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Are Noncompete Agreements Enforceable Against At-Will Employees?

Texas is an at-will employment state, which means employees can quit anytime and employers can fire employees for any reason or no reason at all as long as it’s not an illegal reason (like discrimination). In this environment, questions often arise about whether such employees can be forced to abide by the terms of non-complete agreements.

Texas law on this subject has evolved over the last 15 years. In the 1990s and early 2000s, noncompete agreements were very difficult to enforce against at-will employees. But that changed beginning with a 2006 Texas Supreme Court ruling called Sheshunoff v. Johnson, which made noncompete agreements easier to enforce.

Under current Texas law, a noncompete agreement is generally enforceable provided it:

  1. Is part of an otherwise enforceable agreement;
  2. Is reasonable in scope; and
  3. Protects a legitimate business interest.

In Sheshunoff, the court held that at-will employment arrangements do not satisfy the “otherwise enforceable agreement” requirement unless there is adequate consideration — that is, added value — provided by the employer. There are generally three main types of consideration which, when provided to an at-will employee, will be sufficient:

  • Confidential information about the business, its products, methods or other information worthy of protection
  • Special training that allows the employee to become highly skilled in a specific function
  • Compensation in the form of stock awards, options or other benefits

If any of these exist, a court will probably say there is an “otherwise enforceable agreement.”

Next, employers have the burden of showing that the restrictions are reasonable. This is determined by these criteria:

  • Geographic restrictions typically must be limited to the geographic area where the employee works and where the company does business.
  • The length of the noncompete may vary, but anything longer than five years is suspect.
  • The scope of the restricted activity must not prevent the employee from working for a competitor in a different capacity from what he or she did at the former company.

Finally, the noncompete must be related to the protection of a legitimate business interest. Texas courts do not like overbroad noncompete clauses that attempt to stifle all competition. Examples of protectable business interests include trade secrets, goodwill, confidential information and customer relationships.

As you may have gathered, subjective terms like “reasonable” and “legitimate” are the source of much litigation. It is the employer’s burden to prove the validity of noncompetes, and the outcome of the case usually depends on the employer’s ability to explain how these two terms should be defined.

The Law Office of Paul R. Clevenger handles noncompete issues in Dallas and throughout Texas. I welcome inquiries from businesses and employees. Please call 469-212-9764 or contact me online to arrange a consultation.

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