Noncompete clauses and agreements appear frequently in employment and other types of business contracts. In the employment scenario, a noncompete requires the employee to agree that upon termination or resignation, he or she will not enter into or start a business similar enough to the employer to be considered a competitor. Such agreements are aimed at preventing employees from using the employer’s confidential information, trade secrets, or client lists in gaining a competitive advantage either for a new employer or for their own enterprises.

On one hand, noncompetes protect employers from the potential loss of business that could result from employees leaving to join a competitor or start their own competing businesses. However, an overly broad agreement could, in theory, prevent an employee from working for any employer in a position that matches his or her skill set.

Texas state law provides that a noncompete clause is only enforceable if the following conditions are met:

  1. The clause must be ancillary to or part of an otherwise enforceable agreement; it cannot be a standalone contract. The Texas Supreme Court has ruled that an “otherwise enforceable agreement” may include an executory promise so long as the employer follows through on the promise (Alex Sheshunoff Management Services, L.P. v. Kenneth Johnson and Strunk & Associates).
  2. The agreement must contain reasonable limitations as to time, geographical area, and scope of activity.
  3. If the agreement is challenged, the employer must demonstrate
    • How non-enforcement would adversely impact the organization, and
    • That enforcement would not place an undue burden on the employee’s ability to earn a living.

There are many nuances affecting the enforceability of these provisions under Texas law, but the above are the basic rules of noncompete clauses in Texas.

For more information, visit the Texas Workforce Commission’s page Conflict of Interest, Trade Secrets, Non-Competition Agreements.