Beaumont Court of Appeals Finds a Non-Compete Overbroad When the Employer Failed to Justify the Need for the Restrictions

           On June 13. 2013, the Beaumont Court of Appeals issued its opinion in Hodgson v. U.S. Money Reserve. Inc., No. 09-13-00074-CV (Tex. App. – Beaumont 2013, no pet.).  This is an unpublished decision, but it is nonetheless interesting because it shows how one court of appeals is analyzing non-compete issues in the post-Marsh era.

            Hodgson and Kitchens worked for U.S. Money Reserve (USMR), selling coins and other precious metals.  They signed non-competes.  In 2012, Hodgson and Kitchens left USMR and formed a new company.

            USMR sued to enforce the non-competes.  The trial court entered a temporary injunction against Hodgson and Kitchens.  The injunction prohibited Hodgson and Kitchens from:

(i) hiring, soliciting for hire, calling on, soliciting, diverting, or working with any past, present, or anybody retained in the future as an employee, agent, representative, or consultant of [USMR], or attempting to do so, including, but not limited to [Hodgson and Kitchens];

(ii) contacting, communicating with, selling coins to and/or purchasing coins from any of [USMR's] customers that [Hodgson and Kitchens] initially contacted by utilizing [US MR's] confidential and/or proprietary information[;]

(iii) revealing the names and/or contact information of any of [USMR's] customers that [Hodgson and Kitchens] discovered through the use of [USMR's] confidential and/or proprietary information[;]

(iv) utilizing any of [USMR's] confidential and/or proprietary information[;]

(v) disclosing any of [USMR's] confidential and/or proprietary information to anyone[;] and/or

(vi) associating with or forming any other entity in the business of selling gold coins or similar items within two-hundred miles of Austin or Beaumont, Texas.

Hodgson and Kitchens appealed the temporary injunction.

            The Beaumont Court of Appeals reversed some, but not all, of the temporary injunction.  The specific aspects of the injunction that troubled the court were:

1. A prohibition on working with former USMR employees, which meant that Hodgson and Kitchens could not work with each other.

2.  The 200-mile radius of the non-compete area, which would include Houston, Corpus Christi, San Antonio, Dallas, and Fort Worth.

The court found that USMR had failed to prove its case with respect to those two restrictions:

The testimony from the hearing reflects that none of the witnesses explained how USMR's business interests would be protected by a blanket restriction preventing Hodgson and Kitchens from working with former USMR employees if they were to work together for an organization that did not compete with USMR. Additionally, there was no evidence that USMR had customers who lived within the restricted territory, nor was there any evidence showing that Hodgson and Kitchens had sold coins to any of their former customers or to persons with whom they had contact while working at USMR.

On appeal, USMR has not explained why its business interests would be protected by prohibiting Hodgson and Kitchens from working with USMR's former employees in a noncompeting business, nor has USMR pointed to evidence that explains why, given a restriction that prevents Hodgson and Kitchens from contacting their former customers, a two-hundred-mile restriction is necessary to protect USMR's business interests. For example, the record does not show that Hodgson's and Kitchens' former customers live within the restricted territory, nor does it show that USMR has a significant number of customers living within the restricted territory. Finally, the testimony does not show that Hodgson and Kitchens solicited their former USMR customers while working for UGCB.

The court then found that USMR had failed to prove that these provisions of the non-compete were reasonably calculated to protect its legitimate business interests:

There is no evidence in the record showing that restrictions preventing Hodgson and Kitchens from working with a former employee of USMR in a noncompeting business are necessary to protect USMR's business interest. There is also no evidence demonstrating that the restriction prohibiting Hodgson and Kitchens from working together within two hundred miles of Austin and Beaumont are necessary to protect USMR's business interests. Based on the evidence before the trial court, we hold the trial court abused its discretion by finding that USMR would probably prevail in its effort to enforce these two restrictions. Issues one and two are sustained.

However, the court upheld certain narrower aspects of the injunction:

On this record, the trial court's finding on probable, imminent, and irreparable harm—to the extent the trial court's order prevents Hodgson and Kitchens from hiring or soliciting USMR's current employees; utilizing USMR's confidential and proprietary information; contacting, communicating, selling, or purchasing coins or bullion from former customers or persons to whom they marketed while working at USMR; and from disclosing USMR's confidential and proprietary information—is supported by the evidence. With respect to these aspects of the trial court's order, we overrule issue three.

             The lesson from this case is that the courts will uphold reasonable restrictions, but will look with suspicion on restrictions that are designed solely to keep former employees from going into business for themselves.  What legitimate reason would there be for keeping Hodgson and Kitchens from going into business with each other?  What legitimate reason would there be for a 200 mile radius, which would include Dallas, Houston, San Antonio, and Corpus Christi?  An employer who wishes to enforce those sorts of restrictions will need to be prepared to present a persuasive explanation for the need for such heavy handed restrictions.

David C. Holmes is a Houston employment lawyer with The Law Offices of David C. Holmes

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