A Houston Court of Appeals last week found an employer’s non-compete agreement unenforceable and awarded a former employee his attorney’s fees in defending the lawsuit brought by the former employer. Yes, this can happen in Texas where a company attempts to enforce an agreement that is clearly unenforceable. In this case, the original non-compete was superseded by several employment agreements culminating in one that cancelled the original non-compete provision. Yet, the employer sued the former employee for breaching the original non-compete. The employee asked the court to declare the agreement unenforceable and for his attorney’s fees, and the trial court’s grant of both requests was affirmed by the Court of Appeals. Although a subsequent agreement does not always replace the original one (see my previous post here), the multiple agreements in this case clearly did, as evidenced by the following timeline:
2001 – employee signed an “Employment, Confidentiality and Non-Compete Agreement and Employee Assignment of Intellectual Property.” (every company should have key employees execute agreements like this)
2001 – 2004 – employee returned to work for the company several times, but did not sign any new employment agreements. (the company should have had the employee execute a non-compete each time he came back).
2006 – employee signed “Sales Representation Agreement,” which stated that it superseded all prior contracts and understandings between the employee and the company. The agreement also stated that the employee would execute a separate Confidentiality and Non-Competition Agreement and Assignment of Intellectual Property, but the employee never signed such agreement, and the company never insisted. He later left to work for another company. (the company should have made sure he signed the non-compete).
2010 – employee was hired in market development, but was not asked to sign a non-compete. (the company should have asked him to sign a non-compete if his job involved handling clients and/or confidential information).
2010, 5 months later – the company was sold and the buyer was given a copy of the employee’s 2001 agreement.
2011 – employee signed an employment agreement with the new company, which did not have a non-compete, but stated that it was “supplemental contract to any previous employment agreement in place.” (it is never a good idea to sign an agreement that references prior agreements unless you have a copy of them. In this case, the company should have not referenced prior agreements but should have made sure that the new agreement contained all the necessary terms)
2011, a few months later – the new company changed the nature of the employee’s compensation and the Pay Change Form provided that the “Employment Agreement previously negotiated is nullified and replaced with a . . . bonus . . . .” (somebody at the company should have considered how this nullification clause affected non-compete obligations of the employee).
2012 – employee resigned and was sued by the new company for breach of the 2001 (yes, original) employment agreement, breach of fiduciary duty, and claims under Texas Theft Liability Act, arguing that the employee “reaffirmed” the original agreement each time he came to work for the company and that he was estopped from denying that he was bound by the non-compete. The employee counterclaimed seeking a declaration that there was no enforceable non-compete agreement between the parties, and his attorney’s fees.
The trial court dismissed the employer’s claim for breach of contract on summary judgment and the employer non-suited the rest of the claims. The employee proceeded to try his counterclaim and won – obtaining a declaration from the court that there was no valid non-compete. Such declaration entitled him to obtain his reasonable and necessary attorney’s fees from the employer.
Conclusion: When buying a company or a business, the buyer should always make sure that it has all the employment agreements of all the key employees. If such agreements are missing or are outdated, the buyer should make sure that the key employees sign new employment agreements that contain all the terms necessary to protect the buyer. Finally, all employment agreements must be reconciled with the compensation documents, any arbitration agreements in place, and any employment policies, to ensure that the non-compete and other restraints are the same across all documents signed by the employee.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.
An excellent overview of everything that can go wrong with a non-compete. Thank you.