As a business leader, your primary concern is protecting the company you have worked so hard to build. Non-compete agreements are just one tool you have to accomplish that goal. By strategically using non-compete agreements in Texas, you can prevent former employees from taking the knowledge, skills, and innovative ideas they learned from your company and using them to benefit a competitor.
Still, the enforceability of non-compete agreements is not solely at the discretion of a business. Regulatory frameworks govern them at the federal and state levels. Texas business owners must understand these regulations in order to protect their business at a time when they need it most.
Non-Compete Agreements on a Federal Level
Business leaders say that non-compete agreements are essential to maintaining a fair market environment. However, employee disputes about these agreements have led to severe scrutiny from the federal government. In recent years, the Federal Trade Commission (FTC) has attempted to unilaterally ban non-competes, citing concerns about wage suppression, hindrances to new business creation, and significant harm to employees.
Recent judicial decisions have blocked the widespread enforcement of such a rule, but employers should still be aware of the FTC’s efforts. On a federal level, the FTC has the power to bring individual enforcement actions against businesses it believes are treating employees unreasonably.
That issue of “reasonableness” is at the heart of Texas law surrounding non-compete clauses and agreements.
Are Non-Compete Agreements Enforceable in Texas?
When it comes to non-compete laws, Texas lawmakers continue to ensure they are enforceable. However, Subchapter E of the Texas Business and Commerce Code places certain restrictions on them.
Valid Consideration
To comply with non-compete laws in Texas, you must offer the employee something of value in return for signing the agreement. This can include a promotion, specialized training, or even company stock options.
Ancillary Status
You must ensure that your Texas non-compete agreement is part of an “otherwise enforceable agreement,” such as being attached to a broader business contract. It must also meet these criteria:
- The valid consideration given to the employee must “give rise to” (be the reason for) the employer’s interest in restraining the employee.
- The agreement must be designed to enforce the employee’s consideration or return promise.
The purpose of the non-compete agreement should not be simply to restrict the employee but to protect the business when it has given or provided access to something of value.
Protection of Legitimate Interests
A court of law may refuse to enforce a non-compete agreement that it finds frivolous. In order to prevent this outcome, the agreement must protect access to knowledge or information that could hurt the business in some way if it is shared. This can include:
- Trade Secrets: Proprietary devices, techniques, strategies, or otherwise economically valuable information not generally known to the public
- Client Relationships: The customer base the business or employee developed during their tenure in the organization
- Confidential Information: Information that has not been made public by the company, such as financial records and customer lists
- Specialized Training: Education that provides the employee and the business with a competitive advantage
- Business Goodwill: The reputation the business has built in the industry, in the community, or among its customer base.
This rule requires you to justify the restrictions you impose on an employee through the non-compete agreement.
Reasonable Limitations
As an employer, you have the right to protect your interests with non-compete agreements. However, the courts expect that a non-compete clause will have reasonable limits when it comes to:
- Time: The employee must not be restrained for longer than necessary to protect business interests.
- Geographic Scope: The agreement cannot be enforced beyond the area where the employee worked or where the business has a significant customer base.
- Business Activities: The agreement should be limited to activities within the scope of the employee’s role or training.
These limitations allow your business to get the protection it needs without imposing more restrictions than necessary.
Wondering whether your non-compete contracts meet enforceability criteria? Call (713) 666-1981 to get your pressing non-compete questions answered with a phone consultation from a business attorney at The Weisblatt Law Firm, PLLC.
What Do Texas Courts Consider When Evaluating Non-Compete Agreements?
Employee Position and Access
Entry-level employees who don’t have access to sensitive or confidential information and haven’t received specialized training generally don’t need non-compete agreements. A company may find it hard to justify that restricting employees below the management level is necessary to protect its legitimate business interests.
Industry Norms
What is expected in terms of limits on time, geographic scope, and business activities varies based on the industry. The courts will likely consider industry norms when determining whether the non-compete agreement is “reasonable.”
Public Policy
In general, Texas courts favor an environment where there is competition between businesses because this competition can benefit citizens and the broader state economy. For that reason, your non-compete agreement may not be enforceable if it places too many limits on economic activity.
Best Practices to Protect Your Business With Texas Non-Compete Agreements
As you consider the best way to implement non-competes in your business, consider the following tips:
- Draft clear and specific agreements that limit time, geographic location, and activity restrictions to only what is necessary.
- State how distance and area limitations are calculated and determined when setting geographic boundaries.
- Tailor agreements to the needs of your industry and your organization.
- Justify any restrictions prior to drafting the agreement to show that you are protecting legitimate business interests.
- Consider the best interests of the public when limiting business activity that may restrict access to beneficial information.
- Avoid behavior that may negate non-compete agreements, such as labor law violations, misrepresentation of practices, or failure to deliver agreed-upon value.
Keeping these best practices in mind gives you the best chance of drafting non-compete agreements that will hold up in a court of law.
Take a Proactive Approach With Help From a Texas Business Lawyer
Non-compete agreements can protect your business and intellectual property, but only when their use is justified and they are drafted correctly. An experienced business attorney can offer peace of mind by drafting a non-compete clause that meets all enforceability criteria according to Texas law.
Don’t leave non-compete agreements to chance. Call (713) 666-1981 to get a free phone consultation with a knowledgeable business attorney at The Weisblatt Law Firm, PLLC.
Attorney Andrew Weisblatt
Mr. Weisblatt has practiced continuously since becoming licensed in 1992 and has represented businesses ranging in size from one person start-up ventures to multi-national corporations employing hundreds of people in multiple countries. From 2005 through 2009 Mr. Weisblatt was in-house counsel and chief operating officer of a multi-national corporation in the steel products industry. That in-house position provided valuable insight into how businesses work and what they actually need from their lawyers – both in-house and outside counsel. Attorney Bio
