When is covenant not to compete enforceable in Texas?

ENFORCEABILITY OF CONVENANT NOT TO COMPETE (law governing non-competes)

Whether a covenant not to compete is enforceable is a question of law for the court. Fielding, 289 S.W.3d at 848. Likewise, what constitutes sufficient consideration for a contract is generally a question of law, but can be a question of fact. Burges v. Mosley, 304 S.W.3d 623, 629 (Tex. App.-Tyler 2010, no pet.) (question of law); Roark v. Stallworth Oil and Gas, Inc., 813 S.W.2d 492, 496 (Tex. 1991) (holding factual questions remained on consideration issue in summary judgment case due to failure to produce conclusive proof).

Covenant-not-to-compete Law 

A covenant not to compete is enforceable if it is (1) ancillary to or part of an otherwise enforceable agreement at the time the agreement is made and (2) reasonable, not imposing a greater restraint than is necessary to protect the goodwill or other business interest of the employer. TEX. BUS. & COM. CODE ANN. § 15.50(a) (Vernon 2011).
 
The first element can be broken down into two inquiries: (1) is there an "otherwise enforceable agreement," and (2) was the covenant not to compete "ancillary to or part of" that agreement at the time the otherwise enforceable agreement was made. Fielding, 289 S.W.3d at 849. With regard to the first inquiry, "otherwise enforceable agreements" can emanate from at-will employment so long as the consideration for any promise is not illusory. Id. As to the second inquiry, for a covenant not to compete to be "ancillary to or part of" an otherwise enforceable agreement, the employer must establish both "(1) that the consideration given by the employer in the otherwise enforceable agreement [gives] rise to the employer's interest in restraining the employee from competing; and (2) that the covenant [was] designed to enforce the employee's consideration or return promise in the otherwise enforceable agreement." Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 649 (Tex. 2006).

Business goodwill and confidential or proprietary information are examples of interests that can be, in appropriate circumstances, worthy of protection by a covenant not to compete. Id. However, for a covenant not to compete to be enforceable, the agreement must be designed to enforce the return promises made by the employee. Id. Prior to Sheshunoff, there was confusion about whether the employer's promise to provide confidential and proprietary information could create a unilateral contract upon actual performance of that promise by the employer. Sheshunoff answered that question in the affirmative. See id. at 651. In Fielding, the Texas Supreme Court clarified its holding in Sheshunoff as follows: In Sheshunoff, an employee signed an at-will employment agreement containing a covenant not to compete. In the agreement, the employer promised to provide the employee access to confidential information and the employee promised not to disclose such information. The employer then gave the employee access to confidential information throughout his employment. We followed and confirmed our analysis in Light, with the exception of Light's footnote six.

We concluded that under section 15.50, a covenant not to compete is not invalid simply because the otherwise enforceable agreement to which the covenant is ancillary is not enforceable at the time the agreement is made. Rather, the covenant not to compete need only be "ancillary to or part of" the agreement at the time the agreement is made. Thus, the requirement that there be an "otherwise enforceable agreement" can be satisfied by the employer actually performing its illusory promise to provide an employee with confidential information. Fielding, 289 S.W.3d at 849-50 (internal citations omitted). However, for a covenant not to compete to be enforceable, it must still be supported by consideration. Powerhouse Prods., Inc. v. Scott, 260 S.W.3d 693, 696 (Tex. App.-Dallas 2008, no pet.) (citing Sheshunoff, 209 S.W.3d at 651). Past consideration is insufficient. Id. at 697 (citing Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex. App.-Austin 2004, pet. denied)).

"The covenant cannot be a stand-alone promise from the employee lacking any new consideration from the employer." Id. (quoting Sheshunoff, 209 S.W.3d at 651). In Powerhouse Productions, Eric Scott went to work for Howard Gibson, Jr., in 1993. When he began his employment, he signed a seven year employment agreement containing a covenant not to compete. Id. at 694. In 1996 or 1997, Gibson incorporated and formed Powerhouse Productions, Inc., but did not require Scott to sign a new employment agreement. Id. Although the original agreement expired in 2000, Scott remained employed with Powerhouse, and the parties operated under the prior agreement. Id. In 2004, Scott entered into a new agreement with Powerhouse whereby Scott agreed not to compete with Powerhouse for a five-year period should they sever their employment relationship. Scott and Powerhouse ended their relationship later that same year. Id. Scott went to work for a competitor, and Powerhouse sued him to enforce the 2004 covenant not to compete. The trial court and the Dallas Court of Appeals rejected Powerhouse's argument that confidential information and training provided to Scott before 2004 could serve as consideration for the 2004 covenant not to compete. Id. at 697-98. In doing so, the court reasoned that "past consideration is not competent consideration for contract formation." Id. at 697. 
 
SOURCE: Tyler Court of Appeals - 12-09-00204-CV – 4/29/11 RELATED TERMS, PHRASES: consideration as essential element of valid contract, illusory promise, enforceability of contract, covenant