Attorneys’ Fees Issues in Texas Non-Compete Cases (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.

For Prevailing Employees:

Under section 15.51 of the Texas Business and Commerce Code a court may award costs and attorneys’ fees incurred by an employee in defending an action to enforce covenants not to compete and covenants not to solicit clients if:

(a) the primary purpose of the agreement to which the covenant is ancillary is to obligate the promisor to render personal services;
(b) the employer knew, at the time the agreement was executed, that the agreement did not contain reasonable limitations as to time, geographical area, and scope of activity to be restrained;
(c) the limitations were unreasonable; and
(d) the employer sought to enforce the agreement to a greater extent than necessary to protect its goodwill or business interests.

In Rimkus Consulting Group, Inc. 688 F. Supp. 2d at 678, Judge Lee Rosenthal found that the prevailing employee was not entitled to attorneys’ fees under this section, stating that, “[a]lthough Texas case law on noncompetition and nonsolicitation restrictions was clear in 1996, there is no evidence that Rimkus knew that the relevant provisions of Cammarata’s Employment Agreement were unreasonable under Texas law.” (citing SafeWorks, LLC, 2009 WL 959969, at *7 (granting summary judgment on a claim for attorneys’ fees under § 15.51 because even though Texas law was clear, there was “no evidence that SafeWorks representatives actually knew that the relevant non-solicitation provisions were unreasonable under Texas law”)). On the other hand, in Kenyon Intern. Emergency, Services, Inc. v. Malcolm, No. Civ. A. H-09-3550, 2010 WL 2303328 (S.D. Tex. Jun 07, 2010), aff’d, 421 Fed. Appx. 413, 2011 WL 1332167 (5th Cir. 2011), Judge Lynn Hughes awarded attorneys’ fees to the prevailing employees in defending against their former employer’s attempt to enforce a covenant not to compete. Judge Hughes found that the ex-employees were entitled to recover their fees under section 15.51 because the non-competition clause was unreasonably broad; the employer demonstrated no investment in training that would justify any restriction; and the employer knew when the agreements were signed that the covenants were unreasonable.

There is a question under Texas law regarding whether a employee who fails to satisfy the requirements of section 15.51 may still be entitled to attorneys’ fees under a declaratory judgment action or private agreement with the employer that provides for attorneys’ fees to the prevailing party. The court in Perez v. Tex. Disposal Sys., Inc., 103 S.W.3d 591, 594 (Tex. App.–San Antonio 2003, pet. denied) held that section 15.52’s preemption language (set forth in the section below) applied to employees, so that the only way prevailing employees could obtain attorneys’ fees is if they were entitled to them under section 15.51’s criteria (set out above). Several courts, however, have taken a contrary position, and have held that because section 15.52’s preemption language only covers actions “to enforce a covenant not to compete,” a prevailing employee may be entitled to attorneys’ fees under a declaratory judgment theory or a private agreement, even if they did not fulfill the criteria set out in section 15.51. See, e.g., Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 263 S.W.3d 232, 256 (Tex. App.–Houston [1st Dist.] 2007), rev’d on other grounds, 289 S.W.3d 844 (Tex. 2009); Contemporary Contractors, Inc. v. Strauser, No. 05-04-00478-CV, 2005 WL 1774983, at *2, (Tex. App.–Dallas July 28, 2005, no pet.) (mem. op.); Gage Van Horn & Assocs., Inc. v. Tatom, 26 S.W.3d 730, 732 (Tex. App.–Eastland 2000), pet. denied improvidently granted, 87 S.W.3d 536 (Tex. 2002) (per curiam).

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