INTERNAL AFFAIRS: Ethical Issues for In-House Counsel in Workplace Investigations

1
Texas Supreme Court Rules on Covenants Not to
Compete
Matt Dow Jackson Walker L.L.P.
2
The Statute

• The covenant must be ancillary to or part of an
  otherwise enforceable agreement at the time the
  agreement is made

3
Light v. Centel

• A unilateral contract is not an OWEA at the time
  the agreement is made because the employer is not
  obliged to perform. Footnote 6 of Light.
• Any promise dependent on at will term is illusory
  and not an OWEA

4
Light v. Centel

• Strict Light Employer must promise and
  perform immediately (The Next Millisecond Test)

5
Sheshunoff

• Johnson employed in 1993
• Promoted in 1997
• 1/98Signs CNC
• Receives training from third parties
• 2001Participates in new product meetings
• 3/2002Leaves to work for competitor

6
Sheshunoff

• To assist Employee in the performance of his/her
  duties,
• Employer agrees to provide to Employee
• special training
• access to certain confidential and proprietary
  information

7
Sheshunoff The Court of Appeals

• Not enforceable because
• Information that Johnson had before he signed was
  past consideration
• No new information was given at the time that he
  signed the Agreement
• Promise to provide more training and new
  confidential information in the future was
  illusory, even if performed later

8
Sheshunoff The Supreme Court

• Question Whether an at will employee who signs
  a CNC is bound by the agmt if, at the time the
  agmt is made, the E has no corresponding
  obligation?

9
Sheshunoff The Supreme Court

• Holding An at will employees CNC becomes
  enforceable when the E performs the promises it
  made in exchange for the covenant
• Lights footnote 6 is expressly disapproved.

10
Sheshunoff Reasonableness Test

• Johnson argued the covenant was overly broad
  because
• Not related to training he got later
• ASMs goodwill unrelated to the info he got later
• No basis to restrict Johnson on customers he
  already knew about
• Court rejected
• Even though receiving the same information,
  nothing precluded ASM from seeking the greater
  protection of a CNC when it did.
• Court relied on Johnsons agreement with Strunk
  to show it was reasonable

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Sheshunoff Ancillary Test

• The consideration given by the employer in the
  OWEA must give rise to the employers interest in
  restraining competition
• The covenant must be designed to enforce the
  employees consideration or return promise in the
  otherwise enforceable agreement

12
Sheshunoff Core concerns

• Core concerns are reasonableness as to time,
  geography, and scope of activity
• We did not intend in Light to divert attention
  from the central focus of section 15.50(a). To
  the extent our opinion caused such a diversion,
  we correct it today.

13
Light and Sheshunoff The Enforcing Side

• The technicalities as to whether there is an OWEA
  are gone
• The Supreme Court, for the first time, signals a
  pro covenant view of Section 15.50

14
Light and Sheshunoff The Busting Side

• Ancillary Test Is Still ThereFor Now
• Look Carefully at Breadth of CovenantJuliette
  Fowler Is Still Good Law
• Use equitable defenses like unclean hands

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