Reformation of Covenants not to Compete

On Behalf of | Feb 9, 2012 | Employment Law |

Can the trial court reform a covenant not to compete before it sends the case to arbitration?

Section 15.51 of the Texas Business & Commerce Code allows a trial court on request to reform a covenant not to compete to make it reasonable as to scope, time or area covered. A recent decision of the Waco Court of Appeals, Gray Wireline Service Inc. v. Cavanna, No. 10-11-00058-CV (Tex.App. – Waco, Oct. 17, 2011), holds that reformation is a remedy granted at a final hearing on the merits, and that the trial court erred in reforming the covenant as part of temporary relief rather than staying the case pending resolution of the dispute by an arbitrator under the employment agreement’s arbitration clause.

The employment agreement contained an arbitration clause that provided the arbitrator had the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including the issuance of an injunction. However, the clause also allowed a party to apply to a court to seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the dispute resolved.

After a motion to compel arbitration was filed, the trial court denied the motion to compel arbitration insofar as the request to reform the covenant, but otherwise ordered the matter to be arbitrated. The trial court then reformed the covenant but refused to stay the proceedings as to parties not covered by the arbitration agreement.

On appeal, the court of appeals held absent a defense to enforcement of the arbitration agreement, the trial court has no discretion but to compel arbitration and to stay the proceedings. As to reformation of the covenant, the court rejected the interpretation that it was allowed under the “other equitable relief” language in the arbitration clause, holding that the clause only allowed temporary relief to be sought in the trial court. Reformation of the covenant could only be construed as permanent relief, thus falling outside the scope of the exception in the arbitration provision. The court further held that factual allegations in the motion to reform necessarily touched upon matters that were factually intertwined with the employment agreement containing the arbitration agreement. Thus, the trial court erred in addressing the motion to reform, as that should have been referred to the arbitrator for decision.

Cavanna is noteworthy in holding that the trial court’s power to reform a covenant not to compete under the statute is trumped by the arbitration clause in the employment agreement. The decision represents the continuing trend in state and federal courts to uphold arbitration clauses and read them broadly.