Jottings By An Employer's Lawyer

Tuesday, July 19, 2005

Covenants Not to Compete, Texas Style and the Supreme Court Selection


I know next to nothing about Judge Edith Brown Clement, the media predicted nominee to replace Justice O'Connor. But in the next ten to twelve weeks I am quite sure I will be told more than I want to know about her by people who know next to nothing as well. (Actually that probably can be said of the last six hours.)

The only decision of Judge Clement's that I do know anything about is of significance only to those who have ever tried to determine the enforceability of a covenant not to compete under Texas law.

As some background, it helps to know that in the late 1980's and early 1990's there was a contest of wills between the Texas legislature and the Texas Supreme Court that could basically be summarized as the legislature favored covenants not to compete and the Supreme Court opposed them. After bouncing back and forth with each trying to outdo the other, the matter was finally "settled" by a Supreme Court decision, Light v. Centel Cellular which has puzzled practitioners and courts for a number of years. My view has always been Light ended the debate between the legislature and the Supreme Court because it took years for anyone to understand it.

Just as lawyers were beginning to feel they had some handle on how Light was going to be interpreted by the courts, the 5th Circuit handed down Guy Carpenter & Company, Inc. v. Provenzale, 334 F.3d 459 (5th Cir. 2003) authored by Judge Clement. (There was some irony in that the 3 judge panel interpreting a highly confusing Texas body of law consisted entirely of Louisiana judges.) Although any opinion which waded into the murky waters of Light was potentially difficult to understand, Guy Carpenter was at best confusing, particularly given the way Texas courts had begun to interpret Light.

Commentators agreed. From the Texas Labor and Employment Law Section's newsletter:

The Fifth Circuit also appears to hold that the seminal Texas case on covenants not to compete, Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642 (Tex. 1994), has been misinterpreted by most of the intermediate Texas courts of appeals. In a nutshell, the Fifth Circuit's decision indicates that when an employee's access to trade secrets is the reason for a noncompetition agreement, the noncompetition agreement will not fail merely because the promise of such access may be "illusory" to an employee at will. [emphasis added]
Or Cameron J. Shilling, in his article Restrictive Covenants: A Multi-State Survey Of Judicial Decisions From January 2003 Through January 2004:

Some Courts construe this timing requirement very strictly. See C.S.C.S., (agreement stating that employer "may reveal" confidential information to employee is insufficient); Sheshunoff, ("The fact that [the employer] gave new confidential information and training to [the employee] some time after entering into the agreement will not suffice.") Tom James of Dallas, Inc. v. Cobb (agreement stating that employee "has received" confidential information is insufficient). Other courts do not construe the timing requirement so strictly. See Beasley v. Hub City Texas, L.P., (agreement stating that employee "will be" granted access to confidential information is sufficient where employee later was provided with such information); Guy Carpenter & Co., Inc. v. Provenzale (refusing to read the timing requirement strictly because doing so "pin[s] the enforceability of non-solicitation agreements on whether an employer discloses confidential information at the time the employee signs an employment contract, [which] is not what [Tex. Bus. & Com. Code Ann.] §15.50 intends or requires.") Unfortunately, these disparate readings of the timing requirement are leading to factually indistinguishable results, and confusing Texas' statutory law governing restrictive covenants. [all cites omitted, emphasis added]

One law firm's comment on the decision was that, "The safest route for an employer is to promise in the agreement to provide at least some of the confidential information the moment the employee begins working. Many of the Texas cases have required this, and it is far from clear that the Fifth Circuit's opinion in Provenzale represents the law in Texas.[emphasis added]
And finally, in a written paper at an employment and labor law seminar this spring, two commentators note, "The Fifth Circuit's 2003 opinion in Guy Carpenter & Company, Inc. v. Provenzale ... demonstrates the confusing nature of the unusual non-compete law in Texas. ... The Fifth Circuit, in a confusing opinion, reversed the trial court." [emphasis added]

Although admittedly confusing, Judge Clement's opinion got to what many thought was a common sense reading of the statute and arguably what the pro-covenant legislature had intended. In fact, the Texas Supreme Court is currently considering a case which gives it another opportunity to bring some clarity to this area of the law.

But my biggest hope -- that no Senator bothers to ask Judge Clement about this opinion. No one should be forced to defend having to sort out the post-Light jumble of decisions and the current state of Texas law on the enforceability of covenants not to compete. The process will be painful enough without that added burden.

One final irony -- the author of the initial opinion in Light v. Centel Cellular that started us down this path? None other than one of the likely shepherds of Judge Clement's nomination, then Texas Supreme Court Justice, now United States Senator, John Cornyn, a member of the Judiciary Committee before whom Judge Clement will first appear.

Updated: Almost two years after it was argued the Texas Supreme Court finally issued its opinion in Sheshunoff, see Major Change in Texas Non-compete Law.

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