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Should you use a non-compete agreement in your contracts?

On Behalf of | Sep 6, 2022 | Contract Law

Some types of businesses rely on non-competition (or non-compete) provisions to prevent employees from taking what they’ve learned about their methods and strategies or proprietary information to a job with a rival company and harming their ability to compete in the marketplace. Tech companies and toy companies, for example, frequently include non-compete clauses in employee contracts

There always has to be a balance, however, between protecting valuable information and preventing someone from getting a job in their chosen field without having to relocate. That’s why there are laws that codify what kinds of things can make all or part of a non-compete agreement unenforceable.

What does Texas law say?

Texas law states that for a non-compete clause to be enforceable, it must be “part of an otherwise enforceable agreement” and include “reasonable limitations as to time, geographical area, and scope of activity.

When disputes over non-compete agreements go to court, businesses need to show that they would be harmed if the agreement isn’t enforced. The court also needs to be convinced that “enforcement would not place an unreasonable burden on a person’s right to practice a profession or trade or otherwise make a living.”

Typically, non-compete agreements are more easily enforceable in industries and occupations that require specialized knowledge and skills. Unfortunately, they’ve too often been used to prevent people who work in fast-food restaurants and similar businesses from getting a job with a competitor.

Federal restrictions may be in the future

The effect of unnecessary non-compete agreements on low-wage workers and on economic growth as a whole was one of the reasons behind President Joe Biden’s executive order last year that tasked the Federal Trade Commission (FTC) with looking at ways to limit non-compete agreements on a federal level. Some states already have laws in place prohibiting non-compete agreements.

As a business owner, you have a responsibility to protect your proprietary information and the things that give you an advantage in the marketplace. Requiring employees in select jobs to sign non-compete agreements may be necessary. 

However, a non-compete agreement that’s so restrictive or used so broadly that it won’t hold up in court is essentially useless. It’s only going to cost you time, money and the potential of harm to your reputation. That’s why it’s wise to have experienced legal guidance as you consider the use of non-compete agreements.