Refocusing Light: Alex Sheshunoff Management Services, L.P. v. Johnson Moves Back to the Basics of Covenants Not to Compete.

Authors

Michael D. Paul
Ian C. CrawfordFollow

Abstract

The law regarding covenants not to compete is a product of the tension between competing rights, including the right of companies to protect trade secrets, market share, and corporate goodwill. Companies use non-compete covenants to deter competition from former employees and discourage employees from job hopping. A covenant not to compete is generally defined as a contractual provision in which one party agrees to refrain from conducting business similar to that of the other party. Courts generally enforce covenants concerning activities after the termination of employment if such covenants are “reasonable in scope, time, and territory.” The promise cannot be an unreasonable restraint on trade or restrict gainful employment and should be ancillary to an otherwise valid transaction. A restraint on competition must only be as restraining as necessary to protect the promisee’s rights. The covenant is usually viewed in the context of what could happen when a breach of promise occurs, and not what has already occurred. Up until the 1960s, Texas courts applied the reasonableness standard in enforcing non-compete agreements. If the covenant was deemed unreasonable, the court had the latitude to reform the agreement. Prior to Alex Sheshunoff Management Services, L.P. v. Johnson the agreement had to be enforceable and non-illusory at the time the agreement was made. The covenant still needed to be reasonable in time, geographic area, and scope of the activity to be restrained. Moreover, the covenant also had to be designed to enforce a return promise by the covenantee, which was a very narrowing requirement. Post-Alex Sheshunoff, instead of worrying about determining the precise time the ancillary agreement becomes enforceable, employers and employees focus more on what the legislature intended—meaning, the reasonableness of the restraints. In this respect, Alex Sheshunoff represents a return to common sense in the enforcement of non-compete agreements.

Publisher

St. Mary's University School of Law

Recommended Citation

Michael D. Paul & Ian C. Crawford, Refocusing Light: Alex Sheshunoff Management Services, L.P. v. Johnson Moves Back to the Basics of Covenants Not to Compete., 38 St. Mary's L.J. (2007).
Available at: https://commons.stmarytx.edu/thestmaryslawjournal/vol38/iss3/2