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Non-Compete Agreements in Texas
A non-compete agreement otherwise known as a covenant not to compete is a contract that must be ancillary to or part of an otherwise separate and enforceable agreement and is governed by the Texas Business & Commerce Code §15.50(a) and Texas case law. In essence, these agreements cover issues such as employee behavior regarding competition during and/or after a period of employment. These types of contracts tend to limit competition with an employer by placing restrictions on geography, time and scope of a prior employee’s activities.
A non-compete agreement cannot stand on its own. It must be made “at a time when the separate agreement was enforceable.” For instance, when an employee enters into an employment contract, a non-compete agreement can be executed concurrently or at some future time as long as the employment agreement is still effective. For an employment agreement to be enforceable and, therefore, qualify as “an otherwise separate and enforceable agreement,” it needs to unequivocally and meaningfully limit the employer’s right to terminate employment. The employer must agree not to terminate the employee but for cause.
The concept of “ancillary to or part of” an otherwise separate and enforceable agreement is satisfied if the non-compete agreement is executed as a discrete part of an employment agreement or if it is executed while the employment agreement is in effect. The non-compete agreement is considered ancillary to or part of a separate, enforceable agreement if “the consideration given by the employer in the separate agreement gave rise to the employer’s interest in restraining the employee from competing and the covenant not to compete was designed to enforce the employee’s consideration or return promise in the separate agreement.” In other words, the purpose of giving the employee something needs to be to secure his promise not to compete and the employee’s promise not to compete needs to be given in exchange for something of value.
The employer must give the employee something directly related to the interest the employer is trying to protect (like trade secrets) for the non-compete agreement to be enforceable. The employer’s interest must be “worthy of protection” in order for the non-compete to be enforceable. For instance, the interest could be confidential, proprietary information, trade secrets, or business goodwill.
In Texas, non-compete agreements are also enforceable with at-will employees. An at-will employee is an employee whose employment can either be terminated by the employer or employee for any or no reason (as long as the reason is not an illegal one). At-will employees can enter into employment agreements as long as the agreement is supported by consideration. That is, the employee must enter into a promise and the employer must provide the employee with something of value. The promise must be non-illusory.
Examples of non-illusory promises are; a promise to employ a person for a specific time; an exchange of promises to give a specific time for notice of termination by the employer in exchange for a specific time for notice of quitting; or a promise made by the employer to provide special training in exchange for the employee giving a certain time for notice for quitting and providing an inventory of company property.
An illusory promise is a promise in which performance is optional. For instance, a written contract for at will employment wherein the employee promised to keep certain company information confidential, but there was no promise to provide the employee with any of the information.
For a covenant not to compete to be enforceable as written, it must contain “reasonable” limitations on the employee’s behavior. The agreement must be reasonable as to time, geographic area and scope of activity. Texas law will generally uphold, with exceptions of course, a non-compete time limit of up to three years. A geographic limit that encompassed the previous employee’s covered territory has been held to be reasonable, while a geographic area that is ill-defined, unlimited or indefinite, with exceptions, has been held unreasonable. Key factors in the reasonability test are the specific facts of the restriction and the employer’s market. However, a restriction that included phrases such as “existing market,” or “future market” was found to be unreasonable.
In deciding whether a non-compete agreement is enforceable, the court will look at whether the employer’s interests need protection and if protecting the employer’s interest “outweigh[s] the hardship imposed on the employee by enforcing the restriction.” The restraint also needs to be no greater than necessary to protect the employer’s legitimate business interest. If the covenant is found to be too restrictive, it is not voided in entirety, but reformed to make the restraint on competition reasonable.
If a covenant not to compete is found valid and the employee breached it, the employer can receive damages. An employer’s remedies for a breach of a covenant not to compete include actual damages, injunctive relief and reformation of the agreement. Actual damages (in the event the court does not reform the agreement) can include profits made by the new employer if those profits “would have, at least in part, accrued to the former employer in the absence of breach.”
Equitable relief can be had in the form of an injunction against the employee’s continued competition, if the employer can show that irreparable injury will occur if the employee is not stopped. The injunction can be temporary or permanent.
The employer and employee can seek reformation from the court in order to tailor the restrictions to more narrowly fit the circumstances of the parties. If the court reforms the agreement, the employer cannot recover any damages other than injunctive relief.
Attorney fees can be awarded to an employee who successfully defends an enforcement suit when the restrictions are overbroad. The employee must first prove the covenant not to compete was ancillary to an employment agreement when the covenant was executed, the employer knew “the covenant’s limitation on time, geographic area, or scope of activity were not reasonable… and…the limitations imposed a greater restraint than necessary to protect the goodwill or other business interests of the employer and the employer tried to enforce the covenant to a greater extent than necessary to protect its goodwill or business interests.”
Just as in other contract cases, a defense to a suit for a breach of a covenant not to compete is a limitations defense. Defenses to a suit to enforce a non-compete agreement include limitations, unclean hands and other ordinary contractual defenses. The employee can also assert the defense of illegality.
An unclean hands defense can be asserted if, in an enforcement suit, it is found that the employer breached the employment agreement by firing the employee for a reason other than cause. In this instance, the employer is barred from injunctive relief that would enforce the non-compete agreement.
Covenants not to compete involving physicians have some special statutory requirements found in the Texas Business & Commerce Code section 15.50(b). These provisions pertain to covenants not to compete entered into after September 1, 1999. The statute includes provisions relating to access to patient medical records, patient lists, patient record format, provisions for buyout of covenant not to compete and restrictions on patient continuing care.
As an employer or employee, it is a good idea to have the proposed covenant not to compete reviewed by an attorney familiar with these types of contracts prior to its execution. It is very common to see non-compete agreements coupled with severance packages. If you have been presented with a severance package by your employer, look for a non-compete agreement in it. Be careful to read and understand each provision in the agreement before signing it since it will likely contain restrictive provisions that could severely limit your ability to continue working in your chosen industry.
Call Smith and Garg today at 281.210.0010 or complete our Contact Form and let us assist you with your employment law needs.
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