Having a non-compete agreement or a covenant not to compete are common in sales and employment contracts. Are non-compete agreements enforceable in Texas? Let’s discuss.
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Texas Non-Compete Agreement Laws
In business and employment contracts, having non-compete agreements or clauses is not uncommon. However, the question is whether they are enforceable? Under Texas Law, any restraints on competition are usually considered unlawful. However the Covenants Not to Compete Act, carves out an exception.
The Covenants Not to Compete Act, or Section 15.50 of the Texas Business and Commerce Code states,
(a) Notwithstanding Section 15.05 of this code, and subject to any applicable provision of Subsection (b), a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made 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 is necessary to protect the goodwill or other business interest of the promisee.
The Act sets out two main requirements: that the covenant not to compete is ancillary and is reasonable.
What does the Ancillary Requirement Mean?
As the Act listed above states, a main requirement for a non-compete agreement is that it must be ancillary. Generally, this means that the covenant should not stand alone in order to be enforceable in Texas.
At first glance, this subsection of the Act makes it near impossible to meet the ancillary requirement in an employment contract. To remedy this, Texas case law has set forth precedent that made meeting the requirement more feasible. In short, Texas case law has made it possible for employers to make non-compete agreements if the employers do not breach this agreement; the consideration made for non-compete agreements may be inferred; and consideration must give the employee a competitive advantage.
This might become more clear through an example. Suppose an employer and employee enter into a contract that includes a non-compete agreement; if through the course of employment, the employee will learn valuable trade secrets, this is enough consideration in the agreement. In short, because the employee will be learning valuable and competitive information, the employer is allowed the protection of a non-compete agreement.
Compare trade secrets with cash or information available to the general public; non-compete agreements with simply cash or other incentives may not be considered enforceable since the employee will not have much of a competitive advantage by accepting that consideration.
The Reasonableness Requirement
As stated in the Act listed above, the non-compete agreement must also be reasonable. Unlike the “ancillary” requirement, a series of court decisions does not exist in order to explain this what exactly a “reasonable” non-compete agreement entails.
Although this is true, two things are understood in non-covenant agreements concerning the “reasonableness” requirement.
- The duration of the agreement should be in direct relation to the needs of the business; and
- Any geographical limitation should only be limited in the area in with the employer was employed.
In order to draft a reasonable non-compete agreement, it is important that the employer not exaggerate limitations to the employee’s future ability to compete.
Can a Non-Compete Agreement be Reformed?
In some instances, a non-compete agreement may be too broad; however, a court might still find the agreement valid. A court has the ability to reform an agreement. This means that the court may rewrite the agreement to which the agreement will protects an employers interest within the bounds of what is necessary.
You might also want to look into Texas Employment Agreements.
How are Non-Compete Agreements Enforced?
Non-compete agreements are usually enforced by an injunction, or court order. This court order may command a former employee to refrain from an act.