General enforceability of Texas non-competes
Texas law generally disfavors non-competes as a restraint on trade, but recent Texas Supreme Court decisions and the adoption by Texas of the Uniform Trade Secrets Act bring Texas closer to those jurisdictions generally favoring restrictive covenants.
Statutory requirements for Texas non-competes
To be enforceable under Texas law, a non-compete must meet the requirements of Section 15.50(a) of the Texas Business and Commerce Code:
· The non-compete must be “ancillary to or part of an otherwise enforceable agreement.”
· The non-compete must contain reasonable limitations as to time, geographical area, and scope of activity.
· The non-compete must not impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer.
Sufficient consideration for Texas non-competes
Texas case law clarifies that non-competes must be supported by sufficient consideration. Because Texas is an at-will employment state, an offer of at-will employment is illusory and is not sufficient consideration. The most common form of consideration for non-competes in Texas is giving the employee access to confidential information. See Alex Sheshunoff Mgmt. Serv’s, L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006); Mann Frankfort Stein & Lipp Advisors v. Fielding, 289 S.W.3d 844 (Tex. 2009).
Best practice: The agreement should state that employees will receive confidential information even if the employee is terminated immediately after hire.
· Sufficient consideration can consist of specialized training. See id.
· Stock options can also constitute sufficient consideration. Marsh USA Inc., v. Cook, 354 S.W.3d 764 (Tex. 2011).
Reasonable limitations as to time
· Two years is typically deemed to be a reasonable time period for restriction in Texas. Brink's Inc. v. Patrick, No. 3:14-CV-775-B, 2014 WL 2931824, at *5 (N.D. Tex. June 27, 2014).
· Texas courts have allowed restrictions as long as five years. See, e.g., Johnson Serv. Group, Inc. v. France, 763 F.Supp.2d 819, 826 (N.D. Tex. 2011) (“two to five years has repeatedly been held as a reasonable time limitation”); Salas v. Chris Christensen Systems Inc., No. 10–11–0107–CV, 2011 WL 4089999, at *19 (Tex. App.—Waco Sept.14, 2011, no pet.) (“we cannot say that the Agreement's five-year restraint is per se unreasonable”); Amey v. Barrera, No. 13–01–0130–CV, 2004 WL 63588, at*6 (Tex. App.—Corpus Christ–Edinburgh Jan. 15, 2004, no pet.) (upholding a non-compete agreement that prohibited the defendant from working in “Corpus Christ and surrounding area for 5 years” as reasonable and enforceable).
· Despite the possibility of enforcing a five-year restriction, the better practice is to use the more reasonable time period of two years.
Reasonable limitations as to geography
· Texas courts have generally upheld non-compete agreements that prevent an individual from performing similar services to those he provided in territories in which s/he previously worked. See e.g., Johnson Serv. Group, Inc. v. France, 763 F.Supp.2d 819, 826 (N.D.Tex. 2011) (“Texas courts have upheld geographical limitations preventing competition within a metropolitan area, as the 50–mile limitation essentially does here.”); Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 794 (Tex. App.—Houston [1st. Dist.] 2001, no pet.) (upholding a reformed noncompete covenant that prohibited a former manager from working in those counties where he previously oversaw operations); Propath Services, LLP v. Quest Diagnostics Clinical Laboratories, Inc., No. 3:00–CV–2391–H, 2002 WL 535056, at *10 (N.D.Tex. Apr. 9, 2002) (holding that a covenant which prohibited a party from acting in forty-eight Texas counties was not unreasonable because the defendants marketed the relevant services within those counties); Daily Instruments Corp. v. Heidt, No. H–13–2189, 2014 WL 710683, at *12 (S.D.Tex. Feb.21, 2014) (“Geographic restrictions are reasonable to the extent they are commensurate with the territory in which the employee worked during his employment with the employer.”).
· Texas courts will not uphold non-competes restricting employees from working anywhere the employer had commercial activity if the particular employee did not work in the expanded area. Cobb v. Caye Publishing Group, 322 S.W.3d 780 (Tex. App.—Ft. Worth 2010, pet. filed) (covenant not to compete cannot be enforced outside of area where the employee worked despite the employer’s commercial activity).
Reasonable limitations as to scope of activity
· In determining whether the scope of activity is reasonable, Texas courts will consider “whether the defendant is restricted from earning a living if the agreement not to compete is enforced.” Evans Consoles Inc. v. Hoffman Video Sys., Inc., No. 3:01-CV-1333-P, 2001 WL 36238982, at *8 (N.D. Tex. Dec. 6, 2001) (citing American Express Financial Advisors, Inc. v. Scott, 955 F.Supp. 688, 693 (N.D. Tex. 1996); French v. Community Broadcasting of Coastal Bend. Inc., 766 S.W.2d 330, 334 (Tex. App.—Corpus Christi 1989)).
· If the ban is not industry-wide, the non-compete is more likely to be enforceable. Brink's Inc. v. Patrick, No. 3:14-CV-775-B, 2014 WL 2931824, at *5 (N.D. Tex. June 27, 2014).
What happens if the non-compete is overly broad?
If a Texas Non-Compete is overly broad, Texas courts may reform the non-compete restrictions and then can award the employee’s attorney fees. For this reason, it is advised to use less restrictive terms for time, geography, and scope.
Which employees should sign a Texas non-compete?
While it may be tempting to ask all employees to sign a non-compete, only those employees who truly present a threat to the employer should be asked to sign for the following reasons:
· The downside to asking low-level employees to sign a non-compete is that it is unlikely that they will possess sufficient confidential information (or other adequate consideration) to meet the requirements of Section 15.50(a) of the Texas Business and Commerce Code.
· In addition, employers may waive their rights to enforce the non-compete against more important employees if they do not enforce the non-compete across the board.
· Companies such as Jimmy Johns have recently come under fire for requiring employees as junior as sandwich makers to sign non-competes: http://www.nytimes.com/2014/10/15/upshot/when-the-guy-making-your-sandwich-has-a-noncompete-clause.html?_r=0
Physicians in Texas are subject to special rules for non-competes, including allowing the physician access to certain patient files and buy-out rights. I will address these rules in an upcoming post.
Texas law generally disfavors non-competes as a restraint on trade, but recent Texas Supreme Court decisions and the adoption by Texas of the Uniform Trade Secrets Act bring Texas closer to those jurisdictions generally favoring restrictive covenants.
Statutory requirements for Texas non-competes
To be enforceable under Texas law, a non-compete must meet the requirements of Section 15.50(a) of the Texas Business and Commerce Code:
· The non-compete must be “ancillary to or part of an otherwise enforceable agreement.”
· The non-compete must contain reasonable limitations as to time, geographical area, and scope of activity.
· The non-compete must not impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer.
Sufficient consideration for Texas non-competes
Texas case law clarifies that non-competes must be supported by sufficient consideration. Because Texas is an at-will employment state, an offer of at-will employment is illusory and is not sufficient consideration. The most common form of consideration for non-competes in Texas is giving the employee access to confidential information. See Alex Sheshunoff Mgmt. Serv’s, L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006); Mann Frankfort Stein & Lipp Advisors v. Fielding, 289 S.W.3d 844 (Tex. 2009).
Best practice: The agreement should state that employees will receive confidential information even if the employee is terminated immediately after hire.
· Sufficient consideration can consist of specialized training. See id.
· Stock options can also constitute sufficient consideration. Marsh USA Inc., v. Cook, 354 S.W.3d 764 (Tex. 2011).
Reasonable limitations as to time
· Two years is typically deemed to be a reasonable time period for restriction in Texas. Brink's Inc. v. Patrick, No. 3:14-CV-775-B, 2014 WL 2931824, at *5 (N.D. Tex. June 27, 2014).
· Texas courts have allowed restrictions as long as five years. See, e.g., Johnson Serv. Group, Inc. v. France, 763 F.Supp.2d 819, 826 (N.D. Tex. 2011) (“two to five years has repeatedly been held as a reasonable time limitation”); Salas v. Chris Christensen Systems Inc., No. 10–11–0107–CV, 2011 WL 4089999, at *19 (Tex. App.—Waco Sept.14, 2011, no pet.) (“we cannot say that the Agreement's five-year restraint is per se unreasonable”); Amey v. Barrera, No. 13–01–0130–CV, 2004 WL 63588, at*6 (Tex. App.—Corpus Christ–Edinburgh Jan. 15, 2004, no pet.) (upholding a non-compete agreement that prohibited the defendant from working in “Corpus Christ and surrounding area for 5 years” as reasonable and enforceable).
· Despite the possibility of enforcing a five-year restriction, the better practice is to use the more reasonable time period of two years.
Reasonable limitations as to geography
· Texas courts have generally upheld non-compete agreements that prevent an individual from performing similar services to those he provided in territories in which s/he previously worked. See e.g., Johnson Serv. Group, Inc. v. France, 763 F.Supp.2d 819, 826 (N.D.Tex. 2011) (“Texas courts have upheld geographical limitations preventing competition within a metropolitan area, as the 50–mile limitation essentially does here.”); Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 794 (Tex. App.—Houston [1st. Dist.] 2001, no pet.) (upholding a reformed noncompete covenant that prohibited a former manager from working in those counties where he previously oversaw operations); Propath Services, LLP v. Quest Diagnostics Clinical Laboratories, Inc., No. 3:00–CV–2391–H, 2002 WL 535056, at *10 (N.D.Tex. Apr. 9, 2002) (holding that a covenant which prohibited a party from acting in forty-eight Texas counties was not unreasonable because the defendants marketed the relevant services within those counties); Daily Instruments Corp. v. Heidt, No. H–13–2189, 2014 WL 710683, at *12 (S.D.Tex. Feb.21, 2014) (“Geographic restrictions are reasonable to the extent they are commensurate with the territory in which the employee worked during his employment with the employer.”).
· Texas courts will not uphold non-competes restricting employees from working anywhere the employer had commercial activity if the particular employee did not work in the expanded area. Cobb v. Caye Publishing Group, 322 S.W.3d 780 (Tex. App.—Ft. Worth 2010, pet. filed) (covenant not to compete cannot be enforced outside of area where the employee worked despite the employer’s commercial activity).
Reasonable limitations as to scope of activity
· In determining whether the scope of activity is reasonable, Texas courts will consider “whether the defendant is restricted from earning a living if the agreement not to compete is enforced.” Evans Consoles Inc. v. Hoffman Video Sys., Inc., No. 3:01-CV-1333-P, 2001 WL 36238982, at *8 (N.D. Tex. Dec. 6, 2001) (citing American Express Financial Advisors, Inc. v. Scott, 955 F.Supp. 688, 693 (N.D. Tex. 1996); French v. Community Broadcasting of Coastal Bend. Inc., 766 S.W.2d 330, 334 (Tex. App.—Corpus Christi 1989)).
· If the ban is not industry-wide, the non-compete is more likely to be enforceable. Brink's Inc. v. Patrick, No. 3:14-CV-775-B, 2014 WL 2931824, at *5 (N.D. Tex. June 27, 2014).
What happens if the non-compete is overly broad?
If a Texas Non-Compete is overly broad, Texas courts may reform the non-compete restrictions and then can award the employee’s attorney fees. For this reason, it is advised to use less restrictive terms for time, geography, and scope.
Which employees should sign a Texas non-compete?
While it may be tempting to ask all employees to sign a non-compete, only those employees who truly present a threat to the employer should be asked to sign for the following reasons:
· The downside to asking low-level employees to sign a non-compete is that it is unlikely that they will possess sufficient confidential information (or other adequate consideration) to meet the requirements of Section 15.50(a) of the Texas Business and Commerce Code.
· In addition, employers may waive their rights to enforce the non-compete against more important employees if they do not enforce the non-compete across the board.
· Companies such as Jimmy Johns have recently come under fire for requiring employees as junior as sandwich makers to sign non-competes: http://www.nytimes.com/2014/10/15/upshot/when-the-guy-making-your-sandwich-has-a-noncompete-clause.html?_r=0
Physicians in Texas are subject to special rules for non-competes, including allowing the physician access to certain patient files and buy-out rights. I will address these rules in an upcoming post.
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