Five Non-Compete Agreements Myths in Texas for Employees

share-knowledge-715x400The old saying “ignorance is bliss” may be true in many situations, but not when it comes to non-compete agreements in Texas.  Over the years, I have identified five most common misconceptions about such agreements from my discussions with clients, friends, and even other lawyers.  It’s time to dispel these common myths once and for all:

Myth #1: Non-compete agreements are not enforceable in Texas.  This is absolutely false. In Texas, non-compete agreements are enforceable if they meet certain requirements spelled out in the Texas Covenants Not to Compete Act.  Even if they do not meet those requirements, a lot of times, a judge can reform, i.e. rewrite, them to make them more “reasonable” and then enforce them.

Myth #2: Texas is a right to work state, so an employer cannot prevent employees from going to work for a competitor. This is also false. A “right to work state” simply means that employees in Texas cannot be fired for joining unions.   It has nothing to do with the enforceability of the non-compete agreements. So, while Texas is a right to work state, that doesn’t mean that the non-competes here are invalid. 

Myth #3: An employer threatening to fire an employee if s/he doesn’t sign a non-compete agreement makes such agreement invalid. This is false. Because Texas is an at-will employment state, an employer may change the terms of employment at any time, including adding non-compete restraints to an already-existing employment relationship. Thus, with rare exceptions, employers may force employees to sign non-competes under a threat of termination.

Myth #4: Since an employer never enforced its non-compete agreements, it won’t/can’t enforce it against a particular employee.  Again, this is false.  Employers typically consider many factors when deciding whether to enforce a non-compete agreement, so while they might decide not to enforce the agreement against one employee, they may be motivated to do so against another employee. 

Myth #5: If a non-compete agreement looks/sounds reasonable, there is no way to fight it. This is false. There are many defenses to non-compete agreements, and whether a particular non-compete agreement will hold up in court depends on the specific language of the agreement as well as employee’s job duties, length of employment, access to confidential information and a myriad of other factors.

The bottom line is that employees in Texas cannot afford to ignore non-compete restraints in their agreements and, when in doubt, should seek legal advice to understand the consequences of signing a non-compete agreement, or switching jobs or starting a competing business when subject to a non-compete.  Planning ahead is key when it comes to non-compete agreements in this state. 

Stay tuned for part II to find out common  non-compete agreements myths for employers. 

Leiza litigates unfair competition, non-compete and trade secrets lawsuits on behalf of companies and employees, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

 

Are Non-Compete Agreements Enforceable in Texas?

kkGenerally, Texas allows non-compete agreements between employers and employees as long as they are reasonable in scope, geographic area, and term, and meet a few other requirements. See my previous posts about those requirements here, here, and here

Practically speaking, however, whether a particular non-compete agreement is valid depends heavily on the exact language used in the agreement.  Just as with any other contract, Texas courts will usually look at the precise language of a particular employment agreement to determine what the parties had in mind when they entered into it. 

Last year, a hospitalist group in Houston learned the above principles the hard way when it attempted to enforce a non-compete covenant against a physician who went to work for a competitor and discovered that the non-compete did not prohibit the physician from doing so. 

In Tummalla et. al. v. Total Inpatient Services, P.A., the non-compete clause between the hospitalist group and the physician stated the following:

6.2 NonCompete. In consideration for the access to the Confidential Information provided by [TIPS] and in order to enforce the Physician’s Agreement regarding such Confidential Information, Physician agrees that he/she shall not, during the term of this Agreement and for a period of one (1) year from the date this Agreement expires pursuant to Section 8.3 or is terminated by Physician pursuant to Section 8.6 (the “Restriction Period”), without the prior written consent of [TIPS], except in the performance of duties for [TIPS] pursuant to this Agreement, directly or indirectly within any Hospital in the Service Area or any other hospital in which the Physician practiced on behalf of [TIPS], in excess of 40 hours, within his last year of employment with [TIPS]:
6.2.1 Provide services as a hospitalist physician to any entity that offers inpatient hospital and emergency department services.
In a separate provision in the same agreement, however, it stated that the physician’s first 12 months on the job were to be considered an “introductory period” during which either party could terminate the employment relationship for any reason. The specific paragraph stated that it applied notwithstanding any other provision in the agreement and it failed to included or mention any non-compete restrictions. 

The court of appeals analyzed these various clauses in the contract and concluded that because the physician terminated his employment with the hospitalist group within the first year, i.e. the “introductory period,” the post-employment non-compete clause did not apply to him. Thus, he was free to compete with his former employer. 

TAKEAWAY FOR EMPLOYERS: Employers should have a qualified attorney draft and/or review their non-compete agreements.  While there are many forms out there, because non-compete agreements in Texas have to be catered towards each employer’s business and because courts will scrutinize the language when determining whether to enforce the agreement or not, using a standard form may result in the employer not being able to enforce it due to gaps in the language or failure to address specific termination situations.

TAKEAWAY FOR EMPLOYEES:  Signing a non-compete agreement without reading it first can result in a major headache down the road and severely limit employee’s career options.  Therefore, employees should always: (1) read the agreement; (2) request a clarification if something is not clear; and (3) keep a copy of the signed agreement for their records.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Forfeiture Provisions in Executive Stock Incentive Programs Are Not Covenants Not to Compete

The Texas Supreme Court in ExxonMobil Corp. v. Drennen held that forfeiture provisions in non-contributory profit-sharing plans are not covenants not to compete, but stopped short of opining on whether they constitute an unreasonable restraint of trade in violation of Tex. Bus. Code 15.05.

In Drennen, ExxonMobil’s engineer and Exploration Vice President of Americas, was awarded restricted stock options through the company’s incentive program, which allowed the company to terminate Drennen’s outstanding awards if (among other conditions) he engaged in activities “detrimental” to the company, including working for ExxonMobil’s competitors.

Drennen retired from ExxonMobil in 2007, after working there for 31 years. At the time of his retirement, he had 73,900 shares (approximately $6.2 million) of stock through the company’s incentive program.  When he went to work for a competitor shortly after his retirement, ExxonMobil notified him that his incentive awards were cancelled. Drennen filed a declaratory action seeking a declaration from the district court that the “detrimental activity” forfeiture provision in ExxonMobil’s incentive program was an unenforceable covenant not to compete under Texas law because it did not contain geographic, time, or scope limitations.

Although the incentive program stated that it was governed by New York law, the Court of Appeals decided that Texas had a materially greater interest and a strong public policy interest in the dispute involving the enforceability of a covenant not to compete used against Texas employees, and, therefore, applied Texas law in ruling that the forfeiture provision was unenforceable under Section 15.50 because it did not contain reasonable time, scope, and geographical limitations.  The Texas Supreme Court  disagreed, ruling that New York law governed the forfeiture provision, but even if Texas law applied, the forfeiture provision used by ExxonMobil was not a covenant not to compete subject to Section 15.50 requirements.

The Supreme Court explained that covenants not to compete are generally defined as “covenants that place limits on former employees’ professional mobility or restrict their solicitation of the former employers’ customers and employees.”  Such covenants are governed by the Texas Covenants Not to Compete Act (TCNCA) and, pursuant to it, must be: (1) ancillary to or part of an otherwise enforceable agreement at the time the agreement is made; and (2) contain limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.

The forfeiture of stock provision contained in ExxonMobil’s incentive program, however, did “not fit the mold” of covenants not to compete because it did not limit Drennen’s professional mobility or restrict his future employment opportunities. Instead, according to the Court, the provision simply rewarded Drennen and other employees for continued employment and loyalty to ExxonMobil. Unlike a non-compete, where employer would have to bring a breach of contract suit to enforce the clause, the forfeiture provision simply allowed the employer to stop the incentive program, which belonged to the employer in the first place. Thus, forcing an employee to chose between competing with the former employer without restraint from the former employer and accepting benefits of the retirement plan to which the employee contributed nothing, does not create a covenant not to compete.

The Court concluded this part of the analysis as follows:

Whatever it may mean to be a covenant not to compete under Texas law, forfeiture clauses in non-contributory profit-sharing plans, like the detrimental-activity provisions in ExxonMobil’s Incentive Programs, clearly are not covenants not to compete.  . . . Whether such provisions . . . are unreasonable restraints of trade under Texas law, such that they are unenforceable, is a separate question and one which we reserve for another day.

CONCLUSION:  Because the Texas Supreme Court ruled that forfeiture provisions of that type used by ExxonMobil are not covenants not to compete, they do not have to comply with the requirements of TCNCA, i.e. such forfeiture provisions do not have to be “ancillary to an otherwise enforceable agreement” or be limited in scope, time or geographical reach. The question remains whether such forfeiture provisions constitute an unreasonable restraint of trade under the Section 15.05 of the Texas Free Enterprise and Antitrust Act of 1983, which states that “every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.”  However, the Court’s decision took away an easy way for employees to fight the forfeiture provisions by pointing to the fact that they don’t contain limitations.

In light of this opinion, employers should take a close look at ExxonMobil’s incentive plan and determine whether their own programs have the same characteristics, and employees with significant stock option or profit sharing arrangements as part of the compensation package should carefully review the forfeiture provisions before agreeing to them and, where possible, negotiate their reach.

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.