Geographic Restrictions in Non-Competition Agreements Necessary?—The Texas Supreme Court takes up this issue in Horizon Health

Chris Hanslik, Kasi Chadwick

March 21, 2017

When determining the enforceability of non-competition agreements in Texas, litigants are perpetually reading the tea leaves. Presently, non-competition law in Texas is controlled by a thirty-year-old statute, § 15.50(a) of the Texas Business and Commerce Code, passed during a time when industry was much more geographically confined. As § 15.50(a) states:

[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographic 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.

Tex. Bus. & Comm. Code § 15.50(a) (emphasis added). Interpreting § 15.50(a), many Texas courts have required that a geographic restriction be included in a valid, enforceable non-competition agreement. In a world now driven by e-commerce however, many lawyers and litigants have called into question whether a geographic restriction can truly move the meter in gauging the reasonableness of a non-competition agreement in present day. Many question whether such a restriction should now be required at all. That question has now been presented to the Texas Supreme Court in Horizon Health Corp. v. Acadia Healthcare Company, Inc.

In Horizon Health, Horizon Health Corporation (“Horizon Health”), a mental health contract management service for healthcare entities, sued several of its former, high-level officers and employees for violations of their non-competition agreements when the former officers and employees left Horizon Health and took up employment in a competing venture, Acadia Healthcare Company, Inc. The non-competition agreement prohibited competition with Horizon Health as well as the solicitation of Horizon Health’s employees and/or customers for one year after the termination of employment with Horizon Health. The non-competition agreement did not contain a geographic restriction.

As Horizon Health argued—and the trial court found—Texas law does not require an express geographic limit where a non-compete has other reasonable limits (i.e. restricts competition in a niche market, limited time periods, applies only to direct competitors and clients). In arguing to the Texas Supreme Court, Horizon Health continued that the “limitations as to time, geographic area, and scope of activity to be restrained” are secondary in importance to § 15.50(a)’s reasonableness requirement. Per Horizon Health, the non-competition agreements were otherwise reasonable—even absent an express geographic restriction—because the agreements only last for one year (one-to-five-year limitations are traditionally upheld as reasonable by Texas courts) and were narrowly tailored to clients and direct competitors in Horizon Health’s niche market within the healthcare industry. Horizon Health accordingly asks the Texas Supreme Court to look to the true purpose of the geographic restriction requirement in § 15.50(a)—reasonableness—and hold that an express, geographic restriction need not be included for a non-competition agreement to be otherwise enforceable.

In response, calling on a long line of Texas cases, Arcadia Healthcare and the former officers and employees argue that because the non-competition agreements do not contain a geographic restriction, they are per se invalid and unenforceable per § 15.50(a).

Oral argument was heard recently, and an opinion has not yet been issued. It is not clear that departing from the traditional interpretation of § 15.50(a) requiring a geographic restriction would not best serve the Texas Legislatures intention that non-competes be reasonable and limited. Regardless of the Texas Supreme Court’s decision, determining whether a non-competition agreement is valid and enforceable will likely continue to require some degree of divination.