Employee Hardship in Texas Non-Compete Litigation

Employee Hardship in Texas Non-Compete Litigation

You get the same sob story in most non-compete lawsuits. “Your Honor, if you enter an injunction enforcing this non-compete, my client won’t be able to make a living and support his family.”

You might think this sort of argument is inappropriate. The judge should decide whether to enter an injunction based on the law, not sympathy. If an employee agrees to a non-compete and gets compensated for it, she doesn’t get to avoid it just because she later decides it’s inconvenient. The “hardship” argument should be out of bounds, you might think.

But you would be wrong. An injunction is an “equitable” remedy, so it’s not just a question of “the law,” but a question of equity, or fairness.

The Balance of Equities Rule

This is the rule in Texas state court: “Because an injunction is an equitable remedy, a trial court weighs the respective conveniences and hardships of the parties and balances the equities.” Computek Computer & Office Supplies, Inc. v. Walton, 156 S.W.3d 217, 220 (Tex. App.—Dallas 2005, no pet.). See also NMTC Corp. v. Conarroe, 99 S.W.3d 865, 868 (Tex. App.—Beaumont 2003, no pet.) (“An application for injunction is a request that a court exercise its equitable jurisdiction, and in exercising that power the court balances competing equities”); Surko Enterprises, Inc. v. Borg-Warner Acceptance Corp., 782 S.W.2d 223, 225 (Tex. App.—Houston [1st Dist.] 1989, no writ) (“In determining whether to order a temporary injunction, the trial court balances the equities of the parties and the resulting conveniences and hardships”).

It’s a common-law rule, meaning a rule made by courts. Texas state courts balance the equities even though Rule 683 of the Texas Rules of Civil Procedure doesn’t say anything about that. See Reliant Hosp. Partners, LLC v. Cornerstone Healthcare Group Holdings, Inc., 374 S.W.3d 488, 503 (Tex. App.—Dallas 2012, pet. denied).

And for my Advanced readers, the Texas non-compete statute, which does not speak to the requirements for a temporary injunction, does not preempt this common-law rule. NMTC Corp. v. Conarroe, 99 S.W.3d 865, 868 (Tex. App.—Beaumont 2003, no pet.).

The rule is effectively the same in federal courts: to obtain a preliminary injunction, the plaintiff must show that “the threatened injury outweighs any damage that the injunction might cause the Defendant.” Yellowstone Landscape v. Fuentes, No. 4:20-1778, 2020 WL 4547150, at *3 (S.D. Tex. Aug. 8, 2020) (citing Nichols v. Alcatel USA, Inc., 532 F.3d 364, 372 (5th Cir. 2008)). That’s just another way of saying weigh the balance of equities or hardships.

Implicit in this rule is the idea that the court might deny an injunction based on the hardship on the employee, even if the employer would otherwise be entitled to an injunction.

Think about it. If the employer isn’t entitled to an injunction anyway, there’s no point in arguing about the balance of equities. Hardship on the employee only becomes a real issue if the employer satisfies the other elements required to get an injunction. Thus, the command to “balance the equities” raises the prospect that the hardship on the employee could be the decisive factor weighing against an injunction.

Does that actually happen in practice?

The short answer is no. In most cases the hardship factor is just an afterthought used to justify whatever decision the court has already made about the injunction. If the court wants to grant an injunction, it will say that the balance of equities weighs in favor of enforcing the non-compete. If the court doesn’t want to grant an injunction, it will cite the hardship on the employee as an additional factor against enforcement.

But we mustn’t be too cynical about the hardship issue. In close cases the hardship on the employee may be enough to tip the scales of justice towards denying the injunction. That means the lawyer for the employee who is seeking to avoid the injunction needs to offer evidence of the hardship, and the lawyer representing the employer trying to obtain an injunction needs to be prepared to counter such evidence. More about that later.

First let’s look at some examples of non-compete cases that “balance the equities” to see if they bear out my short answer.

Why It’s Hard to Appeal an Injunction Ruling

In NMTC Corp. v. Conarroe, 99 S.W.3d 865, 869 (Tex. App.—Beaumont 2003, no pet.), the trial court denied a non-compete injunction, and the Court of Appeals affirmed the trial court’s ruling, citing the hardship on the employee as “the determining factor” supporting the trial court’s ruling.

In O’Brien v. Rattikin Title Co., No. 2-05-238-CV, 2006 WL 417237, at *5-6 (Tex. App.—Fort Worth Feb. 23, 2006, no pet.), the trial court granted a non-compete injunction, and the Court of Appeals affirmed the trial court’s ruling, rejecting the argument that the hardship on the employee outweighed the employer’s business interests.

Notice a pattern?

Yes, of course. The appellate courts almost always uphold the trial court’s decision on an injunction, whether the decision is to grant or to deny.

I say “almost” because, of course, there are exceptions. There are some cases where the appellate court reverses the trial court’s decision on an injunction. But those cases are few and far between.

Why is that? Why doesn’t the hardship factor result in more reversals on appeal?

I think it’s a combination of three things.

First, it’s the standard of review. The court of appeals will only reverse if the trial court’s decision on the injunction was an “abuse of discretion.” That means even if the appellate court might have decided the injunction a different way, that’s not enough to reverse. The party challenging the ruling on appeal has to show the trial court didn’t just get it wrong, but really wrong. See, e.g., Univ. Health Servs., Inc. v. Thompson, 24 S.W.3d 570, 578-79 (Tex. App.—Austin 2000, no pet.) (emphasizing standard of review in affirming trial court’s balancing of equities).

Second, the balance of equities is just one factor. If the other requirements for an injunction—like whether the violation of the non-compete will cause irreparable injury to the employer—weigh heavily to one side, it is unlikely the hardship factor will be so strong that it shifts the scales in the other direction.

Third, the balance of equities is a one of those notorious “balancing” tests. The problem with a balancing test is that you can almost always come up with a reasonable argument going one way or the other. There are even memes about this.

So the bottom line is that you shouldn’t put too much stock in the balance of equities issue. Hardship on the employee is not likely to save the employee if the case for an injunction is otherwise strong, and vice versa.

And yet.

There’s always the chance that the hardship factor makes the difference. So you’ve got to be prepared for it.

And while most judicial opinions give short shrift to the balance of equities, there are some that dig a little deeper. Let’s look at some examples.

Cases Applying the Balance of Equities Rule

A good case to cite if you represent the employee, at least in Texas where I practice, is Yellowstone Landscape v. Fuentes, No. 4:20-1778, 2020 WL 4547150 (S.D. Tex. Aug. 8, 2020).

The employee in Yellowstone Landscape, Mr. Fuentes, was an account manager for commercial landscaping accounts, like Yellowstone’s contract with the Harris County Flood Control District for mowing and maintenance of flood control channels in Houston. Mr. Fuentes interacted with the customer to make sure the work was being done properly, but he was not involved in preparing or submitting bids. Id. at *1.

There were some “bad facts” for the employee. Mr. Fuentes resigned, falsely told his employer he was starting his own tree trimming business, and then violated his non-compete by going to work for a competitor, who had recently underbid Yellowstone on a project. Id. at *1-2.

But the balance of equities favored Mr. Fuentes. Yellowstone was the fifth-largest landscaping firm in the nation, with over $200 million in annual revenue. Mr. Fuentes made $75,000 and supported a family of five. An injunction would have caused him to lose his job in the middle of a pandemic. He paid for one child’s college tuition, and his wife needed surgery for a herniated disc. His lawyer was working pro bono. Id. at *8.

With those facts, I don’t even have to tell you what the court’s ruling was.

But of course, most cases don’t have hardship facts as sympathetic or well developed as in Yellow Landscape.  

For example, in Accruent, LLC v. Short, No. 1:17-CV-858-RP, 2018 WL 297614 (W.D. Tex. Jan. 4, 2018), the federal district court held that the balance of equities favored an injunction where the employee did not offer “evidence of how much less he might earn in a different industry” or explain “what diminished earning would mean for his family.” Id. at *9. The court noted that under the agreement as reformed, the employee could still work in the same industry, just not in a role substantially similar to his role with the former employer. Id.

And courts tend to be less sympathetic about hardship to the employee where the employee took the employer’s confidential information. See, e.g., ProofPoint, Inc. v. Boone, No. A-21-CV-667-LY, 2021 WL 5194724, at *6 (W.D. Tex. Sept. 21, 2021) (balance of equities favored employer where employee intentionally downloaded, retained, and disseminated files containing the employer’s confidential proprietary company information while he began working for a competitor).

A state court case that applies reasoning similar to Accruent is York v. Hair Club for Men, LLC, No. 01-09-00024-CV, 2009 WL 1840813 (Tex. App.—Houston [1st Dist.] June 24, 2009, no pet.) (mem. op.). In that case, the plaintiff’s key witness was not only the Hair Club’s president, he was also a client.

Sorry, I just had to get that in.

But seriously, in the Hair Club case there was evidence that the employees, who were licensed cosmetologists, had longstanding relationships with clients, and that 41 former Hair Club customers had followed the employees to a competitor. Id. at *6. The Court of Appeals reasoned that the balance of equities did not weight against the trial court’s injunction, where the injunction did not prevent the employees from working in the hair replacement industry generally and seeking new customers, but only enjoined them from soliciting Hair Club customers. Id.

There’s a key point we can derive from both Accruent and Hair Club: the hardship on the employee will be less of a factor when the injunction is narrowly tailored to protecting the employer’s goodwill with customers.

So, for example, an injunction that entirely bars an employee from working for a competitor is likely to impose too great a hardship. On the other hand, an injunction that only bars the employee from doing business with specific customers of the employer creates less of a hardship.

That means if the trial court does its job right, the burden on the employee should rarely be a decisive factor. A properly tailored injunction should already balance the employer’s interest in protecting its confidential information or goodwill against the employee’s right to use his general knowledge, skill, and experience in the industry.

So there’s our answer. If the court properly limits the scope of the injunction to preventing the employee from taking her customers with her, then the hardship on the employee becomes a non-issue. Right?

I wouldn’t go that far. To understand why, let’s take a little trip to Beaumont.

Why the Balance of Equities Inherently Favors the Employee

If you practice litigation in Texas, you know Beaumont is a fun venue. Maybe not quite as exciting as Hidalgo County, but it’s close.

And if you know anything about East Texas, you know the competition for sales of MATCO® hand tools is fierce in Hardin County. So when tool salesman Jule Conarroe left Matco Tools and went to work for competitor Cornwell Tools, you just knew, “this means war.”

And sure enough, Matco Tools filed suit to get an injunction. Conarroe admitted some of the customers he was selling Cornwell products to had also been customers in his territory at Matco, id. at 866, but the trial court judge found the equities weighed heavily in favor of denying the injunction. NMTC Corp. v. Conarroe, 99 S.W.3d 865, 869 (Tex. App.—Beaumont 2003, no pet.)

Specifically, the judge found that “if a temporary injunction issues, Mr. Conarroe will be put out of business.” The alternative was more equitable. “If a temporary injunction does not issue, Matco may lose some sales within the territory, but the ability to mitigate those losses is within Matco’s control and is subject to recoupment.” Id.

That’s some small-town Texas wisdom right there. And the Court of Appeals agreed. “In balancing the equites,” the court explained, “a trial court may consider whether the degree of injury to the applicant would be slight or significant if the temporary injunction were erroneously denied.” Id.

This really gets to the heart of the balance of hardship analysis for a temporary injunction in a non-compete case. The problem is that a ruling on a temporary injunction is not a final ruling on the merits, and the risk of getting it wrong is not evenly balanced.

Here’s what I mean, and what I think the Beaumont Court of Appeals was getting at. Suppose the trial court gets it wrong and denies an injunction enforcing the non-compete. That does impose a certain hardship on the employer, because it is probably going to lose some business that it should not have lost. But that’s a hardship that can be compensated, because the employer can seek damages for business it loses as a result of the employee breaching the non-compete (assuming the non-compete is enforceable).

The risk of getting it wrong and granting a temporary injunction is much greater. In that case, the employee has no remedy for the loss of income resulting from an erroneous temporary injunction enforcing the non-compete. I explained this problem in The Problem With Non-Competes.

No, the hardship argument should not be an automatic Get Out of Jail Free card that exempts an employee from a reasonably limited non-compete. But courts should take the employee hardship issue seriously. It shouldn’t be just an afterthought.

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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.

Biden Executive Order Raises Key Question: Should Texas Abolish its Hiring Tax?

Biden Executive Order Raises Key Question: Should Texas Abolish its Hiring Tax?

No, contrary to what you may have heard, President Biden did not issue an executive order banning non-competes nationwide. More about that later.

His Executive Order on Promoting Competition in the American Economy did get me thinking, though. Should Texas follow the Biden administration’s lead and abolish the Texas hiring tax?

You didn’t know Texas had a hiring tax? Let me explain.

Comparative Non-Compete Law

Texas law is relatively pro non-compete. I say “pro” because Texas law allows non-compete agreements with at-will employees, provided the scope of the non-compete is reasonable, and if the employer messes up and makes the non-compete too broad, the employer is entitled to have a judge “reform,” or rewrite, the non-compete to make it reasonable in scope.

I say “relatively” because Texas law does have some advantages for employees who challenge non-competes. See my overview in Wolfe’s First Law of Texas Non-Compete Litigation. In short, there’s plenty of Texas case law interpreting “reasonable” in an employee-friendly direction, and the Texas non-compete statute gives employees some significant advantages.

Still, overall Texas law is pretty friendly to non-competes for at-will employees, especially compared to some other states.

California, for example, is well known for its hostility to employee non-competes. They are generally not allowed in the Golden State. See Cal. Bus. & Prof. Code § 16600.

And it’s not just deep blue states. Hostility to non-competes cuts across the political spectrum. Consider deep-red Oklahoma. It also frowns on employee non-competes. See 15 OK Stat § 15-219A.

Plus, the national trend is in the direction of non-compete “reform,” meaning making it more difficult to enforce non-competes with at-will employees. Consider a few examples:

This trend has not made it to the Lone Star State. If anything, the Texas legislature has gone in the other direction.

You may have heard Texas has an “anti-SLAPP” statute, called the TCPA, which allows defendants to move to dismiss unfounded lawsuits before any expensive discovery takes place. That potentially included non-compete lawsuits, until recently. In 2019, the legislature exempted most non-compete lawsuits from the early dismissal procedure provided by the TCPA. See Turn Out the Lights, the Party’s Over: Texas Legislature Takes All the Fun Out of the TCPA.

And in 2021? Governor Abbott called a special session to address numerous issues, including bail overhaul, elections, border security, social media “censorship,” and, of course, Critical Race Theory. But he did not include non-compete reform on the agenda.

The Texas Hiring Tax

Ok, but what does this have to do with a hiring tax?

Well, by continuing to enforce non-competes with at-will employees, Texas effectively imposes a tax on employers who hire employees away from competitors.

The thing you have to understand is that enforcing non-competes with at-will employees does not really prevent competitors from hiring those employees. It just makes it more expensive to do so.

Here’s how it usually goes down. Suppose Dawn Davis is the top sales person at Paula Payne Windows. An upstart competitor, Real Cheap Windows, has its eye on Dawn. Trouble is, Dawn signed a two-year non-compete when she Paula Payne Windows hired her years ago.

Will that stop Real Cheap from recruiting Dawn? Probably not. If Real Cheap really wants to hire Dawn, it’s going to do it, regardless of any non-compete.

This will, of course, provoke a nasty-gram from Paula Payne’s lawyer, demanding that Real Cheap cease and desist from employing Dawn and “stealing” or “poaching” Paula Payne’s customers (as if the customers were property, or wild game). Real Cheap will then hire some smart-aleck lawyer to write a response arguing that the non-compete is unenforceable.

Then, if the loss of Dawn’s customers is a big enough deal to Paula Payne Windows, it’s going to file a lawsuit to try to stop Dawn. The lawsuit will probably include both a request for a temporary injunction ordering Dawn to stop and a demand for damages for the loss of Dawn’s customers to Real Cheap.

I would bet that more than half the time, the lawsuit will get settled before the judge holds a hearing on the requested temporary injunction hearing. And nine times out of ten, the lawsuit will get settled before going to trial.

The end result, typically, is a settlement where Real Cheap Windows agrees to pay some amount of money to Paula Payne Windows and maybe also agrees to some restrictions on Dawn Davis, like maybe she can’t sell to her top three customers for a year. So, the competitor who hired the employee pays its own attorney’s fees plus some amount to settle the litigation with the company the employee left.

That’s the Texas hiring tax.

Is Enforcement of Non-Competes “Pro-Business”?

Isn’t it ironic? I thought Texas was supposed to be anti-tax and “pro-business.” But when businesses have to pay a hiring tax—in effect—to hire the best people, is that really pro-business?

Wouldn’t it be better for Texas to get rid of this hiring tax and abolish non-competes for at-will employees? (It would still make sense to allow non-competes in the sale of a business, for reasons I explain here.)

But wait, defenders of non-competes will say, we need non-competes to protect goodwill and confidential information.

I don’t find either rationale persuasive.

As to confidential information, what if I told you there was already an entire body of law—both state and federal—designed to prevent employees from taking valuable confidential business information to a competitor?

Yes, of course, it’s called “trade secrets” law. Like most states, Texas has a version of the Uniform Trade Trade Secrets Act (TUTSA). You can even make a federal case of it, thanks to the relatively recent federal trade secrets statute, the Defend Trade Secrets Act (DTSA). 

But what about protecting goodwill with customers?

Yeah, about that. Here’s the problem. In most cases, where the goodwill resides in the individual employee’s relationships with certain customers she regularly services, the goodwill walks out the door when the employee clocks out for the last time.

Like I mentioned earlier, customers aren’t property. They have minds (and hearts) of their own. If the person they like to do business with leaves the company, they usually want to follow that person to a new company.

And while a judge can order the employee not to do business with the customers she serviced at her previous employer, a judge can’t make those customers continue to do business with the previous employer. It’s like when Genie explains to Aladdin that he gets three wishes, but he can’t wish for someone to fall in love with him.

So in most cases (not all), an injunction enforcing the non-compete doesn’t really preserve any customer goodwill, it just punishes the departing employee and the customers, third parties who never signed any non-compete.

For these reasons, I think Texas businesses would do just fine if Texas outlawed non-competes with at-will employees. In fact, I think they would do better.

You may be shocked that a lawyer who handles non-compete litigation would make such a statement against interest. Wouldn’t my business dry up if Texas outlawed non-competes?

President Biden’s Executive Order on Non-Competes

My worried mom asked the same thing about Biden’s Executive Order. I told her not to worry.

When the White House announced the President would be issuing an Executive Order addressing non-competes, I made this prediction on Twitter:

In short, I predicted two things. First, the order would be limited in scope. Second, even a national ban on non-competes would not end departing employee litigation, because employers would just shift their legal theory to trade secrets.

How did I do? On the first part, I was spot on. Here’s what Section 5(g) of the Executive Order actually said:

For all the hoopla on the Biden side and the hand-wringing among business lawyers, this was pretty restrained. For one thing, the Executive Order doesn’t change the law at all. It only directs the FTC to consider changes to the law.

As for my second prediction, that the scope of action on non-competes would be limited, the order doesn’t instruct the FTC to outlaw non-competes, it only suggests that the Commission “curtail” the “unfair use” of non-competes.

Only time will tell what that means. I still think any limits the FTC orders are likely to focus on reigning in the use of non-competes in agreements with lower-income workers. That’s the kind of thing that caused a political outcry. Plus, there are sure to be court challenges to any new rules.

Whatever the FTC decides to do, I don’t expect it’s going to materially restrict non-competes for executives and more highly compensated sales people.

And like I said, even if the FTC does something more sweeping than I expect, I will still have plenty of work. Employers will just shift to using trade secrets law to try to impose de facto non-competes on employees who jump ship and go to a competitor.

How do I know this? That’s what they are already doing now when a key employee doesn’t have a non-compete, or has a non-compete the employer realizes is probably not enforceable.

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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.

Is a Non-Recruitment Agreement a Non-Compete?

Is a Non-Recruitment Agreement a Non-Compete?

When you say “recruitment,” it brings up painful memories of law school. But hey, at least we had free pizza (sometimes).

Speaking of recruiting, the Wall Street Journal recently reported that employee mobility is at a two-decade high. That means a lot of employees are quitting their jobs and going to work for competitors. Anecdotal evidence from my own law practice suggests the same. There are a lot of departing employee disputes and lawsuits in Texas right now, and I suspect the same is true in other states.

In many cases, when those employees leave their employers, they will have employment agreements that restrict them from soliciting the customers or employees of their former employer. People often want to know if that’s a non-compete.

The short answer is yes. Generally, a restriction on soliciting a former employer’s customers or clients is a form of non-compete. I covered this in my popular post Is a Non-Solicitation Agreement a Non-Compete? The answer matters because a non-compete has to be reasonable in scope. See Tex. Bus. & Com. Code § 15.50(a).

Restrictions on soliciting employees get relatively less attention. Lawyers and non-lawyers alike tend to assume such restrictions are enforceable.

In Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), the Texas Supreme Court said that restrictions on soliciting a former employer’s “customers and employees” are restraints of trade governed by the non-compete statute. But Marsh was not about solicitation of employees, so the part about soliciting employees could be viewed as dicta.

There is conflicting Texas case law on whether a restriction on soliciting a former employer’s employees is a non-compete subject to the requirements of the non-compete statute.

Some Texas courts have held that a restriction on employee non-solicitation is not a restriction on competition. See, e.g., Totino v. Alexander & Associates, Inc., No. 01-97-01204-CV, 1998 WL 552818, at *8-9 (Tex. App.—Houston [1st Dist.] Aug. 20, 1998) (not designated for publication), dismissed pursuant to settlement, 1999 WL 182518 (March 30, 1999); Nova Consulting Group, Inc. v. Eng’g Consulting Servs., Inc., No. Civ. SA-03-CA-305-FB, 2005 WL 2708811, at *18 (W.D. Tex. June 3, 2005) (citing Totino).

(After I published the original version of this post, a little birdie told me that Totino was later dismissed pursuant to a settlement, and sure enough, Westlaw confirmed that.)

Other cases have held that a non-recruitment clause is a non-compete. See, e.g., Smith v. Nerium International, LLC, No. 05-18-00617-CV, 2019 WL 3543583, at *4 (Tex. App.—Dallas Aug. 5, 2019, no pet.) (mem. op.) (citing Marsh).

The better view is that a restriction on soliciting employees is a form of non-compete. (As always, this is just my opinion, not the opinion of my firm or clients.)

Think about it. Imagine that two competitors enter into an agreement not to solicit each other’s employees. Are you telling me such an agreement would not raise any antitrust concerns? No, of course it would.

Both the motive and effect of a restriction on soliciting employees are to prevent competitors from “poaching” employees. The company’s motive is to protect itself from competition. And the effect—if the restriction accomplishes its intended purpose—is to inhibit competition. So, a restriction on soliciting employees raises the same kind of anti-competitive concerns as a restriction on soliciting customers and should be treated as a non-compete.

Plus, If you say that a restriction on soliciting employees is not a non-compete, be careful what you wish for. Let’s assume for the sake of argument it’s not a “covenant not to compete.” In that case, it could still be a contract in restraint of trade or commerce, and that would make it illegal. See Tex. Bus. & Com. Code § 15.05. Or at the least, it would be subject to some reasonableness limitation.

I suppose you could argue that a restriction on soliciting employees is neither a restraint of trade and commerce nor a non-compete. But in that case, there would be no reasonableness limitation, and that seems like an untenable result. Are you saying that a restriction on soliciting employees could have a ten-year term, or no time limit at all? It makes more sense to treat a restriction on soliciting employees as a form of non-compete—as the Texas Supreme Court did in Marsh—which means it has a reasonableness limitation. 

But what about those Texas decisions that said a restriction on soliciting employees is not a restriction on competition?

Some of those cases were decided before Marsh. So you could argue they were implicitly overruled by the contrary statement in Marsh.

Even aside from that, I don’t find the reasoning of those cases persuasive.

In the Totino case, the court considered whether a non-recruitment covenant was a prohibited contract “in restraint of trade or commerce.” The court held it was not, reasoning that a non-recruitment agreement is more like a nondisclosure covenant, which is not a non-compete. Totino, 1998 WL 552818, at *8-9.

Non-recruitment agreements, the court said, “do not necessarily restrict a former employee’s ability to compete with his or her former employer and, like nondisclosure covenants, should not significantly restrain trade.” The court added that an agreement not to solicit employees does not restrict those employees from leaving but only bars the former employee from soliciting them. Id. at *9.      

The reasoning is flawed. First, the premise that a nondisclosure agreement is not a restraint of trade or commerce is too broad. A confidentiality agreement can be so broad that it functions as a non-compete. See Thoroughbred Ventures, LLC v. Disman, No. 4:18-CV-00318, 2018 WL 3752852, at *4 (E.D. Tex. Aug. 8, 2018) (nondisclosure agreement that has the practical effect of preventing the former employee from using general knowledge, skill, and experience should be treated as a non-compete).

Second, even if we assume nondisclosure agreements are not non-competes, comparing a non-recruitment restriction to a nondisclosure clause is inapt. The primary purpose of a confidentiality agreement is to protect confidential information; the effect on competition is incidental. But as noted earlier, with an agreement not to solicit employees, the primary purpose is to protect the employer from competition.

That leads me to the third flaw in the Totino reasoning. The argument that the non-solicitation agreement is not an absolute bar to employees leaving goes to the reasonableness of the restriction, not whether it restrains competition. A contract term does not have to absolutely prohibit competition to implicate the reasonableness concerns of the non-compete statute. Restraining competition—to some degree—should be enough.

I’m not saying that a restriction on soliciting employees is prohibited. I’m just saying that it should be treated as a non-compete subject to the limitations of the non-compete statute, particularly the reasonableness requirement.

Ultimately, I think that was the real rationale of Totino—that the restriction was reasonable. It would have been better for the court to say, “yes, a restriction on soliciting employees is a restraint on competition, but we find this one to be reasonable.”

That was essentially what the judge did in Everett Financial, Inc. v. Primary Residential Mortgage, Inc., No. 3:14-CV-1028-D, 2016 WL 7378937 (N.D. Tex. Dec. 20, 2016). The reasonableness requirement of Section 15.50(a) applies to employee non-solicitation agreements, the court said, citing Marsh. Id. at *8. But the court held that the restriction on solicitation at issue was reasonable in scope, despite the lack of a geographic limitation, and did not have to be limited to soliciting employees with whom the former employee had “personal contact.” Id. at *8-9.

Bottom line: Totino does not provide a solid basis for holding that a restriction on soliciting employees is not a non-compete, especially in the face of the contrary statement in Marsh. The better view is that a restriction on soliciting employees is a form of non-compete, and therefore it must meet the reasonableness requirement of the Texas non-compete statute. (Plus, Totino was an unpublished opinion in an appeal that was later dismissed, if you care about that sort of thing.)

Totino does make a fine cheap frozen pizza though. Law school students take note.

(Thanks to Dallas lawyer Sean Lemoine for pointing out Totino and its progeny, even if he incorrectly thinks Totino was right, and to Houston lawyer Leigh Freeman for pointing out the Thoroughbred Ventures case.)

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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.

Wolfe’s Pattern Jury Charge for Texas Non-Compete Cases

Wolfe’s Pattern Jury Charge for Texas Non-Compete Cases

Predicting the cost of litigation

Litigators usually wince when clients ask how much a lawsuit is going to cost. It’s kind of like asking “how much will it cost to invade Iraq?” You can’t control what other people do, and you don’t know how long the project will drag on.

For this reason, I’m going to start telling clients “on average, a lawsuit will cost you $10,000 a month until you settle.”

I think this gets the point across better than hemming and hawing about how the total expense is hard to predict. Of course, the $10,000 is just a rule of thumb. You can probably double or triple that for some law firms (you know the kind of firms I’m talking about). But the point is that the cost is largely a function of when the case settles.

And the case will settle, you can tell clients. It will not go to trial.

Ok, that’s a little too strong. But the vast majority of cases will settle before going to trial. We’re talking over 90%. Probably 95%. Maybe even 99%.

You get the point.

Why non-compete cases don’t go to trial

Trials in non-compete lawsuits are even more unusual. There are several reasons for this.

First, in many non-compete lawsuits there is a temporary injunction hearing in the first month or so. The judge’s decision at that hearing will often lead to the case settling, especially if the judge orders that the employee can’t work for the competitor that just hired her.

Second, most cases take at least a year to get to trial. Two years is more likely. Most non-competes expire in one or two years. You do the math.

Third, and this is where it gets a little more esoteric, in most non-compete lawsuits the key issue is enforceability of the non-compete, and that issue is typically seen as a “question of law” (whatever that means). A trial is not required to decide a question of law.

Notice these reasons had a lot of “many,” “often,” “typical,” etc. That’s because of course I’m generalizing. There are plenty of exceptions.

But as a general rule of thumb, non-compete lawsuits just don’t go to trial.

What happens when non-compete cases go to trial?

Of course, non-compete cases sometimes go to trial.

I had one of these a few years back. Some of you might remember my post where I talked about asking the owner of the company what he thought a reasonable time period for the non-compete would be, and he said “when hell freezes over.” That might give you a little insight into why the case went to trial.

When that happens, what are the questions that will go to the jury?

In most non-compete cases, there will be some dispute about whether the non-compete is enforceable as written. This was the subject of my very first blog post, What a Litigator Looks For in the Typical Texas Non-Compete.

Sometimes there will also be a dispute about whether the employee violated the non-compete as written. This is especially true when the non-compete prohibits solicitation of customers or employees. “Solicit” is a word built for factual disputes, which is why my Plain-Language Non-Compete doesn’t rely solely on the word.

But in many cases, it will be undisputed that the employee violated the non-compete—at least a little—as written. In those cases, the two key questions are:

(1) is the non-compete enforceable as written?

(2) if yes, what is the amount of damages caused by the breach?

(If the non-compete is unenforceable as written, there will be no damages. See Tex Bus. & Com. Code § 15.51(c).)

The second question will typically go to the jury (assuming there is admissible evidence establishing an amount of damages), and the standard breach of contract damages question from the Texas Pattern Jury Charge is probably adequate in most cases.

The first question is trickier. Does enforceability go to the jury?

In many non-compete cases, one side—or sometimes both—will move for summary judgment on whether the non-compete is enforceable as written. If the court grants summary judgment that the non-compete is or is not enforceable, then the issue won’t go to the jury (unless the judge changes her mind).

But what if nobody moves for summary judgment on enforceability, or if the judge denies summary judgment on the issue?

In that case, I say you need to submit enforceability to the jury, but I will concede this is more art than science. If you need ideas you can use Wolfe’s Pattern Jury Charge for Texas Non-Compete Cases:

I will also concede that you may get a funny look from the judge when you ask for a jury question on enforceability of the non-compete. “Counsel, isn’t that a question of law?”

And there it is, the “question of law” question. Be aware, there are dozens of Texas cases that say enforceability of a non-compete is a question of law. But those cases are largely wrong, for reasons I explain in Blown Call: The Thing Texas Courts Get Wrong About Non-Competes.

So the short answer to the judge is “no.” But you’ll have to explain.

Scenarios for submitting enforceability to the jury

There are several different ways the issue can arise.

Let’s say you represent the employer who is trying to enforce the non-compete against a former at-will employee.

DANGER! DANGER!

You must be careful in this situation. You might intuitively think that the burden is on the employee to prove unenforceability as a defense to the claim for breach of the non-compete. WRONG!

Take a look at Section 15.50(b) of the Texas Business and Commerce Code. If the non-compete is tied to a “personal services” agreement, e.g. the typical at-will employment agreement, then the burden is on the employer to establish that the non-compete meets the criteria specified in Section 15.50, i.e. that that the non-compete is ancillary to an otherwise enforceable agreement and is reasonable.

I think my smarter appellate lawyer friends will confirm that if a party bears the burden of proof on an issue, and if there is conflicting evidence on that issue, then the party with the burden of proof must submit a question to the jury on the issue. If it doesn’t, it waives the issue.

Sure, you could take a chance, not ask for a question on the issue, and then argue post-verdict that the enforceability of the non-compete is a question of law. And the trial court judge might agree with you. But if there was any evidence during trial that the non-compete was unreasonable, the judge would be wrong. And you’ve just given the employee a good issue to appeal.

Now let’s suppose you represent the employee in this situation. You don’t have the burden of proof on enforceability, so you can just sit back and watch the employer waive the issue, right?

I wouldn’t recommend that. The problem is that many Texas judges will incorrectly think that enforceability of the non-compete is a question of law, even though the statute is quite clear that the employer has the burden of proof on the issue.

If you represent the employee and you ask for a question on reasonableness of the non-compete, you may get it. And you may have a better chance with the jury on reasonableness than you do with the judge.

On the other hand, if the judge denies your requested question on enforceability, you’ve just bought yourself an insurance policy—in the form of reversible error—if the verdict and judgment go against you—assuming there is conflicting evidence on the issue.

That last proviso is important. If you represent the employee, you must be sure to offer evidence concerning the reasonableness of the non-compete.

For example, if it’s a three-year non-compete, ask your client “would the company’s confidential information still have any value after two years?” In most cases the answer will be no. If the geographic area of the non-compete is the State of Texas, ask your client “did your actual sales territory cover the whole State of Texas?” Again, the answer is probably no.

These are just examples, but you get the idea.

The last thing you want to do is blow it at trial after your client has spent $10,000 a month (or more) to get there.

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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.

My Big Fat Texas Non-Compete Paper

My Big Fat Texas Non-Compete Paper

I had a dream. I had everything I wanted.

But it wasn’t a Billie Eilish song. It was finishing and publishing my non-compete paper, Wolfe on Texas Non-Compete Litigation -or- My Big Fat Texas Non-Compete Paper.

And now the dream is a reality. I released the “beta” version in connection with my webcast for UT Law CLE, Non-Compete Essentials in February 2021. (You can register to watch that great webcast here, by the way.)

Since then, I’ve cleaned up some errors (gasp!), inserted a short new section, and added some recent case cites. You can download the paper for free, but first the usual disclaimers.

Number one, I’m not your lawyer (unless you have a signed engagement agreement with my firm).

Number two, every situation is different, so you should not rely on my paper as legal advice, and if you’re not a lawyer, you should definitely consult with your own lawyer.

And number three, any opinions expressed in the paper are solely my own, not those of my law firm or clients.

Of course, you knew all that, but it doesn’t hurt to say it. See my Ethics Tips for Law Bloggers.

If you’re one of my regular Fivers, you’ve probably seen some of the content in the paper before, but I knew it would be valuable to consolidate my non-compete material in one place, which you can download here:

I hope you find it useful.

As big as it is, there is still plenty of room for expansion. There are plenty of Texas non-compete topics I have not yet covered in this version. Future versions will include sections on:

  • Non-competes for physicians (the Texas statute has special provisions for this)
  • Employee hardship as part of the “balance the equities” element of injunctive relief
  • Non-competes for insurance agents

And if there’s another Texas non-compete topic you’d like to see in a future version, what should you do?

Just let me know.

Duh.

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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.

Let the Light In: The Legacy of the Most Famous Texas Non-Compete Case

Let the Light In: The Legacy of the Most Famous Texas Non-Compete Case

When I started practicing law in Texas in the 90s, the key non-compete case was Light v. Centel Cellular Company of Texas, 883 S.W.2d 642 (Tex. 1994). Light held that a non-compete in an at-will employment agreement was unenforceable because it was not “ancillary” to an otherwise enforceable agreement, as required by the Texas non-compete statute. We spent the next decade arguing about what that means.

Today, Light is not such a big deal, as subsequent decisions have largely abandoned it. You might say it’s the Pennoyer v. Neff of Texas non-compete law, in that it presents a dilemma for anyone teaching the subject. Does Light only deserve a brief mention, considering it is now largely obsolete, or is it worth getting down in the weeds and understanding all of its nuances and the subsequent decisions that tried to apply it?

I’m opting for a middle approach. You can find other articles that get down in the weeds. And sure, it would be fun to chronicle the 90s turf battle between the Texas Supreme Court and the Texas legislature over non-competes (see the snark in Light‘s footnote 7, for example).

But I’m just going to focus on three key hurdles Light created for enforcement of non-competes: (1) the “illusory contract” problem; (2) the “give rise to” requirement; and (3) the “designed to enforce” requirement.

The Texas Supreme Court would later knock down two of these hurdles, but one remains (maybe).

The “illusory contract” problem

Let’s start with the illusory contract problem. Light reasoned that an agreement to provide at-will employment cannot not be the “enforceable agreement” in “ancillary to an otherwise enforceable agreement” because the agreement is not really enforceable by the employee. “Describing something as an at-will obligation is nonsensical,” Light said. Id. at 645 n.7.

You can see the logic. If the employer can fire the employee at any time for any reason or for no reason, then what rights does the employee actually have to enforce? Thus, Light said that an agreement to provide at-will employment cannot be the “otherwise enforceable agreement” to satisfy the “ancillary to an otherwise enforceable agreement” requirement. See id. at 644-46.

Did this mean an at-will employee cannot have an enforceable non-compete?

No. Light made it clear that an otherwise enforceable agreement “can emanate from at-will employment so long as the consideration for any promise is not illusory.” Id. at 645.

This theorizing about illusory promises was all well and good, but employers just wanted to know, how do we meet this “ancillary” requirement if an agreement to provide at-will employment is illusory? The Light opinion gave them an answer in its famous footnote 14: an employer’s agreement to provide an employee confidential information or trade secrets can be the “otherwise enforceable agreement.”

Predictably, that is exactly how employers tried to make non-competes stick after Light. The standard form of non-compete would have a non-compete tied to a confidentiality agreement.

But there was a problem, one based on the reasoning of Light itself. If the employment is at will, isn’t the employer’s agreement to provide the employee confidential information also “illusory”?

That objection was correct in theory, but unworkable in practice. What are we supposed to do, exasperated employers asked, draft the contract to require handing the employee a stack of confidential documents at the moment she signs the contract? And believe me, there was much confusion and uncertainty.

The Texas Supreme Court later cleared this up. The Alex Sheshunoff case solved the “illusory contract” problem by holding that an agreement to provide confidential information to an at-will employee becomes an “otherwise enforceable agreement” when the employer performs its obligation to provide the confidential information. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 655 (Tex. 2006). Thus, the “illusory contract” problem addressed in Light was largely solved.

And this was probably a good thing. Like I said, the “illusory contract” point made some sense in theory, but it caused a lot of confusion, which Sheshunoff cleared up.

The “give rise to” requirement

Light also grappled with the meaning of “ancillary.” What does it mean for a non-compete to be “ancillary” to an otherwise enforceable agreement?

We could look up “ancillary” in a dictionary, but I say it’s more important to understand the purpose of the requirement. So let’s step back and ask a more fundamental question: what is the point of the “ancillary” requirement in the first place?

Put simply, the purpose of the “ancillary” requirement is to balance two interests: the interest in enforcing the contracts of private parties and the interest in encouraging free competition.

Let’s illustrate. Imagine you’re an ice delivery business in the 1920s making huge profits. (See Jurassic Non-Competes.) The last thing you want is for a salesman to quit and start selling ice to your customers. So any time an employee quits, you offer to pay him $500 in exchange for agreeing not to compete for a year.

That would be a “naked” non-compete, i.e. a non-compete that is not “ancillary” to an otherwise enforceable agreement, and we don’t want that. In that scenario, we give more weight to the interest in free competition than the interest in enforcing contracts.

So, the “ancillary” requirement has to mean something more than requiring the non-compete in exchange for some benefit provided to the employee. But what?

Citing to the US Supreme Court, the Restatement (Second) of Contracts, and its own decision in DeSantis v. Wackenhut, the Texas Supreme Court reasoned in Light that “ancillary” means two things:

(1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee from competing; and

(2) the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement.

Id. at 647.

To illustrate the first prong, the “give rise to” requirement, Light cited the example already discussed, a confidentiality agreement. In that case, the confidential information is the consideration given by the employer. Providing confidential information to the employee “gives rise to” the employer’s interest in restraining competition, at least where the employee could use the confidential information to compete. See id. at 647 n.14.

Personally, I think Light got this point exactly right. “Ancillary,” in this context, has to mean something more than just related. The non-compete will always be related to some benefit provided to the employee; otherwise, it would be void for lack of consideration under basic contract law principles.

But Texas employers didn’t like this “give rise to” requirement. Yes, this requirement was fairly easy to apply in the typical case where the non-compete was tied to a confidentiality agreement, but in other contexts it presented more of a problem. For example, suppose an employer requires a non-compete as part of an agreement to provide stock options to a trusted executive. It’s hard to see how the stock options “give rise to” an interest in restraining the executive from competing.

Put it this way: Does competition from an executive who has stock options do more damage than competition from a former executive who doesn’t have stock options? I don’t think so.

Still, businesses don’t want employees with stock options to compete, and the Texas Supreme Court likes businesses, so the court jettisoned Light’s “give rise to” requirement in Marsh USA Inc. v. Cook, 354 S.W.3d 764, 773-76 (Tex. 2011). Instead of requiring the consideration to “give rise to” the employer’s interest in restraining competition, Marsh held that it is sufficient for the consideration to be “reasonably related” to an interest worthy of protection, such as confidential information or goodwill. Id. at 775. Applying this new “reasonably related” test, Marsh held that stock options were reasonably related to the protection of goodwill. Id. at 777.

“Reasonably related” is pretty weak sauce. Personally, I think getting rid of the “give rise to” requirement was a mistake, for reasons already covered. Plus, the majority opinion in Marsh is heavy on economic theory and light on practical experience. (For a look at how non-competes actually work in practice, see The Problem With Non-Competes.)

But I’ll bet most lawyers applauded Marsh, because applying the “give rise to” requirement outside the typical confidentiality agreement scenario was such a headache. And I will give Marsh its due: it at least had the benefit of making the “ancillary” requirement simpler to apply.

Still, Marsh did not completely extinguish Light.

The “designed to enforce” requirement

Remember, Light also said “the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement.” In the typical case where the non-compete is tied to a confidentiality agreement, the non-compete meets this requirement because it is designed to enforce the employee’s promise not to use or disclose the employer’s confidential information. At least, that’s the theory.

So, in the typical case involving a confidentiality agreement, Light’s “designed to enforce” requirement will usually be satisfied.

But what about other types of “otherwise enforceable agreements”? Do they still have to meet Light’s “designed to enforce” requirement? Or did Marsh abolish that requirement too?

That was the issue in Titan Oil & Gas Consultants, LLC v. Willis, No. 06-20-00026-CV, 2020 WL 6878418 (Tex. App.—Texarkana Nov. 24, 2020, no pet. h.). In Titan, the employer argued that Marsh overruled Light’s “designed to enforce” requirement, but the Court of Appeals disagreed. Marsh specifically stated that it was only addressing the “give rise to” prong of Light, the Titan court said, not the “designed to enforce” prong. Id. at *5.

The Court of Appeals was therefore bound to follow the “designed to enforce” requirement. “Neither Marsh nor any other Texas Supreme Court that has considered Light has overruled Light’s designed-to-enforce element of an enforceable covenant not to compete,” the court said. And it is not the function of a court of appeals to abrogate or modify Texas Supreme Court precedent. Id. at *6.

So, Light’s “designed to enforce” requirement survives. For now.

Does the requirement make any practical difference? It did in Titan, but the circumstances there were unusual. The employee signed a contract with one company, Titan, but received the confidential information from a different company, Apache, and the non-compete only restricted the employee from working for Apache. The court reasoned that a restriction on working for Apache was not designed to enforce the employee’s promise not to disclose Apache’s confidential information. Id. at *6.            

Outside of oddball situations like Titan, the “designed to enforce” requirement probably doesn’t do much for the employee. But lawyers in Texas non-compete cases should at least be aware of the requirement and consider whether the contract meets it.

______________________________

Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021. This post is dedicated to Bob Schneider.

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.

The Most Common–and Easily Fixable–Mistake in Texas Noncompete Litigation

The Most Common–and Easily Fixable–Mistake in Texas Noncompete Litigation

I made a big mistake last Friday. I opened my Twitter feed before watching the season finale of The Mandalorian with my kids. Y’all can guess what happened.

Speaking of spoilers, here’s a SPOILER ALERT: If you would rather learn for yourself the most common and easily fixable mistake in Texas non-compete litigation, I recommend first litigating a bunch of non-compete cases in Texas and getting them wrong. But if you just want the answer, read on.

And if you’ve watched my YouTube video The Reasonable Time Period Requirement for a Texas Non-Compete, you probably already know the answer.

As that video hints, the most common and easily fixable mistake lawyers make in Texas non-compete litigation is failing to offer evidence—not just argument—regarding the reasonableness of the non-compete’s time period.

Fortunately, this is easily corrected. Just offer testimony from your client explaining why the time period is or is not longer than necessary to protect the company’s confidential information and/or goodwill with customers (depending on which side you’re on). And make sure the testimony is specific, not conclusory.

Even better, offer expert testimony on this issue. In most cases, your client or client representative probably has enough experience in the industry to qualify as an expert, so you won’t need to hire one. For example, if you represent a former employee who has a two-year non-compete, offer expert testimony that the employer’s confidential information becomes stale within a year, or that goodwill with customers is likely to dissipate in a year.

This is sure to draw an objection, but if the witness has significant experience in the industry and gives specific reasons for the opinion, what’s the objection?

You may also draw an objection that reasonableness is a question of law, but that’s wrong (sort of), as I explained in Blown Call: The Thing Texas Courts Get Wrong About Non-Competes.

Anyway, fact or opinion testimony should, at a minimum, create a fact issue regarding the reasonableness of the time period, and thus, the enforceability of the non-compete.

And yet, lawyers in Texas non-compete litigation hardly ever do this.

(Reminder: This is not legal advice for your case. Every case is different, and there may be valid strategic reasons not to offer such evidence in a particular case.)

I’ve handled a lot of non-compete disputes, and in my experience, lawyers on both sides rarely offer evidence about the reasonableness of the non-compete’s time period. And expert testimony on the issue is even more rare.

Most of the time, reasonableness of the time period is an afterthought. At most, the lawyers will offer argument about it, rather than evidence, and cite a few cases.

Why is that?

Let’s back up a bit to put this problem in context.

Enforceability is almost always a key issue in a non-compete lawsuit. In the typical case where an employer sues a former employee to enforce a non-compete, the employer has the burden to prove that the non-compete is enforceable. See Tex. Bus. & Com. Code § 15.51(b). That includes proving that the non-compete is reasonable in time period, geographic area, and scope of activity restrained. Tex. Bus. & Com. Code § 15.50(a).

One caveat: in a temporary injunction hearing, it is debatable whether the judge should address enforceability of the non-compete. On the one hand, likelihood of success on the merits is one of the elements required for a temporary injunction. See, e.g., Tom James of Dallas, Inc. v. Cobb, 109 S.W.3d 877, 884 (Tex. App.—Dallas 2003, no pet.).  On the other hand, the court does not decide the “ultimate issue” of enforceability at the temporary injunction stage. Id.

Let’s put that complication aside and assume that enforceability of the non-compete is somehow an issue before the court, whether it’s a TCPA motion to dismiss, a temporary injunction, a summary judgment motion, or at trial.

In that case, the employer needs to offer evidence that the time period is reasonable. Otherwise, the court may rule that the employer failed to meet its burden of proof. And if you represent the employee, you should offer evidence that the time period is unreasonable, even if you don’t have the burden of proof.

So, for example, even if the time period is only one year, evidence that one year is longer than necessary to protect the employer’s confidential information or goodwill may be enough to prove that the non-compete is unenforceable.

That’s what happened in CDX Holdings, Inc. v. Heddon, No. 3:12-CV-126-N, 2012 WL 11019355 (N.D. Tex. March 2, 2012). In that case, the court held that the plaintiffs failed to meet their burden to show one-year limitation was reasonable, where there was testimony that the information was confidential and would be valuable to competitors, but there was also testimony that the information was “continually changing and updated” and had a “short shelf life.” Id. at *9.

I don’t know if that was the right factual determination, but the approach in CDX Holdings was correct. The court should look at the evidence to decide whether the time period is reasonable.

That is not what usually happens. Here’s the typical scenario. The time period of the non-compete will be less than five years. The employer’s counsel will cite Texas cases for the “Five-Year Rule,” which says that Texas courts have repeatedly upheld non-competes with time periods of two to five years. The employee’s counsel will then make some argument—but not offer any evidence—that this case is different for some reason. In most cases, if the issue goes up on appeal, the Court of Appeals will cite the Five-Year Rule and say the time period was reasonable.

Funny thing about the Five-Year Rule, though: when you investigate its origins, you find that the first Texas case that cited it basically just made it up. I explained this in What is a Reasonable Time Period for a Texas Non-Compete? But the rule has now been repeated so many times that it has become a sort of self-fulfilling prophecy.

Here’s another funny thing about the Five-Year Rule: if you look at the opinions that cite it, very few—if any—are cases where there was conflicting evidence about the reasonableness of the time period. (Or if there was conflicting evidence, the opinion ignores it.)

Let’s look at a recent example.

In Reilly v. Premier Polymers, LLC, No. 14-19-00336-CV, 2020 WL 7074253, at *1-2 (Tex. App.—Houston [14th Dist.] Dec. 3, 2020, no pet. h.) (mem. op.), a commodity polymers company sued a former sales manager and his new employer, claiming breach of contract, tortious interference, and misappropriation of trade secrets. The court held that the 18-month period of the manager’s non-solicitation covenant was reasonable, citing the usual suspects for the Five-Year Rule. Id. at *10-11.

Curiously, the opinion did not cite any evidence from the record about whether 18 months was longer than necessary to protect the employer’s confidential information, goodwill, or other business interest.

So I looked at the Appellants’ Brief (at pp. 41-43) and the Appellee’s Brief (at pp. 35-36) to see if the parties cited any evidence about whether 18 months was reasonable. Nope.

Instead, the defendants argued that the 18-month period was punitive, and therefore unreasonable, because the agreement also provided that employees terminated for reasons other than for “cause” were only subject to a one-year non-solicitation restriction. 2020 WL 7074253 at *11. In effect, the agreement imposed an additional six months of non-solicitation as a punishment for employees who quit, the defendants argued.

That sounds like a plausible argument to me, but the defendants cited no case law to support it, and the plaintiff attacked it as a “made-up rule.” The Court of Appeals sided with the plaintiff, declining to adopt the defendants’ proposed standard, “particularly where the 18-month period at issue is well-within what other courts have deemed reasonable.” Id.

Thus, as in most Texas non-compete lawsuits, it appears neither side offered any evidence about whether 18 months was longer than necessary, and the Court of Appeals decided the case based purely on argument and case law, without considering any evidence in the record.

But what if the defendants had offered evidence?

Let’s say Reilly, who worked as a salesperson and regional manager for the polymers company for seven years, testified as an expert that a one-year non-solicitation covenant would be sufficient to protect the company’s confidential information (if any) and customer goodwill, giving specific reasons based on his familiarity with the company, its customers, and the industry. Would that have been sufficient evidence that 18 months was unreasonable, and the restriction therefore unenforceable?

We may never know, but you should try it. This is the way.

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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.

What Is a Reasonable Time Period for a Texas Non-Compete?

What Is a Reasonable Time Period for a Texas Non-Compete?

Baseball legend Yogi Berra reportedly said “I usually take a two-hour nap from one to four.” He also said “the future ain’t what it used to be.” Obviously the guy had a unique sense of time.

Time is on my mind because of this week’s blog topic: What is a reasonable time period for a Texas non-compete?

For almost a century, Texas case law has required that a non-compete be limited to a reasonable time period, and in 1989 the legislature codified this requirement in the Texas Covenants Not to Compete Act. The time period must be no longer than necessary to protect the employer’s goodwill or other business interest (usually confidential information). See Tex. Bus. & Com. Code § 15.50(a). And in the typical context of an employment contract, the burden is on the employer to prove the time period is reasonable. See Tex. Bus. & Com. Code § 15.51(b).

The time period of a Texas non-compete must be reasonable. That much is clear. But what does “reasonable” mean in practice? Is there any rule we can discern from the decades of case law?

Unfortunately, the Texas case law applying the reasonable time period is remarkably unsatisfying. You’re just not going to find much analysis defining what makes a time period reasonable or not. The best I can do to synthesize a “rule” from the cases is the “Five-Year Rule.”

The Five-Year Rule says that when addressing the reasonable time period requirement, the court will declare that Texas cases have upheld non-competes of two to five years, and if the time period at issue is five years or less, the court will then find the time period reasonable, without discussing any specific evidence.

I don’t find the Five-Year Rule very helpful or persuasive. As the statute indicates, the question is whether a shorter time period would be sufficient to protect the interest at issue, which is usually the employer’s confidential information and/or goodwill.

I propose an alternate rule, the Wolfe Rule. The Wolfe Rule says that when there is conflicting evidence about whether the time period of a non-compete is reasonable, it presents a fact issue for the jury.

Now, you’re not going to find the Wolfe Rule stated explicitly in any Texas cases, but it is the correct rule. I would even go as far as saying it is obviously the correct rule, and the fact that Texas courts have not expressly stated it presents something of a mystery. And one more thing: the Wolfe Rule does not necessarily conflict with the Five-Year Rule.

How can all of this be true?

To understand, first we need some historical perspective.

We’ll start in the Ice Age. I call it that because you could write the early history of Texas non-compete law based on cases involving the ice delivery business. I wrote about one of these cases, City Ice Delivery Co. v. Evans, 275 S.W. 88 (Tex. App.—Dallas 1925, no writ), in Jurassic Non-Competes.

There were at least four more Texas non-compete cases about ice delivery in the 1920s alone. Oak Cliff Ice Delivery Co. v. Peterson, 300 S.W. 107 (Tex. Civ. App.—Dallas 1927, no writ); Carpenter v. Southern Properties, Inc., 299 S.W. 440 (Tex. Civ. App.—Dallas 1927, writ ref’d); Texas Ice & Cold Storage Co. v. McGoldrick, 284 S.W.615 (Tex. Civ. App.—San Antonio 1926, writ ref’d); Bettinger v. North Fort Worth Ice Co., 278 S.W. 466 (Tex. Civ. App.—Fort Worth 1925, no writ).  

You can find in these cases many of the principles that still apply in Texas non-compete law today, including the requirement that the non-compete must have a reasonable time period. For example, in Carpenter v. Southern Properties the court said a non-compete can only prohibit competition “for a reasonable space of time” after employment, and the employer has the burden to prove that the non-compete is reasonable “in its duration of time.” 299 S.W. at 443.

The non-compete in Carpenter had a two-year time period. Id. at 442. Was this reasonable? “[T]he trial court has found that the negative covenant sought to be enforced was both reasonable and necessary,” the court said, “and we are not prepared to say that there is not substantial evidence sustaining such finding.” Id. at 444.

That was it. Nothing about what the evidence regarding the time period was. Nothing about why the evidence established that two years was reasonable. And the depth of analysis of the reasonable time period requirement in the next century of Texas case law would not significantly improve.

By 1960, it was well established that a non-compete should be limited “for such a time as is reasonably necessary to protect the employer’s business and good will,” and that the “burden of proof is on the former employer” to establish “by satisfactory evidence” the reasonableness of the non-compete. Weber v. Hesse Envelope Co., 342 S.W.2d 652, 654-55 (Tex. Civ. App.—Dallas 1960, no writ).

And by that time Texas courts had moved from ice delivery to a more fascinating business: envelope sales. Yes, Weber was about a two-year non-compete signed by an envelope salesman. No word on whether Weber also owned a beet farm.

This battle in the great Metroplex envelope wars was tried to the bench, the salesman was the only witness, and the trial court declared the non-compete enforceable. Id. at 653. As to the two-year time period, the Court of Appeals said only that there was “ample support in the evidence” for the trial court’s implied finding that the two-year period of the non-compete was reasonable. Id. at 655.

That was it. The court didn’t cite any of the “ample” evidence or explain how the evidence established that two years was reasonable.

Are you detecting a pattern?

About 20 years later, the superficial treatment of the reasonable time period requirement got worse in AMF Tuboscope v. McBryde, 618 S.W.2d 105 (Tex. App.—Corpus Christi 1981, writ ref’d n.r.e.). That case addressed another two-year non-compete, this one involving the oilfield pipe inspection business. On an application for temporary injunction, the trial court found the time period unreasonable. Id. at 108.

The Corpus Christi Court of Appeals disagreed. The court did not cite any evidence from the record on the reasonableness of the time period, but it stated that the employees had cited no case authority for the proposition that two years is unreasonable. Id. The court then declared: “Two to five years has repeatedly been held a reasonable time in a noncompetition agreement.” Id.

This appears to be the earliest statement of the Five-Year Rule.

AMF Tuboscope cited three cases in support of the Five-Year Rule, but curiously, none of those cases supported the rule:

  • In Arevalo v. Velvet Door, Inc., 508 S.W.2d 184, 185 (Tex. Civ. App.—El Paso 1974, writ ref’d n.r.e.), there was a three-year non-compete but “no contention that the time or space limitation is unreasonable.”
  • In Electronic Data Systems Corp. v. Powell, 508 S.W.2d 137, 138-40 (Tex. Civ. App.—Dallas 1974, writ ref’d n.r.e.), the court upheld the limited scope of the trial court’s temporary injunction. The non-compete at issue had a three-year period, but the reasonableness of that time period was not one of the issues raised in the case.
  • As we have seen, in Weber v. Hesse Envelope, the court said there was ample evidence to support finding the two-year period reasonable, but the opinion said nothing about five years.

You read that right. None of these cases involved a five-year non-compete. And only one of them even addressed whether the time period at issue was reasonable.

So, while I hate to be harsh, the fact is, the statement of the Five-Year Rule in AMF Tuboscope was at best inaccurate, and at worst dishonest.

Almost 30 years later, the Houston Court of Appeals repeated this error verbatim in Gallagher Healthcare Insurance Services v. Vogelsang, 312 S.W.3d 640 (Tex. App.—Houston [1st Dist.] 2009, pet. denied), a case involving a two-year non-compete in the insurance brokerage business. The trial court granted summary judgment that the non-compete was unenforceable, but the Court of Appeals reversed. Id. at 642-43.

Gallagher reasoned that the two-year period was “not unreasonable” because the evidence showed that insurance contracts lasted for a year. Id. at 655. That at least reflected some analysis based on the evidence.

But then the court declared, “Two to five years has repeatedly been held as a reasonable time in a noncompetition agreement,” citing the same three cases cited in AMF Tuboscope. Id.

Thus, not only did Gallagher repeat the same error made in AMF Tuboscope, it did so while addressing a two-year non-compete.

But once the Five-Year Rule was expressly stated in at least two opinions, Texas courts started to invoke it almost routinely, and not just for two-year non-competes.

For example, in Salas v. Chris Christensen Systems, Inc., No. 10-11-00107-CV, 2011 WL 4089999 (Tex. App.—Waco Sept. 14, 2011, no pet.), the court considered the reasonableness of a five-year non-compete in the dog grooming products industry.

Salas did not cite any evidence about the reasonableness of the time period. Instead, it simply said “Texas courts have held that two to five years is a reasonable time restriction in a non-competition agreement,” citing Gallagher and the same three cases cited by Gallagher and AMF Tuboscope. Id. at *19. “Given this,” the court said, “we cannot say that the Agreement’s five-year restraint is per se unreasonable.” Id.

This, of course, misstated the issue. The question should have been whether the employer met its burden to prove that the five-year period was reasonable, not whether a five-year period was “per se” unreasonable.

But the damage has been done. Since Salas, both state and federal courts in Texas have continued to cite the Five-Year Rule, even when the non-compete at issue has a time period of just one or two years:

All of these cases cite the Five-Year Rule uncritically, perhaps without realizing that AMF Tuboscope pretty much just made up the rule, almost 40 years ago.

But in a sense, the Five-Year Rule has become a self-fulfilling prophecy. Now that so many Texas courts have cited and applied it, it has effectively become true.

So that solves the mystery of how Texas courts came to adopt the Five-Year Rule, at least in part.

But is it the right rule?

I’ll cover that in Part 2. It ain’t over til it’s over.

__________________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. Thomson Reuters named him a 2020 Texas Super Lawyer® for Business Litigation.

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.

Drafting the Bullet-Proof Non-Compete: Part 3

Drafting the Bullet-Proof Non-Compete: Part 3

This series has focused on drafting an enforceable Texas non-compete, because that’s where I practice, but if you’re drafting a non-compete for a company in the oil and gas industry, you may need to consider other states, especially Louisiana. Check out Drafting Enforceable Non-Competes in the Energy Industry for some good tips.

But back to Texas.

In Part 1 we saw how to draft a Texas non-compete to meet the once-elusive “ancillary to an otherwise enforceable agreement” requirement.

In Part 2 we saw how to meet the “reasonableness” requirement.

You could stop there and have a pretty decent Texas non-compete, but do you need a separate non-solicitation agreement? And what about all that additional boilerplate you often see in non-competes? Do you need that?

I’ll answer those questions in this third and final installment.

10. Does the agreement need to restrict both competition and solicitation?

This is kind of a trick question, because a restriction on soliciting customers is a restriction on competition. See Is a Non-Solicitation Agreement a Non-Compete? In other words, a “non-solicit” is subject to the same statutory requirements as a “non-compete,” at least in Texas.

Still, many non-competes have one section for restrictions on competition and another section restricting solicitation. This format is often unnecessarily duplicative. I think it is simpler to combine the two in one section.

But the substantive question remains, should the agreement restrict competition generally and solicitation specifically?

There is a case to be made for restricting competition and not getting into the messier issue of solicitation. The problem with a restriction on solicitation is that it almost always leads to factual disputes.

Suppose Dawn Davis leaves her sales position at Paula Payne Windows and goes to work for Real Cheap Windows. The next week, her friend and customer Bob Builder calls her up:

“Hey Dawn, how’s it going?”

“Pretty good, Bob, it’s been a busy week.”

“Oh really?”

 “Yeah, you may not have heard yet, but I left Paula Payne and went to Real Cheap.”

“Wow, I didn’t know that.”

“Well, Bob, I really like the value they provide for their customers.”

“That’s great. You know, I was going to order some more storm windows for that new subdivision project, can Real Cheap give me a good price on those?”

Did Dawn just “solicit” business from Bob? Would it make a difference if Dawn had made the call to Bob, just to chat? Would it make a difference if Dawn had not volunteered that she changed companies?

You can see how “solicitation” creates questions and uncertainty.

In contrast, it’s pretty easy to determine if an employee violates a restriction on “doing business” with a certain customer. If Dawn goes to Real Cheap and Bob then starts buying windows from Real Cheap, that’s “doing business.” We don’t have to get into the whole “solicitation” issue.

Given the kind of factual disputes that often come up, I don’t use the word “solicit” in my form. But I do include a restriction on “urging or causing” a customer to become a customer of the new company.

That, of course, does not entirely solve the problem, because you could have the same kind of factual disputes about “urging” or “causing.” But I think those terms are easier to apply than “soliciting.”

And I think there is some advantage to including a restriction on “urging or causing” in addition to the more general restriction on “doing business.”

11. Should the non-compete state that it is an “independent covenant”?

Yes. The employee will sometimes argue that she is excused from complying with the non-compete because the employer breached the employment agreement first.

To avoid or at least reduce the risk of this argument being successful, I include this clause in my form:

Even without such a clause, the employer could argue that the non-compete is an independent covenant because the employer’s breach of another clause—such as the obligation to pay a bonus or commission—could be separately compensated by damages. But expressly stating the parties’ intent to treat the non-compete as an independent covenant should remove any doubt. See Chambers v. Hunt Petroleum Corp., 320 S.W.3d 578, 584 (Tex. App.—Tyler 2010, no pet.) (clause should be treated as an independent covenant if “a breach may be compensated for in damages . . . unless this is contrary to the expressed intent of the parties”) (citing Centex Corp. v. Dalton, 840 S.W.2d 952, 956 (Tex.1992)). 

12. Should you have the employee stipulate that the non-compete is reasonable and can be reformed?

This is probably ineffective and unnecessary, but it doesn’t hurt, and it may carry some weight with a judge who is not sophisticated about non-competes.

Most non-competes contain some kind of stipulation that the restrictions are reasonable. In my personal opinion, courts should give these stipulations no weight, especially considering limitations on non-competes are a matter of public policy. But some judges might give some weight to the stipulation, and you might be able to use the stipulation to get the employee to admit the scope of the non-compete is reasonable.

It also doesn’t hurt to include a reformation and severability clause. This is probably unnecessary, because the Texas statute already says the court shall reform an overbroad non-compete. But again, it doesn’t hurt to include it.

So, my form includes the following:

13. Should the non-compete include an “ipso facto” clause granting an injunction?

This is a close call for me. Most non-competes contain stipulations designed to support the employer’s request for an injunction. I call this an “ipso facto” clause. Texas courts vary on whether an ipso facto clause has any effect. See Can a Non-Compete Grant an Injunction by Stipulation?

Personally, I don’t give any weight to a non-compete ipso facto clause. But not everybody agrees with me, and it probably doesn’t hurt to include one. Mine looks like this:

Again, my own view is that this kind of stipulation should have no legal effect, but if the non-compete has an ipso facto clause, I might cite it as at least one of my grounds for an injunction.

14. Should the non-compete include “non-circumvention” language?

Employees often try to “get around” non-competes. “Technically I’m not competing with my former employer,” you can imagine an employee arguing, “I’m just providing consulting services to an LLC that my cousin owns.”

That’s just one example, but you get the idea.

This kind of gambit to circumvent a non-compete is usually not persuasive. If the judge applies the plain, common-sense meaning of the non-compete, this type of argument by the employee should usually fail.

But of course judges don’t always do that, and in fairness to the employee, if the employer drafts the non-compete poorly and its plain language does not prohibit the thing the employee is doing, then that’s the employer’s problem. See, e.g., East Texas Copy Sys., Inc. v. Player, 528 S.W.3d 562, 567-68 (Tex. App.—Texarkana 2016, no pet.) (enforcing plain meaning that allowed employee to avoid non-compete by terminating his own employment without cause).

I try to head off any cleverly contrived arguments by the employee by including the following in my form:

The idea is to avoid any hyper-technical interpretation intended to get around the non-compete. I haven’t had occasion to test it in court yet, but I would rather have it than not.

15. Should the non-compete prohibit making plans to compete?

Hey, why not? My form includes the following:

This is something I came up with that, somewhat surprisingly, I have not seen in other non-competes.

It is common for an employee to make plans to compete while still employed by the employer. And Texas courts have said that making such plans—and even concealing them from the employer—is not a breach of the employee’s quasi-fiduciary duty to the employer. See Fiduciary Duty Lite: What Employees Can and Can’t Do Before Leaving.

The rationale of the employee fiduciary duty cases is employee mobility. But those cases don’t necessarily stop the employer from creating a contractual duty not to make plans or preparations to compete. So I include that commitment in my form.

It’s such a clever idea, I almost feel guilty.

Like I said at the start, I don’t even like non-competes. I think most employers would be better off focusing on keeping their best employees happy, rather than trying to keep their employees from running off with customers. See The Most Effective Form of Non-Compete in Texas (or Anywhere).            

But if you’re going to make an employee sign a non-compete, you might as well draft it as effectively as possible.

______________________________________

Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.

Drafting the Bullet-Proof Non-Compete: Part 2

Drafting the Bullet-Proof Non-Compete: Part 2

I decided to share my updated Plain-Language Non-Compete with the world, and not only that, I’m walking you through it step by step to explain why I drafted it the way I did.

In Part 1 we learned:

  1. You should draft a non-compete in a style and format that is easy to read and present in the courtroom.
  2. The non-compete should expressly state that the company will give the employee confidential information.
  3. The non-compete should provide for giving the employee specialized training, if applicable.
  4. The non-compete doesn’t need a complicated definition of competing.

Next we get into the real heart of making a non-compete as enforceable as possible: reasonableness.

You probably already know that Texas law requires a non-compete to be reasonable in time period, geographic area, and scope of activity. But do you know how to draft the non-compete to meet this requirement?

Don’t worry, we’ve got you covered.

5. Should the non-compete have a reasonable time limitation?

Yes. This is a no-brainer. The statute requires it, Tex. Bus. & Com. Code § 15.50(a), and a non-compete with no time limitation is therefore unenforceable on its face. 

But what should the time limitation be? This is harder, and there’s no one-size-fits-all answer.

If the non-compete is part of the sale of a business, Texas courts are likely to allow a longer time period. See Oliver v. Rogers, 976 S.W.2d 792, 801 (Tex. App.—Houston [1st Dist.] 1998, pet. denied) (lack of time limitation did not render non-compete unreasonable when it was part of the sale of a business).

So for the sale of a business, I would recommend something in the range of three to five years.

But for the typical employee non-compete, shorter is better. Your maxim should be “shorten it until it hurts.” When the length of time is short enough that it causes the client some discomfort, you’re probably getting it right.

As a rule of thumb, I say the typical employee non-compete should be limited to one year. Two years max.

Yes, there are Texas cases that find periods of as long as five years reasonable. See Stone v. Griffin Comms. & Security Sys., Inc., 53 S.W.3d 687, 696 (Tex. App.—Tyler 2001, no writ) (“two to five years has repeatedly been held a reasonable time restriction in a non-competition agreement”) (citing cases).

But the analysis in those cases is superficial. I say go shorter, for several reasons.

First, keep in mind that if a court finds the time period as written is unreasonably long, then this effectively cuts off the employer’s right to get damages for breach of the non-compete. See Tex. Bus. & Com. Code § 15.51(c). The employer can still seek an injunction, but the right to get damages is a significant bargaining chip.

Second, the employer usually has the burden to prove the time period is reasonable. If I’m representing the employee, I guarantee you I am going to try to take advantage of this. If I see a time period of two years or more, that gives me something to attack. I can almost always offer testimony from my client that at least creates a fact issue about whether the time period is reasonable.

One year, on the other hand, is pretty hard to attack. I’m not saying you could never prove that one year is longer than needed, but in most cases that’s going to be a tough sell.

Finally, one year is usually enough to accomplish your client’s key business goal: stop a departing employee from immediately moving her key customers to her new company. The first few months are usually critical. In most cases, one year should be enough time for the company to try to persuade the key customers to stay.

6. Should the time period have a “tolling” clause?

I don’t recommend it.

A tolling provision extends the time period of the non-compete by the time that the employee was violating the non-compete. So, for example, if an employee competes for six months before a court enters an injunction to stop the competition, the time period of the non-compete would be extended by six months.

The upside to the employer is obvious. The downside is that it gives the employee an argument that the time period is indefinite and unenforceable. See Central States Logistics, Inc. v. BOC Trucking, LLC, 573 S.W.3d 269, 277 (Tex. App.—Houston [1st Dist.] 2018, pet. denied) (citing Cardinal Personnel, Inc. v. Schneider, 544 S.W.2d 845 (Tex. App.—Houston [14th Dist.] 1976, no writ)).

I wouldn’t say the issue is totally settled under Texas law, so you can include a tolling clause if you really want to, but why complicate the time period unnecessarily?

Simpler = easier to enforce.

7. Should the non-compete have a reasonable geographic limitation?

Duh. Of course it should. The requirement is right there in the statute. Tex. Bus. & Com. Code § 15.50(a).

But believe it or not, I still sometimes see non-competes with no geographic limitation. How can this happen?

To be fair, there are Texas cases that say a limitation on scope of activity can be used in lieu of a geographic limitation, especially where the employee is a high-level executive who is responsible for the company’s operations everywhere, or where customer goodwill is not tied to any specific geographic area. I cover this is in Geographic Area of a Texas Non-Compete – Part 2.

Still, why chance it? Even if you need to make the geographic area extremely broad, it’s still better to have some geographic limitation than none.

But what should it be?

8. What should the geographic limitation be?

In general, the geographic limitation should coincide with the expected area the employee will be responsible for.

For sales employees, that usually means the employee’s sales territory. I call this the Sales Territory Principle. See Geographic Area of a Texas Non-Compete – Part 1.

It gets more complicated with upper-level management. But even for higher-level executives, I think you should try to define the geographic area they will be responsible for, even if that means a geographic limitation like “the United States,” “North America” or “the US Gulf Coast.”

My form geographic limitation looks like this:

It doesn’t have any more specific formula, but for geographic area there’s just no way to get around the need to adapt the clause to fit the circumstances.

9. Should the non-compete have a reasonable limitation on scope of activity?

Yes. Again, the Texas non-compete statute requires this.

But this is probably the most neglected requirement of the statute. I often see non-competes that define the restricted scope of activity too broadly.

Can you keep a secret? If I represent the employee, this gives me the argument that the non-compete is a prohibited “industry-wide exclusion.” See Burning Down the Haas: The Industry-Wide Exclusion Rule in Texas Non-Compete Law.

This is the most common defensive argument I make for employees. For a typical sales employee, if the non-compete is not limited to the customers the employee dealt with at the company, I will argue it is unreasonably broad.

On the other hand, Texas cases tend to allow restricting a broader scope of activity where the employee is a high-level executive who is responsible for the whole company, not one subset of customers.

So my non-compete form provides two options, depending on the type of employee:

Option 1 may strike some employers as too narrow. But again, the advantage is that it will be difficult for the employee to argue that the scope of activity is too broad. That’s a significant tactical advantage for the employer in a non-compete lawsuit. And from a business perspective, it focuses on the key customers that the company if probably most concerned about the employee taking.

Option 2 is broader, because it is not limited to particular customers, but note that it is still limited to customers or prospects. This is usually better than prohibiting competition with the company generally, which could be seen as a prohibited industry-wide exclusion.

I was on the fence about including “prospects” in Option 2. If you really want to make your enforceability argument strong, you could take that out.

Also note that I use the phrase “doing business” rather than some longer formulation. I think “doing business” has a common-sense plain meaning that is usually easy to understand. If the employee’s lawyer wants to try to argue that providing goods or services for money is somehow not “doing business,” good luck with that.

Beyond Reasonableness

Now you know how to draft the non-compete to be reasonable. That is the most important part of enforceability.

But what else can you include in the non-compete to make sure it is effective and enforceable? Does it need a separate restriction on solicitation of customers? Should it include a lot of self-serving boilerplate in the event of a lawsuit?

I’ll tackle those questions in Part 3.

_______________________________________________

Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.

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.