Texas employment law: the basics of covenants not to compete

Sometimes as a term of employment, an employer will require that a new employee enter into a noncompete agreement, also called a noncompetition agreement or covenant not to compete. A noncompete requires that should the employee leave the job, he or she will not work in a competing business for a certain amount of time within a certain geographical area.

Legal counsel for noncompete issues

It can be extremely important for any potential employee to consult with an experienced employment law attorney about a noncompetition agreement being proposed by an employer. The lawyer can provide advice about whether the terms of the agreement are reasonable, whether to sign the agreement or whether to negotiate for a revised noncompete.

Noncompetition agreements in Texas

A noncompetition agreement falls between two principles favored in U.S. law: the freedom to contract and disfavor of restraint of trade and competition. In Texas, a contract that restrains trade or commerce is illegal, but Texas law carves out an explicit exception for reasonable covenants not to compete.

The Texas noncompete statute is very specific:

  • A noncompete to be valid must be ancillary to or part of an "otherwise enforceable agreement"; this could be, for example, an employment contract or confidentiality agreement.
  • The noncompete is only enforceable to the "extent that it contains limitations as to time, geographical area, and scope of activity to be restrained" that are reasonable.
  • The terms of the noncompete must require the minimum of restraint needed to "protect the goodwill or other business interest" of the potential employer.

(Such covenants in the medical field have their own legal standards.)

Legal remedies for noncompete breaches

Texas law further provides that an employer may sue an employee who breaches a noncompete (such as by leaving employment to work for a direct competitor within the geography and scope of the noncompete) for damages, an injunction or both. However, if the court finds the time, geographical restrictions or scope of activity sought to be restrained are unreasonable and greater than needed to protect the employer's goodwill or other business interest, the court is to "reform the covenant" to make the restrictions reasonable and not any greater than necessary to protect the employer's interests. The court must then enforce the revised noncompetition covenant and the employer may not get money damages, only injunctive relief.

On the other hand, if the employment was for "personal services" and the employee can prove that the employer knew from the start that the terms were unreasonable and excessive, and still tried to enforce those terms, the court can order the employer to pay to the employee the costs and reasonable legal fees for defending the suit to enforce the noncompete.

This article introduces the Texas law concerning noncompetes, but the ins and outs of the law in practice are complex. Anyone facing a real issue regarding one should consult with an employment lawyer about whether to sign, whether accepting new employment would violate an existing one and how to defend against a suit for breach. Kell A. Simon Law Offices in Austin, Dallas and Houston is a full-service employment law firm that can provide just such advice.