The enforceability of employment non-competes in Texas is governed by the Texas Covenants Not to Compete Act. If a non-compete covenant is found to be 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). The Texas Supreme Court has yet to address whether reformation of an overbroad non-compete restriction is appropriate at the temporary injunction stage or whether reformation is only a final remedy after a trial on the merits. In a recent published opinion, the Fifth Circuit squarely examined this issue. Calhoun v. Jack Doheny Companies, Inc., No. 20-20068, — F.3d —, 2020 U.S. App. LEXIS 25001 (5th Cir. Aug. 7, 2020).
Background of the case: Calhoun, a former sales representative, had agreed not to "become engaged by, or aid, assist, own, operate or have any financial interest" in any industrial utility vehicle business for two years after the end of his employment with JDC. Soon after his employment ended, JDC discovered Calhoun was working for a competitor. In the lawsuit that followed, JDC sought reformation of the non-compete restriction at the preliminary-injunction hearing. The district court ruled the covenant likely would be found unenforceable for overbreadth at final judgment and that the covenant could not be reformed at the preliminary-injunction stage of the proceedings. JDC sought an interlocutory appeal.
The Fifth Circuit decision: The Fifth Circuit reversed the district court, holding "[in] the light of Texas authority, the district court erred." "To determine the likelihood of success of JDC's claim," the Fifth Circuit explained, "requires an examination of Texas law, which would have shown that success could only be achieved through reformation. This conclusion would lead to Texas authority that strongly suggests, if not requires, reformation of an agreement at the preliminary injunction stage." The panel rejected Calhoun's argument that reformation is a remedy available only after a final trial, finding that contention was contrary to "the clear majority practice of Texas courts, which have on many occasions reformed contracts for the purposes of granting interim relief." On remand, the Fifth Circuit instructed the district court to specifically address whether reformation would render the covenant to be reasonable and impose no greater restraint than necessary to protect JDC's business interest.
What is the takeaway?: Texas employers may be able to obtain injunctive relief despite having an overbroad non-compete because most Texas courts, and now the Fifth Circuit, agree that reformation of an overbroad non-compete is appropriate at the temporary injunction stage of the proceedings. Whether a company should seek reformation of a potentially overbroad non-compete as interim relief is a strategic decision that involves a complex legal analysis and depends on the particular facts and circumstances of the case. Please contact your Reed Smith attorney for advice regarding these and other non-compete matters.
Originally published by Reed Smith USA, August 2020
This article is presented for informational purposes only and is not intended to constitute legal advice.