Texas Non-Compete Law Blog : Texas Non-Compete Agreements Lawyer & Attorney : K&L Gates : Trade Secret Litigation : Serving Austin, Dallas, San Antonio

A recent case from the federal court in Dallas sheds some light on various issues involving the enforceability of non-compete agreements.

In Staples, Inc. v. Sandler, No. 3:07-CV-0928-K, 2008 WL 4107656 (N.D. Tex. Aug. 29, 2008), the employee, Sandler, upon joining Staples, Inc., signed a “Proprietary and Confidential Information Agreement” and a separate “Non-Compete and Non-Solicitation Agreement” (“Non-Compete Agreement”).

In the “Recitals” section of the Non-Compete Agreement, the employer recited that it “has and will entrust Employee with proprietary information, strategies, knowledge, customer relationships and know-how which would be detrimental to the Company if disclosed.” The court held that, under Sheshunoff, this recital was a “unilateral contract conditioned upon performance.” The court added: “Further, the confidentiality agreement signed contemporaneously with the noncompete provided a promise of confidential information. Thus, Staples promised to provide Sandler with confidential information that would give rise to its interest in restraining Sadler from competing.”

The court confirmed that the confidential information given by Staples to Sandler was sufficient consideration for the non-compete: “Staples has established that it provided Sandler with access to cost margins, pricing lists, sales figures, and assorted business information, including customer information. Although not necessarily trade secrets of the highest order, these may be confidential in the sense that they are not readily available to the public.”

The restrictions contained in the noncompete agreement prohibited Sandler from doing business not only with Staples’ customers, but also with “customers or prospective customers” that he “knew, serviced, or was familiar with prior to joining the Company."

The court held that this restriction was overly broad:

“Here, it is apparent that the restraint on competition is not justified to the extent contemplated in the covenant not to compete given Sandler's relatively short employment, the minimal amount of confidential information he received, and Staples' legitimate interest in protecting the confidential information it provided him during his tenure. Thus, the Court finds that Staples' legitimate interest in confidentiality gives rise only to a restraint on Sandler that prevents him from competing by doing business with customers he gained during his eleven-month tenure with the company. A restraint that prevents him from continuing long-standing relationships that he brought with him to Staples is overbroad, unrelated to Staples; legitimate interest in confidentiality, and would further unreasonably burden these third-party customers.”

OBSERVATIONS:

1.         The court emphasized the need for the employer to promise to convey confidential information. However, the court located part of the promise in a different [but contemporaneously signed] document (the Proprietary and Confidential Information Agreement).

2.         The Court confirmed that confidential information necessary to justify a non-compete agreement does not have to rise to the level of a trade secret. The Court was skeptical of an argument that employers routinely make to prove that their information is confidential (i.e., “The fact that our information is password protected proves it’s confidential”).

3.         The Court found the non-compete restriction overly broad because it applied to customers with whom Sandler worked before he became employed by Staples. It would be interesting to know whether the result might have been different had Staples given Sandler confidential information about these customers. Arguably, if Staples entrusted Sandler with new confidential information (i.e., information that he didn’t previously know) about these customers, the conveying of that information by Staples would have justified the non-compete restrictions.

4.         The Court notes the challenge inherent in binding relatively new employees (11 months, in this case) to non-competes (because they may not yet have been exposed to enough confidential information to justify the restrictions).

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Almost two years ago, in the Sheshunoff case, the Texas Supreme Court rejected the notion that an employer must provide the employee with confidential information at the precise moment the non-compete agreement is signed for the agreement to be enforceable. According to the court, it is not fatal to the agreement's enforceability if the information is actually provided sometime later.

But how exactly must the agreement be worded for it to be enforceable? A recent case out of the Corpus Christi Court of Appeals addresses that question. In Shoreline Gas, Inc. v. McGaughey, an at-will employee was bound by an agreement that contained promises by the employee (a) not to disclose the employer's confidential information and (b) not to engage in post-employment competition. 

Significantly, the agreement did not obligate the employer to provide confidential information to the employee. Nevertheless, the court found that the employer had in fact provided such information.

The court first held that the non-compete agreement was an enforceable unilateral contract. The court explained:

McGaughey's promise not to disclose Shoreline's confidential information, though not enforceable when made, constituted an offer for a unilateral contract which Shoreline had the option to accept. Shoreline accepted McGaughey's offer by performing—that is, by supplying McGaughey with confidential information—and so a unilateral contract was formed under which McGaughey became bound by his promise not to disclose that information.  . . . Under Sheshunoff, such a unilateral contract constitutes an "otherwise enforceable agreement" sufficient to support an accompanying non-compete covenant.

The court specifically addressed the employee's contention that the agreement was unenforceable because it did not contain a promise by the employer to provide the employee with confidential information:

McGaughey notes that, unlike in the present case, the Sheshunoff employment contract required the employer to provide to the employee with "access to certain confidential and proprietary information and materials belonging to Employer. . . ." Alex Sheshunoff Mgmt. Serv., L.P. v. Johnson, 209 S.W.3d 644, 647 (Tex. 2006). This promise was illusory, however, because the employer could avoid performance simply by terminating employment. Further, this promise was not of the type that could be considered an offer for a unilateral contract that could be accepted by the performance of the promise. Therefore, it could not have formed the basis of an "otherwise enforceable agreement" capable of sustaining a non-compete covenant. See Id. at 650.

Thus, according to the court of appeals in McGaughey, as long as the employer provides confidential information to the employee (even if the agreement does not contain a promise by the employer to do so), a unilateral contract is formed when the employer does so (with the employee's promise not to disclose the information constituting the other part of the unilateral contract). According to the court, this unilateral contract is an otherwise enforceable agreement sufficient to support a promise by the employee not to compete.

This holding should be examined in light of the following passages from Sheshunoff (with emphases supplied): 

If only one promise is illusory, a unilateral contract can still be formed; the non-illusory promise can serve as an offer, which the promisor who made the illusory promise can accept by performance. For example, suppose an employee promises not to disclose an employer's trade secrets and other proprietary information, if the employer gives the employee such specialized training and information during the employee's employment. If the employee merely sought a promise to perform from the employer, such a promise would be illusory because the employer could fire the employee and escape the obligation to perform. If, however, the employer accepts the employee's offer by performing, in other words by providing the training, a unilateral contract is created in which the employee is now bound by the employee's promise. The fact that the employer was not bound to perform because he could have fired the employee is irrelevant; if he has performed, he has accepted the employee's offer and created a binding unilateral contract . . . .

*           *           *

We agree with Light's recitation of basic contract law in footnote six that "[i]f only one promise is illusory, a unilateral contract can still be formed; the non-illusory promise can serve as an offer, which the promisor who made the illusory promise can accept by performance." Upon further review of the Act and its history, however, we disagree with footnote six insofar as it precludes a unilateral contract made enforceable by performance from ever complying with the Act because it was not enforceable at the time it was made.

*           *           *

We now conclude, contrary to Light, that the covenant need only be "ancillary to or part of" the agreement at the time the agreement is made. Accordingly, a unilateral contract formed when the employer performs a promise that was illusory when made can satisfy the requirements of the Act.

*           *           *

But if, as in the pending case, the employer's consideration is provided by performance and becomes non-illusory at that point, and the agreement in issue is otherwise enforceable under the Act, we see no reason to hold that the covenant fails.

A few observations:

1.         Sheshunoff addressed a non-compete agreement containing a promise by the employer to provide confidential information to the employee, and the opinion speaks of the employer's "promise"—although the promise was "illusory" when made, because the employee could have been fired in the interim—becoming enforceable upon the information being conveyed. Thus, Sheshunoff can be seen as assuming that the employer must promise to provide the confidential information, even if the promise is "illusory" at the time it is made.

2.         The court in McGaughey construes Sheshunoff as only requiring the employer to provide confidential information; the contract need not contain an explicit promise to provide confidential information.

3.         Obviously, in drafting new agreements, the safest course remains to include language by which the employer explicitly promises to provide confidential information to the employee.

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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.’” 

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