As a general proposition, an employer can restrict an employee’s post employment competition 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.
While Texas courts have been historically reluctant to enforce non-competition agreements, 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:
- State and Federal Jury Trials
- 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.
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 and scope.
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. The non-competition agreement must restrain no more activity than is necessary to protect the legitimate business interest of the employer. Texas courts have consistently refused to enforce agreements that vaguely prohibit all competitive activity or prohibit employment in any capacity for a competitive entity. Texas courts have also refused to enforce agreements that prohibit activity unrelated to the work the employee preformed 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.
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. This is a false assumption. 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. Further, 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. Thus, any employee who is presented with a non-competition agreement would be well advised to have it carefully reviewed by an attorney prior to execution.
No information in this article is intended to constitute legal advice. For specific legal advice, please contact an attorney.