I am leaving an LLC partnership, and upon leaving she wants me to sign a contract that bars me from competing in the same area.

Asked 4 months ago - Carrollton, TX

I started a partnership with a colleague in November and we filed for an LLC in February. Along the way we experienced conflicts regarding the direction of the company and I have currently decided to relinquish my duties with the company and restart a new company while she continues the LLC. However, she wants me to sign a contract banning me from competing in the same area for a fixed term due to me having learned all of the LLC's current model and ideas. Is this legal?

A little background of the situation....The business is an online delivery service, that is still in the stages of development. Neither of us signed any agreements such as an NDA. Does she have the power to legally stop me from starting my own business?

Additional information

There was no operating agreement that was signed which addressed this issue as well.

Attorney answers (4)

  1. Benjamin A. Stolz


    Contributor Level 10


    Lawyers agree

    Answered . You cannot be forced to sign a non-compete. In general, most restraints on competition are unlawful under Texas law, but Covenants Not to Compete are an exception. Under the Texas Covenant's Not to Compete Act, a covenant not to compete may be enforceable if it is:

    1. Ancillary" to another enforceable agreement; and
    2. Reasonable

    Some LLC Operating agreements have "restrictive covenants" and depending on State law, they may or may not be enforceable against their members. It's not clear if your LLC docs have such a provision. The fact that you are being asked to sign a non-compete now might indicate that no such provision was in you Operating agreement.

    For example, If the Operating agreement had a provision disallowing members from leaving with a certain period of time without the consent of all members, she may want something in return for letting you go early.

    There are really any number of plausible reasons why you might be asked to sign a non-compete, but again it must be "ancillary" to an enforceable agreement whether that;s the Operating Agreement itself or some agreement.

    Whatever the case, a non-compete must also be "Reasonable". With respect to Reasonableness, a number of factors come into play:

    1. The covenant's duration should relate to the LLC's business needs. For example, if confidential information provided to you while working on the old company's business model has real value for two years, then a two year non-competition restriction might be valid.

    2, The geographical limitations should generally be no greater than the area in which you worked.

    There are a good deal of reasons why her request might be overreaching and ill-advised and more then a few that might make complete sense.

    I strongly advise you to contact a Business Law attorney to review your situation and get all the facts before making any decision to sign a potentially binding non-compete in Texas. Having "your" lawyer review a legal agreement does not need to make the situation confrontational - it's just good business.

    Best of luck.

    The posting attorney is admitted to the U.S. Tax Court and authorized to represent clients in all 50 states before... more
  2. Robert Neil Newton


    Contributor Level 16


    Lawyers agree

    Answered . You don't have to sign the non-compete. Whether she could cause you trouble in the future depends on a few things. It doesn't help matters that you guys never signed a Company Agreement. Or, to some extent, maybe it does. Who knows?

    This time around, you should retain an attorney to form your company properly and provide you guidance on contracts and risk assessments. Only an attorney knowing more facts could help you.

    The above statements are provided as general information and not intended as legal advice. Each matter has its own... more
  3. Elizabeth Marguerite Broussard

    Contributor Level 13

    Answered . Your colleague cannot stop you from starting your own business or force you to sign a non-compete. Still, you should consult with an attorney about your exit strategy to address any potential intellectual property or trade secret disputes, in addition to any personal obligations you may have for debt incurred by the LLC.

  4. Jennifer Jane Clayton

    Contributor Level 8

    Answered . There is no reason for you to sign such an agreement, especially when you are leaving the business. It limits your options and you get nothing for it. Your soon-to-be ex-partner gets all the benefits and no headaches from your competition. Even if you have no intention of competing with her, you should at least get some type of compensation for signing such an agreement. Just remember if you do, it is a contract and you could be sued for breach if you fail to fulfill your obligations.

    This answer is provided for guidance only. Jennifer J. Clayton is an attorney licensed in Texas. She provides... more

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