Texas ruling shakes up legal assumptions for job contracts
Finance, sales and technology professionals may face signing more noncompete agreements

Dallas Morning News
November 19, 2006
NOBLE SPRAYBERRY / Special Contributor to The Dallas Morning News

Employment in careers such as finance, sales and technology may increasingly mean signing a noncompete contract.

'Many employers were reluctant to use noncompete contracts because the enforceability was so unpredictable,' says Scott McDonald, a Dallas-based attorney who specializes in employment and labor law.

Lawyers say a recent Texas Supreme Court ruling firms up the legal foundation for contracts that can place some limits on a person's future employment while protecting a company's competitive advantage. The emphasis on a noncompete contract must now focus on whether the contract is justifiable and reasonable, a broad distinction replacing a technical reading of the law that many state courts struggled to apply.

"There's still going to be many contracts not enforced because they're not justified," said Scott McDonald, a Dallas-based attorney at Littler Mendelson, which specializes in employment and labor law. "Employers who try to use this for everyone in their workforce will run into trouble."

Employers, however, can now anticipate enforcement of contracts written within the bounds of the new ruling, which should increase the number of noncompete contracts in the workplace, Mr. McDonald said. "Many employers were reluctant to use noncompete contracts because the enforceability was so unpredictable," he said.

The change could touch many industries and many jobs. A salesperson who built up lucrative contacts for one company might face prohibitions against working within 50 miles of that sales territory for a competitor.

Similarly, a technology worker who receives specialized training from a current employer might work under a contract limiting the use of that specific knowledge for one year after leaving to work with a competing business.

Ripple effect

The shift could ripple through several layers of business.

When hiring, a company must now evaluate the ramifications of any noncompete contract a job-candidate signed with an earlier employer. Companies must determine how and whether to incorporate noncompete contracts into their own hiring. And employees who sign a contract should expect enforcement.

"I think this signals strongly that employers can now use noncompete contracts," said Tad McIntosh, founder of a recruiting company, HumCap, specializing in the technology field.

When hiring, a company should now consider whether a possible employee is already encumbered by a contract. "You will be able to create a stronger position for your company, but you must also check to see if a person is wrapped up with a former company that pretty much ties them up," he said.

For employees, it's often easy to allow the emotions of taking a new job to cloud the importance of carefully reading and fully understanding any contract signed, said Jon Davis, director of Matrix Resources' Dallas office. The company is a national staffing agency.

"The advice we give to any job seeker is to thoroughly read any employment agreement you're asked to sign," he said. "If you feel like it's too restrictive, this is something you can negotiate."

An employee shouldn't hesitate to seek legal advice to clarify any contract before signing, Mr. Davis said. "You don't have to take it at face value."

And workers should ignore a common misperception, Mr. McDonald said. Texas is considered a "right to work" state, which people assume provides protection for employees against enforcement of noncompete contracts.

The "right to work" designation only addresses labor unions, stopping any mandatory requirement to join a union before someone takes a job, he said.

Questions abound

Confusion isn't uncommon when it comes to noncompete contracts in Texas.

The recent ruling is the latest shot in years of legal ping-pong, with state lawmakers drafting legislation in favor of these contracts and the state Supreme Court generally weakening their use, Mr. McDonald said.

The new standard was defined in a unanimous opinion by the Texas Supreme Court in the case of Alex Sheshunoff Management Services LP against Kenneth Johnson and Strunk & Associates.

The court evaluated noncompete contracts in light of the state's general rule in favor of at-will employment, which means an employee can be dismissed for any reason at the will of the company or leave a company at any time.

The broad issue was whether an employee was bound by a noncompete contract if the employer didn't immediately disclose the trigger for the contract, such as confidential information or specialized training.

The latest ruling cleared up a case created when Kenneth Johnson left Alex Sheshunoff Management Services, which provides consulting services to banks and other financial institutions.

Mr. Johnson went to work with a Sheshunoff client, Strunk & Associates. Mr. Johnson had signed a noncompete contract and received specialized training and confidential information.

Mr. Johnson and Strunk argued that Texas law required the employee to receive any confidential information or experience at the signing of the noncompete contract. Knowledge gained later didn't apply.

The court ruled a noncompete contract must contain reasonable limitations as to time, geography and scope of activity. And the court determined the transfer of the protected information was not required at a contract's signing.

The court reversed an earlier appeals court decision, which found that the contract between Mr. Johnson and Alex Sheshunoff Management was reasonable and sent the case back to the trial court. Litigation to continue

The ruling, though, doesn't end the possibility of litigation. In fact, the decision may land more noncompete contracts in court as employers realize they now have a better chance of enforcement, said Carrie Hoffman, a lawyer with Gardere Wynne Sewell in Dallas.

She predicts district courts will place a greater emphasis on determining whether a noncompete contract is reasonable. For example, a court might approve limiting competition for a year, or even two, but balk at longer limits, she said.

While many courts will side with the individual, companies probably will anticipate new opportunities to limit competition. Employers probably will go to court more often and expend more effort to enforce these agreements, she said.


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