Texas Employment Law Update : Texas Employment Lawyer & Attorney : Russell D. Cawyer : Kelly Hart & Hallman Law Firm : Dallas TX Labor Updates

I've previously written about the specific requirements that must be included in a covenant not to compete with a licensed physician to make the restrictive covenant enforceable.  The Dallas Court of Appeals recently affirmed a trial court's decision that a noncompetition agreement between a surgical practice and several limited-partner physicians was unenforceable because the agreement lacked one of the statutorily required provisions.  You can access the Court's opinion in Greenville Surgery Center Ltd. v. Beebe here.  In short, the noncompete lacked the buy-out clause required by the statute.  That defect alone was sufficient to render the noncompetition obligation unenforceable.

Beebe should remind Texas employers that when drafting noncompetition agreements, it is important to have a knowledgeable, Texas attorney review the agreement before having employees or partners sign it.

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A trial court's order granting or denying a temporary injunction in a noncompete case is rarely reversed by the court of appeals.  This week the Fourteenth Court of Appeals took the unusual step of reversing a trial court's denial of an employer's application for temporary injunction seeking to prohibit a former employee from engaging in certain competitive activities.

In EMS USA, Inc. v. Shary, EMS brought suit against its former employee (Shary) to enforce the terms of a noncompetition agreement.  The agreement prohibited, in relevant part, Shary from soliciting any of the company's customers existing as of the date of termination.  The trial court issued a temporary restraining order and later held hearings on EMS's application for temporary injunction.  At two temporary injunction hearings the trial court did not take evidence but merely heard oral argument.  Shary argued that the noncompete was overly broad as a matter of law because it was not limited to the customers that he actually dealt with but instead included all customers existing on the date of his termination.  Without taking any evidence, the trial court concluded that EMS had not shown its entitlement to an injunction.

On appeal, EMS argued that the trial court abused its discretion in failing to take evidence addressing the reasonableness of the restrictions; whether the agreement should be reformed; and whether the restrictions were ancillary to or part of an otherwise enforceable agreement such as a personal services agreement. 

The Fourteenth Court of Appeals held that the trial court abused its discretion in denying the temporary injunction without first hearing evidence.  The appellate court found that the trial court should have heard evidence regarding the reasonableness of the restrictions; the circumstances surrounding the execution of the contract; and whether the former employee had dealings with all existing customers of EMS or only part of them.  Consequently, the court of appeals reversed the denial of the temporary injunction and remanded the case to the trial court for further proceedings.

A copy of the opinion is available here.

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Since the Texas Supreme Court's Sheshunoff and Mann Frankfort opinions, Texas appellate courts have, with increasing frequency, enforced covenants not to compete in the employment context.  Gone are the days when noncompetition agreements were difficult to draft and enforce in Texas.

In Gallagher Healthcare Insurance Services v. Vogelsang, the First District Court of Appeals in Houston reversed a summary judgment to a former employee and rendered judgment in favor of the former employer on a breach of contract claim involving noncompetition obligations.  In Gallagher Healthcare, the former employee was employed as an insurance broker.  Her primary job was to renew existing business and secure new business.  After working for Gallagher Healthcare (or its predecessor) for twelve years, Vogelsang resigned and began working for a competitor.  Gallagher Healthcare sued to enforce its noncompetition agreement with Vogelsang that prohibited her from soliciting the clients she worked with during her last two years of employment with Gallagher Healthcare for two years.  The trial court found for Vogelsang and held that the covenant not to compete was not enforceable.  In reversing the trial court and rendering judgment in favor of Gallagher Healthcare, the court of appeals made the following significant conclusions.

• Two year prohibition from doing business with the 80 customers the employee dealt with during last two years of employment was a reasonable limitation.
• A customer limitation prohibiting contact with customers the employee did business during employment is an adequate substitute for a geographic limitation.
• Information given to the employee during employment was sufficient to give rise to interest worthy of protection and included:  financial information, customer information, employee salary information, client specific insurance information (e.g., insurance proposals, coverages, loss histories, exposures, limits, renewal dates, premiums, commissions and fee revenue), team related income and budgets, account retention strategies, at-risk accounts, strategic prospecting and selling, niche strategies, 2004 financial results, 2005 quarterly financial results, new and lost business summaries, professional standards audit results and related analysis, multiple types of prospect lists, premium volume comparisons, budget reviews, production reviews, internal committee lists and 2006 compensation plan.

The take away from Gallagher Healthcare, and other recent opinions, is that Texas courts are increasingly willing to enforce noncompetition agreements that are reasonably limited. 

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In addition to containing reasonable restrictions as to time, geographic scope and scope of activity to be restrained, Texas imposes additional requirements for enforceable covenants not to compete with licensed physicians.  Those additional requirements include that the covenant: 

1. not deny the physician access to a list of his patients whom he had seen or treated within one year of termination of the contract or employment;

2. provide access to medical records of the physician's patients upon authorization of the patient and any copies of medical records for a reasonable fee as established by the Texas Medical Board;

3. provide that any access to a list of patients or to patients' medical records after termination of the contract or employment shall not require such list or records to be provided in a format different than that by which such records are maintained except by mutual consent of the parties to the contract;

4. provide for a buy out of the covenant by the physician at a reasonable price or, at the option of either party, as determined by a mutually agreed upon arbitrator or, in the case of an inability to agree, an arbitrator of the court whose decision shall be binding on the parties; and

5. provide that the physician will not be prohibited from providing continuing care and treatment to a specific patient or patients during the course of an acute illness even after the contract or employment has been terminated.

This legislative session, the law was amended to clarify that these additional limitations are not required to enforce a noncompetition agreement covering a physician's business ownership interest in a licensed hospital or licensed ambulatory surgical center.  (Link here).  An ambulatory surgical center is a facility that operates primarily to provide surgical services to patients who do not require overnight hospital care.  In connection with a physician's ownership interest in those operations, only the standard requirements for enforceability in the non-physician context apply. 

The additional physician-specific requirements for covenant not to compete enforcement appear to still apply to those licensed physicians who perform management or administrative roles within hospitals and healthcare facilities. The new law become effective September 1, 2009.

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In a recent opinion of the Dallas Court of Appeals, the Court held that an insurance brokerage and consulting service firm’s noncompetition and nonsolicitation agreement obtained in return for an award of stock options to an employee was unenforceable under Texas law. (See opinion here).

Rex Cook was a long-term employee of Marsh USA, Inc. Prior to leaving his employment, Cook was a managing director. Cook was granted stock options in 1996 under Marsh’s Employee Incentive and Stock Option Award Plan. Before he exercised his options, Cook was required to sign a non-solicitation agreement that included a two-year covenant not to compete. In 2005 Cook exercised his options and in 2007 he left the company. Thereafter, he began employment with a competitor. Marsh sued the competitor and Cook. Cook asked the court to render judgment in his favor on the enforceability of the noncompete and the trial court held the agreement was unenforceable under Texas law. Marsh appealed that finding. 

On appeal, the Court explained that:

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 and it contains reasonable limitations that do not impose a greater restraint than necessary to protect the goodwill or other business interest of the promisee. [citations omitted]. To be ancillary to or part of an otherwise enforceable agreement, a covenant not to compete must meet the following two conditions: (1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer's interest in restraining the employee from competing; and (2) the covenant must be designed to enforce the employee's consideration or return promise in the otherwise enforceable agreement.

The Court then turned to whether the award of stock options to an employee “gives rise” to any interest worthy of protection for the employer. The employer argued that it uses stock option awards with its employees as a way to retain valuable employees; thereby protecting its goodwill (i.e., the relationship between the customer, employee and brokerage firm). The Court accepted the proposition that retaining valuable employees benefits a company’s good will but rejected the conclusion that such benefit gave rise to any interest in preventing the employee from competing. Furthermore, the Court reiterated that “financial benefits . . . do not give rise to an interest worthy of protection.”

As a result, the Court of Appeals affirmed the trial court’s grant of summary judgment to the employee that held that the noncompetition and nonsolicitation agreements obtained in return for an award of stock options was unenforceable. Marsh filed a petition for review with the Texas Supreme Court.

The take away from this case is that while covenants not to compete have become easier to enforce in Texas, the consideration that is given to the employee in return for the promise not to compete must give rise to some interest worthy of protection.  Money or other financial remuneration alone is unlikely to be sufficient.  Most frequently, valuable consideration to support a covenant not to compete will be in the form of a company's promise to provide its confidential information and trade secrets to the employee and the employee’s return promise not to use or disclose that information.  In that scenario, the promise to disclose the confidential or trade secret information (and the actual disclosure of that information) to the employee necessarily gives rise to an employer's interest in the noncompetition provisions.  

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