bar him from competing with the buyer. The buyer requested that the court enforce the noncompete clauses. The trial court determined that the noncompetition agreement did not bind the seller and the buyer appealed.
On appeal, the buyer argued that the trial court misinterpreted the noncompete clause. The buyer maintained that the noncompete clause should be read to be enforceable if the seller terminated his employment with the buyer. The court rejected this argument, noting that the plain language of the clause made the noncompete nonbinding if the seller’s employment terminated without cause. The plain language did not require that any particular party terminate the employment relationship, only that it be terminated without cause. Since the parties agreed that the seller’s employment terminated without cause, the court ruled that the competitive restrictions were no longer binding on the seller.
The buyer also argued that the noncompete clause should be interpreted as protecting the seller only for being terminated by the buyer because that is the only interpretation that harmonized the purchase agreement and employment agreement to protect the interests of both parties. The buyer essentially claimed that the real purpose of the transaction was to create the noncompete agreement and that to permit the seller to resign and render the noncompete nonbinding would thwart the purpose of the transaction. The court rejected this argument, noting that the agreements between the parties covered more than just the noncompete agreement. The agreements included employment of the seller for four years, creation of a new business relationship between the parties, and mechanisms to address the risks of the relationship, including procedures for either party to terminate the relationship. The court also noted that the parties allocated the risk of an early termination of the agreement by the seller because the seller could forfeit up to two years of future salary if he terminated the agreement before it expired.
The court’s opinion highlights the contractual nature of a noncompete agreement and emphasizes that parties should pay close attention to the language of any agreement containing a noncompetition clause in order to ensure that it meets their expectations. Best practice is to make sure that the language in the applicable noncompete clause is sufficient to protect the business interest the company seeks to protect, and that any release from the competitive restrictions accurately reflects the company’s intent. Employers may want to examine their noncompetes to determine: (1) whether the competitive restriction language actually protects the interests of the company and (2) whether the provisions releasing an individual from competitive restrictions accurately reflect the limited circumstances under which the company would permit such a release. This additional focus can help to ensure that a noncompete provides the company with the desired protection.
Mr. Smith’s practice at Ogletree Deakins primarily involves the defense of employers in labor and employment related litigation before state and federal courts and administrative agencies. Mr. Smith represents employers in claims involving equal employment opportunity law, unfair labor practices, wage and hour issues, unemployment compensation, wrongful discharge, state law tort and contract claims, occupational safety and health matters as well as class action litigation under the Fair...