Noncompete Agreements And The Requirement of Additional Consideration
May 2016 Newsletter Article
For the greater part of the twentieth century and until 2006, Texas courts generally disfavored non-compete agreements, finding them unenforceable as restraints on trade. However, in 2006 the Supreme Court of Texas decided two cases which made courts much more likely to enforce non-competes. As the Texas law of non-competes has evolved, one of the most important lessons to note is that non-compete agreements must be supported by additional consideration.
An employee non-compete agreement, also known as a restrictive covenant, restricts former employees from directly competing with the former employer for some period of time. For a non-compete to be enforceable, Texas Business & Commerce Code (TBOC) Section 15.50(a) provides two basic requirements:
- The covenant must be "ancillary to or part of an otherwise enforceable agreement at the time the agreement is made"; and
- The covenant must contain "limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promise.
In this blog we are concerned with the first requirement that the covenant must be "ancillary to or part of an otherwise enforceable agreement at the time the agreement is made." Prior to 2006, Texas courts often found non-compete agreements unenforceable because the parties to an agreement didn't meet this first-prong of Section 15.50(a). To meet this test, an employer must provide something to an employee that gives rise to its interest in restraining the employee such as trade secrets, and (2) that the non-compete agreement be drafted to enforce the employee's promise, i.e., consideration.
Simply put, a non-compete agreement must be based on additional consideration a specific type. A restrictive covenant cannot be a stand-alone promise from the employee which lacks any new consideration from the employer. Similarly, if a contract provides that in exchange for services, one party will provide monetary compensation as consideration for an otherwise enforceable employment agreement, but there is no additional consideration for a party's promise to not compete upon contract termination, then such an agreement is unenforceable. Thus, if money is the stated consideration, Texas courts will find this to be inadequate because it is not set apart as different consideration for the promise to not compete.
Texas courts have found that a promise for a company to disclose confidential information to its employees and the reciprocal promise from the employee to not disclose such information would meet the requirement for consideration since it is "something [provided] to an employee that gives rise to its interest in restraining the employee." A promise to provide special training to the employee may also be sufficient in meeting the requirement of additional consideration.
When properly drafted, a non-compete agreement can be an excellent tool to preserve a company's competitive advantage stemming from its goodwill or trade secrets. At the Metcalf Adair Law firm, we can assist any employer to protect his or her business with such an agreement.