If you have followed the steps in Part I, you might now be in possession of evidence confirming that your ex-employee is violating his or her non-compete agreement. Such evidence will do you no good, however, if the non-compete agreement that you are relying upon is not enforceable. So, before you race to the courthouse asking for a temporary injunction, an assessment of enforceability is in order. This analysis needs to be done quickly, if not simultaneously, with the steps described in Part I.
Over the years, Texas courts have steadily moved toward making the enforceability of non-compete agreements easier. This post addresses the most current general requirements as spelled out by the Texas Supreme Court over the last decade, but beware of the old cases that used to impose additional requirements, but are no longer good law.
In Texas, non-competition agreements are governed by Section 15.50(a) of the Texas Business & Commerce Code, which states that “a covenant not to compete is enforceable if it is 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.”
Thus, Texas courts require two factors to enforce a non-compete agreement that is ancillary to an otherwise enforceable agreement:
1. There must be consideration.
2. The limitations on time, geographical area, and scope of activity to be restrained must be reasonable.
Question 1: Did the Employee Receive Adequate Consideration for His/Her Promise Not to Compete?
Because Texas is an at will employment state, an employer’s offer of employment can be terminated at any time, is illusory, and does not by itself constitute sufficient consideration for an employee’s promise not to compete. Therefore, an employer must promise its employees something other than an offer of employment in exchange for their signature on the non-compete, which includes confidential information, trade secrets or specialized training provided by the employer. Consideration can also include stock options or other financial incentives that are “reasonably related” to the employer’s interest that is worthy of protection.
Question 2: Are the Limitations on Time, Geography and Scope Imposed by the Non-Competition Agreement Reasonable?
Non-competition agreement must restrain no more activity than is necessary to protect the legitimate business interest of the employer. Texas courts have consistently refused to enforce agreements that prohibit all competitive activity or prohibit employment in any capacity for a competitive entity. The courts have also refused to enforce agreements that prohibit activity unrelated to the work the employee preformed for the former employer.
Similarly, Texas courts have also determined that non-competition agreements that contain no geographical limitations or fail to limit the scope of activity to be restrained are unreasonable and unenforceable. Generally, a reasonable area of restraint consists of only the territory in which the employee worked for the former employer. Thus, courts in the past have refused to enforce non-competition agreements with nationwide applicability when the employee did not have nationwide responsibilities for the former employer.
While the court in Texas have authority to reform a non-competition agreement to narrow the scope or the geographical area of the agreement so as to make it enforceable, they will not always do so.
So, hopefully, you had legal advice regarding the non-compete agreements when they were drafted and the above issues are not going to prevent you from enforcing them. If not, you need to revise your current non-compete agreements and the employment policies that affect the exchange of consideration to ensure that the above-described requirements are met.
If, after conducting the above enforceability analysis, you believe that your non-compete agreements contain reasonable limitations and the former employee was given some sort of consideration in exchange for signing the non-compete agreement, you might have an enforceable agreement on your hands. I will discuss the next steps of enforcing a non-compete agreement in Part III.
Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. His practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.