Fort Worth Court of Appeals Finds Non-Compete Unenforceable Due to Waiver and Overbreadth

In an unpublished opinion, the Fort Worth Court of Appeals found that a non-compete was unenforceable due to waiver and overbreath. Ally Financial, Inc. v. Gutierrez, No. 02-13-00108-CV (Tex. App. -- Fort Worth Jan. 23, 2014).

Gutierrez worked for Ally in Lewisville, Texas. Ally adopted a compensation incentive plan (CIP) under which certain employees (including Gutierrez) would receive payments based on Ally's stock price. The CIP included non-compete and non-solicitation provisions:

While the Participant is employed by the Company or a Subsidiary, and during the 2-year period immediately following the date of any termination of the Participant's employment with the Company or a Subsidiary, such Participant shall not at any time, directly or indirectly, whether on behalf of . . . herself or any other person or entity (i) solicit any client and/or customer of the Company or any Subsidiary with respect to a Competitive Activity or (ii) solicit or employ any employee of the Company or any Subsidiary, or any person who was an employee of the Company or any subsidiary during the 60-day period immediately prior to the Participant's termination, for the purpose of causing such employee to terminate his or her employment with the Company or such Subsidiary.

The CIP included a clawback provision that required the employee to pay back any prior payments in the event of a breach. The CIP also provided that the employee would forfeit any unvested payments if the employee quit. Gutierrez received awards under the CIP in 2009, 2010, and 2011. The payments were scheduled to be paid out over time.

Gutierrez received the first two payments under the 2009 award in 2010 and 2011. She quit in October 2011 and went to work for a competitor. After she left Ally, she communicated with various Ally employees who were interested in going to work for the competitor.

In March 2012, Ally sent a letter to Gutierrez that reminded her of her obligations under the CIP and that threatened enforcement action. In April 2012, however, Ally made the third payment under the 2009 award.

In July 2012, Ally sued Gutierrez and her new employer under a variety of legal theories. Gutierrez and her new employer moved for summary judgment. The trial court granted the motion, and Ally appealed.

The Fort Worth Court of Appeals first examined Gutierrez's argument that Ally waived the non-compete and non-solicitation provisions by making the third payment under the 2009 award. The court noted that the elements of a waiver defense are "(1) an existing right, benefit, or advantage held by a party, (2) the party's actual knowledge of its existence, and (3) the party's actual intent to relinquish, or intentional conduct inconsistent with, the right." Gutierrez argued that the third payment under the 2009 was intentional conduct inconsistent with Ally's right to enforce the non-compete and non-solicitation provisions. Gutierrez also noted that Ally had declined to enforce these provisions against other former employees. The court agreed with Gutierrez and found waiver as a matter of law:

Therefore, Ally represented to Gutierrez that although it believed she had violated the CIP and had forfeited her rights to all unvested payments by voluntarily resigning, it was awarding her incentive compensation as provided by the CIP. Ally's action in paying Gutierrez a third payment under the 2009 award letter was inconsistent with its previously stated intention to enforce the non-solicitation covenant. Further, Gutierrez was aware that Ally repeatedly had declined to enforce the non-solicitation covenant against other Ally employees who resigned. Ally's intentional conduct, inconsistent with its attempted enforcement of the CIP, waived its right to seek enforcement of the non-solicitation covenant.

The court also found that Tex. Bus. & Com. Code ยง 15.50(a) barred the enforcement of the non-solicitation provision because it was overbroad. The court noted that Gutierrez worked in the IT department for Ally, but that the CIP barred her from soliciting any Ally employee in the country. The court found that this exceeded any justification based on the protection of Ally's goodwill:

Here, the non-solicitation covenant barred Gutierrez, for a two-year period, from soliciting or employing (1) all Ally employees who work for Ally or any of Ally's subsidiaries and (2) all former Ally employees who worked for Ally or any of Ally's subsidiaries between August 14 and October 14, 2011. While it might be considered reasonable to limit Gutierrez's solicitation of Ally's employees located in the IT department, which was where Gutierrez worked, the non-solicitation covenant in the CIP was not so limited. Gutierrez was barred for two years from soliciting or employing both all current Ally employees and all former Ally employees who were so employed in late 2011. The undisputed summary-judgment evidence showed that in 2012, Ally had approximately 14,000 employees located across the nation, with some located in foreign countries. These 14,000 employees were included in the scope of Ally's non-solicitation covenant. This covenant goes beyond what was necessary to protect Ally's goodwill or other business interest of Ally.

Accordingly, the court affirmed the summary judgment in favor of Gutierrez and her new employer.

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

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