Non-Compete Agreements

Once a Court enters an order upholding a non-compete, it can enforce its ruling through contempt. In some cases this can lead to jail time – even for a dance instructor (see the story below).

Insurance brokers, like many professionals often confront non-compete agreements when they consider making an employment change. Below is a synopsis of two cases dealing with non-competes in the insurance industry:

Spring v. Walthall, Sachse & Pipes, Inc., 2005 Tex. App. Lexis 6825 (Tex. App. – San Antonio 2005, no pet.) Defendant Rosemay Spring was an insurance broker for Plaintiff Walthall, Sachse & Pipes (“WS&P”). Spring resigned from WS&P and within a week contacted thirty-three of her former customers. Twenty-five signed agent of record letters indicating their desire to do insurance business with Spring. WS&P filed suit against Spring and obtained an injunction preventing her from soliciting WS&P customers or disclosing WS&P trade secrets.

The San Antonio Court of Appeals considered Spring’s appeal of the injunction. Spring’s non-compete with WS&P prevented her from acting as an insurance broker/producer for a period of 1 year within a twenty-five mile radius of WS&P’s principal place of business. Her “non-piracy covenant” prevented her from soliciting or accepting WS&P’s customers for a period of 3 years. Spring testified during the injunction that she was soliciting WS&P clients and essentially competing.

The court of appeals held that WS&P met its burden to obtain a preliminary injunction. Spring did not challenge and the Court did not address whether the non-compete or “non-piracy covenant” actually were enforceable under Texas law.

Hargrave v. Giuffre, 1999 Tex. App. Lexis 9618 (Tex. App. – Beaumont 1999, no pet.) Richard Giuffre worked for Hargrave as an insurance broker. At the outset of his employment he was required to sign a “Producer’s Contract”, that among other things, prohibited him from soliciting or accepting any insurance business from any of the insurance accounts of the agency.

The Beaumont Court of Appeals ruled “We find that the covenant in this case is not reasonable with regard to the scope of activity to be restrained in that it is not limited to those clients whom Giuffre serviced or had dealings with while at the agency.” The opinion seems to suggest that the outcome might have been different if the non-compete was tailored to Giuffre’s customers.

The Hargrave non-compete failed to satisfy Texas Business and Commerce Code 15.50. By drafting a non-compete that was overly-broad, Hargrave lost any opportunity to legally prevent Giuffre from competing.

Disclaimer

In Powerhouse Productions, Inc. v. Scott, the Dallas Court of Appeals affirmed a take-nothing judgment entered in favor of Defendant Eric Scott. Powerhouse builds rocket packs. (A rocket pack was piloted by 007 in Thunderball.) Scott began piloting the packs in the early 1990s, making over 400 flights throughout the world. Powerhouse charged clients between $15,000 to $25,000 per flight.

On February 4, 2004, Scott entered into a confidentiality and non-compete agreement with Powerhouse. The non-compete forbid Scott from competing with Powerhouse for a period of five years after the end of his employment. Scott and Powerhouse ended their relationship in November 2004.

In 2005 Scott went to work for Jet P.I., another rocket pack builder. After learning that Scott was making flights for Jet P.I., Powerhouse filed suit seeking to enjoin Scott from violating the non-compete agreement.

Section 15.50 of the Texas Business and Commerce Code provides: “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or business interests of the promisee.” As stated most recently by the Texas Supreme Court in Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006), the non-compete cannot be a stand-alone promise from the employee lacking any new consideration for the employer.” Id. Consideration from the employer “must give rise to the employer’s interest in restraining the employee from competing.” Id. at 648-49.

The Dallas Court of Appeals rejected Powerhouse’s argument that providing Scott with confidential information and training pre-2004 could serve as consideration for the 2004 non-compete. Further, letting Johnson fly the pack, the Court reasoned, did not give rise to the Powerhouse’s interest in restraining Scott from competing. The Court ruled that as there was no consideration to support the covenant not to compete, it was unenforceable.

Lessons to be learned from this opinion are: (1) an employer must provide something new to the employee to support a non-compete, past training or previous disclosure of trade secrets doesn’t suffice; and (2) there must be a nexus between the consideration provided and the non-compete. Here the court ruled that flying the rocket pack did not give rise to a non-compete. Typically, a non-compete is designed to protect trade-secrets disclosed to the employee during the course of employment.

Disclaimer