Texas Breach of Fiduciary Duty Law: Mere Silence Can Constitute Breach

Posted on December 12, 2007 by Robert Wood


It’s long been the law in Texas that an employee can, while still employed, prepare to compete with his employer, as long as he doesn’t actually do so. If he does compete with his employer, he can be found liable for breach of fiduciary duty. In a recent case decided by the federal Fifth Circuit Court of Appeals, the court explained the reason for the preparation vs. competing distinction:

In general, an employee or other agent who plans to compete with the principal does not have a duty to disclose this fact to the principal. To be sure, the fact that an agent has such a plan is information that a principal would find useful, but the agent's fiduciary duty to the principal does not oblige the agent to make such disclosure. . . .  In this respect, the social benefits of furthering competition outweigh the principal's interest in full disclosure by its agents.

The relevant facts in the case were as follows:

The plaintiff employer was a national consulting firm. One of its offices was a claims administration practice in Dallas, Texas (the “Claims Practice”). The Claims Practice’s primary business was administering complex class-action settlements. 

The two defendants in the case were high level employees who worked for the Claims Practice. Some of their responsibilities included staffing, business development, client relations, and contract negotiations for the Claims Practice. 

In the spring of 2001, one of the defendant employees was contacted by a competitor of the company. The competitor was interested in buying the employer’s Claims Practice. In response, the defendant employees prepared a proposal for the competitor to purchase virtually all of the Claims Practice’s clients and employees for $22.5 million. The proposal contained confidential business information about the Claims Practice: revenue projections, backlog estimates, margin rates, staff turnover rates, and profit margins on specific employees. The transaction was to be routed through a “management-owned corporation” – a corporation owned by the two defendants and unrelated to their employer. The defendant employees never informed their employer of this proposal to sell the Claims Practice.

Although the first proposal fell through, the defendant employees continued to submit similar proposals to other competitors – at least three different competitors between 2001 and 2002. In addition, the defendant employees brought representatives of the competitors into the Dallas Claims Practice office and introduced other employees to those representatives.

In May 2001 – just after the initial contact between the defendant employees and the competitor – one of the defendant employees negotiated and signed a four-year lease in a Dallas office building on behalf of the employer. The employer was aware of and approved of the lease; however, the employer was not aware of the proposals being submitted to various competitors.

In June 2002, about a year later, another employee– a computer technician – was instructed to copy company data onto a portable, non-company server as a “special project” for one of the defendant employees. The corporate office became suspicious and visited the Dallas office, telling the employees to stop copying company data.

In September 2002, soon after the visit from the company’s corporate office, a defendant employee contacted one of the competitors that had received a proposal and urged that the two parties quickly reach a deal. Soon after, the defendant employees provided that competitor with a new proposal. The new proposal specifically identified the defendant employees and two other individuals as the sellers of the Claims Practice. The purchase of the Claims Practice was again to be routed through the corporation owned by the defendant employees. The purchase of the Claims Practice was to be for $1.2 million cash, payable to the defendants’ corporation, and 250,000 shares of the competitor’s stock. That same defendant employees also sought to become the competitor’s agents for the progression of the deal.

In late September 2002, the defendant employees approached their employer’s corporate office and asked if they could acquire the Claims Practice in exchange for assuming the four year lease on the Dallas office building. The employer rejected their offer and the defendant employees resigned. Soon after, both accepted employment with the employer’s competitor. Less than two weeks later, the employer filed suit against the defendant employees.

In upholding a jury verdict in favor of the employer, the Fifth Circuit had this to say about the breach of fiduciary duty claim:

Based on the foregoing evidence, there was a sufficient basis for the jury to conclude that in attempting to sell the Claims Practice, Wilkinson and Taulman breached their obligation of fair dealing and good faith, and in the process disclosed Navigant's confidential information.. The jury could have concluded that their acts of introducing Navigant employees to competitors' representatives and flying an employee to interview with a competitor rose to the level of solicitation. There was also sufficient evidence for the jury to conclude that Wilkinson and Taulman breached their fiduciary duty by failing to disclose their plan to sell the Claims Practice before the lease was signed. We do not mean to suggest that the mere fact that an employer signs a new lease gives rise to a duty of disclosure in all employees who have plan to compete with the employer. But in this case. Wilkinson and Taulman were the two top employees in the Dallas office, and they had active roles in negotiating, recommending, and signing the lease. There was also evidence that the plan to compete was itself wrongful, and that part of this plan was to use the lease as leverage against Navigant in future negotiations to acquire the Claims Practice on favorable terms. The reasonable inference for the jury to draw was that Wilkinson and Taulman had a conflict of interest on the lease, because though they were charged to act for Navigant's benefit when recommending it, they also had an interest in seeing Navigant burdened with a liability that they could use as leverage against it in the future. Given these specific facts, the jury was entitled to conclude that Wilkinson and Taulman's failure to disclose their activities before Wilkinson signed the lease constituted a breach of fiduciary duty.

            As this case illustrates, determining whether a breach of fiduciary claim exists is a fact-intensive endeavor. In cases in which the employee, while still employed by his employer, telephones the employer’s clients and solicits business for the employee’s new enterprise, the factual and legal analysis is comparatively easy. In this case, though, the conduct was not as egregious—or at least not as blatant—as that. But the cumulative effect of the acts in this case was enough to constitute a breach of fiduciary duty. Perhaps most interestingly, the court held that the employees’ failure to disclose—i.e., their mere silence—was one of their actions forming the basis of the breach of fiduciary duty claim.

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Texas Non-Compete Law: Can Duration of Non-Compete Agreements be "Equitably Extended"?

Posted on October 30, 2007 by Robert Wood


In a recent Texas case involving a restrictive covenant, the plaintiff contended that the duration of the non-compete covenant should be judicially extended beyond the agreement’s normal expiration date. In that case, the seller of a dance studio entered into an agreement in which she promised not to compete with the buyer. As is true in most states, non-compete covenants contained in buy-sell agreements are more enforceable than those contained in employment agreements. The covenant in this case was for five years, and the geographical scope consisted of a 50-mile radius around Waco.

The buyer subsequently sued the seller, contending that the latter was in breach of the non-compete agreement. The trial court granted the plaintiff’s motion for summary judgment and an appeal was taken.

On appeal, the seller contended that the trial court erred in holding that the ending date of the covenant not to compete was five years from the date of judgment (as opposed to five years from when the non-compete agreement was signed). The buyer responded that the trial court was right to “equitably extend” the duration of the covenant because of the seller’s “continuous and persistent” violations of the covenant.

The evidence for the alleged “continuous and persistent” violation was as follows:

The Sale and Purchase Agreement was signed on February 27, 2004. Lezley did not begin working for Unity Dance and the Bratchers until July 11, 2005. On August 31, 2005, the trial court temporarily enjoined Lezley from either directly or indirectly soliciting or encouraging any current and/or potential students of Holley's dance studio, Jenni Holley Dance Designs, to become either her student or the student of any other dance company or teacher within 50 miles of Holley's dance studio. She was not specifically enjoined from teaching dance. Unity Dance and Bill and Donna Bratcher were enjoined from either directly or indirectly using Lezley's name in their advertising. They were also enjoined from soliciting or encouraging by direct contact any persons known by them to be current customers of Holley's dance studio as long as Lezley was working at Unity Dance. There is no indication in the record that Lezley, Unity Dance, or the Bratchers violated this temporary injunction.

Based upon these facts, the court of appeals held that the trial court erred in equitably extending the non-compete covenant.  However, the court also stated, “We do not hold that a covenant not to compete cannot be equitably extended, but hold that the record does not support Holley’s argument that the violations of the covenant, if any, were `continuous and persistent.’” 


Farmer v. Holley, 237 S.W.3d 758 (Tex. App.--Waco 2007), review denied.

 


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Texas Trade Secret Law: When Your New Employee Knows Too Much

Posted on October 29, 2007 by Robert Wood


Not infrequently, whenever an employer hires a competitor’s ex-employee, the competitor sues not only its ex-employee (for an alleged non-compete violation, breach of fiduciary duty, misappropriation of trade secrets, tortious interference, etc.), but also the new employer.  The plaintiff contends, for example, that just as its ex-employee is liable for using and disclosing its trade secrets, the new employer is also liable for receiving and using the secrets.

One way in which new employers try to inoculate themselves against such a suit is by directing their new employees not to bring their former employer’s confidential information with them.  In a case decided within the past two months, the “new” employer sent an offer letter to its prospective new employee containing the following language:

We are not interested in confidential business information or trade secrets from your former employer.  Rather, we are looking for your sales talent to contribute to the success of our business.  We do not want you to use any of the confidential and/or proprietary information while you are working for us.  We ask that you not use or divulge any confidential and/or proprietary information obtained during your [previous] employment and require that you sign an Agreement on Prohibited Disclosures as a condition of this offer.

After the employee resigned from his “old” job and began his new one, his new employer had him sign a non-disclosure agreement containing the following language:

You agree not to use, have in your possession, or refer to any information, data process, or method which is or was claimed to be confidential or proprietary by any former employer, customer, supplier or consultant.

By way of clarification, and not by limitation, you agree neither to use, have in your possession, nor refer to any of the following items from a former employer . . . if such information is or was claimed to be confidential or proprietary:

·        Blueprints

·        Business Plans

·        Computer Programs

·        Computers

·        Confidential Knowledge

·        Consultant Lists

·        Customer Lists

·        Data Bases

·        Confidential or Proprietary Data

·        Computer Media (e.g., disks CDs)

·        Documents

·        Employee Lists

·        Equipment

·        Training Materials

·        Files

·        Financial Information

·        Formulas

·        Manuals

·        Market Information

·        Marketing Materials

·        Notebooks

·        Notes

·        Original Works of Authorship

·        Sketches

·        Software

·        Telephone Directories

·        Trade Secrets

·        Vendor Lists

When the former employer subsequently sued both its ex-employee and the new employer for misappropriation of trade secrets, the court found the new employer’s insistence that its new employee not bring any confidential information with him (as evidenced by the documents referenced above) as persuasive evidence (but not the only evidence in the case) that the employee had not in fact done so.

When hiring a new employee, especially one involved in sales (i.e., an employee who, were he trying to do so, might be able to “steal” his former employer’s clients), a new employer is wise to direct its new employee not to use or disclose his former employer’s confidential information (and also to have the new employee sign a non-disclosure agreement that contains a provision reiterating that direction).


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Texas Noncompete Agreements: Effect of Employer Breach

Posted on October 22, 2007 by Robert Wood


What happens if an employer seeking to enforce a non-compete agreement is itself in breach of the agreement.  Does the employer's previous breach adversely affect its ability to enforce the non-compete?  Maybe.

It's "hornbook" law in Texas that one party to a contract is precluded from enforcing a contract if that party itself is in “material” breach. In DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 682 (Tex. 1990, the Texas Supreme Court explicitly recognized that an employer in material breach of an employment agreement could be estopped from enforcing the non-compete provisions contained therein.  Of course, an issue in every case will be whether, assuming the employer is in breach, the breach is “material.”  Failure to pay compensation to which the employee is entitled might, in appropriate circumstances, qualify as material.  Thus, an employer wishing to enforce a non-compete agreement should ensure that it is not already in material breach.

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Texas Executive Employment Agreements: Checklist for Employees

Posted on October 16, 2007 by Robert Wood


Employees signing employment agreements in Texas should be mindful of the following potential terms:

            1.         Term of Employment. Employment agreements are typically either for a fixed term or are at-will. An at-will agreement, obviously, can be terminated by either party at any time for any reason. Some agreements contain “Evergreen” provisions, which state that the term of the agreement shall be automatically extended unless one of the parties notifies the other of its intention that the agreement expire at the end of the then current term (with such notice typically being due thirty or sixty days before the end of the term). Moreover, some employment agreements that are purportedly for a fixed term (e.g., a one-year term) also contain provisions pursuant to which the employer may terminate the employee “for any reason” on shorter notice (e.g., “thirty days’ notice”)—such an agreement is in reality a 30-day employment contract.

            2.         Position, job duties, location. Employment agreements routinely contain provisions outlining what the employee’s title will be, what his duties will be, to whom he will report, where he will work, etc. From the employee’s perspective, it is important that these terms be fairly well defined. For example, does the agreement allow the employer to transfer the employee out of state, or are there restrictions on the employer’s ability to do so? Does the agreement permit the employer to alter the employee’s job duties, or to change the person to whom the employee reports? Especially from the employee’s perspective, it is important that the agreement define these terms with some precision.

            3.         Compensation. Employment agreements typically reference some guaranteed compensation (e.g., salary) and some discretionary compensation (e.g., bonuses and stock options). On the guaranteed part, employees need to know whether they are to be classified as “exempt” under the FLSA or non-exempt. Employees need to know what must occur for the bonus to be paid. Is payment of the bonus totally discretionary? Does it depend upon the company’s performance, or the employee’s performance, or both? Granting of stock options often usually will be governed by a separate plan, and the employee needs to know what its terms are.

            4.         Termination for Cause.  Employment agreements often provide that an employee may be terminated for “cause,” and “cause” is defined to include various acts or omissions by the employee. Some of the acts—such as commission of a felony, or embezzlement of company funds—are fairly easy to understand. However, defining “cause” to include the employee’s failure to perform her job duties may be somewhat problematic from the employee’s perspective, because whether the employee is performing well can be subjective. Generally, employees want what constitutes “cause” to be defined as precisely as possible. Even in an at-will employment agreement, whether “cause” exists can be relevant for other reasons—e.g., whether the terminated employee is eligible to receive severance benefits.

            5.         Termination for Good Reason. Employment agreements for a specified term often set forth situations in which the employee may voluntarily resign. “Good reason” for the employee to terminate might exist where the employee is demoted, or his pay is cut, or he his transferred. Again, even in at-will employment situation, the concept of termination for “good reason” might be relevant to whether the employee receives severance benefits.

            6.         Nondisclosure Agreements. Employment agreements routinely contain provisions prohibiting the employee from disclosing the employer’s confidential or proprietary information to a third party. An employee needs to know what information the employer considers to be confidential or proprietary.

            7.         Noncompete Agreements. Especially for salespeople, executives, or managers, employment agreements can contain provisions limiting an employee’s right to compete with the employer, both during and after employment. The provision usually will specify certain activities in which the employee may not engage, and will typically contain a geographic scope as well. The employee will want to fully understand how long the non-compete lasts, and what it precludes the employee from doing (both in terms of the activities to be restrained and the geographical scope of the restrictions).

            8.         Nonsolicitation Agreements. Along with noncompete provisions, employment agreements often contain provisions prohibiting the employee from soliciting the employer’s customers, or its employees, or its vendors. In Texas, these provisions can be enforceable, but they are held to the same standard to which noncompete agreements are held—i.e., the employer must give consideration to the employee (such as confidential information) that justifies the nonsolicitation provision, and the provision must be reasonable in scope.

            9.         Change in Control. What happens if the employer is purchased by another company? Should that affect the employee’s obligations? Should the employee be able to escape his noncompete and nonsolicitation obligations? On a related note, should the employer be able to assign the agreement to another company (so that the “new” company can enforce the employee’s noncompete and nonsolicitation obligations)? Employment agreements don’t always address these issues, but employees are wise to think about them.

            10.        Arbitration. More and more, employment agreements state that legal disputes between employers and employees must be submitted to binding arbitration (versus being litigated in court). Provisions like this can be one-sided (i.e., sometimes, only the employee is required to arbitrate its disputes, whereas the employer can go to court). Employers need to be mindful of the effects of agreeing to arbitrate disputes as opposed to litigate them.

            11.        Choice of Law and Forum Selection. Employment agreements usually specify the state whose law will govern the agreement, and they sometimes specify the place where suit must be filed in the event of a legal dispute. The latter can be especially problematic for an employee, because it may require her to bring any claims she may have in a foreign state, which can be very expensive.

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What Does "Solicitation" Mean?

Posted on September 28, 2007 by Robert Wood


Texas non-compete agreements frequently contain non-solicitation provisions, i.e., provisions that prohibit the employee, both during employment, and for a period of time thereafter, from soliciting the employer’s clients, employees, or both.  But whether a particular act or communication constitutes solicitation is not always clear.

A Massachusetts case decided a couple of years ago illustrates the difficulty in making this determination.  In that case, the following provision was at issue:

Nonsolicitation Covenant. For a twelve (12) year period commencing on the date hereof, Seller shall not, directly or indirectly, (a) employ or contact any person who is employed or engaged by the Company or in any manner seek to induce any such person to leave his or her employment or engagement with the Company. (emphasis supplied)

The court summarized the pertinent facts in the case were as follows:

Since selling her stock in January of 2001, Deborah Halpin has not been employed by anyone else or anywhere else, as she has worked at home taking care of her three children.  Subsequent to entering the covenant not to compete, Ms. Halpin has engaged in numerous instances of intentional social contact with several Quaboag employees with whom she is good friends.  Ms. Halpin has known one such employee for over twenty (20) years since they worked together in a racquetball club in Charlton.  The summary judgment record does not contain any evidence that Ms. Halpin's contact involved any business-related conduct or discussions.  In her deposition, Ms. Halpin stated that her communications were strictly personal and social in nature.  In response, the plaintiff points solely to the non-solicitation provision, arguing that it prohibits any and all contact, including social contact. (emphasis supplied)

The plaintiff contended that Halpin had violated the non-solicitation provision by having any contact, even though the contact was purely social in nature.  The court disagreed:

The words "no contact" in the agreement in question were used in the context of a non-solicitation agreement.  The term "solicit" denotes more than simple contact.  It consists of "an attempt to obtain something by persuasion, or to ask for the purpose of receiving."

An examination of the heading, "Nonsolicitation Covenant," contained in the covenant suggests it was intended by the parties to bar only contact of this nature. The non-solicitation provision applies only to conduct of a competitive nature when it appears within the context of an agreement such as the "Covenant Not To Compete."  There is no evidence that the conduct complained of has hampered Quaboag's stability or success in any manner.

If the contract language is read as the plaintiff suggests it means that the defendants were prohibited from engaging in any form of direct or indirect contact or communication, regardless of the nature of such exchanges, with any Quaboag employees for a period of twelve (12) years beginning on January 1, 2001.  Not even in the context of civil restraining orders issued to protect people from domestic violence under G.L. c. 290A is the prohibition of "contact" understood in such a strictly formalistic manner.

Based on the above considerations, there are no facts indicating the Deborah Halpin breached the non-solicitation provision of the covenant not compete.  She worked with Quaboag for approximately eighteen (18) years. As such, she likely established lasting professional and personal ties with employees in the Quaboag community. Ms. Halpin's deposition testimony indicates that as she understood the covenant, she could not contact employees or customers for the purpose of enticing them away from Quaboag or interfering with business operations.  The fact that Ms. Halpin's continued friendships and frequent social encounters could give her a competitive advantage in the future if she engaged in any of solicitation (of which there is no evidence in the record before me) is not enough to demonstrate a breach by Ms. Halpin.

As this case illustrates, courts can be reluctant to forbid employees from engaging in social contact with their friends (some of whom can be former customers or employees) when the contact does not involve soliciting for business.  Of course, social contact can involve solicitation for business—even if no business is actually discussed.  The key for employers is, make it clear in the agreement that you not only want to prohibit business contact, but also social contact.  And then be able to persuade a court that such a restriction has a legitimate business purpose.

Quaboag Transfer, Inc. v. Halpin, 2005 WL 937305 (Mass. Super. 2005).


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Texas Physician Noncompete Agreements: Checklist for Physicians

Posted on August 31, 2007 by Michelle E. Roberts


In our practice we see many disputes between doctors and their employers from both sides of the fence. Quite often these disputes are between practices or institutions and doctors who are just “hitting their stride,” developing loyal patients and looking at their practice options for the future. At that point, both parties search for the contract they signed and put in a drawer a few years earlier and begin examining its arcane phrases with a scanning electron microscope.

The eventual terms of any agreement between a doctor and his or her employer depend on many factors, including the respective bargaining power of the parties. We thought it would be helpful for you to have a road map of the terms you are likely to encounter in your first agreement.

Like any document prepared by a lawyer, there is some fine print at the end. In the meantime, give some thought to these items (which by no means exhaust the important provisions of an employment agreement) before you make your first commitment as an employee:

How Long.   What is the duration – called the “term” –  of the contract? This is the duration of your employer’s commitment to you, and yours to your employer.   Is it long enough to allow you to establish your practice? Is it so long that you would be unfairly stuck with a fixed compensation structure while your practice grew?   Does the contract automatically renew at the end of the initial term and keep renewing (usually for a year at a time) unless one side cancels with notice (called an “evergreen clause”) – which can be both good or bad, depending on how the contract handles it?

How Much.   How is your compensation set? Is it tied to performance?   If so, does the contract fairly allow you some influence on your performance goals and your employer’s support in meeting them?   This tends to be a business term heavily influenced by market factors, but you still need to ensure that your future employer gives you a fair shot to maximize your income. 

Review incentive compensation and bonuses. When are they paid? What offsets will the practice take for expenses (such as technicians and nursing staff). If you leave before you receive a bonus, are you entitled to a pro rata share of the bonus or incentive compensation?

Out-of-Pocket (or Purse).    You will have a lot of expenses.   Most employers pay or reimburse the basics, but consider some unusual expenses, such as costs associated with providing services at multiple locations, and don’t forget necessary certifications and continuing medical education. Don’t assume that your employer will pay all expenses of you being a doctor – get it clear up front.

Vacation.   Is there a paid vacation policy? What if you can't or don't choose to take all your paid vacation? Will the days roll over to the next year, or can you cash out your unused days?

Sick Leave/Personal Time.    What does your employer provide if you are temporarily disabled due to injury or illness?  Does the agreement define the term "disability”? If you are disabled, how long will you receive your base compensation?  If you have minimum collection requirements in your contract, can this be adjusted to take into consideration a decrease in productivity due to a temporary disability?

On Call Obligations.   Are your “on call” coverage obligations clearly spelled out? Is call limited to specified locations?

If Your Contract Doesn't’t Go to Term.   Yes, it happens. That great relationship at the outset of your employment can sour for a multitude of unforeseeable reasons. What are the conditions permitting either you or your employer to terminate the agreement before the end of its term?  The procedures are critical here. This is a major source of litigation, as is: 

Noncompetition Agreements. The hands-down winner in the I-guess-I-need-to-call-a-lawyer sweepstakes is the famous “covenant not to compete” provision, sometimes shortened to “noncompete.” This is a provision that limits (but does not entirely prohibit) an employee’s ability to work elsewhere after the employment ends or is terminated.   Some doctors are under the misimpression that these provisions are not enforceable in Texas because they are anticompetitive. Not – we repeat, not – true. It is true that there are special conditions imposed upon them in Texas, but if those conditions are met, courts will enforce contract provisions that keep you from practicing within a certain geographical area for a certain period of time after your employment ends. The good news is that there are ways to limit the effect of such provisions. 

Partnership.    If your employer is a medical practice, consider requiring a commitment on its part to consider you for partnership (or whatever form of ownership the practice uses) after a certain period of time.

Your Patients’ Records.   Your contract may end or your contract may be terminated prematurely. Either way, if you have your own patients you are going to want their records.   You need to provide for that in the agreement.

The More Things Change.   With federal law and regulation changing rapidly with respect to matters such as recordkeeping, reimbursement, and even compensation itself, employers have begun inserting provisions permitting them to make unilateral changes to the contract to keep it in compliance with law. Sounds reasonable, but you should have notice of the change and the opportunity for input (or the option to bail out).

Malpractice Insurance. Yes, your employer will provide it, but it’s more complicated than that – what happens when your employment is over? This issue is of particular importance with respect to your second employer and something called tail insurance.  Big-dollar item.

Dispute Resolution. If you have a dispute over the terms of the employment agreement, how will it be resolved?   Frequently (and, in the case of hospitals, almost always) employment agreements provide for mandatory arbitration (that is, the parties cannot go to court; the dispute is heard by a non-judge with no jury).   Does the contract provide that both sides must conduct a face-to-face meeting before initiating legal proceedings?  Is there a provision requiring the loser to pay legal fees, and, if so, which side does it favor? (One guess.)

Two Sides to Every Story. We have focused here on things that the new doctor is going to want. Your employer is going to want some things, too, and it’s going to insist on them:   Getting and keeping your license; maintaining your privileges at hospitals; abiding by the rules and regulations of the practice or institution; complying with legal requirements; and many more. Still, you want to make sure your employer doesn’t slip in anything unreasonable, or phrases it in such a way that it turns out to be at “gotcha” at some later date.

As noted, this list only hits the highlights. There are many other possible provisions the new employee should carefully heed.

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Will YouTube Subject Apple to Copyright Infringement Claim?

Posted on August 20, 2007 by Robert Wood


Here's an interesting article about Apple's possible liability for copyright infringement due to the ability of its iPhone to play YouTube videos:

http://news.com.com/8301-10784_3-9745198-7.html

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Enforceable Noncompete Agreements: Is At-Will Employment Really "Illusory"?

Posted on July 16, 2007 by Robert Wood


Texas courts routinely hold that at-will employment is "illusory" consideration.  Because the employer is free to terminate the employee at any time, the courts reason, giving an at-will job to someone is, legally speaking, meaningless.  Thus, non-compete agreements in Texas based upon that consideration are unenforceable.

Not all states agree.  While researching a noncompete matter in Illinois the other day, I came across this passage from a case there:

To be enforceable, a covenant not to compete must be ancillary to either a transaction (an otherwise valid contract), or a valid relationship.  Although an at-will employment agreement, whether written or oral, might not be considered "enforceable" in the strictest sense of the term, it is nonetheless an agreement and relationship with numerous legal consequences, imposing rights and obligation son both parties.  Therefore, a noncompetition covenant entered into by an at-will employee, whether the employee is employed under a written or oral agreement, complies with the requirement of ancillarity.  This is because a covenant in such a situation is not a "naked" restraint on trade, but instead is merely ancillary to the primary purpose of the relationship: an employer-employee relationship.  Thus, noncompetition covenants occurring in at at-will employment relationship are not enforceable per se.

According to this court, hiring an at-will employee subjects an employer to potential legal risk.  For example, the employee, even though she is at-will, is entitled to all protections under Title VII, the ADA, the ADEA, workers' compensation laws, the FMLA, and other laws.   The Illinois court held that at-will employment, therefore, is good consideration, not "illusory" consideration.  Although Texas courts disagree, it's interesting to examine foreign law holding otherwise.


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Texas Unfair Competition Law: Court Rejects Tortious Interference and Participating and Assisting Breach of Fiduciary Duty Claims

Posted on July 13, 2007 by Robert Wood


In July 2001, Sysco, a distributor of food service products, issued a Request for Proposal (“RFP”). Among the companies that received the RFP were Mark III and BI.

Mark III and BI had a business relationship that involved them sharing information and customers.  Unbeknownst to Sysco, their relationship was formalized in a written contract. 

Mark III and BI submitted a joint response to the Sysco RFP.  Sysco accepted their proposal, awarding Mark III one function and BI a different function.

Sometime later, a BI employee left BI and became a Sysco manager.  The new Sysco manager then terminated several Sysco employees and replaced them with BI employees.  The manager then informed Mark III that it would no longer perform the functions awarded it under the RFP (and that BI would perform them).  BI informed Mark III that it would perform work for Sysco without Mark III’s help.

Mark III filed suit against Sysco for breach of contract, tortious interference with contracts and relationships, and aiding and abetting BI’s breach of fiduciary duty.

In support of its contract claim, Mark III pointed to language in Sysco’s letter awarding the RFP stating that “if there were any issues with either company that could not be resolved to Sysco’s satisfaction, it would be grounds for both companies to lose Sysco’s business.”  However, the court held that this language imposed no legal obligation upon Sysco to keep Mark III as one of the companies performing the work.

With respect to Mark III’s tortious interference claim, the court found that Sysco was unaware of the contractual relationship between Mark III and BI.  Thus, an essential element of a tortious interference claim could not be met.

The court also declined to accept Mark III’s invitation to recognize a claim for Sysco’s alleged “participating and assisting” BI’s breach of fiduciary duty.

From Mark III’s perspective, this case illustrates the importance of proper documentation of a business deal so that, if the deal falls through, the damaged party enjoys necessary legal protections.  Here, Mark III needed a more definite written contract with Sysco, to prevent work from being taken from Mark III and its partner in responding to the RFP, BI.


Mark III Systems, Inc. v. Sysco Corp., 2007 WL 529960 (Tex. App.—Houston [1st Dist.] 2007).

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