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Landscape changing for noncompete agreements in Texas

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in Employment Law,Hiring,Human Resources,Leaders & Managers,Management Training

A year and a half ago, the Texas Supreme Court took a step toward demystifying noncompete agreements when it decided Alex Sheshunoff Management Services v. Kenneth Johnson, et al. That 2006 case clarified whether employers may require new and existing employees to sign noncompete agreements without changing their at- will status.

The court concluded they can—as long as the employer provides proper consideration in return.

Some basics: A contract is enforceable only when each party gives something to the other. In the case of noncompetes, the employer gives the employee information necessary to perform the job in exchange for a promise not to use that information against the employer.

Promises, promises

The unanswered question prior to Sheshunoff was whether the mere promise to provide employees with confidential information was sufficient consideration for a noncompete to be enforceable. The conventional thinking among the courts was that—because an employer has a right to fire an at-will employee at any time—the employer could not merely promise to provide confidential information in return for the employee’s promise not to compete.  That was because the employer remained free to fire the employee before giving the confidential information.

In Sheshunoff, the court ruled that the employer could indeed merely promise to provide confidential information. The fact that no confidential information is exchanged at the time of the contract signing is no longer an issue to void the covenant.

However, at some point in the employment relationship, the employer must actually provide confidential information to the employee. If the employer fails to deliver, the “consideration” would fail and the employee would be free to compete against the employer following separation.

The Texas Supreme Court’s decision directed trial courts to carefully analyze whether the business interests of the employer justified the scope of the covenant not to compete. In other words, courts must ensure that the confidential information the employer provides justifies the restraints placed on the employee’s post-employment conduct in terms of time, scope and geographic limitations. Those issues will probably take on greater importance in future cases.

What employers can expect now

Sheshunoff gave employers a powerful basis to enforce noncompete agreements.

Employers that have properly crafted agreements can use cease-and-desist letters and other techniques to prevent competitive activity. Further, many executives will think twice before leaving their jobs if they have signed properly drafted noncompete agreements and have actually received confidential information.

When hiring, check to make sure job candidates are not restricted by noncompete agreements. Such agreements are more enforceable now.

Since Sheshunoff, courts have begun to focus more on whether the terms of a noncompete agreement are reasonable; that is, whether the covenants contain the requisite time, scope and geographic limitations.

What should employers do?

Employers considering noncompete agreements should ask the following questions:

  • Do we need a noncompete agreement at all?
  • Should it include a promise not to solicit customers or employees?
  • How restrictive does it have to be in terms of scope, time and geographic area?

If you decide noncompete agreements are the right choice, draft them carefully. As always, consult an attorney. Proceeding without counsel is dangerous in this area, and can result in an expensive and distracting lawsuit.

Final note: If you are working under the terms of a restrictive covenant, review your contract and see whether it was made in connection with a nondisclosure agreement. If not, it might be unenforceable, even after Sheshunoff. Ask yourself whether you actually received confidential information. If so, did the confidential information justify the covenant not to compete?

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