Philip Durst Deats durst & owen, p.l.l.c. - PowerPoint Presentation

Philip Durst Deats durst & owen, p.l.l.c.707 west 34th St.Austin, texas 78705 Recent Developments in Noncompete Cases 1

Key Dates in History of CNTC Law 2 1414 : Dyer’s Case : refusing to enforce noncompete 1711 : Mitchel v. Reynolds : enforcing noncompete in sale of bakery 1891 : Welsh v. Morris: Texas case enforcing noncompete in sale of funeral home 1963 : Wall v. Trinity Sand & Gravel: Texas case enforcing non-compete agreement against employee

Key Dates in History of CNTC Law 3 1987 : Hill v. Mobile Auto Trim: Texas Supreme Court Adopts “Common Calling” restriction: “Today, we are presented with an individual who is skilled in auto trim repair and are asked to prohibit him from engaging in a common calling. We refuse to do so. The longevity of the reasonableness approach has been its flexibility.” Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168, 172 (Tex. 1987)

1989: Legislature First Enacts Statute on Noncompetes (§15.50) 4 Notwithstanding Section 15.05 of this code, a covenant not to compete is enforceable to the extent that it: Is ancillary to an otherwise enforceable agreement but, if the covenant not to compete is executed on a date other than the date on which the underling agreement is executed, such covenant must be supported by independent valuable consideration; and Contains reasonable limitations as to time, geographical area, and scope of activity to be restrained that do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promise.

Key Dates in History of CNTC Law: 21st Century 5

Legislative Update: 2019 6 House passed HB 2730: To add the following language to TCPA (Chap. 27 of CPRC): This chapter does not apply to: (7)  a legal action to enforce: (A)  a noncompete agreement; (B)  a nondisclosure agreement; or (C)  a non-disparagement agreement.

Legislative Update: 2019 7 HB 2960: Gina Hinojosa (D-Austin): Amends §15.50 to add: (b) This section applies only to an employee who earns not more than the greater of: (1) the federal minimum wage under Section 6, Fair Labor Standards Act of 1938 (29 U.S.C. Section 206); or (2) $15.00 an hour .

§15.50 Today: 2 statutes in one? 8 (a) . . . a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee .

The “New” Importance of the Red Language 9 We also take this opportunity to observe that section 15.50(a) does not ground the enforceability of a covenant not to compete on the overly technical disputes that our opinion in Light seems to have engendered …. Concerns that have driven disputes over whether a covenant is ancillary to an otherwise enforceable agreement-such as the amount of information an employee has received, its importance, its true degree of confidentiality, and the time period over which it is received-are better addressed in determining whether and to what extent a restraint on competition is justified. Sheshunoff v. Johnson , 209 S.W.3d 644, 655-56 (Tex. 2006)(emphasis added)

Similar Language Repeated in Mann Frankfort : 10 Rather, the statute's core inquiry is whether the covenant “contains limitations as to time, geographical area, or scope of activity to be restrained that are not reasonable and impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee”. Concerns that have driven disputes over whether a covenant is ancillary to an otherwise enforceable agreement—such as the amount of information an employee has received, its importance, its true degree of confidentiality, and the time period over which it is received—are better addressed in determining whether and to what extent a restraint on competition is justified. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding , 289 S.W.3d 844, 858-859 (Tex. 2009)(Hecht, concurring)

The Language in the Second Part of §15.50 11 (a) . . . a covenant not to compete is enforceable… if it contains limitations as to time , geographical area , and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee .

Is This 3 Factors or 4? 12 Alongside “reasonableness,” the statute also requires that the agreement “not impose a greater restraint than is necessary.” We have never squarely addressed whether the Act envisions two separate inquiries: (1) that the time/geography/scope limitations be “reasonable,” and also (2) that the restraint not reach beyond that which is “necessary” to protect the company's protectable interests . The latter suggests more exacting scrutiny than mere “reasonableness.” The Act separates the latter from the former with the conjunction “ and ,” suggesting separateness, while the pre–1993 version of the Act fused the two explicitly.  Either way, it is not an issue we reach today. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 783 (Tex. 2011)(Justice Willett, concurring)

3 Factors or 4? 13 Mostly 3 factors : “To be enforceable, a covenant not to compete must be ancillary to an otherwise enforceable agreement and its limitations as to time, geographical area, and scope of activity must be reasonable. “The hallmark of enforcement is whether or not the covenant is reasonable.” To be reasonable, the limitations on trade cannot “impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.” Cent. States Logistics, Inc. v. BOC Trucking, LLC, 2018 WL 5662669, at *4 (Tex. App.—Houston [1st Dist.] Nov. 1, 2018, no pet.)(citations omitted)

3 Factors or 4 14 Mostly 4 factors : “To be enforceable under Texas law, a covenant not to compete must be: (1) ancillary to or part of an otherwise enforceable agreement; (2) contain reasonable limitations as to time, geographical area, and scope of activity to be restrained; and (3) not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.” SPBS, Inc. v. Mobley , 2018 WL 4185522, at *13 (E.D. Tex. 2018)

Geographic Area: Ortega v. Abel (2018) 15 Sale of 5 grocery stores with promise that Seller (Abel) will not open an “Hispanic-themed” grocery store within ten-mile radius of 5 stores for 15 years. Ortega v. Abel , 2018 WL 4028427 (Tex. App.—Houston [1st Dist.] 2018, pet. filed)

16 A sells his grocery business to B and as part of the agreement promises not to engage in a business of the same kind within a hundred miles for three years. The business of both A and B extends to a radius of a hundred miles, so that competition anywhere within that radius would harm B's business. A's promise is not unreasonably in restraint of trade and enforcement is not precluded on grounds of public policy. Restatement (Second) of Contracts § 188 (1981)(Illustration 1). Restatement of Contracts (2d) §188: Illus. 1

Abel’s Expert Witness 17 Harper testified that consumers, including Hispanic consumers, travel between 10 to 12 minutes to go the grocery store. “After that, ... there’s no reason to go any farther because they have passed so many stores along the way.” She testified, that for quick trips to the grocery store, the travel time reduces. * * * This 10-to-12-minute travel time translates to a 3-to-5-mile range, depending on how rural or urban the location is. For more urban locations, like Houston, the 10-to-12-minute range typically only involves a 3-mile drive. Ortega v. Abel , 2018 WL 4028427 (Tex. App.—Houston [1st Dist.] 2018, pet. filed)

Court Persuaded By This Analysis of Goodwill 18 “To protect goodwill, Harper testified that a 10-mile radius around the store would be unreasonably large. A circle with a 10-mile radius contains 330 square miles. Houston, Texas, contains about 600 square miles.” Ortega v. Abel , 2018 WL 4028427 (Tex. App.—Houston [1st Dist.] 2018, pet. filed)

Court Reduces/Reforms the Geographic Area 19 “[B]ecause of the limits on distance people are willing to travel, the area needed to support a grocery store, and the locality tied to the goodwill, a 3-mile radius was “extremely generous” to protect the goodwill of a store.” Ortega v. Abel , 2018 WL 4028427 (Tex. App.—Houston [1st Dist.], pet. filed)]

Scope of Activity : McKissock v. Martin: CNTC Language 20 “In recognition and consideration of employment by McKissock, L.P., the employee hereby agrees and covenants that he or she will not during a period of two (2) years immediately following his or her termination of employment with Employer, either directly or indirectly, own manage, operate, control, be employed or retained by, participate in or be connected in any manner with any business or practice which is in competition with Employer located within the customer base which is acknowledged to be nationwide . The geographical restriction is specifically agreed to between the parties and is an acknowledgement of the nationwide nature of the Employer's business. ” McKissock, LLC v. Martin , 267 F. Supp. 3d 841, 847 (W.D. Tex. 2016)]

McKissock: Reforming the Noncompete 21 “Therefore, the Court will reform the agreement to prohibit Martin from providing services to a competitor that are similar to those that she provided to McKissock (i.e., developing and teaching insurance appraisal courses). McKissock, LLC v. Martin, 267 F. Supp. 3d 841, 856 (W.D. Tex. 2016).

Scope of Activity : Redi-Mix Concrete: CNTC Language 22 Following the termination of employment with (Redi-Mix), for any reason, Stanley Knox agrees not to engage directly or indirectly in any business substantially similar to, or in competition with, the business of (Redi-Mix), it [sic] successors or assigns, for a period of Two (2) Years , within a radius of 100 miles of Redi-Mix [sic] home address or within a Twenty-Five (25) mile radius of any customer in any area where he directly worked while employed with (Redi-Mix). Redi-Mix Sols., Ltd. v. Express Chipping, Inc., 2016 WL 7634050, at *1 (E.D. Tex. 2016), report and recommendation adopted, 2017 WL 26083 (E.D. Tex. 2017)

Court Reforms Redi-Mix Noncompete 23 Redi-Mix’s noncompete agreement prevents customers from contacting Knox.  Id.  When faced with a similar limitation, a Texas court held that preventing a customer from initiating contact creates an unreasonable restriction on trade.  Rapid Settlements , 358 S.W.3d at 790 (citing § 15.05). Because the noncompete prevents customers from contacting Knox , it is an unreasonable restraint on trade. Therefore, that limitation is broader than necessary to protect the business interest of Redi-Mix and consequently is also unreasonable. Redi-Mix Sols., Ltd. v. Express Chipping, Inc., 2016 WL 7634050, at *8 (E.D. Tex. 2016), report and recommendation adopted, 2017 WL 26083 (E.D. Tex. 2017)(emphasis added)

Scope of Activity: D’Onofrio : CNTC Language 24 The noncompete provided that for 18 months, “D’Onofrio would not: (1) “[w]ork in any capacity ... for any direct or indirect competitor of VTG in any job related to sales or marketing of cruises, escorted or independent tours, river cruises, safaris, or resort stays ” D'Onofrio v. Vacation Publications, Inc., 888 F.3d 197, 204 (5th Cir. 2018)

Scope of Activity: Court reforms D’Onofrio Noncompete 25 The covenants amount to an industry-wide restriction—preventing former employees from working in any job related to the sales or marketing of not just cruises, but also a host of other travel products—and are not limited as to either geography or clients with whom former employees actually worked during their employment. Accordingly, they amount to unreasonable restraints on trade and are therefore unenforceable.  D'Onofrio v. Vacation Publications, Inc., 888 F.3d 197, 212 (5th Cir. 2018)

5th Circuit Reforms D’Onofrio Noncompete 26 “The covenants amount to an industry-wide restriction—preventing former employees from working in any job related to the sales or marketing of not just cruises, but also a host of other travel products—and are not limited as to either geography or clients with whom former employees actually worked during their employment. Accordingly, they amount to unreasonable restraints on trade and are therefore unenforceable.” D'Onofrio v. Vacation Publications, Inc., 888 F.3d 197, 212 (5th Cir. 2018)

Unreasonable to Prohibit Contact with Customers that Employee Did Not Deal With 27 Under Texas law, covenants not to compete that “extend[ ] to clients with whom the employee had no dealings during [her] employment” or amount to industry-wide exclusions are “overbroad and unreasonable.” D'Onofrio v. Vacation Publications, Inc., 888 F.3d 197, 212 (5th Cir. 2018)

Tolling of Noncompetes for Period of Violation 28 A covenant not to compete that extends for an indeterminable amount of time is not reasonable and, as a result, is not enforceable.  Cardinal Pers., Inc. v. Schneider , 544 S.W.2d 845, 847 (Tex. Civ. App.—Houston [14th Dist.] 1976, no writ);  see also   BUS. & COM.  § 15.51(c) (requiring limitations on time of covenant not to compete to be reasonable). In  Cardinal , the covenant not to compete stated that it lasted for six months after the employee’s termination. Another provision, however, extended the time period until six months after the employee stopped being in violation of the agreement, “whether voluntarily or by injunction.”   Id.  at 847. The court held this rendered the time period indeterminable because the time period could be ascertained “only by hindsight; i.e., the duration of the covenant cannot be determined until the jurisdiction of the trial court is invoked and its equity powers exercised.”  Id. Cent. States Logistics, Inc. v. BOC Trucking, LLC, 2018 WL 5662669, at *5 (Tex. App.—Houston [1st Dist.] 2018, no pet.)

Noncompetes & Future Business Plans? 29 Fomine v. Barrett , 2018 WL 6376500, at *4, fn. 2 (Tex. App.—Houston [1st Dist.] 2018, no pet.): “Further, Fomine does not cite any authority in which the reasonableness of a geographic restriction in a covenant not to compete included plans for future expansion.  See   Cobb v. Caye Pub. Grp., Inc. , 322 S.W.3d 780, 785 (Tex. App.—Fort Worth 2010, no pet.).” GTG Automation, Inc. v. Harris , 2018 WL 5624206, at *4 (Tex. App.—Eastland 2018, no pet.): “The court noted that it had not found any cases where areas “targeted for future potential expansion, standing alone, is reasonable” for the purposes of a covenant not to compete.  [ Cobb ] Id. at 785.

The Future of Generic Noncompetes? 30 In recognition and consideration of employment, the Employee hereby agrees and covenants that he or she will not during a period of two (2) years immediately following his or her termination of employment with Employer, either directly or indirectly, own manage, operate, control, be employed or retained by, participate in or be connected in any manner with any Competitive Business within the United States. “Competitive Business ” is defined as any enterprise performing work similar to that of Employer during the time of Employee’s tenure or any business contemplated by Employer during that period.