LABOR & EMPLOYMENT NEWSLETTER - Hey Alex (Sheshunoff) Is There Any Light Left?

What they did with Light.

Six months ago, in deciding Alex Sheshunoff Management Services, LP v. Kenneth Johnson & Strunk Assoc., 209 S.W.3d 644, 50 Tex. Sup. Ct. J. 44, (Tex. Oct. 20, 2006), the Texas Supreme Court departed from twelve years of noncompete precedent which began with Light v. Centel Cellular, 883 S.W.2d 642 (Tex. 1994). Specifically, the Court ruled that simultaneous consideration was no longer a necessary requirement for noncompete enforcement in Texas.

Prior to Sheshunoff, appellate courts, relying on Light v. Centel Cellular, 883 S.W.2d 642 (Tex 1994) required employers to provide employees with consideration at the exact moment the noncompete was executed. See, e.g., Strickland v. Medtronic, Inc., 97 S.W.3d 835, 839 (Tex. App. - Dallas 2003, pet. dism'd w.o.j.). In practical terms, this translated to a requirement that an employer provide confidential information or specialized training at the time the agreement was executed, preferably at the inception of employment. In return, the employee must have made a reciprocal promise not to use or disclose the confidential information to which the noncompete covenant was ancillary. In addition, valid noncompete consideration had to be of a type which gave "rise to a reason to restrain trade." Light, 883 S.W.2d at 647. Under the pre-Sheshunoff analysis, without a simultaneous exchange of information, the noncompete failed to meet the requirements of Section 15.50 and Light's "at the time the agreement is made" language. See Tex. Bus. & Comm. Code § 15.50; Light, 883 S.W.2d at 645.

In Sheshunoff, the Texas Supreme Court departed from Light's requirement that the employer provide consideration the moment the agreement is signed to bind an at-will employee to an enforceable noncompete. Instead, the Court now reads Section 15.50's "at the time the agreement is made" language to mean that the statutory language always meant that consideration in an at-will relationship could have been provided by an employer at a later time so long as new independent consideration was, in fact, provided to the employee. Given this interpretation of legislative history, albeit a seemingly outcome-based reading, the Court determined that so long as consideration which gives rise to a reason to restrain trade is provided to an employee who agrees not to use or disclose it, such information need not be provided simultaneous with the execution of the agreement. Instead, the agreement becomes enforceable when the promise to provide confidential information or specialized training is fulfilled.

The Good

In Sheshunoff, the Court finally addressed the issue that, prior to October, caused the greatest number of Texas noncompetes to be ruled unenforceable. Specifically, most noncompetes were drafted like the Sheshunoff noncompete - specifying that an employer would provide the employee access to its confidential information to enable the employee to better perform his/her work. Because the confidential information was not required to be given at the time the agreement was signed (or ever) and the employee could be terminated before being granted access to such information, the promise was deemed illusory and, therefore, the noncompete was unenforceable. Thus, despite the reality that most employees actually received confidential information prior to termination, all but the most carefully drafted noncompetes with carefully orchestrated consideration exchanges were found unenforceable. Thus, if the purpose of the 1993 amendment to Section 15.50 was to enhance the enforceability of noncompetes, the reality was not fulfilled.

The Sheshunoff Court specifically indicated its desire to depart from the "overly technical disputes" which Light engendered over whether a covenant was ancillary to or part of an otherwise enforceable agreement. Instead, the Court refocuses the emphasis on whether the covenant is reasonable in terms of time, scope and geography. It further attempts to correct any legal diversions the Light opinion caused. The focus now is whether a restriction on trade is justified based on the type of information an employee received, its confidentiality and the time period involved. Thus, in the wake of Sheshunoff, there should be less controversy of the overly technical, "ancillary to or part of" portion of Section 15.50 and more focus on time, scope and geography.

The Challenging

I. Retroactivity

On October 20, 2006, the Texas Supreme Court ruled that many noncompetes which would not have been unenforceable under Light were suddenly, retroactively enforceable. The holding was without regard to when a particular agreement was signed or scheduled to expire. The Sheshunoff opinion is silent on retroactivity. Thus, unless the Texas Supreme Court decides otherwise, the opinion is presumptively retroactive. This has many implications for previously executed agreements throughout the state. If you once believed or were told that a particular noncompete was unenforceable, the law may have changed and it may now be time to reassess. Further, if you previously believed that all noncompetes in Texas were unenforceable, now may be the time to test the water.

II. Convincing the Judges

Despite the Texas Supreme Court's recent shift and the clear Sheshunoff holding, some judges in Texas remain skeptical about the enforceability of noncompetes. Over the last six months through multiple hearings, judges still seem reluctant to grant injunctive relief or otherwise acknowledge the enforceability of noncompetes. Just as numerous appellate courts made determinations under Light, so, too the Sheshunoff interpretations are necessary in order to fully understand the shift that has occurred.

The Practical

I. The Key Ingredients for an Enforceable Noncompete

Based on Sheshunoff, ask the following:

Is there a promise/agreement by the employer to provide confidential information?

Is there a promise/agreement by the employee not to use or disclose confidential information?

Was confidential/proprietary information actually provided to the employee?

Is the covenant reasonable in terms of time? (generally 1 - 3 years?)

Is the covenant reasonable in terms of scope? (Is it limited to the customers/clients with whom the employee worked?)

Is the covenant reasonable in terms of geographic limitation? (Is it limited to the area in which the employee worked or did business?)

II. Areas Which Can Be Challenged

Post-Sheshunoff, ask:

Does the covenant fail because there is no promise on the part of the employer?

Is the promise to provide something of value but which does not "give rise" to a reason to restrain trade (such as money or a notice period)?

Does the noncompete fail because there is no reciprocal promise by the employee?

Is the noncompete so overly broad that it would be viewed as an unlawful restraint on trade?

Was the consideration given truly confidential information which would support/justify a noncompete?

Was the consideration given past consideration or old consideration?

Is reformation the answer? If there was an enforceable agreement which was too broad in time, scope or geography, perhaps a request to the court lessens the covenant's overall burden.