Non-Compete Contracts are Now Easier to Enforce in Texas

November 10, 2006

Summary

• The Texas Supreme Court, ending years of confusion, has ruled that non-compete agreements do not require that employers immediately provide an employee with confidential information in order to make the agreement binding.
• The court’s decision makes non-compete agreements easier to draft and enforce.
• Employers can now shift their focus away from technical issues of timing and place the greater emphasis on whether the contract terms are reasonable and necessary for the protection of a legitimate business interest.

Making Non-Compete Enforcement Easier

In Alex Sheshunoff Management Services L.P. v. Kenneth Johnson, the Texas Supreme Court has made it easier for the state’s employers to write, implement and enforce at-will employee contracts that contain a non-compete clause.  The court unanimously ruled in a majority and two concurring opinions that its 1994 decision in Light v. Centel Cellular Co. went too far in restricting Section 15.50 of the Texas Business and Commerce Code, which governs non-compete agreements.  In Light, the Texas Supreme Court had held that in order to have an enforceable non-compete agreement, employers should provide employees with confidential information in exchange for the employee's promise not to use the information.  However, the Light decision opened the door for interpreting Section 15.50 to mean that, unless an employer conveyed the confidential information to an employee at the same time the agreement was signed, the agreement was not enforceable.  Some courts had subsequently held that a delay of as little as several hours in supplying confidential information invalidated a non-compete pact.  In the recent Sheshunoff opinion, however, the Supreme Court ruled that confidential information or training need only be given by an employer to an employee within a “reasonable” time after a non-compete agreement is signed.

Defining an Enforceable Agreement

Employers must still pay careful attention to the structure of non-compete agreements used in Texas, because the court reaffirmed certain structural tests that focus on the justification for and the reasonableness of the agreement.  An effective agreement should:

• Be necessary to protect the employer’s legitimate business interests
• Contain a promise or agreement by the employer to provide the employee confidential information in exchange for the employee's promise not to compete
• Apply reasonable enforcement restrictions as to time, territory and activity
• Be in the public interest by not acting as an impermissible restraint on trade.

An important but little noted feature of the ruling gives significant advantage to employers on one key issue of reasonableness.  Courts have previously held that non-compete agreements can prohibit solicitation of former customers, but that prohibiting acceptance of customer business was unreasonable.  In Sheshunoff, the Supreme Court quietly affirmed as reasonable a non-compete agreement that prohibited the employee from soliciting or “providing services" to any former customers for one year.  This added protection is one that employers should consider adopting.

Drawing the Right Lessons

Sheshunoff should make non-compete agreements easier to enforce in Texas.  The Sheshunoff court deliberately shifted the focus of non-compete analysis away from hyper-technical concerns, and placed it on whether the employer took reasonable steps to protect its legitimate business interests involving confidential information, customer goodwill or specialized training.  Prudent employers should draw these lessons from the decision:

• Clearly promise that you will provide the employee confidential information.
• Make every effort to provide the information as soon as possible after the agreement is signed.  Despite the “reasonableness” standard, substantial delay is not worth the risk.
• Document the provision of confidential information; detail in writing the material provided; have the employee sign a dated confirmation; and keep copies of the materials and the confirmation in the employee’s personnel file.
• Take advantage of the finding that providing new business to former customers, as well as soliciting it, can be prohibited for a reasonable period of time.
• Make sure your agreement terms are reasonable with respect to length of time and geographic scope.  Despite the improvement that Sheshunoff provides, courts still have the power under Section 15.50 to assess reasonableness and reform terms if they are egregiously overstated.  When that happens, the employer receives only an injunction, not attorneys' fees or damages.

Answering Your Questions

If your company has questions on the enforcement of non-compete agreements in light of the Sheshunoff decision, now is the time to assess your contract terms.  Bracewell & Giuliani employment and labor attorneys can advise you about the language and provisions of your contracts as well as your rights to enforce them.  Please contact your Bracewell & Giuliani attorney, or contact Jay Aldis, partner in the Houston office, at 713.221.1381, email jay.aldis@bracewellgiuliani.com.

Please contact any of the following Bracewell Labor and Employment attorneys for more information regarding this topic.