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Texas Appellate Court Shows Non-Competes Are Still Alive and Well in Texas

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Attorney Harrison Oldham

Courts have frequently held that a no-solicitation agreement is unreasonable to the extent it prohibits a former sales employee from soliciting customers the employee did not serve for the employer. In Gehrke v. Merritt Hawkins and Associates, LLC, however, the court of appeals held that a trial court should have allowed a broader restriction barring solicitation of all the employer’s current or prospective clients. The employee in question “was much more than a mere salesman—he was an executive and vice president with intimate knowledge of [the employer’s] confidential business information and trade secrets who also supervised other salesmen.” The court of appeals also held that the employer could have legitimate concerns that the employee “might use its goodwill to take clients with him to a competitor and use [the employer’s] confidential business information and/or trade secrets to help that competitor.”

Merritt Hawkins recruits physician placements for healthcare providers, serving its customers throughout the United States. For several years, Gehrke was a Vice President and salesman at Merritt Hawkins, marketing Merritt Hawkins’s services to healthcare organizations, including hospitals and educational institutions, and supervising a team of other salesmen.

Because Gehrke needed MHA’s confidential business information to perform his job, MHA required him to enter into a confidentiality agreement that prohibited him from using the information to compete with MHA within a distinct geographic territory or soliciting MHA actual  or  prospective clients for  eighteen  months  following  his separation from  MHA . Gehrke signed the Confidentiality Agreement.

During his employment and pursuant to the non-compete and confidentiality agreement, Gehrke received access to Merritt Hawkins’s business plans, customer lists and customer information, marketing and pricing strategies, information regarding key staff, sales plans and development efforts and strategies.

In 2018, Merritt Hawkins discovered Gehrke disseminated Confidential Information in violation of the confidentiality agreement and terminated him. Shortly after, Gehrke began working for Pacific, one of Merritt Hawkins’s direct competitors. Although Pacific, like Merritt Hawkins, operated nationally, it assigned Gehrke to sell the same services in the same territories he serviced while employed by Merritt Hawkins. After commencing work for Pacific, Gehrke also contacted numerous Merritt Hawkins customers whom he had worked with while at Merritt Hawkins and customers located in the states in which he was prohibited from competing with Merritt Hawkins, and successfully obtained business for Pacific from Merritt Hawkins’s clients he was prohibited from soliciting. He also used and disclosed Merritt Hawkins’s Confidential Information in performing his duties for Pacific.

Merritt Hawkins sought an injunction against Pacific and Gehrke and asserted claims against both for misappropriation of trade secrets, tortious interference with prospective business and regarding Merritt Hawkins’s existing contractual relationships with its customers, and conspiracy, and sought temporary and permanent injunctive relief against both.

At the trial court, the Dallas District Judge granted an injunction against Gehrke from competing with his former employer but limited the ban to a series of 10-mile radiuses of MHA customers in five states where Gehrke had worked.

Pacific appealed. On appeal, the court affirmed the entry of the injunction. The court stated that enforcement of a covenant not to compete turns on its reasonableness. An enforceable covenant not to compete must contain reasonable limitations “as to time, geographical area, and scope of activity to be restrained” without “impos[ing] a greater restraint than is necessary to protect the goodwill or business interest” of the employer for whose benefit the restraint is imposed. TEX.BUS.&COM.CODE ANN.§15.50(a).  As such, an industry-wide exclusion from subsequent employment generally is unreasonable.

 

However, in this case, the record demonstrated that Gehrke was much more than a mere salesman–he was an executive and vice president with intimate knowledge of MHA’s confidential business information and trade secrets who also supervised other salesmen. As a result, the court of appeals upheld the injunction.

 

Additionally, in this case, the court took a rare extra step. Generally, the territory in which an employee works provides a reasonable geographic area for a covenant not to compete. However, the permissible breadth of geographic restraint also “depend[s] on the nature and extent of the employer’s business and the degree of the employee’s involvement in that business.”  Thus, broad geographic restrictions have been upheld when the area constitutes the employee’s actual work territory or when the employee held a management or executive position with the employer.

 

With that logic, the court of appeals questioned the lower court’s reasoning regarding the 10-mile restriction area. The court of appeals noted that the confidentiality agreement prohibited Gehrke from competing in the states in which he worked during his last year with MHA, which MHA demonstrated to be Missouri, Illinois, Arkansas, Colorado, and Southern California. Yet, the injunction’s ten-mile radius restraint restricted Gehrke’s access to customers within Missouri, Arkansas, and Illinois (the Contested States) but not those states as a whole. As such, the court of appeals concluded that the trial court abused its discretion by misapplying the law to the facts in failing to enforce a geographic restriction for all states where Gehrke had worked during his final year at MHA, including the entirety of the Contested States, and by imposing an arbitrary 10-mile radius.

 

So, what does this mean? Well, many businesses take a laissez faire attitude toward non-competes, thinking they are difficult to enforce. However, when businesses recruit an executive-level employee from a competitor and place him or her in a position to utilize their previously acquired confidential information in a competitive environment,  the company must go the extra mile to ensure that all concerns at the intersection of non-competes and confidentiality clauses have been thoroughly vetted.


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About Harrison Oldham

Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.

Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://lonestarbusinesslaw.com/.

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