Miller Paper Co. v. Roberts Paper Co.
1995 WL 239299, 901 S.W.2d 593 (1995)
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Rule of Law:
Under Texas law, a covenant not to compete is unenforceable if it is not ancillary to an otherwise enforceable agreement. An at-will employment relationship, in which the employer's promises are illusory because they are contingent on continued employment, does not constitute an 'otherwise enforceable agreement' capable of supporting such a covenant.
Facts:
- Barbara Miller served as president for Roberts Paper Company (Roberts), a distributor of paper and janitorial products, along with numerous other employees including Mary Deane Clark, Duane H. Cudd, and others.
- Several sales employees, including Clark, Burk, Klotz, Lile, Reams, and Schriber, had signed employment agreements with Roberts that contained covenants not to compete.
- On December 23, 1994, Barbara Miller submitted her resignation, effective December 31, 1994.
- On December 30, 1994, Roberts' chairman of the board instructed Miller to leave the premises immediately.
- Following Miller's departure, sixteen other Roberts employees resigned on the same day and joined Miller to form a competing business.
- By January 2, 1995, the former employees were operating as Miller Paper Company and began soliciting Roberts' customers, in some cases telling customers that Roberts was no longer in business or had been acquired by Miller Paper.
- One former employee, Duane Cudd, retained approximately fifty orders that had been placed with Roberts and began re-soliciting those customers for Miller Paper.
- The new company also used customer lists, order pads, and other documents taken from Roberts.
Procedural Posture:
- Roberts Paper Company filed suit against Miller Paper Company and sixteen of its former employees in a Texas trial court.
- Roberts sought damages and an injunction to enforce covenants not to compete and to stop other allegedly unlawful acts.
- The trial court granted a temporary restraining order against the defendants.
- Following a hearing, the trial court issued a temporary injunction that prohibited the defendants from violating the covenants not to compete, using Roberts' confidential information, making false statements, and filling Roberts' orders.
- The defendants (appellants) appealed the trial court's order granting the temporary injunction to the Court of Appeals of Texas.
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Issue:
Does a covenant that restricts former at-will employees from soliciting company customers become enforceable when labeled a 'diversion of trade' or 'nonpiracy' clause, even if it is not ancillary to an otherwise enforceable agreement?
Opinions:
Majority - Quinn, Justice.
No, a covenant that restricts competition is unenforceable if it is not ancillary to an otherwise enforceable agreement, regardless of how it is labeled. The court found that the covenants not to compete were invalid because they were not part of an 'otherwise enforceable agreement' as required by Texas statute. The employees' at-will status meant the employment relationship itself was not an enforceable agreement. Furthermore, Roberts' promises within the contract, such as paying commissions and fostering relationships, were illusory because they were dependent on continued employment, which Roberts could terminate at any time. Simply calling the restrictive covenant a 'diversion of trade' or 'nonpiracy' clause does not change its fundamental nature as a restraint on trade, and thus it is subject to the same statutory requirements. The court reversed the injunction as it related to the covenants. However, the court affirmed the portions of the injunction prohibiting the former employees from using confidential information (like customer lists), making false statements about Roberts, and filling orders originally placed with Roberts, based on common law duties and the irreparable harm Roberts would suffer.
Analysis:
This decision reinforces the strict interpretation of Texas's Covenants Not to Compete Act, emphasizing that at-will employment, by itself, cannot support a non-compete agreement because the employer's promises are illusory. The case makes a clear distinction between an unenforceable contractual restraint on trade and an employee's separate, enforceable common law duty not to misappropriate confidential information or trade secrets. By invalidating the non-compete but upholding the injunction on trade secret misuse, the court clarifies that employers have distinct legal avenues to protect their business interests, and the failure of one (a non-compete) does not preclude relief under the other (trade secret law). This ruling solidifies that the substance, not the label, of a restrictive covenant determines its legal validity.
