Texas Law on Covenants Not to Compete

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What Is a Covenant Not to Compete?

Businesses use covenants not to compete in their employment contracts, whereby the employee agrees, after termination of employment, to refrain from working in a certain field or industry.

In general, valid covenants not to compete will protect a legitimate business interest of the employer, should be reasonable in scope, and should provide a return promise of the employer to, for example, share confidential information. Confidential information includes such things as trade secrets, marketing plans, manufacturing processes, and customer information.

Cannot Be Unduly Burdensome in Texas

Covenants not to compete cannot be unduly burdensome on an employee’s freedom of trade. States generally read covenants not to compete "narrowly" by reading the contract in the light most favorable to the employee. For example, courts do not uphold "overbroad" covenants not to compete that prevent a former employee from working in a vast geographic area, for a long period of time, and in a broadly-defined field, profession, or industry.

However, the Texas Supreme Court recently expanded the rights of employers to draft and enforce covenants not to compete. Traditionally, Texas did not uphold covenants not to compete in "unilateral" and "at-will" employment contracts, because these contracts were not formed until the employee finished a performance. At-will employment is when the employee or employer can terminate employment at any time for any reason, as compared to contracted-for employment were the employee is locked in to her job for a period of months or years.

Not to Compete for At-Will Employment

However, the Texas Supreme Court now enforces covenants not to compete for at-will employment, stating that simply because covenants not to compete contain "illusory" promises to share confidential information at some point in the future does not, by itself, mean that they are unenforceable. If the employer actually does share that confidential information, then the covenants not to compete will be upheld, provided they are reasonable in other respects.

As a result of the acceptance of at-will covenants not to compete in Texas, employers might benefit from altering their employment contracts to include more restrictive covenants not to compete. Also, Texas employers should be cautious in hiring an employee with a covenant not to compete from previous employment, even if that employment was merely at-will.

Consulting an Employment Attorney in Texas

An employment lawyer can help you determine whether there is a cause-of-action for the violation of the covenant not to compete. He can also help you navigate the legal system, file the appropriate complaints, and represent you in court.

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Last Modified: 03-04-2014 11:58 AM PST

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