Non-Compete Agreements and Enforcements
A non-compete agreement is enforceable in Texas if it is narrowly defined, reasonable and supported by valid consideration.
In General:
Non-compete agreements are contracts between an employee and employer that prevents an employee from working for or starting a business in direct competition to the employer during or after employment. Noncompete agreements are enforceable when the relationship between an employer and employee ends.
For noncompete agreements to be enforceable they must be narrowly defined, reasonable, and contain:
· An effective date and length time;
· geographical region the agreement applies to;
· definition of a competitor;
· liquidated damages; and
· compensation.
Despite being a legal agreement, the contract depends on the court’s willingness to enforce it and in which state you reside. California, for instance, does not recognize non-compete agreements - banning them outright.
The goal of a noncompete clause depends on the environment of the contract. For example, if an employee works in product development, the purpose of signing a noncomplete clause is to protect trade secrets. For an employee who works as a sales professional, the intent would be to protect customer relations. Noncompete agreements are very common in IT sectors, media, and financial industries.
If an employee breaches the contract, an employer is likely to take the matter to court and sue the former employee for losses or file a lawsuit forcing the non-compete to be enforced.
Notable litigation relating to non-compete agreements:
- Hieber v. Percheron Holdings, LLC
- In 2014 Hieber signed a non-compete with Percheron Holdings, LLC. In 2018, Hieber gave notice of intent to resign and assured Percheron that he was not leaving to join a competing company, however, he already signed a contract to join a company providing the same kind of services as Percheron. Percheron subsequently sued Hieber for breach of non-compete and non-solicitation agreement. Hieber filed an answer to the suit by denying all allegations and asked the court to dismiss the case under the Texas Citizens Participation Act (TCPA). The court ultimately denied Hieber’s motion and the suit still stands.
- Automile Holdings, LLC v. McGovern
- In 2007 Matthew McGovern became a founding member and Chief Financial Officer of Prime Motor Group. After working with Prime for 10 years McGovern was ultimately fired due to, in part, a disagreement over the direction the company was going. After the termination McGovern agreed to not “directly or indirectly … solicit for hire or hire [Prime employees] or encourage [Prime employees] to leave the employment” for 16 months. Ultimately McGovern solicited and/or hired several Prime employees within the 16-month restriction period, and Prime filed suit asking for and injunction and monetary damages. Within the non-compete was an anti-raiding provision (non-recruitment of current employees to new company) and the court determined that it was legal and enforceable. Not wanting to punish the employees that left Prime for the new company and have the hiring reversed, the court ordered that the duration of the noncompete be extended to an additional year. McGovern filed an appeal and ultimately got the extension period reversed. This case illuminates the manner in which Massachusetts Courts would handle non-completes, specifically the anti-raiding provision within the non-complete, suggesting “that such provisions may also be enforceable in the traditional employment context, provided the employer can demonstrate that they are necessary to protect its confidential information, trade secrets, or good will.”
What You Need to Know About Signing a Non-compete In Texas:
A non-compete agreement is enforceable in Texas if it is “ancillary to an otherwise enforceable agreement” (employer’s promise to give confidential information and/or trade secrets in exchange for the employee to not disclose the information), and is reasonable in scope regarding time, activities to be restrained, and geography. Texas being an at-will employment state makes no difference in whether a non-complete can be enforced in the court of law.
Protected in non-compete agreements: knowledge of a unique customer base, knowledge of the equipment or products used by each of the employer’s customers, acquisition strategies, compensation and benefits formulas, and payment rates amongst other confidential information.
Drafting non-competes must have the goal of protecting trade secrets along with proprietary and confidential information. While typical agreements have a time frame of one to two years, it is not unheard of for Texas courts to consider timeframes as long as five years.
The territory in which the employee worked for the employer tends to be considered a reasonable geographic range in which agreements mention. When geographic restrictions are too broad and not specific the court can view a non-compete unenforceable.
Notable litigation in Texas relating to non-compete agreements:
- Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642, 644 (Tex. 1994) - Components of a non-compete for it to be enforceable.
- Ireland v. Franklin, 950 S.W.2d 155, 158 (Tex. App.–San Antonio 1997, no pet.) - Only one non-illusory promise must be found in order for the court to hold a non-compete valid.
- Stone v. Griffin Comm. & Security Systems, Inc., 53 S.W.3d 687, 694 (Tex. App.–Tyler 2001, no pet.) - Knowledge of customer base and equipment or products used by said customers are protectable interests.
- TransPerfect Translations, Inc. v. Leslie, 594 F. Supp. 2d 742, 754 (S.D. Tex. 2009) & Teel v. Hospital Partners of America, Inc., No. H06-cv-3991, 2008 WL 346377, *7 (S.D. Tex. Feb. 6, 2008) - Information on acquisition strategies, compensation and benefits, and payment rates are considered confidential information protectable in non-competes.
- Gallagher Healthcare Ins. Services v. Vogelsang, 312 S.W.3d 640, 652 (Tex. App.–Houston [1st Dist.] 2009, pet. denied) - Propriety and confidential information can also be protected in non-compete agreements.
- Alex Sheshunoff Mgmt Servs., L.P. v. Johnson, 209 S.W.3d 644, 648-51 (Tex. 2006) - Employers may enforce non-competes even if they do not give the employee confidential information immediately after the agreement was signed. Days, weeks, months, and even years can pass before such information is obtained.
- Digital Generation, Inc. v. Boring, NO. 3:12-CV-00329-L, 2012 WL 1413386, at *10 (N.D. Tex. Apr. 24, 2012) - Non-compete cannot be enforced because it was not proven that employer gave employee confidential information after non-compete was signed.
- Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009) - Confidential information expressed or implied: non-compete agreements are enforceable even if the employer does not expressly promise to give the employee confidential information as long as the employee promises not to disclose any confidential information and the nature of the position in which the person is employed with will reasonably require confidential information provided by the employer.
- Jon Scott Salon, Inc. v. Garcia, 343 S.W.3d 532, 535 (Tex. App.–Dallas 2011, no pet.) - At will employment does not invalidate a non-compete.
- Marsh USA Inc. v. Cook, 354 S.W.3d 764, 774-76 (Tex. 2011) - Stock options given in consideration for a non-compete agreement were related to the employer’s interest in protecting its good will.
Wilson Legal Group P.C. attorneys prosecute and defend disputes arising out of non-compete and employment contracts.
All information and summaries are intended as informational only regarding legal trends and news. Nothing should be taken as legal advice or legal opinion and readers should seek out advice from legal counsel prior to acting on information provided by this blog.
