A Court ruled that a company didn’t show a substantial likelihood that it would succeed in enforcing noncompetition restrictions against four former employees. This failure, however, is an important reminder for companies with multi-state operations or employees who may live in a state where non-compete restrictions are not favored or otherwise enforceable.
Turning to the particular case (Cardoni v Prosperity Bank), Prosperity Bank is a Texas-based bank. It had previously purchased a rival bank that was located in Oklahoma. After this purchase, it sought to enforce its three-year noncompete restrictions against four former bankers. These bankers were previously employed in the Oklahoma branch that Prosperity had acquired and they left to work for another bank also in Oklahoma.
Enforcement of Non-Compete Restrictions – What State Law Controls?
In support of its position, Prosperity cited to the employment agreements, which called for the application of Texas law. Non-compete restrictions are generally enforceable under Texas law. The former employees, however, argued that Oklahoma law – which does not generally enforce noncompete restrictions – should be applied to the lawsuit.
The Court agreed that Oklahoma had more of a significant relationship with the case and the parties than Texas. Specifically, the lawsuit affected employees in Oklahoma and both Prosperity and its competitor, the new employer, operated within Oklahoma.
But the Court noted that the contracts’ choice-of-law provision could still govern the parties’ relationship unless applying Texas law would contravene a fundamental Oklahoma policy. And this is where Prosperity’s lawsuit fell off the tracks.
The court offered this colorful characterization about the differences between Texas and Oklahoma when it came to enforcing non-compete restrictions:
In addition to their well-known disagreements over boundaries and football, Texas and Oklahoma do not see eye to eye on a less prominent issue: covenants not to compete. Texas generally allows them so long as they are limited both geographically and temporally … Oklahoma generally does not … These different policy choices—Texas’s view which prioritizes parties’ freedom to contract and Oklahoma’s which emphasizes the right to earn a living and competition—came to a head …
In other words, unlike Texas, Oklahoma has a statutory provision that voids most restrictions on practicing a lawful profession, trade or business. This significant legal distinction combined with the close connection Oklahoma had with the case resulted in the appeals court finding that the choice-of-law provision was not likely to be enforceable concerning the noncompetition provision.
Take Aways – Assessing Non-compete Restrictions Critical in Multi-State Operations and when Purchasing a Business.
While this case involved Oklahoma and Texas, the issues are equally critical for Michigan businesses that operate in other states or employ individuals who live outside of Michigan. See Enforcing Noncompete Agreements – What Law Will Apply?
The Prosperity case also illustrates why when buying a business it is critical for your due diligence to extend to employment matters that include determining non-compete restrictions.
Consider for example the court records noted that Prosperity “considered the retention of these employees critical to the merger’s successful completion.” Accordingly, before completing the merger, Prosperity offered employment contracts to the individuals involved in the litigation. Hopefully, Prosperity considered whether it would be able to retain these key employees before pulling the trigger on the acquisition. If not, it is likely the value that drove Prosperity to complete the acquisition is not going to be there – at least concerning these key bankers.
Where non-compete issues extend into multiple states, we recommend analyzing each the applicable states’ non-compete laws to assess potential enforceability issues. Or as we tell our clients, it is important to know the “good, the bad, and the ugly” about your company’s non-compete agreements and whether they will be enforceable before you need to enforce them.