TEXAS SUPREME COURT BOLSTERS NONCOMPETITION AGREEMENTS
Matt Dow
Jackson Walker L.L.P.
100 Congress, Ste 1100
Austin, TX 78701
512-236-2230 (direct)
512-391-2113 (fax)
[email protected]
Section 15.50 of the Texas Business & Commerce Code provides 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. Unfortunately, the Texas Supreme Court’s 1994 decision in
Light v. Centel Cellular Co. of Texas made it very difficult to enforce non-competition
agreements under § 15.50 and created a nightmare for employers in enforcing noncompetition agreements. Employers can sleep better now after the Texas Supreme Court
shed some light on non-competes in 2006. In its much-anticipated decision, Alex Sheshunoff
Management Services v. Johnson, the Texas Supreme Court overturned part of the Light
decision and made it less burdensome for employers to enforce non-competes.
The Problems Created by Light
In Light, the Texas Supreme Court adopted a test requiring the employer to make a
promise to the employee that would give rise to the employer’s interest in restraining the
employee from working for a competitor. For instance, an employer’s promise to provide
confidential information could be the basis for an enforceable covenant not to compete.
A footnote in the Court’s decision, however, created the headache for employers. This
footnote six stated that when the employee was “at will” (i.e., the employee can be
terminated at any time for any lawful reason) the employer must deliver the promised
confidential information at the same time the employee signs the non-compete. Otherwise,
the Court reasoned, an employer’s promise to provide confidential information during atwill employment would be illusory because the employee could be fired before the
confidential information was actually delivered. Therefore, delivery of the confidential
information could not occur even one hour later but immediately when the employee signed
the non-compete. Some employers struggled with the logistics of actually delivering
confidential information to a brand new employee who might work in a remote location.
Other employers risked creative ways to avoid this simultaneous exchange. Many courts
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ruled in favor of employees and invalidated non-competes for failing the hyper-technical test
of delivering confidential information immediately when the employee signed the noncompete.
With Sheshunoff, the Supreme Court Fixes the Problem
Kenneth Johnson was hired by Alex Sheshunoff Management Services, L.P. as an at-will
employee in 1993. Johnson received a promotion in 1997 and was asked to sign a noncompete. Johnson signed the non-compete in 1998. Several months after signing the
agreement, Johnson began working on a new product and received confidential information
about Sheshunoff’s marketing strategy. Johnson then left Sheshunoff and began working
for a competitor in a similar position where, Sheshunoff argued, Johnson could use
Sheshunoff’s confidential information. Johnson argued that under Light, the non-compete
was unenforceable because after Johnson signed the agreement, Sheshunoff could have
terminated Johnson’s employment and never delivered the confidential information.
In its appeal, Sheshunoff argued that while it did not provide Johnson confidential
information at the moment the agreement was signed, Sheshunoff did so later. Sheshunoff
argued that the strict interpretation of Light requiring an immediate exchange of confidential
information was not required by § 15.50 of the Texas Business & Commerce Code.
The Court removed the legal gymnastics required by footnote six of Light and held that
Johnson’s non-compete was enforceable. Even though Sheshunoff did not provide Johnson
with new confidential information immediately when Johnson signed the agreement,
Sheshunoff did so later, and the Supreme Court held this was sufficient. Thanks to
Sheshunoff, an employer is no longer required to deliver confidential information
contemporaneously when the employee signs the non-compete.
What Does Sheshunoff Mean for Employers?
The Texas Legislature intended employers to utilize non-competition agreements as an
incentive to invest in human capital. Recognizing that legislative intent, the Supreme Court
has removed the artificial and impractical requirement imposed on employers because of
Light. While confidential information must still be delivered to the employee at some point
after the non-compete is signed, it does not have to delivered immediately when the
employee signs the non-compete.
While employers no longer have to worry about the tortured results following Light, noncompetes remain a complex area of the law. For example, the employer must show that the
information delivered to the employee was truly confidential and that the covenant is
reasonable in its restrictions. Employers should use counsel to ensure that the requirements
for an enforceable non-competition agreement are met.
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