The short answer is absolutely – as long as they comply with Section 15.50, et. seq., of the Texas Business & Commerce Code, otherwise known as the Covenants Not to Compete Act (the “Act”). I actually get this question from people quite a bit. In fact, I have heard from many people that they were under the impression that non-competition agreements (“non-competes”) between employers and employees are not enforceable in Texas. I am not sure where this belief came from, but it is certainly a misconception.
All covenants that place limits on employees’ professional mobility are restraints on trade and are governed by the Act. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 768 (Tex. 2011). This includes both non-competes as well as agreements that restrict employees’ solicitation of the former employers’ customers and employees (“non-solicits”). Id.
The Texas Supreme Court has long held that unreasonable limitations on employees’ abilities to change employers or solicit clients or former co-employees could hinder legitimate competition between businesses and the mobility of skilled employees. Id. at 769. Conversely, valid non-competes constitute reasonable restraints on commerce agreed to by the parties and may increase efficiency in industry by encouraging employers to entrust confidential information and important client relationships to key employees. Id. Further, legitimate covenants not to compete also incentivize employers to develop goodwill by making them less reluctant to invest significant resources in developing goodwill that an employee could otherwise immediately take and use against them in business. Id.
As a general rule, contracts, combinations, or conspiracies in restraint of trade or commerce are unlawful in Texas. TEX. BUS. & COM. CODE § 15.05(a). However, under the Act, non-competes and non-solicits are enforceable if 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 to protect the goodwill or other business interest of the promisee. TEX. BUS. & COM. CODE § 15.50(a).
Courts will therefore engage in a two-step inquiry to determine this threshold requirement for enforceability of a non-compete or non-solicit agreement under the Act. Marsh USA, 354 S.W.3d at 771. First, it must be determined whether there is an otherwise enforceable agreement between the parties, then it must be determined whether the covenant is ancillary to or part of that agreement. Id. The otherwise enforceable agreement requirement is satisfied when the covenant is part of an agreement that contained mutual non-illusory promises. Id. at 773.
Continued employment alone is not sufficient consideration for a non-compete or non-solicit agreement. However, consideration for an agreement that is reasonably related to an interest worthy of protection, such as trade secrets, confidential information or goodwill, is sufficient. Id. at 775. Finally, it is of no import that consideration provided (e.g. confidential information) be named specifically in the agreement or that it be provided before the signing of the agreement. Id. at 778. As long as the employee’s position is such that he would receive confidential information and did in fact receive such after the agreement was signed, that is typically sufficient consideration for the agreement to be enforceable. Id.
The Act specifically provides that an employer can seek an injunction against an employee who is violating a non-compete or non-solicit agreement. TEX. BUS. & COM. CODE § 15.51(a). In fact, it is very common for employers to seek injunctive relief to enforce such agreements.
Finally, if the agreement contains limitations as to time, geographical area, or scope of activity to be restrained that are not reasonable or impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer, it is not automatically void. To the contrary, the Act specifically gives courts the power to reform the agreement so that it is reasonable. TEX. BUS. & COM. CODE § 15.51(c). Of course, what is a reasonable limitation as to time, geographical area and scope of activity can vary greatly depending on the particular facts of each case.
At the end of the day, as long as the employee is provided with sufficient protectable information as consideration for his signing of a non-compete or non-solicit agreement with his employer, and the agreement is reasonable in time, area and scope, the agreement is likely to be enforceable.
© Eric C. Wood, 2016