As I write this, it\u2019s Friday night and I feel all right.<\/p>\n
See, my firm recently obtained and collected a judgment for attorney\u2019s fees for a defendant in a Texas noncompete lawsuit.<\/p>\n
After a bench trial, the court entered Preliminary Findings of Fact and Conclusions of Law<\/a>, ruling for our client that the noncompete was unenforceable. After further evidence and briefing on attorney\u2019s fees, the court entered Additional Findings Regarding Claim for Attorney\u2019s Fees<\/a> and a Final Judgment<\/a> for $39,355 <\/strong>in attorney\u2019s fees.<\/p>\n I know, I know. Those are rookie numbers in this racket. Next time we gotta pump those numbers up.<\/p>\n But still, recovering fees for a defendant in a noncompete suit is rare. How did we do it?<\/p>\n Let\u2019s start with the Texas noncompete statute. It says:<\/p>\n 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\u2019s fees, actually and reasonably incurred by the promisor in defending the action to enforce the covenant.<\/p>\n Tex. Bus. & Com. Code \u00a7 15.51(c).<\/p>\n This is already a model of clarity and brevity, obvs. But just for grins, let\u2019s simplify it by assuming the most common scenario: an employer sues a former employee for violating a noncompete in an employment agreement.<\/p>\n In that situation, the employee can recover attorney\u2019s fees by satisfying seven elements:<\/p>\n (1) The employer \u201cknew 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].\u201d<\/p>\n (2) \u201cThe [employer] sought to enforce the [noncompete] to a greater extent than was necessary to protect the goodwill or other business interest of the [employer].\u201d<\/p>\n Then, if the employee proves those two elements,<\/p>\n (4) the court \u201cmay\u201d award the promisor:<\/p>\n (5) \u201ccosts, including reasonable attorney\u2019s fees,\u201d<\/p>\n (6) \u201cactually and reasonably incurred by the promisor\u201d<\/p>\n (7) \u201cin defending the action to enforce the [noncompete].\u201d<\/p>\n Each element raises questions that are not necessarily answered by the text of the statute.<\/p>\n We\u2019ll get to those, but let\u2019s start with some uncontroversial points based on the text of the statute.<\/p>\n The employer\u2019s knowledge that the noncompete was broader than necessary must be at the time the agreement was signed. The employer\u2019s later knowledge won\u2019t cut it.<\/p>\n The employee needs to offer evidence<\/em> of such knowledge. That seems obvious, but there are still cases that have had to say this. See GE Betz, Inc. v. Moffitt-Johnston<\/em>, 885 F.3d 318, 329-30 (5th Cir. 2018) (reversing award of attorney\u2019s fees where the only evidence of knowledge cited by employee was the employer\u2019s counsel\u2019s 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. \u00a0Servs., L.P. v. Johnson<\/em>, 124 S.W.3d 678, 689 (Tex. App.\u2014Austin 2003) (reversing attorney\u2019s fees award where employee cited no evidence of \u201cknowledge on [employer\u2019s] part that any limitations were unreasonable at the time that the parties entered into the agreement\u201d), rev\u2019d on other grounds<\/em>, 209 S.W.3d 644 (Tex. 2006).<\/p>\n If the employer\u2019s knowledge is contested, the employee needs to submit a jury question on it (assuming a jury trial). Unless the evidence conclusively establishes the employer\u2019s knowledge, the employee\u2019s failure to request a jury question will waive the issue. Ginn v. NCI Building Sys., Inc.<\/em>, 472 S.W.3d 802, 848 (Tex. App.\u2014Houston [1st Dist.] 2015, no pet.); Schneider v. Acousti Eng\u2019g Co. of Florida<\/em>, No. 01-92-00921-CV, 1993 WL 415481, at *4 (Tex. App.\u2014Houston [1st Dist.] Oct. 14, 1993, no writ) (unpublished).<\/p>\n 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.<\/em>, 414 S.W.3d 911, 925 (Tex. App.\u2014Houston [1st Dist.] 2013, pet. denied) (employer did not object to submission of employer\u2019s knowledge to jury or request that the trial court, rather than the jury, make the factual determination required by section 15.51(c)).<\/p>\n The employee needs to offer evidence<\/em> the employer sought to enforce the noncompete to a greater extent than necessary (and again, submit that issue to the jury if it\u2019s contested).<\/p>\n Even if the employee satisfies all of these elements, the trial court judge still has the discretion to decide not to award fees.<\/p>\n That\u2019s because the statute says \u201cmay\u201d award costs, not \u201cshall.\u201d See<\/em> Emergicare Sys. Corp. v. Bourdon<\/em>, 942 S.W.2d 201, 205 (Tex. App.\u2014Eastland 1997, no writ); Am. Surgical Assistants, Inc. v. Villareal<\/em>, No. 13-19-00221-CV, 2020 WL 6052550, at *6 (Tex. App.\u2014Corpus Christi Oct. 8, 2020, no pet.) (mem. op.); Spring v. Walthall, Sachse & Pipes, Inc.<\/em>, No. 04-09-00474-CV, 2010 WL 2102988, at *11 (Tex. App.\u2014San Antonio May 26, 2010, no pet.) (mem. op.); Schneider<\/em>, 1993 WL 415481 at *3.<\/p>\n The award is not limited to attorney\u2019s fees. The statute expressly provides for recovery of \u201ccosts,\u201d including<\/em>attorney\u2019s fees. Tex. Bus. & Com. Code \u00a7 15.51(c). Arguably, the \u201ccosts\u201d could include things like expert witness fees, but I haven\u2019t seen a case on that issue.<\/p>\n The fees must be \u201creasonable.\u201d No controversy there. There is already a whole body of law on \u201creasonable\u201d attorney\u2019s fees that presumably applies. Call my friend Robert Ford<\/a>, an expert on Texas law on attorney\u2019s fees, if you need help with it.<\/p>\n The fees must be \u201cactually . . . incurred.\u201d<\/p>\n That\u2019s a little trickier. It\u2019s clear the statute expressly requires the fees to be actually incurred, but it\u2019s not clear what that means in practice. What kind of fees would be reasonable but not \u201cactually incurred\u201d?<\/p>\n The fees have to be for defending the noncompete claim. If there are other claims, that means the employee\u2019s counsel needs to address segregation of fees. See, e.g., Sentinel<\/em>, 414 S.W.3d at 929-30 (affirming award of fees where employee\u2019s counsel testified regarding segregation of fees).<\/p>\n Finally, only the employee who is a party to the noncompete can recover fees. The statute does not authorize a third party\u2014such as the employee\u2019s subsequent employer\u2014to recover fees. Lazer Spot, Inc. v. Hiring Partners, Inc.<\/em>, 387 S.W.3d 40, 53 n.24 (Tex. App.\u2014Texarkana 2012, pet. denied).<\/p>\n Those are the relatively obvious points. Now let\u2019s get to the harder questions.<\/p>\n An objective standard for knowledge would ask whether a reasonable person in the employer\u2019s 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.<\/p>\n The Fifth Circuit has noted this unresolved issue. \u201cThe parties have not cited, and we have not found, a Texas court decision that resolves whether the knowledge component of Texas Business & Commerce Code \u00a7 15.51(a) is a subjective one, requiring actual knowledge, or whether the fact that an employer \u2018knew at the time of the execution of the agreement\u2019 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.\u201d GE Betz<\/em>, 885 F.3d at 331.<\/p>\n It was unnecessary to resolve the question in GE Betz<\/em>, because the employee failed to satisfy either an objective or subjective standard. A subjective standard was not met because there was \u201cno evidence that [employer] actually (subjectively) knew when it signed the agreement that it was unreasonable.\u201d Id<\/em>. at 330. An objective standard was not met, because \u201c[w]e cannot say that any reasonable person who read the covenant would or should have known that it was unreasonable.\u201d Id<\/em>. at 331.<\/p>\n My view is that in most cases it won\u2019t 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.<\/p>\n 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<\/em>. See Rimkus Consulting Group, Inc. v. Cammarata<\/em>, 688 F.Supp.2d 598, 678 (S.D. Tex. 2010) (citing Safeworks, LLC v. Max Access, Inc.<\/em>, 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.<\/p>\n This view that the employer must have legal<\/em> knowledge strikes me as going against both the text and purpose of the statute.<\/p>\n The plain text in Section 15.51(c) only requires knowledge \u201cthat 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.\u201d It doesn\u2019t say anything about knowledge of the law<\/em>.<\/p>\n 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<\/em> that the noncompete was unenforceable would raise the bar for recovering attorney\u2019s fees almost impossibly high, defeating this purpose.<\/p>\n 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<\/em> knowledge would render the employee\u2019s right to recover attorney\u2019s fees virtually meaningless as a practical matter. Surely that\u2019s not what the legislature intended.<\/p>\n Absent availability of a Vulcan mind-meld, proving what is in someone\u2019s head is always a challenge.<\/p>\n Fortunately for the employee, the employer\u2019s knowledge can be established by circumstantial evidence. You don\u2019t need a tape of the company\u2019s president saying \u201cthe lawyers told us this noncompete is unenforceable, but we\u2019re going to make employees sign it anyway! Bwah-hah-hah-hah!\u201d<\/p>\n 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.<\/p>\n In Sentinel<\/em>, the employee, Olson, cited testimony by the employer\u2019s 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<\/em>. Viewing the evidence in the light most favorable to the finding, this was enough to support the jury\u2019s finding of knowledge. Id<\/em>.<\/p>\n In American Surgical Assistants<\/em>, 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\u2019s knowledge that the agreement was unenforceable when it renewed. 2020 WL 6052550 at *7.<\/p>\n In Spring<\/em>, an insurance agency\u2019s 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<\/em>. But the court of appeals relied on the trial court\u2019s 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<\/em>.<\/p>\n Finally, in Veterinary Specialists of Texas, P.C. v. Stroda<\/em> (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.<\/p>\n Under cross examination at trial, the hospital\u2019s 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\u2019s counsel argued that this supported the logical inference that the hospital\u2019s management knew at the time that the noncompete was broader than necessary, and the trial court agreed.<\/p>\n In the immortal words of Montell Jordan, this is how we do it.<\/p>\n ________________________<\/p>\n Zach Wolfe (zach@zachwolfelaw.com<\/a>) is a Texas trial lawyer who defends noncompete and \u201ctrade secret\u201d lawsuits at Zach Wolfe Law Firm (zachwolfelaw.com<\/a>). Thomson Reuters has named him a Texas \u201cSuper Lawyer\u201d\u00ae for Business Litigation every year since 2020. <\/em><\/p>\n These are his opinions, not the opinions of his firm or clients. Reasonable people can disagree. Every case is different, so don\u2019t rely on this post as legal advice for your case. <\/em><\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":" As I write this, it\u2019s Friday night and I feel all right. See, my firm recently obtained and collected a judgment for attorney\u2019s 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 […]<\/p>\n","protected":false},"author":1,"featured_media":364140,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[185495],"tags":[19973,62391,10939,23898,16872],"dealstore":[],"offerexpiration":[],"class_list":["post-364139","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-non-competes","tag-attorneys","tag-defendant","tag-fees","tag-noncompete","tag-recover"],"yoast_head":"\n1. Knowledge at the time the agreement was signed<\/strong><\/h3>\n
2. Evidence of knowledge required<\/strong><\/h3>\n
3. Jury question required<\/strong><\/h3>\n
4. Evidence as to enforcement<\/strong><\/h3>\n
5. Trial court discretion<\/strong><\/h3>\n
6. Costs not limited to attorney\u2019s fees<\/strong><\/h3>\n
7. Reasonable fees<\/strong><\/h3>\n
8. Fees actually incurred<\/strong><\/h3>\n
9. Segregation of fees may be required<\/strong><\/h3>\n
10. No recovery by third party<\/strong><\/h3>\n
Is the knowledge element objective or subjective? <\/strong><\/h3>\n
Does the knowledge element require legal knowledge, or just factual knowledge?<\/strong><\/h3>\n
What kind of evidence is sufficient to prove knowledge? <\/strong><\/h3>\n
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