1-1 By: Carona (Senate Sponsor - Henderson) H.B. No. 7
1-2 (In the Senate - Received from the House May 17, 1993;
1-3 May 18, 1993, read first time and referred to Committee on Economic
1-4 Development; May 19, 1993, rereferred to Committee on
1-5 Jurisprudence; May 25, 1993, reported adversely, with favorable
1-6 Committee Substitute by the following vote: Yeas 6, Nays 0;
1-7 May 25, 1993, sent to printer.)
1-8 COMMITTEE VOTE
1-9 Yea Nay PNV Absent
1-10 Henderson x
1-11 Harris of Tarrant x
1-12 Brown x
1-13 Harris of Dallas x
1-14 Luna x
1-15 Parker x
1-16 West x
1-17 COMMITTEE SUBSTITUTE FOR H.B. No. 7 By: Henderson
1-18 A BILL TO BE ENTITLED
1-19 AN ACT
1-20 relating to covenants not to compete in certain activities or in
1-21 providing certain products or services.
1-22 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-23 SECTION 1. Title 2, Business & Commerce Code, is amended by
1-24 adding Chapter 20 to read as follows:
1-25 CHAPTER 20. COVENANTS NOT TO COMPETE
1-26 SUBCHAPTER A. GENERAL PROVISIONS
1-27 Sec. 20.01. CRITERIA FOR ENFORCEABILITY OF COVENANT NOT TO
1-28 COMPETE. Notwithstanding Section 15.05 of this code, a covenant
1-29 not to compete is enforceable if it is ancillary to or part of an
1-30 otherwise enforceable agreement, except to the extent that it is
1-31 not reasonable.
1-32 Sec. 20.02. CONSTRUCTION OF PRE-TERMINATION AGREEMENT
1-33 COVENANT. A restriction that operates during the term of an
1-34 employment agreement, agency agreement, independent contractor
1-35 agreement, partnership agreement, franchise, distributorship
1-36 agreement, license, shareholders' agreement, or other ongoing
1-37 business agreement shall not be considered unreasonable because it
1-38 lacks a specific limitation on the scope of activity, duration or
1-39 territory if the restriction promotes or protects the purpose or
1-40 subject matter of the agreement or deters a potential conflict of
1-41 interest.
1-42 Sec. 20.03. CONSTRUCTION OF COVENANTS. (a) Activities,
1-43 products, or services that are competitive with the activities,
1-44 products, or services of an employer may include activities,
1-45 products, or services of the employer.
1-46 (b) If a description of activities, products, and services
1-47 or of an area is required by Subchapter B or C, any description
1-48 that provides fair notice of the maximum reasonable scope of the
1-49 restraint satisfies the requirement, regardless of whether the
1-50 description is generalized or could possibly be stated more
1-51 narrowly to exclude extraneous matters.
1-52 Sec. 20.04. CONSTRUCTION OF POST-EMPLOYMENT COVENANTS.
1-53 (a) In construing a post-employment covenant entered into before
1-54 termination of employment, a good faith estimate of the activities,
1-55 products, and services or of the areas that may be applicable on
1-56 the date of termination satisfies the requirements of Subchapter B,
1-57 regardless of whether the estimate is capable of including or
1-58 ultimately proves to include extraneous activities, products, and
1-59 services, or areas. The post-employment covenant shall be
1-60 construed ultimately to cover only as much of the estimate as
1-61 relates to the activities actually conducted, the products and
1-62 services actually offered, or the areas actually involved within a
1-63 stated period before termination.
1-64 (b) Activities, products, or services are considered to be
1-65 sufficiently described if a reference to the activities, products,
1-66 or services is provided and qualified by the phrase "of the type
1-67 conducted, authorized, offered, or provided within one year before
1-68 termination" or similar language.
2-1 (c) The phrase "the areas where (the employee) is working on
2-2 (date of termination)" is considered sufficient as a description of
2-3 areas if the promisor can reasonably determine the maximum
2-4 reasonable scope of the covenant on the date of termination.
2-5 SUBCHAPTER B. SALE OF BUSINESS COVENANTS
2-6 Sec. 20.010. DEFINITIONS. In this subchapter:
2-7 (1) "Affiliate" means a person:
2-8 (A) that directly, or indirectly through one or
2-9 more intermediaries, controls, is controlled by, or is under common
2-10 control with a specified seller or buyer;
2-11 (B) of which a specified seller or buyer is an
2-12 officer, director, or partner or holds an equity interest or
2-13 ownership position that accounts for five percent or more of the
2-14 voting or profits interest of the person;
2-15 (C) that is a trust or other estate in which a
2-16 specified seller or buyer has a beneficial interest of five percent
2-17 or more or in which a specified seller or buyer serves as trustee
2-18 or in a similar fiduciary capacity;
2-19 (D) who is a spouse, lineal ancestor, lineal
2-20 descendant, or sibling of a specified seller or buyer, if the
2-21 seller or buyer is an individual; or
2-22 (E) the spouse of a lineal ancestor, lineal
2-23 descendant, or sibling described by Paragraph (D) of this
2-24 subdivision.
2-25 (2) "Business" means any line of trade or business
2-26 involved in a sale.
2-27 (3) "Buyer" means a person that acquires a controlling
2-28 interest in a business, including the person's
2-29 successors-in-interest.
2-30 (4) "Controlling interest" means an equity interest or
2-31 ownership participation held by a specified seller or buyer in a
2-32 business that accounts for 25 percent or more of the voting or
2-33 profits interest of the business before its sale, alone or in
2-34 combination with the interest or participation held by affiliates
2-35 of the specified seller or buyer.
2-36 (5) "Sale" means a sale or transfer of the goodwill of
2-37 a business, substantially all of the assets of a business, or a
2-38 controlling interest in a business, whether by sale, exchange,
2-39 redemption, merger, or otherwise.
2-40 (6) "Sale of business covenant" means an agreement in
2-41 which a seller for the benefit of a buyer agrees to refrain from:
2-42 (A) carrying on or engaging in any activity
2-43 competitive with the business; or
2-44 (B) soliciting or accepting business from
2-45 customers that were customers or prospective customers of the
2-46 business at or before the date of the sale for the purpose of
2-47 providing products or services competitive with those provided by
2-48 the business within a geographic area where the business conducts
2-49 its operations on the date of the sale.
2-50 (7) "Seller" means a person that:
2-51 (A) owns a controlling interest in a business
2-52 being sold;
2-53 (B) is an executive employee, officer, or
2-54 manager of the business who receives consideration in connection
2-55 with the sale or the sale of business covenant; or
2-56 (C) is an affiliate of or a
2-57 successor-in-interest to a seller described by Paragraph (A) of
2-58 this subdivision.
2-59 Sec. 20.11. SALE OF BUSINESS COVENANT. (a) A sale of
2-60 business covenant is reasonable for purposes of Section 20.01 if
2-61 the covenant describes in writing:
2-62 (1) the competitive activity from which the seller
2-63 will refrain; or
2-64 (2) the business that the seller will not solicit or
2-65 accept from customers or prospective customers and the geographic
2-66 areas where the business conducts its operations at the date of
2-67 sale.
2-68 (b) A geographic area may include any area where the
2-69 business's customers or prospective customers are present or into
2-70 which the business is reasonably expected to expand. If reasonable
3-1 to protect the interests of the buyer or the goodwill of the
3-2 business, a sale of business covenant may describe a worldwide
3-3 geographic area.
3-4 (c) A sale of business covenant may extend for any period
3-5 that is reasonable to protect the interests of the buyer or the
3-6 goodwill of the business.
3-7 (d) A sale of business covenant is binding only on the
3-8 seller entering into the covenant and the seller's
3-9 successors-in-interest unless the covenant expressly binds a person
3-10 that directly or indirectly through one or more intermediaries is
3-11 controlled by or is under common control of the seller or the
3-12 seller's successors-in-interest.
3-13 SUBCHAPTER C. POST-EMPLOYMENT COVENANTS
3-14 Sec. 20.20. DEFINITIONS. In this subchapter:
3-15 (1) "Business" means any line of trade or business
3-16 conducted by an employer.
3-17 (2) "Employee" means:
3-18 (A) an executive employee, officer, manager, or
3-19 key employee;
3-20 (B) an individual who is part of the research
3-21 and development personnel or another person, including an
3-22 independent contractor, in possession of confidential information
3-23 that is important to a business;
3-24 (C) any other person, including an independent
3-25 contractor, in possession of:
3-26 (i) selective or specialized skills,
3-27 learning, or abilities;
3-28 (ii) customer contacts that are material
3-29 contacts; or
3-30 (iii) customer information; or
3-31 (D) any party to a partnership agreement,
3-32 franchise, distributorship, or license agreement or to a sales
3-33 agent, broker, representative, or supervisor agreement.
3-34 (3) "Employer" means any person that conducts a
3-35 business or that directly or indirectly owns an equity interest or
3-36 ownership participation in another person that conducts a business
3-37 that accounts for 50 percent or more of the voting or profits
3-38 interest of the person conducting the business. The term includes
3-39 a successor-in-interest.
3-40 (4) "Material contact" means any contact that exists
3-41 between an employee and a customer or potential customer:
3-42 (A) with whom the employee dealt;
3-43 (B) whose dealings with the employer were
3-44 coordinated or supervised by the employee;
3-45 (C) about whom the employee obtained
3-46 confidential information in the ordinary course of business as a
3-47 result of the employee's association with the employer; or
3-48 (D) who receives products or services authorized
3-49 by the employer, the sale or provision of which results or resulted
3-50 in compensation, commissions, or earnings for the employee within
3-51 two years before the date of the employee's termination.
3-52 (5) "Post-employment covenant" includes any agreement
3-53 described by Sections 20.21 through 20.23 or any substantially
3-54 equivalent agreement.
3-55 (6) "Products or services" means anything of
3-56 commercial value, including goods, property, intangible property,
3-57 services, financial products or services, business opportunities or
3-58 assistance, or any other object or aspect of a business or the
3-59 conduct of the business.
3-60 (7) "Termination" means the termination of an
3-61 employee's engagement with an employer, regardless of whether the
3-62 termination was with or without cause or pursuant to a term or
3-63 at-will employment relationship, on the initiative of either party.
3-64 Sec. 20.21. EMPLOYMENT COVENANT. (a) A post-employment
3-65 covenant by an employee for the benefit of an employer to refrain,
3-66 for a stated period following termination, from conducting activity
3-67 that is competitive with an activity the employee conducted for the
3-68 employer within a geographic area where the employee conducted the
3-69 activity at or within a reasonable period before termination is
3-70 reasonable for purposes of Section 20.01 if the agreement describes
4-1 the activity and area in writing.
4-2 (b) The geographic area in which an employee works may
4-3 include any area where any operation performed, supervised, or
4-4 assisted in by the employee was conducted and any area where
4-5 customers or prospective customers of the business with whom the
4-6 employee had material contact are present.
4-7 Sec. 20.22. CUSTOMER NON-SOLICITATION COVENANT. (a) A
4-8 post-employment covenant by an employee for the benefit of an
4-9 employer to refrain, for a stated period following termination,
4-10 from soliciting or accepting or attempting to solicit or accept,
4-11 directly or by assisting others, business from any of the
4-12 employer's customers, including prospective customers with whom the
4-13 employee had material contact during the employee's employment,
4-14 for purposes of providing products or services that are competitive
4-15 with those provided by the employer's business is reasonable for
4-16 purposes of Section 20.01 if the agreement is in writing.
4-17 (b) An express reference to geographic area or the types of
4-18 products or services considered to be competitive is not required
4-19 for the covenant to be enforceable.
4-20 (c) A reference to a prohibition against soliciting or
4-21 accepting business from customers or similar language is adequate
4-22 for the purpose of enforcing the covenant and shall be construed to
4-23 apply to:
4-24 (1) any of the business's customers, including
4-25 prospective customers, with whom the employee had material contact;
4-26 and
4-27 (2) products and services that are competitive with
4-28 those provided by the employer's business.
4-29 Sec. 20.23. EMPLOYEE NON-SOLICITATION COVENANT. (a) A
4-30 post-employment covenant by an employee for the benefit of an
4-31 employer to refrain, for a stated period following termination,
4-32 from recruiting or hiring or attempting to recruit or hire,
4-33 directly or by assisting others, any other employee of the employer
4-34 or its affiliates is reasonable for the purposes of Section 20.01
4-35 if the agreement is in writing.
4-36 (b) An express reference to a geographic area is not
4-37 required for the covenant to be enforceable.
4-38 (c) A reference to a prohibition against recruiting or
4-39 hiring or attempting to recruit or hire other employees shall be
4-40 construed to apply to other employees who are still employed by or
4-41 doing business with the employer or its affiliates at the time of
4-42 the recruiting or hiring or attempted recruiting or hiring.
4-43 Sec. 20.24. DURATION OF PERIODS. (a) A period stated in a
4-44 post-employment covenant shall be presumed to be reasonable if the
4-45 duration of the period is:
4-46 (1) two years or less, in the case of an employment
4-47 covenant described by Section 20.21; or
4-48 (2) three years or less, in the case of a customer
4-49 non-solicitation covenant described by Section 20.22 or an employee
4-50 non-solicitation covenant described by Section 20.23.
4-51 (b) A post-employment covenant may expressly provide that a
4-52 violation of the covenant automatically tolls and suspends the
4-53 period of the covenant for the period that the violation continues
4-54 if the employer seeks enforcement promptly after discovery of the
4-55 violation.
4-56 Sec. 20.25. EFFECT OF INEQUITY OF DISCHARGE. (a) A
4-57 possible inequity that results from the discharge of an employee
4-58 without cause or in violation of a contractual or other legal
4-59 obligation of the employer may be considered as a factor affecting
4-60 the choice of an appropriate remedy or, if a post-employment
4-61 covenant as a whole is rendered unreasonable, the unenforceability
4-62 of the covenant.
4-63 (b) In this section, "discharge of an employee without
4-64 cause" does not include a termination:
4-65 (1) on the completion or expiration of a partnership
4-66 agreement, franchise, distributorship, or license agreement or of a
4-67 sales agent, broker, representative, or supervisor agreement in
4-68 accordance with the terms of the agreement;
4-69 (2) under a retirement program of an employer;
4-70 (3) following an employee's refusal to accept an offer
5-1 of continued employment on terms and conditions at least as
5-2 favorable to the employee as those previously in effect; or
5-3 (4) under circumstances in which the employee remains
5-4 or becomes entitled to receive earnings, commissions, or benefits
5-5 that serve as compensation, at least in part, for the employee's
5-6 compliance with a post-employment covenant.
5-7 SUBCHAPTER D. VERIFICATION AND CLARIFICATION PROCEDURE
5-8 Sec. 20.30. PROMISOR'S DEMAND FOR VERIFICATION OR
5-9 CLARIFICATION. (a) If a promisor desires to verify the terms of a
5-10 covenant in effect at any time or to obtain a clarification of a
5-11 covenant believed to be unclear, the promisor may demand
5-12 verification or clarification by delivering to the promisee a
5-13 written request for verification or clarification.
5-14 (b) A demand submitted under Subsection (a) must contain:
5-15 (1) if verification is sought, a request for a copy of
5-16 each covenant in effect between the parties;
5-17 (2) if clarification is sought, a description of the
5-18 clarification requested; and
5-19 (3) the following statement:
5-20 "THIS DEMAND IS MADE PURSUANT TO SUBCHAPTER D,
5-21 CHAPTER 20, TEXAS BUSINESS & COMMERCE CODE,
5-22 AND REQUIRES A RESPONSE WITHIN 30 DAYS."
5-23 Sec. 20.31. DEADLINE FOR PROMISEE'S RESPONSE TO DEMAND FOR
5-24 VERIFICATION OR CLARIFICATION. Within 30 days after the date a
5-25 promisee receives a demand under Section 20.30, the promisee shall
5-26 respond by sending the promisor a verification or clarification or,
5-27 if clarification is considered unnecessary because the promisee
5-28 believes the covenant is clear, a statement to that effect.
5-29 Sec. 20.32. CONTENTS OF CLARIFICATION; VOLUNTARY
5-30 CLARIFICATION; EFFECT. (a) A promisee's response to a demand made
5-31 under Section 20.30 is not required to include confidential
5-32 information or business strategies.
5-33 (b) In the interest of reducing or eliminating an unclear or
5-34 overbroad provision of a covenant, a promisee may provide the
5-35 promisor with a clarification or reformulation of the covenant,
5-36 whether or not the clarification or reformulation was requested,
5-37 that is not broader than the terms of the original covenant. Such
5-38 a clarification or reformulation supersedes conflicting terms of
5-39 the covenant and is binding regardless of whether additional
5-40 consideration is provided. The promisor may rely on the
5-41 clarification or reformulation in complying with the terms of the
5-42 covenant.
5-43 Sec. 20.33. EFFECT OF PROMISEE'S FAILURE TO RESPOND. (a) A
5-44 failure or delay of a promisee to respond to a demand received
5-45 under Section 20.30 shall be considered as one factor by a court in
5-46 determining the extent to which an unclear or overbroad covenant
5-47 may be enforced as lawfully serving the business purposes and
5-48 interests contemplated by the parties in their agreement.
5-49 (b) If a demand is submitted in accordance with Section
5-50 20.30 for the benefit of a person who wishes to employ or do
5-51 business with a promisor, subsequent enforcement of an unknown,
5-52 unclear, or overbroad covenant that was not properly identified,
5-53 clarified, or reformulated by the promisee following its receipt of
5-54 a demand under Section 20.30 is limited to avoid prejudice to the
5-55 employment or business to which the unknown, unclear, or overbroad
5-56 aspects of the covenant relate.
5-57 SUBCHAPTER E. ENFORCEMENT
5-58 Sec. 20.40. PROCEDURES AND REMEDIES IN ACTION TO ENFORCE
5-59 COVENANT NOT TO COMPETE. (a) Except as provided by Subsection
5-60 (c), a court may award the promisee under a covenant not to compete
5-61 damages, injunctive relief, or both damages and injunctive relief
5-62 for a breach by the promisor of the covenant.
5-63 (b) If the covenant is a sale of business covenant, as
5-64 described by Section 20.10, the promisor has the burden of
5-65 establishing that the covenant is not reasonable. If the covenant
5-66 is not a sale of business covenant, the promisee has the burden of
5-67 establishing that the covenant is reasonable. For the purposes of
5-68 this subsection, the "burden of establishing" a fact means the
5-69 burden of persuading the triers of fact that the existence of the
5-70 fact is more probable than its nonexistence.
6-1 (c) If the covenant is found to be ancillary to or part of
6-2 an otherwise enforceable agreement but is not reasonable, the court
6-3 shall reform the covenant to the extent necessary to cause the
6-4 covenant to be reasonable and then enforce the covenant as
6-5 reformed, except that the court may not award the promisee damages
6-6 for a breach of the covenant before its reformation and the relief
6-7 granted to the promisee shall be limited to injunctive relief.
6-8 Sec. 20.41. EXCLUSIVE REMEDIES; PREEMPTION. The criteria
6-9 for enforceability of covenants not to compete and the procedures
6-10 and remedies in actions to enforce covenants not to compete
6-11 provided by this chapter are exclusive and preempt any other
6-12 criteria for enforceability of covenants not to compete or
6-13 procedures and remedies in actions to enforce covenants not to
6-14 compete under common law or otherwise.
6-15 SECTION 2. Subchapter E, Chapter 15, Business & Commerce
6-16 Code, is repealed.
6-17 SECTION 3. This Act takes effect September 1, 1993.
6-18 SECTION 4. This Act applies to a covenant not to compete
6-19 entered into before, on, or after the effective date of this Act,
6-20 except that this Act does not apply to any action that has been
6-21 finally adjudicated by a court of competent jurisdiction before the
6-22 effective date of this Act.
6-23 SECTION 5. The importance of this legislation and the
6-24 crowded condition of the calendars in both houses create an
6-25 emergency and an imperative public necessity that the
6-26 constitutional rule requiring bills to be read on three several
6-27 days in each house be suspended, and this rule is hereby suspended.
6-28 * * * * *
6-29 Austin,
6-30 Texas
6-31 May 25, 1993
6-32 Hon. Bob Bullock
6-33 President of the Senate
6-34 Sir:
6-35 We, your Committee on Jurisprudence to which was referred H.B. No.
6-36 7, have had the same under consideration, and I am instructed to
6-37 report it back to the Senate with the recommendation that it do not
6-38 pass, but that the Committee Substitute adopted in lieu thereof do
6-39 pass and be printed.
6-40 Henderson,
6-41 Chairman
6-42 * * * * *
6-43 WITNESSES
6-44 No witnesses appeared on H.B. No. 7.