What Does “Ancillary To An Otherwise Enforceable Agreement” Mean Under Texas Law? (Part I)

We are blogging on “Non-competes, Trade Secrets, Fiduciary Duties, and the Inevitable Disclosure Doctrine.” Mark Oberti has prepared a detailed paper on all of these issues, which can be found here.

In Light, a case decided in 1994, the Texas Supreme Court held that a covenant not to compete is “ancillary to or part of” an otherwise enforceable agreement at the time it was made if: (a) the consideration given by the employer in that agreement gives rise to the employer’s interest in restraining the employee from competing; and (b) the covenant is designed to enforce the employee’s consideration or return promise in that agreement. Light, 883 S.W.2d at 647; see also Alex Sheshunoff Mgmt Servs., L.P. v. Johnson, 209 S.W.3d 644, 648-51 (Tex. 2006).

Note: non-solicitation of customer agreements are subject to the same analysis as covenants not to compete. See Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 600 (Tex. App.–Amarillo 1995, no writ) (stating that “other than the moniker assigned it, nothing truly differentiates the [non-solicitation] promise at bar from a covenant not to compete”).

In 2011, the Texas Supreme Court rejected the “gives rise to the employer’s interest in restraining the employee from competing” requirement set out in Light, stating that “there is no compelling logic in Light’s conclusion that consideration for the otherwise enforceable agreement gives rise to the interest in restraining the employee from competing.” Marsh USA Inc. v. Cook, 354 S.W.3d 764, 775 (Tex. 2011). Rather, it held, the proper test is whether the consideration given by the employer merely is “reasonably related to,” an “interest worthy of protection.” Id. at 774-76.

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