Under Texas employment laws, if an individual signs a valid covenant not to compete in the State of Texas, then they are bound by that agreement. If the employee violates the covenant not to compete, then the employer will be entitled to monetary damages, injunctive relief, or both.
Injunctive relief is a legal remedy that is in the form of a court order that requires a defendant to cease engaging in a certain specific act or behavior. If an individual has signed a non-compete clause, it does not mean that they are 100% bound by the terms of the covenant not to compete.
In Texas, a non-compete clause is only enforceable when an employer is able to demonstrate the following:
- That the restrictions on the terminated employee are no greater than is necessary to protect an employer’s legitimate business interest.
- That the non-compete clause is not excessively severe or oppressive in restricting the former employee’s ability to earn a livable income and find new employment.
- That the covenant not to compete does not violate a clear mandate of Texas public policy.
The Texas Supreme Court provided several factors in order to determine whether or not a non-compete clause is valid and enforceable. When reading a covenant not to compete, an individual should ask themselves:
- Is the restraint on the employee’s ability to make a living harsh and oppressive?
- Are the time or geographic limitations placed on the worker reasonable?
- Is the non-compete clause so ambiguous that its enforcement is not easily determinable?
If the answer to any of the previous questions is “yes,” then a Texas court is likely to determine that the non-compete clause is unenforceable. On the other hand, a Texas court will likely determine that a non-compete clause is valid if it utilizes clear and precise language to place restrictions on a former employee for legitimate business purposes.
In addition, a non-compete clause that restricts the disclosure of customer lists, technological plans or projects, or plans for market expansion will typically be upheld as a valid non-compete restriction. If an individual has any questions about a covenant not to compete in Texas, they should consult with a local Texas attorney.
It is important for employers and employees in Texas to be aware that around August of 2024, there will be a new federal rule that governs non-compete agreements across the country, including Texas. This new law will place a ban on most types of non-compete agreements with only one exception.
This new rule will be discussed at the end of the article.
What Is a Covenant Not to Compete in Texas?
A covenant not to compete, which may also be referred to as a non-competition agreement or a non-compete clause, is a type of contract clause. It is used by employers in their employment contracts wherein an employee agrees that, after their employment is terminated, they will refrain from working in a competing business for a specified amount of time within a certain geographic area.
The purpose of a non-compete clause is to prevent a former employee from disclosing the intellectual property of a company, which may include:
- Company practices
- Clientele
- Other confidential information
If an employee works in the State of Texas and signed an employment contract when they began their employment, that contract most likely contained a covenant not to compete. According to Texas law, restraints on contracts and arrangements that restrict employee mobility are generally disfavored.
The Texas Free Enterprise and Antitrust Act of 1983 provides that “[e]very contract, combination, or conspiracy in restraint of trade or commerce is unlawful.” Texas law, however, created an exception to this rule by permitting non-compete clauses to be enforceable under certain circumstances.
What Does a Typical Covenant Not to Compete Contain?
Typically, when an individual signs a covenant not to compete, they agree that if they leave that employer, they will not go to work for the employer’s direct competitors. The employee may, in some cases, receive compensation for signing the agreement.
Businesses that typically use covenants not to compete include those that deal with:
- Highly confidential materials
- Client demographic databases or information databases that an employee can access
- Businesses with a direct competitor
- Trade secrets
- Trademarks and copyrights
The typical restrictions in a covenant not to compete agreement may relate to:
- Time: After the employee leaves their former employer, the employee must refrain from working for the competitor for a specified period of time.
- Type of business: The employee may be prohibited from working in certain industries and businesses which are related to that of the employer.
- Location: The employee may be prohibited from working for a competitor within a specified geographic location.
What Are the Requirements for a Valid Covenant Not to Compete?
In order for a covenant not to compete to be enforceable under Texas law, the covenant not to compete must be “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary.”
In other words, the clause should be executed as a supplement to an otherwise enforceable agreement, including an employment contract, and should be reasonable in scope.
Generally, a valid covenant not to compete will protect a legitimate business interest of an employer, will be reasonable in scope, and will include a promise from the employee not to share confidential information.
Confidential information includes:
- Trade secrets
- Marketing plans
- Manufacturing processes
- Customer information
A covenant not to compete will be considered unreasonable or not enforceable when:
- It is too long in duration
- Depending on the trade of the employer, the court will determine how much time is appropriate
- The geographic area the covenant covers is too large
- The types of business the covenant covers are too broad
- The covenant typically prohibits employment in companies related to the employer’s industry
- The employer does not have a legitimate business interest in enforcing the non-compete clause
What Are the Consequences of Signing a Covenant Not to Compete in Texas?
As noted above, an individual who signs a valid covenant not to compete in Texas will be bound by that agreement. An employer is not able to recover for an employee’s violation of a non-compete clause without first establishing proof of actual harm, such as monetary damages. However, an employer may always sue the employee in an attempt to enforce the non-compete clause.
Therefore, even if the non-compete clause is overbroad and the court will likely rule that it is invalid, the mere cost of fighting the lawsuit may be substantial. It is important to note that the most important factor in determining the validity of a non-compete clause is the reasonableness and scope of the clause.
Even if the non-compete clause is part of an otherwise enforceable agreement, it is still required to be reasonable in scope. Even in those cases, the employee who is bound by the clause may have various defenses available to them.
What Is the Most Recent Law Governing Non-Compete Agreements?
The Final Rule or Non-Compete Clause Rule, is a new federal law that was voted on in April of 2024 by the Federal Trade Commission (FTC). This new law will place a ban on most types of non-compete agreements.
The Non-Compete Clause Rule will go into effect 120 days after the Federal Register is published. This means that it will likely be in effect in August of 2024.
Once this law goes into effect, all employers, including those in Texas, will have to comply with new requirements. A Texas employer can prepare for these changes by meeting with their in-house counsel or attorney to begin preparations for complying with the new law.
The only exception to the Final Rule is non-compete agreements that were entered into with senior-level executives. Texas employers will be required to provide notice to all of their workers that if a non-compete agreement was previously signed, it will no longer be enforceable under the law.
How Does this Affect State Laws?
The Final Rule preempts the current Texas state laws allowing non-compete agreements to be used because it is a federal law. The changes in this law will affect employers and employees in Texas because, as noted above, all non-compete agreements except for those entered into with senior level employees, will be unenforceable.
These changes in the law may require Texas employers to review, revise, or even completely redraft their current employment agreements.
What if the Final Rule Is Challenged in Court?
The Non-Compete Clause Rule will most likely be challenged in court in the future as well as under interpretations and changes. The rule has a severability clause that allows the remainder of the law to remain in effect if any provision or portion is deemed unenforceable or invalid.
Additionally, it is possible that this new Final Rule may be entirely struck down. Because there are many different possibilities of changes associated with this rule, it is very important that employers in Texas obtain legal advice regarding how to prepare for these possibilities and protect their businesses.
If a Texas party is currently in litigation involving non-compete agreement issues, they should request that their lawyers keep up-to-date with the changes being made to the rule and how it may affect their claim. By keeping updated on the rule, it will allow the parties to present arguments in court that cover all possibilities.
Do I Still Need to Know about the Previous Non-Compete Agreement Laws?
Even though the new law will preempt the current Texas state laws, it is very important to still be aware of the current non-compete agreement laws in the state, as they will go back into effect if the Final Rule is changed or portions are struck down.
Because of this, is it very important to be aware of both the current laws, as they will apply until the Final Rule takes effect, and the new laws, as they will have to be followed after approximately August of 2024.
Texas businesses may decide to still include a non-compete agreement in their employment contracts, although they may not be enforceable at the time, to ensure that their business interests are protected no matter how the law is changed. A company’s lawyer can draft as well as edit their employment agreements, allowing them to comply with the new Final Rule and be prepared for the possibility of changes in the future.
Do I Need an Attorney if I Signed a Non-Compete Clause in Texas?
It is important to have the assistance of a Texas employment contract attorney if you signed a non-compete clause in Texas. Although it is not required, it is always in your best interest to have an attorney review any document that may restrict your future employment options prior to signing it.
In addition, if you are a Texas employer, you should be cautious when hiring an employee who is subject to a non-compete agreement from a previous employer. As an employer, a Texas lawyer can help you draft a valid covenant not to compete or to negotiate the terms of a non-compete clause with a potential employee.
