Texas Covenants Not to Compete
Employees are often asked to sign agreements related to their employment. Confidentiality agreements. Codes of Conduct. Arbitration clauses. One of the most common employment contracts is the non-compete agreement – or covenants not to compete.
The Texas legislature passed the Covenants Not to Compete Act in 1989. It is a relatively simple statute. Essentially it states that in order for a covenant not to compete to be valid it 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 to protect the goodwill or other business interest of the [employer].”
As with most laws, the reasonableness of any of the restrictions is open to interpretation which is why so many of these agreements wind up being decided in court.
Ancillary to an Otherwise Enforceable Agreement
Basically this means that the non-compete must be part of another agreement. It cannot be a standalone agreement. It must contain other promises or be connected with some other contractual agreement in order to be enforceable. See Donahue v. Bowles, Troy, Donahue, Johnson, Inc., 949 S.W.2d 746 (Tex. App. – Dallas 1997, writ denied).
The simplest way to include a non-compete agreement in another enforceable agreement is to add it into an employment contract. Such agreements typically take the employment from at will to one in which the employee has enhanced job security. In other words, the employer may only terminate the employment relationship for good cause or unsatisfactory performance.
However, most employers in Texas want to maintain the at-will employment relationship and have an enforceable covenant not to compete. First, both agreements must be made at the same time. Texas courts have ruled that a non-compete signed four days before the ancillary agreement was unenforceable. C.S.C.S., Inc. v. Carter, 129 S.W.3d 584 (Tex. App. – Dallas 2003, no pet.).
In addition, the Texas Supreme Court set out some parameters to consider for at-will employment situations. Specifically, the noncompetition clause must (i) be supported by consideration from the otherwise enforceable agreement that gives rise to the employer’s interest in preventing competition, and (ii) be designed to enforce the consideration given. Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642, 647 (Tex. 1994). The Light Court specifically mentions a non-disclosure agreement as potentially meeting such criteria. As a result of the Light ruling, if an employer wants to have an enforceable covenant not to compete in an employment-at-will relationship, it must provide the employee access to trade secrets or confidential information and enter into a written non-disclosure agreement which extends beyond the term of employment.
Limitation as to Time
The Covenant Not to Compete Act specifically states a time limitation must be included. Courts have generally upheld limitations up to two years as reasonable. See Property Tax Assoc., Inc. v. Staffeldt, 800 S.W.2d 349, 351 (Tex. App. – El Paso 1990, writ denied). In some instances, time periods up to five years have been upheld as reasonable. Periods over five years are generally unreasonable. See REcon Exploration, Inc. v. Hodges, 778 S.W.2d 848, 853 (Tex. App. – Dallas 1990, no writ). Additionally, courts will not likely uphold a noncompete which is longer than the time an employee was employed. See Lewis v. Krueger, Hutchinson, & Overton Clinic, 269 S.W.2d 798 (Tex. 1954).
Limitation as to Geographic Area
The statute also requires a limitation as to geographic area. To be enforceable, the area must be reasonably related to the employer’s protectable business interest. See Butts Retail, Inc. v. Diversifoods, Inc., 840 S.W.2d 770, 774 (Tex. App. – Beaumont 1992, writ denied). Geographic restrictions usually are defined as:
- Worldwide – almost certainly unreasonable and unenforceable
- Nationwide – likely unreasonable and unenforceable
- Statewide – subject to strict judicial scrutiny
- Countywide – depending on the business interest, likely reasonable
- Citywide – likely reasonable
- Sales Territory – likely reasonable, assuming territory is not too large
- Market Area – likely reasonable, assuming area is defined and not too large
- Radius in Miles – likely reasonable, assuming radius is not too large
Limitation as to Scope of Activity
This limitation is the specific activities which the employee must not perform after termination of the employment relationship. Texas courts generally disapprove of restraints of trade and, therefore, narrowly construe the limitations on scope of activity. See Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 387 (Tex. 1991). For example, this includes not restraining activities: (i) broader than the employer’s actual business, (ii) broader than the employee’s scope of work or department (i.e. legal textbook sales versus medical textbook sales), (iii) regarding solicitation of customers with whom the employee had no personal contact. See Diversified Human Resources Group, Inc. v. Levinson-Polakoff, 752 S.W.2d 8, 11 (Tex. App. – Dallas 1988, no writ) and John R. Ray & Sons v. Stroman, 923 S.W.2d 80 (Tex. App. – Houston [14th Dist.] 1996, writ denied).
Protecting Business Interests
Goodwill in the legal sense defines a business’ relationship with its clients or customers. See Philip H. Hunke, D.D.S., M.S.D., Inc. v. Wilcox, 815 S.W.2d 855, 857 (Tex. App. – Corpus Christi 1991, writ denied). Goodwill includes:
- Trade secrets,
- Customer lists,
- Pricing lists,
- Confidential information,
- Contracts,
- Marketing strategies, and
- Blueprints.
See DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 684 (Tex. 1990); T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 22 (Tex. App. – Houston [1st Dist.] 1998, no writ); Butts Retail, Inc. v. Diversifoods, Inc., 840 S.W.2d 770, 773 (Tex. App. – Beaumont 1992, writ denied).
Conclusion
Texas law and courts place many restrictions on covenants not to compete. However, courts do recognize a need for some employers to restrict some former employees from competing with the business. Employers who believe they need to incorporate noncompetition agreements with the employment relationships should consult with good legal counsel so that the agreements are carefully tailored to be enforceable and effective.