A Texas Court of Appeals recently found that a contract that prohibited a company’s business partner from “accepting business” from a competitor was unenforceable.
In Texas, all restraints on trade are illegal unless they meet the requirements of the Texas Covenants Not to Compete Act. Most of the time, such restraints take the form of a non-competition agreement where an employee or a seller of a business agree not to compete with a company within a certain geographic area.
However, restraints on trade can take other forms, such as, for example, a requirement that an employee repay their training costs to the employer, employee forfeiting their vested incentives, or, as was the case here, a company agreeing not to accept business from a competitor. In such circumstances, these restraints also must meet the requirements of the Texas Covenants Not to Compete Act.
In this particular case, the Court of Appeals ruled that a prohibition on accepting business from a competitor was a “restraint of trade” and, therefore, had to meet the requirements of the Texas Covenants Not to Compete Act. This meant that it had to contain reasonable restrictions on the geography and scope, and have an end date. Since the restriction was indefinite, the Court held that it was not enforceable.
CONCLUSION: Parties drafting contracts that impose restraints on how other parties may conduct business outside of their business relationship need to understand that such restraints may be subject to the requirements of the Texas Covenants Not to Compete Act, which means they cannot be indefinite or have an overbroad geographic scope.
A party that believes that their contract contains restraints on trade, i.e., their ability to conduct business outside of a particular business relationship should consult with an attorney to determine if such restraints are enforceable in Texas.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.