Continuing Challenges in Enforcing Covenants Not to Compete Under Texas Law

January 4, 2019 | Insights

Challenges remain in enforcing covenants not to compete under Texas law, despite a trend since 2006 from Texas Supreme Court decisions that have approved covenants.

A common misconception is that covenants not to compete are unenforceable in Texas. In fact, beginning in 2006, the Supreme Court of Texas issued a series of decisions that gradually swept away artificial constraints on the enforcement of covenants not to compete. A fair summary of the law today on non-competition covenants: a covenant is enforceable to the extent it reasonably protects a legitimate interest of the employer (e.g., confidential information, good will, or training) and provides reasonable limits as to time, geography, and scope of activity. Yet, enforcing a covenant can still be a difficult, although not impossible, task.

First, enforcing a covenant not to compete may hinge on the trial judge deciding the case. Cases involving non-competition covenants often turn on the initial motions in the case to obtain a temporary restraining order and then a temporary injunction to compel the employee to comply with the terms of the covenant. The decision to grant these orders rests largely in the discretion of the trial judge. Trial judges differ greatly on their preferences in enforcing restrictive covenants—some take the view that a promise should be enforced as written, while others tend to favor the rights of individuals to seek new employment. These preferences cross party lines and are not predictable based on which party ticket that the judge ran on.

Second, enforcing a covenant can carry a real risk of an award of attorney’s fees against the employer attempting to enforce the covenant. The Texas Business and Commerce Code provides that an employer may be liable to an employee if the employer “knew at the time of the execution of the agreement that the covenant did not contain limitations as to time, geographical area, and scope of activity to be restrained that were reasonable and the limitations imposed a greater restraint than necessary to protect the goodwill or other business interest” of the employer.

Third, a new risk in enforcing non-competition covenants has arisen recently from the use of an anti-SLAPP motion. (“SLAPP” stands for Strategic Lawsuit Against Public Participation.) Passed in 2011, the stated purpose of the Texas Citizens Participation Act (TCPA) is “encourage and safeguard the constitutional rights of persons to petition, speak freely, associate freely, and otherwise participate in government to the maximum extent permitted by law and, at the same time, protect the rights of a person to file meritorious lawsuits for demonstrable injury.” Thus, anti-SLAPP is an important protection for first amendment rights for individuals, media companies, and others who exercise constitutional rights.

An anti-SLAPP motion is significant because, if the defendant can show the suit affects the employee’s rights to free speech or association, the plaintiff – here, usually, the former employer – can be required to establish “by clear and specific evidence a prima facie case for each element of the claim in question.” If the plaintiff satisfies this second step, the court will dismiss the action if the defendant establishes by a preponderance of the evidence each element of a valid defense to the plaintiff’s claim. This standard is significantly less than that required for a motion for summary judgment and thus affords the defendant (i.e., the employee and/or the current employer) a more likely chance of winning a dismissal – and at an earlier stage with fees and the possibility of sanctions.

One of the cases decided in 2018 reaffirmed the applicability of an anti-SLAPP motion to covenants not to compete. In that case, Grant v. Pivot Technology Solutions, Ltd., 556 S.W.3d 865 (Tex. App.—Austin 2018, pet. filed), the employer sought to bring claims against the president of the company, who, according to the plaintiff, had used his position to acquire confidential information to harm his employer and to benefit a second company in which the president had an interest. The Court affirmed that the suit affected the president’s rights to free speech and association and affirmed the trial court’s dismissal because the plaintiff failed to establish how the alleged actions had damaged it. Without the anti-SLAPP motion, the plaintiff would have had the benefit of additional discovery to show the connection between the alleged actions and how the company was damaged. (A petition for review has been filed with the Supreme Court of Texas, so stay tuned.)

Fourth, it is important that an employer be able to prove its case. In GE Betz v. Moffitt-Johnson, 885 F.3d 318 (5th Cir. 2018), the employer had a bonanza of bad acts by the former employee. Not only did the former employer have a non-solicitation covenant, it also had evidence that the employee, before she left the company, downloaded megabytes of confidential information and was seen talking to customers at a trade show. Business that had formerly rested with the plaintiff now appeared to follow the employee to her new company. In spite of this evidence, though, the Court affirmed the trial judge’s ruling that the former employer failed to show that the employee had actually solicited the former customers. Making these connections is often a challenge to the former employer, who, understandably, screams, “But I know the former employee is out there calling on our customers!” But “knowing” such actions are happening and proving them to a court can be two very different propositions.

Finally, employers should not attempt to overreach when drafting or enforcing covenants not to compete. In the case of Ortega v. Abel, 2018 W.L. 40284276 (Tex. App.—Houston [1st Dist.] Aug. 23, 2018, not pet), remarkable because it involved the sale of a business, the Court held that a restrictive covenant prohibiting a 10-mile radius was overly broad. While a 10-mile radius sounds fairly narrow, the defendant pointed out – and the Court agreed – that this was an area over 314 square miles (remember geometry?) and that most customers in urban areas shopped much closer to their homes or work.

So, while covenants not to compete are more enforceable than they were 12 years ago, enforcing covenants not to compete requires careful work on the front end in drafting the covenant and then careful consideration of the pros and cons of enforcement.