Covenants Not to Compete In Texas – Back To The Future?

With the recent Texas Supreme Court decision in Marsh USA, Inc. v. Cook, the status of covenants not to compete (often called “noncompetes”) has drastically changed in Texas.[1] Or has it?
The Marsh Court held that a covenant not to compete is “ancillary to or part of” an otherwise enforceable agreement – and therefore –enforceable – if the business interest being protected (goodwill) is reasonably related to the consideration given (stock options). (Marsh at *41). This holding was another step in the Supreme Court backing down from previous opinions (especially Light v. Centel Cellular Co., 883 S.W.2d 642 (Tex. 1994), which seemed to require elements not present in the Legislature’s statutory enactments. (See, Texas Business and Commerce Code, Section 15.50, 15.51 and 15.52).
The Supreme Court also stated, several times, that it was not really making new law, but simply
interpreting the Business & Commerce Code per the intent of the Legislature.
What Does It Mean?
For one, it means that the enforceability of a noncompete no longer turns on whether you provided confidential information or specialized training to the employee. Nor does enforceability turn on the timing on the provision of confidential information, as some courts have held. This is not an unexpected turn as the Supreme Court has previously warned judges that “section 15.50(a) does not ground the enforceability of a covenant not to compete on the overly technical disputes that our opinion in Light seems to have engendered.” Alex
Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 655 (Tex.2006). However, many trial courts have persisted in holding employers to a higher standard than the statute in
enforcing noncompetes.
The new byword is, as the Supreme Court has previously stated, reasonableness. That is, are the terms of the covenant not to compete reasonable in balancing the rights of the employee to compete with the employer after leaving, and the employer’s interests in protecting its goodwill, confidential information or other interest worth protection. Marsh at* 26, citing Sheshunoff, 209 S.W.3d at 651. Increasingly, then, the Texas Supreme Court appears to be leaning in the direction of making noncompetes enforceable to allow Texas to compete in the Information Economy of the 21st Century.
Stated differently, a noncompetition agreement is enforceable if it is reasonable in time, scope and geography and, as a threshold matter, “if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.” Marsh at *15, quoting TEX. BUS. & COM. CODE § 15.50(a). But the Court is careful to point out that this new interpretation, basically overruling Light, simply follows “the Act’s intent to return Texas law on the enforceability of noncompete agreements to the common law prior to Hill.[2] Thus the Supreme Court goes “back to the future” and reinstates the former common law per the intent of the Legislature.
Drafting An Enforceable Covenant Not To Compete
So, what does all this legal mumbo jumbo mean to you and your business?
First, to be enforceable, your noncompete must be “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.” An agreement for “at will” employment, by itself, will not be sufficient to support a covenant not to compete.
However, an agreement to provide confidential information or specialized training will (where the information or training is actually provided) support such a covenant, if it is truly confidential information or specialized training. Moreover, as decided by Marsh, a noncompete “signed by a valued employee in consideration for stock options, designed to give the employee a greater stake in the company’s performance,” meets the “ancillary or related to” standard of the Covenant Not To Compete Act.
Second, the noncompete must be reasonable. You are not going to be able to enforce a noncompete that says a man can’t work anywhere in the US for 5 years! Keep it reasonable and restricted in time, place, and scope, and it will probably be enforceable. Ask for the moon and you will be sorry!
The safest way to proceed is to seek professional counsel from a firm, like The Vethan Law Firm, that is experienced in drafting and enforcing covenants not to compete.
[1] 54 Tex. Sup. J. 1234; 2011 Tex. LEXIS 465 (publication status pending).
[2] Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168 (Tex. 1987).