How Not to Draft a Non-Competition Agreement – A Lesson for Employers from a Texas Court of Appeals

Dallas Business Litigation Attorney
Leiza Dolghih
Attorney, Godwin Lewis PC

Earlier this month, the First Texas Court of Appeals found on a summary judgment that a non-competition agreement that covered all of Texas was unenforceable when a company failed to provide evidence that it conducted business in all of Texas or that the employee in question worked in the entire state. Morrell Masonry Supply, Inc. v. Coddou is a good example of how an overly-aggressive non-compete agreement can backfire on an employer.

In this case, MMS, a Houston-based masonry and exterior insulation finishing system (EIFS) supplier, sued Coddou, its former plaster salesman, for breach of the following covenant not to compete, which was included in Caddou’s profit sharing plan:

Employee recognizes and acknowledges that as a participant in employer’s profit sharing program employee will have access to all of employer’s corporate records. . . Employee further recognizes and acknowledges that the information contained in employer[’]s corporate records could be used to its competitive disadvantage. Therefore, employee specifically agrees that for a period of one year following the termination of employment, however caused, the employee will not within he geographical limits of the State of Texas directly or indirectly for himself, or on behalf of, or as an employee of any other merchant, firm, association, corporation, or other entity engaged in or be employed by any stucco and/or EIFS supplier business or any other business that is competitive with employer.

MMS subsequently fired Coddou, and when he went to work for a competitor, sued him for breach of the non-compete covenant.  Coddou filed a motion for summary judgment, arguing that the geographic restriction on the entire State of Texas was unreasonable and, therefore, unenforceable, as a matter of law.  Both the trial court and the Court of Appeals agreed.

The Court of Appeals explained that under the Texas Covenant Not to Compete Act, the burden was on the employer to show than the non-compete covenant was reasonable and did not “impose a greater restraint that is necessary to protect [its] goodwill or other business interest.” Typically, the territory in which an employee worked for an employer is considered to be the benchmark of a reasonable geographic restriction.

Following that same logic, Coddou provided a sworn affidavit in trial court stating that he “had a specific sales territory that encompassed Houston, Beaumont, and the surrounding areas,” and that he never did any sales outside of Houston or Beaumont.

Instead of providing evidence that showed otherwise, such as records of specific sales transactions outside of Houston or Beaumont, MMS’ president and CEO made only conclusory statements that the company did “significant business throughout the entire State of Texas” and Coddou “was responsible for sales throughout the State of Texas.”  The Court of Appeals found that such general assertions were conclusory, self-serving, and not proper summary-judgment evidence.

The Court of Appeals concluded that the “statewide restriction in the covenant not to compete in that instant case [was] too broad to be enforceable because it far exceede[d] the two cities in which Coddou worked on behalf of [MMS], even if MMS’ business extended beyond the area assigned to Coddou.” Furthermore, MMS failed to introduce any evidence to show that its business extended beyond Houston, San Antonio, and Beaumont – far short of the entire state.  Thus, the covenant not to compete restricting activity throughout the entire state was broader than necessary to protect MMS’ business interests.

CONCLUSION:  When determining how far the geographic scope of a non-compete covenant should extend, employers should consider what territory will the employee work in.  A clause that covers the entire state could be reasonable if the employee makes sales calls around the state. At the same time, a clause that covers just one city might not be reasonable if the employee’s territory is much smaller.

While it is easier and, certainly, more tempting, to set restraints on the entire state, entire County, or even entire country, such approach can backfire in Texas courts.  Thus, employers should set reasonable restraints that they could defend in court as being related to their business and employees’ duties.

For more information regarding non-competition agreements in Texas, contact Leiza Dolghih.

Update (8/5/14): Interestingly, in 2011, Morrell sued another of its employees, Juan Perez, for violating his covenant non to compete, claiming that Perez went to work for a competing business and asking for $100 a day in liquidated damages for each day he had worked for a competitor. See Morrell Masonry Supply, Inc. v. Juan Perez.  The trial court granted Perez’ motion for summary judgment, in which he argued that Morrell was collaterally estopped from asserting a claim for a breach of covenant not to compete based on Morrell Masonry Supply, Inc. v. Coddouthe covenant was overbroad, and his new employer was not a competitor of Morrell’s.

In an attempt to salvage its case against Perez after Coddou decision, Morrell dropped its breach of covenant not to compete claim and instead argued that the trial court committed an error when it failed to address the breach of confidentiality clause in Perez’s contract.  The Court of Appeals, however, rejected this argument after finding that Morrell had never alleged a breach of the confidentiality clause in any of its pleadings.

The takeaway for employers is that once a court finds that a non-competition agreement unenforceable as a matter of law in one case, the employer is usually prevented from enforcing the agreement against other employees.

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