Major Change in Texas Non-compete Law

In a long awaited decision, the Texas Supreme Court today drastically alters the landscape for the enforcement of covenants not to compete. In Sheshunoff Management Services, Inc. v. Kenneth Johnson and Strunk & Associates, (Tx. 10/20/06) [pdf] , the Court modifies its earlier holding in Light v. Centel Cellular, to now permit a unilateral contract to support a covenant not to compete. This means employers who promise to provide confidential information in return for a covenant not to compete can enforce the agreement so long as they provide the confidential information to the employee before he departs.

Judge Don Willett in his opening paragraph lays out the change:

In this case we revisit the Court’s 1994 decision in Light v. Centel Cellular Co. and again consider the enforceability of covenants not to compete in the context of at-will employment. The question today is whether an at-will employee who signs a non-compete covenant is bound by that greement if, at the time the agreement is made, the employer has no corresponding enforceable obligation. Under Light, the answer to that question was always “no.” Today we modify our holding in Light and hold that an at-will employee’s non-compete covenant becomes enforceable when the employer performs the promises it made in exchange for the covenant. In so holding, we disagree with language in Light stating that the Covenants Not to Compete Act requires the agreement containing the covenant to be enforceable the instant the agreement is made.

There will be tons of ink written about the decision (including more by me), but cutting to the chase -- the central question about non-compete covenants in Texas law is no longer whether it is enforceable, but whether it is reasonable.

Hiring employers and departing employees are now in a whole new ballgame.