U.S. - Texas
2020.07.10 Everything You Need to Know (and Probably Don’t) About Covenants Not to Compete - Texas
2017.10.17 "Dean Foods Gets TRO Blocking Ex-Exec From Rival Dairy" - That title comes from a Law360 article that begins with these highlights:
- A Texas state judge on Friday granted Dean Foods Co. a temporary restraining order blocking its former vice president of operations from working for a rival dairy company, after Dean Foods alleged the former executive was likely to disclose trade secrets and contact former customers in violation of employment agreements.
- Dean Foods alleges Johnson, its former vice president of operations, would be violating a noncompetition, nondisclosure and nonsolicitation agreement he signed as part of a restricted stock unit award by working for DFA, one of its main competitors. According to the suit, Johnson had agreed not to provide competing services to any company or business engaged primarily in the manufacture, sale, distribution or marketing of milk and dairy products for a year after leaving Dean Foods.
2014.Aug.29 Forfeiture-for-Disloyalty Sustained by Texas Supreme Court (applying NY Choice of Law)
There is a crucial difference between non-competition provisions and forfeitures-for-competition, and the Supreme Court of Texas highlighted that in ruling against a Texas-based employee who resigned from Exxon Mobil to join a competitor. That employee forfeited about $5.7 million of restricted stock awards due to "detrimental conduct" within the meaning of to the underlying plan and award agreements. The decision highlights the importance of well-grounding the forfeiture in suitable state law. Writing that "Forfeiture provisions conditioned on loyalty . . . do not restrict or prohibit the employee's future employment opportunities," the Supreme Court of Texas declined to apply state non-compete principles and instead applied New York's employee choice doctrine. The court enforced the parties' designation of New York law as controlling partly because the employee had worked in New York for 3 of his 31 years, but seemingly more so because --
- "the subject matter of the transaction - XOM shares - are traded on the New York Stock Exchange";
- "consistency is required to administer the Incentive Programs" for "large numbers of employees in many states and countries, many of whom move throughout their careers";
- New York has a well-developed and clearly defined body of law regarding employee stock and incentive plans"; and
- "Exxon Mobil's outside counsel is a New York law firm."Applying New York's employee choice doctrine, the Texas Supreme Court enforced the restricted stock forfeiture because "the employee who leaves his employer voluntarily or is terminated with cause makes an informed choice between retaining the benefit by avoiding competitive employment or forfeiting his benefit by taking competitive employment" (page 19 of Exxon Mobil Corp. v. Drennen).
2013.Feb.08 Schlumberger Obtains TRO to Stop Ex-Engineer from Joining Halliburton
As reported in Law360: "A Texas court on Friday blocked a former employee of a Schlumberger Ltd. unit, who allegedly stole proprietary oil well development technology, from going to work for Halliburton Co., finding he likely violated confidentiality and noncompete agreements he signed." Email Mark for a copy of the TRO petition and decision; see generally Texas.
2013.Feb.12 Texas Appeals Court Strikes Down Cardiologist Non-compete for Public Policy Reasons -- see LinkedIn Discussion.
2011.June.29 Texas Supreme Court Upholds Non-compete Tied to Stock Options. Marsh USA v. Cook comprehensively examines how the Texas Covenants Not to Compete Act (Tex. Bus. & Com. Code 15.50) and Texas non-compete caselaw apply when stock options serve as consideration for covenants not to compete. Marsh prevailed in part due to the court's holding that the executive's "exercise of the stock options to purchase MMC stock at a discounted price provided a reasonable nexus between the noncompete and the company s interest in protecting its goodwill." Here are other highlights quoted from the decision:
- "In the two-step threshold inquiry to determine if a covenant not to compete is enforceable under the Act, we determine whether there is an otherwise enforceable agreement between the parties, and, if so, we determine whether the covenant is ancillary to or part of that agreement. Mann Frankfort, 289 S.W.3d at 849 (quoting Light, 883 S.W.2d at 644)... The otherwise enforceable agreement requirement is satisfied when the covenant is part of an agreement that contained mutual non-illusory promises. " (6th para in Part II.B of the decision.)
- "By awarding Cook stock options, Marsh linked the interests of a key employee with the company's long-term business interests. Stockholders are owners who, beyond employees, benefit from the growth and development of the company. Owners' interests are furthered by fostering the goodwill between the employer and its clients. The stock options are reasonably related to the protection of this business goodwill. Thus, this covenant not to compete is ancillary to an otherwise enforceable agreement." (Text opposite fn 7.)
- "Marsh sought an agreement not to compete from Cook to protect the company s goodwill namely, the relationships the company has developed with its customers and employees and their identities, due in part to Cook s performance as a valued employee. The Act provides that goodwill is a protectable interest. Tex. Bus. & Com. Code 15.50(a)." (4th para before the end of Part II.)
- "Legitimate covenants not to compete also incentivize employers to develop goodwill by making them less reluctant to invest significant resources in developing goodwill that an employee could otherwise immediately take and use against them in business. See generally Richard A. Posner, Economic Analysis of Law 3.1 (2d ed. 1977)." (2nd para in Part II.)Non-Compete Enforced vs Current Employee: agreement secured from current employee became enforceable once the employer performed the promises it made to obtain the agreement, even though those promises were not fulfilled immediately (Alex Sheshunoff Mgmt. Servs. v. Johnson, Tex., 10/20/06) (the court stated that a 1989 amendment to the Texas "Covenants Not to Compete Act" reflected a legislative intent "to ensure that covenants could be signed after the employment relationship began so long as the agreement containing the covenant was supported by new consideration."
Fiduciary Duty Breach While Employed: See discussion at Navigant case (2004).
Sale of Business: 2010 Article titled "Sale of Business Noncompete Agreements in Texas"
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