Agreement Not to Compete

Agreement Not-to-Compete? Is it Enforceable? What Now?

What is a covenant not to compete?

Covenants Not to Compete and Non-Solicitation Agreements are becoming increasingly common in Texas.

A non-compete or non-solicitation agreement restricts an employee’s post-employment activities and are used to prevent an employee from working in the same trade or industry as their employer.

Is it Enforceable?

In Texas, non-compete agreements are enforceable if the agreement meets the requirements of the law. In Texas, the law is very specific:

• First, a non-compete must be “ancillary to an otherwise enforceable agreement.”
• Second, a non-compete is only enforceable to the extent that the restrictions on time, geographical area, and scope of activity to be restrained” are reasonable. However, even if the non-compete is overbroad as to time, geography, or scope, courts are likely to reform the agreement and enforce it.

1. “Ancillary to an otherwise enforceable agreement”

First, to be enforceable in Texas a non-compete MUST be “ancillary to an otherwise enforceable agreement.” This simply means that both parties to the agreement must have made binding promises, or in other words the contract must be supported by consideration. In legal parlance, an agreement is considered “illusory” and unenforceable when one party is not bound by the terms of an agreement or an agreement that lacks consideration. This does not mean the employer must agree to not-compete; it means that in exchange for an employee agreeing not-to-compete, the employer must also agree to give something of value to the employee.

An enforceable agreement requires more than an employer’s agreement to pay an employee. In Texas, the law requires more than continued employment – a “plus factor”. Generally, in Texas the employer must give something of value above and beyond mere employment for the non-compete to be enforceable.

For instance, an employer’s promise to give an employee access to confidential information or trade secrets in exchange for the employee’s promise not to compete is enforceable. However, the confidential information must be truly confidential and treated as such by the employer. If the information is generally known or could be discovered in the public domain, then the information is not confidential.

The consideration given by the employer must be something “designed to enforce the non-compete.” Think of this as the employer must give the employee something that the employer would not give if the employee does not sign a non-compete. An employer would be reluctant to give an employee the secret sauce if the employer thought an employee may then use the secret sauce to compete with the employer. Another example of consideration designed to enforce the non-compete would be an employer providing special training or other skills training to an employee.

2. Time, Geography, and Scope

Second, if the agreement is enforceable, the non-compete will be enforced to restrict an employee’s activities within a reasonable time, geography, and scope of activity to be restrained.

1. Time

The reasonableness of time restrictions in non-competes agreements depends on several factors. Texas courts look at time restriction on a case-by-case basis. Generally, a one (1) year restriction is enforceable. However, each case is different and in some cases a shorter or longer restrictive period may be deemed reasonable.

1. Geography

Again, the geographic restriction of a non-compete is determined on a case-by-case basis; there is not a single dispositive factor. Ultimately, the breadth of the geographic restriction depends on the size of the employer, the target market, and the geography where the employee performed services for the employer.

1. Scope

The scope of activities that a non-compete prohibits an employee from performing must also be reasonable. The scope of a non-compete cannot be so broad as to effectively restrict all work anywhere within the restricted area. Generally, under Texas law, the scope can be no greater than what is needed to protect the interest of the employer and/or confidential information being protected by the agreement. Ultimately, the scope of each non-compete is analyzed on a case-by-case basis and depends on the size of your employer, the industry, and the employee’s specific duties.

Reformation

However, in most cases, even if an agreement is overbroad as to time, geography, or scope, Texas courts are likely to reform the agreement to make it enforceable. In other words, if a non-compete is deemed overbroad as to time or geography, a court will still enforce the non-compete, but will revise the time or geography restrictions.

Does the non-compete matter if I quit or if I am fired?

Under Texas law, the enforceability of a non-compete is not dependent on whether you left, quit, or were terminated. In some rare instances, the language of the non-compete may affect whether the non-compete is enforceable based upon how your employment ended.

Remedies for a breach of a noncompete

Texas law allows for an employer to sue an employee who breaches a noncompete for damages, an injunction, or both. An injunction will be a court order telling the employee who breached the agreement that they can no longer continue competing. However, before a court will enjoin an employee from competing, the employer must show that the non-compete is likely enforceable.

It is best to hire an attorney to review a non-compete before an employee signs it. Many times, employees sign non-compete agreements at the beginning of their employment when the employer-employee relationship is blissful. However, when the relationship sours, employees are usually shocked to find out that they signed a non-compete and are put in a tough position of trying to find work in a different industry.

However, if you have already signed a non-compete and want to discuss its enforceability or if you want more information, contact the employment lawyers at Herrmann Law 817-479-9229 to speak to an experienced employment attorney.