PRACTICE AREA : Trial & Litigation

FREQUENTLY ASKED QUESTIONS ABOUT NON-COMPETE AGREEMENTS IN TEXAS

Non-compete provisions are very common, especially in the high tech sector. Understanding their enforceability can be important for both employers and employees.

• What is a non-compete provision?

A non-compete provision in an agreement is a contractual provision designed to restrict a departing employee from working for a competitor (or otherwise competing) after the employee's voluntary or involuntary termination.

• Are non-compete provisions enforceable in Texas?

As a general rule, yes, they can be enforceable under the proper circumstances. But the enforceablility of a non-compete agreement depends on the language of the agreement and the circumstances in which the agreement was executed. However, many are not enforceable. Keep in mind that the factual circumstances of every case are different and require independent analysis to determine the enforceability of such agreements.

• What specific requirements make a non-compete enforceable in Texas?

To be enforceable in Texas, the Covenants Not to Compete Act requires that the covenant must (1) be ancillary to or part of an otherwise enforceable agreement at the time the agreement was made and (2) contain 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 to protect the goodwill or other business interest of the promisee. TEX. BUS. & COM. CODE ANN. § 15.50 (Vernon Supp. 1997). The enforceability of the covenant not to compete is a question of law for the court to decide.

a. Limitations of Time

The Texas courts have upheld restrictions ranging from two to five years as reasonable time limitations, but every case depends on its own facts. The nature of the business and the employee's position in the company both may have an effect on a reasonable time limitation.

b. Limitations of Geographic Area

The Texas courts have stated that a reasonable area is considered to be the territory in which the employee worked during his employment. For example, a company with a national sales force may be able to justify a larger geographical scope than a company with only a regional sales force. But again, each case depends on its own facts.

c. Scope of Activity to be Restrained

This factor is too factually dependent to be susceptible to generalized descriptions. It can be as varied as there are occupations.

• What if the covenant not to compete does not meet the two-part test to be enforceable?

If the covenant is found to be unenforceable because it is not ancillary to an otherwise enforceable agreement, the Court most likely will NOT enforce the covenant.

However, if the Court determines that the covenant is unreasonable as to the restrictions of time, geographic scope or scope of activity to be restrianed, the Court is likely to reform the covenant in such a way as to create reasonable restrictions. Section 15.50 of the Texas Business and Commerce, provides that a court "shall" reform a covenant not to compete if the restrictions on time, geographical area or scope of activity are not reasonable.

• What type of geographic restriction would be reasonable in a non-compete provision if my work involves the internet?

At this point, it is unclear as to what a reasonable geographic scope of a non-compete provision would be for an employee that services clients over the internet in a large geographic area. However, in one case a Texas court found that, for an employee that worked with clients in both the United States and Canada, a reasonable geographic area was North America. In Pennsylvania, a federal district court found that a nationwide covenant was enforceable where the employee was directly involved in internet sales all over the United States. Although there is not a lot of case law on this issue yet, it appears likely that nationwide non-competes may be enforceable when dealing with nationwide sales through the internet.

• What other restrictions can an employer put in an agreement that the employer requires employees to sign?

Employers can include a variety of protective covenants in an agreement that are intended to protect the employer. The following are some of the restrictions that are often included in employment agreements, stock option agreements, and other contracts:

a. Non-compete: See above.

b. Nondisclosure: Nondisclosure provisions are intended to probibit disclosure of the employer's confidential and trade secret information. In fact, employees have a common-law duty not to disclose an employer's confidential information for their own competitive advantage, and courts can enjoin such conduct, even in the absence of a confidentiality or nondisclosure agreement.

c. Non-solicitation (non-raiding):A non-solicitation clause, also known as a non-raiding clause, is intended to restrict an individual's ability to hire or recruit his former co-workers. If the covenant is interpreted to be a restraint on trade, some Texas courts have required non-solicitation clauses to be analyzed like a non-compete (requiring that it be ancillary to an otherwise enforceable agreement and be reasonably limited in scope).

d. Requirement to Return Confidential Information.

e. Assigning all rights to all inventions to the company.

f. Requiring exit interviews.

DISCLAIMER:

The above information is intended only as general information, and is not intended as a substitute for legal advice regarding a specific factual situation. If you believe you have an issue regarding a non-compete agreement, you should consult competent legal counsel. No Attorney-Client relationship is created unless and until we formally accept representation of you. Please contact us for further information at (512) 225-5800.

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Craig M. Douglas
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