As I write this, it’s Friday night and I feel all right.
See, my firm recently obtained and collected a judgment for attorney’s fees for a defendant in a Texas noncompete lawsuit.
After a bench trial, the court entered Preliminary Findings of Fact and Conclusions of Law, ruling for our client that the noncompete was unenforceable. After further evidence and briefing on attorney’s fees, the court entered Additional Findings Regarding Claim for Attorney’s Fees and a Final Judgment for $39,355 in attorney’s fees.
I know, I know. Those are rookie numbers in this racket. Next time we gotta pump those numbers up.
But still, recovering fees for a defendant in a noncompete suit is rare. How did we do it?
Let’s start with the Texas noncompete statute. It says:
If the primary purpose of the agreement to which the covenant is ancillary is to obligate the promisor to render personal services, the promisor establishes that the promisee knew at the time of the execution of the agreement that the covenant did not contain limitations as to time, geographical area, and scope of activity to be restrained that were reasonable and the limitations imposed a greater restraint than necessary to protect the goodwill or other business interest of the promisee, and the promisee sought to enforce the covenant to a greater extent than was necessary to protect the goodwill or other business interest of the promisee, the court may award the promisor the costs, including reasonable attorney’s fees, actually and reasonably incurred by the promisor in defending the action to enforce the covenant.
Tex. Bus. & Com. Code § 15.51(c).
This is already a model of clarity and brevity, obvs. But just for grins, let’s simplify it by assuming the most common scenario: an employer sues a former employee for violating a noncompete in an employment agreement.
In that situation, the employee can recover attorney’s fees by satisfying seven elements:
(1) The employer “knew at the time of the execution of the agreement that the [noncompete] did not contain limitations as to time, geographical area, and scope of activity to be restrained that were reasonable and the limitations imposed a greater restraint than necessary to protect the goodwill or other business interest of the [employer].”
(2) “The [employer] sought to enforce the [noncompete] to a greater extent than was necessary to protect the goodwill or other business interest of the [employer].”
Then, if the employee proves those two elements,
(4) the court “may” award the promisor:
(5) “costs, including reasonable attorney’s fees,”
(6) “actually and reasonably incurred by the promisor”
(7) “in defending the action to enforce the [noncompete].”
Each element raises questions that are not necessarily answered by the text of the statute.
We’ll get to those, but let’s start with some uncontroversial points based on the text of the statute.
1. Knowledge at the time the agreement was signed
The employer’s knowledge that the noncompete was broader than necessary must be at the time the agreement was signed. The employer’s later knowledge won’t cut it.
2. Evidence of knowledge required
The employee needs to offer evidence of such knowledge. That seems obvious, but there are still cases that have had to say this. See GE Betz, Inc. v. Moffitt-Johnston, 885 F.3d 318, 329-30 (5th Cir. 2018) (reversing award of attorney’s fees where the only evidence of knowledge cited by employee was the employer’s counsel’s admission that the non-solicitation agreement had no geographic limitation and the testimony of two company employees who had no knowledge of the terms before the litigation); Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 124 S.W.3d 678, 689 (Tex. App.—Austin 2003) (reversing attorney’s fees award where employee cited no evidence of “knowledge on [employer’s] part that any limitations were unreasonable at the time that the parties entered into the agreement”), rev’d on other grounds, 209 S.W.3d 644 (Tex. 2006).
3. Jury question required
If the employer’s knowledge is contested, the employee needs to submit a jury question on it (assuming a jury trial). Unless the evidence conclusively establishes the employer’s knowledge, the employee’s failure to request a jury question will waive the issue. Ginn v. NCI Building Sys., Inc., 472 S.W.3d 802, 848 (Tex. App.—Houston [1st Dist.] 2015, no pet.); Schneider v. Acousti Eng’g Co. of Florida, No. 01-92-00921-CV, 1993 WL 415481, at *4 (Tex. App.—Houston [1st Dist.] Oct. 14, 1993, no writ) (unpublished).
Similarly, the employer must object if it contends the issue should not be submitted to the jury. See Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc., 414 S.W.3d 911, 925 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) (employer did not object to submission of employer’s knowledge to jury or request that the trial court, rather than the jury, make the factual determination required by section 15.51(c)).
4. Evidence as to enforcement
The employee needs to offer evidence the employer sought to enforce the noncompete to a greater extent than necessary (and again, submit that issue to the jury if it’s contested).
5. Trial court discretion
Even if the employee satisfies all of these elements, the trial court judge still has the discretion to decide not to award fees.
That’s because the statute says “may” award costs, not “shall.” See Emergicare Sys. Corp. v. Bourdon, 942 S.W.2d 201, 205 (Tex. App.—Eastland 1997, no writ); Am. Surgical Assistants, Inc. v. Villareal, No. 13-19-00221-CV, 2020 WL 6052550, at *6 (Tex. App.—Corpus Christi Oct. 8, 2020, no pet.) (mem. op.); Spring v. Walthall, Sachse & Pipes, Inc., No. 04-09-00474-CV, 2010 WL 2102988, at *11 (Tex. App.—San Antonio May 26, 2010, no pet.) (mem. op.); Schneider, 1993 WL 415481 at *3.
6. Costs not limited to attorney’s fees
The award is not limited to attorney’s fees. The statute expressly provides for recovery of “costs,” includingattorney’s fees. Tex. Bus. & Com. Code § 15.51(c). Arguably, the “costs” could include things like expert witness fees, but I haven’t seen a case on that issue.
7. Reasonable fees
The fees must be “reasonable.” No controversy there. There is already a whole body of law on “reasonable” attorney’s fees that presumably applies. Call my friend Robert Ford, an expert on Texas law on attorney’s fees, if you need help with it.
8. Fees actually incurred
The fees must be “actually . . . incurred.”
That’s a little trickier. It’s clear the statute expressly requires the fees to be actually incurred, but it’s not clear what that means in practice. What kind of fees would be reasonable but not “actually incurred”?
9. Segregation of fees may be required
The fees have to be for defending the noncompete claim. If there are other claims, that means the employee’s counsel needs to address segregation of fees. See, e.g., Sentinel, 414 S.W.3d at 929-30 (affirming award of fees where employee’s counsel testified regarding segregation of fees).
10. No recovery by third party
Finally, only the employee who is a party to the noncompete can recover fees. The statute does not authorize a third party—such as the employee’s subsequent employer—to recover fees. Lazer Spot, Inc. v. Hiring Partners, Inc., 387 S.W.3d 40, 53 n.24 (Tex. App.—Texarkana 2012, pet. denied).
Those are the relatively obvious points. Now let’s get to the harder questions.
Is the knowledge element objective or subjective?
An objective standard for knowledge would ask whether a reasonable person in the employer’s position would know the noncompete was broader than necessary. A subjective standard would ask whether the employer actually thought the noncompete was broader than necessary.
The Fifth Circuit has noted this unresolved issue. “The parties have not cited, and we have not found, a Texas court decision that resolves whether the knowledge component of Texas Business & Commerce Code § 15.51(a) is a subjective one, requiring actual knowledge, or whether the fact that an employer ‘knew at the time of the execution of the agreement’ that the covenant was unreasonable can be imputed by showing that objectively, a reasonable person would know, based on Texas law, that the agreement was unreasonable.” GE Betz, 885 F.3d at 331.
It was unnecessary to resolve the question in GE Betz, because the employee failed to satisfy either an objective or subjective standard. A subjective standard was not met because there was “no evidence that [employer] actually (subjectively) knew when it signed the agreement that it was unreasonable.” Id. at 330. An objective standard was not met, because “[w]e cannot say that any reasonable person who read the covenant would or should have known that it was unreasonable.” Id. at 331.
My view is that in most cases it won’t be necessary to decide whether the standard is objective or subjective. If there is sufficient evidence to meet an objective standard, that will probably be sufficient circumstantial evidence to meet a subjective standard.
Does the knowledge element require legal knowledge, or just factual knowledge?
Two federal district courts in the Southern District of Texas have assumed that the employer must have knowledge not just that the noncompete is unreasonable, but that it is unenforceable as a matter of law. See Rimkus Consulting Group, Inc. v. Cammarata, 688 F.Supp.2d 598, 678 (S.D. Tex. 2010) (citing Safeworks, LLC v. Max Access, Inc., No. H-08-2860, 2009 WL 959969, at *7 (S.D. Tex. Apr. 8, 2009)). Neither case cited any state court opinion for this proposition.
This view that the employer must have legal knowledge strikes me as going against both the text and purpose of the statute.
The plain text in Section 15.51(c) only requires knowledge “that the covenant did not contain limitations as to time, geographical area, and scope of activity to be restrained that were reasonable and the limitations imposed a greater restraint than necessary to protect the goodwill or other business interest of the promisee.” It doesn’t say anything about knowledge of the law.
The obvious purpose of the statute is to deter employers from making employees sign overbroad noncompetes. Requiring the employee to prove the employer knew as a legal matter that the noncompete was unenforceable would raise the bar for recovering attorney’s fees almost impossibly high, defeating this purpose.
As a practical matter, how is the employee going to prove the employer understood the noncompete was unenforceable as a legal matter, especially if the employer relied on legal advice that is protected by attorney-client privilege? Requiring legal knowledge would render the employee’s right to recover attorney’s fees virtually meaningless as a practical matter. Surely that’s not what the legislature intended.
What kind of evidence is sufficient to prove knowledge?
Absent availability of a Vulcan mind-meld, proving what is in someone’s head is always a challenge.
Fortunately for the employee, the employer’s knowledge can be established by circumstantial evidence. You don’t need a tape of the company’s president saying “the lawyers told us this noncompete is unenforceable, but we’re going to make employees sign it anyway! Bwah-hah-hah-hah!”
But what kind of circumstantial evidence is sufficient? The few cases that address the issue suggest that only a little bit of evidence is required.
In Sentinel, the employee, Olson, cited testimony by the employer’s general manager, Corey, that the employer purposely made the geographic area broad, and that he relied on a provision allowing the trial court to reform the agreement. 414 S.W.3d at 926. Olson also cited an email exchange where Olson complained the three-year time period was too long, and Corey responded that Olson could still work as an inspector doing turnarounds, although the language of the agreement appeared to bar that. Id. Viewing the evidence in the light most favorable to the finding, this was enough to support the jury’s finding of knowledge. Id.
In American Surgical Assistants, evidence that the employer knew a court in a previous case had found the same form of agreement unenforceable was sufficient to establish the employer’s knowledge that the agreement was unenforceable when it renewed. 2020 WL 6052550 at *7.
In Spring, an insurance agency’s president testified that the company did not write several types of coverage, but admitted the injunction barred the employee from working as an agent on any line of insurance. 2010 WL 2102988 at *12. The court of appeals held that the testimony did not meet the requirements of section 15.51(c). Id. But the court of appeals relied on the trial court’s discretion not to award fees, so it is not clear if the decision would have come out the same way if the trial court had awarded fees. See id.
Finally, in Veterinary Specialists of Texas, P.C. v. Stroda (Cause No. 2022-02514, 281st District Court, Harris County), a veterinary hospital tried to enforce a broad noncompete against a former veterinarian. After a bench trial, the trial court found that the noncompete was overbroad and unenforceable as written.
Under cross examination at trial, the hospital’s director admitted that the limitations in the noncompete, as it was written by the hospital, were broader than necessary to protect the hospital. The same person was the hospital director at the time the agreement was signed, and he did not testify that his understanding of the noncompete was different at that time. The veterinarian’s counsel argued that this supported the logical inference that the hospital’s management knew at the time that the noncompete was broader than necessary, and the trial court agreed.
In the immortal words of Montell Jordan, this is how we do it.
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Zach Wolfe ([email protected]) is a Texas trial lawyer who defends noncompete and “trade secret” lawsuits at Zach Wolfe Law Firm (zachwolfelaw.com). Thomson Reuters has named him a Texas “Super Lawyer”® for Business Litigation every year since 2020.
These are his opinions, not the opinions of his firm or clients. Reasonable people can disagree. Every case is different, so don’t rely on this post as legal advice for your case.
