Common Misconceptions With Non-Compete Agreements in Texas (Part 1)

Andrew Pearce, Colby Hodges

August 2, 2017

Non-competition agreements in Texas have become an increasingly contentious area of litigation over the past decade. The time and expense associated with these types of lawsuits is often surpassed only by the confusion for many employers and employees regarding the proper scope, limitations, and enforceability of such agreements.

In this two-part series, we discuss common misunderstandings of both employees and employers surrounding non-competition agreements. Part 1 reviews three of the most common employee misconceptions that we hear.

1. True or False? My non-competition agreement is not enforceable because it lacks a geographic restriction.

FALSE. For a non-competition agreement to be enforceable, Texas law requires that it contain restrictions as to the duration, geographic area, and scope of the activity to be restrained. However, as one recent case has shown, simply because a geographic restriction is not set forth in black and white may not mean a non-competition agreement is per se unenforceable. In one case, for example, the trial court was asked to enforce an employment agreement that restricted its former employees from contacting or working for a narrowly defined list of clients and direct competitors, but the agreement did not set forth an express geographic restriction.

Ultimately, the trial court concluded that even absent an express geographic restriction, the non-competition agreement could still be enforced because Texas law does not require an express geographic limit where a non-competition agreement has other reasonable and defined limits (i.e. restricts competition in a niche market, limits time periods, and applies only to direct competitors and clients). Though the trial court’s ruling was appealed all the way to the Texas Supreme Court, the Supreme Court did not take up the issue when it reversed the trial court on other unrelated grounds.

So, as the legal landscape in Texas currently stands, a non-competition agreement that fails to include an express geographic limitation—but narrowly limits the activity to be restrained to a select market or clientele—may still be enforced.

2. True or False? My acceptance of employee incentives cannot serve as a basis for enforcing my non-competition agreement.

FALSE. In one important case, the Texas Supreme Court examined whether vesting stock ownership under a company’s incentive and stock award plan could suffice as sufficient consideration for a covenant not to compete. The managing director in the company was granted the option to purchase a substantial number of shares of stock as part of the company’s stock award plan designed to incentivize “valuable” and “select” employees. The stock vested in percentage increments on a yearly basis and became fully exercisable after a period of four years. However, to exercise the stock option, the employee was required to provide the company with a signed non-solicitation agreement promising not to compete against the company if he resigned within three years of exercising the option. The employee eventually left the company before the end of three years and was sued.

In examining the issues, the Texas Supreme Court reasoned that awarding the stock options that allowed the employee to purchase shares of stock at a discount provided the required connection between the employee’s non-competition agreement and the company’s interest in protecting itself. Specifically, by awarding stock options, the company “linked the interests of one of its key employees with the business’ long-term interests.” The Court reasoned that stockholders are “owners” who profit from the increasing market value of the company. Thus, the stock options were reasonably related to the protection of the business’ goodwill and the covenant not to compete was ancillary to an otherwise enforceable agreement.

3. True or False? My former employer cannot sue me because I never agreed to a non-competition agreement.

FALSE. Simply because an employee does not sign a non-competition agreement does not mean that he or she will be immune from litigation following the end of the employment relationship. As the First Court of Appeals has pointed out, “[t]here are circumstances in which trade secrets inevitably will be used or disclosed, even if the defendant swears that he or she will keep the information confidential.” Setting aside a non-competition agreement, the basic idea is that an employee may have access to the employer’s trade secrets, and, when the employee defects to a competitor to work in the same or similar capacity, he or she will be unable to perform the new job without making use of the previous employer’s trade secrets. One can obviously imagine that the more advanced or specialized the industry, the more this risk becomes a reality.

This “Inevitable Disclosure Doctrine,” though not expressly adopted under current Texas law, has nevertheless been used as a logical basis for granting injunctive relief against a former employee who has left for a competitor. Accordingly, employees departing their current role for a similar position and who have knowledge of their prior employer’s trade secrets and confidential business information should take special precaution to shield the use of that information.

When leaving a job, employees should refrain from taking any documents or information that could be considered an employer’s trade secrets and keep a detailed account of any actions taken to protect a prior employer’s confidential information. Moreover, departing employees should be wary of using external media devices such as flash drives to move information between any personal and work-issued computers, and should refrain from connecting any company-issued devices to personal cloud-based services such as such as iCloud, DropBox or Google.

In many instances in which an employee leaves to work for a competitor, perceptions—whether right or wrong—quickly become reality. Being proactive and forthright both prior to and after leaving a job can help to defuse otherwise potentially explosive situations before they turn into serious legal problems.