First District of Texas Court of Appeals Reverses Trial Court Refusal to Enforce Two Year Non-Compete
The Texas Court of Appeals for the First District reversed and remanded a Harris County (Houston) trial court’s decision refusing to enforce a non-compete provision in a case involving insurance brokers and agents. In Gallagher Health Insurance Services v. Vogelsang, the Court enforced a two year non-compete in a case that is typical of most non-compete cases in the insurance brokerage business; that is, a broker/agent signs an employment agreement with a non-compete, builds up a substantial book of business during their employment with an agency and then leaves with their “book” along with their “team” to compete against their former employer. The Vogelsang decision provides a road map for insurance brokerage firms in drafting non-compete agreements that pass judicial muster in Texas.
Gallagher Health Insurance Services (“GHIS”) entered into an employment agreement with Vogelsang, who was a “Producer” for GHIS following its acquisition of her previous insurance brokerage firm. Vogelsang agreed, in pertinent part, to hold trade secrets and confidential information as proprietary to GHIS and further agreed that, by virtue of her employment, she would be “granted otherwise prohibited access to confidential and proprietary information…which is not known either to its competitor or within the insurance agency and brokerage business generally.” Vogelsang further agreed to a non-compete that prohibited her from soliciting, placing, marketing accepting, aiding, consulting in the renewal, discontinuance or replacement of any insurance “for which [s]he performed any of the foregoing functions during the two year period immediately following [her] termination.”
GHIS sued Vogelsang and her team after they left GHIS to work for a competitor. Vogelsang argued that the non-compete was unenforceable under Texas’ Non-Compete statute, Tex. Bus & Com. Code Ann. § 15.50(a) (Vernon 2002) because: (1) GHIS merely recognized that GHIS would provide access to confidential information and that she would not divulge any future confidential information she might receive, but that the agreement did not promise to actually give her the information; (2) the information was readily available in the public domain, and any client information received by GHIS belonged to the client, and not GHIS; and (3) the covenant not to compete did not satisfy the reasonableness standards under Section 15.50 of the code, as it imposed a greater restraint than necessary to protect the goodwill or other business interest of the employer.
The Court made short shrift of Vogelsang’s arguments. First, the Court followed the Texas Supreme Court’s decisions in Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W. 644, 649 (Tex. 2006) and Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 2009 WL 1028051 (Tex. April 17, 2009). In Sheshunoff, the Texas Supreme Court held that, for a covenant not to compete to be ancillary to or part of an otherwise enforceable agreement, the employer must establish that the consideration given by the employer must rise to the employer’s interest in restraining the employee from competing; and that the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement. In Hardy, the Court held that where the nature of the employment for which an employee is hired required the employer to provide confidential information for the employee to perform their job duties, then a promise to actually provide the confidential information may be implied by the courts.
Importantly, the Court flatly rejected the assertion that key documents in a brokerage business were not worthy of protection (e.g., employee salary information, client specific insurance information, team related income and budgets, at-risk accounts, strategic prospecting, financial results, audit results, production results, etc.) and found that a non-compete “is enforceable not only to protect trade secrets but also to protect proprietary and confidential information.”
Finally, the Court found that the covenant had reasonable time, scope and geographic restraints because Vogelsang worked on 80 accounts in her last two years at GHIS and the agreement precluded her from working on those 80 accounts for two years from the date of her resignation. The Vogelsang Court found that: (1) Texas decisions have allowed use of a customer list as a reasonable means of enforcing a covenant not to compete; (2) two to five years has “repeatedly been held as a reasonable time in a noncompetition agreement.” Vogelsang was free to work in the same industry and to practice her livelihood anywhere in the world. Accordingly, the court reversed and remanded the trial court’s holding that the covenant-not-to-compete provision was unenforceable.
