In Texas, employment relationships are at will. Unless governed by a specific law or a contract, the business or the employee may terminate the relationship at any time. But what if the business wants to prevent the employee from using the information and/or skills obtained during the employment relationship, to compete with the former employer. In employment relationships, employers will often require or request a covenant not to compete, or noncompete clause in the employment contract to ensure that an employee, during employment and after, will not compete with his or her former employer. The employee is generally foreclosed from engaging in similar or competitive businesses, either for himself or herself or another, for a specified time period within a specified geographic location. In Texas, noncompete agreements are enforcable, but must be limited in time and scope or the agreement may be considered a restraint of trade and may not be enforced.
In Texas, the reasonableness and scope of a noncompete agreement is analyzed using three factors: (1) whether the restriction is greater than necessary to protect the business and goodwill of the employer; (2) whether the employer’s need for protection outweighs the economic hardship which the covenant imposes on the employee that is leaving; and (3) whether the restriction adversely affects the interests of the public. Additionally, the noncompete agreement must be related to the activities of the employee. The agreement will not be enforceable if it attempts to keep the employee from doing work that is unrelated to his or her activities with the employer.
A reasonable geographic area for a noncompete agreement is usually considered to be the territory in which the employee worked while in the employment of the employer. Noncompete agreements that are not limited in time are considered unreasonable. The agreement must be limited to a reaonsable amount of time that will protect the business and goodwill of the employer without imposing undue economic hardship on the employee. If an agreement contains a territory or time restraint that is unreasonable, courts do not necessarily consider them void. A court may instead enforce the contract by modifying the contract as to time and an area that is reasonable under the circumstances.
It can be advantageous for employers to have a noncompete agreement with employees who have particular knowledge of the employer’s techniques, practices, customer base and/or trade secrets. Implementation of a noncompete agreement can be tricky. Texas courts will not enforce noncompete agreements unless they are formed under certain circumstances. Factors that courts review when considering whether the formation was reasonable include: whether the employee was already employed at the time of the formation of the noncompete, what consideration was given by the employer and whether the employee was employed for a term or at will. You should seek advice from a licensed attorney if you have employees and are considering a noncompete agreement.