Non-Compete Boilerplate Loses Steam Where Independent Contractor Receives Call and Confidences Directly

The Court of Appeals for the Sixth Appellate District of Texas at Texarkana issued an opinion on November 24, 2020 in Titan Oil & Gas Consultants LLC v. David W. Willis and RIGUP, Inc., a case addressing application of a non-competition provision in the independent contractor context in the oil and gas drilling and production industry in the Permian Basin and elsewhere. Titan addressed non-competition claims of interest both to those focused on the Texas arcana of the state’s restrictive covenant statute and jurisprudence and to those more generally interested in applying restrictive covenants to independent contractors.  Each area of interest is worth examining.

A. Tex. Arcana Around The State’s Restrictive Covenant Statute And Jurisprudence Explained

First, let’s look at the Texas law issues.  Texas covenants not to compete are governed by TEX. BUS. & COMM. CODE Section 15.50(a):

(a) Notwithstanding Section 15.05 of this code, and subject to any applicable provision of Subsection (b), 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 to the extent that it 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.

Texas courts have read this as requiring “two inquiries: ‘[f]irst, we determine whether there is an ‘otherwise enforceable agreement’ between the parties, then we determine whether the covenant is ‘ancillary to or part of’ that agreement.’” [citations omitted] and then the court must determine that “the covenant not to compete is ancillary to or part of an otherwise enforceable agreement.” Titan Op. at 9-10.  Thus, “’the employer must establish both that (a) the consideration given by the employer in the agreement is reasonably related to an interest worthy of protection and (b) the covenant not to compete was designed to enforce the employee’s consideration or return promise in the agreement.’…’Unless both elements of the test are satisfied, the covenant cannot be ancillary to or a part of an otherwise enforceable agreement, and is therefore a naked restraint of trade and unenforceable…The covenant cannot be a stand-alone promise from the employee lacking any new consideration from the employer.’” Titan Op. at 9-10.

To do that analysis, the Titan court relied principally on Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), and Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642 (Tex. 1994).  The latter, Light, had illuminated the requirements, holding that:

in order for a covenant not to compete to be ancillary to an otherwise enforceable agreement between employer and employee: (1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee from competing; and (2) the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement. Unless both elements of the test are satisfied, the covenant cannot be ancillary to or a part of an otherwise enforceable agreement, and is therefore a naked restraint of trade and unenforceable.

[Light, 883 S.W.2d at 647]

In the former case, Marsh, 354 S.W.3d at 774-777, the Texas Supreme Court muddied the analysis by arguably eliminating, perhaps, the first (or “give rise”) element of Light’s test, according to the Titan Court (at 11-13).  But the Titan Court concluded that it need not settle that debate, as the second, “covenant must be designed to enforce the employee’s consideration” prong was still a requirement after Marsh, and Titan could not satisfy that necessary element. Id.

B. The Titan Non-Compete Clause Falls Short

While the factual reasons that the Titan clause fell short of the Marsh/Light requirements were important under Texas law, they may also point to issues employers, staffing agencies, prime contractors, and others who place independent contractors may face even outside Texas.  In Titan, the defendant, David Willis, was contacted directly by Titan’s customer, Apache Corporation, and solicited to join one of its “completions” teams, and then during the engagement Apache provided its confidential information and needs directly to Willis without Titan acting as intermediate, conduit or guarantor of confidentiality.  According to the Court’s opinion, Titan’s connection was an afterthought: “Rather, the undisputed evidence shows that Apache contacted Willis to be a part of its completions team and that Titan subsequently contacted Willis to carry his insurance and administrate payroll while he worked at Apache. Thus, Willis did not gain access to Apache and its confidential information through Titan or because of Titan’s relationship with Apache.” Titan Op. at 16.  As the Titan Court noted, “This is not a case where in exchange for a promise not to disclose confidential information, the employer expends money and resources to provide the employee with specialized training or the employee gains access to the employer’s clients and their confidential information because of the employer’s relationship with its clients.” Id.

While Titan’s contract appeared to have all the right boilerplate language, arguments based on such language lost steam when the facts revealed that Titan was not the source or conduit of referral or confidential information, had not added defendant to its approved contractor list, and had never presented defendant’s credentials to any other Titan customer or client. Titan Op., at 16; see also id. at 4, fn, 2-3 and accompanying text.  Whether inside or outside Texas, and whether one is dealing with employees or independent contractors, documenting the company’s role in providing such workers the actual work opportunity and the ability to fulfill it remains important to justifying the enforcement of such restrictive covenant.  That is true in states like Texas with formal statutory linkage requirements and in purer common law jurisdictions where judges seek evidence showing employers or prime contractors have provided real value, access and opportunity rather than having just sought to curtail competition as a matter of contractual course.