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

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, 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

The clearest type of consideration that satisfies the first requirement is an employer’s promise to give an employee confidential information or trade secrets in exchange for the employee’s promise not to disclose such information. Light, 883 S.W.2d at 647 fn. 14. “[B]usiness goodwill and confidential or proprietary information” are examples of interests that warrant protection by a non-compete covenant. Sheshunoff, 209 S.W.3d at 649. See also Curtis v. Ziff Energy Group, Ltd., 12 S.W.3d 114, 118 (Tex. App.–Houston [14th Dist.] 1999, no pet.) (finding a noncompete covenant ancillary to an otherwise enforceable agreement where “the covenant not to compete [was] designed to enforce [the employee’s] consideration not to disclose or use the confidential information or trade secrets after employment”); Ireland, 950 S.W.2d at 158 (finding a noncompete covenant ancillary to an otherwise enforceable agreement where “the covenant not to compete [was] designed to enforce [the employee’s] consideration not to disclose or use . . . trade secrets”).

A wide variety of confidential information can satisfy this first requirement, and give rise to an interest worthy of protection through a non-compete agreement. For example, knowledge of a unique customer base and knowledge of the equipment or products used by each of the employer’s customers are protectable interests. See Stone v. Griffin Comm. & Security Systems, Inc., 53 S.W.3d 687, 694 (Tex. App.–Tyler 2001, no pet.). Likewise, information concerning acquisition strategies, compensation and benefits formulas, and payment rates may be considered confidential information that is protectable through a non-compete. See TransPerfect Translations, Inc. v. Leslie, 594 F. Supp. 2d 742, 754 (S.D. Tex. 2009); Teel v. Hospital Partners of America, Inc., No. H-06-cv-3991, 2008 WL 346377, *7 (S.D. Tex. Feb. 6, 2008). The information need not be a trade secret: “Moreover, a covenant not to compete is enforceable not only to protect trade secrets but also to protect proprietary and confidential information.” Gallagher Healthcare Ins. Services v. Vogelsang, 312 S.W.3d 640, 652 (Tex. App.–Houston [1st Dist.] 2009, pet. denied) (citing Light, 883 S.W.2d at 647 n. 14). “Customer information is a legitimate interest which may be protected in an otherwise enforceable covenant not to compete.” Id. (citations omitted).

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