Covenants Not to Compete

Covenants not to compete, or non-compete agreements, are governed by Texas Business and Commerce Code Section 15.50. Generally, it requires that for a non-compete agreement to be enforceable, it must be “ancillary to or part of an otherwise enforceable agreement,” and the agreement must be reasonable. In terms of reasonability, the Court will look to the length, geographical area, and scope of employment activity to be restrained.

Determining whether a non-compete agreement is enforceable is a two-step process. First, it needs to be determined whether the contact is “otherwise enforceable,” in other words, whether it is supported by consideration. For any contract to be enforceable, both parties must give consideration. Consideration comes in many forms, but at its most basic form it requires mutual promises to do or not do something. From the employer standpoint, it can include disclosing confidential information or specialized training.

Before the Texas Supreme Court issued the Sheshunoff opinion in 2006, at-will employees trying to get out of these agreements successfully made the argument the contracts were “illusory” and therefore unenforceable because they could be fired at anytime. This changed with the Sheshunoff opinion, where the Court held the contracts are not illusory if the employer actually provided the consideration they promised, like specialized training or confidential information.

In opinions following Sheshunoff, the Texas Supreme Court has held the consideration provided by the employer must be “reasonably related” to the employer’s interest in restraining competition, such as access to trade secrets, confidential information or business goodwill. In one instance, the Texas Supreme Court held that stock options were valid consideration in protecting a company’s goodwill.

Assuming the non-compete is enforceable based on the above analysis, it still must be reasonable as to time, geographic area and the scope of employment activity restricted. The Court will be looking to make sure the non-compete restriction is no greater than necessary to protect the employer’s business interest. In its evaluation, the Court will consider the employee’s hardship in enforcing the agreement against the employer’s need for protection.

Whether a non-compete agreement is enforceable is determined on a case-by-case basis. The answer to that question will typically not be black and white, instead depending on the facts specific to the case. That’s why contacting a noncompete lawyer in Austin, TX from Gray Becker, P.C. may be in your best interest to better understand your specific case today.