Non-compete agreements (also known as covenants not to compete, non-compete clauses, restrictive covenants or non-competition agreements) are most common in employment contracts.
A non-compete agreement is used to restrict an employee’s post-employment activities and is generally aimed at preventing an employee from working in the same trade or industry as their employer, for a certain amount of time.
What makes a non-compete agreement enforceable?
In Texas, the law is very specific:
- A non-compete must be "ancillary to an otherwise enforceable agreement."
- A non-compete is only enforceable to the extent that the restrictions on "time, geographical area and scope of activity to be restrained" are reasonable.
- The terms of the non-compete must be the minimum restraint needed to "protect the goodwill or other business interest."
1. Ancillary to an Otherwise Enforceable Agreement
First, to be enforceable in Texas, a non-compete must be “ancillary to an otherwise enforceable agreement.” This simply means that both parties to the agreement must have made binding promises, or in other words, the contract must be supported by consideration. In legal parlance, when one party is not bound by the terms of an agreement, the agreement is considered “illusory” and unenforceable.
An enforceable agreement requires more than an employer’s agreement to pay an employee or continued at-will employment. In Texas, the law requires more than continued employment – a "plus factor." Generally, in Texas, the employer must give something of value above and beyond mere employment for the non-compete to be enforceable.
For instance, an employer can promise to give an employee confidential information or trade secrets in exchange for the employee’s promise not to compete. However, the confidential information must be truly confidential and treated as such by the employer. If the information is generally known or could be discovered in the public domain, then the information is not confidential.
2. Time, Geography and Scope
Generally, in Texas, courts will uphold non-compete agreements if they are reasonable as to the restrictions on time, geography and the scope of activity to be restrained.
a) Time: There are no concrete rules when it comes to the reasonableness of time restrictions in non-competes. Courts look at these issues on a case-by-case basis. Texas courts have repeatedly upheld non-compete restrictions for periods of up to two years. However, each case is different and in some cases, a shorter or longer restrictive period may be deemed reasonable.
b) Geography: Again, there are no concrete rules when it comes to the breadth of an area that a geographic restriction can encompass. Generally, under Texas law, the restricted non-compete area can be no greater than what is needed to protect the interest of the employer and/or confidential information being protected by the agreement. Ultimately, the breadth of the geographic restriction depends on the size of your employer (the business), the area in which you performed work for the employer, and the target market of your employer.
c) Scope: The scope of a non-compete refers to the specific (i.e., scope) activities that an employee is prohibited from engaging in. The scope of a non-compete cannot be so broad as to effectively restrict you from working anywhere within the restricted area. The scope of activities that a non-compete restricts is analyzed on a case-by-case basis, and depends in large part on the size of your employer (business), the industry, and your particular job duties for the employer.
However, in most cases, even if an agreement is too broad regarding time, geography or scope, Texas courts are likely to reform the agreement to make it enforceable. In other words, if a non-compete is deemed overbroad in terms of time or geography, a court will still enforce the non-compete, but will revise the time or geography restrictions.
Does the non-compete matter if I quit or if I'm fired?
Under Texas law, the enforceability of a non-compete is not dependent on whether you quit or were terminated. In some rare instances, the language of the non-compete may affect whether the non-compete is enforceable based upon how your employment ended.
Remedies for a Breach of a Non-Compete
Texas law allows for an employer to sue an employee who breaches a non-compete for damages, an injunction, or both. An injunction will be a court order telling the employee who breached the agreement that they can no longer continue competing. However, before a court will enjoin an employee from competing, the employer must show that the non-compete is likely enforceable.
It is best to hire an attorney to review a non-compete before an employee signs it. Many times, employees sign non-compete agreements at the beginning of their employment when the employer-employee relationship is blissful. However, when the relationship sours, employees are usually shocked to find out that they signed a non-compete and are consequently put in the tough position of trying to find work in a different industry.
If you have already signed a non-compete and want to discuss its enforceability, or if you want more information, contact the employment lawyers at Herrmann Law (817-479-9229) to speak to an experienced employment attorney.