Supreme Court of Texas Again Shifts Non-Competition Law with Mann Frankfort Decision

In a bold new decision, the Texas Supreme Court has yet again expanded the enforceability of covenants not to compete under Texas Law. No longer must an employer necessarily make an explicit written promise to provide confidential information to create an “otherwise enforceable agreement.” Now, with the Court's decision in Mann Frankfort v. Fielding, an employer's implied promise to provide confidential information, once performed, can not only trigger a conditional contract under which an employee is bound not to disclose confidential information, but also support enforcement of a covenant not to compete.

Mann Frankfort v. Fielding involved a client purchase provision in an accounting practice's at-will employment agreement. Brendan Fielding worked as a Senior Manager in Mann Frankfort's tax practice. In 1995, Fielding signed an at will employment agreement which provided that, if Fielding were to perform any accounting work for a Mann Frankfort client within a year after his departure from the firm, then Fielding would be obligated to purchase the client. Although Fielding's employment agreement included a promise by Fielding not to use or disclose Mann Frankfort's confidential information, the agreement contained no promise to actually give Fielding any confidential information.

After resigning from Mann Frankfort, Fielding opened a new accounting practice. Fielding filed a declaratory judgment action, asking the trial court to declare that the client purchase provision was an unlawful and unenforceable restraint of trade. Fielding was awarded a declaratory judgment. Mann Frankfort and Fielding then filed competing motions for summary judgment of the issue of fees. The trial court granted Mann Frankfort's motion for summary judgment on fees, finding that Section 15.52 of the Texas Business and Commerce Code preempted Fielding's claims for attorney's fees under both the contract and the Declaratory Judgments Act. Fielding decided to appeal the denial of attorney's fees, and Mann Frankfort filed a cross appeal on the issue of enforceability.

Relying on the Sheshunoff and Light decisions, the Court of Appeals held that the client purchase provision was unenforceable. Specifically, the Court of Appeals found that the provision was not ancillary to or part of an otherwise enforceable agreement because Mann Frankfort had made no promise to give Fielding any confidential information. The Court of Appeals also ruled that Fielding was entitled to attorney's fees under his contract.

Mann Frankfort then appealed to the Supreme Court of Texas, arguing that it had impliedly promised to give Fielding confidential information. In ruling, the Supreme Court of Texas paid particular attention to the fact that the use of confidential client information is an essential part of a tax accountant's job. The Court noted that “it was clear that by the nature of his duties as a senior manager in the firm's Tax Department, Fielding would be required to have and use information confidential to the firm.” The Supreme Court of Texas reversed the lower court's decision, holding that, “where the nature of the contemplated employment will reasonably require the employer to furnish the employee with confidential information-the employer impliedly promises to provide the information.” Under the decision, because the nature of a tax accountant's work reasonably requires the use of confidential information, when Mann Frankfort actually performed its implied promise and gave confidential information to Fielding (triggering his non-disclosure obligations), the client purchase provision became enforceable.

The Court's decision represents yet another large step away from Light v. Centel. From the 1994 Light decision until the Court's 2006 decision in Sheshunoff, illusory promises in the context of at-will employment could not support the enforcement of covenants not to compete because they were not enforceable “at the time the agreement is made.” As a result, any agreement which called for the employer to make a disclosure of confidential information at a future time following execution of the covenant not to compete would be unenforceable because the employer could simply fire the employee instead of performing. With the Sheshunoff decision, the Court made a subtle yet radical shift away from Light, holding that the language “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made” does not actually require the “otherwise enforceable agreement” to be enforceable at the time the agreement is made. Rather, future performance not only creates the “otherwise enforceable agreement” but also makes the covenant not to compete enforceable.

For a covenant not to compete to be ancillary to or part of an otherwise enforceable agreement, “the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer's interest in restraining the employee from competing,” and “the covenant must be designed to enforce the employee's consideration or return promise in the otherwise enforceable agreement.” Under Light, the consideration given by the employer had to be both explicitly promised and non-illusory. With Sheshunoff, the consideration only needed to be promised, so long as the illusory promise was ultimately kept. Now, with Mann Frankfort, the consideration given in the otherwise enforceable agreement need no longer even be explicitly promised, so long as it could be inferred given the nature of the employment.

Although we have seen a dramatic shift towards enforceability over the past three years, a prudent employer would still be well served to have its non-competition agreements reviewed by counsel. As a practical matter, the decision in Mann Frankfort will likely shift the scope of a trial court's analysis to whether the information actually given an employee is worthy of protection, and whether the limitations as to time, geography and activity to be restrained are reasonable.