Texas Supreme Court Broadens Circumstances Where Texas Non-Competes May Be Enforced But Employers Must Still Exercise Care


Many Texas businesses view non-competition agreements as a critical component to their strategy to protect their trade secrets and other intellectual property.  In its April 19, 2009 decision in Frankfort Stein & Lipp Advisors, Inc. v. Fielding (“Frankfort Stein”), the Texas Supreme Court gave a another boost to the ability of Texas employers to enforce non-compete agreements signed by existing at-will employees during their employment under the Texas Covenants Not To Compete Act (the “Act”) Section 15.50, which governs the enforceability of employee agreements not to compete in Texas. Despite this helpful ruling, however, Texas employers still must exercise care to comply with all requirements of the Act if they want to position their non-compete agreements for enforceability in Texas.

 

Building on its prior October 20, 2006 employer-helpful decision in Alex Sheshunoff Management Services, L.P v. Johnson (“Sheshunoff”), the Texas Supreme Court in Frankfort Stein clarified that an employer’s implied covenant to provide confidential information to an at-will may constitute adequate consideration to support enforcement of a non-compete under the Act..  The holding expands the Supreme Court’s prior holding in Sheshunoff to apply to both express or implied employer covenants to provide confidential information.

 In Sheshunoff, the Texas Supreme Court previously ruled that that an employer’s express promise to provide confidential information to an at-will employee in exchange for the employee’s express promise not to disclose or use such information, may create an enforceable non-compete covenant under the Act. However, the Supreme Court made clear that employers that desire enforce non-competition agreements still must fulfill the Act’s requirement to provide access to confidential information, training or other appropriate consideration for the employee’s promise not-to compete and the other requirements of the Act before Texas courts will enforce an at-will employee’s agreement not to compete in Texas.

 

The Frankfort Stein decision further clarifies the Court’s interpretation of the Act in Sheshunoff by holding that an implied promise to provide confidential information to an at-will employee also can constitute the required consideration for the employee’s promise to disclose serve as the provision of confidential information required to support enforcement of a non-compete under Texas law.   

The Frankfort Stein decision may offer an additional opportunity for employers that have provided at-will employees access to confidential information to enforce a less than optimally drafted or implemented written non-competition agreement that otherwise complies with the Act under circumstances where the employer can establish it provided the information subject to an implied promise by the employee not to disclose the information.  To avoid the cost and uncertainty of proving the existence and scope of such an implied promise, however, Texas employers desiring to best position their non-compete agreements for enforceability should consult with experienced employment counsel for assistance in reviewing their existing non-competition agreements and practices.  These (and as appropriate, the employer’s employee handbook) should be written and administered:

ü       To require employees to sign non-competition agreements that expressly and appropriately set forth the employers promise to provide the confidential information conditional upon the employee’s agreement not to compete and to protect the confidential information;

ü        To ensure that the agreement appropriately defines confidential information and expressly requires that the employee protect and maintain the confidentiality of trade secrets and other confidential information;

ü       To ensure that the agreement incorporates other procedural provisions that can help minimize the cost and burden to the employer to enforce its provisions;

ü       To ensure that the agreement between the employer and the employee otherwise clearly fulfills all otherwise applicable conditions of the Act and to maintain the confidentiality of the information the requirements of the Act; and

ü       To position the employer to be able to easily prove that it actually engaged in the sharing of confidential information that the Sheshunoff decision identifies as a necessary step to enforce the non-competition agreement under Texas law.

Employers also should position themselves to best investigate possible breaches of these protections by securing written background check consents in accordance with the Fair Credit Reporting Act and ensuring that their handbooks and employment agreements include appropriate privacy, investigations and other policies.

Cynthia Marcotte Stamer and other members of Curren Tomko and Tarski LLP are experienced with advising and assisting employers with these and other labor and employment, employee benefit, compensation, and internal controls matters. If your organization needs assistance with assessing, managing or defending its wage and hour or other labor and employment, compensation or benefit practices, please contact Ms. Stamer at cstamer@cttlegal.com, (214) 270-2402; or your favorite Curren Tomko Tarski, LLP attorney.  For additional information about the experience and services of Ms. Stamer and other members of the Curren Tomko Tarksi, LLP team, see the www.cttlegal.com.

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