In a recent post, I addressed the applicable framework under Texas law when employees not subject to non-compete agreements leave a job to compete with a former employer. This article addresses Texas law on non-compete covenants and its impact on potential disputes when covered employees exit and work in competitive roles.

Employers and employees alike have legitimate interests in these circumstances. Employers have an interest in protecting their investment in competitive information and knowledge held by the employee. On the flipside, exiting employees have a legitimate interest in earning a livelihood—and sometimes their only viable alternative might require a competitive role.

Recent Regulatory Scrutiny of Non-Compete Agreements

Because non-compete agreements can be used abusively, negatively impacting employees and burdening the free market, legislators and regulators have widely acted to restrain freedom of contract in connection with their use. A prospective federal regulatory proposal may soon eliminate their use in employment relationships nationwide.[i] But for the time being, Texas employers and employees would do well to familiarize themselves with the framework described below.

How Can Non-Compete Agreements Restrain Competition from Employees?

The “teeth” that compel compliance with covenants not to compete are (1) damage awards and (2) injunctive relief. Additionally, requests for injunctive relief to enforce non-compete covenants benefit from a special rule: the proponent need only show a substantial breach of a covenant for entitlement to a permanent injunction. See Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 795 (Tex. App.–Houston [1st Dist.] 2001, no pet.) (holding that a showing of irreparable harm was not necessary to support the lower court’s issuance of a permanent injunction); but see Argo Grp. US, Inc. v. Levinson, 468 S.W.3d 698, 702 (Tex. App.—San Antonio 2015, no pet.) (holding that a plaintiff seeking a temporary injunction under Tex. Bus. Com. Code § 15.51 must show a probable, imminent, and irreparable injury in the interim before trial); Primary Health Physicians, P.A. v. Sarver, 390 S.W.3d 662, 664–65 (Tex. App.–Dallas 2012, no pet.) (same). This significantly relaxes the proof required to support a permanent injunction.[ii]

These enforcement mechanisms drastically alter the legal framework governing relationships between employees and their former employers. Unless they are restrained voluntarily by agreement, former employees have a common law right to compete. Consequently, unless a non-compete agreement applies, in typical cases courts will not issue an injunction to restrain competitive conduct by a former employee post-exit. For the same reason, damage awards are not available in these circumstances unless the competing former employee’s pre-exit conduct breached a fiduciary duty or misappropriated a trade secret.
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