5th Circuit Upholds Non-Compete Provision Despite Former Employee’s Forfeiture of Stock Options, Which Constituted Express Consideration for Restrictive Covenant Agreement

On April 27, 2020, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court’s decision to grant a preliminary injunction preventing a real estate agent from working for a competitor, because her non-compete, attached to a grant of restrictive stock units, was likely enforceable despite the agent’s forfeiture of the company stock.

The employee in this case worked for Martha Turner Sotheby’s International Realty (“Martha Turner”) in Houston, Texas for over four years. Approximately nine months before her resignation, Martha Turner’s parent company Realogy Holdings Corporation (“Realogy”) notified the employee that she was selected to participate in the company’s stock option program through an equity grant, in recognition of her accomplishments.  The grant was in the form of restricted stock units, which gave her the opportunity to receive shares of the parent company’s common stock upon vesting of the award after a three-year period.

Among the documents accompanying the equity grants was a Restrictive Covenants Agreement (“RCA”), which the employee executed electronically. The RCA required the employee to acknowledge that she had access to, and knowledge of, “’Confidential Information,’ the disclosure of which ‘could place the Company at a serious competitive disadvantage and could do serious damage” to Realogy’s business.  The RCA further outlined that the employee received good and valuable consideration for the restrictive covenants contained in the agreement, including (a) the right to acquire and own securities, and (b) her continued employment with Realogy.  Among the restrictive covenants by which she agreed to be bound was a non-competition provision, which prohibited the employee, for one year after termination and within fifteen miles of any branch where she worked, from performing services for a commercial or residential real estate brokerage business providing the same or similar services as she did at Martha Turner, and which is likely to result in the use or disclosure of Confidential Information.

In February 2019, the employee resigned from Martha Turner and accepted employment with Urban Compass, Inc. and Compass RE Texas, LLC (collectively “Compass”).  Pursuant to the terms of the stock option program, the employee’s resignation forfeited her right to vest any part of her equity grant.  Realogy subsequently filed a lawsuit with the U.S. District Court for the Southern District of Texas seeking injunctive relief, based on the terms of the RCA.  After a hearing, the district court ruled in favor of Realogy, issuing a preliminary injunction enforcing the restrictive covenants outlined in the RCA.

On appeal, the employee argued that the non-competition provision in the RCA is unenforceable under Texas law, because it is not supported by sufficient consideration.  Specifically, since the stock units and continued employment were the consideration outlined in the RCA, the employee argued that the restricted stock was “illusory” consideration for the non-competition provision, because the units were unvested, and had to be forfeited upon her resignation.  The employee also argued that her “continued employment,” does not constitute valid consideration for a restrictive covenant under Texas law.

Citing Alex Shushunoff Management Services, L.P. v. Johnson, the Fifth Circuit found that Realogy’s implied promise to provide the employee with confidential information constitutes valid consideration for the non-competition provision. The three-member panel determined that the district court correctly found that Realogy furnishing the employee with confidential information and her promise not to disclose that information make the non-competition provision she executed as part of that agreement enforceable, even if Realogy did not make an express promise to provide the employee with confidential information.

This decision further highlights the importance of including a confidentiality provision in restrictive covenant agreements in Texas, and specifically outlining the promise to provide the employee with confidential information as all or part of the consideration for the restrictive covenants by which the employee agrees to be bound.

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National Law Review, Volumess X, Number 136