Non-compete clauses in Texas

Texas state law has long held that restrictions on where and when someone can work are not valid. A series of court cases made it clear that this included non-compete clauses that would have been perfectly valid in other states. It was generally believed that a non-compete clause could not be enforced in the Lone Star State.

Recently, specific requirements and situations for a non-compete clause to be valid under Texas law have been clarified. It is possible to write one that protects your business from competition from key employees, but it has to be reasonable.

The standards under the law

All non-compete clauses in Texas are governed by the Covenants Not to Compete Act  which spells out two very specific requirements. In order to be a valid non-compete it has to satisfy both of these.

The agreement must be “ancillary” to another enforceable agreement. This means that it cannot stand alone, and has to be a part of a general agreement on employment terms and benefits. In practice, it has also been held by the courts that the employee held to a non-compete has to have some clear benefit beyond simply being employed, such as cash payments or stock options.

The agreement also has to be “reasonable.” It cannot bind an employee for a length of time longer than they worked for the company, nor can it limit all activity in areas not clearly related to their employment. What exactly is “reasonable?” It’s obviously in the eyes of the beholder. But it suggests that a good non-compete is specific and not too restrictive.

The problem with other states

Most other states have allowed non-compete clauses under their laws. Traditionally, interpretation of existing law considered non-compete contracts written in other states not valid in Texas. That has not been tested in recent years, however, in light of the new standards.

If you are considering hiring an employee from another state who is subject to a non-compete clause it may well be valid.  You should consider it as such and expect their former employer to seek to have it enforced in the state in which it was drafted.

 

Drafting a good agreement

Because of the specific requirements, it is vital to have a business lawyer with experience draft any non-compete clause. Making sure that it is enforceable under Texas law is primarily a matter of being reasonable more than anything else. Defining what that means in legal terms is not difficult but it takes specific knowledge of your business needs as well as Texas law.