Non-Competes in Texas: Is the Reasonable Standard Reasonably Defined?
You land a new and exciting job offer; you’re ready to sign on the dotted line, but your contract includes a non-compete. You ask: Is this even legal? What happens if this job doesn’t work out? Would I be able to find other work? Can this be enforced? Under Texas law, the answer is yes, maybe, and so long as it’s reasonable.
In the great state of Texas, businesses can negotiate contracts with their employees that restrict their ability to compete against the business when they depart or move on to greener pastures. These agreements are known as “covenants not to compete” or “non-competition agreements.” The Texas Business and Commerce Code mandates that a non-competition agreement be “ancillary to or part of an otherwise enforceable agreement” and “that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable…”. The non-competition statute also provides that an agreement not to compete is reasonable if it does not impose a greater restraint on trade than is necessary to protect the goodwill or other business interest such as trade secrets and other confidential or proprietary information.
‘Ancillary to an enforceable agreement’… what does that really mean? There has been a series of Texas cases attempting to sort out what this really means. Still, generally, the traditional components of an enforceable contract — offer, acceptance, and consideration— must be present. The most common way to meet the “ancillary” requirement for an at-will employee is to tie the non-compete to a confidentiality agreement in an employment contract. The Texas Supreme Court (SCOTX) has clarified that an employer can meet the “ancillary” requirement by doing two things: agree to provide the employee confidential information or training and then actually provide the promised confidential information or training. Given this clear guidance from SCOTX, it is surprising how many Texas non-competes do not expressly state that the employer will provide the employee with confidential information (or specialized training). But in Texas, the standard is fairly low. The agreement to provide confidential information or training can be implied if the nature of the employee’s work necessarily requires access to confidential information or training.
Now let’s talk reasonably about the “reasonable standard.” Ultimately, the definition of reasonable concerning the non-compete statute (and almost any other area of the law) depends on the facts and circumstances and may vary on a case-by-case basis.
With respect to geographical scope, non-compete agreements are more likely to be enforced when they do not restrict an employee beyond the areas where he or she has worked. For example, if the employer is solely selling products in the Dallas area, it will be hard to justify a non-compete that includes Austin, San Antonio, and Houston. In contrast, if the employee holds a position that involves software development, an employer may be able to justify a restriction that goes beyond the company’s immediate business area if there is a risk that a competitor would begin marketing products within that company’s business area. Generally, a non-compete agreement that fails to include any geographic limitation could render the agreement unreasonable and unenforceable. In terms of duration, unlimited restrictions on competition are undoubtedly unenforceable. However, it isn’t really reasonable to describe a hard and fast rule for the number of months or years for which a court will deem as a reasonable duration for non-compete agreements. Of course, it depends on the industry that the business is in, the employee’s role in the company, the market in which the business is operating, and a variety of other factors. Generally, the courts are often skeptical of non-competes that last more than one year. However, inappropriate cases, Texas courts have enforced non-competes for two years or even longer. Non-compete agreements do not necessarily need to specify the duration, but courts will only enforce such agreements for a reasonable time under the circumstances. Again, there are no bright-line rules, and the standard is factually determinative. The ultimate question in terms of duration becomes: how much time is needed to protect the legitimate interests of the employer?
Concerning the scope of activity prong, cases have shown that Texas courts are less likely to enforce non-compete agreements that prevent an employee from working with clients with whom the employee had no contact during his or her employment. But companies may generally prevent contact with existing customers. However, it is important to note that if a non-compete restricts an employee from working for competitors, it must also include reasonable time and geographic limitations to be considered valid. Additionally, a non-compete would be obviously unreasonable and likely unenforceable if it is written so broadly that it prevents an employee from working in a dissimilar business. For example, a non-compete covering the entire oil industry when the employee only markets oilfield services equipment would be frowned upon by a Texas court.
As a rule, if a non-compete is determined to be unreasonable, then a Texas court can reform or modify the non-compete to make it reasonable. If that happens, the employer will not recover any damages based on conduct before the reformation. Additionally, the court would be within its power to order the employer to pay the employee’s attorneys’ fees if the court finds that the employer knew that the non-compete was overbroad.
There are two key takeaways for employees and employers about non-competes:
- Employees should be cautious when signing a non-compete and should seek legal counsel to fully understand their rights; and
- Employers should be aware that non-competes may be subject to strict scrutiny by a court, so narrowly drafted clauses to have a better chance of being upheld and ultimately enforced. Always run your non-compete or other restrictive covenant clauses through an attorney before using them.
If you have questions about non-competes, reach out to the author of this article, attorney, Abbey Cohen, or anyone on the Fears Nachawati team.