When an employee leaves a company in Texas and goes to work for a competitor, the first legal question that usually comes up is whether the employee’s non-compete is enforceable under the Texas non-compete statute.  There is a large and complex body of case law addressing this issue, and the answer is usually not simple.  But as a litigator, I look for five key things when a client wants to know if a non-compete is likely to be enforced by a judge.  And for each of those five things, the key question in my mind is whether there is a disputed fact issue.  Generally, whether a non-compete is enforceable is a question of law for the judge.[1]  But if there is a disputed fact issue concerning one of the elements of enforceability, then the disputed fact issue may have to be decided by the jury.

The Texas non-compete statute says that a non-compete must be “ancillary to an otherwise enforceable agreement.”[2]  The most common way that an employer can meet this requirement is by tying the non-compete to a confidentiality agreement.[3]  The confidentiality agreement will always say that the employee has to keep the employer’s information confidential, but the first thing I look for is whether the agreement expressly states that the employer will provide confidential information to the employee.

If there is no express promise to provide confidential information, then the question becomes whether there is an implied agreement to provide the employee confidential information.  That is a question that cannot be answered by the agreement itself.  You have to look at whether the surrounding circumstances indicate that the employment “necessarily involved the provision of confidential information” to the employee.  In other words, did the “nature of the work” the employee was hired to perform require confidential information to be provided?[4]

The second thing I want to know is whether the employer actually provided the employee confidential information.  This is critical, because if the employment is at will, and it almost always is, then the non-compete will only be considered “ancillary to an otherwise enforceable agreement” if the employer actually performed its promise to provide confidential information.[5]  Of course, the employer always provides some kind of information to the employee.  So the real question is whether the information the employee received was actually confidential.  Of course, there will often be conflicting evidence on this issue, which may present a fact issue for a jury.

The third thing I look for is the time period of the non-compete.  The Texas non-compete statute also says that a non-compete must be reasonable in time, geographic area, and scope of activity restrained.[6]  The statute doesn’t specify a time period that is considered reasonable.  Texas courts will often find a time period of one or two years reasonable, and in some cases have even found a time period as long as five years reasonable.[7]  But it depends on the circumstances.  The question is whether the time period is necessary to protect the “goodwill or other business interest” of the employer.  Specifically, the key factual question is how long will it take for the confidential information received by the employee to become outdated?[8]

The fourth thing I look for as a litigator is how the geographic area in the non-compete compares with the territory that the employee actually covered.  The non-compete has to be reasonably limited in geographic area.  As with the time period, this can be a fact intensive issue that depends on the circumstances.  But as a general rule, Texas courts have said that an employee’s actual sales territory is a reasonable geographic area.[9]

What if, for example, the employee testifies that he only worked with customers in the Houston area, but the employer testifies that the employee’s sales territory was the entire Gulf coast?  The conflicting evidence may present another fact issue for a jury to decide.

The fifth thing I look for in a non-compete is the scope of the activity it actually restrains.  If the non-compete bars the employee from working in any capacity for any company in the same industry, it is probably too broad.  Texas courts generally consider this kind of “industry-wide” exclusion unenforceable.[10]  On the other hand, if the non-compete is targeted at preventing the employee from soliciting or doing business with customers of the employer, then it is more likely to be considered reasonable and enforceable.

So those are the five key things I look for when a client wants to know if a non-compete is enforceable.  That’s not the end of the story, because even if the non-compete is too broad, a judge can reform it to make it reasonable and issue an injunction to enforce the reformed non-compete.[11]  In addition, even if the non-compete is unenforceable, the employer may have other claims against the employee, such as misappropriation of trade secrets.  I’ll address that next time.

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Zach Wolfe is a Texas trial lawyer who handles non-compete and trade secret litigation. His firm Fleckman & McGlynn has offices in Austin, Houston, and The Woodlands.

These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.

[1] Powerhouse Prods., Inc. v. Scott, 260 S.W.3d 693, 696 (Tex. App.—Dallas 2008, no pet.), citing Light v. Centel Cellular Co., 883 S.W.2d 642, 644 (Tex. 1994).

[2] Tex. Bus. & Com. Code § 15.50(a).

[3] See Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 655 (Tex. 2006).

[4] Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 850 (Tex. 2009)

[5] See Sheshunoff, 209 S.W.3d at 655 (“If the agreement becomes enforceable after the agreement is made because the employer performs his promise under the agreement . . . the covenant is enforceable if all other requirements under the Act are met”); Powerhouse, 260 S.W.3d at 699 (“Sheshunoff did not purport to replace the requirement that there be consideration for a non-compete agreement”).

[6] Tex. Bus. & Com. Code § 15.50(a).

[7] See, e.g., Stone v. Griffin Comm. & Security Sys., Inc., 53 S.W.3d 687, 696 (Tex. App.—Tyler 2001, no pet.) (noting that “two to five years has repeatedly been held a reasonable time restriction in a non-competition agreement”).

[8] Id. (holding that five years was reasonable where there was “ample evidence” that it would take five years for the information received by the employees to become outdated).

[9] Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 793 (Tex. App.—Houston [1st Dist.] 2001, no pet.).

[10] “The Texas Supreme Court has held that an industry-wide exclusion is unreasonable.”  John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80, 85 (Tex. App.—Houston [14th Dist.] 2010, no pet.), citing Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 386-88 (Tex. 1991).

[11] Tex. Bus. & Com. Code § 15.51(c).  In that case, the employer cannot recover damages for competition that occurred before reformation.

13 thoughts on “What a Litigator Looks For in the Typical Texas Non-Compete

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