Are Non-Competition Agreements for Sale?

Andrew Pearce, Molly Hust

July 14, 2016

What Happens When an Employer Offers Severance Payments in Exchange for an Employee’s Acceptance of Post-Employment Restrictive Covenants

Traditionally, Texas non-competes are governed by the statutory framework of Tex. Bus. & Comm. Code. Ann. § 15.50, et seq., which provides that a non-compete is enforceable if it:

  1. 1. Is ancillary to or part of an otherwise enforceable agreement;
  2. 2. Contains limitations as to time, geographic area, and scope of activity restrained; and
  3. 3. Does not impose a greater restraint than necessary to protect the goodwill or other business interest of the employer.

Texas courts have enforced these agreements so long as they comply with the requirements of § 15.50. Generally, the requirement that the non-compete be ancillary to or part of an otherwise enforceable agreement is met by the employer promising to provide the employee with access to confidential and proprietary information, or some other condition of employment.

However, employees have begun to circumvent those requirements by shifting the consideration for non-competes away from confidential information and towards financial incentives, specifically, severance payments. This type of agreement would appear to take a non-compete outside of the realm of § 15.50, and into the world of general contract law. The question then becomes: can an employer condition a non-compete agreement on the receipt of severance payments?

A court in the Southern District of Texas is currently interpreting an employment agreement containing such a provision. In Giries v. Howmedica Osteonics Corp., an employer brought a breach of contract claim against a former employee. The contract at issue was a separation agreement, which included a covenant not to compete in exchange for severance payments to the employee. The employer moved for summary judgment, arguing the employee breached the non-compete. The district court denied the employer’s motion for summary judgment, holding the employer failed to prove the employee breached the contract as a matter of law.

Although the enforceability of the non-compete in the Giries separation agreement was not the subject of the motion for summary judgment, the ultimate outcome of this case may provide guidance when faced with a similar severance-based non-compete.

Until then, other Texas courts have spoken on the issue of whether financial benefits may be the basis for a post-termination non-compete. Two Texas courts have previously held that financial benefits provided by an employer when the employee is terminated are not valid consideration for a non-compete. See Strickland v. Medtronic, Inc., 97 S.W.3d 835 (Tex. App.—Dallas 2003, pet dism’d) (finding the financial incentive of three month’s salary upon termination was not valid consideration for a non-compete); see also Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452 (Tex. App.—Austin 2004, pet. denied) (holding one month’s salary was not valid consideration for a post-termination non-compete).

Both the Strickland and Trilogy courts found that financial incentives offered to employees upon termination did not give rise to an interest worthy of protection by the non-compete. Therefore, an employer faces an uphill battle if it hopes to obtain injunctive relief or damages against an employee for violating the terms of a non-compete based on a promise to provide financial benefits to the employee upon termination.