Matt Dow Jackson Walker L.L.P. Texas Supreme Court Rules on Covenants Not to Compete

Jackson Walker L.L.P. The Statute The covenant must be “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made”

Jackson Walker L.L.P. Light v. Centel A unilateral contract is not an OWEA at the time the agreement is made because the employer is not obliged to perform. Footnote 6 of Light. Any promise dependent on at will term is illusory and not an OWEA

Jackson Walker L.L.P. Light v. Centel “Strict Light” : Employer must promise and perform immediately (The “Next Millisecond Test”)

Jackson Walker L.L.P. Sheshunoff Johnson employed in 1993 Promoted in /98—Signs CNC Receives training from third parties 2001—Participates in new product meetings 3/2002—Leaves to work for competitor

Jackson Walker L.L.P. Sheshunoff To assist Employee in the performance of his/her duties, Employer agrees to provide to Employee special training access to certain confidential and proprietary information

Jackson Walker L.L.P. Sheshunoff: The Court of Appeals Not enforceable because: Information that Johnson had before he signed was past consideration No new information was given at the time that he signed the Agreement Promise to provide more training and new confidential information in the future was illusory, even if performed later

Jackson Walker L.L.P. Sheshunoff: The Supreme Court Question: Whether an at will employee who signs a CNC is bound by the agmt if, at the time the agmt is made, the E has no corresponding obligation?

Jackson Walker L.L.P. Sheshunoff: The Supreme Court Holding: An at will employee’s CNC becomes enforceable when the E performs the promises it made in exchange for the covenant Light’s footnote 6 is expressly disapproved.

Jackson Walker L.L.P. Sheshunoff: Reasonableness Test Johnson argued the covenant was overly broad because Not related to training he got later ASM’s goodwill unrelated to the info he got later No basis to restrict Johnson on customers he already knew about Court rejected: Even though receiving the “same information,” “nothing precluded ASM from seeking the greater protection of a CNC when it did.” Court relied on Johnson’s agreement with Strunk to show it was reasonable

Jackson Walker L.L.P. Sheshunoff: Ancillary Test The consideration given by the employer in the OWEA must give rise to the employer’s interest in restraining competition The covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement

Jackson Walker L.L.P. Sheshunoff : Core concerns “Core concerns” are reasonableness as to time, geography, and scope of activity “We did not intend in Light to divert attention from the central focus of section 15.50(a). To the extent our opinion caused such a diversion, we correct it today.”

Jackson Walker L.L.P. Light and Sheshunoff: The Enforcing Side The technicalities as to whether there is an OWEA are gone The Supreme Court, for the first time, signals a “pro covenant” view of Section 15.50

Jackson Walker L.L.P. Light and Sheshunoff: The Busting Side Ancillary Test Is Still There—For Now Look Carefully at Breadth of Covenant— Juliette Fowler Is Still Good Law Use equitable defenses like “unclean hands”

Jackson Walker L.L.P.