Non-compete agreements have been under fire for years, and it’s unlikely 2025 will be any different. While non-competes are currently governed at the state level; the Federal Trade Commission’s (FTC) nationwide ban on most non-competes was supposed to take effect in September 2024. Instead, a Texas federal court blocked the rule, arguing the FTC lacks enforcement authority. The appeal is still pending, and the new Chair, Andrew Ferguson, may lead the FTC in a different direction.
What does that mean for Texas businesses?
Texas has long enforced non-competes when they meet certain legal requirements. Under the Texas Covenants Not to Compete Act , a non-compete agreement (“NCA”) is enforceable if it:
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- is part of an otherwise enforceable agreement;
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- is supported by valid consideration; and
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- includes reasonable restrictions on geographic area, time, and scope of activities.
Texas courts tend to favor reformation over invalidation and judges often narrow the NCA rather than throw it out completely.
What is Considered Too Broad?
Several Texas cases have shaped court’s views on NCAs:
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- In 2006 the Texas Supreme Court addressed concerns about at-will employment and whether an employer’s promise was binding enough to support enforcement of a noncompete. The Court held that a noncompete could become enforceable when an employer later performed a promise, such as providing training or confidential information, and that the agreement did not have to be binding at the time of signing.
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- A 2011 decision in Marsh clarified that a covenant not to compete is enforceable if it is reasonably related to a legitimate business interest (i.e., goodwill, trade secrets, confidential information, specialized training) and supported by consideration.
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- Texas courts have struck down NCAs that broadly prohibit employees from contacting all potential customers as overly restrictive and thus too broad, but have upheld limitations on existing customer relationships as more reasonable.
How Does Texas Compare?
While Texas still allows NCAs under certain conditions, other states have taken different approaches:
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- New York: Courts enforce NCAs on a case-by-case basis, but the state legislature has been pushing for a ban similar to the FTC rule, a landscape to continue to monitor in 2025.
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- California: Non-competes are virtually unenforceable in the Golden State, joining 3 other states in full bans with NCAs. The recent enactment of Senate Bill 699 and Assembly Bill 1076 has even banned employers from requiring employees to sign unenforceable NCAs.
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- 33 states and DC currently have some restrictions falling short of full bans. Aside from complete or near complete bans, categories of restrictions include: (a) income thresholds, (b) industry bans, and (c) other restrictions, such as Texas’ “reasonable restrictions” test and Florida’s “presumption of unreasonableness after two years”.
So, What’s Next?
For now, the FTC’s non-compete ban remains in legal limbo; businesses should monitor for federal changes while operating under applicable state law.
If you need advice about non-compete provisions, contact us today!
(image by Freepik)
