As a business owner or investor in Texas, noncompete agreements can be a valuable tool for safeguarding your competitive advantages. Doing so is essential for long-term success. However, these contracts are only valid if they have the right language and structure.
Texas business law imposes specific requirements that determine whether your agreement will hold up in court or not. Following these rules is key to protecting your investment and your business interests.
The ancillary contract to an enforceable agreement
A noncompete agreement usually cannot exist on its own. It has to be part of a real, valid contract that includes something the employee gets in return. For example, you may include it in a confidentiality agreement or a nondisclosure agreement (NDA).
This means the employee must receive something of value in exchange for agreeing not to compete. That value can include specialized training, access to private information or another real benefit from the employer.
If the employee does not receive anything meaningful in return, a court will likely say the agreement is not enforceable. In other words, you must support the promise not to compete with a valid exchange, not just have the employee sign it on its own.
Passing the reasonableness test
Texas courts generally apply a three-pronged test to ensure the restraint is not broader than necessary to protect your business interests. Generally, a judge may see limits of six months to two years as fair while anything longer requires significant justification.
The limit should also match the territory where the employee actually worked. A nationwide ban for a local sales rep, for example, may likely raise concerns in court.
Moreover, your agreement cannot stop a former employee from working in the industry entirely. Restrictions must be narrowly tailored to the specific type of work they did for you. If your noncompete agreement is too broad, a judge can rewrite it to meet reasonable standards.
Legitimate business interest protection
You typically cannot use a noncompete just to keep a former employee from competing with your business. Instead, you must show that the restriction is necessary to protect a real business interest. This can include customer goodwill, trade secrets or other proprietary information.
Smart protection starts with smart drafting
For business owners and investors, it is vital to protect what you have built before your competition does it for you. Getting the details right in noncompete agreements is also a form of risk management. Whether you are launching a new venture or managing an established enterprise, working with an experienced attorney can help you tailor your contracts to Texas law.