Non Competes

Texas covenant not to compete law dramatically changed in June 2011. The effect of this new law is that Texas non compete agreements previously considered to be invalid now may be enforceable. If you’ve recently been asked to sign a non compete agreement or you’re exploring whether to end an employment relationship governed by one, contact a Dallas employment lawyer. Legal advice you previously received concerning your non compete’s enforceability no longer may be current.

Perhaps you didn’t notice the non-compete provision buried towards the end of your employment agreement or you didn’t think much about the non-compete when you signed it. The reality is that many Texas executives, professionals, and other employees pay little attention to their non-compete covenant and other post-employment obligations until they anticipate leaving their job or, worse, after they receive a threatening letter from their former employer’s lawyer.

A covenant not to compete is a kind of employment agreement whose purpose is to restrict an employee’s post-employment activities. Texas non-competes generally aim to prevent an employee from working in the employee’s chosen profession, trade, or industry, soliciting a former employer’s customers, or hiring the former employer’s employees. (Click here for information on non-solicitation agreements, non-disclosure agreements, and anti-raiding provisions).

While Texas courts generally disfavor non-compete agreements, they will enforce a non-compete covenant if it is executed for valid consideration, contains reasonable geographic, temporal, and activity restrictions, and protects the employer’s legitimate business interests.

Texas law imposes two main requirements on whether a non-compete agreement is enforceable. First, the employee’s promise not to compete must be reasonably related to an interest worthy of your employer's protection

• Under prior law, the employee and employer were required to enter into an agreement with reciprocal promises, and the promise given by the employer must have given rise to the employer's interest in preventing the employee from competing. The non-compete provision must have been designed to enforce the employee's promise to the employer in the underlying agreement.
• Few reciprocal promises satisfied this former standard. The rare exception was when an employer agreed to provide an employee with confidential business information or trade secrets and, in return, the employee promised not to improperly disclose or use the employer’s sensitive information. It was well established under the prior law that Texas employers could not "buy" a non-compete by paying an employee additional compensation or a bonus in return for a non-compete agreement.
• The Texas Supreme Court scrapped the prior law and, in June 2011, concluded that an employee's promises must only be reasonably related to or have a factual nexus with an employer's non-compete agreement. The effect of this change is that covenants not to compete that may have been unenforceable under the prior law may now be enforceable.

Second, a non-compete must contain reasonable restrictions describing the covenant’s geographical limits, restrictive time period, and description of the employee’s activities to be restrained.

• Determining whether restrictions are reasonable is complex, extremely fact intensive, and depends on the employer’s businesses interests being protected by the non-compete agreement.
• Even if a restraint is reasonable against one employee, it may be unreasonable as to one or more other employees working for the same employer.
• Courts disfavor overly broad restrictions and instead require that limitations be tailored to the duties and responsibilities performed by the employee to be restrained.

It is easiest for an employer to enforce a non-compete agreement when it provides the employee with confidential information or trade secrets and, in return, the employee promises not to disclose the employer’s confidential information or trade secrets and agrees not to perform similar duties for a competing business in the same geographic area for a reasonable period of time.

Before October 2006, many Texas non-competes failed because employers did not satisfy the first requirement: they failed to provide employees with binding consideration that gave rise to their interest in retraining the employee.

Because most employment relationships are “at-will”—meaning either the employee or employer may terminate the employment relationship at any time for any or no reason—courts interpreted this first element to require employers to provide confidential trade information to employees at the moment (or close to it) when the employee signed his reciprocal non-disclosure promise and non-compete obligation.

All but the best Texas non-compete agreements failed under this standard because few employers slid trade secrets across the boardroom table at the time their employees signed their non-competes. Consequently, employers faced significant obstacles when attempting to enforce non-compete agreements.

The Texas Supreme Court changed all of this in October 2006. The Court clarified that an instantaneous exchange of confidential information was impractical, overly-technical, and unnecessary.

Under the new Texas non-compete law, even if an employer does not provide confidential information or other valid consideration at the time the employee signs a Texas covenant not to compete, the employee’s non-compete promise will become enforceable if and when the employer actually provides the employee with the information.

Since 2006, the Texas Supreme Court has steadily diminished the ability of Texas employees to successfully challenge the validity of non-compete agreements on the grounds that an employer did not provide an employee with valid consideration for the employee's post-employment restrictions. Now, it may even be possible for an employer to obtain a valid non-compete from key employees merely by providing them stock options in return for a non-compete. 

The short answer is that courts are increasingly finding non-compete agreements to be enforceable under the first requirement, but are more closely scrutinizing the scope of a covenant’s restrictions under the second requirement--reforming them if a covenant's restrictions are overly broad.

The long answer is that Texas covenant not to compete law remains a complex, murky, and continually evolving area of the law—one with potentially perilous implications on an employee’s livelihood. No other area of Texas employment law bears the possibility of depriving an employee of his/her financial ability to provide for one's family like a non-compete agreement does. Even those employees who are able to obtain solid job offers face the prospect of expensive litigation initiated by a former employer—perhaps accompanied by a damaging court order forbidding the employee from working until the case is resolved.

Many Dallas law firms and lawyers practice employment law. But with the risks so high, Texas employees are strongly encouraged to consult with a lawyer who is Board certified in Labor and Employment Law by the Texas Board of Legal Specialization before signing a non-competition agreement and before (or immediately after) an employment relationship governed by a non-compete ends.

Dallas lawyer Barry Hersh reviews non-competition agreements on behalf of individuals on a flat fee and hourly basis. He also drafts and litigates Texas non-compete agreements on behalf of employees and businesses.  Barry dedicates a significant part of his practice to counseling clients and litigating non compete issues.  If you are interested in having your Texas non-compete agreement reviewed, you anticipate ending an employment relationship governed by a non-compete, or you are threatened with non-compete litigation by a former employer, complete the law firm's online inquiry form.