For Your Consideration: Ensuring the Enforceability of Non-Compete Agreements

by | Jun 27, 2017 | Litigation & Local Counsel

This article is the first in a two-part series covering the basics of drafting a non-competition agreement in Texas. We have enjoyed strong economic and population growth in recent years in the Lone Star State, particularly in the technology sector. Joel Kotkin, The Valley And The Upstarts: The Cities Creating The Most Tech Jobs, Forbes, 04/14/cities-creating-the-most-tech-jobs-2015/#6c275ea958ef[1] (last visited June 21, 2017). As start-ups sprout and established companies grow, more and more employees are getting specialized training and access to trade secrets. Consequently, non-competition agreements have become more important. Today, non-competition agreements enjoy significant legislative and common law protection. Nevertheless, if employers don’t pay careful attention to how they draft these agreements, they may be left with an unenforceable piece of paper. This short article will address the fundamentals of enforceability of non-competition agreements.

I. The Non-Compete Act

Any agreement in Texas that places limits on a former employee’s professional mobility or restricts his or her solicitation of former customers and/or employees is considered a restraint on trade and is governed by Texas Business and Commerce Code § 15.50. Section 15.50 provides that:

[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

Section 15.50 addresses enforceability and reasonableness. That is, whether or not the agreement can even be enforced, and even if it can, whether its terms are reasonable. Unfortunately, the plain language of the statute does not offer a crystal-clear definition of enforceability, and indeed, the Supreme Court has wrestled with the concept since the statute was enacted.

II. From Light to Mann Frankfort: The Supreme Court Whittling Down the “Consideration” Requirement

Enforceability is a two-step threshold inquiry determining whether an “otherwise enforceable agreement” exists between the parties, and if so, “whether the covenant is ancillary to or part of that agreement.” See Marsh USA Inc. v. Cook, 354 S.W.3d 764, 773 (Tex. 2011) (internal citations omitted). If the parties have an employment agreement with a promise of continued employment, then the enforceability test is satisfied. Id. However, if the employment is at-will, there is no “otherwise enforceable” agreement.

The Supreme Court of Texas has held that “otherwise enforceable agreements under section 15.50(a) can emanate from at-will employment so long as the consideration for any promise is not illusory.” Alex Sheshunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644, 648 (Tex. 2006) (citing Light v. Centel Cellular Co., 883 S.W.2d 642, 645 (Tex. 1994)). In other words, a non-compete agreement must be supported by consideration, or mutual promises, in order to be enforceable in the at-will employment context. But what does that really mean?

An agreement not to compete is a contract like any other contract—it must be supported by consideration to be legally enforceable. Id. Stated another way, both parties to the agreement must make an exchange of promises in order for the agreement to be enforceable. In exchange for the employee agreeing not to compete with the employer, the employer must provide something to the employee. Otherwise, the promise not to compete is illusory.

When the Supreme Court of Texas first addressed this issue in Light, it held that not only must the non-compete agreement be supported by consideration, the consideration could not merely be a promise to perform in the future. Light, 883 S.W.2d at 645 n.6. “For example, suppose an employee promises not to disclose an employer’s trade secrets and other proprietary information, if the employer gives the employee such specialized training and information during the employment.” Id. According to the Light Court, while the employee’s agreement not to disclose trade secrets would be enforceable if the employer provided specialized training, the promise to provide the training in the future meant that at the time the non-compete agreement was formed, the employer had not yet performed. Id. Therefore, the agreement was invalid.

Since Light, the Supreme Court of Texas has chipped away at the “consideration” requirement. First in Sheshunoff, the Court held that the promise to perform in the future did not render a non-compete agreement invalid, but only unenforceable until the promise was actually performed. Sheshunoff, 209 S.W.3d at 651. To use the same example as above, the agreement not to compete would become enforceable when the employer provided the specialized training. And, even though the promise is to perform in the future, the non-compete agreement is not invalid; instead, it is only unenforceable until the promise is performed.

In Mann Frankfort, the Court went a step further, and held that an employee’s agreement not to disclose confidential information carried an implicit agreement from the employer to provide confidential information. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 850 (Tex. 2009). As such, an employer is not even required to make a promise that it will provide confidential information, as it would be presumed by the employee’s agreement not to share it. Notably, however, the Mann Frankfort Court conditioned the implicit promise on whether the nature of the work required the employer to provide confidential information and trade secrets. Id. It would appear that consideration hangs upon a thread after Mann Frankfort. But despite Texas’s modern relaxed view of consideration, the prudent course would still be to include express promises in exchange for the employee’s agreement not to divulge confidential information.

III. Where we stand today

While the statutory language is unclear as to the precise enforceability requirements for a non-compete agreement, the Supreme Court’s trend toward enforcement leaves us with a couple practical considerations. The first is that a non-compete agreement must still be supported by consideration, though admittedly, this requirement has lost steam since Light. And, for at-will employment, where no promise for continued employment exists, consideration can come in the form of a promise to provide specialized training, or simply to provide confidential information. While certain types of employment may not require an express promise by the employer to provide confidential information, when drafting a non-compete agreement, the safest course is still to include an express promise.

[1] Forbes published that Austin boasted the strongest expansion in tech sector employment of any of the nation’s 52 largest metropolitan areas from 2004 to 2017 (73.9%).

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