74(R) SB 511 Senate Committee Report

BILL ANALYSIS

C.S.S.B. 511
By: Henderson
Jurisprudence
3-7-95
Committee Report (Substituted)
BACKGROUND

A "covenant not to compete" is an agreement which restricts a
person from competing with another in some activity for a period of
time in a particular geographical area. To be enforceable, a
covenant not to compete must meet a variety of standards
established by statute. Chapter 15 of the Business and Commerce
Code deals with covenants not to compete, and Section 15.50
establishes the criteria under which a covenant not to compete is
enforceable. Texas courts have not consistently followed the
requirements of Chapter 15. One case has implied that the common
law on the subject remains applicable. Another case invalidates
covenants not to compete in connection with "at will" employment
contracts.

PURPOSE

As proposed, C.S.S.B. 511 establishes criteria for the
enforceability, construction, verification and clarification
procedures of business and postemployment covenants not to compete.
Provides for the enforcement of covenants not to compete.

RULEMAKING AUTHORITY

It is the committee's opinion that this bill does not grant any
additional rulemaking authority to a state officer, institution, or
agency.

SECTION BY SECTION ANALYSIS

SECTION 1. Amends Title 2, Business & Commerce Code, by adding
Chapter 20, as follows;

CHAPTER 20. COVENANTS NOT TO COMPETE

SUBCHAPTER A. GENERAL PROVISIONS

Sec. 20.01. CRITERIA FOR ENFORCEABILITY OF COVENANT NOT TO
COMPETE. Provides that a covenant not to compete (covenant) is
enforceable if it is part of an otherwise enforceable
agreement or an otherwise valid transaction or relationship
(agreement), except to the extent that it contains a
limitation on scope of activity, duration, or territory
(limitation) that is unreasonable and imposes a restraint
greater than is necessary to protect the goodwill or other
business interest (protection) of the promisee.

Sec. 20.02. CONSTRUCTION OF PRETERMINATION AGREEMENT COVENANT.
Establishes criteria under which a restriction that operates
during the term of an employment agreement is not
unreasonable.

Sec. 20.03. CONSTRUCTION OF COVENANTS IN GENERAL. (a) Provides
that an activity, product, or service (activity) that is
competitive with an activity of a promisee includes any
related activity.

(b) Sets forth provisions under which a description required
under Subchapter B or C is satisfactory.

(d) Provides that an agreement is not required to be in
writing to be enforceable, unless required by other law.
Provides that, if the agreement or covenant is in writing,
the business interests of the promisee to be protected is
not required to be described in the text of the agreement or
covenant. Provides that a covenant is not required to be in
writing to be enforceable.

(e) Provides that creation or continuation of at-will
employment is a valid transaction and relationship.

Sec. 20.04. CONSTRUCTION OF POSTEMPLOYMENT COVENANTS. (a)
Provides that this section applies only to a postemployment
covenant under Subchapter C.

(b) Sets forth provisions under which a postemployment
covenant entered into before termination of employment
satisfies the requirements of Subchapter C. Requires the
postemployment covenant to be construed to cover only as
much as relates to activities or areas involved within the
two-year period preceding termination.

(c) Provides that activities are sufficiently described if
a reference to the activities is provided and qualified by
certain language.

(d) Provides that certain language is sufficient to describe
areas if the promisor can determine the scope of the
covenant on the date of termination. Authorizes a
postemployment covenant to describe a worldwide area for
employer protection.

Sec. 20.05. PRESUMPTIONS. (a) Provides that a fact or
conclusion presumed under this chapter is established as a
rebuttable presumption notwithstanding any statement of the
burden of proof. Provides that on rebuttal of the factor
presumption, the burden of proof is as provided by Section
20.41(b).

(b) Provides that a fact or conclusion is established as a
matter of law and may not be rebutted if this chapter
provides the fact or conclusion is conclusively deemed.
SUBCHAPTER B. BUSINESS COVENANTS

Sec. 20.11. DEFINITIONS. Defines "affiliate," "business,"
"business covenant," "controlling interest," and "sale."

Sec. 20.12. BUSINESS COVENANT. (a) Sets forth provisions under
which a business covenant is presumed to be necessary for
promisee protection and to be reasonable as to scope of
activity and territory (reasonable).

(b) Authorizes the business covenant to include any
geographic area where customers are present or into which
the business is expected to conduct its business. Authorizes
a business covenant to describe a worldwide area.

(c) Provides that a business covenant is binding only on the
promisor entering into the covenant and the promisor's
successors-in-interest unless the covenant expressly binds
a person that is controlled by or is under common control
with the promisor.

Sec. 20.13. DURATION OF PERIOD. (a) Provides that a period of
five years or less stated in a business covenant is presumed
to be reasonable for purposes of Section 20.01.

(b) Authorizes a business covenant to provide that a
violation of the covenant automatically tolls or suspends
the period of the covenant for the period that the violation
continues if the promisee seeks enforcement promptly after
discovery of the violation.

SUBCHAPTER C. POSTEMPLOYMENT COVENANTS
Sec. 20.21. DEFINITION. Defines "business," "employee,"
"employer," "material contact," "postemployment covenant,"
"products or services," and "termination."

Sec. 20.22. EMPLOYMENT COVENANT. (a) Provides that a
postemployment covenant by an employee to refrain from
conducting an activity that is competitive with an activity
conducted by the employer and that is within a geographic area
where the employee conducted the activity on or within a two-year period preceding termination is presumed to be necessary
for employer protection and reasonability.
(b) Sets forth the geographic area in which an employee's
competitive activities are authorized to be limited by a
covenant.
Sec. 20.23. CUSTOMER NONSOLICITATION COVENANT. (a) Provides
that a postemployment covenant by an employee to refrain from
soliciting or accepting business from a customer of the
employer with whom the employee had contact on behalf of the
employer during the employee's employment for purposes of
providing a product or service that is competitive with a
product or service provided by the employer's business is
deemed necessary for employer protection and reasonability.

(b) Provides that an express reference in the covenant to
geographic area or the types of competitive products or
services is not required for the covenant to be enforceable.

(c) Provides that a reference in the covenant to a
prohibition against soliciting or accepting business from
customers is adequate and required to be construed to apply
to any of the business's customers with whom the employee
had contact and competitive products and services.

Sec. 20.24. EMPLOYEE NONSOLICITATION COVENANT. (a) Provides
that a postemployment covenant by an employee, to refrain for
a stated period after termination from recruiting or hiring
other employees of the employer, is deemed necessary for
employer protection and reasonability.

(b) Provides that an express reference in the covenant to a
geographic area is not required for the covenant to be
enforceable.

(c) Requires a reference in the covenant to a prohibition
against recruiting or hiring other employees to be construed
to apply to employees who are still employed by or doing
business with the employer at the time of the recruiting or
hiring.

Sec. 20.25. DURATION OF PERIODS. (a) Sets forth periods in a
postemployment covenant that are presumed reasonable.

(b) Provides that a period stated in a postemployment
covenant described by Section 20.23 or 20.24 is deemed
reasonable if the period is one year or less.

(c) Authorizes a postemployment covenant to provide that a
violation of a covenant automatically tolls and suspends the
covenant for the period that the violation continues if the
employer seeks enforcement promptly after discovery of the
violation.
SUBCHAPTER D. VERIFICATION AND CLARIFICATION PROCEDURE

Sec. 20.31. PROMISOR'S DEMAND FOR VERIFICATION OR
CLARIFICATION. Authorizes a promisor to demand verification or
clarification of a covenant by delivering to the promisee a
request including certain information.

Sec. 20.32. DEADLINE FOR PROMISEE'S RESPONSE TO DEMAND FOR
VERIFICATION OR CLARIFICATION. Requires the promisee, no later
than 30 days after the date a promisee receives a demand, to
respond by sending the promisor a verification or
clarification. Sets forth provisions under which clarification
is not necessary.

Sec. 20.33. CONTENTS OF CLARIFICATION: VOLUNTARY
CLARIFICATION; EFFECT. (a) Provides that a promisee's response
to a demand made under Section 20.31 is not required to
include confidential information or business strategies.

(b) Authorizes a promisee to provide the promisor with a
clarification or reformulation of the covenant that is not
broader than the terms of the original covenant. Provides
that the clarification of reformulation supersedes a
conflicting term of the covenant and is binding. Authorizes
the promisor to rely on the clarification or reformulation
in complying with the covenant.
Sec. 20.34. EFFECT OF PROMISEE'S FAILURE TO RESPOND. Requires
a court, arbitrator, or trier of fact (court) to consider
failure of a promisee to respond timely to a demand in
determining the extent to which an unclear or overbroad
covenant may be enforced as lawfully serving the business
purposes and interests contemplated by the parties in the
agreement.

SUBCHAPTER E. ENFORCEMENT

Sec. 20.41. PROCEDURES AND REMEDIES IN ACTION TO ENFORCE
COVENANT NOT TO COMPETE. (a) Authorizes a court to award the
promisee under a covenant damages, injunctive relief,
including a temporary restraining order, or both damages and
injunctive relief for a breach by the promisor of the
covenant. Provides that a promisee need not prove actual
injury, and inadequate remedy at law, or danger of immediate
and irreparable harm to obtain injunctive relief, but is
required to show that the promisor has acted in a manner
contrary to a covenant that is valid.

(b) Provides that the promisee has the burden of
establishing that a covenant is reasonable. Provides that,
if a presumption created by Subchapter B or C, other than
Section 20.22, is rebutted, the promisor has the burden of
establishing that the covenant is unreasonable. Provides
that if a presumption created by Section 20.22 is rebutted,
the promisee has the burden of establishing that the
covenant is reasonable. Defines "burden of establishing a
fact."

(c) Requires a court, if the covenant is found to be
ancillary to or part of an agreement but is not reasonable
with respect to certain limitations, to reform the covenant
to cause it to be reasonable and enforce the covenant as
reformed. Prohibits a court, arbitrator, or trier of fact
from awarding the promisee damages for a breach of the
covenant before its reformation and requires the relief
granted to the promisee to be limited to preliminary and
permanent injunctive relief.

(d) Provides that the reasonability of a covenant as to the
scope of activity, duration, or territory is an issue of
fact, not an issue of law. Provides that this section does
not create a right of trial by jury at a preliminary
injunction hearing.

(e) Requires this chapter to be interpreted in favor of
validity and enforceability of a covenant.
Sec. 20.42. EXCLUSIVE REMEDIES; PREEMPTION. Provides that the
criteria for enforceability of a covenant and the procedures
and remedies in an action to enforce a covenant provided by
this chapter are exclusive and preempt any other criteria for
enforceability of a covenant under common law or otherwise.

SECTION 2. Repealer: Chapter 15E, Business & Commerce Code
(Covenants not to compete).

SECTION 3. Effective date: September 1, 1995.

SECTION 4. Makes application of this Act retroactive, except for
an action that has been finally adjudicated before the effective
date of this Act.

SECTION 5. Emergency clause.