Understanding Non-Solicitation Agreements in Texas

What is a Non-Solicitation Agreement?

A non-solicitation agreement is a restrictive covenant that prohibits an employee from soliciting, recruiting or hiring customers, prospective customers, vendors, suppliers, or even other employees in certain cases. The general purpose of the agreement is to protect a business from the risks that arise when an employee leaves for a new job and takes the customer database with him. By requiring the employee to agree not to recruit or solicit customers away from the business, it is designed to protect the goodwill the employer has built up and, more importantly, to prevent the employee from using the former employer’s resources to build up a new business for his new employer.
More specifically, a non-solicitation agreement prohibits an employee from hiring or soliciting either: (1) the customers or potential customers of the former employer; or (2) the vendors or suppliers of the former employer; or (3) the employees of the former employer . It can also be tailored to prohibit the employee from actually making contact with those former customers, vendors, suppliers or employees. It may be a particularly good fit for a customer-based business or if the breakdown between customers and employees is particularly even, but has little effect otherwise. It may also be appropriate if the only time the business is sensitive about the protection is at or immediately following termination of employment, as opposed to throughout the entire course of employment. That is, if your business does not have regular contact with customers/venders, you may only want the non-solicitation agreement to have a limited duration based on either the customer service agreement or the general 1 or 2 years agreement period.

Requirements Under Texas Law

For a non-solicitation agreement to be enforceable in Texas, it must meet several legal requirements. Most importantly, the non-solicitation agreement must be limited in time and geographic scope. It must also protect business interests of the company that the company cannot reasonably do itself by lawful means.
Of course, even if these legal requirements are met, there are additional requirements that a covenant not to solicit must meet. For example, the covenant must be ancillary to an otherwise-enforceable agreement. The agreement usually serves to interrupt a current course of conduct between the parties. Examples include: (1) an agreement in which an employee or independent contractor agrees to become an agent and/or representative of a company and the non-solicitation agreement protects continuing customer relationships; (2) an agreement where an employee agrees to share confidential information about a company’s customers while employed, and the non-solicitation agreement protects the company’s confidential information by preventing the employee from using the information to compete; and/or (3) an agreement where an employee agrees in a covenant not to compete to refrain from competing after employment, and the non-solicitation agreement protects the customer goodwill of the employer and prevents customers from being lured to the competitor.
These "fencing-in" provisions, set out above, are commonly found in many types of non-solicitation agreements. Non-solicitation agreements must also be supported by consideration; however, the question of what consideration is adequate depends on the circumstances of each case. For instance, under Texas law, continued employment is sufficient consideration for a non-compete that is part of an offer of employment to a prospective employee (because the non-compete is given in exchange for employment). Although continued employment is generally sufficient for an existing employee, it may not be enough in all circumstances-such as those involving non-compete agreements.
Over the years, Texas Courts have attempted to modify this bright-line rule. Texas law now allows industry regulations to be relevant to determining whether there is adequate consideration that supports a non-compete that restricts post-employment activities. For example, if the employment agreement is subject to regulatory oversight by an agency, such as a loan originating agency, the agency’s regulations may permit the scope of the non-compete "to be keyed to public policy concerns" by restricting its enforceability.

Employers Versus Employees

Employers’ Perspective
To an employer, such non-solicitation of employees provisions serve strategic purposes during a litigation. First and foremost, the threat of a non-solicitation of employees provision provides the employer with a potential springboard from which to argue that severance pay or other compensation owed to the employee should be withheld or forfeited because of the employee’s failure to abide by the restriction. Additionally, an employer can use such a provision as the basis for temporary restraining orders and injunctive relief to prevent an ex-employee from raiding employees under the guise of "advertising" the former employer’s job opportunities on internet job boards or, on occasion, attempting to lure away customers or clients with promises related to employment.
Employees’ Perspective
For the employer’s employee, on the other hand, it may feel as though he or she has a noose around his or her neck while still in the employer’s employ. The employee may wish to leave the employment and seek work elsewhere but doing so before the non-solicitation clause expires (usually one or two years) might be cost prohibitive because the employee fears that the employer will use its leverage to file suit or do other damage because of the restriction. Like the employer, the employee may feel hamstrung while remaining on the job but clearly hopes that the period will expire quickly.

Typical Provisions

To supplement the general enforceability standards contained within Texas law, non-solicitation agreements in Texas usually include several standard provisions, including:

• Specific Scope and Duration. Non-compete agreements are governed by Texas Business and Commerce Code section 15.50, which requires non-compete provisions to specify the activities that the employee is constrained from engaging in, the scope of the prohibited actions, the period during which the non-compete is in effect, and the geographical area to which the agreement applies.

• Proprietary Information. Non-solicitation agreements often provide that unless specific information is a trade secret, or proprietary information, an employer cannot prevent an employee – even one who has signed a non-compete – from using general knowledge and experience he gained while employed by the company.

• Injunctive Relief and Attorneys’ Fees. Non-compete agreements will often allow an employer to seek injunctive relief to prevent a former employee from continuing to violate the agreement, while prohibiting a court from awarding attorneys’ fees to the prevailing party. Under Texas law, attorneys’ fees are generally unavailable unless they are awarded by statute, contract, or are incurred to collect a debt.

In Texas, Some Are Hard To Enforce

The former employee or employee’s new employer may argue that the non-solicitation agreement is unenforceable by asserting that the agreement is unconscionable because its scope is overly broad or is overly restrictive to the point that it amounts to a restraint of trade by virtue of its duration, geographical area, and scope. When an employer drafts a non-solicitation agreement, it should take care to make sure that the scope, whether a period of time or geographic area, is reasonable. "A temporary restraint [is] less offensive than a permanent one, and smaller restrictions [are] more palatable than larger ones." In Martin v. Credit Protection Association, the Southern District of Texas held that restrictions against soliciting or inducing customers or employees on a permanent basis was unreasonable and unenforceable. Similarly, a five-year restriction that resulted in a broad restraint of trade was held unenforceable as an undue restraint on trade in Access Telecom, Inc. v. MCI Telecomm. Corp. A temporary restraint may be enforceable when the restraint is no greater than necessary to protect the former employer’s legitimate business interest. The former employee or employee’s new employer may also argue that the non-solicitation agreement should not be enforced because it should be equitably reformed . Autonation, Inc. v. Premier Chrysler, Jeep, Dodge, LLC, No. H-08-1360, 2010 WL 3619661 (S.D. Tex. Sept. 14, 2010). Relying on Section 1662 of the Texas Business and Commerce Code, the court held that Section 1662 authorized the court to reform the covenant so that it is reasonable and does not impose a greater restraint than necessary. The court held that to the extent that the defendant has forbidden from soliciting the customers and employees of any location in which the defendant did business at any time during the six months preceding the termination of the agreement, the covenant be reformed so that it only applies to the defendant’s customers and employees inside the state of Texas. Id. Section 1662 empowers a Texas court to reform a written contract containing an overbroad non-solicitation clause so that the agreement complies with Texas law. A court is also empowered to enforce the non-solicitation agreement as written if the agreement is unambiguous and reasonable. "In deciding how to draft a non-solicitation or similar clause, East Texas marketers are wise to bear in mind the Houston bar’s admonition in the Access case that such restrictions must be clear, precise, and equitable to be enforceable."

Drafting A Strong Protectable Agreement

Employers can help prevent the headache of enforcing non-solicits by drafting clear and concise contracts. A non-solicitation agreement serves to protect an employer’s legitimate business interests – it is best not to let those interests be overstated in the contract. Remember, you cannot ask an employee to sign a non-solicit that would prevent them from getting a job. Employees always have to have the ability to work and provide for themselves, and courts look at whether the non-solicit is too broad in scope. You want to write in just enough detail what the employee cannot do. You do not want to go too far – you want the covenants to be reasonable.
Best Practices for Drafting Non-solicitation Agreements:
Here are some specific tips for ensuring your non-solicitation and non-competes are upheld.

• Be reasonable in your description and avoid wording that would lead to an overly broad interpretation.
• Keep non-competes and non-solicits separate (this is especially important if your employee is currently working for a competitor).
• You can prevent your employees from taking clients – but they must have some significant contact with your clients to actually perform services.
• Do not attempt to prevent employees from recruiting former co-workers – this is all part of the free market system.
• Try to avoid trying to close everything off in the agreement itself. Your agreement should contain a severability clause that saves a non-compete that is reasonable, while severing the unenforceable parts. You want to allow the employee to leave on very good terms. You want to ensure the employee has no qualms about signing the document and believes the restrictions to be reasonable. You want your agreement to be narrowly tailored to the point that it only prevents them from doing things they really shouldn’t be doing.

Alternatives to Non-Solicitation Contracts

There are other alternatives to non-solicitation agreements. Some are similar to non-solicitation agreements, but focus on different aspects of the employment relationship. Others seek to protect the employer without having the same direct effect on the employment relationship. Employers may use non-compete clauses, which prohibit an employee from working in a particular industry or with a particular competitor for a certain period of time following termination of employment. These are more readily enforceable in Texas than in many other states, although they are still not as favored by the courts as non-disclosure agreements and trade secrets statutes. There are several categories of exceptions to the enforcement of non-compete agreements, such as enforceable non-compete clauses must be ancillary to or part of an otherwise enforceable agreement at the time of the agreement, and must contain reasonable limitations as to (i) time (two years is typically reasonable), (ii) geographical area (state-wide is likely reasonable), and/or (iii) the activities to be restrained (only activities that are related to the employee’s employment). The Texas Supreme Court recently reiterated that the rule of reasonableness governs the enforceability of a non-compete, and that a court may only refuse to enforce a non-compete if the entire agreement is deemed unenforceable as a matter of law. Thus, even though a non-compete may contain several provisions that are not legal, a court may sever missing or unenforceable provisions as long as the remaining agreement gives effect to the original intent of the parties and is enforceable.
Employers may also use confidentiality agreements or non-disclosure agreements to protect confidential information and trade secrets. Unlike non-competes and non-solicitation agreements, a non-disclosure agreement controls an employee’s post-employment activities indirectly, as opposed to directly. While the agreement may prevent the employee from ultimately disclosing key information to a competitor, it does not prohibit the employee from going to one or not from using their knowledge in the same way as a non-compete would. In addition, the Texas Uniform Trade Secrets Act (TUTSA) provides for civil and sometimes criminal remedies against persons who misappropriate trade secrets. As defined by TUTSA, a trade secret includes, among other things, a formula, pattern, compilation of information, program, device, method, technique, or process. The definition also covers financial, business, scientific, technical, economic, or engineering information, and lists other factors indicating economic value, as well as the effort or resources used to develop the materials in question. Nonetheless, there are two limitations on these protections-first, even if something is confidential information, an employee can disclose it if they obtained it from other sources and not from their employment, or the employee independently discovers the information through their own devices. Second, there are limits on how long these protections will last. The restrictions are typically three years or so, but that depends on the scope of protection and the length of time for which the information would have economic significance.

Engage Legal Counsel

It is worth noting that because of the potential for a challenge to a non-solicitation agreement, it is highly recommended to consult with an attorney familiar with the nuances of Texas law prior to creation or contesting a non-solicitation agreement . A skilled attorney will help you ensure that the terms of such an agreement are not overly broad. Likewise, an attorney will be able to assist you in determining whether an employer has a possible case against you or if a former employer has the underlying reasons required to issue your non-solicitation agreement.