Employee Non-Compete Agreement and Enforceability Memo — Texas

Texas Employee Non-Compete Agreement and Enforceability Memo

Quick-Reference Summary

Part A — Enforceability Memo

I. Statutory and Common-Law Framework

The Texas Covenants Not to Compete Act (Tex. Bus. & Com. Code §§ 15.50–15.52) preempts the common law and supplies the exclusive test:

"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." § 15.50(a).

Two layers of inquiry follow:

1. "Otherwise enforceable agreement" / "ancillary to": Under Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642 (Tex. 1994), and clarified by Sheshunoff (2006) and Marsh USA v. Cook (2011), the employer's consideration must be "reasonably related" to an interest worthy of protection (goodwill, confidential information, specialized training). Stock options, promised access to confidential information that is later delivered, and grants of equity all qualify.

2. Reasonableness of time, geography, and scope: A fact-specific inquiry. The covenant cannot impose a greater restraint than necessary to protect the legitimate interest.

II. Reasonableness Factors

III. Consideration Requirements

• At-hire covenants: The offer of employment together with a promise to provide confidential information / specialized training — when actually performed — supports the covenant (Sheshunoff).
• Mid-employment / post-hire covenants: Continued at-will employment is not by itself sufficient consideration in Texas; a new benefit (promotion, raise, stock grant, new training, new confidential-information access) is required.
• Stock options / equity: Recognized as adequate consideration tied to goodwill protection (Marsh USA, 2011).
• For independent contractors: Same statute applies (§ 15.50 covers "covenants"); reasonable consideration required.

IV. Notice and Disclosure Requirements

Texas does not impose a statutory advance-notice or review period for non-compete agreements (unlike Massachusetts, Oregon, Illinois). Best practice:

• Disclose the requirement in the offer letter so the candidate can review before accepting.
• For mid-employment agreements, provide written notice of the new consideration (e.g., stock grant agreement, promotion memo) contemporaneously with execution.
• Allow a reasonable review period and recommend that the employee consult counsel; document the offer to do so.

V. Income / Salary Thresholds

None. Texas does not exclude any income tier from non-compete coverage; however, courts may scrutinize covenants imposed on low-wage workers more closely under the "reasonableness" prong.

VI. Industry Carve-Outs

VII. Remedies

• Injunctive relief under Tex. Civ. Prac. & Rem. Code § 65.011.
• Actual damages for breach (only on terms as originally written if reasonable, or as reformed only prospectively).
• Liquidated damages if a reasonable estimate of difficult-to-quantify harm.
• Fee-shifting: § 15.51(c) — if the court reforms because the covenant was overbroad and the employer "knew at the time of the execution of the agreement that the covenant did not contain reasonable limitations," the court may award the promisor (employee) reasonable attorneys' fees and costs. This is a substantial deterrent to drafting overly aggressive covenants.
• Trade-secret claims under Tex. Civ. Prac. & Rem. Code §§ 134A.001 et seq. (TUTSA) — independent statutory remedies, including injunctive relief, damages, exemplary damages, and attorneys' fees.

VIII. Recent Caselaw and Legislative Changes (2023–2025)

• FTC Non-Compete Rule (2024): Set aside nationwide by Ryan, LLC v. FTC, No. 3:24-cv-986 (N.D. Tex. Aug. 20, 2024). Texas § 15.50 controls.
• Titan Oil & Gas Consultants LLC v. Willis, 614 S.W.3d 261 (Tex. App.—Houston [14th Dist.] 2020) — independent contractors covered by Act.
• Continued post-Marsh expansion of "goodwill" as protectable interest supports broader use of equity-grant noncompetes.
• No material amendment to §§ 15.50–15.52 in 2023–2025 legislative sessions; statutory framework remains stable.

Part B — Employee Non-Compete Agreement (TEMPLATE)

Caption and Recitals

EMPLOYEE NON-COMPETITION, NON-SOLICITATION, AND CONFIDENTIALITY AGREEMENT

This Agreement is entered into as of [__/__/____] (the "Effective Date") between:

Recitals:

A. Company is engaged in the business of [________________________________] (the "Business") within the State of Texas and the geographic area described in Section 3.

B. Company has developed and will continue to develop confidential, proprietary, and trade-secret information, customer relationships, and goodwill of substantial value.

C. As consideration for this Agreement, Company will provide Employee with access to its Confidential Information, specialized training, and customer relationships, and the additional consideration specified in Section 6.

D. The parties enter into this Agreement under the Texas Covenants Not to Compete Act, Tex. Bus. & Com. Code §§ 15.50–15.52.

1. Definitions

"Confidential Information" means non-public information of Company including customer lists, pricing, business plans, financial information, marketing strategies, technical data, vendor relationships, methods, and processes, in any form.

"Trade Secret" has the meaning in Tex. Civ. Prac. & Rem. Code § 134A.002(6).

"Restricted Period" means [____] months [insert duration — recommended 12–24 months] following the Termination Date.

"Restricted Territory" means: ☐ a [____]-mile radius from each Company office at which Employee worked or had supervisory responsibility during the [____] months preceding the Termination Date; ☐ the following counties: [________________________________]; ☐ the customer accounts assigned to Employee during the [____] months preceding the Termination Date.

"Restricted Business" means the design, sale, marketing, or provision of products or services materially similar to or directly competitive with the Business in which Employee was actually involved during the [____] months preceding the Termination Date.

"Termination Date" means the date Employee's employment with Company ends for any reason.

2. Acknowledgment of Legitimate Business Interests

Employee acknowledges that Company has legitimate business interests in protecting its (a) Confidential Information and Trade Secrets, (b) substantial customer relationships and goodwill developed at Company's expense, and (c) specialized training and investment in Employee. Employee acknowledges that the restrictions in this Agreement are reasonable, are no broader than necessary to protect these interests, and will not preclude Employee from earning a livelihood.

3. Non-Competition Covenant

During the Restricted Period and within the Restricted Territory, Employee shall not, directly or indirectly, engage in the Restricted Business, whether as employee, owner, partner, agent, officer, director, consultant, or independent contractor. Passive ownership of less than 1% of a publicly traded company is not a violation.

4. Non-Solicitation of Customers

During the Restricted Period, Employee shall not, directly or indirectly, solicit or accept business from, or attempt to divert from Company, any customer or prospective customer with whom Employee had material contact, or about whom Employee had Confidential Information, during the [____] months preceding the Termination Date.

5. Non-Solicitation of Employees

During the Restricted Period, Employee shall not, directly or indirectly, solicit, recruit, or hire any employee or contractor of Company with whom Employee worked or had access to Confidential Information during the [____] months preceding the Termination Date.

6. Consideration

Employee acknowledges that, in addition to employment, Company is providing the following consideration which is "reasonably related" to the protectable interests under Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), and which supports this Agreement as ancillary to an otherwise enforceable agreement:

☐ Initial offer of at-will employment, together with Company's promise to provide access to Confidential Information, specialized training, and customer relationships (which Company will perform);

☐ Grant of stock or stock options pursuant to the [________________________________] Equity Plan (value $[________]);

☐ Promotion to [________________________________] effective [__/__/____];

☐ Signing bonus of $[________________________________];

☐ Other: [________________________________].

7. Garden Leave / Continued Compensation (Optional)

[Garden leave is not required by Texas law. If included, specify the notice period and continued compensation. If not included, delete this section.]

☐ Not applicable.

☐ Upon Employee's notice of termination, Employee shall provide [____] days' advance written notice, during which Employee shall remain on the payroll at full salary and benefits, may be relieved of active duties, and shall not begin employment with another business.

8. Acknowledgment of Review Opportunity

Employee acknowledges that Employee was provided this Agreement on [__/__/____], had at least [____] days to review it, was advised of the right to consult with an attorney of Employee's choice at Employee's expense, and signs voluntarily and knowingly.

9. Remedies

Breach or threatened breach of Sections 3, 4, or 5 will cause Company irreparable harm for which monetary damages would be inadequate. Company is entitled to a temporary restraining order, preliminary injunction, and permanent injunction under Tex. Civ. Prac. & Rem. Code § 65.011, in addition to actual damages, without need to post bond (to the maximum extent permitted by law). Company is also entitled to recover its reasonable attorneys' fees and costs to the extent provided by law or contract.

10. Reformation Election

If a court of competent jurisdiction finds any restriction in this Agreement to be unenforceable as written, the parties expressly request that the court reform such restriction to the maximum scope permitted by Texas law and enforce it as reformed, pursuant to Tex. Bus. & Com. Code § 15.51(c). The parties acknowledge that under § 15.51(c), Company may not recover damages for breach of the pre-reformation, overbroad terms.

11. Choice of Law and Forum

This Agreement is governed by Texas law without regard to its choice-of-law principles. Any action arising out of or relating to this Agreement shall be brought exclusively in the state or federal courts located in [____] County, Texas, and the parties consent to personal jurisdiction and venue in those courts.

12. Severability

If any provision is held invalid (and reformation under Section 10 is not available), the remaining provisions shall remain in full force and effect.

13. Entire Agreement

This Agreement constitutes the entire agreement of the parties as to its subject matter and supersedes all prior agreements and understandings. It may be amended only by a writing signed by both parties.

Signature Block

COMPANY:

By: [________________________________]
Name: [________________________________]
Title: [________________________________]
Date: [__/__/____]

EMPLOYEE:

[________________________________]
[Employee Printed Name]
Date: [__/__/____]

Part C — Pre-Signing Checklist (☐)

☐ Income threshold met — N/A in Texas (no statutory threshold).
☐ Notice / review period satisfied — recommended best practice (no Texas statutory minimum).
☐ Consideration adequate — confirm one of: at-hire offer + promised confidential-information access (performed), stock/equity grant, promotion, signing bonus, or new training (Sheshunoff; Marsh USA).
☐ Geographic scope tied to actual employee territory or customer accounts.
☐ Duration justifiable — typically 12–24 months; longer requires senior-role / multi-year-cycle justification.
☐ Scope of activity limited to Restricted Business actually performed by Employee.
☐ Public-policy carve-out review — physician § 15.50(b) buy-out, patient-records access, acute-illness exception, if applicable.
☐ Attorneys exempt under Tex. Disciplinary Rule 5.06 — verify if subject employee is a lawyer.
☐ Choice-of-law: Texas selected; conflict with another state's protective law (e.g., California § 925) checked if employee resides elsewhere.
☐ Reformation clause (§ 10) included to invoke § 15.51(c) reformation.
☐ Fee-shifting risk audit — confirm Company did not "know at execution" that limits were unreasonable (mitigates § 15.51(c)(3) employee fee award).
☐ TUTSA / trade-secret claim documentation preserved as parallel remedy.
☐ Counsel review completed.

Sources and References

• Tex. Bus. & Com. Code § 15.50 — https://statutes.capitol.texas.gov/Docs/BC/htm/BC.15.htm#15.50
• Tex. Bus. & Com. Code § 15.51 — https://statutes.capitol.texas.gov/Docs/BC/htm/BC.15.htm#15.51
• Tex. Bus. & Com. Code § 15.52 — https://statutes.capitol.texas.gov/Docs/BC/htm/BC.15.htm#15.52
• Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642 (Tex. 1994)
• Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006)
• Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011) — https://caselaw.findlaw.com/court/tx-supreme-court/1589532.html
• Tex. Civ. Prac. & Rem. Code §§ 134A.001 et seq. (TUTSA)
• Tex. Disciplinary Rules of Prof'l Conduct R. 5.06
• Ryan, LLC v. FTC, No. 3:24-cv-986 (N.D. Tex. Aug. 20, 2024) — setting aside FTC noncompete rule
• Texas Legislative Reference Library — non-compete bill tracker: https://lrl.texas.gov/