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An Employee Violating a Non-Compete Agreement? Ask the Court to Extend The Term

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:

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.

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