magnifying glass showing non-compete agreement form

When Is a Non-Compete Agreement Illegal? 

Are you wondering how to withdraw from a non-compete agreement that you signed? There may be ways to prove that your non-compete agreement is contrary to law. 

At Gardner Employment Law, we specialize in saving our client’s careers. If you are not sure whether you signed an enforceable non-compete agreement, we can help. Give us a call.

Is a Non-Compete Agreement Legal in Texas?

Black’s Law Dictionary defines “illegal” as “not authorized by law.”  Is a non-compete agreement authorized by any Texas law?  Yes. Texas legislated a special statute to permit the use of non-compete agreements, which is Section 15.50 of the Texas Business & Commerce Code.  This special statute was needed because the law generally abhors interfering with free trade. The Texas Legislature made this clear in Section 15.05(a) by stating, “Every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.“ Section 15.50 is an exception to that general rule. We explained the concept of non-compete agreements in Non-Compete Lawyer.

Section 15.50 contains 2 basic requirements. The non-compete provision must be (1) connected to or be part of a valid contract and (2) reasonable in its restrictions. Therefore, to prove that your non-compete agreement is illegal, you must be able to show that your agreement lacks one or both of these requirements.

Special Contract Requirements for Non-Competes

There is a general rule in contract law that both parties must furnish adequate “consideration” to make a valid binding contract. “Consideration” is a fancy word for value. In the opinions interpreting Section 15.50, Texas courts require a special type of consideration.  The employer must provide the employee access to confidential information about its business or customers or provide the employee specialized training on how to use confidential information. This is the only type of consideration that will support a valid non-compete agreement.  In other words, if an employee is asked to sign a non-compete agreement in exchange for money, that would not be lawful.  

“Reasonable” Is in the Eye of the Beholder

The second requirement of Section 15.50 is that the time, geographical area, and scope of activity to be restrained must be reasonable. If an employee’s non-compete agreement is litigated, a judge, not a jury, will decide whether the restraints stated in the non-compete agreement are reasonable. That is because no one can be prohibited from earning some type of income.

Regarding the time element, courts have allowed the period of time during which the employee cannot compete with the previous employer to last as long as 10 years.  Texas courts usually consider the industry and when the particular skill likely will become obsolete.  It would be unreasonable to prohibit a computer programmer from working in his field for 10 years. Upon return to that type of work, everything would have changed to the point that the employee could not find a job with only obsolete skills.

The courts gauge the other two elements, geographic area and scope of activity, by what the employee did and where he worked for his previous employee. If the job was selling widgets in Texas, likely the court will rule that it is reasonable to prohibit the employee from selling the very same type widget in Texas for a competitor for a reasonable amount of time. Courts will not create contract terms that the employer did not insert into the contract, but judges will revise contract terms that are unreasonable.

What Happens If I Violate the Non-Compete Agreement?

Generally, if you violate a valid and enforceable non-compete agreement, it is likely that your previous employer will file a lawsuit against you and your new employer. This lawsuit would start with a temporary restraining order, stopping you from continuing to work for the new employer until the judge can get things organized for a hearing.  At the injunction hearing, your former employer would seek to enforce the non-compete agreement and to obtain a court order ruling that you cannot violate the non-compete restrictions in the future.  Also, if the previous employer wins the lawsuit, likely you would be ordered to pay for the other side’s attorneys’ fees and costs. Losing can be very expensive.

The analysis of your non-compete agreement, whether it passes muster under Section 15.50, is critical. That is why you should contact an expert non-compete lawyer even before you sign a non-compete agreement.

Why Do Employers Insist on Non-competes?

Non-compete laws are designed to protect an employer’s confidential information and trade secrets. A great example is the formula for Coca Cola, which was created in 1891. Coca Cola is careful to keep that formula a secret to this very day. Others have tried to replicate it, but none have cracked the code on this beloved fizzy beverage. Even the company’s most famous competitor, Pepsi, is a distant second in market share.

It’s clear that confidential information gives companies a competitive edge, and they are right in wanting to protect this advantage. They’ve put the time and money into developing their trade secrets, so it makes sense that they would restrict employees from sharing those secrets if they were to leave to work for a competitor. This would be unfair competition.

A company may decide to sell the business.  In this instance, its trade secrets and the goodwill of its customers constitute valuable assets that are quantifiable. These are legitimate business interests, and the restrictive covenants will protect the employer. This is where non-compete agreements have a valid, reasonable purpose.

Contact A Non-Compete Expert

Non-compete agreements are legal in Texas if they comply with the requirements of Section 15.50. The analysis can be tricky for those who are not familiar with this statute and the various courts’ interpretations of the statute.

If you are concerned about your non-compete agreement and need expert legal advice, contact Gardner Employment Law. We are here to help you.

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