Non-compete agreements are important legal tools that help business owners seeking to protect their interests. Texas has a reputation for looking out for business interests, and this holds true when it comes to non-compete agreements. This was highlighted this past summer when Texas courts blocked the United States Federal Trade Commission’s (FTC) attempt to ban the use of these legal contracts. The court stated that the ruling was “arbitrary and capricious” because it was overly broad and did not include a reasonable explanation.
Although Texas law supports the use of these legal tools, there are rules. The state requires non-compete agreements to be reasonable in scope, duration, and geographic area. The agreement must also be ancillary to an otherwise enforceable agreement, such as an employment contract. Business owners are wise to understand these requirements to better ensure they draft a legally sound non-compete agreement.
What are the key elements to include in a non-compete agreement?
To help ensure a non-compete agreement withstands legal challenges, business owners should focus on the following elements:
- Reasonableness: The agreement must be reasonable in terms of time, geographic area, and scope of activity. In the event of a legal challenge, the court might not enforce an agreement with overly broad restrictions.
- Consideration: Valid consideration is also important and can a raise in salary or stock options.
- Specificity: The agreement should clearly define restricted activities. Vague or overly broad language can lead to legal challenges.
By focusing on these key elements, business owners can draft non-compete agreements that are more likely to withstand legal challenges in Texas.
Business owners increase the likelihood that a non-compete meets these elements and protects their business interests when they customize the agreement to fit the specific needs of the business and the employee’s role. Use of generic templates may leave you open to legal challenges.