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

A recurring issue in non-compete cases involves how definite the employer's promise to provide confidential information must be for the agreement to be enforceable.  Historically, disputes have focused on whether an explicit promise to provide the information was required, or whether an implied promise (e.g., language in which the employee "acknowledged" that he would receive information) was sufficient. 

In a recent case from the United States Court of Appeals for the Fifth Circuit, the court held that the following combined to make a non-compete agreement enforceable: 

1.  A definite term of employment.  The agreement provided that the employee would be employed for three years, and that he could only be terminated for good cause; 

2.  A nondisclosure provision.  The employee promised that he would not disclose his employer's confidential information to others; and 

3.  Receipt of confidential information (but no promise by the employer to provide any information).  The employee actually received confidential information from the employee. 

Based upon these facts, the court held that the agreement contained an implied promise by the employer to provide confidential information to the employee.  The court explained: "The Employment Agreement indicates that both Stock and Vybiral anticipated that Vybiral would work at Stock for at least three years. . . . Further, the Employment Agreement itself contemplated that Vybiral would be receiving confidential information, as evidenced by the nondisclosure covenant. Finally, the district court found that Vybiral did in fact have access to Stock's confidential information, including sales strategies, marketing strategies, pricing strategies, vendor arrangements, contractor programs, and customer information."

OBSERVATION: 

This opinion, as well as the earlier opinion from the Corpus Christi Court of Appeals (about which we blogged on October 1, 2008), suggests that, in determining whether the wording of a non-compete agreement is enforceable, courts are less willing than ever to invalidate an agreement because certain words (such as "Employer promises to provide Employee with confidential information") are not used.  Rather, courts seem willing to examine an agreement in its totality, to assess whether the parties envisioned that the employer would convey confidential information to the employee.  The lesson of the Texas Supreme Court's Sheshunoff opinion, and subsequent cases, appears to be that courts are putting substance over style in determining the enforceability of non-compete agreements. As a result, non-compete agreements that formerly might not have been enforceable may now be viable. 

Ray Mart Inc. v. Stock Building Supply of Texas LP, et al., No. 07-50609 (5th Cir. Nov. 5, 2008).

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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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A recent opinion issued by the federal Southern District of Texas sheds a little light on the question of how definite a promise to provide confidential information must be for a noncompete agreement to be enforceable. In Teel v. Hospital Partners of America Inc., No. H-06-3991, 2008 WL 346377 (S.D. Tex. Feb. 6, 2008), the court, quoting the Light case, noted that an "employer's promise to provide an employee with confidential or proprietary information and an employee's reciprocal promise not to disclose such confidential information `would meet the requirement that the covenant be designed to enforce the employee's consideration provided in the agreement.'"

The agreement in Teel stated that the employee's employment "will involve access to and work with" confidential information. The court, without discussion of whether this language was a sufficiently definite promise to provide confidential information, simply confirmed that the employee did in fact receive confidential information and that the restrictions imposed upon the employee were reasonable. 

As noted elsewhere on this blog, several Texas cases discuss how definite the employer's promise to provide confidential information must be for the employee's non-compete promises to be enforceable. Although the Texas Supreme Court in Sheshunoff rejected appellate decisions requiring that confidential information be transferred simultaneously with the signing of a non-compete agreement, it did not explicitly do away with the requirement that the employer actually promise to give the information to the employee.

The question in some cases becomes, "What counts as a promise?" Put another way, "How definite must the promise to provide confidential information be?" In some cases, the employee’s “acknowledgment” that he will receive confidential information gets characterized as an "implied" promise by the employer to convey the information. In the Teel case, the statement that the employee's work "will involve access to and work with" confidential information was evidently deemed to be a promise--either explicit or implied--that the employer would provide such information to the employee.

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