Amidst the hustle and bustle of daily business activities and the peripheral noise about non-compete agreements, the basics may get lost. Therefore, it is useful to periodically return to first principles.
With respect to non-compete agreements, the starting point, of course, is whether such agreements are even valid or enforceable. In Texas, they are. See Tex. Business & Commerce Code section 15.50.
Employers (and others) can enforce non-compete agreements and sue those who breach them in Texas courts. To sustain a claim under Texas law for breach of a non-compete agreement, the claimant must show: (1) the non-compete agreement is enforceable; (2) the defendant violated the non-compete; and (3) the defendant does not have an affirmative defense. In re Gomez, 520 B.R. 233, 237 (Bankr. S.D. Tex. 2014) (applying Texas law).
On that first prong, a non-compete agreement is enforceable in Texas if:
- It is ancillary to or part of an otherwise enforceable agreement at the time it is made;
- It contains a reasonable time limitation on its duration;
- It contains a reasonable limitation as to the geographic area it covers; and
- It contains a reasonable limitation on the scope of activity restrained that is not greater than necessary to protect the company’s goodwill or business interest.
Tex. Business & Commerce Code section 15.50.
Not surprisingly, there has been substantial litigation concerning each of these requirements. Confronted with allegations that they have breached a non-compete agreement, defendants frequently challenge their enforceability. As such, courts have been asked to clarify when a non-compete agreement is ancillary to an otherwise enforceable agreement and are routinely asked to determine whether specific limitations to time, geography, and/or scope of activity are reasonable. Such determinations are often driven by and sensitive to the specific facts and industry involved.
Employers attempting to enforce a non-compete agreement should expect the defendant to contest the reasonableness of the agreement’s limitations. Defendants regularly claim the agreement is overly broad, as such, and cannot be enforced. In response, the employer/company routinely asserts reasonableness of the limitations and articulates why the limitations are necessary and appropriate. Usefully, too, in Texas the proper remedy for overbreadth of a non-compete provision is reformation, not a declaration that it is unenforceable. See Tex. Business & Commerce Code section 15.51. This so-called blue penciling allows the employer/company to advocate for enforcement of the agreement with some reformation of the limitations rather than complete rejection of the agreement as unenforceable.