Noncompete Agreement Enforceability Upheld in Texas
In a recent decision, the highest court in the Lone Star state has once again upheld the enforceability of a noncompete agreement. Many people believe noncompete agreements are unenforceable and, in fact, some states consider them illegal, generally speaking. Take California, for example. Noncompete agreements are enforceable to protect a company’s trade secrets, but not to prevent fair competition. For partnerships in California, and when someone is selling an interest in a company, a noncompete agreement is enforceable. It was on this point that the Texas Supreme Court based its decision in June 2011. The noncompete agreement is this instance was signed in conjunction with the purchase of stock. The Court deemed that the employee became a company owner when he exercised the stock purchase and the noncompete was ancillary to that action. In this situation, a long-time employee was rewarded with a stock offer but was required to sign a noncompete when he purchased the stock. Hence, the court ruled that this noncompete was enforceable.
The Texas high court was split 5 to 8 in its decision, reflecting the divergent opinions of the justices, indeed, reflecting the different opinions legislatures, courts, companies, and employees who are influenced by and engaged in the use of noncompete agreements. In its opinion, the Texas Supreme Court wrote, “Amid increasing labor fluidity, there is no shortage of debate surrounding the propriety of enforcing restrictive covenants that tie up skills, knowledge, ideas, and expertise. The fault line runs between first principles – freedom of contract versus freedom of competition – and judicial treatment of noncompetes has been, well, eclectic. Some jurisdictions favor freedom of contract (enforcing a noncompete because the employee signed it) and fret little about whether the company’s interest is legitimate; other jurisdictions (most notably, California) champion freedom of competition and void virtually all noncompetes. Texas courts, like most, enforce “reasonable” ones necessary to protect legitimate interests. This multiplicity of standards across states – dubbed “fifty ways to leave your employer”—makes for an unsteady legal landscape, particularly for far-flung employers that operate throughout the country.” 1
During the past few years, there were many decisions in Texas courts that the Texas Supreme Court recognized in its opinion as “close calls in disputes over trade secrets, confidential information and goodwill…restrictions on employee mobility that exist only to squelch competition are per se illegal in Texas, and for good reason.” 2
Justice Don R. Willett, in his concurring opinion, underscores an obvious point. Where restraint of trade results from a noncompete, it should be struck down. The pro-business stance in Texas requires the nourishment of a dynamic economic climate that foments competition by means of a knowledge-based market that rewards ingenuity and intellectual talent. 1
The Texas Supreme Court has dropped the gauntlet by addressing this dichotomy in its opinion, “But this duty requires circumspection, lest the COVENANT NOT TO COMPETE ACT exception swallow THE FREE ENTERPRISE AND ANTITRUST ACT rule. The latter sides with the virtues of economic liberty – the basic right to pursue what you choose, where you choose, and among whom you choose —not the vice of unduly denying skilled people the rewards of their earned success or injuring society by depriving the wider public of someone’s talents and enterprise. So while free enterprise recognizes, demands, actually, that economic actors will doggedly pursue self-interest, Texas noncompete law recognizes the difference between constructive self-interest and destructive selfishness.” 1
In 1989, the Texas Legislature enacted its first covenant not to compete statute for employees. Texas businesses wanted the statute because it allegedly protects company techniques, procedures, and customer lists from competitors. It also protects employers who pay for training employees only to lose the employees to a competitor. However, subsequent Supreme Court decisions rendered such contracts unenforceable until 2006. That year the Texas Supreme Court, much maligned after a University of Texas Professor’s study revealed that the Texas Supreme Court decides against individuals 87 percent of the time in personal injury cases, enforced a noncompete. This changed the landscape. 3
A recent study of regional disadvantages from noncompete agreements found that despite historical evidence that inventors and knowledge have migrated from states that enforce noncompetes to those that do not, the causal evidence for a brain-drain remains weak. The study reports that inventors who leave their employers are less likely to join entrepreneurial firms and more likely to leave their technical specialty. These deleterious effects of noncompetes, for both human and social capital, may be exacerbated in difficult economic times. Most noncompetes are constructed to be enforceable against individuals who were laid off, contributing to un- and underemployment. Noncompete enforcement also places a brake on entrepreneurship as incumbents receive extensive subsidies and individuals become more risk averse. 4
In Massachusetts, there is an outright campaign to get rid of noncompete agreements. Scott Kirsner, of the Boston Globe, declares in his Sunday Boston Globe column that “we need an employee- and entrepreneur-led revolution to rid our state of noncompete agreements. These contracts foster the illusion of helping to preserve the market position of established enterprises, but their real effect is to impede the creation and rapid growth of new businesses in our state.” He identified some resources on the topic, including The Alliance for Open Competition, a group of entrepreneurs, business leaders, and venture capitalists trying to ban (or at least discourage) the use of noncompete agreements in Massachusetts. 5
Michael Rosen recently wrote in a piece entitled, The Latest on MA Noncompete Reform Efforts, that Massachusetts Representative Brownsberger has co-sponsored a bill that would permit the continued enforcement of non-competition agreements but would impose significant limitations. This bill has been revised to eliminate and scale back certain restrictions to which pro-noncompete business groups had objected. While those reform efforts continue into the 2011-12 legislative session, two new bills have been filed that would more or less follow the California model and prohibit noncompetes in the employment context. Brownsberger had started off with this stance back in 2009, then backed off in the face of opposition. A bill filed in the MA House of Representatives would prohibit noncompetes except in the context of a sale of business or departure from a partnership or limited liability company. A bill filed in the Senate focuses on noncompetes in the employment and independent contractor contexts. It’s not clear that any of these reform approaches has sufficient legislative support to move forward. 6
Now when employees saddled with noncompete agreements walk down the street for jobs with competitors, their former employers send a team of lawyers into courtrooms to obtain temporary retraining orders against both the employees and the new employers, to prevent them from competing. Texas courts routinely grant these restraining orders. 3
If you want to leave an employer but have signed a noncompete agreement, check first with an attorney who is well-versed in this polemic issue. So many different factors weigh in, not only the state where the agreement was signed, but also, the situation surrounding the signing of it, that to protect yourself and your work, a qualified opinion and exit strategy might be just what the doctor ordered. If you want to learn more on this subject, click this link Employment Law Advice.
1 Supreme Court of Texas, 2011 Tex. Lexis 465; 54 Tex. Sup. J 1234, Argued 09/16/10; Opinion Delivered 06/24/11; Concurring Opinion by Justice Don R. Willett.
2 Supreme Court of Texas, 2011 Tex. Lexis 465; 54 Tex. Sup. J 1234, Argued 09/16/10; Opinion Delivered 06/24/11; Opinion by Justice Dale Wainwright.
3 Theodore C. Anderson, May, 2009, article entitled, “Is Texas Handcuffed by Employment Noncompete Restrictions?” Read this Article
4 Matt Marx, Jasjit Singh and Lee Fleming; Regional Disadvantage? Noncompete Agreements and Brain Drain (July 21, 2010). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1654719 & http://www.google.com/url?sa=t&source=web&cd=18&ved=0CE4QFjAHOAo&url=http%3A%2F%2Fpapers.ssrn.com%2Fsol3%2FDelivery.cfm%3Fabstractid%3D1654719&rct=j&q=regional%20disadvantages%20of%20noncompete%20agreements&ei=K8hXTriyFczisQKLzuieDA&usg=AFQjCNE8FyCBnEFKgsdwQhSR1kRLFeqLAg
5 Scott Kirsner, Boston Globe, August 16, 2011, electronic link: http://www.boston.com/business/technology/innoeco/2011/07/needed_a_revolution_to_rid_mas.html
6 Michael Rosen, The Latest on MA Noncompete Reform Efforts, July 8, 2011 electronic link: http://www.massachusettsnoncompetelaw.com/