Some Basic Issues in Texas Non-Compete Law Remain Unresolved

First of all, I don’t understand why the Texas non-compete statute says “geographical” when “geographic” would do. More about that later.

The typical Texas non-compete follows a predictable pattern, and there are thousands of them in circulation in Texas. As I explained here, as a Texas litigator I look for five key things to decide whether a typical Texas non-compete is enforceable.

But the answer is often cloudy. The recent case Orchestratehr, Inc. v. Trombetta shows that basic questions about Texas non-compete law remain unanswered, and that minor factual distinctions can make all the difference to whether a Texas non-compete will be found enforceable. As we will see, this makes witness preparation especially critical in a Texas non-compete lawsuit.

Most Texas lawyers who deal with non-competes know the two basic requirements for enforceability: (1) the non-compete must be “ancillary to an otherwise enforceable agreement,” and (2) the non-compete must be reasonable in time period, geographic area, and scope. But lawyers who don’t have practical experience actually litigating these issues can get tripped up easily.

“Ancillary to an Otherwise Enforceable Agreement”

Whether the non-compete is “ancillary to an otherwise enforceable agreement” often comes down to whether the employee admits that (a) he needed confidential information to do his job, and (b) he received confidential information. Why? Here is how it usually plays out:

  1. The employer’s agreement to provide confidential information to the employee can be an “otherwise enforceable agreement” supporting a non-compete, if the employer actually provides the confidential information.[1]
  1. If the confidentiality agreement contains no express promise by the employer to provide confidential information (which, inexplicably, is sometimes the case), the question is whether there is an implied promise to provide confidential information.[2]
  1. There is an implied promise if the nature of the work to be performed by the employee requires providing him confidential information.[3]
  1. The confidentiality agreement, drafted by the employer, will typically define confidential information to include virtually every kind of information the employee receives in the course of employment.
  1. The typical Texas non-compete will have a time period of one to three years. Despite the requirement of a reasonable geographic limitation, it will often have no express geographic limitation. Sometimes the non-compete will be limited to the employer’s existing customers, or the customers the employee personally dealt with.

It is safe to say this scenario—or some variation of it—has occurred in thousands of Texas lawsuits. So Texas courts by now must have a standard answer to whether the non-compete is enforceable in this scenario, right?

Well, not really. Even this cookie-cutter scenario raises at least two unresolved legal issues, and an important factual issue that varies from case to case.

Legal Issue #1: Does it Matter if the Information is Not Really Confidential?

The first unresolved legal issue is this: does it matter whether the information the employer provided the employee was actually confidential? The employer will argue that it is sufficient for the agreement to define the information as confidential and will cite this statement from the Texas Supreme Court:

Concerns that have driven disputes over whether a covenant is ancillary to an otherwise enforceable agreement—such as the amount of information an employee has received, its importance, its true degree of confidentiality, and the time period over which it is received—are better addressed in determining whether and to what extent a restraint on competition is justified.[4]

In other words, the degree of confidentiality of the information goes to the reasonableness requirement, not the “ancillary” requirement. Yet, despite this statement, it remains clear that a confidentiality agreement is only an “otherwise enforceable agreement” if the employer actually provides confidential information.

a man wearing a suit showing a document with the text confidenti
A non-compete is enforceable if it is stamped “Confidential” at the top. Just kidding. Sort of.

In the recent Orchestratehr case, the employee made the typical argument that the non-compete was not ancillary to an otherwise enforceable agreement because the employer did not give the employee any actual confidential information. Although the court implicitly accepted the employee’s legal premise, it rejected the employee’s argument based on two facts. First, the agreement had a typical clause that defined virtually everything as the employer’s confidential information.[5] Second, the employee admitted in his deposition that the information was confidential.[6]

Obviously, the second reason deserves more weight than the first. The fact that the agreement defines virtually all information as confidential should receive little, if any, weight. If employers could satisfy the “ancillary” requirement simply by reciting the right “magic words,” it would render the requirement meaningless.

The employee’s admissions, on the other hand, are hard to ignore. At the least, these admissions raised a fact issue for the jury on whether the employee actually received confidential information. This shows the importance of witness preparation in non-compete cases.

Factual Issue: Did the Employee Testify That He Received Confidential Information?

As Orchestratehr shows us, whether a non-compete meets the “ancillary” requirement can often turn on whether the employee admits that the information he received was confidential. This makes witness preparation critical.

If you represent an employee who signed a typical non-compete tied to a confidentiality agreement, you need to thoroughly debrief the employee early in the case about the kind of information needed to do the job and the type of information the employer actually provided. Go into detail, and review the documents (if available). It’s important to do this early so you can answer two crucial questions.

First, if the non-compete does not have an express agreement to provide confidential information to the employee, did the nature of the work required confidential information? If the answer is no, you need to prepare your client to say so and to explain why.

Second, can the employee reasonably contend that the information he received was not really confidential? If the answer is no, then don’t waste your time and effort trying to argue the employer failed to provide confidential information. Ultimately, a half-hearted or frivolous argument that the information was not confidential will not help your client.

But the answer is often yes. Customer lists, customer information, and prices are the information most commonly claimed to be confidential. I sometimes call this kind of information “soft” trade secrets. Employers always think this information is extremely valuable and confidential. In reality, it is often readily ascertainable by competitors. The real value is usually in the personal relationships the employee has with his customers.

Don’t get me wrong. There are legitimate cases where these “soft” trade secrets are truly confidential. (The cases where I represent the employer typically fall into this category.) But those cases are rare.

orchestra
Orchestratehr shows the importance of witness preparation in non-compete litigation

There is almost always at least a reasonable argument that the price and customer information the employee received is not really confidential. If you represent the employee, push hard to test whether that is really true, and if it is true, then prepare your client to make that argument and to stick to his guns. It does no good to take the position that the information was not confidential if your client is going to fold under pressure in his deposition and concede that “yeah, I guess that was sort of confidential.” That’s the kind of testimony likely to be cited in a later opinion—like the one in Orchestratehr—holding that the non-compete is enforceable.

Conversely, if you represent the employer who is trying to enforce the non-compete, you need a plan for getting the employee to admit that the information he received was confidential. I would give you some tips on this, but I can’t give away all my secrets.

Legal Issue #2: Do You Really Have to Have a Geographic Limitation?

Like a lot of typical non-competes, the non-compete in Orchestratehr had no express geographic limitation. As the federal district court correctly noted, some Texas appellate courts have held that limiting a non-compete to certain customers can substitute for a geographic limitation. The Orchestratehr court held that, despite the absence of a geographic limitation, limiting the non-compete to existing customers of the company was sufficient.[7]

This is certainly a plausible position, but it is troubling. I am not aware of the Texas Supreme Court ever adopting this position, and the reasonable geographic limitation is an express requirement in the non-compete statute. It would be a little odd for our current Texas Supreme Court, which seems fond of “strict” textual construction of statutes, to interpret the plain language “geographical area” as meaning “geographical area or some reasonable substitute for it.”

Until the Texas Supreme Court definitively resolves the issue, lawyers for Texas employees should continue to argue that, by statute, a Texas non-compete must have an express geographic limitation.

Or “geographical.” If you insist.

____________________________________________

head-shot-photo-of-zach-wolfe

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn, PLLC has offices in Houston, Austin, and The Woodlands.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] See Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 655 (Tex. 2006).

[2] Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 850 (Tex. 2009).

[3] Id.

[4] Sheshunoff, 209 S.W.3d at 655 (emphasis added).

[5] The agreement defined Confidential Information as “any information of any kind, nature, or description concerning any matters affecting or relating to Employee’s services for COMPANY, the business or operations of COMPANY, and/or the products, plans, pricing models, customer lists, marketing plans, processes, or other data of COMPANY.”

[6] Orchestratehr, Inc. v. Trombetta, No. 3:13-CV-2110, 2016 WL 4563348, at *3 (N.D. Tex. Sept. 1, 2016).

[7] Id. at *4.

One thought on “Recent Case Shows How to Enforce the Typical Texas Non-Compete

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s