NON-COMPETITION AGREEMENTS – WHAT ARE THEY?
A non-compete agreement is an agreement wherein an employee contractually agrees with their employer they will refrain from competing with the employer during and/or following the conclusion of the employee’s employment with the employer. In Texas, the statutory authority is located as part of Texas Business & Commerce Code, §§15.50-15.02.
(a) Notwithstanding Section 15.05 of this code, and subject to any applicable provision of Subsection (b), a covenant not to compete is enforceable if it is 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 to protect the goodwill or other business interest of the promisee.
Tex. Bus. & Com. Code Ann. § 15.50(b) addresses covenants not to compete in the practice of medicine. Because this article focuses on non-competition agreements in the employment context, this Section will not be explored further.
These types of agreements are also commonly referred to as covenants not to compete or an employment restrictive covenant. Regardless of what they are called, they are intended to limit an employee’s right to work for a competitor and/or prevent an employee from starting a business similar to that of the employers. To be enforceable, a non-compete agreement must be reasonable in time and scope, discussed further hereunder. Non-competition laws vary drastically throughout the United States, and thus, it is important to consult with a qualified attorney if you are faced with any issues pertaining to a non-compete agreement.
ARE NON-COMPETITION AGREEMENTS VALID IN TEXAS?
Courts engage in a two-step inquiry to determine the threshold requirement for enforceability under the Covenants not to Compete. First, the court must determine whether there is an otherwise enforceable contact between the parties. In Texas, generally, a contract is enforceable if the parties thereto have a meeting of the minds, and the agreement is supported by consideration. Next, the court will determine whether the covenant not to compete is ancillary to the agreement.
Generally, in Texas, reasonable non-compete clauses in the employment context are not considered to be against public policy.
RESTRICTIONS
Again, the limitations of a Texas non-compete agreement must be reasonable, not imposing a greater restraint than what is necessary to protect the goodwill or other business interest of the employer. Enforcing a non-competition covenant in Texas is typically fact-sensitive. Generally, we can look to the following guidelines as to reasonableness of a non-competes scope:
- Time: Texas courts have typically upheld covenant terms between two and five years. Longer periods are available for key employees who had access to the employer’s major customers and important proprietary information. A perpetual noncompete has not been found enforceable in Texas.
- Geographical Area: The geographic area of a covenant typically cannot exceed the areas where the employer does business or has customers. Enforcement of the noncompete is more likely to be successful if the scope is narrowed to the specific geographic areas where the employee provided services to the company’s clients or customers.
- Scope of Limitations: A noncompete that prohibits an employee from engaging in a certain career or occupation, or forbids them from working in a certain industry in any capacity, will more than likely not be upheld. As a general rule, an employee can work for a competitor of their prior employer, but cannot use proprietary information obtained at the old job to perform the new job.
CAN A NON-COMPETITION AGREEMENT BE ENFORCED IN A DIFFERENT STATE?
Perhaps you signed a non-compete agreement with an employer, but you are now moving to a different state – is it still enforceable? In short, it depends – but likely not. As an initial consideration, a non-competition agreement, to be held enforceable, must contain a reasonable geographic scope. If an individual is moving outside of Texas, it is more likely than not that the geographical scope will extend that far. Further, if the employer does not conduct business in the employee’s new state, it is unlikely a court would enforce a non-competition agreement.
BREACH OF A NON-COMPETE AGREEMENT
You may be asking, ‘what happens if an individual breaks their non-compete agreement?’ Again, a non-compete agreement is an agreement between an employee and their employer prohibiting the employee from competing with the employer during and/or following the conclusion of the employee’s employment with the employer. While a specific breach will be highly fact intensive, generally, it will be in the form of an ex-employee working for or starting a competing business and/or soliciting the former employer’s customers/vendors. It is important to note that, more often than note, an employee’s termination does not render the non-compete agreement invalid. Most often, a non-compete agreement will include language extending the agreement for a specified period of time following the conclusion of an employee’s employment. Thus, an employee will be bound to a non-competition agreement whether they voluntarily sever their employment with an employer or are fired for cause.
If an employee is in breach of a non-compete agreement, the employer has several remedies available. Initially, depending on the attorney, it is likely an employee in breach will receive a demand letter from the employer demanding that they cease and desist all activities in breach of the agreement. These letters will often include a set deadline wherein the employee must confirm they will refrain from any further activities in breach of the agreement. This pre-litigation tactic is used as an effort to effectuate the desired result without resorting to the costs and time associated with litigation. There is, however, no binding legal effect if the employee disregards the demand letter. From the employee perspective, if you receive a cease and desist demand letter, it will be prudent to consult a qualified attorney to discuss and determine the validity of the demand.
If the initial cease and desist demand is ignored, an employer’s next step is likely to file a lawsuit. Non-compete agreements sounds in contract law. Thus, the primary basis for an employer’s lawsuit will likely be a claim for breach of contract. If the employer alleges the employee sought to solicit the employer’s customers, vendors, or the like, an employer may include other causes of action, such as tortious interference. An employer may, too, request an injunction from the court seeking to enjoin a former employee from engaging in specific behavior. This process is done through an application for temporary restraining order and/or application for temporary injunction.
The consequences of violating a valid and enforceable non-compete agreement can be serious. There are, however, potential defenses against or means of attacking the validity of a non-compete agreement.
CAN AN EMPLOYEE GET OUT OF A NON-COMPETE AGREEMENT?
While it is true Texas courts favors the right to freely contract, there are several defenses available to an employee who is alleged to have breached their non-compete agreement. From the employer standpoint, it is important to consider these potential defenses in order to best formulate your non-competition agreements to make them as enforceable as possible.
As an initial step, it is a worthwhile endeavor for an employee to negotiate with their former employer regarding the restrictive covenant. This, of course, is yet another reason why it is beneficial to leave a place of employment on good terms. While a former employer may not be willing to completely release a former employee from a non-compete agreement, they may be willing to agree to reasonable concessions which may alleviate the employee’s problems.
A non-compete agreement must be reasonable as to time, the geographical area, and scope of limitations. The extent of these restrictions is listed above. While a more direct, an employee who believes their non-compete agreement is unreasonably broad in scope may petition to a court to render the agreement invalid through, for example, a declaratory judgment. Depending on the facts, a court may invalidate the agreement in and of itself or, alternatively, rewrite the restrictions contained therein limiting the same to a reasonable extent.
Again, non-competition agreement issues are typically heavily fact intensive. Thus, an individual’s best option will depend on the specific circumstances they are faced with. Consulting with an experienced attorney can assist you in determining the most viable option and effectuating the same.
POTENTIAL DAMAGES
Under Texas law, an employer successful in brining an action for violation of a breach of a non-compete agreement may receive 1) damages, 2) injunctive relief (i.e., an order issued by a court commanding a party to take or refrain from taking a specific action), 3) or both.
If the covenant is found to be ancillary to or part of an otherwise enforceable agreement but contains limitations as to time, geographical area, or scope of activity to be restrained that are not reasonable and impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee, the court shall reform the covenant to the extent necessary to cause the limitations contained in the covenant as to time, geographical area, and scope of activity to be restrained to be reasonable and to impose a restraint that is not greater than necessary to protect the goodwill or other business interest of the promisee and enforce the covenant as reformed
this process is called “blue penciling,” which means that the court will draw a line through the improper portions of the agreement and enforce whatever remains. In this case, the enforcing party’s relief is limited to injunctive relief.
PROPOSED LEGISLATION
The 88th Texas Legislative regular session began on January 10, 2023 and will continue through May 29, 2023. As of the publication of this article, there are two (2) active house bills currently proposed that would, if signed into law, effect non-compete agreements in the employment aspect.
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2023 Texas House Bill 1043.
TX H.B. 1043 relates to a prohibition against covenants not to compete for certain low-wage employees. The amendment would render non-compete agreements unenforceable as they relate to employees who earn not more than the greater of the federal minimum wage under the FLSA, or $15 an hour. An employee who meets this criteria may not be required to enter a restrictive covenant restricting the employee from performing work 1) for another employer for a specified period of time, 2) in a specified geographical area, or for another employer similar to the employee’s work for the current employer.
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2023 Texas House Bill 3139
TX H.B. 1043 relates to the enforceability of restrictive covenants against physicians. Again, because this article focuses on covenants not to compete in the employment context, this Bill will not be explored further.
MY FORMER EMPLOYER CLAIMS THAT I HAVE VIOLATED MY NON-COMPETITION AGREEMENT. WHAT HAPPENS NOW?
Non-competition law varies drastically by state and is often heavily fact intestine. It is not a ‘one size fits all’ approach.
As an employee, being accused of violating a non-competition agreement can be a scary and unsettling thing – especially if the employer seeking to enforce the agreement is a big company. Alternatively, as an employer, it can be frustrating and harmful to your business if an employee violates a non-competition agreement which they voluntarily entered. Regardless of which side you may find yourself on, it is important to consult with an attorney to assist in bringing or defending a non-compete action. At the Sul Lee Law Firm, we are here to assist you if you are faced with a non-compete issue.
- Tex. Bus. & Com. Code Ann. § 15.50
- consideration requires both parties to a contract to give up something of value. Often this is monetary, but it can be of anything of value, including time or refraining from engaging in a particular activity.
- Tex. Bus. & Com. Code Ann. § 15.50
- This article does not intend to provide a full analysis of a breach of contract claim in the context of a non-competition agreement, but rather simply provide an example.
- Tex. Bus. & Com. Code Ann. § 15.51(c)
- 2023 Texas House Bill No. 1043, Texas Eighty-Eighth Legislature, 2023 Texas House Bill No. 1043, Texas Eighty-Eighth Legislature
- 2023 Texas House Bill No. 1043, Texas Eighty-Eighth Legislature, 2023 Texas House Bill No. 1043, Texas Eighty-Eighth Legislature
- 2023 Texas House Bill No. 3139, Texas Eighty-Eighth Legislature, 2023 Texas House Bill No. 3139, Texas Eighty-Eighth Legislature