Generally, a covenant not to compete seeks to restrict a departed employee from going to work for a competitor or starting a competing business for a period of time in a given market area. Typically the covenant is part of a collection of employment
documents designed to protect an employer's business, customer lists, trade secrets and other confidential information.

We've received a number of calls in recent years that reveal some common misimpressions about covenants not to compete in Texas. We recall a recent case in which a client avoided serious litigation by questioning a prospective employee's assurance that a covenant not to compete he had signed with a former employer was "not worth the paper it was written on because Texas is an employment at will state." A word to the wise: treat these agreements with respect. While in years past many Texas courts were reluctant to enforce these covenants, the Texas statutes have been updated and the clear trend in the courts today is to enforce the agreements if they are drafted correctly.

On April 17, 2009, the Texas Supreme Court handed down its opinion in Mann Frankfort Stein & Lipp Advisors v. Fielding, which is the latest in a long line of cases dealing with covenants not to compete. The case involved an agreement signed by Mr. Fielding, a CPA, who had left his accounting firm to start a competing business and had
taken some of the firm's clients with him. Mr. Fielding had been an "employee at will," meaning that either he or the accounting firm could end their employment for any reason at any time without obligation. However, Mr. Fielding had signed an agreement in which he had promised to keep information obtained at his prior firm confidential and that contained a "client purchase provision." Under the client purchase provision, Mr. Fielding agreed to pay a fee to his former firm in accordance with a formula any time he performed work for a client of the accounting firm within one year after leaving. Such an agreement is considered a type of covenant not to compete because it creates a financial disincentive for departing employees to compete with their former employers by working for the same clients or customers.

The so-called "Covenant Not to Compete Act" in Texas provides in part as follows:

"[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains 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 promisee."

The phrase "otherwise enforceable agreement" has been at the center of several recent cases. An employment contract for a specific term or one that can only be terminated for "cause" is an "enforceable agreement" and, therefore, if a covenant not to
compete is part of the employment contract it is also enforceable assuming the other requirements of the statute are satisfied. The situation becomes more complicated where employment is at will and neither party has a legally "enforceable agreement" for continued employment. In employment at will cases some other type of "enforceable agreement" between the employer and employee must exist or else a covenant not to compete is invalid and will fail. Depending on the facts, an employer's promise to provide an employee at will access to confidential information, coupled with the
employee's promise not to disclose such information, can be considered an "otherwise enforceable agreement" that will support a covenant not to compete.

The facts of the Fielding case presented a unique situation because while the contract Mr. Fielding signed required him to keep the accounting firm's client information confidential, there was no corresponding language in the agreement obligating the firm to give Fielding any confidential information. Mr. Fielding argued, therefore, that the agreement he had signed was one-sided, "illusory" and unenforceable because at no time could he have sued the firm to force it to provide him with anything. Although it took about four years of litigation, the accounting firm finally won the case in the Texas Supreme Court. The high court held that an "enforceable agreement" existed because the accounting firm's agreement to provide confidential information could be "implied" from the circumstances. According to the court, "[w]hen the nature of the work the employee is hired to perform requires confidential information to be provided for the work to be performed by the employee, the employer impliedly promises confidential information will be provided." The court observed that, starting the second day of his employment, the accounting firm had actually given Mr. Fielding confidential information so that he could perform his duties.

The Fielding case illustrates that the significance of covenants not to compete should not be underestimated in Texas and that, depending on the facts, they can be and are enforceable in court if the controlling legal standards are met.

Congratulations to the following OBT attorneys who have been selected for inclusion in the 2009 edition of The Best Lawyers in America:

inception 25 years ago honoring his work and dedication in the specialties of Labor and

Employment

Law Jack P. Carroll – Personal Injury Litigation
 

Benny H. Hughes, Jr. – listed for at least 10 years in the specialty of Corporate Law
 

Gilbert I. Low – listed for at least 20 years in the specialties of Commercial Litigation,

Personal Injury Litigation, and White-Collar Criminal Defense
 

J. Hoke Peacock II – listed for at least 10 years in the specialty of Commercial Litigation
 

Gary Neale Reger – listed for at least 10 years in the specialties of Banking Law,

Bankruptcy and Creditor-Debtor Rights Law and Real Estate Law
 

Jo Ben Whittenburg – Health Care Law and Personal Injury Litigation

Regarded as the definitive guide to legal excellence in the United States, selection to Best Lawyers is based on an exhaustive peer-review of more than 2.5 million evaluations by the top attorneys in the country.

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Orgain Bell & Tucker, LLP proudly recognizes its attorneys listed in Super Lawyers 2008 magazine: Gilbert I. "Buddy" Low and J. Hoke Peacock II (Business Litigation); Donean Surratt, Michael Truncale and Jo Ben Whittenburg (Civil Litigation Defense); Robert Hambright (Employment Litigation Defense); Curry Cooksey (Healthcare); and David Fisher (Personal Injury Plaintiff: General).

The annual list by Law & Politics and the publishers of Texas Monthly magazine recognizes the top five percent of lawyers who have received the highest point totals as chosen by their peers, as well as through independent research. They identify highly talented lawyers in specialty areas for their outstanding professional achievements.

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We extend our congratulations to the following attorneys for their selection on the 2008 Texas Super Lawyers-Rising Stars list: Nathan Brandimarte (Business Litigation); Denise Gremillion (Personal Injury – Medical Malpractice); Ronda Harkey (Immigration); Greg Wilkins (Insurance Coverage). The annual list by Law & Politics and the publishers of Texas Monthly magazine names the state's top up-and-coming attorneys.