Is Your Non-Compete Agreement Hidden in Your Stock Option Plan?

reading_document-300x253Many employees assume that a non-compete agreement will be clearly titled so as to provide them notice that they are agreeing not to compete with their employer on certain terms after they leave. However, that is not always the case. In fact, a lot of times, a non-compete agreement is just a clause in an another contract, buried among many other terms and conditions of employment or a compensation package.

After the Texas Supreme Court ruled in 2011 that an employer’s grant of stock options to an executive employee constituted sufficient consideration to support the enforcement of a non-solicitation of customers provision (in an employment agreement) against a former executive when he jumped ship to work for a competitor, employers in Texas began to include covenants not to compete and/or non-solicitation clauses in their stock options plans. Soon, Texas employees began to challenge them, and we are now seeing a new wave of opinions addressing these covenants not to compete coming out of the Texas Appellate Courts. I have previously written about the Texas Supreme Court’s ruling in ExxonMobil v. Drennen that came out in early September, and now, the Houston Court of Appeals in Cameron Int’l Corp. v. Guillory upheld the employer’s application for a temporary injunction because of a covenant not to compete included in the employee’s stock award agreement.

In Guillory, in recognition of its employee’s exceptional performance, Cameron awarded him 283 shares of restricted stock.  The employee was sent a copy of the restricted stock agreement online via http://www.etrade.com and was prompted to “accept” its terms electronically. Included in those terms was the covenant not to compete, solicit or disclose confidential information. Guillory accepted the terms, but then left to work a competitor. Cameron filed a lawsuit seeking a temporary injunction based on the non-compete provision that Guillory accepted in return for receiving Cameron’s stock.

The Court of Appeals found that a temporary injunction was justified, that Guillory’s electronic acceptance of the contract was valid under Texas Uniform Electronic Transactions Act, and that I-didn’t-read-the-contract-before-I-agreed-to-it was not a defense (duh!).

So, what’s the conclusion?

If you are an employee, read your employment agreements and your compensation agreements carefully before signing them and make sure you understand them. If you can, negotiate the restrictive covenants. If you cannot negotiate, plan for contingencies before leaving your employer.

If you are an employer, make the covenant not to compete prominent in the agreement to alert the employee that they are agreeing to certain restrictions.  If an employee is aware that s/he has agreed to such a covenant and the covenant is reasonable, they are less likely to violate it and you are less likely to have to spend your money on enforcing the agreement.

Also, when an employee leaves, remind him or her, either during the exit interview or via a separate letter, that they are subject to a covenant not to compete or a non-solicitation clause.

Leiza litigates non-compete and trade secrets lawsuits on behalf of EMPLOYERS and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete agreement, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.

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