Matt DowMatt DowJackson Walker L.L.P.Jackson Walker L.L.P.

Texas Supreme Court Texas Supreme Court Rules on Covenants Not to CompeteRules on Covenants Not to Compete

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The StatuteThe Statute• The covenant must be “ancillary to or part of

an otherwise enforceable agreement at the time the agreement is made”

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Light v. CentelLight 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

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Light v. CentelLight v. Centel

• “Strict Light” : Employer must promise and perform immediately (The “Next Millisecond Test”)

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SheshunoffSheshunoff

• Johnson employed in 1993• Promoted in 1997• 1/98—Signs CNC• Receives training from third parties• 2001—Participates in new product meetings• 3/2002—Leaves to work for competitor

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SheshunoffSheshunoff

• 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

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Sheshunoff: The Court of AppealsSheshunoff: 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

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Sheshunoff: The Supreme CourtSheshunoff: 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?

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Sheshunoff: The Supreme CourtSheshunoff: 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.

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Sheshunoff: Sheshunoff: Reasonableness TestReasonableness 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

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Sheshunoff: Ancillary TestSheshunoff: 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

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SheshunoffSheshunoff: : Core concernsCore 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.”

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Light and Sheshunoff: Light and Sheshunoff: The Enforcing SideThe 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

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Light and Sheshunoff: Light and Sheshunoff: The Busting SideThe 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”

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