In Texas, there are two elements that must be present when determining the validity of non-compete agreements: (1) the non-compete agreement must be ancillary to an otherwise enforceable agreement and (2) the non-compete agreement must contain reasonable limitations that are not too burdensome.
Ancillary to an otherwise enforceable agreement
In regards to the first element, the Texas Supreme Court has ruled that the non-compete agreement and the consideration do not have to be given simultaneously. If the employer makes a promise to provide confidential information or specialized training in exchange for a non-compete agreement, as long as the employer performs the promise, then this is viewed as sufficient consideration. Alex Sheshunoff Management Service, L.P. v. Johnson, 209 S.W.3d 644, 655 (Tex. 2006). The next step is to figure out if the non-compete is designed to protect the interest of the business. The Texas Supreme Court has recently ruled that there only be a “nexus” between the covenant not to compete and the business interest being protected. Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011). This overturns the strict interpretation the court formally implemented, which stated that the non-compete agreement had to “give rise” to the employer’s interest. Since the Court has been more flexible and allowed the expansion of non-compete agreements to be part of an otherwise enforceable agreement, the analysis will likely come down to the reasonableness of the limitations.
Reasonable Limitations
The factors used to determine whether a non-compete agreement is reasonable are (1) time, (2) geography, and (3) the type of activity prohibited. Time should be limited only to the amount of time necessary to legitimately protect the employer’s interest. Each case is different, but generally, two years has been viewed as reasonable. When dealing with geographical restrictions there are two different issues to consider: (1) the geographical area in which the company does business and (2) the area the employee preformed his duties or limitations as to certain customers. For example, if the business is nationwide then a national restriction would be reasonable. The court has ruled that the activity being prohibited must bear some relationship to the activities of the employee during his underlying employment.
Takeaways
1. Your company should review its non-compete agreements and consult an attorney to make sure that the agreements fall within the law.
2. Since the Texas Supreme Court is more flexible when analyzing whether ancillary to an otherwise enforceable agreement, your company should focus on how the limitations are drafted to make sure they are deemed as reasonable.
Your company should focus on time, geographical restrictions, and activity being prohibited, and decide which if not all, would be best to protect the business interest.
Mike H. Bassett is a Senior Partner at The Bassett Firm. Mr. Bassett’s practice focuses on Insurance Defense, Transportation Litigation, Products liability, Premises Liability, and Employment Litigation. He received his B.B.A from the University of Texas El Paso in 1984 and his J.D. with distinction from St. Mary’s School of Law in 1987. Mr. Bassett was voted a Texas Super Lawyer in 2006.
is a Law Clerk at The Bassett Firm graduated with high honors from New Mexico State University. He is currently in his second year at Southern Methodist University Dedman School of Law in Dallas, Texas.
