Companies often require their employees to sign covenants not to compete as part of an employment arrangement. These covenants may include a forum-selection clause and/or a choice-of-law clause, requiring that any lawsuit arising out of the covenant be brought in a particular jurisdiction and specifying what jurisdiction’s laws are to be applied in adjudicating a dispute. Businesses with employees in Texas should consider a recent Texas Supreme Court decision enforcing a forum-selection clause in a covenant not to compete signed by a Texas resident. In In re AutoNation, Inc., 228 S.W.3d 663 (Tex. 2007), the court held that a forum-selection clause in a covenant not to compete designating Florida as the forum was enforceable in Texas. The decision means that Texans who agree to a covenant not to compete cannot count on that covenant being interpreted in a Texas court.
The case arose out of a 2003 agreement between AutoNation, a national chain of automobile dealerships, and Hatfield, a former employee who was general manager of one of AutoNation’s dealerships. As a condition of his continued employment, Hatfield was required to sign a “Confidentiality, No-Solicitation/No-Hire and Non-Compete Agreement,” which included a one-year covenant not to compete. A choice-of-law provision in the agreement stated that the agreement would be construed under Florida law, and a forum-selection clause provided that any litigation arising out of the agreement must be filed in Florida. After learning that Hatfield had resigned and accepted a position with a competitor, Auto Nation filed a suit seeking injunctive relief and damages in a Broward County, Florida state court. Before learning of the Florida action, Hatfield filed a declaratory judgment suit in a Harris County, Texas state court seeking, inter alia, a declaration that the non-compete agreement was governed by Texas law and was unenforceable.
At Hatfield’s request, the Texas trial court later signed a temporary anti-suit injunction prohibiting AutoNation from taking any further action in connection with the pending Florida law suit or filing any future litigation seeking to enforce the non-compete agreement in any non-Texas court. In its injunction order, the trial court found that “it is probable that the covenant not to compete is unenforceable in Texas.” The court of appeals, relying on the decision in DeSantis v. Wachkenhut Corp., 793 S.W.2d 670 (Tex 1990), ruled that the trial court did not abuse its discretion in issuing the injunction because in this case, “fundamental Texas public policy requires application of Texas law to the question of enforceability of a non-compete agreement.”
The Texas Supreme Court disagreed. The court noted that it is well accepted in Texas that parties have the freedom to negotiate contracts. Texas courts generally enforce forum-selection clauses, unless the opposing party clearly shows that enforcement would be unreasonable or unjust, or the clause is invalid for other reasons such as fraud or overreaching. The court disagreed with the appellate court’s reliance on DeSantis. While DeSantis and this case involved similar factual scenarios – litigation between Florida Corporations and their Texas resident Employees concerning non-compete clauses – the court explained that DeSantis actually dealt only with a choice-of-law provision rather than a forum-selection clause. In DeSantis, a Florida corporation sued a former employee in Texas for a violation of a non-compete clause. The agreement at issue between those parties included a choice-of-law provision specifying the Florida law would govern disputes. The Supreme Court in DeSantis concluded then that Texas law should govern the dispute regardless of the choice-of-law provision. In DeSantis, the court indicated that “the law governing enforcement of noncompetition agreements is fundamental policy in Texas” and “to apply the law of another state to determine enforceability of such an agreement in the circumstances of a case like this would be contrary to that policy.”
In AutoNation, however, the court clarified its holding in DeSantis, stating that there was nothing in DeSantis requiring that a suit be brought in Texas when a forum-selection clause mandates venue elsewhere. The court affirmed the necessity of judicial respect for bargained-for contractual agreements and rejected the notion that fundamental Texas policy requires that every employment dispute with a Texas resident must be litigated in Texas. According to the court, a contractual forum-selection clause is clearly enforceable in cases involving a covenant not to compete. It would be up to the Florida court to decide whether the choice-of-law provision was enforceable. In support of its conclusion, the court also noted that because AutoNation’s suit was filed first in Florida, the decision also honored principles of interstate comity. In the wake of AutoNation, companies that employ Texas residents will be able to specify the jurisdiction where disputes regarding a covenant not to compete will be heard.