Because the Federal Trade Commission is attempting to generally ban noncompete agreements throughout the United States, with exceptions in certain limited circumstances, there is a renewed interest in the enforceability of noncompete agreements in Texas.
Generally, the purpose of noncompete agreements, or “noncompetes,” is to protect important business information including confidential or proprietary information such as trade secrets, valuable information unique to a business and customer relationships. Noncompetes also often include non-solicitation agreements wherein the party receiving information agrees not to solicit employees or customers of its employer or other party with whom the receiving party does business. In addition, confidentiality agreements can be used to protect important information from disclosure.
However, noncompetes can sometimes be used to unfairly bar employees from changing employment, growing in their careers, or improving their economic situation. As a result, Texas law attempts to appropriately balance two competing factors: (1) the importance of protecting important information; and (2) not unfairly banning an employee or contractor from being able to change employment, transact business, or improve their financial future.
In Texas, a noncompete is generally enforceable if it is:
- Part of or connected to an otherwise enforceable agreement such as an employment agreement or a confidentiality/non-disclosure agreement;
- Supported by valid consideration, which is something of sufficient value and can include money, binding obligations, or enforceable promises; and
- Reasonable and does not impose restraints greater than necessary to provide the desired protection including the restraints in time, scope, and geographic area.
A reasonable period of time is the minimum time necessary to protect the disclosing party’s business interest or goodwill. The burden is on the enforcing party to prove the restrictive time period is reasonable. Courts often determine a time period of one or two years to be reasonable and enforceable. However, there is no bright-line test. Courts will analyze the specific facts and circumstances of each case to determine reasonability.
Likewise, the scope, or the actions prohibited by the employer or company, must not be broader than necessary to protect their legitimate business interests or goodwill. The restricted activities should typically be the same or similar to those performed for the party seeking protection. The geographic scope must also be reasonable in light of the contracting party’s type of work, the geographic location of the work, and the manner in which the work is performed.
The Federal Trade Commission proposed a rule that would generally ban most non-competes in the U.S. After a public comment period, the Federal Trade Commission still has not issued a final rule. Once the final rule is issued, private parties will surely challenge the rule in court. Varying states, including Texas, may also challenge the final rule. The result from any potential court challenge, including any potential ruling from the United States Supreme Court will only be known upon the issuance of court rulings. As a result, it will be important to monitor and analyze court decisions as they occur.
Clark Hill, PLC will track, monitor, and analyze these court decisions and provide periodic updates regarding the developing law controlling non-competes as this is a vitally important area of business law affecting business throughout Texas and the United States. In order to stay informed we invite you to subscribe to our News Alerts.
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