Texas Supreme Court Ruling Favors Enforcement of Non-Competition Agreements

In Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, the Texas Supreme Court once again ruled in favor of enforcing non-competition agreements.  Notably, the case involved the issue of whether a covenant not to compete in an at-will employment agreement is enforceable when the employee expressly promises not to disclose confidential information, but the employer makes no express return promise to provide confidential information.

On April 17, 2009, the Court held that “if the nature of the employment for which the employee is hired will reasonably require the employer to provide confidential information to the employee for the employee to accomplish the contemplated job duties, then the employer impliedly promises to provide confidential information and the covenant is enforceable so long as the other components of Texas’ Covenant Not to Compete Act [(see Sec. 15.50)] are satisfied.”  The Court’s ruling establishes that the enforceability of a covenant not to compete should be dependent on its substance rather than whether the covenant is ancillary to an otherwise enforceable agreement or when the employee actually received confidential information.  This is notable because the law in Texas under Light v. Centel Cellular Co. of Tex. (decided in 1994) required employers to promise to provide and actually to provide confidential information or trade secrets to employees “at the time the agreement is made.”  This was the trap employers were usually caught in when attempting to enforce their non-competes because such a transaction almost never happened and non-competes were therefore difficult to enforce under the law at that time.

In 2006, however, the Court modified Light and held in Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson that the employer’s promise to provide confidential information or trade secrets is enforceable as long as the employer provides the information at some point during employment.  As a result, non-competes became somewhat easier to enforce after this ruling.

Now, after Mann Frankfort, the Court has gone further and held that an employer’s promise to provide confidential information or trade secrets within the non-compete need not be express.  Instead - it can be implied.  Accordingly, as long as a covenant not to compete is “ancillary to or part of an otherwise enforceable agreement,” (such as a written and executed non-disclosure agreement) and the nature of the contemplated employment will reasonably require the employer to furnish the employee with confidential information, then the employer impliedly promises to provide the information and the contract is enforceable.

When that occurs, the only remaining issue is the reasonableness of the terms (whether the restrictions are reasonable in length of time, geography, and scope of activity restrained by the agreement).

Score one for employers because this ruling makes it more difficult for an employee to challenge the formation of a covenant not to compete in Texas under the Act.