• Texas Supreme Court Decision Assists Employers By Removing Hurdle to the Enforcement of Covenants Not to Compete
  • June 25, 2007 | Author: James A. Collura
  • Law Firm: Coats Rose - Houston Office

    In Alex Sheshunoff Management Services, L.P. v. Kenneth Johnson and Strunk & Associates, ___ S.W.3d ___, 2006 WL 2997287 (Oct. 20, 2006) the Texas Supreme Court revisited the issue of whether an at-will employee who signs a non-compete covenant is bound by that agreement if, at the time the agreement is made, the employer has no corresponding enforceable obligation. Previously, in Light v. Centel Cellular Co., 883 S.W.2d 642 (Tex. 1994), the Texas Supreme Court held that an employer must provide consideration (money, confidential information or training) at the time the covenant not to compete is entered into or else the covenant is not enforceable under the Texas Covenants Not to Compete Act, Tex. Bus. & Com. Code § 15.50(a). The effect of the Sheshunoff Management Services decision is that an employer is no longer required to provide consideration at the time of executing the covenant not to compete. Instead, the covenant not to compete is not effective until the employer has provided the consideration.

    For example, an employee enters into an agreement with her employer whereby she promises to keep information strictly confidential in exchange for access to confidential information and training. In addition, the agreement contains a covenant not to compete clause. Under Light if the employer did not provide the confidential information and training immediately, the covenant not to compete would fail for lack of consideration. After Sheshunoff Management Services, the covenant not to compete would be valid if at some point prior to termination the employer provided training and access to confidential information.

    The impact of Sheshunoff Management Services on employers is that covenants not to compete are easier to draft and enforce. Thus, employers can shift their focus to what the Texas Supreme Court calls the “central focus” of the Texas Covenants Not to Compete Act — whether the covenant not to compete is reasonable and necessary. Therefore, effective covenants not to compete after Shesunoff Management Services should: (1) incorporate the employer’s legitimate business interests; (2) incorporate an agreement by the employer to provide the employee confidential information in exchange for the employee’s promise not to compete; (3) apply reasonable enforcement restrictions as to time, territory and activity; and (4) not be an impermissible restraint on trade.