A non-compete agreement in Texas is enforceable if it meets all five requirements under Texas law: it is part of an otherwise enforceable agreement; there is valid consideration; reasonable in time; reasonable in geographic scope; and reasonable in activities restrained. If the non-compete agreement satisfies all four elements, then the answer to the question: “Is my Texas non-compete agreement enforceable?” is yes.
Today’s post will discuss what is a non-compete agreement, what do these five requirements mean and what should you do if your Texas employer asks you to sign one.
What is a non-compete agreement under Texas law?
At its core, a non-compete agreement is a contract between two parties not to compete with each other in the same market to sell the same goods or services. Most commonly we use the term non-compete agreement to refer to a contract between an employer and an employee or independent contractor.
Although employers use non-compete agreements for some not great reasons, the legal purpose is to protect the employer’s trade secrets. Employers want to protect their “secret sauce” and deter former workers from taking client lists, proprietary business processes and products and competing in the same market selling the same goods and services. To accomplish those goals employers enter into non-compete agreements.
An enforceable non-compete agreement restricts the employee or contractor’s post-employment activities. Some examples of restrictions you may find in a non-compete agreement:
- Restrict employees from going to work for a competing business in the same geographic area;
- Stop an employee from soliciting its customers for another business;
- Restrict an employee from doing the same work for another business in the same area;
- Prevent a contractor from sharing proprietary processes with other businesses
- Stop an employee or contractor from setting up a competing business in the same area.
Texas law regarding these covenants not to compete changed over time generally in favor of these contracts. Generally Texas law disfavors restricting employee mobility. It is hard to insist that employees have equal bargaining power with employers if employers can restrict what you do after you leave the company. Texas even incorporated this public policy into statutory law in the Texas Free Enterprise and Antitrust Act of 1983. (This became part of the Texas Business and Commerce Code.) In the following forty years Texas law changed to carve out an exception for non-compete agreements which has been slowly expanded by the courts.
Elements of a valid non-compete agreement in Texas
In Texas a valid non-compete agreement must meet five elements in addition to operating as a valid contract under Texas contract law. Non-compete agreements are often attacked on these five elements but there may be other issues that make the contract invalid. Today we will focus on the four elements of enforceability. These elements are:
- The non-compete agreement is part of an otherwise enforceable agreement;
- Supported by valid consideration;
- The agreement is reasonable in time;
- The geographic scope is reasonable; and
- Activities restrained are reasonable.
The latter three elements when taken together must show that the scope of limitations on employee are no greater than necessary to protect the employer’s business interests or goodwill.
Let’s discuss each in turn.
Part of an otherwise enforceable agreement
An employer cannot enforce a non-compete agreement unless it is part of a larger enforceable agreement. That can be an employment agreement or even a non-disclosure agreement. Practically, a non-compete agreement will generally be part of a non-disclosure and/or non-solicitation agreement. It would not make sense to let an employee or contractor share information without compensation but not allow it if it generates value for the employee or contractor.
One way to attack the enforcement of a non-compete agreement is to attack the validity of the associated agreement. If, for example, the non-compete agreement is part of an employment agreement and the employment agreement is not valid, then the non-compete agreement would not be valid either.
Valid consideration for a covenant not to compete
Our first element requires the employer to give valid consideration for the contract. Consideration is what you get in exchange for an agreement. For example, you agree to buy a car for $25,000 from a dealership. The dealership gets $25,000 in consideration and you get a car in consideration. Note here we discuss “valid” consideration. Not everything is valid consideration for a non-compete agreement.
What constitutes valid consideration under Texas law has changed over the past twenty years. In 2011 the Texas Supreme Court issued its decision in Marsh USA, Inc. v. Cook which redefined this element. Before Marsh USA the Texas Supreme Court required the two sides to exchange promises as consideration in which the employer’s promise gave rise to the employer’s interest in preventing competition. Marsh USA broadened the requirement. It held that there must be “a nexus between the otherwise valid transaction and the interest worthy of protection.”
Ok what does this mean?
Under Marsh USA and cases following there are generally only two types of consideration valid for a non-compete agreement.
One, the employer promises to give the employee access to whatever it seeks to protect. That might be specialized training, client lists, proprietary product or service knowledge, proprietary business processes and so forth.
Two, the employer gives stock options or other atypical compensation to encourage the employee to promote the business’s goodwill.
Note that in the first type of consideration the value gained by the employee or contractor is not monetary. What is the person then getting of value?
The confidential information is the value because the person could take that information and sell it to a competitor or open a competing business.
How would that person otherwise do their job without the confidential information?
They probably couldn’t so the agreement is really something of an illusion for the employee. Often the non-compete agreement is part of employment contract at hiring or a condition of receiving a promotion in which the employee will need the confidential information.
The confidential or proprietary information forming consideration has to be something specific to the business that has real value to the business operations. An employer cannot promise to exchange training on typical business processes or access to general consumers in the market. Often enforceable noncompete agreements involve high level executives, specialized professionals and salespeople for this reason.
Additionally, employers cannot simply buy noncompete agreements from employees. In Texas, an employer cannot pay employees to sign noncompete agreements to suppress competition in the market. It is not valid consideration for a non-compete agreement to receive:
- A raise;
- A bonus;
- Additional PTO;
- A one-time payment specifically for the contract;
- Promotion;
- A promise for future promotion;
- Continued employment.
Whether valid consideration exists for your non-compete agreement is a highly technical question. If you plan to leave a job where you signed a non-compete agreement, then you should talk to an employment attorney about whether the agreement is valid.
Reasonableness
Before discussing the specifics of what must be reasonable let’s talk about these elements together in a broader sense. The restrictions on the employee or contractor can only go as far as necessary to protect the confidential or proprietary business interest. An employer must take caution not to exceed these boundaries or the contract may not be enforceable.
Whether the restrictions are reasonable is fact specific to the situation and parties involved. The agreement must be reasonable in time, georgraphic scope and activities. Overextending limitations on just one of these elements may be enough to make the entire agreement unenforceable.
Ensuring reasonableness limits a non-compete agreement’s ability to go beyond the intended goal to protect a business interest in confidential or proprietary information. Without these limitations an employer could use a non-compete agreement to deter employees from leaving or to prevent other businesses from gaining access to experienced employees. This would allow the employer to go beyond protecting the business it has to leveraging anti-competitiveness across the market.
Time
A non-compete agreement in Texas is enforceable if the restrictions are reasonably limited in time. The agreement can only restrict the employee or contractor long enough to protect the business’s interests in the consideration given. An employer cannot make a non-compete agreement restrictive forever or generally for an extensive period of time. Generally Texas courts uphold non-compete agreements up to five years but remember, this is fact specific to the circumstances.
For example, an architectural firm might ask its architects to sign a non-compete agreement that restricts them from working for another architectural firm in the same area for a period of six months to allow the firm to complete projects and avoid clients following the architect to another firm. That might be a reasonable restriction in time. If the firm restricted the architect from working in the same area for ten years, then that would probably not be reasonable.
There is no hard rule for how long is unreasonable. It depends on the facts and circumstances of the agreement.
Geographic scope
Texas non-compete agreements must also have a limited geographic scope. The covenant can only cover an area reasonably related to the business interest protected by the agreement. An employer cannot restrict the employee worldwide, nationwide, or even across Texas as a matter of course. The larger the area the harder it will be to defend the reasonableness of the restriction.
For example, a dental practice may require dentists to sign non-compete agreements so they don’t take patients to a new practice when they leave. The practice is in Houston and has patients across the greater Houston area. It would likely be reasonable to restrict the dentist from the greater Houston area for a period of time.
If the dental practice thinks it might want to branch out into other Texas cities, then it would be unreasonable to include a larger part of the state in the non-compete agreement if the practice does not do business in those areas.
Activities restricted
Similarly, a non-compete agreement in Texas can only restrict activities reasonably related to the protected business interests. Generally a non-compete agreement can only restrict the employee or contractor from engaging in the same or very similar work as done for the employer.
For example, a non-compete agreement for a salesperson could generally only limit sales of the same or very similar products or services as the employer. A non-compete agreement generally could not stop the salesperson from selling a different product or service.
What will happen if I violate a non-compete agreement in Texas?
If the non-compete agreement is enforceable under Texas law, then the employer can sue you and any business involved to protect its interests. The lawsuit may seek an injunction prohibiting you from conducting work restricted by the agreement. Or the employer may seek monetary damages for financial harm. Or both. Employers do not always attempt to enforce their non-compete agreements.
The employer may also threaten prospective employers with litigation or cease and desist letters which may make finding and keeping new employment considerably more difficult for you.
The best thing to do is talk to an experienced employment attorney about the non-compete agreement before leaving your current employer. That will give your attorney the opportunity to review the agreement, consider potential defenses and craft an exit strategy with you. After you leave the job and find work elsewhere it may take some options off the table.
Hiring an employment attorney to review your non-compete agreement
There is a lot of information online from non-legal sources encouraging Texans to believe non-compete agreements are not enforceable in Texas. Most of this information is wrong or at least partially misinformed. Texas courts since Marsh USA often uphold non-compete agreements when they are well thought out and limited. Many employers use form language with too broad of restrictions and these often fail in court. The only way to know for sure what you are dealing with and what moves you can make is to speak with an experienced employment attorney.