Restrictions On Non-Sales Employees

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.

Yesterday, we cited case law stating that, in the context of sales employees, “a covenant not to compete that extends to clients with whom a salesman had no dealings during his employment is unenforceable.” Wright v. Sport Supply Group, Inc., 137 S.W.3d 289, 292 (Tex. App.–Beaumont 2004, no pet.).

Where the employee at-issue is not merely a salesperson, however, the above-mentioned rule does not necessarily apply. For example, in M-I LLC v. Stelly, 733 F. Supp. 2d 759 (S.D. Tex. 2010), Judge Keith Ellison reviewed a non-compete agreement that prohibited the employee from all contact with his former employer’s customers, not merely the customers he had dealings with. Id. at 798. Nevertheless, Judge Ellison upheld the non-compete agreement, stating:

Three important factors bring the Court to this conclusion. First, the short six-month duration of the covenant not to compete imposes a limited burden on Knobloch. During that six-month period, Knobloch still had several options: he could have chosen to work outside the wellbore completion industry, to work in that industry but outside of the Americas, or not to work and launch a competing business six months later. The Court is convinced that, given Knobloch’s scientific background and in-depth knowledge of the industry, all of those options remained open to him when he left his employment with SPS/GCS.

The second factor is the upper management position held by Knobloch at SPS/GCS. M-I has submitted evidence showing that Knobloch was much more than a manager and salesman for his former employer. He oversaw SPS/GCS’s relationships with major international clients. (Knobloch Dep. 85:15-86:25; Doc. No. 196, Exs. 25-27.) An engineer by training, Knobloch participated in the design of SPS/GCS’s tools and in facilitating wellbore completions. He delivered technical presentations internationally, formulated company growth strategies, and discussed product development with engineers. (Doc. No. 196, Ex. 16.) Given Knobloch’s high level of involvement in the company’s growth and development, the Court believes that restricting him from contacting SPS/GCS’s customer base was reasonable.

The third, and perhaps most important, factor goes to SPS/GCS’s protectable interest. Texas courts are generally concerned about customer contract restrictions where the client base is the protectable business interest. See, e.g., Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 387 (Tex. 1991) (defining the business interest in that case to include preserving the firm’s client base). M-I has made a strong case that the business interest in this case extends beyond SPS/GCS’s client base, given Knobloch’s intimate knowledge of tool designs and functionality. Knobloch had access to sensitive company information, including many trade secrets. The Court is convinced that the definable business interests in this case involve not just preserving a client base, but also maintaining trade secrets and other sensitive information. The restriction on all customer contact is accordingly not an unreasonable restraint of trade as to this particular employee. See Weed Eater, Inc. v. Dowling, 562 S.W.2d 898, 902 (Tex. Civ. App.–Houston [1st Dist.] 1978, writ ref’d n.r.e.).

Id. at 798-800.

In reaching his decision in M-I LLC, Judge Ellison relied on Curtis v. Ziff Energy Group. That case also teaches that a combination of factors, including the high rank of the departing employee and unique aspects of the industry involved, may make a seemingly overbroad non-competition agreement reasonable and enforceable. In Curtis, the employee worked for the employer as the Vice President of Pipelines and Energy Marketing. The relevant covenant not to compete prohibited the employee from engaging in competitive business in Canada or the United States. In the ensuing litigation over the covenant’s enforceability, the employee claimed that he was restricted from working for any oil and gas company in North America. The employer disagreed, and submitted evidence to show the court that it limited its competitors to twenty companies, which were comprised of oil and gas consulting firms. 12 S.W.3d at 119. The Court sided with the employer, holding that, based on the employee’s “job description and responsibilities, it was reasonable to restrict [him] from working in other oil and gas consulting firms in North America for a six month period.” Id. (citing Weed Eater, Inc. v. Dowling, 562 S.W.2d 898, 902 (Tex. Civ. App.–Houston [1st Dist.] 1978, writ ref’d n.r.e.).

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