Two new cases from California and Texas suggest that, after a few years of regularly enforcing non-compete agreements, courts might be returning to placing limits on their enforceability.
By statute, California makes noncompetition agreements invalid, with few exceptions. It is, therefore, not surprising that the California Supreme Court would find that an employer could not enforce a noncompete agreement signed by a former employee. The justices did differ on other issues concerning whether the statute also outlawed firing the employee for refusing to sign a waiver of claims agreement with a successor employer. The Court also rejected Ninth Circuit Court of Appeals decisions that had upheld noncompete agreements in California. Edwards v. Arthur Andersen, Case No.S147190 (Cal. Aug. 7, 2008). http://www.courtinfo.ca.gov/opinions/archive/B178246.PDF
The Texas case invalidated a noncompetition and confidentiality agreement under standard contract law. It held that the company failed to give anything of value in exchange for the agreements. (This sort of exchange is referred to in contract law as “consideration” and is generally necessary for a valid contract.) In this case, consideration was lacking, because the employee had worked for eleven years and, according to the court, being allowed to continue to do one’s job is not consideration. This outcome is in line with the traditional approach to noncompete agreements and means that employers who wish to use them should include them in a job offer to a new employee and not raise the issue after an agreement has been reached. Powerhouse Products, Inc. v. Scott, Case No.05-07-700-cv (Tex. Ct. App. Aug. 8, 2008).
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