Upon Further Consideration: What Exactly Constitutes “Consideration” in Texas Non-Compete Agreements?

by | Mar 5, 2019 | Litigation & Local Counsel

In Texas, Competition Is on the Table

Despite Texas being an employment-at-will state, non-compete agreements represent an important point of negotiation between employees and employers. If you are looking to protect your company’s economic viability, you may want to bring yourself up to speed on the enforceability of various types of non-compete agreements.

Non-Competes vs. Non-Disclosures

Although legal concepts in nondisclosure and noncompete agreements will undoubtedly overlap, this blog post will largely focus on covenants not to compete. Because nondisclosure agreements are typically limited primarily to protecting former employers’ trade secrets, and Texas employees have a broad common-law duty not to disclose such secrets, nondisclosures are more easily enforced and have not warranted much litigation. On the other hand, Texas law on non-competes is more complex, developed, and instructive.

Timing Isn’t Everything: Consideration Is Key

Covenants not to compete are legal in Texas if they meet the requirements of Texas Business and Commerce Code Section 15.50:

[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.

As discussed at length in our previous post on non-compete agreements, defining the enforceability prong of covenants not to compete poses some difficulty. Enforceability represents a two-part inquiry—(1) whether an “otherwise enforceable agreement” exists between the parties and (2) 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).

Agreements promising continued employment automatically satisfy the enforceability test. At-will employment arrangements, however, do not automatically satisfy the “otherwise enforceable” standard. Rather, 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)).

Alex Sheshunoff Mgmt. Services, L.P. v. Johnson had the practical effect of allowing an employer’s promise to perform in the future serve as adequate consideration to support a non-compete agreement. The case emphasized that non-competition provisions in at-will agreements can withstand muster as “otherwise enforceable” as long as “consideration for any promise is not illusory.” Id. at 648. This language is abstract and begs the question of what represents “consideration,” sufficient to support an enforceable non-compete agreement.

Types of Consideration

For covenants not to compete, Texas courts have recognized three main categories of acceptable consideration:

  • Confidential information, broadly construed as meaning information “worthy of protection.” See Marsh USA Inc. v. Cook, 354 S.W.3d 764, 766 (Tex.2011).
  • Special training, which “concentrate[s] on a particular activity or product” or which allows a person to “become adapted to a specific environment or function.” See Neurodiagnostic Tex., L.L.C. v. Pierce, 506 S.W.3d 153, 164-65 (Tex. App.—Tyler 2016, no pet.).
  • Stock interests which align the interest of the employee with those of the shareholders. See Marsh USA Inc., 354 S.W.3d at 766.

When Consideration May Exist

Upon Procuring Employment

How might these types of consideration play out in the real world? Hiring a new employee characterizes a classic case where a covenant not to compete may be signed. Before including a non-compete clause in an employment contract, it is necessary to determine whether adequate consideration, likely in the form of one of the three categories above, exists.

Prior to Receiving Confidential Information

Odd as it may seem, consideration can exist before an employee receives any confidential information at all, so long as an employer promises to perform. For example, if an employer pledges to provide an employee with specialized training a few months after hire, the noncompete could be signed when the employee was hired but still not become enforceable until the training began. See Sheshunoff, 209 S.W.3d at 651.

If the nature of the work requires an employer to share confidential information, like trade secrets, with a new employee, the bar is even lower than that set by Sheshunoff. In this scenario, an employer would not even be required to promise that it will provide confidential information. The Texas Supreme Court regards consideration as presumed by the employee’s agreement not to share confidential material. See Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 850 (Tex. 2009).

As Part of a Promotion

Provided that proper consideration is present, a non-compete agreement can be signed as part of a promotion. Indeed, this was the case in Sheshunoff. Alex Sheshunoff Mgmt. Services, L.P., 209 S.W.3d at 646 (“A few months after the promotion, [Employer] presented [Employee] with an employment agreement . . . containing a covenant not to compete” and proceeded to let the employee know “that signing the agreement was a condition of continued employment.”).

With Bonuses

The Texas Supreme Court has differentiated between bonus-incentive programs that could stifle competition and covenants not to compete, choosing not to decide the enforceability of these bonus-incentives. See Exxon Mobil Corp. v. Drennen, 452 S.W.3d 319 (Tex. 2014). Because this area of the law remains unresolved, it is a best practice not to rely on bonus incentive packages to enforce a non-compete agreement.

Keeping Your Company Competitive

Non-compete agreements are valuable tools companies may use to protect information and prevent employees from directly competing with a former employer. Nevertheless, it is important to craft the non-compete under appropriate circumstances so that it will be enforceable, should you need to enforce it. If you or your company need to explore options for drafting or enforcing non-compete agreements, please contact Cobb & Counsel.

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