Fourteenth Court of Appeals: An Employer May Not Recover Attorneys’ Fees When a Non-Compete Is Reformed

The Fourteenth Court of Appeals considered whether a frachisor who successfully obtained an injunction enforcing a non-compete could recover attorneys' fees when the trial court reformed the non-compete before entering the injunction.  The case is Franlink, Inc. v. GJMS Unlimited, Inc., No. 14-12-00290-CV (Tex. App. -- Houston [14th Dist.] April 25, 2013) (to be reported).

The franchisor operated a staffing business through franchisees.  The defendants were franchisees.  The franchise agreement included a two-year non-compete.  After the franchise agreement expired, the defendants opened their own independent staffing company.

The franchisor sued to enforce the non-compete.  The defendants argued that the non-compete was unreasonable as to time, geographical area, and scope of activities.  The court reformed the non-compete by limiting the time and geographical area, but then entered an injunction in favor of the franchisor.

The issue on appeal was whether the franchisor could recover its attorneys' fees.  The Texas non-compete statute provides that, if the non-compete is reformed, "the court may not award the promisee damages for a breach of the covenant before its reformation and the relief granted to the promisee shall be limited to injunctive relief."  Tex. Bus. & Com. Code § 15.51(c).  The franchisor argued that it was nonetheless entitled to recover its attorneys' fees either under the non-compete statute or under the separate statute that provides for an award of attorneys' fees in breach of contract cases (Tex. Civ. Prac. & Rem. Code § 38.001).

The court rejected the franchisor's arguments:

Although Link argues robustly in defense of its interpretation, we conclude that Link’s interpretation is contrary to the statutory scheme of the Act and the plain meaning of section 15.51(c).  Section 15.50 of the Act provides that a covenant not to compete is enforceable "if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made" and "contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee."  Tex. Bus. & Comm. Code § 15.50(a).  Section 15.51, which governs the procedures and remedies in actions to enforce covenants not to compete, reflects that the legislature expressly intended to permit an award of attorney’s fees in certain circumstances but not in others.

The court noted that section 15.51(c) permits an award of attorneys' fees to the promisor (in this case the defendants) if the non-compete is unreasonable:

If the primary purpose of the agreement to which the covenant is ancillary is to obligate the promisor to render personal services, the promisor establishes that the promisee knew at the time of the execution of the agreement that the covenant did not contain limitations as to time, geographical area, and scope of activity to be restrained that were reasonable and the limitations imposed a greater restraint than necessary to protect the goodwill or other business interest of the promisee, and the promisee sought to enforce the covenant to a greater extent than was necessary to protect the goodwill or other business interest of the promisee, the court may award the promisor the costs, including reasonable attorney’s fees, actually and reasonably incurred by the promisor in defending the action to enforce the covenant.

The court reasoned that this was the legislature did not intend to permit an award of attorneys' fees to the promisee (in this case, the franchisor) if the non-compete was unreasonable:

Viewed in its entirety, subsection (c) provides for an award of attorney’s fees in a single circumstance: In the context of a personal-services agreement, attorney’s fees may be awarded to a promisor who satisfies certain evidentiary requirements in defending against enforcement of an unreasonable covenant.  Link does not contend that this circumstance applies here.  Notably, the legislature did not similarly provide for an award of attorney’s fees to a promisee who seeks to enforce an unreasonable covenant not to compete that must be judicially reformed, as this one was.

Likewise, the court rejected the argument that attorneys' fees could be awarded under the general statute:

To allow an award of attorney’s fees under section 38.001(8), when the covenant was judicially reformed, would be contrary to the plain meaning of the more specific statute, section 15.51(c), which prohibits such an award.

The court therefore affirmed the denial of an award of attorneys' fees.

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

One Comment

  1. Posted June 17, 2013 at 5:51 am | Permalink

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