The Changing Law on Non-Competes in Texas
Patrick J. Dyer

           Many business owners in Texas have their employees sign non-compete agreements. These “non-competes,” also called covenants not to compete, typically provide that, after the employee leaves the company, the employee cannot go to work for a competitor for a stated period of time. The agreements may or may not be enforceable depending on the circumstances.

           Recently, on October 20, 2006, the Texas Supreme Court finally issued a long-awaited opinion re-examining the enforceability of non-compete agreements. The opinion rather dramatically changes the law. In Alex Sheshunoff Management Services, L.P. v. Johnson, the high Court revisited its earlier decision in Light v. Centel Cellular Co. and ruled, for the first time, that a covenant not to compete which was unenforceable when made can become enforceable if the employer subsequently performs the promises it made in exchange for the covenant. In light of the decision, employers and employees alike would do well to review their non-compete agreements.

           The full text of the opinion is available online at www.supreme.courts.state.tx.us in the section entitled “Weekly Orders - 10/20/06.” The facts of the case present a relatively common employment situation in Texas. An at-will employee is hired and told that, as a condition of employment, he or she must sign a non-compete agreement. The agreement itself recites that, in exchange for the non-compete, the employee will be given confidential information and specialized training. The employee agrees not to disclose the confidential information.

           Under the law before the Sheshunoff decision, the enforceability of the non-compete depended upon whether the employer gave the confidential information and specialized training “at the time the agreement was made.” If the exchange were not contemporaneous, the agreement was not enforceable. The Supreme Court has altered that rule. Now, under Sheshunoff, the employer does not have to provide the information or training at the time the agreement is signed. Rather, the employer can provide the confidential information or special training at a later time.

           The most obvious impact of the Texas Supreme Court’s decision is that it will make more non-compete agreements enforceable because it has removed one ground upon which the agreements had previously been invalidated. Perhaps a less obvious impact is that it will enable some employers with previously unenforceable non-competes to make them enforceable. In any event, whether you are an employer who used non-comnpetes or an employee who has signed one, the recent decision from the court is significant enough to warrant consultation with your counsel.

February 14, 2008

           The foregoing information is general only and is not intended as legal advice. Because the facts for any particular person or situation may vary greatly, the reader should consult his or her attorney for a specific opinion. Nothing herein should be construed as establishing an attorney-client relationship.