Contracts / Trade Secrets

Covenants Not to Compete – Texas Style

Love them or hate them, if you are in any sort of competitive field, eventually you’ll need to deal with a convenant not to compete.  In this article I’ve summarized the basics of covenants restricting post-employment activities, and related considerations for both employers and employees.

“The healthiest competition occurs when average people win by putting above average effort.” ~ Colin Powell

Each state determines the  enforceability of contract provisions, and therefore, each state may have different rules.  In Texas, covenants not to compete (a.k.a noncompetition covenants) are governed by the Business and Commerce Code.  Generally, such covenants will be enforced if it is “ancillary to or part of an otherwise enforceable agreement at the time the agreement [was] made.”  However, these covenants will only be enforced to the extent the contain reasonable limitations with respect to time, geographical area and scope of the activity to be restrained.  The limitation must not impose a greater restrain that is needed to protect the goodwill or business interest of the benefiting party.

Are you still reading?  Good.  I thought I might lose you there.

Now, in English …

1.     Part of an enforceable contract:

Gifts are generally not enforceable, even if in writing and signed by the parties.  Therefore, if an employee signs a covenant not to compete, the employer must provide some consideration (e.g. payment, an act, refraining from some act, or return promise) in the agreement for that agreement to be enforceable.  Frequently, the “consideration” provided by the employer is confidential information, and this has been held as sufficient consideration by Texas courts.

2.     Reasonable as to time, geography, and scope:

A court’s analysis of a covenant will be dependent on the parties’ particular circumstances.  A reasonable length of time will be one that protects the employer’s interests, while balancing the hardship imposed on the employee.  Courts frequently find two to five years reasonable time limitations on restrictive covenants.

Geographical limitations will be found reasonable if they are tailored to sphere of influence exercised by the employee during their employment.

Scope refers to the nature of the activity being curtailed.  Generally, these activities must be limited to those which would result in direct competition with the former employer.  The scope should be narrowed such that it does not prohibit more than is needed to protect the employers business interest and customer goodwill.

The Texas Supreme Court has held that because this issue involves fundamental policies, it WILL NOT adhere to choice of law provisions within the contract.  Therefore, you can expect Texas courts to use their own statutes and caselaw when hearing cases regarding these covenants.

Bottom Line

Employers: If you’re employing Texas residents, be reasonable when drafting covenants not to compete.  The more closely tied with a business interest recognized by the state (such as protecting confidential information) the more likely courts will issue injunctive or monetary remedies.

Employees: Read and understand restrictive covenants in your employment and confidentiality agreements before you sign them.  Texas courts will enforce covenants not to compete – and what seems reasonable to them, might not seem reasonable to you.  Don’t assume a restrictive covenant is unenforceable.

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