Businesses prosper when employees and employers work together toward a common goal. When an employee leaves a company or looks for opportunities outside of their employment, however, their interests may conflict with those of the employer.
To address this dilemma, companies often turn to non-compete agreements as a means to safeguard their interests and protect their competitive edge. Should an employee leave for a competitor, embark on their own endeavor, or engage in a side hustle that competes with their current or former employer, the employer would, in theory, obtain the right to enforce the non-compete and obtain relief.
But not always.
Though companies in Texas often require workers to sign non-competition agreements, they do not always prevail in enforcing them when violated. Courts are inclined to side with workers when unreasonable and overly broad non-competes restrict their ability to earn a living.
Texas courts do recognize that companies have legitimate interests worth protecting and that non-competes can be a viable means to protect them. But the existence of a signed non-complete alone does not guarantee it will be enforceable.
What Makes a Non-Compete Enforceable?
In Texas, the enforcement of non-compete agreements is governed by the Texas Covenants Not to Compete Act, which states generally that:
“a covenant not to compete is enforceable . . . 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 necessary to protect the goodwill or other business interest of the [employer].” Tex. Bus. & Com. Code § 15.50(a)
The enforceability of a non-compete is reviewed by courts on a case-by-case basis. To improve the chances your non-compete will be viewed favorably by the court, keep the following in mind:
1. Act fast!
If you suspect an employee or former employee is violating the terms of your non-compete agreement, move quickly to enforce your rights. If you hesitate to enforce a known violation, the courts may question whether legitimate business interests are at risk, a key test for enforcing a non-compete agreement. Speak to an attorney about next steps – from collecting evidence to pursuing an injunction to stop improper competitive activity and further actions to recover financial damages.
2. Specify business interests that will be protected, and ensure they are legitimate.
For a non-compete to be enforceable in Texas, it must be seen as a reasonable mechanism to protect an employer’s legitimate business interests. This can include a business’ goodwill, trade secrets, and other confidential or proprietary information that provide a competitive edge.
Employers drafting non-competes should ensure their agreements specify these business interests and why they are worth protecting.
3. Provide adequate consideration.
Non-competes are valid and enforceable if they are ancillary to or part of an otherwise enforceable agreement and provide adequate consideration to the employee for entering into the agreement.
Employment is typically sufficient when agreements involve new employees. In the case of existing employees, however, additional consideration such as a promotion or pay raise may be necessary.
4. Make reasonable restrictions on duration, scope, and geographic area.
Non-competes have three dimensions: a stipulation on geographic area, services provided, and how long the covenant lasts. The non-compete must be specific and limited regarding each, and restrictions must be reasonable – no employer has the right to limit an individual’s business entirely or indefinitely.
What is reasonable will ultimately depend on the situation and interpretation by the court. In general, it is best practice to ensure your non-compete:
- Contains specific limitations regarding its scope. An employer may be able to prevent a former employee from working for a competitor, but cannot prevent them from working in another industry.
- Is reasonable in geographic restrictions. While an employer may be able to limit a former employee’s ability to work for a competitor or start their own competing enterprise in a select city or region where it does business, it may not be successful in restricting them from working in an entire state.
- Clearly indicates the length of time restrictions will apply. Non-competes should specify a duration that is reasonable under the circumstances. If an agreement was intended to protect confidential information, for example, it would be unreasonable for it to persist beyond the date the information is no longer of value or no longer provides a competitive edge.
Ensuring reasonableness is vital to enforceability, and employers should remember that seeking enforcement is not an all-or-nothing matter. Texas Courts not only have wide latitude in determining reasonableness, they can also modify or reform a non-compete found unreasonable or overly broad.
5. Include language to make the right to enforce assignable.
Employers should consider adding clear language that allows them to assign the right of enforcement to any new owners of the company in the event of an ownership change or merger and acquisition. Assigning the right to enforce a business’ covenants can play a role in attracting buyers and determining the ultimate purchase price. On the flip side, as a buyer, ensure key employees are covered by a non-compete before completing the transaction, or you may find yourself competing against the same talent you sought to acquire.
A seller non-compete that prevents a seller from creating a competing business within a reasonable geographic distance and period of time may be equally important to a purchase and sale transaction.
6. Tailor the agreement to the industry and specific circumstances.
Non-compete agreements are not one-size-fits-all contracts. Employers should account for the specific circumstances involved in each employment relationship and tailor agreements accordingly.
When drafting executive non-competes, for example, employers may want to include specific language to protect IP or trade secrets a senior-level employee is likely to encounter during their employment. Employers should be ready to amend restrictive provisions to make employment offers more attractive, or at the request of an executive candidate during contract negotiations.
Employers should also take industry-specific needs or requirements into consideration. You may want to tailor your agreement to prohibit an employee from working for specific industry competitors by name or adapt the duration of the agreement to the typical customer life cycle in your industry. The more specific and tailored your agreement, the more likely it will be enforced by Texas courts.
For those in the healthcare industry, be aware that physician non-competes must take into account the best interests of doctors, hospitals, and the public. While medical facilities have an interest in seeing that physicians do not leave to become competitors, non-competes must not be overly-restrictive or violate public policy.
To be legally enforceable, physician non-competes must allow a physician to:
- Continue treating patients for an acute illness.
- Access medical records for previous patients, pending the patient’s approval.
- Access a list of all patients treated or seen within one year of termination.
- Buy-out of the non-compete if desired.
Counsel for Non-Competes, Contracts & Disputes
Employers must carefully craft non-compete agreements to ensure they can withstand the scrutiny of Texas courts should there come a time to enforce. This means making sure agreements protect legitimate interests, are part of an otherwise enforceable agreement, and that any restrictions on duration, scope, and geographic area are reasonable.
At Hendershot Cowart, P.C., our award-winning attorneys have extensive experience counseling employers and employees in a range of employment and business law matters. We have the insight to help clients address the fine balance of interests that must exist in restrictive covenants, as well as the resources to help them enforce or defend when contract disputes arise.
If you have questions about Texas non-compete agreements and their impact on your company or career, call or contact us online to speak with an attorney.