When you say “recruitment,” it brings up painful memories of law school. But hey, at least we had free pizza (sometimes).

Speaking of recruiting, the Wall Street Journal recently reported that employee mobility is at a two-decade high. That means a lot of employees are quitting their jobs and going to work for competitors. Anecdotal evidence from my own law practice suggests the same. There are a lot of departing employee disputes and lawsuits in Texas right now, and I suspect the same is true in other states.

In many cases, when those employees leave their employers, they will have employment agreements that restrict them from soliciting the customers or employees of their former employer. People often want to know if that’s a non-compete.

The short answer is yes. Generally, a restriction on soliciting a former employer’s customers or clients is a form of non-compete. I covered this in my popular post Is a Non-Solicitation Agreement a Non-Compete? The answer matters because a non-compete has to be reasonable in scope. See Tex. Bus. & Com. Code § 15.50(a).

Restrictions on soliciting employees get relatively less attention. Lawyers and non-lawyers alike tend to assume such restrictions are enforceable.

In Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), the Texas Supreme Court said that restrictions on soliciting a former employer’s “customers and employees” are restraints of trade governed by the non-compete statute. But Marsh was not about solicitation of employees, so the part about soliciting employees could be viewed as dicta.

There is conflicting Texas case law on whether a restriction on soliciting a former employer’s employees is a non-compete subject to the requirements of the non-compete statute.

Some Texas courts have held that a restriction on employee non-solicitation is not a restriction on competition. See, e.g., Totino v. Alexander & Associates, Inc., No. 01-97-01204-CV, 1998 WL 552818, at *8-9 (Tex. App.—Houston [1st Dist.] Aug. 20, 1998) (not designated for publication), dismissed pursuant to settlement, 1999 WL 182518 (March 30, 1999); Nova Consulting Group, Inc. v. Eng’g Consulting Servs., Inc., No. Civ. SA-03-CA-305-FB, 2005 WL 2708811, at *18 (W.D. Tex. June 3, 2005) (citing Totino).

(After I published the original version of this post, a little birdie told me that Totino was later dismissed pursuant to a settlement, and sure enough, Westlaw confirmed that.)

Other cases have held that a non-recruitment clause is a non-compete. See, e.g., Smith v. Nerium International, LLC, No. 05-18-00617-CV, 2019 WL 3543583, at *4 (Tex. App.—Dallas Aug. 5, 2019, no pet.) (mem. op.) (citing Marsh).

The better view is that a restriction on soliciting employees is a form of non-compete. (As always, this is just my opinion, not the opinion of my firm or clients.)

Think about it. Imagine that two competitors enter into an agreement not to solicit each other’s employees. Are you telling me such an agreement would not raise any antitrust concerns? No, of course it would.

Both the motive and effect of a restriction on soliciting employees are to prevent competitors from “poaching” employees. The company’s motive is to protect itself from competition. And the effect—if the restriction accomplishes its intended purpose—is to inhibit competition. So, a restriction on soliciting employees raises the same kind of anti-competitive concerns as a restriction on soliciting customers and should be treated as a non-compete.

Plus, If you say that a restriction on soliciting employees is not a non-compete, be careful what you wish for. Let’s assume for the sake of argument it’s not a “covenant not to compete.” In that case, it could still be a contract in restraint of trade or commerce, and that would make it illegal. See Tex. Bus. & Com. Code § 15.05. Or at the least, it would be subject to some reasonableness limitation.

I suppose you could argue that a restriction on soliciting employees is neither a restraint of trade and commerce nor a non-compete. But in that case, there would be no reasonableness limitation, and that seems like an untenable result. Are you saying that a restriction on soliciting employees could have a ten-year term, or no time limit at all? It makes more sense to treat a restriction on soliciting employees as a form of non-compete—as the Texas Supreme Court did in Marsh—which means it has a reasonableness limitation. 

But what about those Texas decisions that said a restriction on soliciting employees is not a restriction on competition?

Some of those cases were decided before Marsh. So you could argue they were implicitly overruled by the contrary statement in Marsh.

Even aside from that, I don’t find the reasoning of those cases persuasive.

In the Totino case, the court considered whether a non-recruitment covenant was a prohibited contract “in restraint of trade or commerce.” The court held it was not, reasoning that a non-recruitment agreement is more like a nondisclosure covenant, which is not a non-compete. Totino, 1998 WL 552818, at *8-9.

Non-recruitment agreements, the court said, “do not necessarily restrict a former employee’s ability to compete with his or her former employer and, like nondisclosure covenants, should not significantly restrain trade.” The court added that an agreement not to solicit employees does not restrict those employees from leaving but only bars the former employee from soliciting them. Id. at *9.      

The reasoning is flawed. First, the premise that a nondisclosure agreement is not a restraint of trade or commerce is too broad. A confidentiality agreement can be so broad that it functions as a non-compete. See Thoroughbred Ventures, LLC v. Disman, No. 4:18-CV-00318, 2018 WL 3752852, at *4 (E.D. Tex. Aug. 8, 2018) (nondisclosure agreement that has the practical effect of preventing the former employee from using general knowledge, skill, and experience should be treated as a non-compete).

Second, even if we assume nondisclosure agreements are not non-competes, comparing a non-recruitment restriction to a nondisclosure clause is inapt. The primary purpose of a confidentiality agreement is to protect confidential information; the effect on competition is incidental. But as noted earlier, with an agreement not to solicit employees, the primary purpose is to protect the employer from competition.

That leads me to the third flaw in the Totino reasoning. The argument that the non-solicitation agreement is not an absolute bar to employees leaving goes to the reasonableness of the restriction, not whether it restrains competition. A contract term does not have to absolutely prohibit competition to implicate the reasonableness concerns of the non-compete statute. Restraining competition—to some degree—should be enough.

I’m not saying that a restriction on soliciting employees is prohibited. I’m just saying that it should be treated as a non-compete subject to the limitations of the non-compete statute, particularly the reasonableness requirement.

Ultimately, I think that was the real rationale of Totino—that the restriction was reasonable. It would have been better for the court to say, “yes, a restriction on soliciting employees is a restraint on competition, but we find this one to be reasonable.”

That was essentially what the judge did in Everett Financial, Inc. v. Primary Residential Mortgage, Inc., No. 3:14-CV-1028-D, 2016 WL 7378937 (N.D. Tex. Dec. 20, 2016). The reasonableness requirement of Section 15.50(a) applies to employee non-solicitation agreements, the court said, citing Marsh. Id. at *8. But the court held that the restriction on solicitation at issue was reasonable in scope, despite the lack of a geographic limitation, and did not have to be limited to soliciting employees with whom the former employee had “personal contact.” Id. at *8-9.

Bottom line: Totino does not provide a solid basis for holding that a restriction on soliciting employees is not a non-compete, especially in the face of the contrary statement in Marsh. The better view is that a restriction on soliciting employees is a form of non-compete, and therefore it must meet the reasonableness requirement of the Texas non-compete statute. (Plus, Totino was an unpublished opinion in an appeal that was later dismissed, if you care about that sort of thing.)

Totino does make a fine cheap frozen pizza though. Law school students take note.

(Thanks to Dallas lawyer Sean Lemoine for pointing out Totino and its progeny, even if he incorrectly thinks Totino was right, and to Houston lawyer Leigh Freeman for pointing out the Thoroughbred Ventures case.)

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. 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.

Predicting the cost of litigation

Litigators usually wince when clients ask how much a lawsuit is going to cost. It’s kind of like asking “how much will it cost to invade Iraq?” You can’t control what other people do, and you don’t know how long the project will drag on.

For this reason, I’m going to start telling clients “on average, a lawsuit will cost you $10,000 a month until you settle.”

I think this gets the point across better than hemming and hawing about how the total expense is hard to predict. Of course, the $10,000 is just a rule of thumb. You can probably double or triple that for some law firms (you know the kind of firms I’m talking about). But the point is that the cost is largely a function of when the case settles.

And the case will settle, you can tell clients. It will not go to trial.

Ok, that’s a little too strong. But the vast majority of cases will settle before going to trial. We’re talking over 90%. Probably 95%. Maybe even 99%.

You get the point.

Why non-compete cases don’t go to trial

Trials in non-compete lawsuits are even more unusual. There are several reasons for this.

First, in many non-compete lawsuits there is a temporary injunction hearing in the first month or so. The judge’s decision at that hearing will often lead to the case settling, especially if the judge orders that the employee can’t work for the competitor that just hired her.

Second, most cases take at least a year to get to trial. Two years is more likely. Most non-competes expire in one or two years. You do the math.

Third, and this is where it gets a little more esoteric, in most non-compete lawsuits the key issue is enforceability of the non-compete, and that issue is typically seen as a “question of law” (whatever that means). A trial is not required to decide a question of law.

Notice these reasons had a lot of “many,” “often,” “typical,” etc. That’s because of course I’m generalizing. There are plenty of exceptions.

But as a general rule of thumb, non-compete lawsuits just don’t go to trial.

What happens when non-compete cases go to trial?

Of course, non-compete cases sometimes go to trial.

I had one of these a few years back. Some of you might remember my post where I talked about asking the owner of the company what he thought a reasonable time period for the non-compete would be, and he said “when hell freezes over.” That might give you a little insight into why the case went to trial.

When that happens, what are the questions that will go to the jury?

In most non-compete cases, there will be some dispute about whether the non-compete is enforceable as written. This was the subject of my very first blog post, What a Litigator Looks For in the Typical Texas Non-Compete.

Sometimes there will also be a dispute about whether the employee violated the non-compete as written. This is especially true when the non-compete prohibits solicitation of customers or employees. “Solicit” is a word built for factual disputes, which is why my Plain-Language Non-Compete doesn’t rely solely on the word.

But in many cases, it will be undisputed that the employee violated the non-compete—at least a little—as written. In those cases, the two key questions are:

(1) is the non-compete enforceable as written?

(2) if yes, what is the amount of damages caused by the breach?

(If the non-compete is unenforceable as written, there will be no damages. See Tex Bus. & Com. Code § 15.51(c).)

The second question will typically go to the jury (assuming there is admissible evidence establishing an amount of damages), and the standard breach of contract damages question from the Texas Pattern Jury Charge is probably adequate in most cases.

The first question is trickier. Does enforceability go to the jury?

In many non-compete cases, one side—or sometimes both—will move for summary judgment on whether the non-compete is enforceable as written. If the court grants summary judgment that the non-compete is or is not enforceable, then the issue won’t go to the jury (unless the judge changes her mind).

But what if nobody moves for summary judgment on enforceability, or if the judge denies summary judgment on the issue?

In that case, I say you need to submit enforceability to the jury, but I will concede this is more art than science. If you need ideas you can use Wolfe’s Pattern Jury Charge for Texas Non-Compete Cases:

I will also concede that you may get a funny look from the judge when you ask for a jury question on enforceability of the non-compete. “Counsel, isn’t that a question of law?”

And there it is, the “question of law” question. Be aware, there are dozens of Texas cases that say enforceability of a non-compete is a question of law. But those cases are largely wrong, for reasons I explain in Blown Call: The Thing Texas Courts Get Wrong About Non-Competes.

So the short answer to the judge is “no.” But you’ll have to explain.

Scenarios for submitting enforceability to the jury

There are several different ways the issue can arise.

Let’s say you represent the employer who is trying to enforce the non-compete against a former at-will employee.

DANGER! DANGER!

You must be careful in this situation. You might intuitively think that the burden is on the employee to prove unenforceability as a defense to the claim for breach of the non-compete. WRONG!

Take a look at Section 15.50(b) of the Texas Business and Commerce Code. If the non-compete is tied to a “personal services” agreement, e.g. the typical at-will employment agreement, then the burden is on the employer to establish that the non-compete meets the criteria specified in Section 15.50, i.e. that that the non-compete is ancillary to an otherwise enforceable agreement and is reasonable.

I think my smarter appellate lawyer friends will confirm that if a party bears the burden of proof on an issue, and if there is conflicting evidence on that issue, then the party with the burden of proof must submit a question to the jury on the issue. If it doesn’t, it waives the issue.

Sure, you could take a chance, not ask for a question on the issue, and then argue post-verdict that the enforceability of the non-compete is a question of law. And the trial court judge might agree with you. But if there was any evidence during trial that the non-compete was unreasonable, the judge would be wrong. And you’ve just given the employee a good issue to appeal.

Now let’s suppose you represent the employee in this situation. You don’t have the burden of proof on enforceability, so you can just sit back and watch the employer waive the issue, right?

I wouldn’t recommend that. The problem is that many Texas judges will incorrectly think that enforceability of the non-compete is a question of law, even though the statute is quite clear that the employer has the burden of proof on the issue.

If you represent the employee and you ask for a question on reasonableness of the non-compete, you may get it. And you may have a better chance with the jury on reasonableness than you do with the judge.

On the other hand, if the judge denies your requested question on enforceability, you’ve just bought yourself an insurance policy—in the form of reversible error—if the verdict and judgment go against you—assuming there is conflicting evidence on the issue.

That last proviso is important. If you represent the employee, you must be sure to offer evidence concerning the reasonableness of the non-compete.

For example, if it’s a three-year non-compete, ask your client “would the company’s confidential information still have any value after two years?” In most cases the answer will be no. If the geographic area of the non-compete is the State of Texas, ask your client “did your actual sales territory cover the whole State of Texas?” Again, the answer is probably no.

These are just examples, but you get the idea.

The last thing you want to do is blow it at trial after your client has spent $10,000 a month (or more) to get there.

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. 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.

I made a big mistake last Friday. I opened my Twitter feed before watching the season finale of The Mandalorian with my kids. Y’all can guess what happened.

Speaking of spoilers, here’s a SPOILER ALERT: If you would rather learn for yourself the most common and easily fixable mistake in Texas non-compete litigation, I recommend first litigating a bunch of non-compete cases in Texas and getting them wrong. But if you just want the answer, read on.

And if you’ve watched my YouTube video The Reasonable Time Period Requirement for a Texas Non-Compete, you probably already know the answer.

As that video hints, the most common and easily fixable mistake lawyers make in Texas non-compete litigation is failing to offer evidence—not just argument—regarding the reasonableness of the non-compete’s time period.

Fortunately, this is easily corrected. Just offer testimony from your client explaining why the time period is or is not longer than necessary to protect the company’s confidential information and/or goodwill with customers (depending on which side you’re on). And make sure the testimony is specific, not conclusory.

Even better, offer expert testimony on this issue. In most cases, your client or client representative probably has enough experience in the industry to qualify as an expert, so you won’t need to hire one. For example, if you represent a former employee who has a two-year non-compete, offer expert testimony that the employer’s confidential information becomes stale within a year, or that goodwill with customers is likely to dissipate in a year.

This is sure to draw an objection, but if the witness has significant experience in the industry and gives specific reasons for the opinion, what’s the objection?

You may also draw an objection that reasonableness is a question of law, but that’s wrong (sort of), as I explained in Blown Call: The Thing Texas Courts Get Wrong About Non-Competes.

Anyway, fact or opinion testimony should, at a minimum, create a fact issue regarding the reasonableness of the time period, and thus, the enforceability of the non-compete.

And yet, lawyers in Texas non-compete litigation hardly ever do this.

(Reminder: This is not legal advice for your case. Every case is different, and there may be valid strategic reasons not to offer such evidence in a particular case.)

I’ve handled a lot of non-compete disputes, and in my experience, lawyers on both sides rarely offer evidence about the reasonableness of the non-compete’s time period. And expert testimony on the issue is even more rare.

Most of the time, reasonableness of the time period is an afterthought. At most, the lawyers will offer argument about it, rather than evidence, and cite a few cases.

Why is that?

Let’s back up a bit to put this problem in context.

Enforceability is almost always a key issue in a non-compete lawsuit. In the typical case where an employer sues a former employee to enforce a non-compete, the employer has the burden to prove that the non-compete is enforceable. See Tex. Bus. & Com. Code § 15.51(b). That includes proving that the non-compete is reasonable in time period, geographic area, and scope of activity restrained. Tex. Bus. & Com. Code § 15.50(a).

One caveat: in a temporary injunction hearing, it is debatable whether the judge should address enforceability of the non-compete. On the one hand, likelihood of success on the merits is one of the elements required for a temporary injunction. See, e.g., Tom James of Dallas, Inc. v. Cobb, 109 S.W.3d 877, 884 (Tex. App.—Dallas 2003, no pet.).  On the other hand, the court does not decide the “ultimate issue” of enforceability at the temporary injunction stage. Id.

Let’s put that complication aside and assume that enforceability of the non-compete is somehow an issue before the court, whether it’s a TCPA motion to dismiss, a temporary injunction, a summary judgment motion, or at trial.

In that case, the employer needs to offer evidence that the time period is reasonable. Otherwise, the court may rule that the employer failed to meet its burden of proof. And if you represent the employee, you should offer evidence that the time period is unreasonable, even if you don’t have the burden of proof.

So, for example, even if the time period is only one year, evidence that one year is longer than necessary to protect the employer’s confidential information or goodwill may be enough to prove that the non-compete is unenforceable.

That’s what happened in CDX Holdings, Inc. v. Heddon, No. 3:12-CV-126-N, 2012 WL 11019355 (N.D. Tex. March 2, 2012). In that case, the court held that the plaintiffs failed to meet their burden to show one-year limitation was reasonable, where there was testimony that the information was confidential and would be valuable to competitors, but there was also testimony that the information was “continually changing and updated” and had a “short shelf life.” Id. at *9.

I don’t know if that was the right factual determination, but the approach in CDX Holdings was correct. The court should look at the evidence to decide whether the time period is reasonable.

That is not what usually happens. Here’s the typical scenario. The time period of the non-compete will be less than five years. The employer’s counsel will cite Texas cases for the “Five-Year Rule,” which says that Texas courts have repeatedly upheld non-competes with time periods of two to five years. The employee’s counsel will then make some argument—but not offer any evidence—that this case is different for some reason. In most cases, if the issue goes up on appeal, the Court of Appeals will cite the Five-Year Rule and say the time period was reasonable.

Funny thing about the Five-Year Rule, though: when you investigate its origins, you find that the first Texas case that cited it basically just made it up. I explained this in What is a Reasonable Time Period for a Texas Non-Compete? But the rule has now been repeated so many times that it has become a sort of self-fulfilling prophecy.

Here’s another funny thing about the Five-Year Rule: if you look at the opinions that cite it, very few—if any—are cases where there was conflicting evidence about the reasonableness of the time period. (Or if there was conflicting evidence, the opinion ignores it.)

Let’s look at a recent example.

In Reilly v. Premier Polymers, LLC, No. 14-19-00336-CV, 2020 WL 7074253, at *1-2 (Tex. App.—Houston [14th Dist.] Dec. 3, 2020, no pet. h.) (mem. op.), a commodity polymers company sued a former sales manager and his new employer, claiming breach of contract, tortious interference, and misappropriation of trade secrets. The court held that the 18-month period of the manager’s non-solicitation covenant was reasonable, citing the usual suspects for the Five-Year Rule. Id. at *10-11.

Curiously, the opinion did not cite any evidence from the record about whether 18 months was longer than necessary to protect the employer’s confidential information, goodwill, or other business interest.

So I looked at the Appellants’ Brief (at pp. 41-43) and the Appellee’s Brief (at pp. 35-36) to see if the parties cited any evidence about whether 18 months was reasonable. Nope.

Instead, the defendants argued that the 18-month period was punitive, and therefore unreasonable, because the agreement also provided that employees terminated for reasons other than for “cause” were only subject to a one-year non-solicitation restriction. 2020 WL 7074253 at *11. In effect, the agreement imposed an additional six months of non-solicitation as a punishment for employees who quit, the defendants argued.

That sounds like a plausible argument to me, but the defendants cited no case law to support it, and the plaintiff attacked it as a “made-up rule.” The Court of Appeals sided with the plaintiff, declining to adopt the defendants’ proposed standard, “particularly where the 18-month period at issue is well-within what other courts have deemed reasonable.” Id.

Thus, as in most Texas non-compete lawsuits, it appears neither side offered any evidence about whether 18 months was longer than necessary, and the Court of Appeals decided the case based purely on argument and case law, without considering any evidence in the record.

But what if the defendants had offered evidence?

Let’s say Reilly, who worked as a salesperson and regional manager for the polymers company for seven years, testified as an expert that a one-year non-solicitation covenant would be sufficient to protect the company’s confidential information (if any) and customer goodwill, giving specific reasons based on his familiarity with the company, its customers, and the industry. Would that have been sufficient evidence that 18 months was unreasonable, and the restriction therefore unenforceable?

We may never know, but you should try it. This is the way.

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. 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.

If Part 1 was a flashback to the vinyl era, then this Part 2 moves us into the cassette era. That’s more my time. I never actually had a Peter Frampton record, but I can still remember recording The Name of This Band is Talking Heads on to a blank cassette tape.

The theme of Part 1 was the Sales Territory principle, which says that a reasonable geographic area for a Texas non-compete should usually coincide with an employee’s actual sales territory. This principle goes all the way back to the first vinyl era, the Jazz Age, when Texas courts reasoned that an employee is going to develop goodwill only in the area where he has personal contact with customers.

But of course, not every case involves the typical sales employee who is responsible for a certain territory. What about cases where physical territory is not important, or where the employee is a high-level executive?

In such cases, the Sales Territory principle may be less useful, and Texas courts may be more likely to follow what I call the Holistic principle. The Holistic principle considers the reasonableness of the geographic limitation not in isolation, but in combination with other factors, such as the employee’s rank in the company, the employee’s knowledge of high-level confidential information, the nature of the business, and perhaps most important, the scope of activity restrained by the non-compete.

This leads us to General Rule No. 5.

General Rule 5: No geographic limitation or broad geographic limitation + non-compete limited to existing customers = probably reasonable.

The Sales Territory principle was rooted in the idea that customer goodwill is usually tied to a certain geographic territory. This idea goes back at least as far as the City Ice Delivery case in the 1920s. But Texas courts also recognized decades ago that even a non-compete with no geographic limitation at all can be reasonably limited to protecting customer goodwill, if the scope of activity it restrains is narrow.

Consider Stocks v. Banner American Corp., 599 S.W.2d 665 (Tex. Civ. App.—Texarkana 1980, no writ). Stocks sold his stock in Banner and agreed not to compete with Banner for three years. Banner’s business included manufacturing and selling blank cassette tapes, selling blank labels for cassette tapes, and custom duplication of cassette tapes. Banner’s customers included Tandy Corporation and Apple Computers. Id. at 666.

Stocks apparently could not leave the cassette game behind, because he somehow became an owner of Xalon Corporation, which sounds like an evil company from Aliens or Terminator. Despite the lack of any geographic limitation in the non-compete, the trial court enjoined Stocks and Xalon Corporation from doing business with Tandy, Apple, or a list of other Banner customers. Id. at 666-67.

The Court of Appeals found that the lack of a geographic area was not fatal to the non-compete. See id. at 667 (“Failure to include a territorial limitation will not void a covenant to compete”). The court cited Justin Belt Company, Inc. v. Yost, 502 S.W.2d 681 (Tex. 1973), where the court held that a non-compete that was “unlimited both as to time and to space” could be enforced to a reasonable extent. Id. The court also reasoned that non-competes may be construed more broadly in the sale of a business than in an employment relationship. Id. (citing Seline v. Baker, 536 S.W.2d 631 (Tex. Civ. App.—Houston [1st Dist.] 1976, no writ)).

Thus, the non-compete could be enforced to some extent, despite the lack of a geographic limitation. But to what extent? The Stocks court cited two cases approving injunctions limited to prohibiting a former employee from contacting certain listed customers. Id. at 667-68 (citing Toch v. Eric Schuster Corp., 490 S.W.2d 618 (Tex. Civ. App.—Dallas 1972, writ ref’d n.r.e.), and Arrow Chem. Corp. v. Anderson, 386 S.W.2d 309 (Tex. Civ. App.—Dallas 1965, writ ref’d n.r.e.)). The takeaway was that “[t]he use of a customer list as an alternative to setting a specific geographical limit is a reasonable means of enforcing a covenant not to compete.” Id. at 668.

From the Stocks rule we can deduce this common-law principle of Texas non-compete law: a non-compete that is limited to prohibiting a former employee or owner from doing business with the company’s existing customers may be reasonable and enforceable even if it lacks a geographic limitation. See also Investors Diversified Servs., Inc. v. McElroy, 645 S.W.2d 338, 339 (Tex. App.—Corpus Christi 1982, no writ) (non-compete limited to clients securities salesmen contacted or learned about while working for company was enforceable despite lack of defined territory).

The logic of the rule is that the point of requiring a geographic limitation was to protect customer goodwill. If the non-compete is otherwise limited to protecting customer goodwill—because it is limited to the company’s existing customers—then a geographic limitation may not be necessary. This is the most basic formulation of the Holistic principle.

But this was a common-law rule. Did the Stocks rule survive the enactment of the Texas non-compete in 1989? Let’s just say the Stocks rule fared better than cassette tapes at the end of the 80s.

Even though the statute expressly requires a geographical limitation, Texas courts continued to hold that a geographic limitation may be unnecessary if the scope of activity restrained is sufficiently narrow.

In Totino v. Alexander & Associates, Inc., No. 01-97-01204-CV, 1998 WL 552818 (Tex. App.—Dallas Aug. 20, 1998), former employees of an insurance brokerage argued that the their non-competes violated the statute because they contained no geographic limitation, but the court rejected this argument. Id. at *3. The statute’s reasonable geographic restriction parallels a similar common-law requirement, the court reasoned, and Texas courts had held that a geographic limitation was not necessary where the non-compete was limited to clients the former employee had contact with. Id. at *3-4 (citing McElroy and Stocks). The non-compete “implicitly” contained a reasonable geographic restriction because it was limited to clients of the brokerage. Id. at *4.

The First Court of Appeals followed the same approach in Gallagher Healthcare Insurance Services v. Vogelsang, 312 S.W.3d 640 (Tex. App.—Houston [1st Dist.] 2009, pet. denied). The non-compete in Gallagher had no geographic limitation, but it was limited to clients the employee had worked with in her last two years at the company. Id. at 654. “A number of courts have held that a non-compete covenant that is limited to the employee’s clients is a reasonable alternative to a geographical limit,” the court said, citing Stocks, Totino, and McElroy. Id. at 654-55. The court held the limitation to clients the employee worked with while employed by the company was a “reasonable alternative to geographical area.” Id. at 655.

As these cases illustrate, the scope of activity restrained is usually a more important factor than geographic area. Even a non-compete that has a reasonable geographic area will be unenforceable if the scope of activity restrained is too broad. See Burning Down the Haas: The Industry-Wide Exclusion Rule in Texas Non-Compete Litigation.

The employee’s position in the company is also an important factor, which leads to the next general rule.

General Rule 6: No geographic limitation or broad geographic limitation + non-compete not limited to specified customers + high-level executive = It depends.

We have seen that a broad geographic area—or even the lack of any geographic area—may be found reasonable if the non-compete is limited to existing clients or customers. But what if the non-compete is not limited to existing clients or customers?

This is where it gets hard. In a case like this, other factors, such as the employee’s rank in the company and knowledge of the company’s confidential information, become more important.

Judge Ellison considered the issue in detail in M-I LLC v. Stelly, 733 F.Supp.2d 759 (S.D. Tex. 2010). In that case, Knobloch resigned from his position as Manager of Sales for the Americas at M-I, an oilfield services company. He started his own oilfield services company and allegedly started “raiding” employees from M-I. Id. at 769-70.

Knobloch’s non-compete restricted doing business with existing M-I customers, but it did not end there. Like many non-competes, it also prohibited Knobloch from engaging in any business “involving oilfield displacement tools or services or any other businesses then conducted by Employer.” Id. at 794. These restrictions applied “in any geographic area” where the company did business, which effectively meant North America, South America, and the Caribbean. Id. at 797.

Knobloch argued that his non-compete was unenforceable because the geographic area was too broad, but Judge Ellison disagreed, citing his own formulation of the Holistic principle. “[N]on-compete covenants with restrictions covering a wide geographic area may be reasonable if they are limited in scope to a firm’s current or prospective clients such that they do not pose a greater restraint than necessary to protect the firm’s goodwill,” he said, citing his own opinion in TransPerfect Translations (I love that flex). Id. at 797-98.

He also cited a version of the Sales Territory principle: “Covenants with wide geographic areas have been upheld frequently in Texas courts, especially when the area covered constitutes the employee’s actual sales or work territory.” Id. at 798.

Applying these rules, Judge Ellison acknowledged that “a geographic area covering the Western hemisphere is broad, reaching to the outer limits of a restriction.” But he ruled that this broad geographic area was reasonable, even where the non-compete was not limited to existing customers, where:

• Knobloch had “extensive job responsibilities” and held a position in “upper management” (Manager of Sales for the Americas). He was “much more than a manager and salesman for his former employer.” He oversaw the company’s “relationships with major international clients.”
• His actual territory did span the Americas.
• Knobloch knew the company’s technical confidential information: “An engineer by training, Knobloch participated in the design of [the company’s] tools and in facilitating wellbore completions. He delivered technical presentations internationally, formulated company growth strategies, and discussed product development with engineers.”

Id. at 798-99.

In short, in M-I v. Stelly the geographic area covering the entire Western hemisphere was reasonable where the employee was a high-level executive, he was actually responsible for that territory, and he had knowledge of the company’s confidential technical information.

Texas cases since M-I v. Stelly have tended to find broad geographic areas reasonable when the former employee was a high-level executive.

Consider Daily Instruments Corp. v. Heidt, 998 F.Supp.2d 553 (S.D. Tex. 2014). In that case, the non-compete broadly applied to the United States and any country in which Daily Instruments did business. Id. at 567. Daily Instruments specialized in the narrow field of reactor thermometry, which involved electrical temperature measurement devices used in reactors for the refining, chemical, and petrochemical industries. Id. at 557.

The court found the non-compete reasonable for three reasons. First, the employee was a high-level sales manager with responsibility for a very large territory and with access to the company’s confidential information regarding worldwide clients and sales. Id. at 567-68. Second, the field of reactor thermometry was very narrow, with a narrow customer base, few competitors, and a global scale. Id. at 568. Third, the non-compete had a reasonable limitation on scope because it did not bar the employee from working in the industry, but only from performing the kind of work he had performed in his last two years of employment in the narrow field of reactor thermometry products, and from disclosing confidential information. Id.

Similarly, in Ameripath, Inc. v. Hebert, 447 S.W.3d 319, 335 (Tex. App.—Dallas 2014, pet. denied), the court found a broad geographic area reasonable considering the employee was a member of employer’s “highest level management team.” The employee cited the Sales Territory principle and argued that he only worked in two counties, while the geographic scope of the non-compete was much broader. Id.

But the court said “the breadth of enforceable geographical restrictions in covenants not to compete must depend on the nature and extent of the employer’s business and the degree of the employee’s involvement in that business.” Id. (citing Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 793 (Tex. App.—Houston [1st Dist.] 2001, no pet.). The restriction on working anywhere for a company that operated in the Dallas-Fort Worth area was reasonable, the court reasoned, because the employee’s “management knowledge of and experience with [the company’s] Dallas-area operations would be valuable to his new employer.”

And in McKissock, LLC v. Martin, 267 F.Supp.3d 841, 856-57 (W.D. Tex. 2016), the court found a nationwide geographic area reasonable, where the company had a national customer base, the employee taught online courses available to the national customer base, and the employee held an upper-level position as Senior Appraisal Instructor.

Hmm. “Senior Appraisal Instructor.” I’m wondering how “upper-level” that really was. In theory, I don’t have a problem with the Holistic principle applied in M-I v. Stelly and subsequent cases. Courts should remember that the primary rationale for requiring a geographic limitation is to protect a company’s goodwill.

But I fear that in practice, dispensing with the geographic limitation requirement or allowing an extremely broad geographic area can have a real chilling effect on the ability of businesses to hire the best executive talent. I’ve seen this in my practice.

Maybe it’s time to hit rewind.

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. 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.

The reasonable geographic area requirement of Texas non-compete law is delightfully dated. It’s an analog throwback in a digital era. When Texas courts say a non-compete must be limited to a reasonable geographic area, you can just feel the needle dropping into the well-worn grooves of your uncle’s vinyl copy of Frampton Comes Alive!

But some of you will object that requiring a geographic limitation in a non-compete is an obsolete relic of a bygone era, like Microsoft stores. We’re in the WFH era now. The physical location of an employee doesn’t matter. You might argue a sales person with a cell phone and a laptop can do just as much damage to your business from a beach chair in Fiji as a cubicle in Pearland.

Maybe so. But if the non-compete says “within Pearland,” you’re kind of stuck with that. Plus, the Texas non-compete statute still requires a non-compete to have a reasonable limitation as to “geographical area.” Tex. Bus. & Com. Code § 15.50(a).

The traditional connection between physical proximity and customer goodwill

This is perhaps the most old-fashioned part of Texas non-compete law. It hearkens back to a time when physical proximity was the key to a salesman maintaining goodwill with the customer.

Consider Randolph v. Graham, 254 S.W. 402, 403-4 (Tex. App.—San Antonio 1923, writ ref’d), where the court held that a medical practice non-compete was reasonable and enforceable, despite having no time limitation, because it was limited to practicing medicine within a 20-mile radius of Schertz, Texas.

The court didn’t explain why the geographic area was reasonable, but it’s easy to understand. People like to go to a doctor with an office near them. So, if a doctor sells his practice in Schertz and moves to Austin, it is unlikely his patients will follow him. (The drive from Schertz to Austin is 65 miles up I-35, which usually takes 5-7 hours.) A 20-mile radius sounds about right to prevent the doctor from taking advantage of the goodwill he developed with his patients.

Two years later, the geographic limitation requirement took shape in City Ice Delivery Co. v. Evans, 275 S.W. 87 (Tex. Civ. App.—Dallas 1925, no writ). The court said the test for enforceability of a non-compete in an employment contract was whether it imposed “any greater restraint than is reasonably necessary to secure protection of the business of the employer or the good will thereof.” Id. at 90.

Applying this principle to the geographic area of the non-compete, the court held that the employer was entitled to an injunction against the employee competing in the ice delivery business in the territory where he had delivered ice to the company’s customers, but not against competition outside of the territory, where the company had no goodwill based on the employee’s “personal contact” with customers. Id.

Again, we can see why it made sense to limit the non-compete to the employee’s delivery area. In a business that involves physical delivery of the product to the customer, it was unlikely that a salesman was going to develop goodwill with customers outside his delivery area. Especially in 1925, when the ice would melt if you had to go too far.

So there you have it. Two keys to the geographic area requirement: (1) it should be limited to the territory where the employee interacted with customers, because (2) that is the area where the employee developed goodwill with the customers on behalf of the company.

64 years later, the Texas legislature enacted the 1989 non-compete statute. It provides that a non-compete must contain limitations as to time, geographical area, and scope of activity to be restrained that are “reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.” Tex. Bus. & Com. Code § 15.50(a).

How have Texas courts interpreted the statute’s reasonable geographic area requirement? In principle, not much has changed since City Ice Delivery.

The Sales Territory principle

In most cases, where the employee worked in some kind of customer-facing sales role within a defined territory, the reasonableness of the geographic area will turn on whether it matches the employee’s sales territory. Let’s call this the Sales Territory principle.

When the case involves a sales person or other low to mid-level employee, the Sales Territory principle will usually explain why the court found the geographic area reasonable or unreasonable. In other words, the Sales Territory principle usually applies when the case does not involve a high-level executive. That leads to our first general rule.

General Rule 1: Non-executive + no geographic limitation = probably unreasonable

The easiest cases are those involving a non-executive who has a non-compete with no geographic limitation.

One of the first cases to apply the statute’s geographic area requirement was Zep Manufacturing Co. v. Harthcock, 824 S.W.2d 654 (Tex. App.—Dallas 1992, no writ). That case involved a non-compete between Zep, an industrial chemical manufacturer, and Harthcock, an industrial chemist. Id. at 656-57. Harthcock’s non-compete barred him from performing services similar to those he performed for Zep for two years following termination, with no geographic limitation. Id. at 660.

The court cited the general principle that “what constitutes a reasonable area generally is considered to be the territory in which the employee worked while in the employment of his employer.” Id. (citing two pre-statute cases, Justin Belt Co. v. Yost, 502 S.W.2d 681, 685 (Tex. 1973), and Diversified Human Resources Group v. Levinson-Polakoff, 752 S.W.2d 8, 12 (Tex. App.—Dallas 1988, no writ)).

The court then said the non-compete failed to comply with the statute because it contained no limitation as to geographic area. Id. at 661. Thus, the non-compete would prohibit Harthcock from working as an industrial chemist anywhere, regardless of whether it was in an area not serviced by Zep or Harthcock.

“Noncompete covenants with broad geographical scopes have been held unenforceable,” the court said, “particularly when no evidence establishes that the employee actually worked in all areas covered by the covenant.” Because the non-compete contained no geographic restriction, the court held it was unenforceable. Id.

But today, most Texas lawyers are smart enough to include some geographic limitation in the non-compete. What then?

General Rule 2: Non-executive + ill-defined geographic limitation = probably unreasonable

Texas courts have reached similar conclusions when the non-compete has some geographic limitation, but is so broad or vague that it has no connection to protecting the goodwill developed by the employee.

For example, in TENS Rx, Inc. v. Hanis, No. 09-18-00217-CV, 2019 WL 6598174, at *1 (Tex. App.—Beaumont Dec. 5, 2019, no pet.) (mem. op.), the non-compete applied “in any state or geographical territory in which Employer is conducting, has conducted or anticipates conducting its business.”

The employee filed a motion for summary judgment that the non-compete was unenforceable because the geographic limitation and scope of activity restrained were unreasonable. Id. at *2. The employer argued that the employee was bound by the contractual stipulation that the geographic restriction was reasonable, stating it was “disingenuous” for the employee to now assert the contrary. Id. at *3.

This brings up one of my pet peeves: lawyers for the first employer love to argue that the employee is being dishonest or “disingenuous” when the the non-compete recites that its limitations are reasonable and the employee later argues they’re unreasonable. I don’t find this persuasive, and I’m guessing most judges don’t either. Almost every non-compete contains self-serving recitals like this. Even when I’m representing the employer trying to enforce the non-compete, I would rather just demonstrate that the limitation is reasonable than play this game.

In any case, the trial court in TENS Rx didn’t buy the “disingenuous” argument. It granted summary judgment that the non-compete was unreasonable in geographic scope and scope of activity restrained. Id.

Because the non-compete related to provision of personal services, the employer had the burden to prove the non-compete was reasonable. Id. at *4. On appeal, the employer cited no authority that the restrictions were reasonable, instead merely arguing that the employee was bound by the contract’s stipulation that the restrictions were reasonable. Id. at *4. The court appeared to reject this argument, instead looking to Texas case law on reasonableness of a geographic limitation. Id.

The question is “whether the covenant contains limitations that are reasonable as to geographical area and do not ‘impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.’” Id. (citing Marsh USA Inc. v. Vook, 354 S.W.3d 764, 777 (Tex. 2011)).

“The territory in which the employee worked for an employer is generally considered to be the benchmark of a reasonable geographic restriction,” the court said. Id. “Noncompete covenants with broad geographical scopes have been held unenforceable, particularly when no evidence establishes that the employee actually worked in all areas covered by the covenant.” Id.

“Here, there is no definite territory stated and no evidence that Hanis worked in all areas covered by the covenant,” the court said. “It is also unreasonable to impose a condition upon Hanis that would require her to know where TENS ‘anticipates doing its business.’” Id.

TENS Rx shows the risk of making the geographic limitation too abstract. Sure, there is some logic to defining the area as “the employee’s sales territory.” What better way to comply with the Sales Territory principle? But the risk of defining the geographic area this way is that the court may say it is too indefinite. How are the employee—and the court—to know what the sales territory is if it’s not spelled out in the contract?

On the other hand, the company may not know in advance what the employee’s sales territory will be. What if the employee works for the company for over a decade and the territory changes? I don’t have any foolproof solution to this problem, other than to say that usually the better practice is to include a specific geographic area that predicts, as well as the company can, what the employee’s likely sales territory will be.

Let’s say the employer tries to do that and limits the non-compete to a specific, concrete geographic area, such as “within Harris County, Texas.” Is that reasonable? It will probably depend on the employee’s actual sales territory, which leads us to the next general rule.

General Rule 3: Non-executive + well-defined geographic area broader than sales territory = probably unreasonable

When the employee is not a high-level executive and the non-compete has a specific geographic area, the question will be whether the geographic area is broader than the employee’s actual sales territory.

This creates an obvious problem. Dozens of Texas cases say that the reasonableness of a non-compete is a question of law. But how can a judge decide the reasonableness of the non-compete’s geographic area without considering extrinsic evidence about the facts?

Suppose the non-compete’s stated geographic area is “within Harris County, Texas and surrounding counties.” On a motion for summary judgment, the Employee signs a sworn affidavit stating “my sales territory was limited to Harris County,” while the Employer’s CEO signs a sworn affidavit stating “Employee’s sales territory included Harris County and all the surrounding counties.” In other words, conflicting evidence. How can the trial court decide that issue as a question of law?

It can’t. And this illustrates why Texas courts are simply wrong when they declare that the reasonableness of a geographic limitation is always a question of law. On the other hand, if the facts regarding the employee’s sales territory are undisputed, then the reasonableness of the geographic area could present a question of law for the court.

Consider Fomine v. Barrett, No. 01-17-00401-CV, 2018 WL 6376500, at *1 (Tex. App.—Houston [1st Dist.] Dec. 6, 2018, no pet.), which prohibited a chiropractic case manager from competing within a 500-mile radius of the clinic’s location. The former case manager, Barrett, moved for summary judgment that the geographic limitation was unreasonable, extending beyond her work responsibilities for the clinic. Id. at *2.

The Court of Appeals affirmed summary judgment for Barrett. The court began by citing the Sales Territory principle, i.e. “[t]he territory in which an employee worked for an employer is generally considered to be the benchmark of a reasonable geographic restriction.” Id. at *3.

The clinic argued that a 500-mile radius was reasonable because Barrett marketed to patients throughout the State of Texas, but the court rejected this argument. Even assuming Barrett’s sales territory included all of Texas, a 500-mile radius would include all of Louisiana and significant portions of Alabama, Arkansas, Mississippi, Oklahoma, and Mexico. Id. at *3. The geographic scope was therefore “significantly broader” than the geographic scope of Barrett’s employment with the clinic, and the non-compete was therefore unenforceable as written. Id. at *4.

Fomine shows the importance of the employer offering evidence that an employee responsible for generating sales actually worked in the entire geographic area stated in the non-compete. Otherwise the area may be found broader than necessary to protect the employer’s goodwill.

The Sales Territory principle can also apply when the defendant is not a sales employee. Ortega v. Abel, 562 S.W.3d 604 (Tex. App.—Houston [1st Dist.] 2018, pet. denied), was a non-compete case involving the sale of a Hispanic-themed grocery store chain. The geographic area was a 10-mile radius from each of the five stores sold, which equated to most of the Greater Houston area. Id. at 611. The defendants’ expert testified that a three-mile radius would be more than sufficient to protect the goodwill of each store, reasoning that people in a city like Houston rarely travel more than 10 to 12 minutes to go to the grocery store. Id. The plaintiff, Ortega, did not present any evidence to contradict this testimony. Id. at 612.

The Court of Appeals held that the evidence was sufficient to support the trial court’s determination that the 10-mile radius in the non-compete was greater  than necessary to protect Ortega’s goodwill. Id. The court reasoned that “[t]he goal of a covenant not to compete is to establish the restraints on trade reasonably necessary to protect the goodwill or other business interest of the promise, not to prevent any competition.” Id. The expert’s testimony supported the trial court’s conclusion that a 3-mile radius was sufficient. Id.

General Rule 4: Non-executive + geographic area basically matching sales territory = probably reasonable

The next application of the Sales Territory principle is where the employee is a sales person or other lower to mid-level employee, and it is undisputed that the geographic area matches the sales territory the employee actually worked (or is at least pretty close).

That presents a fairly easy case for the court to hold that the geographic area is reasonable.

For example, in Gehrke v. Merritt Hawkins & Associates, LLC, No. 05-18-001160-CV, 2020 WL 400175, at *4 (Tex. App.—Dallas Jan. 23, 2020, no pet. h.), the non-compete between a national physician recruiting firm and a salesman prohibited competition in states in which the salesman worked during his last year with the firm. The court held that the multi-state geographic restriction was enforceable because the salesman actually worked within those states. Id.

But of course not every case involves an ordinary sales-level employee. What if the employee was a high-ranking executive who knew everything about the company and was responsible for all of the company’s customers?

I feel like I should save that for Part 2.

Do you feel like I do?

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Zach Wolfe (zwolfe@fleckman.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. 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.