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Perhaps you didn’t notice the non-compete provision buried at the end of your employment agreement or you didn’t think much about the non-compete when you signed it.  The reality is that many Texas executives, professionals, and other employees pay little attention to their non-compete covenant and other post-employment obligations until they anticipate leaving their job or, worse, they receive a threatening letter from their former employer’s lawyer. 

Understanding Texas Non-Competes

A covenant not to compete is a kind of employment agreement whose purpose is to restrict an employee’s post-employment activities.  Texas non-competes generally aim to prevent an employee from working in the employee’s chosen profession, trade, or industry, soliciting a former employer’s customers, or hiring the former employer’s employees.  (Click here for information on non-solicitation agreements, non-disclosure agreements, and anti-raiding provisions).  

While Texas courts generally disfavor non-compete agreements, they will enforce a non-compete covenant if it is executed for valid consideration, contains reasonable geographic, temporal, and activity restrictions, and protects the employer’s legitimate business interests. 

Legal Requirements

Texas law imposes three main requirements on whether a non-compete agreement is enforceable.  First, the employee’s promise not to compete must be “ancillary to or part of” a related or underlying contract imposing binding obligations on the employee and employer. 

• Reciprocal obligations in employment agreement are many.  For example, an employee may promise to return his employer’s documents and information upon termination. In return, his employer may agree to provide the employee 30-days notice before ending the employment relationship. 
  

• While virtually all employment agreements contain some form of reciprocal obligations, Texas law states that only those reciprocal obligations that satisfy the second requirement described below can support a binding non-compete.

Second, the promise given by the employer in the underlying agreement must give rise to the employer's interest in preventing the employee from competing.  At the same time, the non-compete provision must be designed to enforce the employee's promise to the employer in the underlying agreement. 

• Few reciprocal promises satisfy this restrictive standard.  The rare exception is when an employer agrees to provide an employee with confidential business information or trade secrets and, in return, the employee promises not to improperly disclose or use the employer’s sensitive information. 
  

• Under certain circumstances, an employer’s promise to provide an employee with goodwill or specialized training also may support a valid Texas covenant not to compete.
  

• It is well established that Texas employers cannot "buy" a non-compete by paying an employee additional compensation or a bonus in return for a non-compete agreement.

Third, the non-compete must contain reasonable restrictions describing the covenant’s geographical limits, restrictive time period, and description of the employee’s activities to be restrained. 

• Determining whether restrictions are reasonable is complex, extremely fact intensive, and depends on the employer’s protectable businesses interests. 
  

• Even if a restraint is reasonable against one employee, it may be unreasonable as to one or more other employees working for the same employer. 
  

• Courts disfavor overly broad restrictions and instead require that limitations be tailored to the nature of the employer’s information to be protected and the responsibilities performed by the employee to be restrained.

It is easiest for an employer to enforce a non-compete agreement when it promised to provide the employee confidential information or trade secrets and actually provided that information to the employee and, in return, the employee promised not to disclose the employer’s confidential information or trade secrets and agreed not to perform similar duties for a competing business in the same geographic area for a reasonable period of time.

Before and After:  Changes in Texas Non-Compete Law Favor Employers

Before October 2006, many Texas non-competes failed because employers did not satisfy the second requirement:  they failed to provide employees with binding consideration that gave rise to their interest in retraining the employee. 

Because most employment relationships are “at-will”—meaning either the employee or employer may terminate the employment relationship at any time for any or no reason—courts interpreted this second element to require employers to provide confidential trade information to employees at the moment (or close to it) when the employee signed his reciprocal non-disclosure promise and non-compete obligation. 

All but the best Texas non-compete agreements failed under this standard because few employers slid trade secrets across the boardroom table at the time their employees signed their non-competes.  Consequently, employers faced significant obstacles when attempting to enforce non-compete agreements.

The Texas Supreme Court changed all of this in October 2006.  The Court clarified that an instantaneous exchange of confidential information was impractical, overly-technical, and unnecessary. 

Under the new Texas non-compete law, even if an employer does not provide confidential information or other valid consideration at the time the employee signs a Texas covenant not to compete, the employee’s non-compete promise will become enforceable if and when the employer actually provides the employee with the information. 

What the New Texas Non Compete Law Means for Employees

The short answer is that courts are increasingly finding non-compete agreements to be enforceable under the first two requirements, but are more closely scrutinizing the scope of a covenant’s restrictions; reforming them if a covenant's restrictions are overly broad. 

The long answer is that Texas covenant not to compete law remains a complex, murky, and continually evolving area of the law—one with potentially perilous implications on an employee’s livelihood.  No other area of Texas employment law bears the possibility of depriving an employee of his or her financial ability to provide for one's family like a non-compete agreement does.  Even those employees who are able to obtain solid job offers face the prospect of expensive litigation initiated by a former employer—perhaps accompanied by a damaging court order forbidding the employee from working until the case is resolved. 

How to Select a Texas Non-Compete Lawyer

Many Dallas law firms and lawyers practice employment law. But with the risks so high, Texas employees are strongly encouraged to consult with a lawyer who is Certified in Labor and Employment Law by the Texas Board of Legal Specialization before signing a non-competition agreement and before (or immediately after) an employment relationship governed by a non-compete ends.  

Dallas lawyer Barry Hersh reviews non-competition agreements on behalf of individuals on a flat fee and hourly basis.  He also negotiates, drafts, and litigates Texas non-compete agreements on behalf of employees and businesses.  If you are interested in having your Texas non-compete agreement reviewed, you anticipate ending an employment relationship governed by a non-compete, or you are threatened with non-compete litigation by a former employer, complete the law firm's online inquiry form and call Barry at (214) 303-1022.