Texas Employers Seeking to Enforce Non-Compete Agreements Get Welcome Relief From The Texas Supreme Court

1n 1994, the Texas Supreme Court held that an employment at-will relationship, without more, would not support a covenant not to compete under Texas law. Light v. Centel Cellular Co., 883 S.W.2d 642 (Tex. 1994). In the twelve years since the Light decision, employers have attempted to find creative ways around the near absolute prohibition against having an enforceable non-compete agreement with an at-will employee. Unfortunately for those employers, most lower courts construing the Light decision rejected these attempts, finding that they were “illusory,” and often the reason for this result was that what the employer was giving as value for the covenant simply was not given at the moment the agreement was signed by the at-will employee.

In Alex Sheshunoff Management Services, L.P. v. Johnson, 03-1050 (10/20/06) the Texas Supreme Court addressed head on whether at-will employment necessarily invalidated a non-compete agreement. The defendant Johnson had been promoted within the Alex Sheshunoff Management Company (ASM) to a high-level managerial position. Four months later, ASM insisted that Johnson sign an employment agreement containing a non-compete. In exchange for Johnson’s promise not to compete with ASM for a period of one year following the separation of his employment, ASM promised to provide Johnson with confidential information and specialized training.

The Court noted that, under the reasoning in Light, this agreement would fail because everything ASM promised to provide Johnson was conditioned upon at-will employment and, therefore, “illusory.” The Court modified Light by finding that because ASM promised to provide confidential information and in fact fulfilled that promise, the employee should also be bound to fulfill his promises under the agreement. The Court rejected the argument that the promise to provide the confidential information was “illusory” because ASM could have had Johnson sign the agreement and then immediately discharge him. This is a significant departure from more than a decade of case law following Light invalidating non-compete agreements based on the notion that they were founded upon illusory promises by employers.

ASM v. Johnson provides Texas employers with opportunities to create enforceable non-compete agreements, even with their at-will employees. It also creates challenges for employers who hire employees bound by non-competes.

For more information about drafting and defending non-competes, please contact the Jackson Lewis attorney with whom you regularly work, William Davis in the Dallas, Texas office, at (214) 520-2400; DavisW@jacksonlewis.com or Joseph “Chip” Galagaza in the Houston, Texas office, at (713) 654-0404; Galagazj@jacksonlewis.com. For more information regarding national non-competition or trade secret issues, please contact A. Robert Fischer or Shawn Kee, in the Stamford, Connecticut office, at (203) 961-0404; Fischera@jacksonlewis.com or Keec@jacksonlewis.com.

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