Texas Court Gives Employers More Flexibility to Encourage Employees Not to Compete: 5 Things to Know<\/p>\n
Texas employers recently got a win when a state appellate court held that a contract provision giving an employee the option of receiving a benefit by not competing with their employer is not a true \u201cnon-compete agreement.\u201d The August 6 decision in Healing Hearts Clinic v. Ramineni means that contracts that give employees a financial incentive not to compete don\u2019t have to meet the reasonableness requirements that generally apply to non-competes in the state. This ruling clears the way for Texas employers to use such \u201cforfeiture provisions\u201d as a carrot rather than having to resort to the stick of a true non-compete when it comes to protecting your business. What are the five things you need to know about this key decision?<\/p>\n
The Nature of the Contract Provision at Issue<\/p>\n
Rajesh Ramineni was a physician who alleged that his Texas employer \u2013 Healing Hearts Clinic \u2013 failed to pay 50% of his accounts receivable following his resignation and sale of his shares. The shareholder agreement at issue contained a provision allowing for the additional payment if the employee retired from the active practice of cardiology or continued to practice cardiology outside a 20-mile radius of his employer\u2019s principal office. The additional payment would be made approximately one year and 30 days after the employee gave notice (assuming he complied with the non-compete).<\/p>\n
Ramineni was also bound by a separate non-compete provision restricting competitive activities within a 20-mile radius of the Clinic for a period of two years, with a buyout provision that complied with Texas law (read more here<\/a> on recent changes to non-compete agreements for healthcare employees in Texas).<\/p>\n Ramineni paid the required amount to buy out that non-compete provision and immediately began practicing as a cardiologist in the neighborhood across from the Clinic\u2019s main office. In light of the buyout, the Clinic did not attempt to stop him from practicing across the street. But it refused to pay Ramineni 50% of his accounts receivable since he did not meet the condition to receive it under the shareholder agreement. This prompted Ramineni to sue for breach of contract.<\/p>\n Appellate Court Says a Forfeiture Clause is Not a Non-Compete<\/p>\n The trial court sided with Ramineni, finding that the forfeiture provision in the shareholder agreement was an unenforceable non-compete and the Clinic breached the agreement by not making the additional payment. The appellate court reversed, finding that the forfeiture provision in the shareholder agreement offered Ramineni an unvested benefit he was not otherwise entitled to receive, giving him a financial incentive not to compete.<\/p>\n The provision was a \u201cpermissible choice\u201d under Texas general contract law. It was not a restraint on the employee\u2019s ability to compete, which is governed by the Texas Covenants Not to Compete Act. Thus, the provision did not prohibit Ramineni from competing within 20 miles. It simply required him to give up the additional, unearned payment if he chose to do so.<\/p>\n This decision greatly expands the application of a Texas Supreme Court opinion in 2014 that applied the same logic to forfeiture provisions in non-contributory profit-sharing plans that offer an additional unvested equity award to incentivize non-compete compliance.<\/p>\n 5 Key Takeaways for Texas Businesses<\/p>\n 1. Does a forfeiture provision need to meet the same statutory requirements as true non-competes?\u00a0No. The court did not treat this type of forfeiture provision as a non-compete under the Texas Covenants Not to Compete Act. A properly structured and worded forfeiture provision does not have to be tied to another enforceable agreement, such as a non-disclosure agreement. Nor does it have to meet the same reasonableness requirements for duration, geographic distance, and scope of activities, or adhere to the healthcare-specific requirements under the act. With that said, there are likely some limits that can be drawn from other general contract principles, but courts have yet to flesh those out in this particular context.<\/p>\n 2. Can a forfeiture provision provide protection from competitive activity for employers? Yes. This opinion highlights an additional avenue for employers to discourage employees from competing or poaching customers and employees. However, a forfeiture provision does not operate as an enforceable non-compete. Instead, it gives employees an incentive not to compete, which they can freely choose to forego. Thus, unlike traditional non-competes, employees are not breaching the contract by competing and courts cannot enforce forfeiture provisions through a restraining order or injunction.<\/p>\n 3. Are forfeiture provisions only available for physicians?\u00a0No. While the employee in this case was a physician, that fact was incidental to the court\u2019s decision, so the same legal logic would apply in other contexts.<\/p>\n 4. What other types of contracts could contain forfeiture provisions?\u00a0Because the court\u2019s reasoning did not depend on the forfeiture provision being part of a shareholder agreement, similar forfeiture provisions can be used in standard employment agreements, bonus agreements, and other employment-related contracts. Further, the court may also have opened the door to utilizing them in separation and settlement agreements, which would be important as an additional mechanism for incentivizing compliance with existing non-competes or for creating new ones.<\/p>\n 5. Should you eliminate non-competes in favor of forfeiture provisions?\u00a0It depends on the situation. There are pros and cons to each approach, and in some cases, it may make sense to use both for the same employee, possibly in different agreements. You should consult with your attorney to determine the best options for your business.<\/p>\n Conclusion<\/p>\n Ramineni has asked for additional time to consider petitioning the Texas Supreme Court for review, so we may not have heard the last of this issue. Meanwhile, if you have questions, please contact the authors of this Insight, your Fisher Phillips attorney, any attorney in our\u00a0Texas offices<\/a>, or any attorney in our\u00a0Employee Defection and Trade Secrets Practice Group<\/a>. Make sure you are subscribed to\u00a0Fisher Phillips\u2019 Insight System<\/a>\u00a0to gather the most up-to-date information directly to your inbox. We constantly monitor new cases, legislation, and regulatory developments to keep you at the cutting edge of the law, so check out\u00a0Blue Pencil Box<\/a> for our daily updates on restrictive covenant law.<\/p>\n","protected":false},"excerpt":{"rendered":"Texas Court Gives Employers More Flexibility to Encourage Employees Not to Compete: 5 Things to Know Texas employers…\n","protected":false},"author":2,"featured_media":471874,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[159981,159979,159974,159977,159980,159975,159982,159983,159984,159976,159970,159971,159973,27,159969,29,28,159972,159978],"class_list":["post-471873","post","type-post","status-publish","format-standard","has-post-thumbnail","category-texas","tag-employment-law-articles","tag-employment-law-blog","tag-employment-law-news","tag-employment-law-news-today","tag-labor-and-employment-law-blog","tag-labor-and-employment-law-news","tag-labor-law-articles","tag-labor-law-news","tag-labor-law-updates","tag-law-employment-news","tag-new-texas-employment-laws","tag-non-compete-agreements","tag-non-compete-laws-texas","tag-texas","tag-texas-employment-laws","tag-texas-headlines","tag-texas-news","tag-texas-non-competes","tag-workplace-law-blog"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/posts\/471873","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/comments?post=471873"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/posts\/471873\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/media\/471874"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/media?parent=471873"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/categories?post=471873"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-tx\/wp-json\/wp\/v2\/tags?post=471873"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}