Employers are increasingly requiring employees to sign agreements stating that, if the employee ever leaves the company (regardless of the circumstances), the employee will not go to work for a competitor. These agreements are called non-competition (or non-compete) agreements. Employees sometimes sign these agreements believing that Texas courts will not enforce them. Guess again. Non-compete agreements are alive and well in Texas.
Non-competes do have to meet certain requirements, but it is mistake to assume a professionally drafted non-compete will not meet them. To be enforceable, a non-compete agreement must be reasonable in time, geographical area, and scope of activity; and each of these limitations must not impose a greater restriction on the employee than is necessary to protect the employer.
Typically, a time restriction on the employee competing with their former employer of one to three years after termination of employment is reasonable. As for the geographical restriction, a non-compete agreement should be limited to areas where the employer conducts business or reasonably expects to conduct business. If the employer cannot give a legitimate business reason for preventing employment in a certain area, then the geographical area is unreasonable. For example, if a dry cleaner only has customers within a three-mile radius of its store, then a provision that bars employment anywhere beyond that three-mile radius (e.g., the entire State of Texas) would be unreasonable. Regarding scope of activity, the non-compete must bear a meaningful relationship to the employee’s activities. The employee can be restrained from engaging in the same kinds of activities they performed for the employer; but they cannot be excluded from working for a competitor in every capacity. For example, an automobile sales person may be restrained from going to work for a competitor as a sales person; however, they may not be restrained from going to work as a mechanic.
Considering the reasonableness of each of these restrictions is important because an enforceable non-compete allows the employer to prevent a former employee from working for a competitor and recover damages and attorney’s fees. Even if a non-compete is unreasonable or a greater restraint than is necessary, the non-compete is not automatically void. Instead, a judge must re-write the offending provisions so that they are reasonable and then enforce the new agreement. Therefore, unreasonableness is not a proverbial get out of jail free card for the employee. The employee is still subject to its newly re-written terms, and the employer can ask the court for an injunction preventing the employee from violating the revised non-compete agreement. However, while the employee may still be subject to the re-written non-compete, the employer cannot recover damages from the employee for competitive activities they engaged in prior to the non-compete being reformed (e.g., lost profits, etc.) nor can the employer recover its attorney’s fees from the employee.
While employers hold most of the cards in the deck, they do not hold them all. Some defects will render a non-compete agreement unenforceable. For example, a non-compete agreement must be ancillary to an otherwise enforceable agreement. This means the non-compete cannot be the only agreement between the employee and employer. Usually this means the non-compete must be entered into along with an enforceable employment agreement. This can be more problematic than it sounds because most employees in Texas are at-will. In other words, the employer (as well as the employee) can terminate employment immediately for virtually any reason. Because the at-will employee can literally be fired one second after they sign the non-compete, in some situations the employer may have hired the employee and still not given the employee sufficient value for the employee’s promise not to compete to be enforceable. To avoid this problem, employers often give the employee immediately or soon after they are hired trade secrets and confidential or proprietary information (e.g., confidential customer lists; etc.). Until the information is provided, however, there is no consideration to make the non-compete enforceable. Other defects can render a non-compete void, but a discussion of all such defects exceeds the scope of this article.
Non-compete agreements are alive and well in Texas. If you are thinking of having your employees sign one, or if you are an employee who has already signed one, it is a good idea to have them reviewed by an attorney with experience in this area. Simply assuming that a non-compete is enforceable or unenforceable is a mistake for both employers and employees.