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The Retreat From Technicalities

The Mann Frankfort holding follows the same trajectory as the Texas Supreme Court’s 2006 decision in Sheshunoff Management Services, L.P. v. Kenneth Johnson and Strunk & Associates, L.P., 209 S.W.3d 644, 655-56 (Tex. 2006). In Sheshunoff, the court modified its 1994 holding in Light v. Centel Cellular Co., and eliminated the technical “enforceable when made” defense to covenants not to compete, holding that an employer’s promise to provide confidential information, goodwill, or other consideration giving rise to an interest in restraining competition need not be enforceable when the agreement is made, provided the employer ultimately makes good on the promise. 

Although Sheshunoff was clear in holding that a covenant must still contain a return promise from the employee that the covenant is designed to enforce (e.g., a promise not to disclose confidential information or misuse goodwill) as originally required by Light, Sheshunoff was not clear on whether a covenant must still contain an explicit promise from the employer to provide confidential information or other consideration giving rise in an interest in restraining competition, such as goodwill. To the contrary, Sheshunoff acknowledged that a covenant not to compete could be supported by an otherwise enforceable unilateral contract formed when the employer provides the employee with confidential information and thereby triggers the employee’s return promise not to disclose it. See Sheshunoff 209 S.W.3d 644, 651 (Tex. 2006) (“There is no sound reason why a unilateral contract made enforceable by performance should fail under the Act.”). 

This lack of clarity prompted disagreement among lower courts as to whether an explicit promise by the employer was required at all. Compare Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 2007 WL 1299661, *9 (Tex. App.—Houston [1st Dist.] 2007), rev’d Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, -- S.W.3d --, 2009 WL 1028051 (2009) (lack of explicit promise to provide confidential information fatal to non-competition agreement, notwithstanding the fact that the employer in fact provided the employee with confidential information) with Shoreline Gas, Inc. v. McGaughey, 2008 WL 1747624, *4-8 (Tex.App.—Corpus Christi, April 17, 2008, no pet.) (unpublished) (lack of explicit promise not fatal to non-compete, where employer in fact provided employee with confidential information) and In re Electro-Motor, Inc., 390 B.R. 859 (Bankr. E.D. Tex. 2008) (finding an otherwise enforceable agreement based on the employee’s promise not to disclose confidential information, despite the fact that there was “no express provision by which [the employer] directly promised to provide confidential information to [the employee]”); cf. Powerhouse Productions, Inc. v. Scott, 2008 WL 3196174, *14-15 (Tex.App.—Dallas, Aug. 8, 2008, no pet.) (non-compete unenforceable where there was conflicting evidence over whether the employer actually provided the employee with confidential information and the only consideration recited in the agreement was the opportunity to become a jetpack pilot); Wood v. Reserve First Partners, Ltd., 2007 WL 2199901, *3 (Tex. App.—Beaumont 2007, no pet.) (lack of explicit promise to provide confidential information not fatal to non-compete, given that the employment agreement was not an at-will agreement and the employer in fact provided the employee with confidential information).

Implied Promise Analysis

In Mann Frankfort, the Texas Supreme Court answered the “explicit promise to provide” question by engaging in an implied promise analysis, holding, “When the nature of the work the employee is hired to perform requires confidential information to be provided for the work to be performed by the employee, the employer impliedly promises confidential information will be provided.” Mann Frankfort, -- S.W.3d --, 2009 WL 1028051, *5. In other words, a promise to provide confidential interest or other consideration giving rise to an interest in restraining competition is required, but a court may imply such a promise based on the nature of the employee’s work. See id.

It should be noted that the covenant at issue in Mann Frankfort contained an explicit promise on the part of the employee not to disclose confidential information. Notably, the court used this explicit promise not to disclose confidential information as support for finding an implied promise to provide confidential information. See Mann Frankfort, -- S.W.3d --, 2009 WL 1028051, *6 (“[I]f one party makes an express promise that cannot reasonably be performed absent some type of performance by the other party, courts may imply a return promise so the dealings of the parties can be construed to mean something rather than nothing at all.”).

A Covenant At All?

It should also be noted that the provision at issue in Mann Frankfort did not explicitly prohibit competition by Brandon Fielding but instead required Fielding to purchase from Mann Frankfort the business of any client Fielding serviced within the one year period following Fielding’s separation. Id. at 2009 WL 1028051, *1. The parties and the court assumed the purchase provision was a non-competition agreement subject to the requirements of Texas Business and Commerce Code § 15.50. See id. at 2009 WL 1028051, *3 n. 2. (not identifying as an issue on appeal the question of whether the purchase provision was subject to TEX. BUS. & COM. CODE § 15.50). Presumably, the parties so assumed based on the Texas Supreme Court’s 1991 decision in Peat Marwick & Co. v. Haass, which held that a provision requiring an employee to pay his or her former employer for certain client acquisiton expenses associated with clients subsequently serviced by the former employee was subject to the same reasonableness analysis as is applied to covenants not to compete. Peat Marwick & Co. v. Haass, 818 S.W.2d 381, 385-86 (Tex. 1991). Notably, the court held such provisions are subject to the same reasonableness analysis as is applied to covenants not to compete, if the payment provisions are “sufficiently severe” but did not explicitly hold that such provisions are themselves covenants not to compete. Id. 385-86. Moreover, the parties in Haass agreed that a separate provision requiring payment for the billed and unbilled fees and expenses associated with a client subquently serviced by the former employee was “merely a collection device” and not a covenant not to compete. Id. at 384, n. 6. Given the agreement of the parties, Peat Marwick expressly reserved any judgment regarding such provisions. Id. These issues were not addressed in Mann Franfort.

Focus on Reasonableness

In any event, it is clear that the Texas Supreme Court is serious about shifting the focus away from technicalities and toward reasonableness when it comes to covenants not to compete in Texas. Indeed, in Sheshunoff, the court specifically noted that the “core” question for covenants not to compete in Texas should be whether the covenant’s restrictions are reasonable. Mann Frankfort underscores this admonition by holding that an explicit promise to provide confidential information is not required, provided the nature of the employee’s employment requires confidential information to be provided. Accordingly, it is more important than ever that parties be prepared to litigate the reasonableness of a covenant’s restrictions. For a collection of Texas cases discussing reasonableness, please see our Texas Covenants Update.

Questions

The foregoing is not intended as legal advice. If you have questions regarding a covenant not to compete or any other matter relating to fair competition, please contact one of our attorneys.