By: Abby Campbell

Covenants not to compete are commonly found in many employment contracts, licensing agreements, franchise agreements, and similar commercial transactions. Businesses spend a significant amount of resources to improve their products, services, and business processes.  To protect these assets, companies may choose to install safeguards to protect a company’s business interests, goodwill, and trade secrets, and maintain the company’s competitive edge in the marketplace. Because non-compete provisions are common, parties should be aware of how these clauses impact their business and employment prospects, as the case may be.  

  • Non-competes Are Enforceable in Texas. In Texas, covenants not to compete are regarded as a restraint on trade unless they conform with statutory requirements. (Tex. Bus. & Com. Code §§15.50 to 15.52 (West 2011).  When a non-compete serves to restrain trade by inhibiting competition, it is covered under the Texas Business & Commerce Code. To be valid, any restraint on trade must be reasonable with respect to time, geographic area, and scope of activity to be restrained. It also must be ancillary to an otherwise enforceable agreement. Id. at §§15.50-15.52.
  • The second phase of the analysis involves a balancing test: is the restriction necessary to protect the business’ interests while still allowing a former employee to earn a living for himself? Stated differently, the court asks whether the restrictions placed are more than what is necessary to protect the business’s interest. 
  • Reformation. When a court determines that a covenant not to compete is unreasonable, it may modify the agreement to make it reasonable. Id. at §15.51(c).
  • What are “reasonable” restrictions? Texas courts have yet to fashion a set of hard and fast rules in identifying what is reasonable in terms of non-compete provisions. Courts typically evaluate the non-compete restrictions on a case-by-case approach. The courts have substantial discretion in deciding what is “reasonable” under the circumstances.

To be enforceable, a covenant not to compete must be ancillary to or part of an otherwise enforceable agreement and its limitations as to time, geographical area, and scope of activity must be reasonable. TEX. BUS. & COM. CODE ANN. § 15.50(a). The analysis evaluates whether the restrictions are reasonable by balancing each party’s interests.

  • Ancillary to an Otherwise Enforceable Agreement – The non-compete restrictions must be ancillary to or a party of an agreement that contains mutual non-illusory promises, and is “otherwise enforceable” at the time the agreement is made. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 649 (Tex. 2006)
  • Time Periods Must Be Determinable – A non-compete period between two to five years is generally enforceable in Texas, depending on whom the restrictions are placed. Central States Logistics, Inc. v. BOC Trucking, LLC, 573 S.W.3d 269, 276 (Tex. App.—Houston [1st Dist.] 2018, pet. denied).
  • Geographical Limitations Must be Clearly Defined – Geographic restrictions that cover areas where the former employee has previously worked are generally enforced. Overly broad and undefined geographical limitations are unreasonable and should be stricken or modified. However, regardless of the geographical limitations, a non-compete may be enforced if it prohibits the employee from working with the employer’s clients, regardless of location. Alex Sheshunoff Mgmt. Servs., 209 S.W.3d 644, 656. 

Scope of Activity to be restrained must be related to the work rendered to former employer . Non-competes cannot impose industry-wide restrictions. However, a non-compete provision that prohibits an employee from dealing with the employer’s clients, prospective or actual, is usually binding. Investors Diversified Servs., Inc. v. McElroy, 645 S.W.2d 338, 339 (Tex. App.—Corpus Christi 1982).

The contents of this article do not constitute legal advice nor does it create an attorney-client relationship with Canada Lewis & Associates PLLC. You should discuss your situation with an attorney whom you have engaged to perform legal services for you. If you wish to retain the services of Canada Lewis & Associates, please contact our office for more information.

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