Entries in Non-Competes (1)

Thursday
Apr292010

Non-Competes: It Can't Just be About the Money

At a Dallas Bar Association conference last fall, Michael Maslanka gave an excellent presentation on Texas Non-Compete Law.  His presentation was informative, topical, and entertaining.  He was also very gracious in speaking with various conference attendees afterwards.  As part of his presentation, he highlighted a legal point about non-competes that is generally misconstrued when he noted that non-compete provisions cannot be supported with monetary consideration.  While it is generally known that non-compete provisions require separate consideration to be enforceable, it is less well known that non-compete provisions also require a specific type of consideration to render the provision enforceable.  In general, Texas courts have required the consideration to be an interest in something worthy of limiting competition and enjoining an individual from making a living.  So, while Texas courts will allow a company to enforce a non-compete provision when the consideration is providing access to trade secrets or other confidential information, it will not enforce non-compete provisions when the consideration is monetary.  Monetary consideration is not a worthy enough interest to prohibit competition and to limit someone from making a living.  To illustrate this proposition, the Dallas Court of Appeals recently held that consideration consisting of stock options was insufficient to support an enforceable non-compete provision.  See Marsh USA v. Rex Cook, 287 S.W.3d 378 (Tex.App.--Dallas 2009) ("Financial benefits...do not give rise to an interest worthy of protection.").

As a practical matter, this rule requiring a specific type of consideration may present problems for some employers who want their employees to execute a non-compete after that employee already has access to the employer’s trade secrets and other confidential information.  For instance, when new owners purchase a company and want to implement non-compete agreements to protect their investment, they might have some trouble getting the newly acquired employees to lawfully enter non-compete agreements if the employees’ positions do not require access to new trade secrets or other new confidential information.  In resolving this issue, an attorney must remember that money will not solve the legal problem.