Many people willingly sign non-compete agreements with employers without stopping to read the fine print or consider the implications. What happens if you've signed a non-compete and you get offered a better job in a different state? Will you suffer legal repercussions for taking a better job?
An Overview of Non-compete Agreements
A non-compete agreement, also known as a covenant not to compete or a restrictive covenant, is used by an employer to limit the ability of an employee to compete unfairly by stealing the employer’s customer information or trade secrets.
The enforceability of any non-compete agreement in most states requires that they strike a balance between protecting the employer's legitimate business interests from unfair competition and an employee’s right to work in a field for which he or she is trained.
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Non-compete Agreements in Texas
Non-compete agreements in Texas are governed by the Covenant Not to Compete Act, a statute formally known as Texas Business and Commerce Code Section 15.50.
Under the Texas statute:
- Texas does not recognize stand-alone non-compete agreements.
- All non-compete agreements must be ancillary to another otherwise enforceable agreement and contain reasonable limits as to time, geography, and scope of activity restricted.
- Texas does not consider an at-will employment relationship, in which an offer of initial employment is made, to be an otherwise enforceable agreement.
- A non-compete agreement signed after an employment relationship has begun may not have requisite consideration unless accompanied by additional pay or a promotion.
- A non-compete agreement must be executed at the same time as another agreement where the relationship is binding on both parties in order to be enforceable.
Most courts determine what is considered reasonable or not reasonable in a non-compete agreement by looking at the type and size of the business as well as the time period and geographic area encompassed by the agreement. The court will also examine whether adequate consideration or benefit was given to the employee at the time the agreement was signed.
Is a Non-compete Enforceable Across State Lines?
The answer is: it depends. Some states will choose to enforce a non-compete agreement and others will choose not to. It will typically come down to the specifics of your situation, the limitations outlined in the agreement, and which state laws are applied to the agreement. An agreement that is too restrictive will likely not hold up in any court.
However, if the limitations are considered "reasonable" and that company does business in the state you've moved to, the agreement could be enforced. If you've signed a non-compete agreement with your previous employer and you move to a state where they don't conduct business, the non-compete will most likely not be enforced. To even have a chance at enforcing the agreement, your previous employer would need to prove that the agreement protects a legitimate business interest of theirs.
That being said, Texas does not have an authoritative decision, as California does, that prevents Texas state courts from enjoining (stopping) the actions in other states.
For a Texas non-compete agreement to be enforceable outside Texas, the employer must make sure to include provisions within the NCA for exclusive jurisdiction and venue provisions. Then any disputes will only be litigated in the state whose laws govern the interpretation of the NCA.
A case in Texas suggests that the rules of enforcement of forum selection clauses are different from the rules controlling the choice of law in the context of non-competes. Courts in both states may yield jurisdiction to the court selected in the agreement.
The Similarity of Texas Non-compete Law to California
Both California and Texas are notorious for their views toward competition and their refusal to enforce agreements that restrict competition.
California does not recognize non-compete agreements except in extremely narrow circumstances, and NCAs are automatically void by California state law. Specific exceptions include the following:
- Where the owner of a business is selling the entire business or is selling the goodwill in the business, the seller may be bound by a non-compete clause.
- When there is a dissolution or dissociation of a partnership.
- Where there is a dissolution of a limited liability company.
Texas does enforce non-compete agreements, but they are more particular than other states about which agreements they choose to enforce.
This is a vital reason why it's important to have your contract written by a Dallas transactional attorney who specializes in non-compete agreements in the state of Texas. Many people are under the false impression that simply getting the other party to sign the agreement makes it enforceable, and that isn't the case.
To reiterate, according to Texas state law: "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, 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 Promisee."
Texas will not enforce an agreement that is overly restrictive because Texas is a proponent of competition and free trade.
Other Texas Non-compete Myths
One myth that circulates among lawyers who are not specialists in non-compete agreements is that an employer suing to enforce an NCA in Texas will recover their attorney fees.
While the Supreme Court of Texas has not ruled on this, several intermediate appellate courts have said that the non-compete statute of Texas preempts other laws. Since the non-compete statute does not specifically state that attorney fees can be recovered, the employer bringing suit cannot expect to be compensated for them.
The employee, on the other hand, may be able to recover attorney fees depending on the circumstances.
Another myth about Texas is that the courts treat non-solicit agreements differently from non-compete agreements. This is not true. As far as Texas is concerned, a non-solicit agreement is considered to be governed by the non-compete statute because it is anticompetitive just like non-competes.
If you have signed a non-compete agreement in Texas, a variety of circumstances will determine whether or not the Texas employer can enforce the non-compete agreement outside the state.
As long as the agreement follows Texas Business and Commercial Code Section 15.50, the non-compete agreement could be enforced against you. The laws of the state where you are attempting to become employed will also have a say in whether the Texas non-compete agreement can or will be enforced.