Once upon a time, a lawyer in Texas could almost certainly tell a client that the naked promise of an at-will employee that he would not compete with the employer or solicit the employer's customers after the employment relationship ended was—without more—unenforceable. Texas law regarding employee covenants not to compete prior to 2006 hinged on Texas Business and Commerce Code § 15.50(a) and the general propositions that (1) a promise to do something, without consideration, is usually unenforceable as a contract1, and (2) an employer's promise to perform some act in an at-will relationship is illusory.2 However, in recent years the Texas Supreme Court has gone to great lengths to assist employers in enforcing non-compete agreements—so much so that it may be fairly questioned whether its 2009 decision in Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 850 (Tex.2009) has bypassed the statute that expressly controls such agreements.
Before 2006, the key case for enforceability of non-compete agreements was Light v. Centel Cellular. In Light, the Court diligently applied the express requirements of TEX. BUS. & COM. CODE § 15.50(a):
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 and it contains reasonable limitations that do not impose a greater restraint than necessary to protect the goodwill or other business interest of the promisee. TEX. BUS. & COM.CODE ANN. § 15.50(a) (Vernon 2002). To be ancillary to or part of an otherwise enforceable agreement, a covenant not to compete must meet the following two conditions:
(1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer's interest in restraining the employee from competing; and
(2) the covenant must be designed to enforce the employee's consideration or return promise in the otherwise enforceable agreement.
Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 647 (Tex.1994).3 Unless both elements of the test are satisfied, the covenant cannot be ancillary to or a part of an otherwise enforceable agreement, and is therefore a naked restraint of trade and unenforceable. Light at 647.
In Light, the at-will employee executed a covenant not to compete with her employer. Id. Relying on TEX. BUS. & COM.CODE § 15.50(a), the employer sought to enforce the covenant against Light after she left the company. Id. The Texas Supreme Court held that "[a]lthough Light and [the employer] did have an otherwise enforceable agreement between them, the covenant was not ancillary to or a part of that otherwise enforceable agreement." Light, 883 S.W.2d at 643. The Court determined that Light's agreement included three non-illusory promises, but that Light's promise not to compete with her employer upon termination was not enforceable because it was not "ancillary to or a part of" the non-illusory promises, i.e., the covenant not to compete was "not designed to enforce any of Light's return promises in the otherwise enforceable agreement." Id. The agreement failed to meet the requirements of the statute, thus the covenant not to compete was not enforceable. Id. at 647-48. Although not germane to the facts in Light, The Texas Supreme Court indicated in a footnote that when the employee promises not to compete, and the employer makes an illusory promise to provide confidential information, once the employer actually provides the confidential information, the contract becomes enforceable rather than a mere promise not to compete. But this type of contract (one that may only be accepted by the employer's future performance) is not an "otherwise enforceable agreement at the time the agreement is made" and thus would still not comply with the statute. Light, at 648 n.6. This is the precise situation the Court addressed in Sheshunoff some twelve years later.
Sheshunoff Management Services, L.P. v. Johnson indicated a radical departure from the Texas Supreme Court's earlier decisions regarding covenants not to compete. The court wholly retracted its position that the non-compete provision must be ancillary to an otherwise enforceable agreement at the time the agreement is made: "[W]e disagree with footnote six insofar as it precludes a unilateral contract made enforceable by performance from ever complying with the Act because it was not enforceable at the time it was made." Sheshunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644, 650-651 (Tex.2006). The court reasoned:
Simply reading the text, the clause "at the time the agreement is made" can modify either "otherwise enforceable agreement" or "ancillary to or part of." No amount of pure textual analysis can tell us unequivocally which preceding clause is modified. Light stated that the agreement must be enforceable at the time the agreement is made, and therefore concluded that "at the time the agreement is made" must modify "otherwise enforceable agreement." We now conclude, contrary to Light that the covenant need only be "ancillary to or part of" the agreement at the time the agreement is made. Accordingly, a unilateral contract formed when the employer performs a promise that was illusory when made can satisfy the requirements of the Act.
Id. In Sheshunoff, the material terms of the agreement were that the employer promised to provide the employee access to confidential information, and the employee promised not to disclose such information. The promise to provide confidential information was illusory, because the at-will employee could be terminated at any time, thus nullifying the employer's duty to provide the confidential information. See Sheshunoff, 209 S.W.3d at 649-650. However, the employer actually gave the employee access to confidential information throughout his employment. The Texas Supreme Court held that the covenant not to compete need only be "ancillary to or part of" the agreement at the time the agreement is made, and the requirement that there be an "otherwise enforceable agreement" can be satisfied by the employer's later performance of its originally illusory promise to provide an employee with confidential information. Id. at 655. Because of the actual existence of contract terms which became enforceable later, it was somewhat understandable that the court held that TEX. BUS. & COM.CODE § 15.50(a) "does not ground the enforceability of a covenant not to compete on the overly technical disputes that Light seems to have engendered over whether a covenant is ancillary to an otherwise enforceable agreement." Fielding, 289 S.W.3d at 858 (Hecht, concurring). Its reading of the statute's "at the time the agreement is made" language is a stretch, but not clearly incorrect.
Anyone who was surprised by the Texas Supreme Court's rescission of its statement in Light's footnote six was surely stunned by its recent decision in Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 850 (Tex.2009), which stretches the law so far that it seems to abandon the need for any enforceable contract at all. In Fielding, the employee signed an agreement not to compete and not to disclose confidential information, but the employer gave no return promises whatsoever. Though the employer failed to make even an illusory promise in Fielding, the court decided to imply a promise:
The circumstances surrounding Fielding's employment indicate that his employment necessarily involved the provision of confidential information by Mann Frankfort before Fielding could perform the work he was hired to do. As a certified public accountant, Fielding was required to use the tax and financial information of Mann Frankfort's clients to complete their tax returns. In order for Fielding to perform his duties, Mann Frankfort gave him access to its client database, which contains clients' names, billing information, and pertinent tax and financial information. This was confidential information which Mann Frankfort was interested in keeping confidential.
Fielding, 289 S.W.3d at 851. The Texas Supreme Court held that the agreement not to compete was enforceable because there was an implied contract: "When the nature of the work the employee is hired to perform requires confidential information to be provided for the work to be performed by the employee, the employer impliedly promises confidential information will be provided." Fielding, 289 S.W.3d at 850 (emphasis added). The court said that if one party makes an express promise that cannot reasonably be performed absent some type of performance by the other party, courts may imply a return promise so the dealings of the parties can be construed to mean something rather than nothing at all. Fielding, 289 S.W.3d at 850. Instead of holding that the mere promise not to compete was a naked restraint of trade, as one would have expected based on precedent, the Court opted to imply an agreement that the parties never made.
The authorities cited in the Fielding opinion itself show the error of its reasoning.4 The Fielding court tries to justify its result by twisting the text of the Restatement of Contracts into something it does not actually say. Contrary to the court's explanation, an "implied contract" does not mean "an express promise that cannot reasonably be performed absent some type of performance by the other party." An "implied in fact" contract is one in which there is agreement expressed in some other manner than in the written agreement. "A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct." Restatement Second of Contracts § 4. The distinction between express and implied contracts "lies merely in the mode of manifesting assent." Restatement Second of Contracts § 4 cmt. a. The Restatement does not provide for the judicial creation of an agreement merely because one party makes a promise that could not be performed without some performance by the other party.
Another authority mis-cited by the Fielding opinion, Haws & Garrett Gen. Contractors, Inc. v. Gorbett Bros. Welding Co., 480 S.W.2d 607, 609 (Tex.1972), states that an implied contract "arises from the acts and conduct of the parties, it being implied from the facts and circumstances that there was a mutual intention to contract." The plain language of Haws demonstrates the error in the Fielding interpretation of what an "implied contract" means:
It is said that the distinction between an express contract and one implied in fact is that the former arises when the contractual terms are stated by the parties; and that the latter arises from the acts and conduct of the parties, it being implied from the facts and circumstances that there was a mutual intention to contract. 13 Tex.Jur.2d Contracts s 4 (1960); 17 Am.Jur.2d Contracts s 3 (1964); 17 C.J.S. Contracts s 4 (1963). Professor Corbin in his treatise points out, however, that contractual duty is imposed by reason of a promissory expression; and that as to this, all contracts are express contracts, the difference being in the modes of expressing assent.
Haws, 480 S.W.2d at 609. Implied assent is not created by the "circumstances" described in the written promise, as the Fielding opinion suggests. Instead, implied assent to the contract is created by the parties' actual acts and conduct. In Haws, one party had leased equipment from the other on prior occasions in an informal manner, and argued that a contract "arose out of the circumstances of the particular transaction in question in the light of prior dealings between the parties." Haws, 480 S.W.2d at 609. The proposition that a second promise must be implied where the first promise could not be performed without performance of the second promise is not stated in Haws, even in dicta. The Court has gone far afield in citing Haws as authority for its holding in Fielding.
While it may feel that Light was followed by "overly technical disputes" regarding whether a covenant is ancillary to an otherwise enforceable agreement, even the Texas Supreme Court is not free to disregard a statute duly enacted by the Legislature. The statute requires that covenants not to compete must be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made. In Sheshunoff, the court chipped away at the edges of the statute by limiting the effect of the clause "at the time the agreement is made." In Fielding, however, it has entirely ignored the statutory requirement that the covenant must be part of an "otherwise enforceable agreement."
1 Richarz v. Wolcken, 34 Tex. 102, 1870 WL 5808 (Tex.1870).
2 Consideration for a promise, by either the employee or the employer in an at-will employment, cannot be dependent on a period of continued employment. Such a promise would be illusory because it fails to bind the promisor, who always retains the option of discontinuing employment in lieu of performance. When illusory promises are all that support a purported bilateral contract, there is no contract. Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 644-45 (Tex.1994) See Sheshunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex.2006).
3 The give rise requirement may be met only if the consideration given by the company creates the interest in restraining competition. This, in turn, will occur only where the interest in restraining competition did not exist before the consideration was given. Marsh USA v. Cook, 287 S.W.3d 378, 382 (Tex.App.—Dallas 2009, pet filed). The Texas Supreme Court has consistently held that the promise to provide the employee with confidential information "gives rise to" the employer's interest in restraining the employee from competing.
4 While the Fielding opinion cites Portland Gasoline Co. v. Superior Mktg. Co., 150 Tex. 533, 243 S.W.2d 823, 824-25 (1951), overruled on other grounds, N. Natural Gas Co. v. Conoco, Inc., 986 S.W.2d 603, 608 (Tex.1998) for the proposition that an obligation should be implied, the Portland Gasoline case involved an "output contract" between merchants who made mutual promises (a completely different type of contract from the one in Fielding), and N. Natural Gas Co. overruled Portland Gasoline, holding that an implied obligation was unnecessary.