Fifth Circuit Provides Guidance on Non-Compete Reformation Timing

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Attorney Harrison Oldham

On August 7, 2020, the Fifth Circuit provided guidance on a previously unaddressed issue under Texas law: namely whether reformation of an overbroad non-compete restriction is appropriate at the preliminary injunction stage or must occur as a remedy after trial upon the merits.

In Calhoun v. Jack Doheny Companies, Inc., the Fifth Circuit decided that reformation of an overly broad covenant not to compete agreement was warranted at the preliminary injunction stage. No. 20-20068, — F.3d —, 2020 WL 4557641 (5th Cir. Aug. 7, 2020).

In Calhoun, Jack Doheny Companies (“JDC”) sought a preliminary injunction against its former employee, Donald Calhoun, for breach of a non-compete agreement.  Although the district court found the agreement likely to be overbroad and unenforceable under Texas law, it declined to preliminarily reform the agreement into one with reasonable terms pursuant to the Texas Covenants Not to Compete Act, holding that the record was not yet developed enough for such reformation to be appropriate.

Jack Doheny Company sells, rents, and repairs “industrial utility vehicles” like garbage trucks and street sweepers. Donald Calhoun worked for JDC in a sales position in Texas from 2010 to 2019. During the course of his employment, Calhoun signed a contract labelled “Employee Confidentiality and Non-Competition Agreement.” Part of that agreement stated that Calhoun “shall not perform, in North America, service for, become engaged by, or aid, assist, own, operate or have any financial interest in a company that is in the [industrial utility vehicle business]” for two years after leaving JDC.

Soon after Calhoun left JDC, he began working for Custom Truck One Source. JDC discovered that Calhoun was working for Custom Truck when an email to Calhoun from a potential customer was inadvertently sent to Calhoun’s old JDC email address instead of his new Custom Truck address.

After this discovery, JDC sent Calhoun a cease-and-desist letter requesting that he “refrain from competing with [JDC] per the terms of the Non-Competition Agreement.”

Calhoun then sued JDC in Texas state court, seeking a declaratory judgment that the non-compete agreement is unenforceable for overbreadth

In Texas, covenants that place limits on former employees’ professional mobility or restrict their solicitation of the former employers’ customers and employees are restraints on trade and are governed by the Covenants Not to Compete Act. Tex. Bus. & Com. Code § 15.50 et. seq.

The Act provides that:

a covenant not to compete is enforceable . . . 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.

Texas courts have previously noted, “[u]nder Texas law, covenants not to compete that extend to clients with whom the employee had no dealings during her employment or amount to industry-wide exclusions are overbroad and unreasonable.” For that reason, the district court was correct to find that JDC was unlikely to prove the agreement enforceable as written and therefore not entitled to a preliminary injunction enforcing the terms of the agreement

The Texas Covenants Not to Compete Act states that if a non-compete covenant is found to be unreasonably overbroad, “the court shall reform the covenant to the extent necessary to cause” the covenant to be reasonable. Tex. Bus. & Com. Code § 15.51(c).

In reaching its decision, the Fifth Circuit noted that a preliminary injunction inquiry requires judicial determination of likelihood of success on the merits, which necessitates an examination of the agreement under Texas non-compete law. The Fifth Circuit further noted, “[t]his conclusion would lead to Texas authority that strongly suggests, if not requires, reformation of an agreement at the preliminary injunction stage.”

The Fifth Circuit’s decision outright rejects the argument that reformation is a remedy available only after a final trial, finding “[t]his argument runs against the clear majority practice of Texas courts, which have on many occasions reformed contracts for the purposes of granting interim relief.” Instead, the Fifth Circuit cited Texas authority stating that, in addition to being a final remedy, reformation may be made as incident to a grant of injunctive relief.

In closing, the Fifth Circuit held that the district court “should have decided whether and what reformation terms were most likely to make the agreement enforceable under Texas law,” and remanded to allow the district court receive evidence and argument to effectuate this analysis at the preliminary injunction stage.

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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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