Texas Non-Compete Agreements: Sale-of-Business and Employment Covenants That Hold Up
Updated: 11 hours ago
A Texas non-compete is governed by a short statute and a long line of cases, and most of the disputes I see come from agreements that ignored one or the other. Sections 15.50 through 15.52 of the Texas Business and Commerce Code set the rules for both employment covenants and covenants signed in the sale of a business. The federal picture has also settled for now, after the FTC abandoned its nationwide rule in 2025, and Texas changed the law for physicians and several other health care practitioners the same year. This article walks through each piece, with drafting choices that tend to survive a challenge.
The statutory test for a Texas non-compete
Section 15.50(a) makes a covenant not to compete enforceable if two things are true. First, it must be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made. Second, it must contain limits on time, geographic area, and scope of activity that are reasonable and do not impose a greater restraint than necessary to protect the goodwill or other business interest of the party relying on it.
Section 15.52 says these criteria and the procedures in Section 15.51 preempt other criteria and procedures under common law or otherwise. In other words, Texas courts apply the statute, not a general reasonableness standard from older cases.
"Ancillary to an otherwise enforceable agreement"
This phrase has produced more Texas Supreme Court opinions than any other part of the statute. Three cases set the current framework.
In Alex Sheshunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006), the court held that an at-will employer's promise to provide confidential information can support a non-compete if the employer actually performs the promise. The agreement becomes enforceable when the employer delivers the confidential information, even though the promise was illusory when made.
In Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009), the court went further. When the nature of the job requires the employer to give the employee confidential information, the employer impliedly promises to provide it, and that implied promise, once performed, can support the covenant.
In Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), the court held that stock options granted to a key employee could support a non-compete because the consideration was reasonably related to the company's interest in protecting its goodwill. The court rejected an older requirement that the consideration itself "give rise" to the interest being protected.
What this means in practice for an employer:
Tie the covenant to something real: confidential information the employee will actually receive, specialized training, equity, or goodwill.
Deliver it, and keep a record that you did. A promise of confidential information that is never fulfilled does not support the covenant.
A non-compete signed after employment begins can still work, but only if it is supported by new consideration of this kind, not just continued at-will employment.
Reasonable time, territory, and scope
The statute does not set numeric limits for most workers. Courts look at the facts. Geography is usually tied to where the employee actually worked or had responsibility, and Texas courts of appeals have declined to enforce restrictions covering areas where the employee never worked. Scope should match the employee's actual role. A covenant that bars a salesperson from working in any capacity for any company in the industry is the kind of restraint courts treat as broader than necessary.
A customer-based restriction is often stronger than a radius. Barring a former employee from soliciting or serving the customers they personally dealt with in the last 12 to 24 months of employment directly protects goodwill and is easier to defend. Texas courts generally analyze customer non-solicitation covenants under the same statutory test.
Reformation and the fee trap
If a covenant is ancillary to an enforceable agreement but its limits are unreasonable, Section 15.51(c) requires the court to reform it to the extent necessary and enforce it as reformed. That sounds like a safety net, but it has two costs. The employer cannot recover damages for conduct before the reformation, only injunctive relief. And if the primary purpose of the agreement was to obligate the employee to render personal services, and the employee proves the employer knew at signing that the limits were unreasonable and then tried to enforce them beyond what was necessary, the court may award the employee costs, including attorney's fees.
Under Section 15.51(b), in an agreement whose primary purpose is personal services, the employer also bears the burden of proving that the covenant meets the statute. Drafting a five-state, five-year covenant for a regional manager in the hope that a court will trim it is not a safe strategy.
Sale-of-business covenants
When an owner sells a business, the buyer pays for goodwill, and a covenant from the seller protects what was bought. Section 15.50 still applies, and the covenant should be ancillary to the purchase agreement. Texas courts have generally been more willing to enforce longer durations and broader territories in this context than in ordinary employment, because the seller received payment for the goodwill and usually had a hand in negotiating the terms.
A few drafting points come up in nearly every deal:
Two covenants for two roles. If the seller stays on as an employee, use a sale covenant in the purchase agreement and a separate employment covenant, with separate durations. The sale covenant often runs from closing, and the employment covenant from the end of employment.
Who is bound. Every selling equity holder who received meaningful proceeds should sign, not just the entity seller.
Territory matched to the business sold. Tie the restricted area to where the target actually did business at closing.
Rollover sellers. If sellers roll equity into the buyer's holding company, the holding company agreement may contain its own restrictive covenants. Make sure the three sets of covenants do not conflict.
The tax allocation matters too. Amounts allocated to a seller's non-compete are generally ordinary income to the seller, while the buyer typically amortizes them over 15 years under Section 197. That makes the allocation a negotiated point between the parties, and one to review with your CPA. For related terms, see our pieces on rollover equity and NDA terms in M&A deal processes.
2025 changes for physicians and other health care practitioners
Senate Bill 1318, effective September 1, 2025, tightened Texas law for health care non-competes entered into or renewed on or after that date. For physicians, Section 15.50(b) now requires a buyout capped at the physician's total annual salary and wages at termination, a duration that expires no later than one year after termination, a geographic limit of no more than a five-mile radius from the location where the physician primarily practiced, and terms clearly and conspicuously stated in writing. The physician covenant also still requires access to patient lists and records. A covenant is also void against a physician who is involuntarily discharged without good cause, as the bill defines that term.
New Section 15.501 extends the buyout, one-year, five-mile, and clear-and-conspicuous requirements to dentists, licensed professional and vocational nurses, and physician assistants. Practices that acquire or employ these practitioners should update templates, and buyers of medical and dental practices should check which covenants were signed or renewed after the effective date.
Where the FTC rule stands
The FTC issued a Non-Compete Clause Rule in April 2024 that would have banned most non-competes nationwide. On August 20, 2024, the U.S. District Court for the Northern District of Texas set the rule aside in Ryan, LLC v. FTC. On September 5, 2025, the Commission voted 3 to 1 to dismiss its appeals and accede to the vacatur, and the Fifth Circuit dismissed the appeal shortly after. The rule is not in effect.
That does not mean federal scrutiny is gone. The Commission said it will pursue case-by-case enforcement against non-competes it views as anticompetitive, and the Chairman said employers in some industries would receive warning letters. Broad non-competes for lower-wage workers carry the most federal risk.
Drafting tips I use
State the business interest being protected and the consideration that supports it.
Prefer customer-based restrictions over large radius restrictions, and tie any territory to where the person actually worked.
Keep employment durations proportionate to the role, and reserve longer terms for sale-of-business covenants.
Include a reformation clause, but do not rely on it to rescue an overbroad covenant.
Pair the non-compete with a confidentiality agreement and an invention assignment, which protect the same information through different routes.
For health care practitioners, build in the SB 1318 requirements and a clearly stated buyout.
Review choice-of-law and forum clauses with care for employees outside Texas, since other states' rules can be very different.
Questions clients ask
Does a non-compete still apply if the company fires the employee?
For most workers, Texas law does not void a covenant just because the employer ended the relationship, although the circumstances can affect how a court views reasonableness and equitable relief. Physicians are different under SB 1318: the covenant is void if the physician is discharged without good cause.
Do non-competes in an LLC company agreement follow the same rules?
Texas courts generally apply Section 15.50 to restrictive covenants among owners as well, with the company agreement serving as the otherwise enforceable agreement. The reasonableness analysis can reflect the owner's equity and access to the business.
Can we enforce a covenant against an independent contractor?
The statute is not limited to employees. The same requirements apply, and the consideration and the protected interest need to be just as concrete.
If you are drafting a covenant or evaluating one you signed, email info@robertsandwillie.com or call (469) 910-4017. Sending a message does not create an attorney-client relationship.
This article is for general information and is not legal advice. Attorney Advertising. Roberts & Willie, PLLC, Dallas, Texas; Trenton Roberts, responsible attorney.
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