Many employees must sign non-compete agreements with their employer as a condition of their employment. Despite the Biden Administration’s stated intent to ban these agreements, and the Federal Trade Commission’s proposed rule doing so, many workers are still subject to the terms of these agreements within their employment contracts.
One common question employees ask when they are about to change jobs is whether the non-compete agreement they signed is binding. The answer is that it depends on the scope and extent of the language. Texas courts will uphold non-compete agreements under certain circumstances.
Texas Law Allows Some Non-Compete Agreements to Be Enforced
Whether a non-compete is enforceable is most often an issue decided under state law. Texas has a specific state law that addresses non-compete agreements. There is nothing in Texas law that says that a non-compete agreement is per se invalid. To the contrary, Texas law allows non-compete agreements subject to the following:
- They need to be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made; and
- They need to be reasonable, not imposing a greater restraint than is necessary to protect the goodwill or other business interest of the employer
An employment agreement for an at-will job could count as “an otherwise enforceable agreement,” meaning that an employer could require a non-compete as part of accepting a job offer.
Whenever you see the word “reasonable,” you should know that the court will decide the case based on its specific circumstances. Although courts do not necessarily like agreements that restrain trade, there are circumstances in which these agreements are upheld.
Under Texas precedent, courts will look to see whether there is a legitimate business interest for a non-compete agreement.
Legitimate business interests could include:
- Business goodwill
- Confidential or proprietary information
- Trade secrets
- Customer information
- Specialized training
For example, if your employer put you through an extensive training program at the start of your job, it could require you to sign a non-compete agreement as a condition of your employment. There are broad circumstances under which a non-compete agreement could be upheld; however, an employer does not have carte blanche to draft as broad of a non-compete as it wants as a way to protect itself.
Courts Will Decide Non-Compete Cases Based on Specific Circumstances
Texas courts will look at these agreements on a case-by-case basis. While some judges are skeptical of these agreements when they are challenged, on the other hand, courts also recognize that companies have a legitimate interest in protecting their trade secrets and their own intellectual property. If a non-compete clause is narrowly tailored and is primarily aimed at legitimate business interests (like the ones listed above), a court may enforce the agreement. There will be scenarios in which these clauses will be enforced, preventing employees from taking certain jobs.
Where Texas Courts May Draw a Line
Texas courts will be more likely to strike down a non-compete agreement when it imposes a broad prohibition on an employee that prevents them from taking any kind of employment in their field or prevents them from selling to a large number of prospective customers or clients. In these cases, a court may view the agreement as an impermissible restraint on trade.
For example, when a company tried to enforce a non-compete agreement that restricted an employee from contacting any type of prospective client, the Texas Supreme Court found the non-compete was unreasonable and overbroad because it applied to clients who first became clients after the plaintiff left his old employer or with whom he had no contact while he worked for that employer.
Explaining what might be the line between a permissible and impermissible non-compete agreement, in a later case the Texas Court of Appeals ruled that “a prohibition against contacting existing customers does not necessarily equate to a prohibition against contacting customers with whom the former employee had no dealings,” and that restricting the solicitation of current customers was not automatically unreasonable.
Non-Compete Agreements in Other Contexts
A non-compete is more likely to be enforced under other circumstances. For example, if you sign a non-compete agreement in connection with the sale of a business, a court would be more likely to uphold it. However, there may be federal antitrust concerns if the buyer of the business asks you to sign an agreement that is overly broad. The FTC recently issued a consent order that struck down a non-compete that stretched into areas other than the one directly impacted by the sale.
What Employees Can Do
As an employee, you may not have to take your chances by ignoring a non-compete and then accepting other employment, hoping that your employer does not sue you. You may be able to negotiate an end to the agreement. However, if the employer is not being reasonable, there may be nothing else that you can do other than to defend yourself if and when they file a lawsuit.
Employees can only hope that the FTC’s proposed rule banning many forms of non-compete agreements will take effect. Its proposed rule would invalidate existing non-compete agreements and would preempt state laws that conflict with it. The FTC has already taken enforcement action against several companies for broad non-compete agreements that are violations of federal competition laws. Therefore, the tide may be turning on state laws like Texas’ that permit non-competes if certain requirements are met.
Still, employers would be able to use language in employment agreements that would serve to protect trade secrets. The language must still be narrowly tailored, and it cannot bar the employee from seeking employment elsewhere. One can expect that if the FTC’s rule goes into effect, employers will try to find creative language to simulate and mimic a non-compete clause.
Nonetheless, unless and until the FTC’s rule is finalized, Texas state law still applies. You may still have a valid worry that your employer could come after you if you violate the non-compete agreement you signed. For more employment advice, contact Berg Plummer, Johnson & Raval, LLP to find out your options.