Despite what you may have heard to the contrary through the years, noncompetition (or noncompete) agreements can be enforceable in Texas, and it makes no difference that Texas is an “at-will employment” state. However, if the only promise made by the employer in the agreement is to hire the employee on at at-will basis, the agreement will fail for lack of consideration. In general, for a noncompetition agreement to be enforceable in Texas, the agreement must contain either an express or implied promise (agreement) by the employer to provide confidential information to the employee. Also, the agreement should contain a corresponding promise by the employee not to use the confidential information for his or her own benefit or for someone else’s, and should also restrict or prohibit the disclosure the employer’s confidential information. Together, these promises can create a binding noncompetition agreement in Texas.
Prior to 2006, Texas courts regularly failed to uphold or enforce noncompetition agreements that arose in the context of at-will employment because there was a gap in time between when the employee signed the noncompetition agreement and when he or she received the consideration (i.e., confidential information) from the employer. Texas courts reasoned that since the employer theoretically could have terminated the employee between the time he signed the agreement and the time when the employer conveyed the information, the employer’s promise to provide the information was “illusory” (meaningless) when it was made. Thus, even if the employer did in fact provide confidential information to the employee, the noncompetition agreement would be held to be unenforceable. It left employers in the situation of having to hand over confidential information at the exact moment the noncompetition agreement was being signed in order to avoid being invalid and unenforceable.
In 2006, the Texas Supreme Court handed down its opinion in the Sheshunoff case. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006) (see copy of case online here: http://www.supreme.courts.state.tx.us/historical/2006/oct/031050.htm) In that case, the court held that a “unilateral contract formed when the employer performs a promise that was illusory when made can satisfy the requirements of the Act.” Thus, in a situation in which (a) an employee was employed “at will”; (b) the non-compete agreement contained a promise by the employer to provide confidential information to the employee; and (c) the employer provided confidential information to the employee, the agreement would become enforceable at the time the confidential information was conveyed. This decision created a dramatic shift in Texas employment law regarding noncompetition agreements.
Even with this shift, for noncompetition agreements to be enforceable in Texas, they must be supported by adequate consideration. In the employment context, the only kind of consideration that the courts have consistently held to be adequate is the employer’s provision of confidential information to the employee. This is not to say that financial consideration—such as the providing of company stock, a promotion, or monetary payment—can never be sufficient. However, generally speaking, for a non-compete agreement to be enforceable in the employment context, the employer must provide confidential information to the employee. This has been the case in Texas before the Sheshunoff case, and remains that way today.
Until 2009, it had also been true in Texas that a non-compete agreement, to be enforceable, had to be worded in a certain way. Specifically, the agreement had to contain an affirmative promise by the employer to provide confidential information to the employee. Thus, in some cases, Texas courts held that covenants not to compete were unenforceable because they did not contain a promise by the employer to provide confidential information to the employee (and this was so even if the employee did, in fact, subsequently receive confidential information from the employer).
In April 2009, the Mann Frankfort case changed this as well. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009) (see copy of that case online here: http://www.supreme.courts.state.tx.us/historical/2009/apr/070490.htm) In that case, the Texas Supreme Court held that a non-compete agreement could be enforceable even if it did not contain an explicit promise by the employer to provide confidential information. The court held that, in some situations, the employer’s promise to provide confidential information could be “implied.” The court noted: “When the nature of the work the employee is hired to perform requires confidential information to be provided for the work to be performed by the employee, the employer impliedly promises confidential information will be provided.”
After the Mann Frankfort case, in certain circumstances, a court will find in a noncompetition agreement an implied promise to provide confidential information, even though the agreement does not contain such an explicit promise. The primary inquiry is whether the employee’s job duties are such that the conveying of confidential information would be required. If that is the case, and if confidential information is in fact disclosed to the employee, then the agreement may be enforceable.
If a noncompetition agreement in Texas is properly worded and supported by adequate consideration, the next question is whether the restrictions contained in the agreement are reasonable. Texas courts have regularly ruled that the scope of the restrictions should bear some relationship to the activities that the employee performed for his former employer. For example, if an employee performs work for his employer only in the Austin metropolitan area, a non-compete agreement that keeps him from competing with his employer anywhere in the State of Texas or throughout the United States might be too broad. In light of the fact that our world getting smaller and potential sales territories getting larger on account of the internet, the facts of each case must be assessed on their own merits, and sometimes even a world-wide restriction could be deemed reasonable. Texas courts have typically focused upon where an employee performed his job duties for the employer.
Courts also have to consider the duration of the noncompetition agreement’s restriction on competing employment. There is no “across the board” bright-line test that provides that less than “this amount” is okay, and more than “that amount” is not. Courts generally look at the totality of the circumstances. In many cases, restrictive periods of 6 months to a year are upheld, while restrictive periods of more than 2 years are often found to be too long. But neither of those describes all cases, and there is a wide range of results along that spectrum as well.
Finally, what is confidential information? Texas courts have long held that an employer’s provision of confidential information can constitute valid consideration for a noncompetition agreement. But it can be difficult to apply this widely accepted premise, as was demonstrated in a recent case. In the case, an insurance broker signed an agreement in which he acknowledged that he would receive confidential information:
This information (hereinafter referred to as “Confidential Information”) includes, but is not limited to, data relating to AJG and the Corporation’s unique marketing and servicing programs, procedures and techniques; the criteria and formulae used by AJG and the Corporation in pricing its insurance and employee benefits products and claims management, loss control and information management services; the structure and pricing of special insurances packages that AJG and the Corporation have negotiated with various underwriters; lists of prospects compiled by AJG and the Corporation’s management and research staff; the identity, authority and responsibilities of key contacts at AJG and the Corporation accounts, including accounts of the Acquired Business; the composition and organization of accounts’ businesses; the peculiar risks inherent in their operations, highly sensitive details concerning the structure, conditions and extent of their existing insurance coverages; policy expiration dates; premium amounts; commission rates; risk management service arrangements; loss histories; and other data showing the particularized insurance requirements and preferences of the accounts. The Executive recognizes that this Confidential Information constitutes a valuable property of the Corporation, developed over a long period of time and at substantial expense.
As can be seen above, the broker was to receive various types of confidential information. The broker argued to the court that much of this information could not be considered “confidential” because it could be obtained from public sources.
The company countered, and argued that its confidential information (a) took years to acquire; (b) was only shared with the company’s employees and agents on a “need to know” basis; (c) was not “readily ascertainable by competitors”; and (d) gave the company a “valuable competitive advantage in the insurance brokerage industry.” The company also argued that it spent substantial resources developing and acquiring the information, and that it took reasonable precautions to prevent the disclosure of what it included in the definition of “confidential information.”
In the end, the court decision was in favor of the company. The court there found it compelling that the company had spent substantial time and resources developing and acquiring the information, it had taken reasonable precautions to prevent disclosure of the information to third parties, the information was not readily available to competitors, and the information gave the company a valuable competitive advantage in the industry. Based upon these factors, the court held that the confidential information was sufficient to make the non-solicitation agreement enforceable.