Another Step Forward In The Enforcement Of Noncompetes

The Texas Supreme Court in Frankfort Mann Stein & Lipp

Advisors, Inc. v. Fielding has further clarified the

circumstances in which noncompete contracts with at-will employees

will be enforced that was first announced by the same court in

Sheshunoff Management Services, L.P. v.

Johnson.1 In Sheshunoff, the court

announced that the focus should be shifted back from overly strict

technical requirements to the reasonableness of the restrictions

used in the contract. In addition to agreeing with decision in

Sheshunoff, the court in Frankfort Mann also

eliminated yet another technical argument against the enforcement

of noncompete agreements. Although Texas law still adheres to

certain special requirements for noncompete contracts, the

enforcement of such agreements has become one step easier.

Although the Texas Supreme Court's ruling in

Sheshunoff was a welcome clarification of the law for

employers, it left unanswered one important question —

whether a noncompete contract would fail if the agreement contained

neither an explicit promise by the employer to provide confidential

information to the employee nor an acknowledgment by the employee

of receipt of such information. It is now clear that if the

performance of the employee's position would necessarily

involve the provision of confidential information, the law will

deem the employer to have impliedly promised to provide such

confidential information.

Texas Non-Compete Law – A Refresher

The Texas Covenants Not to Compete Act (the "Act"), as

amended in 1993, reads:

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 interests of the

promisee.2

Under the Act, a threshold issue is

whether a covenant not to compete is ancillary to an otherwise

enforceable agreement. In the 1994 decision, Light v. Centel

Cellular, the Texas Supreme Court created a two-part test to

address whether an agreement not to compete was "ancillary to

an otherwise enforceable agreement" as required by the Act,

stating:

1. the consideration given by the employer in the otherwise

   enforceable agreement must give rise to the employer's

   interests in restraining the employee from competing; and

2. the covenant must be designed to enforce the employee's

   consideration or return promise in the otherwise enforceable

   agreement.3

   The above test created a new requirement that the

   "ancillary agreement" and the covenant not to compete be

   linked in order to be adequate. In other words, the covenant must

   be designed to enforce the ancillary agreement. What this meant in

   actual application was cloudy. This murkiness was exacerbated by

   footnote 6 of the Light decision, which indicates that the

   ...