Texas law on the enforceability of noncompete clauses has taken a long and twisted path to end up where it is today: a general view in favor of enforceability with certain exceptions meant to protect against egregious outcomes. This is all fine and good until the Federal Trade Commission (“FTC”) enters the picture and threatens to categorically ban enforcement of both non-compete agreements and de facto non-compete agreements nationwide starting in 2024.
First, let’s look at the current state of noncompete clauses in Texas. The Covenants Not to Compete Act (the “Act”) was originally introduced by Senate Bill 946 in 1989 and has been amended on multiple occasions since its introduction.[1]The Supreme Court of Texas’s most recent foray into the interpretation of the Covenant Not to Compete Act came in Marsh USA Inc. v. Cook, where the Supreme Court overturned its own precedent on the topic found in Light v. Centel Cellular Co. of Texas.[2]
In Marsh USA, the Court explained that to determine if a covenant not to compete is enforceable, courts begin with a two-step threshold inquiry: (1) determine whether there is an “otherwise enforceable agreement between the parties; and, if so, (2) determine whether the covenant in question is “ancillary to or part of” that otherwise enforceable agreement from step 1.[3] Importantly, the Court overturned a previous requirement created by the Light Court, which required that consideration for the covenant in question “give rise” to the employer’s interest in restraining the employee via the covenant.[4]. The Marsh USA Court’s decision, which still controls today, dispelled with this interpretation of the Act in favor of a textual-centered approach. Now, a covenant is found to be “ancillary to or part of” an otherwise enforceable agreement if it is: (1) supplementary to; or (2) one of several units of which the agreement is composed.[5]
The Covenant Not to Compete Act also contains a procedures and remedies section that sets out the relief a court has discretion to award promisees of covenants not to compete.[6] Among the remedies listed are damages, injunctive relief, and reformation of the clause if it is found to be ancillary to another agreement but fails to include proper limitations as to time, geographical region, or scope of activity.[7] This section of the Act is followed by a “Preemption of Other Law” section that restricts remedies for a breach of the Act to those enumerated and that the enumerated remedies preempt remedies under the common law.[8]
The injunctive relief provided for under the Act has been found by Texas courts to preempt the common law requirements for obtaining a permanent injunction.[9] However, this preemption has not been applied to the requirements for obtaining either a temporary restraining order or preliminary injunctive relief. Id.
Today, a covenant not to compete in Texas should be given effect if there is an otherwise enforceable agreement between the parties and the covenant not to compete is supplemental to it or one of several units of which it is composed of. If a Court has found the two requirements to be met, the Court must enforce the covenant, reform it if necessary, and has the discretion to grant relief enumerated in the Act to remedy a breach.
While it may seem like the law as to noncompetition clauses is finally settling down after decades of turmoil and change, the FTC is currently debating a rule that would drastically alter the current noncompete clause landscape.
The FTC’s proposed rule would effectively ban noncompete clauses nationwide by finding that noncompete clauses constitute an unfair method of competition banned under 15 U.S.C. § 45.[10] While the rule would except certain clauses between the seller and buyer of a business, it would otherwise categorically ban employers from using non-compete clauses.[11] The FTC claims that the definition they use for a “non-compete clause” would not ban other agreements like non-disclosure agreements or non-solicitation agreements, but this is immediately qualified by the FTC itself: “However, under the proposed definition of non-compete clauses, [non-disclosure agreements and non-solicitation agreements] would be considered non-compete clauses where they are so unusually broad in scope that they function as such.”[12]
The FTC essentially is reserving for itself the apparent unchecked power to interpret other types of agreements as non-compete agreements, and therefore banned by the proposed rule. This concern is reinforced by the FTC’s inclusion of a non-disclosure agreement and a non-solicitation agreement in a list of “examples of non-compete clauses.”[13] Immediately following these examples, the FTC describes them as “sometimes so broad in scope that they serve as de facto non-compete clauses.”[14] While the FTC claims NDAs and non-solicitation agreements will not be banned under this rule, they retain the power to find any agreement as a banned de facto non-compete provision.
This rule, if promulgated, would come into effect 60 days after the publication of the final rule.[15] Employers would be required to rescind existing non-compete clauses no later than 180 days after the publication of the final rule in the Federal Register.[16]
Again, while the current legal landscape surrounding non-competes in Texas seems to have settled in a business-friendly manner, the FTC holds the power to throw this area of law into turmoil and uncertainty in the new year.
The following Shields Legal attorney(s) assisted in preparing this client update: Bayley Clark
Shields Legal’s lawyers are available to assist in addressing any questions you may have regarding these developments.
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[1] See Alex Sheshunoff Management Services, L.P. v. Johnson, 50 Tex. Sup. Ct. 44, 209 S.W.3d 644, 652-53 (Tex. 2006).
[2] Marsh USA Inc. v. Cook, 55 Tex. Sup. Ct. J. 184, 354 S.W.3d 764, 775 (Tex. 2011).
[3] Id at 773.
[4] Id.
[5] Id at 775.
[6] See Tex. Bus. & Com. Code § 15.51(a).
[7] Id.
[8] See Tex. Bus. & Com. Code § 15.52.
[9] See Sanders v. Future Com, Ltd., 2017 WL 2180706 at *10 (Tex. App.—Fort Worth May 18, 2017, no pet.); Tranter, Inc. v. Liss, 2014 WL 1257278 at *6 (Tex. App.—Fort Worth March 27, 2014, no pet.) (mem. op.).
[10] See 88 FR 3482.
[11] 88 FR 3482, 3512.
[12] 88 FR 3482.
[13] 88 FR at 3483.
[14] Id.
[15] Id.
[16] Id.
