The Covenants Not to Compete Act (the "Act") governs the enforceability of non-competition and non-solicitation agreements. To be enforceable under the Act, an agreement must (1) be ancillary to an otherwise enforceable agreement at the time the agreement is made and (2) contain reasonable limitations as to time, geographic area, and scope of activity that only restrain the promisor to the extent necessary to protect the promisee's good will or other business interest. Tex. Bus. & Com. Code § 15.50(a).
When determining whether the first threshold has been met, courts evaluate whether the consideration reflects legitimate business interests. The non-compete agreement should contain mutual, non-illusory promises that benefit each party. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 773 (Tex. 2011). To increase the likelihood of an agreement being upheld, the employer's consideration should relate to an interest worthy of protection. This consideration should also support the primary purpose of the non-compete. When an employee is restricted from disclosing confidential information, consideration most commonly takes the form of confidential information, or the promise of such in the future, being given to the employee. Similarly, the employee's consideration is the consent to be bound by the non-compete agreement.
Note that the consideration does not have to be express. The Texas Supreme Court has upheld implied consideration where the nature of the employee's work necessitates receiving confidential information in order to perform his/her duties.
The second requirement for a non-compete to be upheld is reasonableness of time, area, and scope. Employers should be prepared to show why these limitations are reasonable. For example, a one year bar on competition may be inappropriate if the information is of a type that changes constantly. However, one to two year covenants will be upheld if shown to be legitimately necessary and reasonable under the circumstances. A prolonged restriction on competition may be appropriate where an employee has confidential information on a company's four year plan, for example.
Generally, non-compete agreements that restrict areas of competition in geographic areas where the employee did not work are overbroad and unenforceable. Even if the company itself does business in those areas, the chances of the agreement being upheld are diminished if the employee did not themselves work in that geographic area. A non-compete that restricts a former employee from competing in the entire nation when the employee only worked in the southwestern portion of Florida was found to be unreasonable. CDX Holdings, Inc. v. Heddon, 2012 U.S. Dist. LEXIS 86041, *27 (N.D. Tex. Mar. 2, 2012).
However, if the defendant, while employed, had a nation-wide, or world-wide presence, the reasonableness of restrictions mirroring that territory (however big) are appropriate. Id.
Finally, the activity that a non-compete agreement restricts must correlate with the activities of the employee. The agreement should not blanket every possible activity that the company performs, but should limit the restriction to just the work of the employee. Evan's World Travel v. Adams, 978 S.W.2d 225, 233 (Tex. App. Texarkana 1998).
In recent decisions, Texas courts have been more willing to uphold non-compete agreements that strictly comply with the Act. Adhering to the three explicit requirements of an enforceable non-compete will increase the chances of an agreement being upheld. Knowing the extent to which an agreement should be limited and what sort of consideration may be given can protect an employer from both a vengeful former employee and a litigious former employer of a new hire.
- The consideration for the non-compete reflects a genuine business interest
- The time limitations are appropriate
- The geographical region is not too broad
- The restricted activity is within the duties of the employee