Non-Competes in Texas: No Longer as Difficult to Enforce
Celeste R. Yeager - Partner
Prior to 2006, non-competes were difficult to enforce, but not unenforceable. Texas required "special" consideration for non-competes: confidential information or specialized skills and training. Historically, the timing of the conveyance was also of utmost importance. However, these legal barriers were virtually stripped away by the last three Texas Supreme Court non-compete opinions, issued in 2006, 2009 and 2011.
Alex Sheshunoff Mgmt. v. Johnson (Tex. 2006): This opinion uprooted draconian technical barriers to the enforcement of non-compete agreements that were first put in place by the opinion in Light v. Centel Cellular (Tex. 1994). The Court held that an employer’s promise to provide confidential information to an employee at some time in the future was sufficient consideration for the enforcement of the non-compete, so long as such information was eventually provided. Largely eliminating a traditional barrier to non-compete enforcement, the opinion overturned the requirement that the employer provide confidential information to an at-will employee contemporaneously with the signing of the non-compete.
Mann Frankfort Stein & Lipp Advisors v. Fielding (Tex. 2009): In this opinion, the Court opened the door wider for non-competes, holding that even where the employer did not specifically promise to provide confidential information to the employee, an implied promise to do so (by virtue of the employee’s specific promise to protect confidential information he actually needed and received for his job) is enough to support the enforceability of a non-compete.
Marsh USA Inc. v. Cook (Tex. 2011): This opinion significantly liberalized the enforcement of non-competes in Texas, well beyond even the above-cited opinions. The Court held for the first time that the issuance of stock options which are exercised by an employee can support a non-compete. Prior to this opinion only confidential information or specialized training would support a non-compete. More fundamentally, breaking with long precedent, the Court ruled that the consideration for a non-compete agreement does not have to "give rise" to the employer’s interest in restraining competition. Instead, there only has to be a “reasonable relationship” between the consideration provided (here, stock options), and the business interest the employer is trying to protect (here, the employer’s goodwill). Because stock options resulted in the employee’s ownership interest in the company, that “reasonably related” to the company's interest in protecting its goodwill. The decision opened the door to enforcement of non-competes based on a variety of employer interests and consideration delivered to the employee.
If you have legitimate business interests that need protection by virtue of a non-compete, the doors have been opened to placing these agreements into stock option agreements in addition to the more traditional approach of placing them in employment and confidentiality agreements. In light of the recent shift in enforceability, we are encouraging employers to review their non-compete agreements.