Are non compete agreements enforceable in Texas?
As attorneys who frequently handle contract dispute matters involving Texas non compete agreements, one of the questions that we are asked more than any other (by both employers and employees) is: “Is my Texas non-compete agreement enforceable?”
The short answer is:
Continue reading for a more in-depth explanation of the enforceability of non compete agreements in Texas…
Generally, Texas law disfavors contracts and arrangements that restrict employee mobility. The Texas Free Enterprise and Antitrust Act of 1983 states that “Every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.”
However, the Texas legislature has carved out an exception to this, by allowing non compete agreements to be enforceable in certain circumstances.
To be enforceable in Texas, non competes must be reasonable in scope
Texas courts have recognized that overly broad restrictions on employee mobility are harmful to the free market. Accordingly, not all non compete agreements (ie. restrictive covenants) are enforceable in Texas. To be valid under Texas law, a covenant not to compete must be “ancillary to an otherwise enforceable agreement.”
Then, the restrictions must be reasonable in scope.
The “otherwise enforceable agreement” requirement simply means that both parties to the contract must have made binding promises. In the 1990s and 2000s, whether an “otherwise enforceable agreement” existed was the subject of much litigation. This was especially true in the context of an at-will employee.
An at-will employee in Texas would typically contend that any consideration promised by the employer—such as specialized training—was “illusory,” because the employee could theoretically be fired before receiving it. For years, this was an argument that Texas courts accepted.
That all changed, though, in 2006, when the Texas Supreme Court issued its Sheshunoff opinion. There, the court held that a promise to an at-will employee could be part of a valid agreement once the consideration was actually provided. This was an important holding which precluded a substantial amount of potential litigation related to when the consideration for a non compete was given.
Several other Texas Supreme Court cases enhanced the enforceability of non compete agreements, culminating in the Marsh USA case in 2011. There, the court held that the consideration given by the employer, in exchange for the employee’s promise not to compete, did not have to “give rise” to the need to restrain competition. Rather, the consideration had to be “reasonably related” to the need to restrain competition. Consideration such as confidential information, trade secrets, and the need to protect goodwill could, in the right case, meet this standard.
In reaching this result, the Texas Supreme Court noted that the “Texas Constitution protects the freedom to contract.” But the court also reaffirmed the legislative restrictions imposed upon non competes. The court noted that “unreasonable limitations” could “hinder legitimate competition.”
In his concurring opinion in the Marsh USA case, Justice Willett cautioned judges to “divine when competition becomes unfair competition and when a restraint becomes an unreasonable or unnecessarily restrictive restraint.” Texas law, he said, “does not allow protectionism,” and that non competes cannot protect against “the bruises of ordinary competition.”
So, the answer to the question of whether a particular Texas non compete agreement is enforceable is, it depends. What an employee bound by a non compete really wants to know is, What will happen to me if I violate a non compete in Texas? There is no easy answer to that question. The contract itself must be reviewed, as well as the individual circumstances.
Also, a non compete agreement, even if supported by valid consideration, must be reasonable in scope. Some non competes are unreasonable, because the term of the restriction, the geographic scope, or the scope of the activity to be restrained is too broad.
Even if a non compete is valid under Texas law, that does not mean that an employer suing to enforce the agreement will automatically prevail. An employee bound by a non compete may have various defenses. The employer’s unclean hands, for example, may be a defense to injunctive relief. Or, an employer seeking a temporary injunction may not have suffered irreparable harm, or it may have an adequate legal remedy. The facts of each case must be carefully analyzed.
We have assisted many employees who are bound by non competes. We are familiar with the law governing these agreements. We also have substantial practical experience, gained from both inside and outside of the courtroom. Also, because we also represent companies, we know how employers tend to view violations of these agreements.
If you are party to a noncompete agreement, or have a legal matter involving a non compete in Texas, contact us today.
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