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WinTech Legal Insight for Start-Up and Established Technology Businesses

Non-Competition Agreements

Posted in Technology Transactions

Take care when entering into non-competition agreements.

This post deals with non-competition agreements in Texas. These rules vary from state to state so if you are not in Texas, you should consult with an attorney in your state.

For many years, non-competition agreements have been notoriously difficult to enforce in Texas but Texas courts in recent years have taken steps to make it more likely that they will be enforced. By statute, the non-competition agreement has to be “ancillary to or part of” another enforceable agreement and it has to be reasonable as to time, the geographic area covered and the scope of activity that is limited.

For many years, the only “otherwise enforceable agreement” that courts held would satisfy the statute was an agreement at the inception of employment to immediately provide confidential information or training of a unique value. Recent Texas cases have provided a much broader view of an “otherwise enforceable agreement.” One case has held that the “otherwise enforceable agreement” can include a promise of confidential information as long as the confidential information is given at any time during the term of the agreement. Another case has held that the grant of stock options is an “otherwise enforceable agreement.” As a result of these cases, we recommend that companies get a non-competition agreement with their employees as part of a proprietary information agreement (discussed below) on the first day of employment and, if that is not possible, to grant some consideration at the time the employee is entering into the non-competition agreement. At the time of this writing, the only consideration that the courts have held is sufficient is stock options so it is not clear what other consideration might suffice.

Non-competition agreements must also be reasonable as to the territory covered in order to be enforceable. The territory where the employee worked will generally be deemed to be a reasonable territory. In the case of a software company that does business nationwide, the territory can be nationwide. In the case of a consulting company that does business only in one city, the territory should be limited to that city or that metropolitan area. An alternative way to define a “territory” is to limit the employee’s ability to do business with customers he or she did business with on behalf of the employer.

The non-competition agreement must also be reasonable as to time. Texas courts have held one-year restrictions to be reasonable as a matter of law and two-year restrictions are often enforced.

Finally, the non-competition agreement must be reasonable as to the activities that the employee is prohibited from engaging in. The restriction should be similar to the activities the employee performed for the company and may also include activities that would allow the employee to use the employer’s confidential information on behalf of his new employer.