Can a Texas employer lay off an employee and then enforce the employee’s non-compete? As with so many legal issues, I’d bet all my chips there’s a short, simple answer, a longer more complicated answer, and a practical answer.
The short answer is yes, an employer can fire an at-will employee—for a good reason, an unfair reason, or for no reason at all—and then enforce the employee’s non-compete. There is nothing in the Texas non-compete statute that expressly ties enforceability to whether the employee quit, got fired, or got laid off.
You can see this harsh reality in the recent case Amend v. J.C. Penney Corp., No. 05-19-00723-CV, 2020 WL 1528497 (Tex. App.–Dallas Mar. 31, 2020, no pet. h.) (mem. op.). In that case, J.C. Penney eliminated Amend’s position and terminated him. He later found a job at Lowe’s as President of Online. J.C. Penney’s sued Amend for breaching his non-compete, the trial court judge refused to dismiss the suit, and the Court of Appeals upheld the trial court’s decision. The fact that J.C. Penney laid off Amend didn’t stop it from suing to enforce his non-compete.
But the longer answer is that the reason for termination of employment can be a factor that affects how the judge evaluates the reasonableness of the non-compete and whether to grant a temporary injunction enforcing the non-compete. I’ll walk through that answer momentarily.
The practical answer is that if the employer cares enough to spend the time and money to sue the employee to enforce the non-compete, then it’s going to cost the employee around $10,000 in legal fees to fight back, at least initially. If the employee doesn’t have that kind of money, it’s going to be tough sledding. I’ll cover that too.
But first, let’s put these questions in context by understanding some basic principles of Texas non-compete law.
Background on Basics of Texas Non-Compete Law
For about a century, Texas law on non-competes was common law, i.e. law made by judges. I covered some of this history in Jurassic Non-Competes. In 1989, the Texas legislature passed the Covenants Not to Compete Act, found at sections 15.50-52 of the Texas Business and Commerce Code. I just call it the non-compete statute for short. For the most part, it codified the common law principles the courts had developed (with two important exceptions I’ll get to later).
The statute has two basic requirements. First, a non-compete must be “ancillary to an otherwise enforceable agreement.” Second, a non-compete must be reasonably limited in time, geographic area, and scope of activity restrained. We now have three decades of case law applying those requirements.
Bear in mind that even if the non-compete as written fails the reasonableness test, the statute says the court shall reform the non-compete, i.e. rewrite it, to the extent necessary to make it reasonable.
But as a practical matter, true reformation hardly ever happens, because the parties almost never get that far. And strangely enough, the Texas non-compete statute says nothing about the event that is usually most important in a Texas non-compete lawsuit: the temporary injunction hearing.
The statute does talk about “injunctive relief,” but not specifically about a temporary injunction (or preliminary injunction, in federal court). Courts have developed common-law requirements for a temporary injunction, including “imminent harm” and “irreparable injury,” and the statute does not preempt those common-law requirements. See Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 241 (Tex. App.—Houston [1st Dist.] 2003, no pet.) (rejecting argument that proof of irreparable injury is not required in non-compete case).
A temporary injunction hearing usually takes place a few weeks after the lawsuit is filed. At that hearing the judge will decide whether to order the employee to comply with the non-compete while the lawsuit is pending. If the judge thinks the non-compete is overbroad, the judge can enter a temporary injunction that only enforces the non-compete to a reasonable extent.
The losing party can appeal that decision to the Court of Appeals, but the chance of winning the appeal is low. The main reason for that is the standard of review: abuse of discretion. Even if the Court of Appeals thinks the judge got it wrong, it is supposed to uphold the decision as long as the trial court judge didn’t do anything too crazy.
The end result is that non-compete cases often settle after the temporary injunction hearing. If the judge orders the employee to stop competing, in most cases that might as well be a permanent injunction, because usually the employee is going to have to look for some other job. If the judge denies the request for a temporary injunction, the employer may decide to cut a deal with its former employee rather than spending more money on what may be losing lawsuit.
With this background information you are now equipped to understand what I’m going to say about companies laying off employees and then enforcing their non-competes.
Explanation of the Short Answer
You can now see why I say that, in theory, the way employment ended does not impact whether the non-compete is enforceable. As I said, the non-compete has two requirements, “ancillary” and “reasonable.” There’s nothing in the statute that says the employer can’t fire or lay off an at-will employee and then enforce the employee’s non-compete.
Of course, this doesn’t seem fair. It strikes most people as wrong that a company could fire an employee without good cause and then prevent the employee from working for a competitor. That’s probably why there is a common misconception that the employer can only enforce the non-compete if the employee quit, or if the employee was fired for good cause.
Our intuitive sense of fairness also tells us that a company shouldn’t be able to use a non-compete to prevent a former employee from making a living. And for many decades, Texas courts shared this sentiment. This led Texas courts to say that a non-compete must not be “oppressive” to the employee and must not restrain the employee from engaging in a “common calling.” See Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168, 171-72 (Tex. 1987).
But the 1989 statute did not include those two requirements. And the statute says its criteria for enforceability are “exclusive” and preempt any other criteria “under common law or otherwise.” Tex. Bus. & Com. Code § 15.52.
So, arguably, the Texas non-compete statute eliminates the burden on the employee as a factor in deciding enforceability of the non-compete. That means the employee cannot argue it is unfair or oppressive for the company to lay off the employee and then enforce the non-compete, right?
Well that’s the short answer, at least.
The Longer Answer
There are still some ways for the employee to argue it is unfair to enforce the non-compete against an employee who was laid off.
First, remember the reasonableness requirement. The non-compete must be reasonably limited and “not impose a greater restraint than is necessary to protect the goodwill or other business interest” of the employer. Tex. Bus. & Com. Code § 15.50(a).
In deciding what is reasonably necessary to protect the employer’s goodwill, the judge can take into account the circumstances of the employee’s departure. The scope may be more or less reasonable depending on whether the employee had a premeditated plan to quit and take customers to a competitor, as opposed to the employee getting laid off.
Second, keep in mind both the common-law requirements for a temporary injunction and the standard of review that applies to an appeal of a trial court’s decision on a temporary injunction. Put those together, and the result is that the trial court judge has a lot of wiggle room to grant or deny a temporary injunction.
For example, if the judge doesn’t think it would be fair to enforce a non-compete against an employee who got laid off, it’s pretty easy for the judge to say, “sorry, you may have a case for breach of the non-compete, but damages would be adequate to compensate for that, so I don’t see any irreparable injury.” The facts will almost always provide some support for that conclusion. And because of the “abuse of discretion” standard, it is very unlikely that the trial court judge’s denial of a temporary injunction will get reversed by the Court of Appeals.
Third, if the lawsuit is in federal court, then the company trying to enforce the non-compete has the burden to show that “the threatened injury outweighs any prejudice the injunction might cause the defendant.” BMC Software, Inc. v. Int’l Bus. Machines Corp., No. H-17-2254, 2018 WL 4530020, at *2 (S.D. Tex. Sept. 21, 2018) (citing Bluefield Water Ass’n, Inc. v. City of Starkville, 577 F.3d 250, 252-53 (5th Cir. 2009)). That opens the door to the employee arguing that the burden of getting laid off and then prevented from working for a competitor outweighs any loss of revenue to the company.
Fourth, the laid-off employee’s best friend may be the “industry-wide exclusion” rule, which I explain in Burning Down the Haass: The Industry-Wide Exclusion Rule in Texas Non-Compete Law.
That rule is really a subset of the first question of reasonableness, but it’s important enough to deserve its own category. Texas law says a non-compete that prohibits working for a competitor in the industry in any capacity is too broad. Usually, the non-compete must be tied to preventing the employee from taking the company’s customers with her. This is where I get Wolfe’s First Law of Texas Non-Compete Litigation: you can’t take your customers with you.
If you get laid off and want to go to work for a competitor, in most cases Texas law should allow you to do it, as long as you’re not trying to take your customers with you. That means you may have to start from scratch at a new company, at least until the non-compete expires, but at least you can get a job in the same industry.
The Practical Answer
But what if you want to take your customers with you? What if you’ve had those customers for years, even before you joined the company that laid you off? What if you’re mad as hell and you’re just not going to take it anymore?
You can fight, and you may have a shot at winning, but it’s going to cost you. If you have a non-compete, get laid off, and try to take your customers with you to a new company, chances are your former employer is going to file a lawsuit (assuming the dollar amount of lost business is worth fighting over). If you can’t afford to hire a lawyer to defend you, your chance of winning is not good.
So what’s it going to cost to defend yourself? I tackled this question in How Much Does a Texas Non-Compete Lawsuit Cost? at my YouTube channel, That Non-Compete Lawyer. As a rule of thumb, the first stage of the lawsuit through the temporary injunction hearing is going to cost you $10,000.
Of course, it’s just a rule of thumb. As I say in the video, it may be more, it may be less. But that number should give you some sense of what it’s going to take. If $10,000 is a huge amount of money to you, then maybe you shouldn’t be gambling at this table.
Zach Wolfe (firstname.lastname@example.org) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021. This post is dedicated to Houston’s own Kenny Rogers.
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.