Texas Appellate Court Holds Condition Subsequent in Noncompete Agreement Excused Former Employee’s Competitive Activities

by Seyfarth Shaw LLP
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A Texas Court of Appeals affirmed a summary judgment last month in favor of an ex-employee declaring that a noncompete clause in an asset purchase agreement and separate noncompete agreement did not bar him from competing with his former employer after he had resigned his position. The court’s opinion serves as a reminder that conditions subsequent in noncompete clauses must be drafted with special care in order to avoid the risk that former employees may ignore such clauses with impunity.

Jason Player, a former IT manager for East Texas Copy Systems, Inc. (“Copy Systems”) sold his business to Copy Systems and, in the process, signed an asset purchase agreement (“APA”), as well as a separate noncompete agreement (“NCA”), that contained clauses precluding him from competing with Copy Systems for a certain period of time. Both the APA and the NCA also included nearly identical provisions which provided that “[i]f . . . Player’s employment with [Copy Systems] is terminated prior to two years from the date of this Agreement [July 1, 2013] for any reason other than a for cause termination, this non-compete Agreement will no longer be binding.” Player resigned his position with Copy Systems effective June 30, 2015—one day shy of the two-year period—and immediately began engaging in IT-related business for a competitor. Copy Systems then sent a cease-and-desist letter to Player demanding that, pursuant to its interpretation of the noncompete clauses, he refrain from engaging in any activities that are competitive with Copy Systems.

Player then filed suit in Texas state court against Copy Systems, requesting a declaration that the NCA and noncompete clause in the APA no longer forbid him from competing with Copy Systems. Copy Systems, in turn, filed a counterclaim seeking (1) a declaration that the noncompete provisions at issue remained effective, and (2) damages for breach of contract. As the facts were undisputed, both parties filed motions for summary judgment. After a hearing, the trial court granted Player’s motion and denied Copy Systems’.

On appeal, Copy Systems challenged the trial court’s construction of the parties’ noncompete agreement as reflected in the NCA and APA. Both parties focused on the interpretation of “[i]f . . . Player’s employment with [Copy Systems] is terminated prior to two years from the date of this Agreement for any reason other than a for cause termination, this non-compete Agreement will no longer be binding.” Copy Systems argued that this clause should be interpreted so that the noncompete would remain effective post-termination in the event Player resigned.  This is, the noncompete would cease to apply only if the Player was fired without cause. Player, on the other hand, maintained that the clause was effective if either party terminated his employment, including if he resigned.

Siding with Player, the court of appeals construed this clause, like the trial court had before it, to be a condition subsequent clause, i.e., a clause where the fulfillment of a condition excuses performance of an otherwise binding agreement. The court reasoned that, adhering to the plain and ordinary meaning of the agreements’ terms, the clause at issue was effective if either party terminated Player’s employment, since that clause did not identify which party must terminate the employment relationship. According to the court of appeals, what triggers the condition subsequent clause is “the termination of Player’s employment, not which party initiates the termination.” Copy Systems’ argument to the contrary was, in effect, asking the court to rewrite the agreement to insert the following underlined language: “[i]f . . . Player’s employment with [Copy Systems] is terminated [by Copy Systems] prior to two years from the date of this Agreement for any reason other than a for cause termination, this non-compete Agreement will no longer be binding.” This the court refused to do. Because Player resigned on June 30, 2015, and nothing in the parties’ agreement indicated that the inclusion of this clause was intended to restrict the party initiating the triggering termination to only Copy Systems, the court held that Player was excused from the performance of any obligations prescribed by the APA and NCA.

The takeaway from this case appears to be that employers should be cautious when inserting conditions subsequent in noncompete agreements, especially if the language triggering the condition subsequent does not specify which party terminates the employment relationship. If employers intend for noncompetes to continue to bind an employee post-resignation, they must specifically include language in any condition subsequent clause that the termination was at the instance of the employer. If no such language is included, the courts may decline to reform imprecise agreements and redistribute the contractually allocated risks and benefits. Accordingly, employers may wish to protect themselves by ensuring that an employee’s voluntary resignation is not a triggering event, thereby guaranteeing that the noncompete does not become ineffective upon the employee’s resignation.

E. Texas Copy Sys., Inc. v. Player, 06-16-00035-CV, 2016 WL 6638865 (Tex. App.—Texarkana Nov. 10, 2016, no. pet. h.).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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