Court Opinion

ID: 9775173
Source: CourtListenerOpinion
Date Created: 2023-08-29 18:47:02.900893+00
Date Added: 2024-06-11T08:50:35.053555
License: Public Domain

SAM D. JOHNSON, Justice
(dissenting).
The dissent respectfully submits that the court of civil appeals correctly ruled the noncompetition covenant invalid.
To grasp the effect of the majority’s holding, the circumstances of the parties’ relationship to each other must be understood. Joe Yost worked as an employee of Justin in the belt business and Roger Souder worked as an employee of Justin in the boot business. Each worked in a managerial capacity for an extended number of years. Neither employee at any time contemporaneously with or during the period of his employment executed any kind or character of noncompetition agreement or contract. The record does not reveal that either employee was ever requested to do so; it does not in fact appear that such action was ever discussed, contemplated or considered. At different times during the month of December 1969, both employees resigned and both thereafter became employees of Tony Lama.
Thereafter, Justin filed suit against Yost and Souder, alleging that they had enticed away Justin employees, had disclosed trade secrets to Lama, and prayed for damages and a noncompetition injunction. It is clear that under no authority of any jurisdiction would Justin have been entitled to obtain such a noncompetition injunction at this point.
During the pendency of that first suit, Justin, Yost, Souder and Lama entered into the agreement set forth in the opinion of the majority. The trial court’s judgment there made no reference to such agreement, and Justin’s suit was dismissed with prejudice.
Some time thereafter the instant case was filed and tried. Here the trial court has taken two actions. First, the noncom-petition covenant, wholly unlimited as to both time and space, was reformed as to both. Second, the trial court issued an injunction enforcing the entire agreement as reformed, including the noncompetition covenant.
The true question is, therefore, whether a settlement agreement containing a non-competition covenant may be enforced when there was never, at any time before, during or contemporaneously with employment, any written covenant against competition. The majority answers this question in the affirmative, relying on a single erroneously decided case. Novelty Bias Binding Company v. Shevrin, 342 Mass. 714, 175 N.E.2d 374 (1961). That case and the instant holding, it is submitted, are contrary to the otherwise unanimous and consistent weight of authority.
According to the Restatement, Contracts § 515, entitled When a Restraint of Trade Is Unreasonable, this particular covenant is an unreasonable restraint of trade. “A restraint of trade is unreasonable, in the absence of statutory authorization or dominant social or economic justification, if it . is based on a promise to refrain from competition and is not ancillary either to a contract for the transfer of good-will or other subject of property or to an existing employment or contract of employment.” [Emphasis added.] See also Annot., 3 A.L.R. 250: Contracts to keep out of a particular business as an unlawful restraint of trade, when independent of *687any other contract, as supplemented in Annot., 91 A.L.R. 980. The courts are rightfully chary of employee noncompetition agreements because of the potential harm to both the public and the employee. 14 Williston on Contracts §§ 1635, 1636, 1643 (3d ed. 1972). “Bargains to refrain from conpetition not ancillary to a sale or existing employment are generally deemed to be unreasonable and invalid.” 14 Wil-liston, supra, at 144, 145, Promises Ancillary to Contracts of Employment. [Emphasis added.] Section 1636, at 96, The Restraint by Agreement must be reasonable, asserts that the purpose of a restrictive covenant is almost always to enhance the promisee’s business by limiting competition from former employees.
“This purpose has been regarded as so inimical to the public interest that generally it is only in cases where the restrictive promise is ancillary to some other transaction that its validity has been upheld.”
Texas courts have long and consistently recognized this rule. Almost half a century ago it was stated that “contracts which are recognized as being in reasonable restraint of trade must be ancillary to and in support of another contract.” Potomac Fire Ins. Co. v. State, 18 S.W.2d 929, 934 (Tex.Civ.App. — Austin 1929, writ ref’d). Two Texas cases dealing with noncompetition contracts, one of which is cited by the majority, are significant. In Chenault v. Otis Engineering Corporation, 423 S.W.2d 377 (Tex.Civ.App. — Corpus Christi 1967, writ ref’d n. r. e.), the employee signed a noncompetition agreement pursuant to a leave of absence agreement. The court, mindful of the rule, carefully distinguished between termination of employment and a leave of absence. The court went to considerable pains to show this man was still an employee and upheld the agreement as ancillary to his existing term of employment.
In Brooks Gas Corporation v. Sinclair Oil & Gas Co., 408 S.W.2d 747 (Tex.Civ.App. — Houston 1966, writ ref’d n. r. e.), the plaintiff gas processing plant revealed trade secrets to a competitor interested in buying out the plant in return for an agreement not to reveal those secrets and not to extend into plaintiff’s territory. The sale was never consummated and the competitor later extended into plaintiff’s territory in violation of the agreement. The trial court denied a temporary injunction and the court of civil appeals affirmed because the agreement was not “ancillary either to a contract for the transfer of good will or other subject or property or to an existing employment or contract of employment.” 408 S.W.2d at 753. The plaintiff argued that the handing over of trade secrets constituted a bailment and the noncompetition agreement was ancillary to this bailment, but the court of civil appeals rejected this proposed exception to the terms of § 515 of the Restatement, Contracts.
Justin asserts that to recognize the “exceptions” in § 515(e) of the Restatement as exclusive commits the court to an inflexible and narrow approach to public policy. Section 515 does not, however, delineate exceptions to the general rule that contracts in restraint of trade are void; rather, such section outlines specific instances in which these contracts are illegal. The commentary on clause (a) says, “[t]he rules stated in this Section cover cases where the bargain is illegal, but no implication is intended that all bargains that do not fall within these rules are legal.” Restatement, Contracts, at 989. Novelty Bias Binding Company v. Shevrin, supra, relied on by the majority, rests also on an erroneous interpretation of the Restatement. Comment a of § 515 does speak of an “open territory” between § 515 and § 516 of the Restatement. However, the Novelty Bias court overlooked the fact that § 515 explicitly outlaws employee noncompetition covenants not ancillary to existing employ*688ment. Like Novelty Bias, the instant case falls squarely within § 515, not between § 515 and § 516.
Justin urges the creation of an exception to § 515(e) for settlement agreements. It is this, a new and novel exception, which the majority has apparently accepted. Undoubtedly settlement agreements are favored and the courts will not lightly disturb them. Courts, however, and particularly Texas courts, will not and should not enforce portions of settlement agreements which are against public policy. Johnson v. U. S. Industries, Inc., 469 S.W.2d 652 (Tex.Civ.App. — Eastland 1971, no writ).
“A contract of compromise is unenforceable and may be disregarded where it is illegal, is against public policy or in contravention of statute or the policy thereof, . . ” 15A C.J.S. Compromise and Settlement § 38, at 262 (1967).
Justin also argues that the noncompetition agreement is necessary to protect its trade secrets and that the restraint of trade cases are not applicable in the trade secret context. However, Justin does not distinguish between injunctions to prevent the disclosure and use of trade secrets and injunctions to prohibit competition. The skills an employee acquires on the job, as distinguished from trade secrets, belong to the employee and in the absence of a valid noncompetition agreement the employee has the right to use these skills. Ventura Manufacturing Company v. Locke, 454 S. W.2d 431 (Tex.Civ.App. — San Antonio 1970, no writ); 56 C.J.S. Master and Servant § 72 (1948). “Where an employee will acquire by virtue of his employment trade secrets, the law permits greater restriction to be imposed by contract on the employee than in other contracts of employment .” 14 Williston § 1643, supra. [Emphasis added.]
It must be noted that equity here is not entirely on the side of Justin. As stated, the original suit could not have yielded a noncompetition injunction since neither Yost nor Souder executed an agreement before or during their employment with Justin. The temporary injunctions affirmed by the court of civil appeals already protect the trade secrets of Justin and shield Justin from the enticement of its employees. It must be emphasized this is the maximum injunctive relief Justin could have obtained in its original suit. Nevertheless, the majority opinion focuses on the need to protect Justin’s trade secrets but nowhere in its opinion are such trade secrets enumerated. The record gives the majority no assistance for the trial court has made no final determination on the existence of trade secrets. The record is quite clear, however, that Yost and Souder have both worked for Lama for some time now and any trade secrets (if they exist) employment might reveal have long since been disclosed. The proper remedies now are an injunction to prohibit the use of trade secrets, if any, already disclosed, an injunction against further disclosure, and damages for any injury Justin has suffered. A noncompetition covenant in these circumstances does not protect trade secrets. Its true purpose and effect, as pointed to by 14 Williston, supra, is to eliminate competition and the covenant is thus an unjustified restraint of trade. Any time an employee leaves one employer to work for a competitor and, under threat of a suit, signs a noncompetition agreement, the same would be true. Here trade secrets are not protected; rather, the covenant’s oppressive effect is to improperly limit competition.
The Restatement, it is submitted, has struck a proper balance in creating an exception to the general prohibition against contracts in restraint of trade for noncom-petition covenants ancillary to existing employment. An employer who solicits such an agreement at the outset of employment or while the employee is still employed is taking reasonable measures to protect still undisclosed trade secrets; the same cannot *689be said for covenants signed after the employee has worked for a competitor.
One last aspect of the majority opinion must be noted. Employee noncompetition agreements, even those signed pursuant to existing employment, are not per se valid. In delineating what is a reasonable restraint, 14 Williston § 1636, supra, focuses on three considerations:
“1. The question whether the promise is broader than is necessary for the protection of the covenantee in some legitimate interest;
“2. The effect of the promise or agreement upon the covenantor, and
“3. The effect of the promise or agreement upon the public welfare or common good.”
To the extent that the noncompetition feature of the settlement agreement is circumscribed, the majority addresses the second consideration. It is to be noted that no other consideration is given to the -effect upon the covenantor, however, and the instant case is precedent for substantial harm to employees. An employee, almost invariably in a position of economic imbalance with his former employer, may sign a settlement agreement containing a restrictive covenant to avoid litigation, regardless of the merits of the former employer’s suit. The first consideration, the “legitimate interest” of Justin, is not shown to be protected by a noncompetition agreement, however. The third consideration, the public interest, is wholly ignored. As indicated, the true effect of enforcing the settlement agreement is to limit competition, and what should be a paramount consideration, the public interest, is disserved by its enforcement.
The dissent would affirm the court of civil appeals.
GREENHILL, C. J., and McGEE, J., join in this dissent.