Covenants not to Compete

In the competitive business world, especially in sectors that primarily rely on proprietary technology, or which heavily rely on carefully cultivated sales and marketing contacts, covenants not to compete have long played a significant role. Such covenants have permitted employers to share confidential information with at-will employees and at the same time rest assured that the employees couldn't acquire the confidential information and then immediately launch or work for a competitor. Texas Business & Commerce Code §15.50 establishes two basic requirements of a covenant not to compete: 1) The covenant must be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made; and 2) the covenant must 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.

In late 2006, the Texas Supreme Court handed down its decision in Alex Sheshunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006). Sheshunoff clarified the Court's previous decision in Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642 (Tex. 1994), and as a result significantly eased a burdensome restriction on covenants not to compete. In Light, the court held that at-will employment was not sufficient consideration to support a contemporaneous covenant not to compete, calling a promise that is dependent on continued employment "illusory," and thus failing the first requirement of §15.50. Several appellate courts construed the Light holding as to require the contemporaneous exchange of confidential information at the time of the execution of the covenant not to compete for there to be sufficient consideration and thus "an otherwise enforceable agreement."

Sheshunoff eliminated the requirement imposed by Light of a contemporaneous exchange of confidential information. Instead, the Supreme Court held a unilateral covenant not to compete, supported only by the employer's promise of performance, is an "otherwise enforceable agreement." The covenant not to compete becomes enforceable when the employer performs its part of the agreement (by sharing the confidential information with the employee). The Supreme Court recently expanded the scope of Sheshunoff in Mann Frankfort v. Fielding, 52 Tex. Sup. Ct. J. 616 (April 17, 2009). In Mann Frankfort, an at-will employee executed a covenant not to compete. Unlike Sheshunoff, the employer did not expressly promise to provide the employee, an accountant, confidential information. The court of appeals held that the absence of this express promise invalidated the covenant not to compete. The Supreme Court reversed the court of appeals' decision and held that the employer's "implied promise," followed by its actual provision to the employee of confidential information, formed the "otherwise enforceable agreement" which made the covenant not to compete valid and enforceable.

Watson Caraway's attorneys are experienced at drafting covenants not to compete and other business and commercial contracts. Please contact us to find out how we can meet your business needs.