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A Texas Supreme Court decision has breathed new life into noncompete covenants previously thought to be unenforceable. In Alex Sheshunoff Management Services v. Johnson, et al., a unanimous Supreme Court held on Oct. 20 that an at-will employee’s agreement not to compete with an employer after he left the job is enforceable. [ See the court's opinion.] But the Supreme Court majority also modified the court’s 1994 decision in Light v. Centel Cellular Co., holding that an at-will employee’s noncompete covenant becomes enforceable when the employer makes good on the promises it made in exchange for the employee’s agreement not to compete. In so holding, the majority disagreed with language in Light that the Covenants Not to Compete Act, Texas Business & Commerce Code ��15.50-15.52, requires the agreement that contains the noncompete covenant to be enforceable the instant the agreement is made. Under Light, an employer had to perform on its promises at the time the employee signed the agreement. Hughes & Luce labor and employment partner Robert Wood of Dallas, who is not involved in Sheshunoff, says the Supreme Court’s decision provides clarity that has been needed for a long time. “It means that noncompete agreements signed for years, stuck in somebody’s personnel file and thought to be unenforceable, may be enforceable,” Wood says of the Sheshunoff decision. Wood, who represents employers in noncompete disputes, says a noncompete agreement typically is contained in a larger employment agreement. He says the noncompete agreement must be ancillary to an otherwise enforceable agreement, and the employer and employee are making mutual promises. Matthew Hill, a Dallas labor and employment lawyer who represents employees in noncompete covenant disputes but is not involved in Sheshunoff, says that as a result of the decision, “Texas has gone from being employee-friendly to employer-friendly on noncompetes.” Hill, principal in the Law Firm of Matthew D. Hill, says the opinion “freezes” employees out of their careers, because their noncompete agreements will prevent them from working in their fields. “I think some employees will be chased out of the state,” he says. The Supreme Court’s majority opinion in Sheshunoff, written by Justice Don Willett, sets out the following FACTS: In 1993, Kenneth Johnson became an at-will employee at Alex Sheshunoff Management Services (ASM), which provides consulting services to financial institutions. In 1997, after promoting Johnson to oversee a program that developed and maintained relations with financial institutions, ASM presented Johnson with an employment agreement containing a covenant not to compete. ASM told Johnson that signing the agreement was a condition of continued employment. Johnson signed the agreement in 1998. Under the covenant, if Johnson left ASM, he was barred for one year from providing consulting services to ASM clients to whom he had provided more than 40 hours of fee-based services within his last year of employment. The covenant also barred Johnson for one year from soliciting or assisting another party in soliciting business from ASM clients or prospective clients. In 2001, Johnson attended confidential meetings on ASM’s plans to introduce a bank overdraft protection product. Strunk & Associates, which also markets such products, contacted Johnson in early 2002 about hiring him. Johnson continued to receive ASM’s confidential information on the new overdraft product after Strunk contacted him. In March 2002, Johnson told ASM that he was leaving to work for Strunk. ASM sued Johnson in a Travis County district court, alleging that Johnson had breached the noncompete covenant and seeking injunctive relief and damages. Strunk intervened in the suit, and Strunk and Johnson filed motions for summary judgment. As noted in the Supreme Court’s majority opinion, Strunk and Johnson argued in their motions that under footnote six of Light, ASM’s promises to provide Johnson confidential information and specialized training were illusory at the time the agreement was made, making the noncompete covenant unenforceable. Under footnote six, if the employee is at-will and the only consideration that the employer is required to give the employee depends on the employee continuing to be employed, then the noncompete covenant is unenforceable, Hill says. The trial court granted Strunk and Johnson’s summary judgment motions, and the 3rd Court of Appeals in Austin affirmed in 2003, based on Light. Justice Jan Patterson wrote the 3rd Court’s opinion in which Chief Justice Ken Law and Justice Bea Ann Smith joined. The Supreme Court majority in Sheshunoff disagreed with Light’s view that the employment agreement containing the noncompete covenant must be enforceable at the time the agreement is signed. The majority concluded instead that the noncompete covenant need only be “ancillary to or part of” the employment agreement at the time the agreement is made. An employee is bound by his or her promise not to compete when the employer later performs its corresponding promise to provide specialized training and confidential information, the court held in Sheshunoff. Pandora’s Box “I think it’s a very practical solution,” says employment lawyer Art Lambert, a director in Kane Russell Coleman & Logan in Dallas. Lambert, who is not involved in Sheshunoff, says a noncompete covenant becomes enforceable when the employer provides the employee the promised training and trade secrets. But Dan Byrne, Johnson’s attorney and a partner in Austin’s Fritz, Byrne, Head & Harrison, says the standard for enforceability has dropped dramatically as a result of Sheshunoff. “As a general proposition, it’s now much easier to enforce a covenant not to compete in Texas than it was for the last 12 years,” Byrne says. Preston Randall, one of the attorneys representing Sheshunoff, says that prior to the high court’s opinion, an employer had to provide its confidential information to the employee instantaneously to meet the standard, which was not practical. “The court is making the law fit the real world,” says Randall, a shareholder in Graves, Dougherty, Hearon & Moody in Austin. John Mings of Houston, a Fulbright & Jaworski partner who represents Strunk, calls Sheshunoff a pro-business decision. “We’re looking at it,” Mings says. “We are considering whether to file a petition for rehearing.” Three justices in the Sheshunoff majority � Willett, Paul Green and Phil Johnson � were not on the Supreme Court when the case was argued on Nov. 10, 2004. Three other members of the court do not agree with modifying Light. Chief Justice Wallace Jefferson wrote in a concurring opinion that the Covenants Not to Compete Act does not permit the employer’s promise “to hang in the air, indefinitely, until it “becomes enforceable’ by performance.” Jefferson, who was joined in the concurrence by Justices Harriet O’Neill and David Medina, wrote that he would hold that the employer must perform on its promise “within a reasonable time after the agreement is made.” Jefferson wrote: “After today, an employer may easily refrain from sharing trade secrets or other specialized technical knowledge with an employee for a substantial period of time after the covenant is signed, only to quickly perform once the employee indicates an intention to leave his current job for the employer’s competitor.” However, Wood says he believes there still will be an incentive for an employer quickly to provide whatever training or confidential secrets it promised to an employee to assure that the employee will be bound by the noncompete covenant. In a separate concurring opinion, Justice Dale Wainwright wrote that he would hold that the noncompete covenant that Johnson signed is enforceable because it is ancillary to an otherwise enforceable confidentiality agreement. Lambert, who represents employers, says Sheshunoff “takes away a large hurdle” for companies but doesn’t solve the core problem in noncompete cases: What is a trade secret? When the employer tries to enforce a noncompete covenant, the other side always says that the employer didn’t provide any trade secrets, he says. To help resolve that problem, Lambert says, the employer should obtain written confirmation from the employee that the employee has received the employer’s confidential information. Obtaining the confirmation, he says, will trigger the noncompete covenant. “The employer can argue that from that time on the noncompete is enforceable,” Lambert says. Hill says Sheshunoff “opens a whole new Pandora’s box of questions.” The focus now will be on whether the restrictions that employers put on employees are reasonable, Hill says. Courts will look at whether the restrictions that an employer is trying to place on an employee are justified and how broad those restrictions should be, he says. Notes Hill: “That will be where the battles are fought, on reasonableness.” Mary Alice Robbins’ e-mail address is [email protected] . Click here for the full text of Alex Sheshunoff Management Services, L.P. v. Johnson

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