Written by attorney Brian W. Erikson

Covenants Not to Compete in Texas

As a general rule, any contract that seeks to restrain trade is illegal in Texas. That provision is set out in Texas Business & Commerce Code section 15.05, which states:

Sec. 15.05. UNLAWFUL PRACTICES. (a) Every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.

A covenant not to compete that affects employees in Texas, is an exception to Section 15.05, as long as the covenant complies with Texas Business & Commerce Code section 15.50, set out below. In short, a covenant not to compete has to be reasonable in terms of duration, geographic area and scope of activity.

But before a court examines the reasonableness of a covenant, the court has to first find that the covenant is ancillary to or a part of an otherwise enforceable agreement. In other words, there has to be an offer and consideration from the employer, and acceptance by the employee of a promise to induce an employee to sign a covenant not to compete.

In Marsh USA, Inc. v. Cook, 354 S.W.3d 764, 777 (Tex. 2011), a high level management employee was offered stock options in return for signing a covenant not to compete. The employee exercised the stock options and signed the covenant not to compete. The Texas Supreme Court upheld the covenant under those circumstances, since there was a promise, consideration, and acceptance of the employer’s offer to the employee.

Some employers will contend that they have offered to reveal trade secrets and other confidential and proprietary information in exchange for the signing of a covenant not to compete. But, all employers have trade secrets of some sort, and can contend that the trade secrets constitute confidential and proprietary information. That would mean that the employer would not have to offer any particular employee anything that was not offered to other similarly situated employees to obtain a signature on a covenant not to compete. In other words, anyone working at McDonald’s who made the secret sauce for a Big Mac would be prohibited from working at Wendy’s since the employee had acquired knowledge of a trade secret.

Typically, the geographic area is analyzed city by city and county by county. Whole states generally do not comply with a reasonable geographic area. The entire United States would likewise be an overbroad geographic scope.

A one year limitation is typically found to be reasonable.

For employees, on your way out of your current job, make sure that you do not burn any bridges, and take efforts to leave on a good note. Don’t give your current employer any reason to teach you a lesson.


Texas Business & Commerce Code

Sec. 15.50. CRITERIA FOR ENFORCEABILITY OF COVENANTS NOT TO COMPETE. (a) Notwithstanding Section 15.05 of this code, and subject to any applicable provision of Subsection (b), 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.

(b) A covenant not to compete relating to the practice of medicine is enforceable against a person licensed as a physician by the Texas Medical Board if such covenant complies with the following requirements:

(1) the covenant must:

(A) not deny the physician access to a list of his patients whom he had seen or treated within one year of termination of the contract or employment;

(B) provide access to medical records of the physician's patients upon authorization of the patient and any copies of medical records for a reasonable fee as established by the Texas Medical Board under Section 159.008, Occupations Code; and

(C) provide that any access to a list of patients or to patients' medical records after termination of the contract or employment shall not require such list or records to be provided in a format different than that by which such records are maintained except by mutual consent of the parties to the contract;

(2) the covenant must provide for a buy out of the covenant by the physician at a reasonable price or, at the option of either party, as determined by a mutually agreed upon arbitrator or, in the case of an inability to agree, an arbitrator of the court whose decision shall be binding on the parties; and

(3) the covenant must provide that the physician will not be prohibited from providing continuing care and treatment to a specific patient or patients during the course of an acute illness even after the contract or employment has been terminated.

(c) Subsection (b) does not apply to a physician's business ownership interest in a licensed hospital or licensed ambulatory surgical center.

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