Can an Employer Prohibit Former Employees From Planning to Compete?
In Nationsbuilders Insurance Services, Inc. v. Houston International Insurance Group, Ltd, a company sued a group of former employees to enforce non-competition provisions. The parties settled that lawsuit, with the settlement agreement providing that the former employees would not engage in “competition” with their former employer for a specified period of time. Competition was defined to include planning to conduct or engage in a competing business. During the restricted period the former employees did not sell competing insurance products or otherwise actively compete with their former employer, but they did engage in internal activities designed to enable them to begin competing as soon as the restricted period expired. Upon learning of these activities, the former employer filed an arbitration action claiming breach of the settlement agreement. The arbitrator found that the former employees, even though they had not actively competed, had nonetheless breached the settlement agreement because they had taken actions that would give their planned business a “head start” prior to the conclusion of the restricted period.
This arbitration decision raises the question of whether Texas courts will enforce a non-compete provision that prohibits an employee from “planning” to compete during the time the employee is contractually prohibited from competing with the employer. Considering that in recent years the Texas Supreme Court has issued several opinions that show a clear trend toward finding grounds on which to enforce non-compete provisions, it may prove worthwhile for companies to restructure employment agreements to add this additional layer of protection against former employees unfairly competing after termination of their employment.