This is the second of two posts discussing the enforceability of executive non-compete agreements in Texas. In Part I, we discussed the basics of a non-compete agreement as well as the first prong of Texas’s two-part analysis to determine their enforceability.
In this second part of the analysis, we will see how Texas courts evaluate the duration, geographical limitations and scope of the non-compete clause—the three keys to enforcing non-compete agreements in Texas.
A non-compete agreement must specify a time period during which the employee agrees not to engage in certain activity. Individual agreements and situations vary, but Texas case law provides ample guidance that one to five years is the approximate period of time that may be considered reasonable.
Still, the analysis will be based on the facts on a given case—a balance between the time required to protect the interests of the employer without being unnecessarily oppressive on the employee–so this timeframe is just a guide.
2. Geographical limitation
A determination of whether a non-compete agreement is reasonable in its geographical limitations depends greatly on the type of business involved. Remember, in order to be reasonable under § 15.50 of the Texas Business and
Commerce Code the restriction must “not impose a greater restraint than is necessary to protect the goodwill or other business interest” of the employer. An international business, for example, would have an easier time defending a worldwide geographical restriction than a company that only does business in Austin.
A non-compete agreement without any stated geographical area whatsoever could be at risk of being found unenforceable, but even this isn’t a bright line rule. For example, a Texas federal court has found a non-compete clause’s restriction of communications only with the employee’s former clients to be “a reasonable alternative to a geographical limit.”
The final part of the analysis looks at the scope of activities restricted by the non-compete agreement. In order to be found reasonable, the activities generally should be limited to those that the employee performed for the employer. An industry-wide restriction that would prohibit an employee from working in the same industry as that of the employer would likely be too broad and found unreasonable.
If Non-Compete Restrictions Are Found Unreasonable
In Texas, if a court finds the restrictions in a non-compete agreement unreasonable, Texas Business and Commercial Code § 15.51 allows the court to “reform the non-compete to make it reasonable.”
At this point, the employee loses the right to damages, however, and can only obtain injunctive relief to stop the employer’s actions.
Final Reminder: The Importance of Facts
It cannot be overstated how fact-driven the court’s analysis of these three factors will be in a determination of whether a non-compete complies with Texas law and is enforceable. Every employment situation is different.
If you have questions or concerns about your non-compete agreement, please contact Shaw Cowart for a consultation.