Alex Sheshunoff Management Serv. V. Johnson

• Decision Date: 20 October 2006
• Docket Number: No. 03-1050.,03-1050.
• Citation: 209 S.W.3d 644
• Parties: ALEX SHESHUNOFF MANAGEMENT SERVICES, L.P., Petitioner, v. Kenneth JOHNSON and Strunk & Associates, L.P., Respondents.
• Court: Texas Supreme Court

Page 644

209 S.W.3d 644

ALEX SHESHUNOFF MANAGEMENT SERVICES, L.P., Petitioner, v. Kenneth JOHNSON and Strunk & Associates, L.P., Respondents.

No. 03-1050.

Supreme Court of Texas.

Argued November 10, 2004.

Decided October 20, 2006.

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John J. McKetta III, J. Preston Randall and Eric G. Behrens, Graves, Dougherty, Hearon & Moody, P.C., Austin, for Petitioner.

Daniel H. Byrne, Cynthia W. Veidt, Bruce Perkins, Fritz, Byrne, Head & Harrison, LLP, Austin, Mary S. Dietz, Marcy H. Greer and John M. Mings, Filbright & Jaworski L.L.P., Houston, for Respondent.

Bruce C. Morris, Beirne, Maynard & Parsons LLP, Houston, M. Scott McDonald, Littler Mendelson, P.C., Dallas, for Amicus Curiae.

Justice WILLETT delivered the opinion of the Court, in which Justice HECHT, Justice BRISTER, Justice GREEN, and Justice JOHNSON joined.

In this case we revisit the Court's 1994 decision in Light v. Centel Cellular Co.¹ and again consider the enforceability of covenants not to compete in the context of at-will employment. The question today is whether an at-will employee who signs a non-compete covenant is bound by that agreement if, at the time the agreement is made, the employer has no corresponding enforceable obligation. Under Light, the answer to that question was always "no." Today we modify our holding in Light and hold that an at-will employee's non-compete covenant becomes enforceable when the employer performs the promises it made in exchange for the covenant. In so holding, we disagree with language in Light stating that the Covenants Not to Compete Act² requires the agreement containing the covenant to be enforceable the instant the agreement is made.

I. Background

Petitioner Alex Sheshunoff Management Services, L.P. (ASM) provides consulting services to banks and other financial institutions. Respondent Kenneth Johnson began working for ASM in 1993 as an at-will employee. In September, 1997, ASM promoted Johnson to director of its "Affiliation Program," a program designed to maintain relationships with clients and prospective clients. A few months after the promotion, ASM presented Johnson with an employment agreement (Agreement) containing a covenant not to compete. ASM informed Johnson that signing the agreement was a condition of continued employment. Johnson signed the Agreement in January 1998.

The Agreement was at-will in the sense that it had no fixed term of employment and stated that "[e]ither party may elect to terminate this Agreement at any time for any reason," subject to employer and employee notice provisions. The employer notice provision stated that ASM would give notice of termination to Johnson (unless the termination stemmed from employee misconduct) but then stated that ASM could immediately terminate Johnson so long as ASM paid a specified fee to Johnson.³

The Agreement also stated:

To assist Employee in the performance of his/her duties, Employer agrees to provide to Employee, special training regarding Employer's business methods and access to certain confidential and proprietary information and materials belonging to Employer, its affiliates, and to third parties, including but not limited to, customers and prospects of the Employer who have furnished such information and materials to Employer under obligations of confidentiality.

The Agreement then specified information that qualified as confidential information, and provided that the employee agreed to keep all such information strictly confidential.

The Agreement included a covenant not to compete, providing that for one year after his termination, Johnson would not provide consulting services to any ASM clients to whom Johnson had "provided fee based services in excess of 40 hours within the last year of employment," and would not "solicit or aid any other party in soliciting any affiliation member or previously identified prospective client or affiliation member."

The parties dispute whether the nature of the training and confidential information Johnson received after he signed the Agreement was different from the information and training he had previously received. However, there is no dispute that after the Agreement was signed Johnson received confidential information. ASM also paid for training from third parties that was provided to Johnson after he signed the Agreement. ASM was under no preexisting contractual obligation to provide such information and training.

In 2001, Johnson participated in confidential meetings regarding ASM's plans to introduce a bank overdraft protection product. He requested and received an internal manual on this new product. The market leader for such products was Respondent Strunk & Associates, L.P. (Strunk). In early 2002, Strunk contacted Johnson about hiring him. ASM offered evidence that, after Strunk contacted Johnson, he continued to receive confidential information from ASM regarding its plans to offer the new overdraft product. In March 2002, Johnson told ASM that he was leaving to work for Strunk.

ASM sued Johnson, alleging breach of the covenant not to compete and seeking injunctive relief and damages. Strunk intervened. The court granted a temporary injunction. Strunk and Johnson then moved for summary judgment, arguing that the covenant was unenforceable as a matter of law. They argued that under footnote six of Light, 883 S.W.2d at 645 n. 6 (discussed below), ASM's promises to provide confidential information and specialized training were illusory at the time the agreement was made and the covenant was therefore unenforceable. The district court granted the summary judgment motions. The court denied Strunk's request for attorney fees, however, and entered a final judgment.

The court of appeals affirmed. 124 S.W.3d 678. It held that under footnote six of Light, the covenant was unenforceable because the promises to provide specialized training and confidential information were illusory when the agreement was made and therefore did not comport with the Act's requirement that the agreement be enforceable when it was made:

At the heart of the parties' dispute is whether ASM's promise to provide special training and access to confidential information was illusory. Under section 15.50, the relevant inquiry is whether ASM's promise was binding at the time that the agreement was made . . . . ASM's promise to give Johnson access to training and confidential information in the future was illusory because ASM could have fired Johnson immediately after he signed the agreement and escaped its obligation to perform . . . . Thus, ASM's acceptance of Johnson's promise to maintain confidentiality by later providing confidential information created a unilateral contract but not an otherwise enforceable agreement at the time the agreement was made. See Light, 883 S.W.2d at 645 n. 6.

124 S.W.3d at 685, 687.

II. Discussion

The Covenants Not to Compete Act (Act) states:

[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 other business interest of the promisee.

TEX. BUS. & COM.CODE § 15.50(a).

A. "At the Time the Agreement Is Made"

1. Light's Analysis

In Light, we analyzed the requirements for enforceability of a covenant not to compete under section 15.50. In that case, an employee (Light) who had held her job since 1985 signed an agreement in 1987 containing a covenant not to compete. 883 S.W.2d at 643. The agreement stated that the employer "agrees to provide the [employee] initial and on-going specialized training necessary to sell the mobile radio communications services [employer] offers." Id. at 646 n. 8. It provided that "employment is terminable at the will of either [employee] or [employer]." Id. at 645-46 n. 8.

We held that "otherwise enforceable" agreements under section 15.50(a) "can emanate from at-will employment so long as the consideration for any promise is not illusory." Id. at 645. We concluded that the agreement contained, in addition to the covenant not to compete, three non-illusory promises: (1) the employer's promise to provide initial specialized training; (2) the employee's promise to provide fourteen days' notice prior to termination; and (3) the employee's promise to provide an inventory upon termination. Id. at 645-46. We construed the employer obligation to provide initial training as not depending on whether the employee was still employed: "Even if Light had resigned or been fired after this agreement was executed, United would still have been required to provide the initial training." Id. at 646.

We held that these promises were not sufficient to make the covenant enforceable under the Act. We held that section 15.50 requires the covenant to be "ancillary to or part of" the otherwise enforceable agreement, and that to meet this requirement, two conditions must be met: "(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." Id. at 647. We concluded that the non-illusory promises in the agreement did not satisfy these requirements because the covenant not to compete was not designed to enforce the employee's promises to give notice and provide an inventory. Id. at 647 & n. 15. We recognized that the agreement must give rise to an "interest worthy of protection" by a covenant not to compete, id. at 647 (quoting DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 682 (Tex.1990)), and that "business goodwill and confidential or proprietary information are examples of such worthy interests," id. W...