I usually don’t dive into the weeds of particular cases here because it can be tedious and boring. That said, a recent case from the 14th Court of Appeals in Houston caught my eye. First, the employer at issue is none other than Buc-ee’s. If you’ve ever driven the highways of Texas there is a good chance you went by one and may have even stopped for gas or Buc-ee’s red velvet fudge (not that I would know). The place is gigantic and has about everything in it one would need or not need for that matter.
The case at issue involved a management level employee that Buc-ee’s hired away from TGI Fridays. Included in the employment agreement was an “Additional Compensation” provision. It provides:
…Employee shall be required to work for Employer a minimum of 60 months … and shall also provide Employer with a minimum of 6 months separation notice. In the event Employee does not provide the required notification, Employee shall be required to repay all of the Additional Compensation to Employer …
The additional compensation was a fixed monthly bonus of $1500. Guess what – the employee quit after 36 months not 60 and received a demand to pay back the additional compenation. The employee responded with a lawsuit asserting the repayment clause was unenforceable and an unreasonable restraint of trade. Buc-ee’s counterclaimed for the amount owed and they were off to the litigation races. The employee lost on summary judgment and appealed.
The court of appeals first ruled that the repayment provisions were unreasonable restraints of trade. It reasoned that the repayment obligation had no limitation tied to the geographical area the employee went to work or if the employee was actually competing. The Court also held that the provision was unreasonable because the employee had to repay even if Buc-ee’s terminated the employment relationship for any reason and even if the employee didn’t work (no competition). Not that surprising – the intent behind the provision was not to satisfy the non-compete statue it was to force a repayment. The analysis from the court of appeals was straightforward.
Here the core issue was whether the repayment provision was a forfeiture provision or a non-compete? A few years ago we discussed the Drennan case where the Texas Supreme Court addressed the issue. Here is a really long quote from that case:
[n]on-competes protect the investments an employer has made in an employee, ensuring that the costs incurred to develop human capital are protected against competitors who, having not made such expenditures, might appropriate the employer’s investment. Forfeiture provisions conditioned on loyalty, however, do not restrict or prohibit the employees’ future employment opportunities. Instead, they reward employees for continued employment and loyalty. As we recognized in Marsh, employee stock-ownership plans have a purpose that is unrelated to restraining competition—linking the interest of key employees with the employer’s long-term success. Under a non-compete, the former employer can bring a breach of contract suit to enforce the clause. But under a forfeiture provision, the former employer does not need to take legal action because the profit-sharing plan belongs to the employer.
The court of appeals held the repayment provision was not a forfeiture provision because: (1) the employer was required to pay back the company even if the company terminated her; (2) the longer the employee worked the larger the penalty became; and (3) the money had been paid already, the employer was not retaining funds.
Forfeiture provisions can be a powerful tool for preventing competition but they are not as strong as a well drafted non-compete. If crafted properly they should put the employee in the position of choosing additional compensation over working for a competitor. We will continue to monitor these types of cases. Here is a link to the case.
Enjoy your holidays.