Texas Supreme Court Changes Its Covenant Not to Compete Law

When it comes to the enforcement of covenants not to compete (also know as noncompetition clauses), which prevent employees from competing against their former employers for a certain period of time within a certain location, courts in all states look at the reasonableness of such a restrictive covenant given the interference with an employee's right to earn a livelihood (with the notable exception of California where such covenants are generally illegal). 

Of the many factors that are considered in making this reasonableness determination, one area that tends to vary across the states is what constitutes "adequate consideration" to support a noncompetition agreement.  Although offering new employment to a worker in return for agreeing to a covenant generally suffices, some states have gone so far to say that mere continued employment of a current worker is also sufficient.  Others have taken a stricter view and have required employers to offer current employees some additional consideration like a bonus or other additional benefits, and provide that benefit at the time that the covenant is entered into.

The Texas Supreme Court last week changed its law about when such noncompetition agreements are supported by adequate consideration.  In Sheshunoff Management Services, Inc. v. Kenneth Johnson and Strunk & Associates, No. 03-1050 (Tx. Oct. 20, 2006), the court found that a unilateral promise by the employer may support a covenant not to compete.  More specifically, the court held:

In this case we revisit the Court’s 1994 decision in Light v. Centel Cellular Co. and again consider the enforceability of covenants not to compete in the context of at-will employment. The question today is whether an at-will employee who signs a non-compete covenant is bound by that agreement if, at the time the agreement is made, the employer has no corresponding enforceable obligation. Under Light, the answer to that question was always “no.” Today we modify our holding in Light and hold that an at-will employee’s non-compete covenant becomes enforceable when the employer performs the promises it made in exchange for the covenant. In so holding, we disagree with language in Light stating that the Covenants Not to Compete Act requires the agreement containing the covenant to be enforceable the instant the agreement is made.

Thanks to Michael Fox at Jottings By An Employer's Lawyer for the pointer.

PS