Covenants Not to Compete

Monday, November 13, 2006
Contributed by: Slater Elza

Does confidential information have to be provided to an employee at the time the employee signs a covenant not to compete?

In a long awaited decision, the Texas Supreme Court has held in Alex Sheshunoff Management Services, L.P. v. Johnson that the answer is no, but the covenant not to compete will probably be unenforceable until the employer actually provides confidential information. Texas law regarding covenants not to compete has been clear as mud for years. The Covenants Not to Compete Act states, in part, that one of the requirements to enforceability of a covenant not to compete is that it must be "ancillary to or part of an otherwise enforceable agreement at the time the agreement is made." One of the best, or at least most common, ways to comply with this requirement is to draft the covenant in a manner designed to help enforce a confidentiality agreement. The idea is that the covenant not to compete will be considered "ancillary to or part of" the confidentiality agreement because the covenant will help ensure that the employee fulfills his or her promise to keep information confidential.

The question with which many courts have stuggled is whether the confidentiality agreement can be considered enforceable when it is made if the employer has only promised to provide confidential information but has not yet provided the information. The Sheshunoff opinion suggests that is the wrong question to ask. According to the Texas Supreme Court, a covenant not to compete is not made unenforceable merely because the employer only promised to provide confidential information at the time the confidentiality agreement and covenant were signed. However, the covenant not to compete will not be enforceable unitl the employer fulfills its promise by actually providing confidential information to the employee. The majority opinion did not provide guidance on how long the employer can wait to provide confidential information.

Although it may not be obvious, Sheshunoff makes a little clearer what remains a muddy area of the law. We now know that confidential information does not have to be provided at the time a covenant not to compete is signed. Although less certain, the decision also suggests that covenants signed by at-will employees can be enforceable, so long as confidential information is provided pursuant to a confidentiality agreement prior to the termination of the at-will relationship. The case does not clear up another of the Act's requirements that a covenant not to compete must contain "limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the [employer]." Applying that requirement will continue to be a source of debate.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.