What is a non-compete clause?
A non-compete clause, or a non-compete agreement, is a contract between an employee and an employer in which the employee agrees not to enter into direct competition with the employer during or after employment, regardless of whether the employee is terminated or resigns. The employee is also barred from revealing any trade secrets learned during employment. Many times, these agreements are presented to employees on a take-it-or-leave-it basis, meaning employees must agree to the contract as a term of employment.
Valid non-compete clauses may increase efficiency in industry by encouraging employers to entrust confidential information and important client relationships to key employees. Employers will be more trusting when they know their employees have agreed not to take the information or skills they obtain elsewhere. On the other hand, unreasonable limitations on employees’ ability to change employers or solicit clients or former co-employees could hinder legitimate competition between businesses and the mobility of skilled employees.
Valid non-compete clauses may increase efficiency in industry by encouraging employers to entrust confidential information and important client relationships to key employees. Employers will be more trusting when they know their employees have agreed not to take the information or skills they obtain elsewhere. On the other hand, unreasonable limitations on employees’ ability to change employers or solicit clients or former co-employees could hinder legitimate competition between businesses and the mobility of skilled employees.
Are non-compete clauses valid in Texas?
States vary widely in their enforcement and recognition of non-compete clauses. The Texas Constitution protects the freedom to contract—subject to reasonable restrictions. In Section 15.05(a) of the Texas Business and Commerce Code, the Legislature included such a restriction, stating: “Every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.” So long as a non-compete clause is reasonable—and not merely a restraint of trade—it will be enforced.
A non-compete clause is thus enforceable if it is: (1) ancillary to or part of an otherwise enforceable agreement; (2) supported by consideration; and (3) contains reasonable restrictions in time, geographic scope, and the scope of activity. The burden of proof is on the employer to show that the non-compete clause meets the statutory criteria.
These factors are viewed collectively, so even a clause that encompasses a large geographic area may be found valid if the time period is relatively short. A valid non-compete clause must serve to protect an employer’s trade secrets, business relationships, or a similar interest, and must not overly restrict the free market.
In addition to the statutory requirements above, the Texas Business and Commerce Code imposes special requirements for physician non-compete clauses designed to protect a patient’s right to receive care from her preferred provider.
A non-compete clause is thus enforceable if it is: (1) ancillary to or part of an otherwise enforceable agreement; (2) supported by consideration; and (3) contains reasonable restrictions in time, geographic scope, and the scope of activity. The burden of proof is on the employer to show that the non-compete clause meets the statutory criteria.
These factors are viewed collectively, so even a clause that encompasses a large geographic area may be found valid if the time period is relatively short. A valid non-compete clause must serve to protect an employer’s trade secrets, business relationships, or a similar interest, and must not overly restrict the free market.
In addition to the statutory requirements above, the Texas Business and Commerce Code imposes special requirements for physician non-compete clauses designed to protect a patient’s right to receive care from her preferred provider.
Summary
Like many areas of employment law, the validity of a non-compete clause is decided on a case-by-case basis, looking to the unique facts presented in each case.
Texas courts are more likely to uphold non-compete clauses if the employee held a sensitive position with access to vital information or trade secrets as opposed to those with little to no proprietary information. However, courts have the option of modifying or reforming over-broad non-compete clauses to ensure the time, geographic area, and scope of activity to be restrained is reasonable and does not impose a greater restraint than necessary to protect the goodwill or business interest of the employer.
If you are considering signing a non-compete clause or engaging in an activity that may constitute a breach of the agreement, consider consulting an experienced employment attorney to navigate your options.
Texas courts are more likely to uphold non-compete clauses if the employee held a sensitive position with access to vital information or trade secrets as opposed to those with little to no proprietary information. However, courts have the option of modifying or reforming over-broad non-compete clauses to ensure the time, geographic area, and scope of activity to be restrained is reasonable and does not impose a greater restraint than necessary to protect the goodwill or business interest of the employer.
If you are considering signing a non-compete clause or engaging in an activity that may constitute a breach of the agreement, consider consulting an experienced employment attorney to navigate your options.
Are you concerned about a non-compete clause in your contract?
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