The Lowdown on Texas Non-Compete Laws

What Are Non-Compete Agreements?

Non-compete clauses, sometimes referred to as non-competition agreements, are often utilized by employers to protect their business interests. A non-compete agreement is a covenant, or a promise, between an employer and an employee whereby the employee contracts to not work for a competitor, either in a particular area, industry, or for a certain period of time after the conclusion of their employment, within or without the state of Texas, depending on the terms of the agreement.
Employers typically employ these types of clauses in order to protect trade secrets, sensitive business information, client lists, relationships, and other business interests that could be utilized by a former employee in a similar capacity for a competing business. Not all covenants not to compete are valid and enforceable , even if signed. Whether a non-compete agreement is enforceable depends largely on the state in which any action is filed to enforce a non-compete; Texas state law has specific requirements for a non-compete agreement to be enforceable and is generally more favorable towards enforcing non-compete agreements than other states.
The Texas Uniform Non-Compete Act sets out the basic guidelines on when and how a non-compete agreement can be enforced. Generally speaking, a valid Texas non-compete will require: (1) consideration (i.e., some type of benefit) given to an employee in exchange for signing; (2) reasonable limitations, such as geographic areas or timeframes; and (3) reasonable restrictions to further legitimate business interests.
Texas courts are heavily governed by this Texas Uniform Non-Compete Act and will generally uphold a non-compete agreement in a Texas court if it is enforceable under the Act. However, there can be a lot of gray areas in what makes a non-compete enforceable.

The Legal Landscape of Non-Competes in Texas

In order for a non-compete agreement to be enforceable in Texas, the contract must contain certain requirements as set forth in Texas Business and Commercial Code § 15.50 et seq., commonly known as the Texas Covenants Not to Compete Act. The Texas Supreme Court has described three elements for determining the enforceability of a noncompete: "(1) whether the limitations as to time, geographical area, and scope of activity to be restrained are reasonable, and (2) whether the limitation contained in the covenant appears to be greater than necessary to protect the goodwill or other business interest of the promisee." Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 258 S.W.3d 647, 666 (Tex. 2008). In Texas, non-compete agreements are enforceable only if:
The Texas Covenants Not to Compete Act has determined that a non-compete between an employer and its employee will not be enforceable without consideration "of valuable lessons and courses of instruction given by the person or entity seeking enforcement…in exchange for which the employer expects the employees…to work." §§ 15.002(1), 15.004.
The Texas Covenants Not to Compete Act also requires that the agreement must be ancillary to or part of an otherwise enforceable agreement, which is typically satisfied if the covenants are given to protect the interests of the employer. Johnson v. MedCor, Inc., 20 F.3d 330, 334 (5th Cir. 1994).
Texas courts have applied the same analysis in regard to covenant not to compete agreements within partnership agreements as controls in employment agreements. See Electrostim Medical Services, Inc., 817 S.W.2d 209 (Close Corporation); Dresser Industries, Inc. v. Halliburton Co., 843 S.W.2d 200 (General Partner); Leland v. Brother’s Builders, Inc., 16 S.W.3d 99 (Member of a Limited Liability Company). However, to determine the reasonableness of a restriction, some jurisdictions employ a "balancing of interests approach" by which the court considers the parties’ relative bargaining power and sophistication. See, e.g., Kelly v. Rio Grande Medical Center, 255 S.W.3d 665 (Tex.App.-El Paso 2007, pet. denied). Most Texas courts, however, utilize a strict liability standard. See Frymire Eng’g Co. v. Clark, 53 S.W.3d 711, 716 (Tex.App.-Dallas 2001, pet dism’d w.o.r.e).
While Texas courts have previously held that they will not rewrite or reform non-compete agreements to make them enforceable, the Texas legislature adopted a new statute during the 87th Legislative Session which went into effect in September 2021. The statute, House Bill 1863, eliminates the bar on reforming non-compete and nonsolicitation agreements to make them enforceable. Section 15.505. The new law allows courts to modify or limit the time, geographic application, and scope of activity of a non-compete that is found to be overly broad as long as doing so would not be "inconsistent with the intent of the original non-compete agreement." Sections 15.505(c) and (d). These issues are discussed below under the Enforcement section.
For non-compete agreements to be enforceable in the state of Texas, there needs to be an agreement not to engage in particular business activity and the employer or business must establish that the non-compete agreement is part of an otherwise enforceable agreement. Texas typically has found that an enforceable agreement must include some sort of consideration, such as confidential information, efficiencies in scope, specific training and/or education.

Are Non-Compete Agreements Enforceable?

In Texas, an enforceable non-compete agreement must be ancillary (or incidental) to or be included in an otherwise enforceable agreement. No particular form is necessary for a covenant not to compete to be ancillary to or part of an otherwise enforceable agreement, and an agreement does not need to expressly state that it is ancillary to or part of an enforceable agreement. However, a non-compete agreement is not enforceable if a less restrictive agreement would adequately protect the legitimate business interest. Moreover, a non-compete may be enforceable in areas where the primary business does not focus its services.
The non-compete must contain limitations as to time, geographical area, and scope of activity to be restrained that would be deemed reasonable by the best interests of the two parties or the interests of the general public. The reasonableness of each of these considerations will depend upon the facts of each individual case. The covenant must also be sufficiently limited so as to justify the impairment of the employee’s right of free competition.
As a general rule, the geographical restraints imposed by covenants not to compete by former employers should be connected to the scope of area wherein services are performed. However, the circumstances of the facts in each case will determine what is "reasonable," according to the purposes of the covenant. If a covenant restricts a former employee from competing only with a former employer in a very limited area, for example, this covenant may not be in line with protecting a former employer’s business interest. The court will look at the overall scope of prior services rendered relative to the covenant to see how the particular geographical restriction fits into the big picture analysis of the entire agreement.
The duration of a covenant not to compete in Texas should not exceed three years, although courts have previously upheld covenants allowing up to a five-year duration, depending on circumstances. Again, the duration of a covenant not to compete must be reasonable in terms of the nature of the employer’s business and the legitimate business interest being served. For example, in multi-state or national businesses, a three-year restriction may be considered too short. It is also important to note that the larger the territorial scope of the agreement, the shorter the contract’s duration should be. Courts will not enforce a non-compete contract that has an indefinite period of time; one court has stated that five years was "too indefinite" and therefore unreasonable. Instead, a non-compete may be deemed valid with a reasonable beginning and termination date.
A covenant not to compete may not be enforced if the restriction is not carefully calculated to eliminate the former employee’s necessity of such competitive practice that is unreasonable and does not interfere with the public’s interest. A restriction that prohibits an employee from working in the same business for a competitor where there is no evidence to warrant a restriction of that conduct may be deemed void.

Exceptions and Limitations to Non-Competes

Exceptions and limitations in non-compete agreements to consider
The most common exception to the general rule that an employee can be prohibited from competing with his/her former employer during the 2-year period relates to a liquidated damages provision, an agreement whereby the employer in connection with a transaction or an agreement to sell all or part of the business names a good faith estimate of the damages it can foreseeably expect from a breach by the employee of the noncompete covenant. These liquidated damages are not to exceed the greater of an amount specified in the agreement or 18 months salary.
An example of a liquidated damages provision may look like this:
"Employee acknowledges that in connection with the employment relationship between Employer and Employee, Employer will disclose, make available to, and/or develop for Employee, certain confidential information and trade secrets crucial to the success of Employer’s business, and as a result Employee acknowledges that he/she will receive very specialized training, confidential information and trade secrets, significant recruitment and hiring of and transition of customers, and other unique and valuable intangible assets which have substantial value and which Employee has agreed that he/she could not replace or recreate. The parties hereto acknowledge that an irreparable harm may come to Employer if Employee should violate the terms of paragraph 13 hereof and that employer may not have an adequate remedy at law for such a violation. The parties hereto further acknowledge that in recognition of Employer’s willingness to employ Employee and the expenses related to recruiting and employing Employee, incurred by Employer, that it would be impossible for Employer to establish with particularity what damages it may suffer in the event of a breach by Employee of the aforementioned non-compete covenant. Therefore, Employee hereby agrees that in the event of a breach by Employee of the aforementioned restrictive covenant, Employer shall be entitled to recover as stipulated liquidated damages from Employee for each breach, an amount equal to the greater of (a) the liquidated damages calculated in accordance with the schedule below or (b) 18 months of Employee’s Annual Base Salary immediately prior to such breach, such amount to be offset by Employee’s Salary earned during the period of breach, provided that notwithstanding the foregoing, this schedule of liquidated damages shall not constitute a limit on any party and shall not be exclusive of any other remedy(s) available at law or under the agreement. If breach occurs (a) within 1 year after termination, Employee shall pay to Employer $50,000; (b) within 2 years after termination, Employee shall pay to Employer $40,000; (c) within 3 years after termination, Employee shall pay to Employer $30,000; (d) within 4 years after termination, Employee shall pay to Employer $20,000; (e) within 5 years after termination, Employee shall pay to Employer $10,000; (f) within 6 years after termination, Employee shall pay to Employer $0.00. For the avoidance of doubt, in calculating a breach of the aforementioned non-compete covenant, it shall be possible to breach such covenant cumulatively so that the penalties and liquidated damages shall be applicable to each cumulative breach of the covenant, whether or not such breaches occur in any specified order."
A significant limit to the applicability of the covenant not to compete during the 2-year post-termination period was first set forth in Becker v. Wrightson, 572 SW2d 13 (Tex.App.—Dallas 1978, writ ref’d n.r.e.). The Becker court was concerned that a former employee would be completely prevented from earning a living in his/her chosen profession long after termination of the employment relationship. Becker involved a physician who was employed by a group of physicians in a specialty practice. Each member of the group was required to sign a restrictive covenant not to compete for 2 years with any member of the group if they left the group. Upon separation of the employment relationship, the employer would then redistribute the practice among the remaining employees. Such a 2-year period for a physician was found by the Becker court to be unreasonable, thus unenforceable, as it would prohibit a physician from practicing medicine long after separation from the group because the industry is characterized by period(s) of mobility and very young physicians commonly change employers, sometimes several times, throughout their careers. This groundbreaking decision has subsequently been cited and followed by Texas courts.
In Beaver v. QEP Resources Company, 2011 WL 23440789 (N.D. Tex. 2011), the district court previously located in Dallas held that a restrictive covenant preventing a drilling engineer from working for a competitor for the remainder of his life was unreasonable in duration. The practical effect of this ruling was that the engineer was free to work for any of several competitor companies after the expiration of the 30-month period of the restrictive covenant.

Employees & Their Rights Under Non-Compete Agreements

All employees in Texas need to know that the inclusion of a non-compete agreement in an employment contract does not mean that the agreement is enforceable. This is especially true for noncompetes that purport to prohibit employees from competing with their former employer for a specific period of time after employment is terminated. Many of these agreements are drafted broadly and may go well beyond the enforceable limits of non-compete agreements. Moreover, there is a tendency for many employers to disregard or simply ignore the requirements of the Texas Uniform Trade Secrets Act (TUTSA) when drafting these agreements.
The following information will be helpful to all employees who are asked to sign an employment contract containing a non-compete. It may also be helpful to former employees who discover too late that they signed a bad agreement….Employees’ Right to Negotiate: Under Texas law, employees have a right to negotiate what the terms of their employment agreement will be. They have a right to negotiate the terms of their non-compete agreement as well as the terms of their provisions regarding non-solicitation of customers and other employees. Although negotiations do not appear in writing , Texas law requires, as a condition of enforcing an agreement containing a non-compete, that a legitimate business reason "factually support," at the time of the agreement, the duration, geographical area and scope of activity to be restricted under the agreement: Employees’ Obligation to Perform: Texas law does not require an employee who is the recipient of a non-compete agreement to render performance for a certain period of time or under certain established conditions. However, if he/she fails to perform the conditions required by the agreement after it has been executed, the employer may try to enforce the agreement against the employee in court and obtain an injunction to force the employee to comply with its terms. Employees have the right to affirmatively state the conditions under which they will perform; Employees’ Right to Challenge Enforcement of Non-compete: If an employer cannot meet what is required for enforcement under Texas law, enforcement of the non-compete may be challenged in a lawsuit or through an administrative procedure if the non-compete was included in a post-employment termination severance package.

How Non-Compete Laws Affect Employers

The impact of Texas non-compete laws on businesses must be understood before entering into an agreement with an employee. Texas non-compete laws and judicial interpretations influence the formation, enforcement, and violation of a Board’s non-competition agreement with its management level employees.
Texas non-compete laws allow an employer to impose restrictions on an employee’s ability to compete with the employer, or not to compete in a narrow geographic area or over a narrow period of time. State courts discourage excessive restrictions on post-termination competition, but Texas courts have enforced reasonable restrictions despite employees’ hardships.
Leaving aside technical issues regarding the requirements for enforcement of a non-competition agreement apart from consideration, the first question we often hear from employers is whether Texas non-compete laws apply to its low level or rank and file employees. Well, assuming that your business is an enterprise based in Texas and the applicable non-competition agreement is governed by Texas law, the answer is "yes," almost certainly. That is, a non-compete can run for years after termination of employment, includes not only personal compensation but also compensation to any of the employee’s family members, and includes not only similar employment for the terminated employee but also other entities controlled by the terminated employee or those entities formed by him or her.

Seeking Professional Help: Consultation and Legal Counsel

Obtaining qualified legal advice is the best way to make an informed decision regarding your situation. Getting the facts with legal counsel can be the difference that protects your reputation and livelihood from years of expensive litigation. Most disputes, and some litigation, can be avoided by taking steps before signing a noncompete agreement. In the long run, this could save employers money, and save employees years of fighting a restrictive covenant .
We frequently work with employers and individuals to negotiate, draft, review, and enforce non-compete agreements, as well as to understand their rights and obligations related to trade secrets, non-solicitation restrictions and other restrictive covenants. In the event of an actual or potential dispute, the lawyers at Jackson Spencer will provide effective and assertive representation in pursuing or defending against a non-compete dispute in Texas and across the nation.