By Brimer H.B. No. 644
74R1890 DWS-F
A BILL TO BE ENTITLED
1-1 AN ACT
1-2 relating to covenants not to compete.
1-3 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-4 SECTION 1. Title 2, Business & Commerce Code, is amended by
1-5 adding Chapter 20 to read as follows:
1-6 CHAPTER 20. COVENANTS NOT TO COMPETE
1-7 SUBCHAPTER A. GENERAL PROVISIONS
1-8 Sec. 20.01. CRITERIA FOR ENFORCEABILITY OF COVENANT NOT TO
1-9 COMPETE. Notwithstanding Section 15.05 of this code, a covenant
1-10 not to compete is enforceable if it is ancillary to or part of an
1-11 enforceable agreement or a valid transaction or relationship,
1-12 except to the extent that it contains a limitation on scope of
1-13 activity, duration, or territory that is unreasonable and imposes a
1-14 restraint greater than is necessary to protect the goodwill or
1-15 other business interest of the promisee.
1-16 Sec. 20.02. CONSTRUCTION OF PRETERMINATION AGREEMENT
1-17 COVENANT. A restriction that operates during the term of an
1-18 employment agreement, whether ancillary to or part of an agreement
1-19 or relationship at will or for a term, or of an agency agreement,
1-20 independent contractor agreement, partnership agreement, franchise,
1-21 distributorship agreement, license, shareholders' agreement, or
1-22 other ongoing business agreement is not unreasonable because it
1-23 lacks a specific limitation on scope of activity, duration, or
1-24 territory if the restriction promotes or protects the purpose or
2-1 subject matter of the agreement or deters a potential conflict of
2-2 interest.
2-3 Sec. 20.03. CONSTRUCTION OF COVENANTS IN GENERAL. (a) An
2-4 activity, product, or service that is competitive with an activity,
2-5 product, or service of a promisee includes any related activity,
2-6 product, or service.
2-7 (b) If Subchapter B or C requires a description of an
2-8 activity, product, service, or area, a description that provides
2-9 fair notice of the maximum reasonable scope of the restraint
2-10 satisfies the requirement, regardless of whether the description is
2-11 generalized or could possibly be stated more narrowly to exclude
2-12 extraneous activities, products, services, or areas.
2-13 (c) A covenant not to compete that is ancillary to or part
2-14 of an enforceable agreement or a valid transaction or relationship
2-15 is not required to be supported by independent consideration, even
2-16 if the covenant not to compete is entered into after commencement
2-17 of the agreement, transaction, or relationship.
2-18 (d) An agreement, transaction, or relationship is not
2-19 required to be in writing to be an enforceable agreement or valid
2-20 transaction or relationship, unless other law requires the
2-21 agreement to be in writing to be enforceable or the transaction or
2-22 relationship to be in writing to be valid. If the agreement,
2-23 transaction, relationship, or covenant not to compete is in
2-24 writing, the goodwill or other business interest of the promisee to
2-25 be protected by the covenant not to compete is not required to be
2-26 described or expressly set forth in the text of the agreement,
2-27 transaction, relationship, or covenant not to compete. A covenant
3-1 not to compete is not required to be in writing to be enforceable
3-2 under this chapter.
3-3 (e) Creation or continuation of at-will employment is a
3-4 valid transaction and at-will employment is a valid relationship.
3-5 Sec. 20.04. CONSTRUCTION OF POSTEMPLOYMENT COVENANTS. (a)
3-6 The section applies only to a postemployment covenant under
3-7 Subchapter C.
3-8 (b) In a postemployment covenant entered into before
3-9 termination of employment, a good faith estimate of the activities,
3-10 products, services, or areas applicable on the date of termination
3-11 satisfies the requirements of Subchapter C, regardless of whether
3-12 the estimate is capable of including or includes extraneous
3-13 activities, products, services, or areas. The postemployment
3-14 covenant shall be construed to cover only as much of the estimate
3-15 as relates to activities actually conducted, the products and
3-16 services actually offered, or the areas actually involved within
3-17 the two-year period preceding termination.
3-18 (c) Activities, products, or services are sufficiently
3-19 described if a reference to the activities, products, or services
3-20 is provided and qualified by the phrase "of the type conducted,
3-21 authorized, offered, or provided within two years before
3-22 termination" or similar language.
3-23 (d) The phrase "the areas where the employee is working on
3-24 the date of termination" or similar language is sufficient to
3-25 describe areas if the promisor can reasonably determine the maximum
3-26 reasonable scope of the covenant on the date of termination. If
3-27 reasonable to protect the goodwill or other business interests of
4-1 the employer, a postemployment covenant may describe a worldwide
4-2 area.
4-3 Sec. 20.05. PRESUMPTIONS. (a) If this chapter provides
4-4 that a fact or conclusion is presumed, the fact or conclusion is
4-5 established as a rebuttable presumption notwithstanding any
4-6 statement of the burden of proof established by Section 20.41(b).
4-7 On rebuttal of the factor presumption, the burden of proof is as
4-8 provided by Section 20.41(b).
4-9 (b) If this chapter provides that a fact or conclusion is
4-10 conclusively deemed, the fact or conclusion is established as a
4-11 matter of law and may not be rebutted.
4-12 (Sections 20.06-20.10 reserved for expansion
4-13 SUBCHAPTER B. BUSINESS COVENANTS
4-14 Sec. 20.11. DEFINITIONS. In this subchapter:
4-15 (1) "Affiliate" means an individual or entity:
4-16 (A) that directly, or indirectly through one or
4-17 more intermediaries, controls, is controlled by, or is under common
4-18 control with a specified promisor or promisee;
4-19 (B) of which a specified promisor or promisee is
4-20 an officer, director, or partner or holds an equity interest or
4-21 ownership position that accounts for five percent or more of the
4-22 voting or profits interest of the entity;
4-23 (C) that is a trust or other estate in which a
4-24 specified promisor or promisee has a beneficial interest of five
4-25 percent or more or in which a specified promisor or promisee serves
4-26 as trustee or in a similar fiduciary capacity;
4-27 (D) who is a spouse, lineal ancestor, lineal
5-1 descendant, or sibling of a specified promisor or promisee; or
5-2 (E) who is the spouse of a lineal ancestor,
5-3 lineal descendant, or sibling described by Paragraph (D) of this
5-4 subdivision.
5-5 (2) "Business" means a line of trade or business of
5-6 the promisee or an affiliate of the promisee or that is the subject
5-7 of the agreement, transaction, or relationship to which the
5-8 covenant not to compete is ancillary.
5-9 (3) "Business covenant" means an agreement, other than
5-10 a postemployment covenant, in which a promisor for the benefit of a
5-11 promisee agrees to refrain from:
5-12 (A) carrying on or engaging in any activity
5-13 competitive with the business; or
5-14 (B) soliciting or accepting business from
5-15 customers that were customers of the business at or before the date
5-16 of a sale, or during and on the date of termination of the
5-17 agreement, transaction, or relationship to which the covenant not
5-18 to compete is ancillary, for the purpose of providing products or
5-19 services competitive with those provided by the business within a
5-20 geographic area where the business conducts its operations:
5-21 (i) on the date of the sale; or
5-22 (ii) during or on the date of termination
5-23 of the agreement, transaction, or relationship to which the
5-24 covenant not to compete is ancillary.
5-25 (4) "Controlling interest" means an equity interest or
5-26 ownership participation held by a specified promisor or promisee in
5-27 a business that accounts for 25 percent or more of the voting or
6-1 profits interest of the business before its sale, alone or in
6-2 combination with the interest or participation held by affiliates
6-3 of the specified promisor or promisee.
6-4 (5) "Sale" means a sale or transfer of the goodwill of
6-5 a business, substantially all of the assets of a business, or a
6-6 controlling interest in a business, including an exchange,
6-7 redemption, or merger.
6-8 Sec. 20.12. BUSINESS COVENANT. (a) A business covenant is
6-9 presumed to be necessary to protect the goodwill or other business
6-10 interest of the promisee and to be reasonable as to scope of
6-11 activity and territory for purposes of Section 20.01 if the
6-12 covenant describes in writing:
6-13 (1) the competitive activity in which the promisor may
6-14 not engage; or
6-15 (2) the business that the promisor may not solicit or
6-16 accept from customers or prospective customers; and
6-17 (3) the geographic areas where the business conducts
6-18 its operations on the date of sale, or during or on the date of
6-19 termination of the agreement, transaction, or relationship to which
6-20 the covenant not to compete is ancillary.
6-21 (b) The business covenant may include any geographic area
6-22 where the business's customers or prospective customers are present
6-23 or into which the business is reasonably expected to conduct its
6-24 business or expand. If reasonable to protect the interests of the
6-25 promisee or the goodwill of the business, a business covenant may
6-26 describe a worldwide area.
6-27 (c) A business covenant is binding only on the promisor
7-1 entering into the covenant and the promisor's
7-2 successors-in-interest unless the covenant expressly binds a person
7-3 that directly or indirectly through one or more intermediaries
7-4 controls, is controlled by, or is under common control with the
7-5 promisor or the promisor's successors-in-interest.
7-6 Sec. 20.13. DURATION OF PERIOD. (a) A period stated in a
7-7 business covenant is presumed to be reasonable for purposes of
7-8 Section 20.01 if the duration of the period is five years or less.
7-9 (b) A business covenant may expressly provide that a
7-10 violation of the covenant automatically tolls or suspends the
7-11 period of the covenant for the period that the violation continues
7-12 if the promisee seeks enforcement promptly after discovery of the
7-13 violation.
7-14 (Sections 20.14-20.20 reserved for expansion
7-15 SUBCHAPTER C. POSTEMPLOYMENT COVENANTS
7-16 Sec. 20.21. DEFINITIONS. In this subchapter:
7-17 (1) "Business" means a line of trade or business
7-18 conducted by an employer.
7-19 (2) "Employee" means:
7-20 (A) an executive employee, officer, manager, or
7-21 key employee;
7-22 (B) an individual who possesses technical
7-23 information or knowledge important to a business or any other
7-24 person, including an independent contractor, in possession of
7-25 confidential or proprietary information, including trade secrets,
7-26 that is important to a business;
7-27 (C) any other person, including an independent
8-1 contractor, who, in relation to a business, possesses:
8-2 (i) selective or specialized skills,
8-3 learning, or abilities;
8-4 (ii) customer contacts that are material
8-5 contacts; or
8-6 (iii) customer information;
8-7 (D) a party to a consulting, sales agent,
8-8 broker, independent contractor, representative, or supervisor
8-9 agreement or relationship; or
8-10 (E) a prospective employee, if the employee's
8-11 employment begins and the employee serves in a position or
8-12 relationship described by Paragraphs (A)-(D).
8-13 (3) "Employer" means a person or successor-in-interest
8-14 to a person that conducts a business or that directly or indirectly
8-15 owns an equity interest or ownership participation in another
8-16 person that conducts a business that accounts for 50 percent or
8-17 more of the voting or profits interest of the person conducting the
8-18 business.
8-19 (4) "Material contact" means a contact between an
8-20 employee and a customer or potential customer of the employer:
8-21 (A) with whom the employee dealt while employed
8-22 by the employer;
8-23 (B) whose dealings with the employer were
8-24 coordinated or supervised by the employee;
8-25 (C) about whom the employee obtained information
8-26 in the ordinary course of business as a result of the employee's
8-27 association with the employer; or
9-1 (D) who receives a product or service authorized
9-2 by the employer, the sale or provision of which resulted in a
9-3 commission or other compensation for the employee within the
9-4 two-year period preceding the date of the employee's termination.
9-5 (5) "Postemployment covenant" includes an agreement
9-6 described by Sections 20.22-20.24 or a substantially equivalent
9-7 agreement.
9-8 (6) "Products or services" means anything of
9-9 commercial value, including goods, property, intangible property,
9-10 services, financial products or services, business opportunities or
9-11 assistance, or other object or aspect of a business.
9-12 (7) "Termination" means the termination of an
9-13 employee's engagement with an employer on the initiative of either
9-14 party, regardless of whether the termination was with or without
9-15 cause or under a term or at-will employment agreement or
9-16 relationship.
9-17 Sec. 20.22. EMPLOYMENT COVENANT. (a) A postemployment
9-18 covenant by an employee, for the benefit of an employer, to refrain
9-19 for a stated period after termination from conducting an activity
9-20 that is competitive with an activity conducted by the employer and
9-21 that is within a geographic area where the employee conducted the
9-22 activity on or within a two-year period preceding termination is
9-23 presumed to be necessary to protect the goodwill or other business
9-24 interest of the employer and to be reasonable as to activity and
9-25 territory for purposes of Section 20.01 if the covenant describes
9-26 the activity and area in writing.
9-27 (b) The geographic area in which an employee's competitive
10-1 activities are limited by a covenant under this section may include
10-2 any area where the employee performed, supervised, or assisted in
10-3 an operation for the business and any area where customers or
10-4 prospective customers of the business with whom the employee had
10-5 material contact are present.
10-6 Sec. 20.23. CUSTOMER NONSOLICITATION COVENANT. (a) A
10-7 written postemployment covenant by an employee, for the benefit of
10-8 an employer, to refrain for a stated period after termination from
10-9 directly or indirectly soliciting, accepting, or attempting to
10-10 solicit or accept business from a customer or prospective customer
10-11 of the employer with whom the employee had material contact on
10-12 behalf of the employer during the employee's employment for
10-13 purposes of providing a product or service that is competitive with
10-14 a product or service provided by the employer's business is for the
10-15 purposes of Section 20.01:
10-16 (1) conclusively deemed to be necessary to protect the
10-17 goodwill or other business interest of the employer and to be
10-18 reasonable as to territory; and
10-19 (2) presumed to be reasonable as to activity.
10-20 (b) An express reference in the covenant to geographic area
10-21 or the types of products or services considered to be competitive
10-22 is not required for the covenant to be enforceable.
10-23 (c) A reference in the covenant to a prohibition against
10-24 soliciting or accepting business from customers or similar language
10-25 is adequate and shall be construed to apply to:
10-26 (1) any of the business's customers, including
10-27 prospective customers, with whom the employee had material contact;
11-1 and
11-2 (2) products and services that are competitive with
11-3 those provided by the employer's business.
11-4 Sec. 20.24. EMPLOYEE NONSOLICITATION COVENANT. (a) A
11-5 written postemployment covenant by an employee, for the benefit of
11-6 an employer, to refrain for a stated period after termination from
11-7 directly or indirectly recruiting, hiring, or attempting to recruit
11-8 or hire, another employee of the employer or its affiliates is
11-9 conclusively deemed for the purposes of Section 20.01 to be
11-10 necessary to protect the goodwill or other business interest of the
11-11 employer and to be reasonable as to activity and territory.
11-12 (b) An express reference in the covenant to a geographic
11-13 area is not required for the covenant to be enforceable.
11-14 (c) A reference in the covenant to a prohibition against
11-15 recruiting, hiring, or attempting to recruit or hire other
11-16 employees shall be construed to apply to other employees who are
11-17 still employed by or doing business with the employer or its
11-18 affiliates at the time of the recruiting, hiring, or attempted
11-19 recruiting or hiring.
11-20 Sec. 20.25. DURATION OF PERIODS. (a) A period stated in a
11-21 postemployment covenant is presumed to be reasonable for the
11-22 purposes of Section 20.01 if the period is:
11-23 (1) two years or less for an employment covenant
11-24 described by Section 20.22; or
11-25 (2) three years or less for a customer nonsolicitation
11-26 covenant described by Section 20.23 or an employee nonsolicitation
11-27 covenant described by Section 20.24.
12-1 (b) A period stated in a postemployment contract described
12-2 by Section 20.23 or 20.24 is conclusively deemed to be reasonable
12-3 for purposes of Section 20.01 if the period is one year or less.
12-4 (c) A postemployment covenant may expressly provide that a
12-5 violation of the covenant automatically tolls and suspends the
12-6 period of the covenant for the period that the violation continues
12-7 if the employer seeks enforcement promptly after discovery of the
12-8 violation.
12-9 (Sections 20.26-20.30 reserved for expansion
12-10 SUBCHAPTER D. VERIFICATION AND CLARIFICATION PROCEDURE
12-11 Sec. 20.31. PROMISOR'S DEMAND FOR VERIFICATION OR
12-12 CLARIFICATION. A promisor may demand verification or clarification
12-13 of a covenant not to compete by delivering to the promisee a
12-14 written request for verification or clarification that contains:
12-15 (1) the name of the promisor as originally known to
12-16 the promisee and the address to which the promisor wishes the
12-17 promisee's response to be sent;
12-18 (2) if verification is sought, a request for a copy of
12-19 each covenant in effect between the parties; and
12-20 (3) if clarification is sought, a description of the
12-21 clarification requested and the following statement:
12-22 "THIS DEMAND IS MADE UNDER SUBCHAPTER D,
12-23 CHAPTER 20, TEXAS BUSINESS & COMMERCE CODE,
12-24 AND REQUIRES A RESPONSE WITHIN 30 DAYS."
12-25 Sec. 20.32. DEADLINE FOR PROMISEE'S RESPONSE TO DEMAND FOR
12-26 VERIFICATION OR CLARIFICATION. Not later than the 30th day after
12-27 the date a promisee receives a demand under Section 20.31, the
13-1 promisee shall respond by sending the promisor a verification or
13-2 clarification or, if clarification is considered unnecessary
13-3 because the promisee believes the covenant is clear, a statement to
13-4 that effect.
13-5 Sec. 20.33. CONTENTS OF CLARIFICATION: VOLUNTARY
13-6 CLARIFICATION; EFFECT. (a) A promisee's response to a demand made
13-7 under Section 20.31 is not required to include confidential
13-8 information or business strategies.
13-9 (b) A promisee may provide the promisor with a clarification
13-10 or reformulation of the covenant, regardless of whether the
13-11 clarification or reformulation was requested, that is not broader
13-12 than the terms of the original covenant. The clarification or
13-13 reformulation supersedes a conflicting term of the covenant and is
13-14 binding regardless of whether additional consideration is provided.
13-15 The promisor may rely on the clarification or reformulation in
13-16 complying with the covenant.
13-17 Sec. 20.34. EFFECT OF PROMISEE'S FAILURE TO RESPOND. A
13-18 court shall consider failure of a promisee to respond timely to a
13-19 demand received under Section 20.31 in determining the extent to
13-20 which an unclear or overbroad covenant may be enforced as lawfully
13-21 serving the business purposes and interests contemplated by the
13-22 parties in the agreement.
13-23 (Sections 20.35-20.40 reserved for expansion
13-24 SUBCHAPTER E. ENFORCEMENT
13-25 Sec. 20.41. PROCEDURES AND REMEDIES IN ACTION TO ENFORCE
13-26 COVENANT NOT TO COMPETE. (a) Except as provided by Subsection
13-27 (c), a court may award the promisee under a covenant not to compete
14-1 damages, injunctive relief, including a temporary restraining
14-2 order, or both damages and injunctive relief for a breach by the
14-3 promisor of the covenant. A promisee need not prove actual injury,
14-4 an inadequate remedy at law, or danger of immediate and irreparable
14-5 harm to obtain preliminary or permanent injunctive relief, but is
14-6 required to show that the promisor has acted in a manner contrary
14-7 to a covenant that is valid under this chapter or that is valid
14-8 after being reformed under Subsection (c).
14-9 (b) The promisee has the burden of establishing that a
14-10 covenant is reasonable with respect to the limitation on the scope
14-11 of activity, duration, and territory of a covenant other than a
14-12 covenant described by Section 20.12, 20.23, or 20.24. If a
14-13 presumption created by Subchapter B or C, other than Section 20.22,
14-14 is rebutted, the promisor has the burden of establishing that the
14-15 covenant is unreasonable with respect to the subject of the
14-16 rebutted presumption. If a presumption created by Section 20.22 is
14-17 rebutted, the promisee has the burden of establishing that the
14-18 covenant is reasonable with respect to the subject of the rebutted
14-19 presumption. For the purpose of this subsection, "burden of
14-20 establishing a fact" means the burden of persuading a court,
14-21 arbitrator, or trier of fact that the existence of the fact is more
14-22 probable than its nonexistence.
14-23 (c) If the covenant is found to be ancillary to or part of
14-24 an enforceable agreement or valid transaction or relationship but
14-25 under this chapter is not reasonable with respect to the limitation
14-26 on the scope of activity, duration, and territory as written or
14-27 subsequently clarified or reformed under Section 20.33, a court,
15-1 arbitrator, or trier of fact shall reform the covenant to the
15-2 extent necessary to cause the covenant to be reasonable with
15-3 respect to the limitation on the scope of activity, duration, and
15-4 territory and shall enforce the covenant as reformed. A court,
15-5 arbitrator, or trier of fact may not award the promisee damages for
15-6 a breach of the covenant before its reformation and the relief
15-7 granted to the promisee shall be limited to preliminary and
15-8 permanent injunctive relief.
15-9 (d) The reasonability of a covenant not to compete as to
15-10 scope of activity, duration, or territory is an issue of fact and
15-11 is not an issue of law. This section does not create a right of
15-12 trial by jury at a preliminary injunction hearing.
15-13 (e) This chapter shall be liberally interpreted in favor of
15-14 validity and enforceability of a covenant not to compete.
15-15 Sec. 20.42. EXCLUSIVE REMEDIES; PREEMPTION. The criteria
15-16 for enforceability of a covenant not to compete and the procedures
15-17 and remedies in an action to enforce a covenant not to compete
15-18 provided by this chapter are exclusive and preempt any other
15-19 criteria for enforceability of a covenant not to compete or
15-20 procedures and remedies in an action to enforce a covenant not to
15-21 compete under common law or otherwise.
15-22 SECTION 2. Subchapter E, Chapter 15, Business & Commerce
15-23 Code, is repealed.
15-24 SECTION 3. This Act takes effect September 1, 1995.
15-25 SECTION 4. This Act applies to a covenant not to compete
15-26 entered into before, on, or after the effective date of this Act,
15-27 except that this Act does not apply to any action that has been
16-1 finally adjudicated by a court of competent jurisdiction before the
16-2 effective date of this Act.
16-3 SECTION 5. The importance of this legislation and the
16-4 crowded condition of the calendars in both houses create an
16-5 emergency and an imperative public necessity that the
16-6 constitutional rule requiring bills to be read on three several
16-7 days in each house be suspended, and this rule is hereby suspended.