The Texas Covenant to Compete Act, and the cases decided under it, set out the requirements of an enforceable noncompetition agreement. The act provides that for a noncompetition agreement to be enforceable, it must:
be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made,
contain reasonable limitations as to: time, geographical area, and scope of activity restrained, and not impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer.
What is an “Otherwise Enforceable Agreement?”
The first determination is whether the noncompetition agreement is “ancillary to an otherwise enforceable agreement.” If not, end of discussion – the noncompetition agreement is not enforceable. The trick is in determining what is an “otherwise enforceable agreement”. In the employment context, an at-will employment contract (where the employee can be fired at any time and can quit at any time) usually cannot be an “otherwise enforceable agreement” because either the employer or the employee can terminate employment at any time, for any reason. Nevertheless, in the proper circumstances, an at-will employment agreement can create the required “otherwise enforceable agreement”. For example, an employer’s giving an employee confidential and proprietary information or trade secrets in exchange for the employee's promise not to disclose them, may create the “otherwise enforceable agreement”. For this to work, the employer must actually provide information that constitutes actual trade secrets or confidential information.
A trade secret may consist of any formula, pattern, device, or compilation of information that is used in a person’s business and which gives an opportunity to obtain an advantage over competitors who do not know or use it. Items such as customer lists, pricing information, client information, customer preferences, buyer contacts, market strategies, blueprints, and drawings have been shown to be trade secrets.
Is the covenant not to compete “ancillary” to the otherwise enforceable agreement?
Once you have an “otherwise enforceable agreement”, the covenant not to compete must be “ancillary” to it. There are two requirements for a covenant not to compete to be “ancillary” to an otherwise enforceable agreement:
the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer's interest in restraining the employee from competing; and the covenant must be designed to enforce the employee's consideration or return promise in the otherwise enforceable agreement.
If both requirements are not satisfied, the covenant cannot be ancillary to an otherwise enforceable agreement and will not be enforceable.
Does the Noncompete Agreement Provide Reasonable Limitations?
Merely satisfying the foregoing is not enough. The noncompetition agreement must also be reasonable as to:
geographical area
time of restraint
scope of activity restrained
What constitutes a reasonable area generally is considered to be no greater than the territory in which the employee actually worked while in the employment of the employer.
Regarding the time of restraint, depending on the context, Texas courts have upheld restrictions ranging from two to five years as reasonable, but many practitioners feel that in the fast-moving area of technology, anything greater than a year may be too long, with six months being more likely to be enforced.
The scope of activity restrained should be limited to the specific business in which the employee worked for the employer. A covenant that prohibits soliciting customers will probably not be enforced if it is not limited to those customers with whom the employee worked or had contacts.
For additional information, see the accompanying article: Benefits of a Nondisclosure Agreement.
This informational memorandum from the law offices of Thomas D. Solomon, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the area of covenants not to compete. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the pertinent elements of such matter. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.
