So you want a bullet-proof Texas non-compete.
Well, don’t we all. But of course, there is no such thing. The basic principle of non-compete law is reasonableness, and that’s a pretty fuzzy concept. So no matter how well the non-compete is drafted, there will almost always be some argument that it is unreasonable.
Still, there are ways to draft a non-compete to maximize the chance that a court will enforce it later.
I’m a little reluctant to share these tips. For one thing, I don’t really like non-competes. But sometimes my clients want me to draft one or enforce one, and like they say in the Fabulous Baker Boys, if the money’s green . . .
So I do have a form non-compete I use. You can download it here if you want. *Disclaimer: every situation is different, and you should not use this form without being or consulting with a lawyer.
And here are the key questions that come up when you’re drafting a typical Texas non-compete.
1. Should you draft the non-compete in a style and format that is easy to read and to present in the courtroom?
The question pretty much answers itself, doesn’t it?
And yet . . . most non-competes are written in a format that is difficult to read.
When it comes to style, lawyers who draft non-competes tend to go wrong in several ways:
- Long, dense paragraphs
- Each clause written as a single lengthy sentence
- Small type
- Unappealing fonts
- No paragraph breaks between items in a list
- Really long lists
- Too much ALL CAPS
- No Oxford commas (an almost unforgivable sin)
- Too many acronyms or abbreviations
- Too much legalese
I’ve seen a lot of non-competes that commit one or more of these offenses.
But one might object, what difference does the style make if the substance is good?
I addressed this in The Plain-Language Non-Compete. In short, if you want to maximize the enforceability of a non-compete in the courtroom, you will make it as readable and presentable as you can.
So, I now use 12-point Century Schoolbook. Not too stuffy, but not too modern. It’s not going to win any typeface awards or anything, but it’s less generic than Times New Roman. You can probably find a better font that suits your style.
I use bold headings, but not in all caps, and I now indent my paragraphs. When I use a list, I have a paragraph break after each item in the list. I use fairly standard margins.
You might decide to make different decisions regarding style and format, and that’s fine. You can probably come up with something better than I have. The point is to pay attention to these style issues.
Now let’s get into substance.
2. Should the non-compete expressly state that the company will give the employee confidential information?
The answer is yes.
The first thing any Texas non-compete with an employee should do is expressly state that the company agrees to provide the employee with confidential information. This is the simplest way to meet the requirement that a Texas non-compete must be “ancillary to an otherwise enforceable agreement.” Tex. Bus. & Com. Code § 15.50(a); Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 655 (Tex. 2006).
I will sometimes see a confidentiality clause stating that the employee will not disclose the company’s confidential information, but never expressly promising to give the employee confidential information.
That’s better than nothing, and it may be sufficient to create an implied promise to provide the employee confidential information. See Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 850 (Tex. 2009).
But why chance it? There’s no good reason not to include an express promise. So, the first part of my form non-compete looks like this:
As you can see, my form has two options, depending on whether the employee is a new hire or is being promoted.
Having an employee sign a non-compete midstream is tricky. If the company doesn’t provide some new consideration for the non-compete, then the employee can argue later that the non-compete is void for lack of consideration.
The obvious candidate for consideration is continued employment. But the promise of continued at-will employment may be considered illusory and therefore not real consideration. See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 228 (Tex. 2003) (at-will employment does not preclude providing contract formation “so long as neither party relies on continued employment as consideration”); Eurecat US, Inc. v. Marklund, 527 S.W.3d 367, 389 (Tex. App.—Houston [14th Dist.] 2017, no pet.) (“a promise of continued [at-will] employment is illusory and does not constitute consideration”). But see Arevalo v. Velvet Door, Inc., 508 S.W.2d 184, 186 (Tex. Civ. App.–El Paso 1974, writ ref’d n.r.e.) (“continuation of employment with payment of salary is consideration for a restrictive covenant not to compete”) (citing cases).
So, the employer needs to provide some kind of consideration other than just continued employment.
Continued access to the company’s confidential information may be sufficient, provided the company actually provides it. But if the company merely continues to provide the same kind of information as before, the employee can argue there was no new consideration.
The better thing to do, when feasible, is to tie the non-compete to a promotion that gives the employee access to a wider scope of confidential information than before. That’s why my form for a post-promotion non-compete says “we will also give you new types of confidential information that you did not have access to in your previous position.”
There could still be a factual dispute about whether this actually happened. But if the company includes this language, it will at least have a reasonable argument that it agreed to provide new consideration for the non-compete, and that the non-compete was ancillary to that agreement.
3. Does the non-compete need to provide for specialized training?
Specialized training is the Dickey Betts of Texas non-competes. Less well known than confidential information, but just as effective.
Including a promise to provide specialized training is another way to meet the requirement that a Texas non-compete must be “ancillary to an otherwise enforceable agreement.” E.g., Neurodiagnostic Tex, LLC v. Pierce, 506 S.W.3d 153, 164-65 (Tex. App.—Tyler 2016, no pet.). See also Texas Non-Compete Case Teaches Importance of Providing Specialized Training.
That means a Texas non-compete doesn’t necessarily need to provide for specialized training, but it’s a good idea, if the company is actually going to provide the employee specialized training. My specialized training clause looks like this:
The important thing is to include a description that is specific enough to persuade a judge that this is not mere boilerplate. A generic promise of providing specialized training may not cut it, especially if the company later struggles to identify what the training was and why it was “specialized.”
4. Does the non-compete need a complicated definition of competing?
You can probably already guess where I come out on this one. Most non-competes have a pretty wordy definition of competing. Here’s a typical example:
This way of describing the prohibited competition isn’t really wrong, but it strikes me as unnecessarily complicated. You want to be able to put the clause in front of a judge or jury and make it as simple as possible.
I suspect the more complicated clauses came about as a result of clever employees coming up with ways to circumvent the non-compete.
You can imagine. “I know,” the employee says, “for the first year I’ll be an unpaid consultant to an LLC that my brother-in-law forms, so I won’t really be competing.”
I’m sure there have been endless variations on this sort of thing. And it almost never works. I think most judges and juries are smart enough to figure out that this kind of thing still violates an agreement not to “compete” with the employer.
On the other hand, you don’t want your non-compete to be vulnerable to shenanigans like this. Courts will decline to enforce the claimed purpose of the non-compete when the unambiguous language establishes that the non-compete does not apply. See, e.g., Total Safety U.S., Inc. v. Code Red Safety & Rental, LLC, No. 4:19-CV-03836, 2020 WL 57775826, at *4 (S.D. Tex. Sept. 4, 2020) (rejecting employer’s argument that employment did not terminate when employee was promoted and went to work for an affiliate).
So, even though I favor simplicity and plain language, I do include the common non-compete modifier “directly or indirectly” in my form:
You agree not to compete with us or to help anyone compete with us, directly or indirectly, . . .
I also include the “or to help anyone complete with us.” I think this is a good plain-language way to cover most scenarios where the employee tries to get around the non-compete by working through a middleman.
So now you’ve got a non-compete that meets the “ancillary to an otherwise enforceable agreement” requirement, because it expressly promises to give the employee confidential information and/or specialized training. And you’ve got a common-sense definition of competing.
All you need now are reasonable limitations on time period, geographic area, and scope of activity. How should you draft those limitations?
Stay tuned for Part 2.
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.
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.