YOU Let the Dogs Out ... If You Fail to Comply with the Intricacies of the Texas Law of Noncompetition Covenants

The 21st Century employer will spend astronomical sums to recruit and train the finest minds it can attract. On the eve of the Company's receipt of the benefit of its investment, a now valuable employee will relocate across the street with a laptop or briefcase fully of trade secrets, either to compete directly or to accept a job with a competitor. The scenario is as real as today's headlines.

The pro-active employer seeks to protect against the migration of key employees and trade secret information with carefully drafted noncompetition covenants in employment agreements. In a further attempt to achieve uniformity of enforcement, the noncompetition agreement will often include a "choice of law" provision purporting to require application of a particular state's law that would uphold the restraint on a former employee's freedom of action. Unfortunately, in Texas, courts will disregard a choice of law provision if the employee's services are predominately performed in Texas. DeSantis v. Wackenhut, 793 S.W.2d 670 (Tex. 1990).

What to do? Here are some basic steps toward maximizing your chances to protect against an employee intent on unfairly competing:

• the DeSantis decision instructs that a noncompetition covenant seeking to restrain a former employee will be judged under Texas law if the employee's services were predominately performed in Texas. Lesson learned: for Texas-based employees, customize the agreement to conform to Texas law;
   
• Texas courts "generally disfavor noncompete agreements because of the public policy against restraints of trade and the hardships resulting from interference with a person's means of livelihood." Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 658 (Tex.App.—Dallas 1992, no writ). Lesson learned: a Texas court will not grant injunctive relief to restrain the former employee in the absence of strict compliance with Texas law;
   
• because "at-will" employment may be legally terminated at any time by the employer, the "job" is insufficient consideration to support a noncompetition covenant. Light v. Centel Cellular Co., 883 S.W.2d 642 (Tex. 1994). Lesson learned: the employee must receive something of value to support an agreement not to compete;
   
• the employee must receive something of value that also gives rise to the employer's interest in restraining the employee post-employment. A promise of notice of termination, stock options, and money are not enough since they do not give rise to an employer's need for competitive protection. Tom James of Dallas, Inc. v. Cobb, 109 S.W.3d 877, 883 (Tex.App.—Dallas 2003, no pet.); Strickland v. Medtronic, Inc., 97 S.W.3d 835 (Tex.App.—Dallas 2003, pet. filed); American Fracmaster v. Richardson, 71 S.W.3d 381, 387 (Tex.App.—Tyler, pet. granted, judgm't vacated w.r.m.); Olander v. Compass Bancshares, Inc., 172 F.Supp. 846 (S.D.Tex. 2001). Lesson learned: simply giving the employee something of value may not be enough if the consideration does not give rise to the employer's need for protection;
   
• a commitment by the employer to provide confidential information or specialized training in exchange for the employee's promise to preserve the confidentiality of information both during and after employment, may (1) constitute an enforceable agreement that (2) gives rise to the need for competitive protection sufficient to support the enforcement of a noncompetition agreement. Light, id. Vague references that the employee may be provided confidential information at some point in the future are insufficient. Lesson learned: an agreement which includes the provision and protection of confidential information is a step in the right direction to enforceability;
   
• the relevant inquiry is "whether, at the time the agreement is made, there exists a binding promise." Tom James of Dallas, Inc. v. Cobb, 109 S.W.3d 877, 883 (Tex.App.—Dallas 2003, no pet.); Strickland, 97 S.W.3d at 839; CRC Evans Pipeline Int'l v. Myers, 927 S.W.2d 259, 263 (Tex.App.—Houston [1st Dist.] 1996, no pet.). In an "at-will" employment relationship, a promise by the employer to provide confidential information may not create a "binding agreement when made" since the employer retains the power to terminate employment before supplying any confidential information. Lesson learned: contemporaneous with the execution of the noncompetition covenant, the employer must supply the employee with something of value that also gives rise to the need for competitive protection.

If the foregoing discussion still reads like hieroglyphics, do not despair. Texas courts and practitioners continue to struggle with formulating a balance between an employer's legitimate interest in protecting itself against unfair competition and Texas public policy favoring competition and free enterprise. If nothing else, the arcane nature of the Texas approach to noncompetition covenants argues in favor of revisiting your company's inventory of employment agreements for compliance with Texas law.

     
STRASBURGER & PRICE, LLP  •  DISCLAIMER
This publication provides information on general legal issues and is not intended to provide advice on any specific legal matters.