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Enforcing Employee Non-Compete Agreements in Texas

February 2016 Newsletter Article Those familiar with employee non-compete agreements know that enforcement of such agreements varies greatly from state to state. Employee non competes, also known as restrictive covenants, impose restrictions on an employee who leaves his employer that seek to prevent the former employee from directly competing with the former employer for a period of time. In California, employee non-compete agreements are not enforceable as a matter of public policy. In other states, such as Pennsylvania, non-competes are routinely enforced as long as the terms of the agreement satisfies the judicial tests for reasonableness. In Texas, enforcing a non-compete agreement is fairly difficult, but not impossible. The agreement must be drafted very carefully to comply strictly with the requirements imposed by Texas law, which requires more than just the usual test of reasonableness. Texas Business and Commerce Code (TBOC) Section 15.50 imposes two strict requirements of all non-compete agreements in order for them to be enforceable. First, the agreement must be ancillary to or a part of an otherwise enforceable agreement in place at the time the non-compete is executed. What this means is that there must be some consideration on the part of the employee that supports the agreement. Such consideration must extend beyond the usual components of an employer-employee relationship. Consequently, mere payment of salary or continued employment are insufficient to satisfy the consideration requirement. Put differently, the consideration in exchange for the agreement not to compete must be an additional item of value, such as access to confidential information or provision of special training. Otherwise, the non-compete will probably be unenforceable for lack of sufficient independent consideration. Secondly, TBOC Section 15.50 requires that any limitations imposed as to time, geographic area, and scope of activity must be reasonable and not impose a greater restraint than necessary to protect the goodwill of the business or some other business interest. In the case of physicians, TBOC enumerates several specific additional requirements, including continued access to patient lists and records, among other things as well as requiring a "buy out" at a "reasonable price". These additional requirements are often overlooked or ignored in non-compete agreements for physicians. There is a generous amount of case law that describes what constitutes "reasonableness" with respect to the scope, duration, and geography of employee non-compete agreements. However, each analysis is extremely fact-dependent and cannot be decided in a vacuum. While case law has provided some basic contours of the reasonableness standard, analyzing the enforceability of such covenants is far from an easy task. Enforceable agreements are mostly limited to the same type of work the employee performed for the former employer, confidential information furnished to the employee, the proximate geographic area where the employee worked, and only for a time period that matches, but does not exceed, the time it would take for the confidential information to become commonly used by competitors. Parties involved in agreements including a non-compete or other similar covenant will be well served by obtaining professional guidance with interpreting the enforceability of such covenants as the presence and importance of each of the above factors will vary in each circumstance. When properly written and executed, a non-compete agreement can be an excellent tool to preserve a company's competitive advantage stemming from its goodwill or trade secrets.

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