Are Non-Compete Agreements Enforceable in Texas?

kkGenerally, Texas allows non-compete agreements between employers and employees as long as they are reasonable in scope, geographic area, and term, and meet a few other requirements. See my previous posts about those requirements here, here, and here

Practically speaking, however, whether a particular non-compete agreement is valid depends heavily on the exact language used in the agreement.  Just as with any other contract, Texas courts will usually look at the precise language of a particular employment agreement to determine what the parties had in mind when they entered into it. 

Last year, a hospitalist group in Houston learned the above principles the hard way when it attempted to enforce a non-compete covenant against a physician who went to work for a competitor and discovered that the non-compete did not prohibit the physician from doing so. 

In Tummalla et. al. v. Total Inpatient Services, P.A., the non-compete clause between the hospitalist group and the physician stated the following:

6.2 NonCompete. In consideration for the access to the Confidential Information provided by [TIPS] and in order to enforce the Physician’s Agreement regarding such Confidential Information, Physician agrees that he/she shall not, during the term of this Agreement and for a period of one (1) year from the date this Agreement expires pursuant to Section 8.3 or is terminated by Physician pursuant to Section 8.6 (the “Restriction Period”), without the prior written consent of [TIPS], except in the performance of duties for [TIPS] pursuant to this Agreement, directly or indirectly within any Hospital in the Service Area or any other hospital in which the Physician practiced on behalf of [TIPS], in excess of 40 hours, within his last year of employment with [TIPS]:
6.2.1 Provide services as a hospitalist physician to any entity that offers inpatient hospital and emergency department services.
In a separate provision in the same agreement, however, it stated that the physician’s first 12 months on the job were to be considered an “introductory period” during which either party could terminate the employment relationship for any reason. The specific paragraph stated that it applied notwithstanding any other provision in the agreement and it failed to included or mention any non-compete restrictions. 

The court of appeals analyzed these various clauses in the contract and concluded that because the physician terminated his employment with the hospitalist group within the first year, i.e. the “introductory period,” the post-employment non-compete clause did not apply to him. Thus, he was free to compete with his former employer. 

TAKEAWAY FOR EMPLOYERS: Employers should have a qualified attorney draft and/or review their non-compete agreements.  While there are many forms out there, because non-compete agreements in Texas have to be catered towards each employer’s business and because courts will scrutinize the language when determining whether to enforce the agreement or not, using a standard form may result in the employer not being able to enforce it due to gaps in the language or failure to address specific termination situations.

TAKEAWAY FOR EMPLOYEES:  Signing a non-compete agreement without reading it first can result in a major headache down the road and severely limit employee’s career options.  Therefore, employees should always: (1) read the agreement; (2) request a clarification if something is not clear; and (3) keep a copy of the signed agreement for their records.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Common Misconceptions About Non-Competition Agreements in Texas 

A big part of my practice consists of enforcing non-competition, non-solicitation and non-disclosure agreements against the departing employees on behalf of their employers. Conversely, I also advise employees regarding what they can and cannot do in light of the non-competition or non-solicitation restrains imposed on them by their former employers.  Here is a quick list of misconceptions that I have encountered among employers and employees about non-competition agreements in Texas.

1.         Non-competition agreements are not enforceable in Texas.  This is false.  For some reason, a lot of employees still believe that non-competition agreements are not enforceable under Texas law. While this used to be the case roughly a decade ago, all through mid- and late-2000s, Texas courts have been slowly relaxing the requirements that an employer must meet in order to enforce a non-compete agreement. It used to be virtually impossible for an employer to enforce a non-competition agreement, but now as long as the restraints are “reasonable” and a few other requirements are met, a non-compete agreement will be upheld in court. A detailed explanation of the requirements can be found here.

Keep in mind that not all agreements for Texas employees are governed by Texas law. Each state has its own rules about the enforceability of non-competition agreements and, for example, an agreement that would be enforceable under Texas law, would not be enforceable under California law.  Typically, non-compete agreements will state which law governs. If they do not, a more detailed analysis will have to be performed to determine which state’s law applies and how it affects the restraints imposed on the employee.

2.         I never signed a “non-competition agreement,” therefore I can compete with the employer. Employees rarely sign an actual contract titled “non-competition agreement.” Instead, non-competition clauses are often included in any number of documents, including employment agreements, arbitration agreements, benefits plans, stock option agreements, or employment handbooks and manuals. Thus, employees should carefully read every employment document they sign and keep the most current copy in their files.  When the time comes to leave the employer or start their own company, it helps to know exactly what the non-competition provisions state.

3.         A non-competition clause that is good for one employee is good for all employees.  This is false.  While simply including a non-competition or non-solicitation clause in an agreement often deters employees from competing against their former employers, when push comes to shove and an employer is forced to sue its former employee for violating his or her non-compete agreement, Texas courts will look at whether the restraints imposed by such agreements are “reasonable.”  As part of this analysis, they will consider what duties the employee performed, which customers he or she worked with, what geographic area his or her work covered, and many other factors.  Since this is a very factually intensive analysis, non-compete restraints that might be reasonable for one employee might be completely unreasonable for another employee. Thus, including a cookie-cutter non-compete clause in all of your employees’ contracts might not adequately protect the company’s interests. This does not mean, of course, that an employer must draft a different non-compete clause for each employee, but it does mean that certain positions or certain levels of employees within the company might need different clauses than other types of employees.

4.        Texas courts can always rewrite or “fix” a non-competition clause that is too broad. While technically this is true, practically speaking this kind of thinking can cost an employer a lot of money down the line.  First, employees are much more likely to challenge or violate a non-competition agreement that contains broad or unreasonable restraints because they think it is unenforceable or because they feel that it leaves them no choice by to violate it.  Second, an employer who knowingly attempts to enforce an unreasonable non-competition agreement may end up paying the restrained employee’s attorney’s fees if a court finds that the agreement was unreasonable. See a prior detailed discussion here.

BOTTOM LINE: Employers should attempt to craft non-competition clauses that take into consideration their industry, employees’ duties, the geographic area where employees will be working, and the time limitation that can be justified in court as necessary to protect the business of the company. While it might be tempting to draft a non-compete or non-solicitation clause that is broader than is necessary such approach can backfire if the employee decides to challenge the agreement in court.

Employees should carefully read and make sure they understand and agree with the non-competition or non-solicitation clauses contained in their employment documents.  They should assess the effect of the clause on their employment opportunities after they leave their current employer. If the clause is not clear, they should seek clarification in writing from the employer explaining the geographic scope, time limitations and the scope of restrained activities covered by the non-competition or non-solicitation clause.

Leiza litigates non-compete and trade secrets lawsuits on behalf of EMPLOYERS and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete agreement, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.