NON-COMPETITION AGREEMENTS IN TEXAS
Houston business law attorney Douglas McIntyre has for more than 30 years skillfully and professionally handled Texas non-compete agreements.
In Texas there are many aspects to handling non-compete agreements. Put simply, non-competition law is filled with traps for the unwary. Attorney Douglas McIntyre's experienced in the non-compete agreement area of the law will assist you in avoiding these traps.
An employer can frequently choose to restrict an employee's post employment competition with him through a non-competition agreement, which is also commonly referred to as a covenant not to compete. A non-competition agreement typically restrains the employee from engaging in a competing business with his or her former employer, in a certain geographic area, for a limited period of time following the termination of the employment relationship. Or it can restrict the ability of the former employee from doing business with any clients or customers that were clients or customers of the old employer while the former employee was employed at the old firm.
Employees presented with a non-competition agreement should carefully consider the impact that the covenant may have upon their future employment in the event that the employment is later terminated.
Lots of judges are reluctant to enforce non-competition agreements, since it means the employee is out of work and unable to support his family. Often it's the only work he or she knows how to do. The Texas legislature has enacted the Covenants Not to Compete Act (the "Act"), specifically making such agreements enforceable provided there is compliance with all of the provisions of the Act. Consequently, employers seeking to prevent employees from competing after their termination must carefully draft non-competition agreements to fit within the limited perimeters established by the legislature.
The Act provides for certain distinct elements that must be present in order for a non-competition agreement to be enforceable. The agreement must:
- Be ancillary to or part of otherwise enforceable agreement at the time the agreement is made;
- Protect a legitimate business interest;
- Contain reasonable limitations as to the scope of activity to be restrained;
- Contain reasonable geographical limitations; and
- Contain reasonable durational limitations.
There are two classes of non-competes: those that are part of a sale of a business, and are set out in a contract made part of the sale-and instead of involving an employee, involve the former owner. These are very enforceable, and judges consider these much stronger than those involving a "working stiff" former employee. Those will not be discussed here. This discussion relates to former employees.
In interpreting the Act's requirement that the covenant be "ancillary to or part of otherwise enforceable agreement" the Texas Supreme Court has held that an "at-will" employment relationship is not an "otherwise enforceable agreement" since it can be terminated by either party at any time for any reason. For this reason, a non-competition agreement that is ancillary only to an "at-will" employment agreement is invalid, no matter how reasonable in scope. Hence, attorneys generally look at whether or not the employer limited his ability to fire the employee. For if some other thing of real value was given to, or taken by the employee; such as a client list.
An employer cannot require an at-will employee to sign a non-competition agreement without providing some sort of independent "consideration" for the agreement. The consideration may be in the form of a bonus or a payment in addition to the employee's salary. The consideration can also be a promise to provide confidential or proprietary information to the employee in exchange for the employee signing the non-competition agreement.
Assuming that the non-competition agreement is ancillary to otherwise enforceable agreement, it must still be reasonable in scope of the activity to be restrained. Whether the restrictions are reasonable or not is ultimately up to the judge. The non-competition agreement must restrain no more activity than is necessary to protect the legitimate business interest of the employer. Texas courts have also refused to enforce agreements that prohibit activity unrelated to the work the employee performed for the former employer.
Similarly, Texas courts have also determined that non-competition agreements that contain no geographical limitations or fail to limit the scope of activity to be restrained are unreasonable and unenforceable. Generally, a reasonable area of restraint consists of only the territory in which the employee worked for the former employer. Courts have also refused to enforce non-competition agreements with nation wide applicability when the employee did not have nation wide responsibilities for the former employer. However, keep in mind that the courts have authority to reform a non-competition agreement to narrow the scope or the geographical area of the agreement so as to make it enforceable. Judges often reform the agreement, and then enforce it.
Many employees assume that if they are laid off or otherwise involuntary terminated by the employer that the employer cannot seek an enforcement of a non-competition agreement previously signed by the employee. Au contraire. They can. Seems unfair? Unless the contract specifically provides that it is only enforceable in the event of the employee's voluntary termination, then the employer can seek to enforce a non-competition agreement, even when the employer caused the employee to be terminated.
Employees who are presented with a non-competition agreement should carefully consider the impact that the covenant may have upon their future employment in the event that the employment is later terminated. Many employers present these agreements to existing employees after they have been employed for years. It's never a good idae to sign one, but if you're threatened with termination, whether to sign or not is a hard decision in most circumstances. Even though no independent consideration may be given for the non-competition agreement, or the agreement is completely invalid on its face as being over-broad in scope or other restrictions, the employee may very well be subjecting himself or herself to a lawsuit in the future by an employer seeking to enforce the non-competition agreement. The price of defending these lawsuits can be extremely costly. Likewise, a future employer may be reluctant to hire or retain an employee who has previously signed a non-competition agreement as the future employer may not want to take the risk of being subjected to a lawsuit involving the non-competition agreement. So the new hire gets fired, or maybe doesn't even get hired once the new employer gets a demand letter from the old employer's attorney.
This article is NOT intended to constitute legal advice because each case is usually very different. For legal advice in an area as important as this, please contact an attorney.
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