Texas Law on Covenants Not to Compete

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 Are Covenants Not to Compete Enforceable in Texas?

Under Texas employment laws, if an individual signs a valid covenant not to compete in the State of Texas, then they are bound by that agreement. If the employee violates the covenant not to compete, then the employer will be entitled to monetary damages, injunctive relief, or both.

Injunctive relief is a legal remedy that is in the form of a court order that requires a defendant to cease engaging in a certain specific act or behavior. If an individual has signed a non-compete clause, it does not mean that they are 100% bound by the terms of the covenant not to compete.

In Texas, a non-compete clause is only enforceable when an employer is able to demonstrate the following:

  • That the restrictions on the terminated employee are no greater than is necessary to protect an employer’s legitimate business interest;
  • That the non-compete clause is not excessively severe or oppressive in restricting the former employee’s ability to earn a livable income and find new employment; and
  • That the covenant not to compete does not violate a clear mandate of Texas public policy.

The Texas Supreme Court provided several factors in order to determine whether or not a non-compete clause is valid and enforceable. When reading a covenant not to compete, an individual should ask themselves:

  • Is the restraint on the employee’s ability to make a living harsh and oppressive?
  • Are the time or geographic limitations placed on the worker reasonable?
  • Is the non-compete clause so ambiguous that its enforcement is not easily determinable?

If the answer to any of the previous questions is “yes,” then a Texas court is likely to determine that the non-compete clause is unenforceable. On the other hand, a Texas court will likely determine that a non-compete clause is valid if it utilizes clear and precise language to place restrictions on a former employee for legitimate business purposes.

In addition, a non-compete clause that restricts the disclosure of customer lists, technological plans or projects, or plans for market expansion will typically be upheld as a valid non-compete restriction. If an individual has any questions about a covenant not to compete in Texas, they should consult with a local Texas attorney.

What Is a Covenant Not to Compete in Texas?

A covenant not to compete, which may also be referred to as a non-competition agreement or a non-compete clause, is a type of contract clause. It is used by employers in their employment contracts wherein an employee agrees that, after their employment is terminated, they will refrain from working in a competing business for a specified amount of time within a certain geographic area.

The purpose of a non-compete clause is to prevent a former employee from disclosing the intellectual property of a company, which may include:

  • Company practices;
  • Clientele;
  • Other confidential information.

If an employee works in the State of Texas and signed an employment contract when they began their employment, that contract most likely contained a covenant not to compete. According to Texas law, restraints on contracts and arrangements that restrict employee mobility are generally disfavored.

The Texas Free Enterprise and Antitrust Act of 1983 provides that “[e]very contract, combination, or conspiracy in restraint of trade or commerce is unlawful.” Texas law, however, created an exception to this rule by permitting non-compete clauses to be enforceable under certain circumstances.

What Does a Typical Covenant Not to Compete Contain?

Typically, when an individual signs a covenant not to compete, they agree that if they leave that employer, they will not go to work for the employer’s direct competitors. The employee may, in some cases, receive compensation for signing the agreement.

Businesses that typically use covenants not to compete include those that deal with:

  • Highly confidential materials;
  • Client demographic databases or information databases that an employee can access;
  • Businesses with a direct competitor;
  • Trade secrets; and
  • Trademarks and copyrights.

The typical restrictions in a covenant not to compete agreement may relate to:

  • Time: After the employee leaves their former employer, the employee must refrain from working for the competitor for a specified period of time;
  • Type of business: The employee may be prohibited from working in certain industries and businesses which are related to that of the employer; and
  • Location: The employee may be prohibited from working for a competitor within a specified geographic location.

What Are the Requirements for a Valid Covenant Not to Compete?

In order for a covenant not to compete to be enforceable under Texas law, the covenant not to compete must be “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains 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.”

In other words, the clause should be executed as a supplement to an otherwise enforceable agreement, including an employment contract, and should be reasonable in scope.

Generally, a valid covenant not to compete will protect a legitimate business interest of an employer, will be reasonable in scope, and will include a promise from the employee not to share confidential information.

Confidential information includes:

  • Trade secrets;
  • Marketing plans;
  • Manufacturing processes;
  • Customer information.

A covenant not to compete will be considered unreasonable or not enforceable when:

  • It is too long in duration;
    • Depending on the trade of the employer, the court will determine how much time is appropriate;
  • The geographic area the covenant covers is too large;
  • The types of business the covenant covers are too broad;
    • The covenant typically prohibits employment in companies related to the employer’s industry; or
  • The employer does not have a legitimate business interest in enforcing the non-compete clause.

What Are the Consequences of Signing a Covenant Not to Compete in Texas?

As noted above, an individual who signs a valid covenant not to compete in Texas will be bound by that agreement. An employer is not able to recover for an employee’s violation of a non-compete clause without first establishing proof of actual harm, such as monetary damages. However, an employer may always sue the employee in an attempt to enforce the non-compete clause.

Therefore, even if the non-compete clause is overbroad and the court will likely rule that it is invalid, the mere cost of fighting the lawsuit may be substantial. It is important to note that the most important factor in determining the validity of a non-compete clause is the reasonableness and scope of the clause.

Even if the non-compete clause is part of an otherwise enforceable agreement, it is still required to be reasonable in scope. Even in those cases, the employee who is bound by the clause may have various defenses available to them.

Do I Need an Attorney if I Signed a Non-Compete Clause in Texas?

It is important to have the assistance of a Texas employment contract attorney if you signed a non-compete clause in Texas. Although it is not required, it is always in your best interest to have an attorney review any document that may restrict your future employment options prior to signing it.

In addition, if you are a Texas employer, you should be cautious when hiring an employee who is subject to a non-compete agreement from a previous employer. As an employer, a Texas lawyer can help you draft a valid covenant not to compete or to negotiate the terms of a non-compete clause with a potential employee.

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