Are Non-Compete or NDA agreements with out of business companies still enforceable in any way?

Asked 8 months ago - Dallas, TX

Are there any legal obligations of a Non-Compete / Non Disclosure agreement that an individual signed but the other party to the agreement (an LLC) has since gone out of business? For example - can that company "re-form" and take over it's old agreements? We pitched a project to a Texas LLC that is closed and no longer in good standing with the Texas Sec. of State ("FRANCHISE TAX INVOLUNTARILY ENDED") and we wish to do that project ourselves now after 2 years of waiting but there is 1 year left on the NDA clause.

Attorney answers (3)

  1. Brian W. Erikson

    Pro

    Contributor Level 18

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    Answered . You really need to have an attorney review the paperwork to determine the extent of your exposure. The legal implications of a non compete provision are quite different from a non disclosure agreement.

    The law on covenants not to compete in Texas is fairly arcane, and has been changing over time. A lot of covenants not to compete are simply not enforceable for failing to comply with the Covenant Not To Compete Act, Tex. Bus. & Comm. Code Section 15.50, et seq. I set out the following so that you can understand a little about covenant not to compete law in Texas.

    In order for a covenant not to compete to be enforceable it must be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made and contain 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 good will or other business interest of the promisee. The employer must make a non-illusory promise in return for which the employee's promise not to compete was made.

    In Mann Frankfort v. Fielding, the Texas Supreme Court took a significant step away from its prior decision in Light v. Centel. From the Light decision in 1994, until the Court's 2006 decision in Sheshunoff, illusory promises in the context of at-will employment could not support the enforcement of covenants not to compete because they were not enforceable "at the time the agreement is made." As a result, any agreement which called for the employer to make a disclosure of confidential information at a future time following execution of the covenant not to compete would be unenforceable because the employer could simply fire the employee instead of performing. With the Sheshunoff decision, the Court made a subtle yet radical shift away from Light, holding that the language "ancillary to or part of an otherwise enforceable agreement at the time the agreement is made" does not actually require the "otherwise enforceable agreement" to be enforceable at the time the agreement is made. Rather, future performance not only creates the "otherwise enforceable agreement" but also makes the covenant not to compete enforceable.

    To make a long story short, you really need to have an attorney review your covenant not to compete, and assess and evaluate your particular circumstances. Your particular dealings with your employer can affect the enforceablility of the covenant not to compete agreement.

    Since you are in the Dallas area, you may wish to take advantage of my free hour of consultation for new clients. If you make an appointment, please bring copies of your pertinent paperwork.

    Good luck.

  2. Lewis Andrew Lefko

    Contributor Level 7
    Best Answer
    chosen by asker

    Answered . In order to enforce a covenant not to compete, a business has to have a protectable interest in the business activity that is the subject of the covenant. If the company has truly gone out of business, there is no protectable interest in any business activities. A business is not "out of business" because it is no longer in good standing with the State of Texas. The business may still be operating or liquidating its assets, including trying to sell the project you mentioned and the non-compete/non-disclosure agreement. The company may be in bankruptcy and re-organizing or liquidating. You need to engage an attorney to make inquiries and determine its status.

  3. Robert Neil Newton

    Pro

    Contributor Level 15

    Answered . It sounds as though you may need more information. You should hire an attorney and obtain more information about the prior company and its owners.

    The above statements are provided as general information and not intended as legal advice. Each matter has its own... more

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