Although your services were once seen as essential to the company’s success, your former employer has now terminated your employment contract. Unfortunately, the only job prospects you have are in the same industry and same geographical area. Your former company nonetheless insists that it will enforce the terms of the non-compete, non-solicitation, or forfeiture provisions in your employment agreement. After years of building a career, the prospect of starting over is less than appealing, and retirement is still a long way off.
Should things get to the lawsuit stage, the former employer’s first move might be to seek a temporary restraining order (TRO). A TRO would prevent you, the departing executive, from taking a new job pending resolution of the lawsuit. That may be more than enough to scare a new employer away. It can seem like an impossible bind.
This is a tough situation. Texas, unlike some other states, favors enforcement of these restrictive covenants. This remains true even in the face of the Biden administration’s recent Executive Order Promoting Competition in the American Economy, signed on July 9, 2021, directing the FTC to examine potential federal rule changes affecting non-competes. To date, the employer-friendly rules remain in place, but there are still strategies that may soften the blow. This is the time to explore your legal options.
Our Texas Employment Lawyers Help Executives Negotiate, Review and Defend against the Enforcement of Non-Compete Agreements
First, a word to the wise. Do not sign an employment agreement until you have had a Texas employment lawyer review it. That is the best chance you have to avoid these problems.
The Texas employment lawyers at Kilgore & Kilgore may be able help protect you against harsh or unfair enforcement of a non-compete agreement. Click this link to learn more about our Executive Compensation law practice. Use this link to read more about non-compete agreements. To get the conversation started about your situation, click here, and submit your information Contact Kilgore & Kilgore.
Employment Contract Details and the Non-Compete Agreement
Restrictions on competition come up in a variety of circumstances, and non-compete clauses are not always labeled as such. It is important, therefore, to have an employment lawyer evaluate your full employment agreement.
Start With the Letter of the Law
Paragraph 15.50(a) of the Texas Business and Commerce Code provides that:
There are a lot of terms to parse here, but the bottom line is that a non-compete agreement is enforceable in Texas if it is:
“[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.”
- supported, at the time the agreement was made, by something of value (often money);
- reasonable in time;
- reasonable in geographic scope; and
- reasonable in the activities to be restrained.
It would be misleading to announce a bright-line rule for any of these criteria. The court decisions on these issues are extremely fact and industry specific. This is the kind of detail about which you need to talk to an attorney. No two situations are the same.
Some other potential defensive strategies come from the basic common law of contracts. Among these (and this is not, by any means, an exclusive list) is the doctrine of “unclean hands,” which addresses issues about whether a contract may be assigned to another entity, and choice-of-law questions.
The Doctrine of Unclean Hands in Employment Agreements
The doctrine of unclean hands argues that the party claiming a breach of contract (in this case the former employer) is not entitled to a remedy (the TRO) if it was also responsible for committing the breach. The availability of this defense may depend on evidence of knowing and deliberate misdeeds.
Examples might include:
- deception as to the terms of the contract or the consequences of the breach;
- purposely and knowingly not responding to correspondence from the other party on time; or
- breaking the contract with the employee on the assumption that the employee will not fulfill his or her side of the deal.
Assignability of an Employment Contract
Imagine a situation in which you went to work for ABC Corporation and signed an employment contract that included restrictive covenants. ABC Corporation is thereafter acquired by XYZ Company. As part of the purchase agreement, XYZ acquired all ABC’s contract rights, including your employment agreement. After valiant efforts, you decide that you hate working for XYZ, and so begin to look for another job.
You get an offer from LMNO Ltd., which is a direct competitor of XYZ, but was not of ABC. XYZ sues you and seeks a TRO to prevent you from working for LMNO. Can they do that? The answer is that it may depend on the nature of the services you provided to ABC and XYZ.
Some courts have found that, where an employee does not explicitly agree that his or her employment contract is assignable to a purchaser, and the services provided to the company are personal services – unique to the employee – then the employment agreement may not be assignable. As above, this is a highly fact-specific situation.
Choice of Law and the Non-Complete Agreement
Another interesting wrinkle has to do with which state’s law is to be applied in determining the enforceability of the employment contract. When it comes to non-compete agreements, Texas law is particularly employer friendly. Some other states, like California, hold that non-compete agreements are unenforceable. Many states’ laws fall somewhere in between these poles.
Most Texas non-compete agreements specify that Texas law is to be applied. In Cardoni v. Prosperity Bank, the Fifth Circuit Court of Appeals determined that Oklahoma law applied, rather than Texas law, as provided in the parties’ choice-of-law provision. The decision was the product of a two-step analysis.
First, the court determined that Oklahoma law had a more significant relationship to the employment agreements in question. Therefore, Oklahoma law would have applied had there been no Texas choice-of-law provision in the agreements.
Even with the choice-of-law provision in place, however, Oklahoma had a materially greater interest than Texas because of a fundamental public policy in Oklahoma against enforcement of non-compete agreements. The decision, although it dates from 2015, seems to suggest some possible avenues for employees hamstrung by the consequences of their employment agreements.
Our Employment Lawyers Can Help You Negotiate, Review, and Challenge Enforcement of a Non-compete Agreement or an Employment Agreement
Executives who are subject to restrictive covenants as part of their employment agreements may face unintended consequences when their employment situation changes. For an evaluation of your situation and help with responding in the best way, reach out to our employment lawyers by clicking on this link and submitting your contact information Contact Kilgore & Kilgore.