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Non-Compete Clauses in Texas

There exists a misconception that, in Texas, a non-compete agreement is seldom worth the paper it’s written on.  Such is not the case.

Non-compete agreements in Texas are governed by the Covenant Not to Compete Act (Section 15.50 of the Texas Business and Commerce Code).  Pursuant to the Act, a non-compete is enforceable if: (1) it is ancillary to or part of an enforceable agreement at the time the agreement is made; and (2) to the extent it contains reasonable limits aScreen Shot 2014-11-24 at 9.59.35 AMs to geography, time, and scope of activity.

As previously stated, the non-compete must be ancillary to or part of an otherwise enforceable agreement.  Consideration is key here.  For example, a contract for at-will employment, by itself, is not an otherwise enforceable agreement because neither side is bound by it.   With that stated, in determining what constitutes consideration, courts in Texas will consider not just the provision of money, but also things such as trade secrets, confidential information, or goodwill.  Thus, consideration exists, for example, in instances where an employer promises the provision of confidential information and subsequently provides the same (before seeking to enforce the covenant).

A further aspect of enforceability is whether the agreement has reasonable limits as to scope, geography, and time.  While that review is contextual, a duration of 1 to 5 years is generally considered reasonable.  Geographic scope is usually considered reasonable if it accounts for the prior area in which the employee worked.  In addition, the scope of the covenant should not exceed the scope of the employee’s duties while with the employer.

The absence of reasonable limits may render the covenant unenforceable as written.  However, even if limits are unreasonable, the Covenant Not to Compete Act still provides some measure of relief to a party seeking enforcement.  Specifically, in the event of unreasonable limitations in the agreement, a court addressing the same is tasked with reformation of the covenant so as to create reasonable limitations.

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