Wanting to expand out of North Dakota before the Christmas season, Homer’s Christmas Tree Farm picked Bubba’s Christmas Farm in the Texas Panhandle. Knowing that Bubba’s employee, Skeeter Jones, was critical to Bubba’s continuing success, Homer required Skeeter to sign a new employment contract complete with non-competition and non-solicitation provisions under North Dakota law. When Skeeter decided to quit and open his own Christmas tree farm several months later, Homer called his lawyer Haven O’Sham in a fit of fury demanding that the non-compete be enforced against Skeeter in Texas. But which law applies, North Dakota or Texas? Homer’s lawyer insists Texas; Skeeter’s lawyer argues North Dakota law which would make the non-compete unenforceable. Who’s right?   Which state law applies? Hang on, this one is a little complicated and a departure from the customary short answer.

Texas Non-Compete Law.

Non-compete agreements are generally enforceable in Texas, so long as they are reasonable geographically, in length of time and in their scope, and so long as the employer gives up something of value such as confidential information about pricing, customers, marketing or the like.

North Dakota Non-Compete Law.

Unfortunately for Homer, North Dakota law prohibits any non-competition agreement except when: (1) you sell the goodwill of a business and limit the non-compete to a city or county; or (2) partners in a partnership agree not to carry on a similar business in the same city as the partnership.

The Winner?

Probably Homer and Texas law. Most courts if given the opportunity will enforce their own state law against their own residents. Recently the United States Court of Appeals for the Fifth Circuit addressed an argument similar to Homer’s that Texas law should apply. In Cardoni v. Prosperity Bank, Prosperity Bank acquired F&M Bank and Trust out of Oklahoma. As part of the deal Prosperity required F&M’s employees in Tulsa to sign new employment contracts that contained non-compete agreements. The contracts were governed by Texas law. The employees quit and went to work for a competitor in Tulsa. Prosperity tried to obtain an injunction to enforce the non-competes, but the employees said Oklahoma law governed, and that Oklahoma law prohibited the non-competes. The court of appeals agreed, holding that Oklahoma had a materially greater interest than Texas in determining the issue because the bankers performed most of their work in Oklahoma, and Tulsa was identified as the place of performance in their contracts. Because Oklahoma prohibits non-compete agreements, those provisions in the bankers’ contracts were invalid.

Tilting the Scales in Your Favor.

Because each state’s laws differ widely, to successfully enforce important provisions such as non-compete agreements, carefully review your options with your attorney. Properly done, Homer almost certainly would have crafted a Texas employment agreement and successfully enforced the non-compete against Skeeter without having to argue about whether Texas or North Dakota law applied. Yet, final results do depend on the circumstances. There is no “one size fits all.” Enforcement of non-compete agreements are becoming more common place.

What about Generic Non-Compete Forms from the Internet?

Generic internet non-compete and employment agreements are just that – generic – and sometimes more expensive to try to enforce than they are worth. As a general rule you should always avoid generic forms from the internet for almost any legal issues. They usually cause more harm than good.

Merry Christmas and Happy New Year to all!

For most of the late 1990s and early 2000s, it was considered to be nearly impossible to have an enforceable non-compete in Texas. After clarification by the Texas Supreme Court in 2006, non-competition agreements in Texas have found new life.

Non-competition agreements typically prevent an employee from competing with an employer after their employment ends. Frequently, employers use them to protect their customer lists and contact information, pricing structures, methodologies and business strategies, or other “proprietary” information like methods to cultivate new and existing clients or marketing strategies.

Prior to the 2006 decision, most of the Texas Courts of Appeal believed that an employer had to provide trade secrets or confidential information at the same time that an employee signed a covenant not to compete. Even then, many courts declined to enforce the non-compete if the disclosed information was not “secret” enough.

Now, thanks to the Texas Supreme Court’s decision in Sheshunoff, covenants not to compete become enforceable at any time after signing when the employer actually discloses confidential information to its employee. This decision not only allows enforcement of existing covenants not to compete, it can breathe new life into non-competes previously written off by employers and their counsel as being unenforceable.

Still, in Texas, a covenant not to compete must have reasonable limitations on duration, geographical area and scope of activity. Ultimately, the enforceability of a Non-Competition Agreement depends on the balance between the employee’s ability to earn a living and the employer’s protection of its economic self interest.

Practical Points. Employees who have confidential and proprietary information, training methods or proprietary business processes to protect should avoid using a “form” agreement that is broader and longer than necessary. A Court will invariably “reform” such an arrangement. Additionally, the existence of a valid covenant not to compete might be a useful bargaining point when attempting to negotiate a mutual release of claims with a departing, disgruntled employee.

For more information, please see Alex Sheshunoff Mgmt. Services, L.P. v. Kenneth Johnson and Strunk & Associates, L.P., 209 S.W.3d 644 (Tex. 2006).

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