What Happens if My Texas Restrictive Covenant Is Reformed?

Locke Lord LLP

“Is this non-compete enforceable?” It’s a question regularly raised by employers, the answer to which depends on state law. The duration of restrictive covenants, prohibited activities, and even the description of the restricted geographic areas may vary from state-to-state. Many employers are likely familiar with such concepts, but one variable that often gets overlooked is “blue-penciling” – how will a court address an overbroad restrictive covenant? Will the court invalidate the agreement in its entirety? Strike out or severe the offending covenant? Or perhaps, the court will revise the restrictive covenant to bring it within the confines of the applicable law. The answer will not only impact an employer’s chances of obtaining injunctive relief, but, in Texas, it also may affect the availability of monetary damages.

In Texas, restrictive covenants must be reasonable as to “time, geographical area, and scope of activity to be restrained.” TEX. BUS. CODE §15.50(a). If those restrictions are broader than what is needed to protect a company’s legitimate business interests (e.g., goodwill, client relationships, confidential information), then Texas courts are required to reform the restrictive covenants such that they are no greater than necessary to protect the company’s legitimate business interests and, therefore, may be enforced. TEX. BUS. CODE §15.51(c). As a result, many employers may be tempted to push the limits of the restrictive covenants. In doing so, however, employers may hinder their ability to collect monetary damages.

An overbroad restrictive covenant that requires reformation means monetary damages are unavailable in Texas unless and until the restrictive covenant is reformed. If reformation is required, then monetary damages are only available for breaches occurring after reformation. Reformation may happen relatively quickly in the form of an injunction, providing equitable relief, or it could be months or more than a year before a restrictive covenant is reformed, precluding a business from recovering monetary damages suffered due to the offending party’s breach.

While Texas employers should take comfort that Texas courts are required to reform overbroad restrictive covenants, there are practical and strategic disadvantages that come with overbroad restrictive covenants, one of which is the unavailability, at least initially, of monetary damages. Employers are encouraged to ensure that their restrictive covenants not only protect their legitimate business interests, but are drafted in a way to empower them to immediately seek monetary damages along with injunctive relief.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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