Changing its prior position on the issue, the Texas Supreme Court has held that an employer’s promise to perform (for example, to provide training or confidential information) is sufficient to create an enforceable covenant not to compete in an at-will employment relationship; however, the non-compete covenant is not enforceable until the employer takes the action it has promised. See Alex Sheshunoff Management Services, Inc. v. Johnson (October 20, 2006).
Changing its prior position on the issue, the Texas Supreme Court has held that an employer’s promise to perform (for example, to provide training or confidential information) is sufficient to create an enforceable covenant not to compete in an at-will employment relationship; however, the non-compete covenant is not enforceable until the employer takes the action it has promised. See Alex Sheshunoff Management Services, Inc. v. Johnson (October 20, 2006).
In this case, Johnson was hired as an at-will employee. He was later promoted and, a few months after his promotion, was asked to sign an Employment Agreement as a condition of continued employment. The Agreement was at-will in that it did not contain a fixed term of employment and stated that either party could terminate the Agreement at any time for any reason, subject to certain notice requirements. The Agreement also stated that ASM would provide Johnson with special training relevant to ASM’s business methods and would provide him with access to certain confidential and proprietary business information belonging to ASM. The Agreement also contained a covenant not to compete, which provided that for one year after his termination Johnson would not provide consulting services to any ASM clients to whom Johnson had “provided fee based services in excess of 40 hours within the last year of employment,” and would not “solicit or aid any other party in soliciting any affiliation member or previously identified prospective client or affiliation member.”
ASM provided Johnson with training and confidential information; however, Johnson subsequently resigned to work for a competing employer. ASM sued, alleging breach of the covenant not to compete. The lower courts held that the covenant not to compete was not enforceable because the consideration provided by ASM in exchange for Johnson’s agreement not to compete was an “illusory promise” – that is, ASM’s promise to provide training and confidential information was illusory because the company could have fired him immediately after he signed the agreement, thus avoiding its obligation to perform this promise. The Supreme Court reversed, holding that the covenant not to compete is enforceable.
In Texas, covenants not to compete are governed by the Covenants Not to Compete Act (Tex. Bus. & Com. Code § 15.15(a)), which states, in part, that 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 . . .” The Texas Supreme Court noted that the phrase “at the time the agreement is made” could refer to either the phrase “an otherwise enforceable agreement” or the phrase “ancillary to or part of.” The Court held that the meaning of the statute is not clear from an analysis of the text alone. Previously, the Court interpreted this phrase to mean that a contract that was not enforceable at the time it was made, but became enforceable upon the performance of an act, did not comply with § 15.15(a). In ASM, the Court retreated from this position and held that the phrase “at the time the agreement is made” means that the non-compete covenant must be part of the agreement at the time the agreement is made.
In reaching this decision, the Court examined the legislative history of the Act and concluded that the language “at the time the agreement is made” was included to maintain the rule, previously recognized in the Act, that a non-compete covenant could be signed after the date employment began as long as the new agreement was supported by independent consideration. The Court held that this language was not intended to impose a new requirement that the agreement containing the non-compete covenant be enforceable “the instant it is made.”
The Court also noted that the legislative history indicates that one of the purposes of this phrase was to make it clear that at-will employment relationships can be the subject of a covenant not to compete. The Court held that requiring the agreement to be enforceable when it is made would mean that most covenants not to compete executed in the context of an at-will employment relationship would be unenforceable.
Thus, the Court held that a covenant not to compete is not unenforceable merely because it is supported by a promise to take certain action. “If the agreement becomes enforceable after the agreement is made because the employer performs his promise under the agreement and a unilateral contract is formed, the covenant is enforceable if all other requirements under the Act are met.” In ASM, when Johnson resigned, the agreement was enforceable because ASM had provided the training and confidential information it promised in exchange for the non-compete covenant.
Employers’ Bottom Line:
This decision is good news for employers in Texas, because it expands the enforceability of non-compete covenants in the at-will employment context. If you have any questions regarding this decision or any other labor or employment related issues, please contact the Ford & Harrison attorney with whom you usually work or Mike Maslanka, a partner in our Dallas, Texas office at 214-256-4702 or
mmaslanka@fordharrison.com.