Non-Compete Agreements: Garbage In, Garbage Out

Enforcing Non-Compete Agreements in TexasLast week, a Texas Court of Appeals ruled that a non-compete agreement between a transportation logistics broker and its freight carrier was unreasonable because it was not clear when the 24-month non-compete period would begin to run. This case serves as a reminder that a confusing, ambiguous, or imprecise non-compete agreement will yield poor results in court.  In other words: garbage in, garbage out. 

The covenant not to compete at issue was meant to ensure that the freight carrier would not take away the broker’s clients after the broker had revealed their identity to the carrier.  Thus, there was a legitimate business reason for the non-compete agreement.  However, the following language in the agreement created a problem: 

For a period of twenty four (24) months following the Carrier’s last contact with any client or client[s] of Broker the Carrier agrees it shall not either directly or indirectly influence or attempt to influence customers or clients of Broker (or any of its present or future subsidiaries or affiliates) for whom the Carrier has rendered services pursuant to this Agreement to divert their business to the Carrier or any individual, partnership, firm, corporation or other entity then in competition or planning to be in competition in the future with the business of Broker or any subsidiary or affiliate of Broker. 

The Court explained that there were two problems with this language that made it impossible to determine how long the restrictive covenant was going to last.  First, under the terms of the covenant not to compete, the 24-month restraint period would start from the date of the carrier’s last contact with “any” client of the broker, not just the clients that the carrier had provided services to.  Since the broker testified that its client list was a trade secret, the carrier would have no way of determining the date of its last contact with the clients whose identity it had no way of knowing.  Second, the non-compete would begin to run from the date of the last contact, regardless of whether the contact took place during or after the broker-carrier agreement had terminated, which meant that it could begin at any time. 

Consequently, the Court ruled that a covenant not to compete that extended for an indeterminable amount of time was not reasonable, and as a result, was not enforceable. It reversed the jury’s finding that the agreement had been breached and took away the damages the jury had awarded to the broker.

Texas Bar Association Top TenBOTTOM LINE:  There are plenty of “sample” non-compete agreement “forms” online, but there is a difference between a non-compete clause and a non-compete clause that is enforceable. Unfortunately, many companies do not find that out until they are in court trying to enforce their agreements that may not be enforceable.  Companies should avoid using “standard” non-compete clauses and make sure that their restraints are tightly drafted to address their specific industry, business model, and particular needs. 

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 Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below. 

 

 

Want to Switch Jobs, But Not Sure if You Can? Do Not Let A Non-Compete Hold You Down.

3d4bc84Many employees sign non-compete agreements without giving it a second thought, but then a time comes when the company starts slumping, they get a new boss that they do not particularly like, receive a better job offer from a competitor of their current employer, or they want to strike out on their own. All of a sudden, the non-compete restraints come out of the shadows looking rather menacing. Should the employee take a new job or open a competing company and risk a lawsuit from the former employer? Should she or he discuss the non-compete agreement with the current employer and see if they’ll agree not to enforce it? Should she or he forego the new job in order to avoid facing the wrath of the former employer and the legal costs associated with it?

Many employees will seek advice from former co-workers, friends, or family, or on the internet. However, seeking information about enforceability or validity of non-compete agreements in Texas on the web is like seeking information about a possible illness from WebMD.  There are many general statements, but no realistic explanation of how it applies to the employee’s particular situation.

This is, of course, because the area of non-compete law in Texas is a gray area. Rarely is an entire non-compete agreement invalid or iron-clad. Most of the time, the agreement’s force depends on the specific language of the agreement, the type of business the employer is involved in, what employee did for that employer, for how long, whether the employee received confidential information, goodwill, or stock options from the employer, whether employees’ duties changed at any time during the employment, whether the employer has “unclean hands,” and many other factors.

So, when you start wondering about whether your non-compete will hold you back in accepting a job offer or opening your own business, do yourself a favor, and after doing online research and talking to your friends or co-workers, consult with an attorney in your state regarding whether your non-compete agreement is enforceable as well as what is the likelihood of the employer enforcing the agreement.  A good attorney will help you structure your departure from the former employer in a way that will minimize the risk of a non-compete lawsuit, will help deflect any bullying attempts from the former employer, and will be able to provide you with a realistic risk assessment of any non-compete-related litigation. When facing a possible non-compete enforcement situation, an ounce of prevention is worth a pound of cure and being proactive about it can save major headaches down the road.

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.