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Implied Promise to Provide Confidential Information Supports Covenant Not to Compete in Mann Frankfort Stein & Lipp Advisors Inc. v. Fielding Decision

April 20, 2009

On April 17, the Texas Supreme Court held in a 9-0 decision in Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding that an implied promise to provide confidential information can support a covenant not to compete. The Court held that if the nature of the employment will reasonably require the employer to provide confidential information to the employee in order to accomplish his duties, then the employer impliedly promised to provide confidential information to the employee and the covenant is enforceable as long as the other requirements of the Act are satisfied.  Houston appellate partner Warren Harris and Houston trial partner Laura Herring represented Mann Frankfort.

This case fills a void in Texas employment law where an employment agreement requires the employee to keep information confidential, but lacks an express promise by the employer to provide confidential information to the employee. This decision follows a recent trend by the Texas Supreme Court in non-compete law. The Court's ruling demonstrates that the enforceability of a covenant not to compete should be dependent on its substance rather than whether the covenant is ancillary to an otherwise enforceable agreement or when the employee actually received confidential information.

Mann Frankfort Stein & Lipp Advisors, Inc., now known as UHY Advisors, Inc., is an accounting firm. The Texas Supreme Court held that a client purchase provision in the Mann Frankfort employment agreement was enforceable under the Covenant Not to Compete Act. The client purchase provision required a departing accountant who performed services for a client within one year of his departure, to purchase that client account pursuant to a formula in the agreement based on accounts receivable and billable time.

The trial court had previously granted a summary judgment to the employee, holding that the client purchase provision was unenforceable because it was not ancillary to or part of an otherwise enforceable agreement. However, the trial court granted summary judgment to the accounting firm on the employee's claim for attorneys' fees. The First Court of Appeals held that the client purchase provision of the agreement was unenforceable based on an absence of consideration and reversed the trial court's denial of an award of attorneys' fees to the employee.

The Texas Supreme Court reversed the Court of Appeals and held that the covenant not to compete was enforceable. The Supreme Court also held that because the employee was no longer the "prevailing party," he was not entitled to attorneys' fees.