If you signed a non-compete agreement, you may end up feeling stuck unable to leave or work elsewhere in your preferred field. Rarely is that truly the case, unless you received specialized training in return for an agreement not to compete, access to highly proprietary confidential information (trade secrets, source code, client details, etc.), stock ownership, or sold a majority stake of your own business in return for a promise not to open another similar business for a reasonable period of time, geographic location, and scope. Even then, there must be true economic harm—threatened or actual—for a noncompete to have any practical impact at stopping you from a pursuit.
Non-compete agreements exist to prevent exploitation of a company’s work to develop its business, by preventing competitors from leveraging that investment at less cost to simply take customers away or stop those with special knowledge provided by a company from turning around to use it in competition.
Although such restrictions have valid purposes, they are commonly used to control employee mobility rather than protect real competitive concern, and are regularly misunderstood by all involved. Companies who try to use a noncompete for illegitimate purposes may find themselves in for quite a surprise since there are many ways in which one can easily be declared unenforceable or void, and an employee required to defend against an overbroad or invalid noncompete can recover attorneys’ fees (while the employer cannot even if prevailing against a former employee, except in limited circumstances).
What makes a non-compete valid in Texas?
The public policy of Texas favors a strong business environment and healthy competition, but also the freedom of its citizens to work for whomever they can or want.
Nonetheless, the Legislature carved an exception out of its antitrust law—the Texas Free Enterprise and Antitrust Act of 1983—to allow for reasonable restrictions on the ability to work for a competitor or engage in direct competition after receiving certain benefits of employment. See Tex. Bus. & Comm. Code § 15.50. There are several key requirements that must be met for such an agreement to be valid though:
1. There must first, in every instance, be a separate “enforceable” agreement beyond the noncompete restriction itself. In other words, a standalone noncompete procured in return for a sum of money or other compensation is simply void as against Texas public policy. That is a naked restraint that will not be enforced. One example of that not fully recognized by many employers is a noncompete signed only at time of severance with no other legitimate related provisions, such as providing for confidentiality. There must be some other valid agreement between the parties before a noncompete can be valid, such as an agreement at the outset to provide specialized training or access to proprietary information.
An employment agreement for a fixed term that cannot be ended without “good cause” is itself an example of a separate enforceable provision, along with things like an agreement to sell your business or its key assets, a franchise arrangement, the licensing of intellectual property, or an ordinary non-disclosure agreement.
On the other hand, at-will employment by itself is not an enforceable contract in Texas since either party can terminate at any time and for any non-protected reason. That does not mean a noncompete entered into by an at-will employee (or independent contractor) is never valid though. Again, promises by an employer to provide specialized training or access to proprietary information that the employee agrees not to disclose can itself be the separate enforceable agreement to support a noncompete even if it occurs only in connection with at-will employment. Thus, to be clear, there is no prohibition in Texas against a noncompete for at-will employees; there just must be something more than the fact of work provided, ordinary pay or benefits, or generalized job training.
2. The noncompete must also be “ancillary to or part of” the separate enforceable agreement. That phrasing is quoted directly from the statute but far from clear on its own. Courts in Texas have construed it to mean that the extra thing given by an employer (e.g., specialized training, access to confidential information, stock options) must be related to an interest legitimately worthy of protection by a noncompete restriction—such as to help foster goodwill with clients or protect trade secrets—with the restriction further designed to prevent a breach of the person’s obligations in that regard.
An example of something which does not meet this test is a mutual agreement by both employer and employee to provide two weeks’ notice prior to quitting or termination, since that really has nothing to do with protecting competitive interests as opposed to regular business staffing concerns.
3. A restriction must be “reasonable” in terms of time, scope, and geography. A noncompete is valid only if tailored to the situation, which is why the terms must be reasonable. Restrictions on time, scope, and geography are typically what matter most to an employee required to sign a noncompete, and the burden of those must be commensurate with the extra thing provided to the employee in order to be valid: i.e., the level of training, critical nature of confidential information, amount of stock ownership, etc. The less central an employee or other person is to the business’s goodwill or ability to develop its business and compete, then the lesser restrictions that can be justified as “reasonable.”
In general, low-level employees should be restricted only for a period of months up to a year (if at all) in a narrow geographic band covering the same scope of duties in which they worked for the company, while senior executives can be barred for up to a few years on even a nationwide basis (if the business operated on that scale) for all its activities in general.
Founders selling a business they created are subject to perhaps the most onerous restrictions—up to six years has been approved by courts before—to prevent the seller of a business from turning around and devaluing precisely what they just sold by engaging in competition or taking their old customers with them. Unlike ordinary employees though, a person selling their business usually has leverage to negotiate compensation and terms that are acceptable on the front end. Indeed, if ever ending up in court over a noncompete outside of the employment context, Texas law flips the burden and puts it on the restricted former business owner to show why what they agreed to as a noncompete is not reasonable.
What is my exit strategy?
Anyone subject to a noncompete who is seriously considering other opportunities should first sit down and take a close look at the language of their restriction. There is no standard form of what is “reasonable” since it depends on facts concerning the employee, the business, their role, and information or training provided (or other considerations noted previously above). Persons in technology, sales, and business development naturally can expect to have more information that can subject them to making a noncompete valid for some reasonable period of time and/or location. An employee working only in a support or other type of role has far less to be concerned about though. The language of your apparent restriction may be quite broad either way because companies tend to use a single form of noncompete for everyone. That is not a good practice for most companies and routinely runs the risk of being over- or under-inclusive. No matter your role, however, unless you are seeking to work in the same exact job description for a direct rival of your current company, the restrictive language of your noncompete may not actually be applicable once you undertake a close read of the language.
Keep in mind also that noncompete agreements are an exception carved out of the strong Texas policy that favors competition in all respects—including competition in the labor markets—so courts should scrutinize the language of a restriction and resolve any ambiguities in your favor (so long as you are not one of those fortunate enough to be able to negotiate the terms upfront, which is true for business owners and also many high-level executives). If you are seeking to work for another company in an unrelated or tangential field, or at a different level of the market even if in a related field (such as with a vendor or customer), then it is often difficult for the employer to legitimately claim there is a real threat of loss to its own business. In fact, bringing those connections to a vendor or customer often stands only to improve the business of your prior employer. Companies trying to enforce a broad noncompete in that type of situation likely are doing so only out of spite or a desire then to demonstrate control to other remaining employees, which is not at all “reasonable.”
If you remain concerned after reviewing the language, you should then step back and take stock of the bigger picture of your role in the organization. A fairly low- or mid-level employee being made subject to any noncompete at all does not often pass the “smell” test, and so is less likely to be enforceable (at least not to the extent stated in the document). It may be that your employer would not seek to hold you to a noncompete either given the litigation costs that involves—although many are not above still making threats or routinely sending cease-and-desist letters—especially if your role is rather fungible, does not deal directly with customers, or the information you received is not even close to the “secret sauce” variety. (And, of note, if you were let go by your employer rather than quit, it is harder for a noncompete to be enforced since clearly you were not all that essential to the past employer’s business.)
On the other hand, if you are a senior executive or had some other significant role in developing and maintaining business or sales for the company—with relationships that could easily follow you to another employer—you should tread carefully. It is best to have an experienced litigation attorney review and advise you on the risks in that instance, and prudent to make sure your new prospective employer is fully informed of the noncompete. Some will hire you for a non-competitive role to start or provide additional compensation to make up for a “sit out” period, or even be willing to accept the risk of litigation they may face themselves from the competitor (for which you would want to negotiate indemnification for yourself), with it quite possible they may have insurance coverage if the noncompete claim is meritless.
No matter your situation, there is usually a pathway out of or around a noncompete.
There are other considerations beyond the face of what may appear to be a valid noncompete that can impact its legal enforceability as well, such as:
- Whether fraud or undue coercion was used to get you to sign the document.
- Whether the training or information recited as the reason for a noncompete was not actually ever provided to you, or something you already were provided or knew at the time it was signed.
- The conduct of the employer throughout the process; if it has any “unclean hands” along the way, then a court need not provide equitable relief (such as an injunction).
Good News for Employees
Most judges are rightfully reluctant to enforce noncompete agreements when an employer pursues legal action against an ordinary employee—particularly when the worker was not a high-level executive and enforcing the noncompete would be substantially burdensome—and will require strict proof of actual harm to the prior employer if the noncompete is not fully enforced at the outset. The court at all times must interpret how the qualifier “reasonable” applies to you and your situation – and that can be very subjective. Further, courts in Texas also have the ability to reform (or, essentially, rewrite) a noncompete if it is overbroad or an unusual burden on the ability to work. For example, if you worked in Dallas with clients limited to the local area only for your past employer, a noncompete preventing you from working nationwide (or even statewide) for a competitor would likely be deemed too restrictive and can be reformed as such to allow you to continue working, if even ever sought to be enforced in court.
If a noncompete restriction is causing you concern, it may be well worth your time to begin the consultation process with an experienced commercial litigation attorney who can help walk you through the risks, advise on the numerous circumstances that can change the analysis and outcome, and provide representation to you in which you may be able to recover attorneys’ fees if you end up in a dispute over the terms of a noncompete or its enforceability.
Contact Wright Commercial Litigation if you are interested in requesting an initial consultation regarding your noncompete matter.