United States: Fifth Circuit Holds That Reformation Of Texas Non-Competes Is Authorized, And Perhaps Required, At Preliminary Injunction Stage

Decision overview

On August 7, 2020, the Fifth Circuit addressed an issue presently undecided by the Texas Supreme Court; namely, whether reformation of an overbroad non-compete restriction is appropriate, and perhaps even required, at the preliminary injunction stage or must occur as a remedy after trial upon the merits.

In reversing and remanding the contrary lower court decision that declined to reform an overboard non-compete due to an inadequate record, the Fifth Circuit held that reformation of an overly broad covenant not to compete agreement was warranted at the preliminary injunction stage. Calhoun v. Jack Doheny Companies, Inc., No. 20-20068, - F.3d -, 2020 WL 4557641 (5th Cir. Aug. 7, 2020).

The Fifth Circuit's rationale

In Texas, employment non-competes are governed by the Texas Covenants Not to Compete Act. Tex. Bus. & Com. Code § 15.50 et. seq. The Texas Covenants Not to Compete Act states that if a non-compete covenant is found to be unreasonably overbroad, "the court shall reform the covenant to the extent necessary to cause" the covenant to be reasonable. Tex. Bus. & Com. Code § 15.51(c) (emphasis added).

In response to the district court's concern about the lack of necessary information, the Fifth Circuit noted the district court's ability to obtain such information during such injunctive proceedings and generally reform the agreement to restrain customer solicitation even without listing the individual customers. Calhoun, 2020 WL 4557641 at *3. Further, the Fifth Circuit noted that a preliminary injunction inquiry requires judicial determination of likelihood of success on the merits, which necessitates an examination of the agreement under Texas non-compete law (i.e. the Covenants Not To Compete Act) which in turn mandates reformation of overbroad agreements. Id. The Fifth Circuit further noted, "[t]his conclusion would lead to Texas authority that strongly suggests, if not requires, reformation of an agreement at the preliminary injunction stage. See Tranter, Inc. v. Liss, No. 02-13-00167-CV, 2014 WL 1257278, at *7 (Tex. App.-Fort Worth Mar. 27, 2014, no pet.) (finding that although a noncompete agreement was overbroad, the employer had "established a probable right to recovery" because of the likelihood that the agreement could be "reformed to contain reasonable limitations")." (citation in original).

In reaching this decision the Fifth Circuit outright rejected the argument that reformation is a remedy available only after a final trial, finding "[t]his argument runs against the clear majority practice of Texas courts, which have on many occasions reformed contracts for the purposes of granting interim relief." Calhoun, 2020 WL 4557641 at *3. Instead, the Fifth Circuit cited Texas authority stating that, in addition to being a final remedy, reformation may be made as incident to a grant of injunctive relief. Id.

In closing, the Fifth Circuit held that the district court "should have decided whether and what reformation terms were most likely to make the agreement enforceable under Texas law," and remanded to allow the district court receive evidence and argument to effectuate this analysis at the preliminary injunction stage. Calhoun, 2020 WL 4557641 at *4.

Application to trade secret cases

While some states disfavor or outright refuse to partake in reformation of overbroad non-competition agreements, Texas not only requires reformation in most cases but now permits it from almost case inception during the preliminary injunction stage. This ruling provides an avenue for companies seeking to enforce their restrictive covenants in Texas to obtain injunctive relief in some circumstances despite those covenants being facially overbroad.

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