Summary: This article discusses Texas conflict-of-law rules as they apply to non-compete agreements, and some ways that employers may try to get around those rules.
Various articles we have published address in general what a non-competition agreement is and what is required for one to be enforceable in Texas. But with Texas increasingly becoming a hub for large or even multinational companies, it can be much more confusing for workers to figure out what a non-compete their company insists they sign even means. That is especially true as companies may demand that employment documents be governed by some other state’s laws, or even another country’s.
This arcane choice can have profound consequences. Other states’ non-compete laws may be more protective of employees, or instead may allow an employer to get away with more restrictive limits on you. If you are dealing with a contract governed by some other state’s law, it may be a good idea to consult an attorney licensed in that state. However, even if you are in Texas, you should also ask yourself whether your employment agreement subjects you to another state’s non-compete laws, and what that might mean. This article is meant to give a basic overview of Texas’s so-called “conflict of law” rules when it comes to non-competes, as well as some closely related non-compete pitfalls.
The 1990 Texas Supreme Court decision in DeSantis v. Wackenhut Corp., 793 S.W.2d 670, lays out the “basic” conflict of law rules for contracts. First, even if a contract calls for it, Texas courts generally will not enforce another state’s laws (related to a non-compete or otherwise) if that state “has no relation whatever to [the parties to the contract] or their agreement.” Beyond that, Texas will not enforce another state’s laws as selected in a contract if Texas has a “materially greater interest” in the issue than the state named in the contract, and that state’s law is “contrary to fundamental policy of Texas.”
Turning to non-competes, the DeSantis decision infers that when what is at stake is something like “whether a Texas resident can leave one Texas job to start a competing Texas business,” Texas has a materially greater interest in that non-compete. The Court goes on to conclude that “the law governing enforcement of noncompetition agreements is fundamental policy in Texas, and . . . to apply the law of another state to determine the enforceability of such an agreement in the circumstances of a case like this would be contrary to that policy.” In layman’s terms, the non-compete laws of another state, especially those that conflict with Texas law, should not be enforced in Texas. Depending on the state, of course, you might be in a better or worse position under Texas law.
Still, you probably aren’t surprised that this answer is not the end of the story. There are some limits to this doctrine. One limit is that DeSantis does not necessarily mean that all disputes involving Texans and non-competes must be heard in Texas courts. Companies may try to mandate that disputes be moved to some other state’s courts. Those states might have no problem enforcing different non-compete rules. Texas courts generally require a good reason not to enforce these “forum selection” clauses asking for a dispute to be heard elsewhere, such as evidence the out-of-state forum is unreasonable, unjust, or that the clause is fraudulent or overreaching in some way. Without that, depending on the contract you may be stuck being sued out of state under another state’s non-compete laws.
Second, Texas non-compete laws, and thus the DeSantis rule, apply only to “restraints of trade,” e.g., limits on professional mobility or solicitation of employment. Because companies are aware of this, they may attempt to circumvent Texas’s non-compete laws by trying to craft something that is not an obvious non-compete while still accomplishing the same goals of controlling employees and discouraging supposed competition. They might do this all while trying to bind you to some other state’s laws. One recent and fortunately unsuccessful example was an attempt by Buc-ee’s to force employees to pay back their compensation if they quit. Rieves v. Buc-ee’s Ltd., 532 S.W.3d 845 (Tex. App.–Hous. [14th Dist.] 2017).
If you have been required to sign a non-compete and are concerned about how it might be enforced against you and what laws might even apply, you should talk to an employment attorney like those at Rob Wiley, P.C.