Non-Compete

Recently, an interesting case came out of the Dallas Court of Appeals that addressed a number of the topics dealt with here, including arbitration, choice of law, and equitable extension of a non-compete agreement. A copy of the opinion can be found here. In short, the defendants sold their insurance underwriting company to the plaintiff. Included within the buy sell agreement was a non-compete agreement that provided for Delaware choice of law. In an interesting twist, there was a provision in the non-compete agreement that essentially prevented the defendants from even preparing to compete.

Not surprisingly, the defendants began preparations to compete by sending marketing materials to prospective clients, filing regulatory materials, and preparing business forms.  Once the plaintiff learned of this, it instituted an arbitration proceeding and prevailed. The arbitrator equitably extended the non-compete agreement by one year.

The defendants then challenged the arbitration in the 134th Judicial District in Dallas County. The trial judge set aside the arbitration and there was an appeal. Ultimately, the court of appeals reversed the trial judge and upheld the findings of the arbitrator. I intend to address a number of concepts raised from the opinion over the next few posts.

The first key concept, is the language in the non-compete that specifically prohibited the defendants from preparing to compete. Texas and most other jurisdictions will allow an employee to prepare to compete in their own time. What this constitutes varies and of course most employees will always push the edge. Things such as setting up an LLC, preparing a website, or preparing  business cards generally do not constitute competition. But what happens when an agreement specifically prevents this type of conduct?  Here is the language;

The Restricted Parties also agree during the Restricted Period not to acquire, own or have an ownership interest in, manage, operate, or be employed or engaged by, any person or entity that conducts or plans to conduct a business that is in Competition with the [Purchasing Company].

The Dallas Court of Appeals upheld the language of the anti-preparation provision in the agreement. It reasoned  that since the parties bargained for this they were stuck with it. Though the contract was governed by Delaware law, my suspicion is that if the Texas court was applying Texas law, it might reach the same conclusion. Texas courts are very likely to enforce the agreements made between parties as long as they do not violate the law.  This provision will most likely have to pass muster under the Texas non-compete statute.  This is a new twist to efforts to curve preparation for competition by employees. There are no Texas cases on point addressing such a clause. Such a provision might be useful for employers to consider.