No, contrary to what you may have heard, President Biden did not issue an executive order banning non-competes nationwide. More about that later.

His Executive Order on Promoting Competition in the American Economy did get me thinking, though. Should Texas follow the Biden administration’s lead and abolish the Texas hiring tax?

You didn’t know Texas had a hiring tax? Let me explain.

Comparative Non-Compete Law

Texas law is relatively pro non-compete. I say “pro” because the Texas law allows non-compete agreements with at-will employees, provided the scope of the non-compete is reasonable, and if the employer messes up and makes the non-compete too broad, the employer is entitled to have a judge “reform,” or rewrite, the non-compete to make it reasonable in scope.

I say “relatively” because Texas law does have some advantages for employees who challenge non-competes. See my overview in Wolfe’s First Law of Texas Non-Compete Litigation. In short, there’s plenty of Texas case law interpreting “reasonable” in an employee-friendly direction, and the Texas non-compete statute gives employees some significant advantages.

Still, overall Texas law is pretty friendly to non-competes for at-will employees, especially compared to some other states.

California, for example, is well known for its hostility to employee non-competes. They are generally not allowed in the Golden State. See Cal. Bus. & Prof. Code § 16600.

And it’s not just deep blue states. Hostility to non-competes cuts across the political spectrum. Consider deep-red Oklahoma. It also frowns on employee non-competes. See 15 OK Stat § 15-219A.

Plus, the national trend is in the direction of non-compete “reform,” meaning making it more difficult to enforce non-competes with at-will employees. Consider a few examples:

This trend has not made it to the Lone Star State. If anything, the Texas legislature has gone in the other direction.

You may have heard Texas has an “anti-SLAPP” statute, called the TCPA, which allows defendants to move to dismiss unfounded lawsuits before any expensive discovery takes place. That potentially included non-compete lawsuits, until recently. In 2019, the legislature exempted most non-compete lawsuits from the early dismissal procedure provided by the TCPA. See Turn Out the Lights, the Party’s Over: Texas Legislature Takes All the Fun Out of the TCPA.

And in 2021? Governor Abbott called a special session to address numerous issues, including bail overhaul, elections, border security, social media “censorship,” and, of course, Critical Race Theory. But he did not include non-compete reform on the agenda.

The Texas Hiring Tax

Ok, but what does this have to do with a hiring tax?

Well, by continuing to enforce non-competes with at-will employees, Texas effectively imposes a tax on employers who hire employees away from competitors.

The thing you have to understand is that enforcing non-competes with at-will employees does not really prevent competitors from hiring those employees. It just makes it more expensive to do so.

Here’s how it usually goes down. Suppose Dawn Davis is the top sales person at Paula Payne Windows. An upstart competitor, Real Cheap Windows, has its eye on Dawn. Trouble is, Dawn signed a two-year non-compete when she Paula Payne Windows hired her years ago.

Will that stop Real Cheap from recruiting Dawn? Probably not. If Real Cheap really wants to hire Dawn, it’s going to do it, regardless of any non-compete.

This will, of course, provoke a nasty-gram from Paula Payne’s lawyer, demanding that Real Cheap cease and desist from employing Dawn and “stealing” or “poachig” Paula Payne’s customers (as if the customers were property, or wild game). Real Cheap will then hire some smart-aleck lawyer to write a response arguing that the non-compete is unenforceable.

Then, if the loss of Dawn’s customers is a big enough deal to Paula Payne Windows, it’s going to file a lawsuit to try to stop Dawn. The lawsuit will probably include both a request for a temporary injunction ordering Dawn to stop and a demand for damages for the loss of Dawn’s customers to Real Cheap.

I would bet that more than half the time, the lawsuit will get settled before the judge holds a hearing on the requested temporary injunction hearing. And nine times out of ten, the lawsuit will get settled before going to trial.

The end result, typically, is a settlement where Real Cheap Windows agrees to pay some amount of money to Paula Payne Windows and maybe also agrees to some restrictions on Dawn Davis, like maybe she can’t sell to her top three customers for a year. So, the competitor who hired the employee pays its own attorney’s fees plus some amount to settle the litigation with the company the employee left.

That’s the Texas hiring tax.

Is Enforcement of Non-Competes “Pro-Business”?

Isn’t it ironic? I thought Texas was supposed to be anti-tax and “pro-business.” But when businesses have to pay a hiring tax—in effect—to hire the best people, is that really pro-business?

Wouldn’t it be better for Texas to get rid of this hiring tax and abolish non-competes for at-will employees? (It would still make sense to allow non-competes in the sale of a business, for reasons I explain here.)

But wait, defenders of non-competes will say, we need non-competes to protect goodwill and confidential information.

I don’t find either rationale persuasive.

As to confidential information, what if I told you there was already an entire body of law—both state and federal—designed to prevent employees from taking valuable confidential business information to a competitor?

Yes, of course, it’s called “trade secrets” law. Like most states, Texas has a version of the Uniform Trade Trade Secrets Act (TUTSA). You can even make a federal case of it, thanks to the relatively recent federal trade secrets statute, the Defend Trade Secrets Act (DTSA). 

But what about protecting goodwill with customers?

Yeah, about that. Here’s the problem. In most cases, where the goodwill resides in the individual employee’s relationships with certain customers she regularly services, the goodwill walks out the door when the employee clocks out for the last time.

Like I mentioned earlier, customers aren’t property. They have minds (and hearts) of their own. If the person they like to do business with leaves the company, they usually want to follow that person to a new company.

And while a judge can order the employee not to do business with the customers she serviced at her previous employer, a judge can’t make those customers continue to do business with the previous employer. It’s like when Genie explains to Aladdin that he gets three wishes, but he can’t wish for someone to fall in love with him.

So in most cases (not all), an injunction enforcing the non-compete doesn’t really preserve any customer goodwill, it just punishes the departing employee and the customers, third parties who never signed any non-compete.

For these reasons, I think Texas businesses would do just fine if Texas outlawed non-competes with at-will employees. In fact, I think they would do better.

You may be shocked that a lawyer who handles non-compete litigation would make such a statement against interest. Wouldn’t my business dry up if Texas outlawed non-competes?

President Biden’s Executive Order on Non-Competes

My worried mom asked the same thing about Biden’s Executive Order. I told her not to worry.

When the White House announced the President would be issuing an Executive Order addressing non-competes, I made this prediction on Twitter:

In short, I predicted two things. First, the order would be limited in scope. Second, even a national ban on non-competes would not end departing employee litigation, because employers would just shift their legal theory to trade secrets.

How did I do? On the first part, I was spot on. Here’s what Section 5(g) of the Executive Order actually said:

For all the hoopla on the Biden side and the hand-wringing among business lawyers, this was pretty restrained. For one thing, the Executive Order doesn’t change the law at all. It only directs the FTC to consider changes to the law.

As for my second prediction, that the scope of action on non-competes would be limited, the order doesn’t instruct the FTC to outlaw non-competes, it only suggests that the Commission “curtail” the “unfair use” of non-competes.

Only time will tell what that means. I still think any limits the FTC orders are likely to focus on reigning in the use of non-competes in agreements with lower-income workers. That’s the kind of thing that caused a political outcry. Plus, there are sure to be court challenges to any new rules.

Whatever the FTC decides to do, I don’t expect it’s going to materially restrict non-competes for executives and more highly compensated sales people.

And like I said, even if the FTC does something more sweeping than I expect, I will still have plenty of work. Employers will just shift to using trade secrets law to try to impose de facto non-competes on employees who jump ship and go to a competitor.

How do I know this? That’s what they are already doing now when a key employee doesn’t have a non-compete, or has a non-compete the employer realizes is probably not enforceable.

_______________________

Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation.

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.

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