Enforceability of Employee Non-Compete Agreements by Adam D. Plunk

As a general proposition, a Texas employer can restrict a Texas employee's post-employment competition through a non-competition agreement, which is also commonly referred to as a covenant not to compete.  A non-competition agreement typically restrains the employee from engaging in a business that competes with his or her former employer, in a certain geographic area, for a limited period of time following the termination of the employment relationship.

For many years, Texas courts were reluctant to enforce non-competition agreements; however, in 2006 the Texas Supreme Court opened the door to certain non-competition agreements.  In Alex Sheshunoff Management Services, L.P. v. Kenneth Johnson and Strunk & Associates, L.P., 209 SW.3d 644 (Tex. 2006), the Court held that an employer's covenant not to compete was binding on an at-will employee – even though the agreement was not enforceable at the moment it was made – since confidential information and training were promised in the future and the employer actually provided that consideration before the non-compete was to be enforced. Sheshunoff provided that non-competition agreements can be valid if the employer provides confidential information to the employee as consideration for the employee's agreement not to compete following termination of the employee's employment with the company.  

Following Sheshunoff, the question remained whether a non-competition agreement must contain an explicit promise by the employer to provide confidential information to the employee in order to be enforceable.  The Texas Supreme Court's recent opinion in Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 52 Tex. Sup. J. 616 (Tex. 2009), answered this question, and held that the employer's promise to provide confidential information can sometimes be implied.  In Mann, the Court held that even if the non-competition agreement does not contain an explicit promise by the employer to provide confidential information to the employee, if the employee's job will reasonably require the employer to provide the employee confidential information, then an implied promise to provide confidential information exists.  This implied promise will be the consideration necessary to make the non-competition agreement enforceable.

The Mann holding is extremely important because it means that some non-competition agreements that were previously thought to be unenforceable, are now arguably enforceable.  Prior to the Sheshunoff ruling, most employment agreements did not provide that the disclosure of confidential information was in fact consideration for entering into non-competition agreements, and therefore, many employment agreements entered into prior to 2006 failed to meet the Sheshunoff requirements.  Many of our current clients have either entered into employment agreements themselves or have employees who entered into employment agreements years ago which contained non-competition provisions.  Of these, many failed to state that the provision of confidential information was consideration for entering into the non-competition agreement. 

Sheshunoff and Mann do not restrict the ability of an employee who is bound by a non-competition agreement to challenge whether the information provided to him or her was truly confidential, and he or she may also be able to contend that the scope of the restriction is unreasonable.  Nevertheless, the combined effect of Sheshunoff and Mann suggests that the Texas Supreme Court has moved away from the technical arguments over the enforceability of non-competition agreements.  Rather than constantly focusing on the precise wording of certain non-competition agreements the Texas Supreme Court may be signaling a desire to focus on whether confidential information was in fact conveyed to the employee, and if it was, whether the information justifies the restrictions contained in the non-competition agreement.

The rulings in Sheshunoff and Mann have expanded the enforceability of non-competition agreements, and Mann, particularly, has made enforceable agreements that would otherwise have been unenforceable.  Prior to Mann, the non-competition provisions in many employment agreements would likely have not been enforceable.  Existing non-compete agreements should be reviewed by legal counsel to determine their likelihood of being enforceable under the changed law.