If you work in the state of Texas and signed an employment contract when you began your employment, that employment contract likely contained a covenant not to compete.
A covenant not to compete, also referred to as non-competition agreements or non-compete clauses, are contract clauses used by employers in employment contracts wherein an employee agrees, after termination of employment, to refrain from working in a competing business for a certain amount of time within a certain geographical area.
The purpose of a non-compete is to prevent former employees from disclosing the intellectual property of the company, including company practices, clientele, and other confidential information.
Under Texas law, restraints on contracts and arrangements that restrict employee mobility are generally disfavored. In fact, the Texas Free Enterprise and Antitrust Act of 1983 explicitly states that “[e]very contract, combination, or conspiracy in restraint of trade or commerce is unlawful.” However, Texas law created an exception to this law, by allowing non-compete clauses to be enforceable in certain circumstances.
In order to be enforceable under Texas law, a 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 essence, the non-compete clause should be executed as a supplement to an otherwise enforceable agreement, such as an employment contract, and should also be reasonable in scope.
In general, valid covenants not to compete will protect a legitimate business interest of the employer, will be reasonable in scope, and will provide a return promise of the employer to, such as sharing confidential information. Confidential information includes such things as trade secrets, marketing plans, manufacturing processes, and customer information.
Simply put, if you sign a valid covenant not to compete in Texas, then you are bound by the terms of that agreement. If you as an employee violate the covenant not to compete, the employer is entitled to monetary damages, injunctive relief, or both. Injunctive relief is a legal remedy that comes in the form of a court order that compels a defendant to stop doing a specified act or behavior.
If you have signed a non-compete clause, that does not mean that you are 100% bound by the terms in the covenant not to compete. Texas non-compete clauses are only enforceable if an employer can demonstrate the following:
- That the restrictions on the terminated employee are no greater than is necessary to protect the employer’s legitimate business interest;
- That the non-compete clause is not excessively oppressive or severe in restricting the former employee’s ability to make 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 provides several factors in order to determine whether a non-compete clause is valid and enforceable. When reading the covenant not to compete, you should ask yourself the following:
- 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 covenant not to compete so ambiguous that its enforcement is not easily determinable?
If the answer to any of the above questions is “yes,” then a Texas court will likely determine the non-compete clause to be unenforceable. On the other hand, Texas courts will likely determine that a non-compete clause is valid if it utilizes clear and precise language to place restrictions on former employees for legitimate business purposes.
Additionally, non-compete clauses restricting disclosure of customer lists, technological plans or projects, and plans for market expansion will usually be upheld as valid non-compete restrictions.
Although an employer cannot recover for an employee’s violation of a covenant not to compete without first establishing proof of actual harm, such as monetary damages, the employer can always sue you to attempt to enforce the non-compete clause. Thus, even if the non-compete clause is overbroad and a court would likely rule that it is invalid, the cost of fighting the lawsuit in court can be very difficult and costly.
As can be seen, the most important thing in determining the validity of a non-compete clause is the reasonableness and scope of the clause. Even if the non-compete clause is a part of an otherwise enforceable agreement, it must still be reasonable in scope, and even then an employee bound may still have various defenses.
Although not required, before signing anything that may restrict your future employment options, it may be in your best interests to consult a well qualified and experienced employment attorney that specializes in employment law to review the contract.
Texas employers should be cautious in hiring an employee subject to a non-compete agreement from their previous employer. If you are an employer, than a Texas lawyer specializing in employment law can help you draft a valid covenant not to compete, or negotiate the terms of such a non-compete clause.