The days of corporate loyalty are long gone. In today’s culture, the only thing that can prevent an employee from poaching its former employer’s clients is a rock-solid non-competition agreement. The Fifth Texas Court of Appeals in Nationsbuilders Insurance Servs., Inc. v. Houston Int’l Ins. Group, et al., recently ruled that an employer that proves a violation of a non-competition agreement, may ask to extend the term of the agreement to preserve the fairness of the original bargain.
In Nationsbuilders, an insurance underwriter and two of its ex-employees entered into a non-competition agreement, which barred the ex-employees, for one year, from competing with the underwriter or working for an entity that planed to conduct a business in competition with the underwriter. The ex-employees used this year to prepare for the competition that would commence as soon as the non-competition agreement expired. They sent out marking materials to potential clients stating that they will begin their business on a certain date past the restricted term of the non-compete agreement; developed underwriting guidelines; and conducted market research. The underwriter found out about their activities and filed a claim for arbitration pursuant to the arbitration clause in the non-compete agreement, claiming a breach of contract.
The arbitrator found that Nationsbuilders was damaged because “the [ex-employees]’ breaches deprived [Nationsbuilders] of the benefit of its bargain, i.e., a one-year restricted period with no competition, including solicitations, and no ‘head start’ planning for competition.” He then determined that Nationsbuilders should “be restored the benefit of the bargain” and extended the restricted period by another 12 months. A trial court vacated the arbitrator’s award, finding that the arbitrator exceeded his power under Texas law by extending the time period of the non-competition agreement.
The Texas Fifth Court of Appeals reversed the trial court and held that since the arbitration award ordered the parties to engage in conduct expressly required by the parties’ agreement – that the ex-employees go one year without planning a business in competition with Nationsbuilders – the award drew its essence from the agreement and, therefore, was within the scope of the arbitrator’s power. The Court of Appeals ruled that equitable extensions of non-competition agreements’ restricted terms were not contrary to Texas public policy, and the arbitrator did not exceed his powers by awarding an equitable extension of the restricted period by another 12 months.
WHAT DOES THIS CASE MEAN FOR BUSINESS OWNERS:
- An extension of a non-competition agreement in certain circumstances is allowed within Texas’s public policy. Thus, if you end up in a litigation or arbitration over a breach of a non-competition agreement with one of your former employees, but your business, at the time of the lawsuit/arbitration, has not incurred any damages from the breach of the non-compete, you can ask the court or the arbitrator to extend the period of the non-compete agreement for another term to preserve the fairness of the original agreement.
- A non-compete provision prohibiting preparation for competition might constitute an unconscionable restraint on competition or be against public policy. The Court of Appeals remanded the case back to the trial court to consider those two issues. You can still add the language regarding preparation for competition to your non-compete agreements, but until there is more guidance from the courts, realize that it might be found unenforceable down the road.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. His practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.