9 Are Noncompete Agreements Enforceable in Texas?

President Biden signed a series of executive orders designed to “increase competition in the American economy” earlier this month. The Biden Administration addresses the use of noncompete agreements, arguing that such agreements “serve to keep wages down and disempower employees from demanding better working conditions.” The orders “encourage” the Federal Trade Commission (FTC) to “exercise [its] statutory rulemaking authority . . . to curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.”

Although the FTC has yet to make any rules pursuant to these orders, employers utilizing noncompete agreements should anticipate opposition from the FTC in the future. Although the FTC can take months or years to make rules addressing noncompetes, that the FTC has authority to seek injunctive relief and financial penalties from companies taking “anticompetitive action” means employers should take notice now and begin reviewing their use of noncompetes.

Texas Noncompete Agreements

Texas employers will now have to think more in depth and use greater than usual caution when requesting employees to execute noncompete agreements, especially for low-wage workers or workers without an advanced education, as those were two of the Biden administration’s target groups cited as examples of overreach.

Texas law, as it currently stands, holds that in order to protect company goodwill and confidential information, a Texas employer can utilize a noncompete agreement. A noncompete agreement is enforceable in Texas if (1) it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made, and (2) to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained, such limitations are reasonable and do not impose a greater restraint than is necessary to protect the employer’s goodwill or other business interest.

To increase the chances your noncompete agreement will be found enforceable under Texas law, work with an experienced business lawyer to ensure that it:

  • Protects Legitimate Business Interests: A noncompete agreement should be designed to protect a company’s trade secrets, confidential information, and other important business interests and should specify what interests need protection.
  • Adequately Compensates the Employee: In order for an employee to agree, they should receive adequate consideration for their agreement. The promise of employment is generally sufficient, but with regard to existing employees, additional consideration should be contemplated (e.g., a pay raise or promotion).
  • Has a Reasonable Scope: The scope of the restraints on an employee’s future job prospects must be reasonable in order for a noncompete agreement to be enforceable. The reasonableness applies to duration and geography as well. To take an extreme example, a noncompete that says the employee may not compete with the employer’s business for 20 years after employment will be considered unreasonable and therefore unenforceable.
  • Specifies It Is Governed by Texas Law: State law governs the enforceability on noncompete agreements. For example, in California, they are illegal; therefore, any agreement made in Texas must specify that it will be governed by Texas law.

Trade Secret Exposure

President Biden has previously said he will except the very few noncompete agreements that are absolutely necessary to protect a narrowly defined category of trade secrets, but it remains unclear what would fall under definition. One of the most common problems a successful growing business faces is when an employee leaves and takes confidential and proprietary trade secret information with them to a competitor. Recognizing the growing problem facing businesses when former employees attempt to steal customer lists, catalogs, formulas, designs, training materials and other trade secrets, the Texas Legislature enacted the Texas Uniform Trade Secrets Act (TUTSA) in 2013. This law, in conjunction with other state and federal laws, protect businesses from trade secret theft and include remedies such as temporary restraining orders, injunctions, punitive damages, attorneys’ fees, and more.

Non-Compete Lawyer Houston

If you have questions about drafting or enforcing a noncompete agreement in Texas or about protecting your company’s trade secrets, our experienced business litigation lawyers can speak with you today about your options. If you are an executive or an employee who would benefit from an experienced non-compete lawyer  reviewing a non-compete agreement, contact us today to discuss.

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