Hecht Concurrence in
Mann Frankfort Stein & Lipp Advisors v. Fielding, No. 07-0490 (Tex. Apr. 17, 2009)
(enforceability of covenant not to compete, at will employment, confidentiality)
MANN FRANKFORT STEIN & LIPP ADVISORS, INC., MFSL GP, L.L.C., AND MFSL EMPLOYEE
INVESTMENTS, LTD. v. BRENDAN J. FIELDING; from Harris County; 1st district (01-05-01080-CV,
263 SW3d 232, 05-03-07)
The Court reverses the court of appeals' judgment and renders judgment.
Justice Johnson delivered the opinion of the Court. [pdf]
Justice Hecht delivered a concurring opinion
═══════════════════════════════════════════════════════════════
Concurrence: Mann Frankfort Stein & Lipp Advisors v. Fielding (Tex.
2009)(Hecht, concurring)
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Justice Hecht, concurring.
I join most of the Court’s opinion with two additional observations.
I
We granted the petition for review in this case for the same reason we granted the petition for review
several years ago in Gage Van Horn & Associates, Inc. v. Tatom:[1] to consider whether the Texas
Covenants Not to Compete Act[2] controls the award of attorney fees to an employee suing for a
declaratory judgment construing a covenant not to complete when the employer is also suing to
enforce the covenant. Our review of the record in Tatom revealed that the issue was not preserved,
and we therefore withdrew the order granting the petition as having been improvidently granted. The
issue is preserved in the present case, but the Court does not reach it, concluding instead that the
employee, Fielding, is not entitled to attorney fees on the only basis still asserted — a provision of
his employment agreement allowing attorney fees for a prevailing party in litigation over the
agreement. I would hold that even if the agreement would allow Fielding attorney fees, the Act
controls.
Section 15.52 of the Act states:
The criteria for enforceability of a covenant not to compete provided by Section 15.50 of this code
and the procedures and remedies in an action to enforce a covenant not to compete provided by
Section 15.51 of this code are exclusive and preempt any other criteria for enforceability of a
covenant not to compete or procedures and remedies in an action to enforce a covenant not to
compete under common law or otherwise.[3]
In Tatom, as in the present case, an employee sued for a declaration of his rights under a covenant
not to compete he had given his former employer, and the employer sued to enforce the covenant.
[4] In each case,[5] the trial court granted summary judgment holding the covenant unenforceable
under section 15.50(a) of the Act.[6] The trial court in Tatom awarded the employee attorney fees,
and the court of appeals affirmed.[7] The trial court in the present case did not award the employee
attorney fees, but the court of appeals did.[8] In each case, the court of appeals held that suit by an
employee for a declaratory judgment construing a covenant not to compete is not an action to
enforce the covenant to which section 15.52 applies.[9]
When the declaratory judgment raises only issues related to the covenant’s enforceability, the court
of appeals’ construction of section 15.52 is clearly wrong. The statute preempts the enforceability
requirements, procedures, and remedies afforded by any other law with respect to covenants not to
compete. An employee’s suit for a declaration of rights as they pertain to enforcement of a covenant
(they almost always do) and an employer’s suit for breach are opposite sides of the same coin. To
apply one law to the employee’s claims and a different law to the employer’s would often be
impossible. For example, although the basic standards for enforcement are the same under the Act
as under the common law,[10] the Act imposes special requirements when the employee is a
physician licensed in Texas.[11] It would be impossible — or at least nonsense — to declare that,
under the common law, the covenant limited the physician’s right to compete with his former
employer, while at the same time holding that, under the Act, the covenant was unenforceable. The
common law and the Act could not both control the same issues without direct conflict.
There are other differences between the Act and the common law. The Act allocates the burden of
persuasion in a case differently depending on whether the employment is primarily for rendition of
personal services,[12] precludes a damages award for conduct prior to any necessary reformation of
the scope of the covenant,[13] limits attorney fees awards to employers,[14] and does not provide
for attorney fees awards to employees. The common law does not draw all of these distinctions. It
would be inconsistent to declare under the common law that a covenant entitled an employer to
damages or injunctive relief while denying such relief under the Act, or to declare that an employee
was entitled to attorney fees that the Act would preempt.
The courts of appeals in this case and Tatom did not refuse to apply section 15.52’s preemption
because the declaratory judgment actions raised issues beyond enforcement of the covenants not
to compete and therefore beyond the Act’s scope. They refused to apply the statute simply because
in each case the employee’s action was for declaratory relief and therefore not Aan action to enforce
a covenant”. But while the employees certainly sought to avoid enforcement, they were not the only
parties to the actions. The employers sought enforcement. As a whole, the actions were to enforce,
or not, covenants not to compete. I would hold that section 15.52 applied to the actions and to the
employees’ claims for attorney fees.
II
My second observation is this: in cases involving the enforceability of covenants not to compete, a
shift in focus away from the reasonableness of the covenant’s time, territory, and conduct
restrictions toward issues of contract formation increases the risk that achieving what must in the
end be an equitable result will cause a court to distort, confuse, or misstate contract law. Texas law
has long been that unreasonable restrictions do not void a covenant not to compete but limit its
enforcement.[15] Section 15.51(c) specifically requires a trial court to reform unreasonable
restrictions.[16] In determining whether and how to enforce a covenant not to compete, a court must
seek equity in reformation, not in the statement and application of general contract principles. The
enforcement vehicle must be directed by steering, not by rebuilding the chassis.
Light v. Centel Cellular Co. of Texas[17] is a case in point. A concern in Light was that while an at-will
employee could be held to a covenant not to compete, the employer should not be allowed to take
advantage of the employee by requiring her to sign a broad covenant not to compete, terminating
her soon afterward, and then enforcing the covenant as written.[18] The simple answer is that the
court cannot enforce the restrictions beyond the limits reasonable to protect the employer’s interest
— in the example, perhaps not at all. Rather than focus on the reasonableness of the restrictions in
Light, the Court concluded that a covenant is not enforceable at the time it is made if the only
consideration given by the employer is a promise to provide training and confidential information in
the future that is illusory because it is contingent on continued employment.[19] We have since
withdrawn from that conclusion and held that a covenant not to compete must only be ancillary to
another agreement at the time that agreement was made, even if that agreement is not yet
enforceable because the promise of future action has not been performed.[20] Today we withdraw
further and hold that the promise of future action need not be express but may be implied.[21]
The Court’s estrangement from Light has not been over its result — its handling of the covenant not
to compete — but over its seriously flawed statement of contract law. It is certainly true, as the
Restatement (Second) of Contracts explains: “Words of promise which by their terms make
performance entirely optional with the ‘promisor’ whatever may happen, or whatever course of
conduct in other respects he may pursue, do not constitute a promise.”[22] Such a “promise” — in
reality no promise at all — is often said to be “illusory” and “is not consideration for a return promise.”
[23] Employment at will can be terminated by the employer or the employee at any time and for any
reason; continuation of the employment relationship is entirely optional for each.[24] Thus, as we
said in Light, “[a]ny promise made by either employer or employee that depends on an additional
period of employment is illusory because it is conditioned upon something that is exclusively within
the control of the promisor.”[25]
What the Court should have added in Light is that courts have long been reluctant to invalidate a
contract because a promise given in consideration was technically illusory. When the only
consideration one party gives for a contract is a promise that is illusory, there is no “mutuality of
obligation”, sometimes said (though not entirely accurately) to be required for a contract.[26] Thirty-
five years ago, in Texas Gas Utilities Co. v. Barrett, we wrote:
It is presumed that when parties make an agreement they intend it to be effectual, not nugatory.
Portland Gasoline Co. v. Superior Marketing Co., Inc., 150 Tex. 533, 243 S.W.2d 823 (1951). A
contract will be construed in favor of mutuality, Carpenter Paper Co. v. Calcasieu Paper Co., Inc.,
164 F.2d 653 (5th Cir. 1947). The modern decisional tendency is against lending the aid of courts to
defeat contracts on technical grounds of want of mutuality. Armstrong v. Southern Production Co.,
Inc., 182 F.2d 238 (5th Cir. 1950).[27]
To avoid invalidating a contract, section 77 of the Restatement (Second) of Contracts explains:
Illusory and Alternative Promises
A promise or apparent promise is not consideration if by its terms the promisor or purported
promisor reserves a choice of alternative performances unless
* * *
(b) one of the alternative performances would have been consideration and there is or appears to
the parties to be a substantial possibility that before the promisor exercises his choice events may
eliminate the alternatives which would not have been consideration.[28]
The same principles should be employed in construing and applying the Act, the purpose of which,
after all, is to facilitate, not impede, enforcement of covenants not to compete. The parties to an
employment agreement are presumed to have intended it to be effectual, and the agreement should
not be denied enforceability on technical grounds of want of mutuality if that result can be avoided.
The Act does not ground the enforceability of a covenant not to compete on the overly technical
disputes that Light seems to have engendered over whether a covenant is ancillary to an otherwise
enforceable agreement. Rather, the statute’s core inquiry is whether the covenant “contains
limitations as to time, geographical area, or scope of activity to be restrained that are not reasonable
and impose a greater restraint than is necessary to protect the goodwill or other business interest of
the promisee”.[29] Concerns that have driven disputes over whether a covenant is ancillary to an
otherwise enforceable agreement — such as the amount of information an employee has received,
its importance, its true degree of confidentiality, and the time period over which it is received — are
better addressed in determining whether and to what extent a restraint on competition is justified.
There will certainly be covenant not to compete cases with important issues of contract formation,
but the central concern will usually be the reasonableness of the restrictions. Light should not divert
attention from the central focus of the Act.
Nathan L. Hecht
Justice
Opinion delivered: April 17, 2009
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[1] 87 S.W.3d 536 (Tex. 2002) (per curiam) (order granting petition for review withdrawn as having
been improvidently granted); see also Perez v. Texas Disposal Sys., Inc., 103 S.W.3d 591, 592-594
(Tex. App.-San Antonio 2003, pet. denied) (holding that an employer is not entitled to recover
attorney fees under Tex. Civ. Prac. & Rem. Code § 38.001, because the remedies provided by the
Covenants Not to Compete Act are exclusive under Tex. Bus. & Com. Code § 15.52) (after remand
from Texas Disposal Sys., Inc., v. Perez, 80 S.W.3d 593 (Tex. 2002) (per curiam)).
[2] Tex. Bus. & Com. Code §§ 15.50-.52.
[3] Id. § 15.52.
[4] Gage Van Horn & Assocs., Inc. v. Tatom, 26 S.W.3d 730, 732 (Tex. App.-Eastland 2000), pet.
denied, 87 S.W.3d 536 (Tex. 2002) (per curiam); Hardy v. Mann Frankfort Stein & Lipp Advisors,
Inc., 263 S.W.3d 232, 240 (Tex. App.- Houston [1st Dist.] 2007), rev’d, ___ S.W.3d ___ (Tex. 2009);
cf. Perez, 103 S.W.3d at 592.
[5] Tatom, 26 S.W.3d at 732; Hardy, 263 S.W.3d at 240.
[6] Tex. Bus. & Com. Code § 15.50(a) (“[A] covenant not to compete is enforceable if it is ancillary to
or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it
contains limitations as to time, geographical area, and scope of activity to be restrained that are
reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other
business interest of the promisee.”).
[7] Tatom, 26 S.W.3d at 732, 734.
[8] Hardy, 263 S.W.3d at 241, 259.
[9] Tatom, 26 S.W.3d at 733 (“[T]he procedures and remedies set forth in the Covenants Not To
Compete Act have preemptive effect only in an action to enforce a covenant not to compete. The
declaratory judgment action filed by Tatom, which was the first claim filed in this matter and the claim
on which summary judgment was granted, was not and could not be an action to enforce a covenant.
By the plain language of the Act, the procedures and remedies, including attorney’s fees, set forth in
section 15.51 of the Covenants Not To Compete Act had no preemptive effect on Tatom’s
declaratory judgment action.” (footnote omitted)); Hardy, 263 S.W.3d at 255-256 (following Tatom);
see also Contemporary Contractors, Inc. v. Strauser, No. 05‑04‑00478‑CV, 2005 Tex. App. LEXIS
5868, at *7, 2005 WL 1774983, at *2 (Tex. App.-Dallas July 28, 2005, no pet.) (mem. op.) (following
Tatom).
[10] Compare Tex. -us. & Com. Code § 15.50(a), quoted supra note 6, with DeSantis v. Wackenhut
Corp., 793 S.W.2d 670, 681-682 (Tex. 1990) (“The fundamental common law principles which
govern the enforceability of covenants not to compete in Texas are relatively well established. An
agreement not to compete is in restraint of trade and therefore unenforceable on grounds of public
policy unless it is reasonable. An agreement not to compete is not a reasonable restraint of trade
unless it meets each of three criteria. First, the agreement not to compete must be ancillary to an
otherwise valid transaction or relationship. Such a restraint on competition is unreasonable unless it
is part of and subsidiary to an otherwise valid transaction or relationship which gives rise to an
interest worthy of protection. Such transactions or relationships include the purchase and sale of a
business, and employment relationships. Second, the restraint created by the agreement not to
compete must not be greater than necessary to protect the promisee’s legitimate interest. Examples
of legitimate, protectable interests include business goodwill, trade secrets, and other confidential or
proprietary information. The extent of the agreement not to compete must accordingly be limited
appropriately as to time, territory, and type of activity. An agreement not to compete which is not
appropriately limited may be modified and enforced by a court of equity to the extent necessary to
protect the promisee’s legitimate interest, but may not be enforced by a court of law. Third, the
promisee’s need for the protection afforded by the agreement not to compete must not be
outweighed by either the hardship to the promisor or any injury likely to the public. Before an
agreement not to compete will be enforced, its benefits must be balanced against its burdens, both
to the promisor and the public. Thus, such an agreement may, in a particular case, accomplish the
salutary purpose of encouraging an employer to share confidential, proprietary information with an
employee in furtherance of their common purpose, but must not also take unfair advantage of the
disparity of bargaining power between them or too severely impair the employee’s personal freedom
and economic mobility. Whether an agreement not to compete is a reasonable restraint of trade is a
question of law for the court.” (citations and footnotes omitted)).
[11] Tex. Bus. & Com. Code § 15.50(b) (AA covenant not to compete is enforceable against a
person licensed as a physician by the Texas State Board of Medical Examiners if such covenant
complies with the following requirements: (1) the covenant must: (A) not deny the physician access
to a list of his patients whom he had seen or treated within one year of termination of the contract or
employment; (B) provide access to medical records of the physician’s patients upon authorization of
the patient and any copies of medical records for a reasonable fee as established by the Texas
State Board of Medical Examiners under Section 159.008, Occupations Code; and (C) provide that
any access to a list of patients or to patients’ medical records after termination of the contract or
employment shall not require such list or records to be provided in a format different than that by
which such records are maintained except by mutual consent of the parties to the contract; (2) the
covenant must provide for a buy out of the covenant by the physician at a reasonable price or, at
the option of either party, as determined by a mutually agreed upon arbitrator or, in the case of an
inability to agree, an arbitrator of the court whose decision shall be binding on the parties; and (3)
the covenant must provide that the physician will not be prohibited from providing continuing care
and treatment to a specific patient or patients during the course of an acute illness even after the
contract or employment has been terminated.”).
[12] Id. § 15.51(b) (“If the primary purpose of the agreement to which the covenant is ancillary is to
obligate the promisor to render personal services, for a term or at will, the promisee has the burden
of establishing that the covenant meets the criteria specified by Section 15.50 of this code. If the
agreement has a different primary purpose, the promisor has the burden of establishing that the
covenant does not meet those criteria. For the purposes of this subsection, the >burden of
establishing’ a fact means the burden of persuading the triers of fact that the existence of the fact is
more probable than its nonexistence.”).
[13] Id. § 15.51(c) (“If the covenant is found to be ancillary to or part of an otherwise enforceable
agreement but contains limitations as to time, geographical area, or scope of activity to be restrained
that are not reasonable and impose a greater restraint than is necessary to protect the goodwill or
other business interest of the promisee, the court shall reform the covenant to the extent necessary
to cause the limitations contained in the covenant as to time, geographical area, and scope of
activity to be restrained to be reasonable and to impose a restraint that is not greater than
necessary to protect the goodwill or other business interest of the promisee and enforce the
covenant as reformed, except that the court may not award the promisee damages for a breach of
the covenant before its reformation and the relief granted to the promisee shall be limited to
injunctive relief.”).
[14] Id. (AIf 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.”).
[15] Justin Belt Co. v. Yost, 502 S.W.2d 681, 685 (Tex. 1973) (“[I]t can no longer be said that a
covenant not to compete is void and unenforceable simply because it is not reasonably limited as to
either time or area, and that a court of equity will nevertheless enforce the contract by granting an
injunction restraining competition for a time and within an area that are reasonable under the
circumstances.”); Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d 950, 952 (Tex. 1960) (“[A]
lthough the territory or period stipulated by the parties may be unreasonable, a court of equity will
nevertheless enforce the contract by granting an injunction restraining the defendant from
competing for a time and within an area that are reasonable under the circumstances.”); Spinks v.
Riebold, 310 S.W.2d 668, 669 (Tex. Civ. App.- El Paso 1958, writ ref’d) (“[C]ontracts of employment
containing restrictive covenants . . . will not be declared void because said covenants are
unreasonable as to time, or as to the extent of territory covered, or unreasonable as to both time
and territory. . . . [This is] not making a new and different contract for the parties, but . . . it would
hardly be doing violence to the established principles to hold that the restriction is merely void or
unenforceable with respect to that portion of the time beyond what the court considers reasonable.”
(internal quotation marks omitted)); Lewis v. Krueger, Hutchinson & Overton Clinic, 269 S.W.2d 798,
799 (Tex. 1954) (“Merely because a limit has not been fixed for the duration of the restraint, the
agreement will not be struck down but will be enforceable for such period of time as would appear to
be reasonable under the circumstances.”); see also City Ice Delivery Co. v. Evans, 275 S.W. 87, 90
(Tex. Civ. App.- Dallas 1925, no writ) (concluding that the trial court, instead of dissolving a
temporary injunction, should have limited it to only the district assigned to the employee).
[16] Tex. Bus. & Com. Code § 15.51(c), quoted supra note 13.
[17] 883 S.W.2d 642 (Tex. 1994).
[18] Id. at 646.
[19] Id. at 644-645.
[20] Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson 209 S.W.3d 644, 651 (Tex. 2006).
[21] See ante at ___.
[22] Restatement (Second) of Contracts § 2 cmt. e (1981).
[23] Id. § 77 cmt. a (“Where the apparent assurance of performance is illusory, it is not consideration
for a return promise.”).
[24] Federal Express Corp. v. Dutschmann, 846 S.W.2d 282, 283 (Tex. 1993) (per curiam) (“The
long‑standing rule in Texas provides for employment at will, terminable at any time by either party,
with or without cause, absent an express agreement to the contrary.”) (citing Schroeder v. Texas
Iron Works, 813 S.W.2d 483, 489 (Tex. 1991), and East Line & R.R.R. v. Scott, 10 S.W. 99, 102
(Tex. 1888)).
[25] 883 S.W.2d at 645 n.5 (citing E. Allan Farnsworth, Contracts 72-82 (1982)).
[26] Compare, e.g., Federal Sign v. Texas S. Univ., 951 S.W.2d 401, 408 (Tex. 1997) (AA contract
must be based upon a valid consideration, in other words, mutuality of obligation.”), with
Restatement (Second) of Contracts § 79 (1981) (“If the requirement of consideration is met, there is
no additional requirement of (a) a gain, advantage, or benefit to the promisor or a loss,
disadvantage, or detriment to the promisee; or (b) equivalence in the values exchanged; or (c)
‘mutuality of obligation.’”) and id. cmt. a (“’[M]utuality of obligation’ has been said to be essential to a
contract. But experience has shown that [this is not an] essential element[] of a bargain or of an
enforceable contract . . . .”).
[27] 460 S.W.2d 409, 412 (Tex. 1970).
[28] Restatement (Second) of Contracts § 77 (1981).
[29] Tex. Bus. & Com. Code § 15.51(c).