It’s no secret that Texas has experienced a large influx of corporate relocations in recent years. With its business-friendly environment and lower cost of living, the state has become a haven for businesses — and employees — seeking certainty in contracting and relief from heavy taxes and onerous regulations.
In the past 10 years alone, the Texas governor’s office estimates that over 300 companies have shifted their headquarters to Texas, with nearly half of these moves coming from California alone. And with the recently announced Texas Stock Exchange and the relocation of Goldman Sachs in the works, New York finance professionals are similarly en route.
In the midst of a relocation, it’s tempting for companies and professionals alike to narrow their focus on the obvious to-dos, like finding new homes or offices or hiring new staff. But what’s equally important is ensuring all parties understand what their move means in terms of employee job mobility, specifically when it comes to covenants not to compete.
A covenant not to compete, or “noncompete,” is generally defined as any agreement that limits an employee from competing with his or her employer after the two part ways. Though employers have used noncompetes for decades to protect their business interests, their longstanding use has not stopped the controversy surrounding their enforceability.
In early 2024, the Federal Trade Commission approved a regulation that would ban almost all noncompetes throughout the United States. But following immediate litigation and a change in administration, this regulation has been abandoned, leaving the enforceability of noncompetes up to state officials to decide.
Perhaps unsurprisingly, Texas and California legislators have taken opposing views on the legality and enforceability of noncompetes. New York remains the middle ground, although the New York Senate introduced a bill earlier this year to restrict enforceability significantly.
The California Business and Professions Code states that noncompete provisions are illegal and unenforceable “regardless of where and when the contract was signed,” subject only to limited exceptions following the sale or dissolution of a business. An employer who attempts to enforce such a provision in California faces harsh consequences; it can find itself subject to injunctive relief, forking over damages and attorneys’ fees to the employee affected, and even paying civil penalties under the state’s unfair competition laws.
In stark contrast, Texas courts routinely enforce noncompetes so long as they meet certain criteria. According to the Texas Business and Commerce Code, a noncompete must be (1) ancillary to an otherwise enforceable agreement at the time the agreement was made, (2) reasonable as to time, geographic area, and scope of activity to be restrained, and (3) no more restrictive than is necessary to protect the goodwill or other business interest of the employer.
New York courts engage in a similar balancing exercise but only enforce a noncompete if it is deemed “reasonable,” meaning the provision (1) imposes no greater restriction than required for the protection of the employer’s legitimate business interest, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public, as the Court of Appeals of New York held in Brown & Brown, Inc. v. Johnson. In practice, this means that New York courts “strictly construe” noncompetes and view them with “general judicial disfavor,” as seen in American Broadcasting Companies, Inc. v. Wolf. And recent legislation indicates a growing distaste for noncompetes in the Empire State. If enacted, Senate Bill S4641A would prohibit noncompetes across the board, subject to exceptions for healthcare professionals and employees earning an annual $500,000 or more.
What does all this mean? Following a relocation, newly Texan employers and employees should pause to consider how Texas standards on noncompete enforceability might impact them directly. They should also be aware that their prior home state’s law is unlikely to govern in the event a dispute arises, even if the employment agreement at issue selects that state as the governing law. Indeed, Texas courts consistently hold, as seen in Exxon Mobil Corp. v. Drennen, that “the law governing enforcement of non-competes is fundamental policy in Texas” and will almost certainly apply when an employee and his employer are in Texas.
From an employer’s perspective, offering incentives to key employees who move with them in exchange for a reasonable, tailored noncompete can be an immediate way to take advantage of Texas’s commitment to “maintain and promote economic competition in trade and commerce” through the freedom of contract. Conversely, employees should be aware that attempts to thwart such provisions may prove unsuccessful in court.
When considering whether a noncompete might be enforceable, Texas courts have set forth several guiding principles that new Texas entrants should keep in mind:
- When an employment relationship is at-will, a noncompete is typically enforceable if offered along with a promise to convey confidential information in exchange for the employee’s receipt of and promise not to disclose such information, as the Supreme Court of Texas noted in Alex Sheshunoff Management Services v. Johnson.
- A noncompete term should be limited to a maximum of five years — but the shorter, the better. A noncompete must be no longer than necessary to protect the employer, as noted by the First Court of Appeals of Texas in Houston, in Gallagher Healthcare Insurance Services v. Vogelsang.
- Restrictions prohibiting an employee from working with certain company clients for a set period of time can be an effective, enforceable option in lieu of traditional activity or geography limits, as the First Court also recognized in Gallagher.
- Industry-wide restrictions on an employee’s work following his or her departure are generally unenforceable, as expressed in Gehrke v. Merritt Hawkins & Associates from the Fifth Court of Appeals in Dallas.
While these parameters set a general framework, no substitute exists for able Texas counsel who can guide new market entrants as they seek to protect their businesses. Indeed, as Texas continues to position itself as a hub for world-class talent, the role noncompetes play will only increase — and so will challenges to their enforceability. Only Texas-based counsel can truly understand the very “Texan” considerations at stake — such as the state’s love for the freedom of contract, its pro-business bent, and its desire for a productive citizenry — and anticipate how a Texas court is likely to balance those considerations in a challenge. Now is an exciting time to move to Texas, but employers and employees alike should do so with the assistance of counsel who can advise on what, precisely, new Texans are getting themselves into.
Daniella Main is a partner and head of the Commercial Litigation practice group at Vartabedian Hester & Haynes LLP. She specializes in complex commercial litigation and class action suits.
Alicia Pitts is an associate in the Commercial Litigation practice group at Vartabedian Hester & Haynes LLP.
