Non-Competes and Other Contract Restrictions Under Texas Law

Which clauses are restrictions

Some contract clauses ask a party to act. Others ask it to refrain from acting. The common restrictions are non-competes, non-solicitation clauses and confidentiality clauses. This page deals mainly with the non-compete, because Texas has a statute for it.

An indemnification clause, which the earlier blog post listed as a restriction, is different. It allocates the risk of third-party losses and does not restrain the other side's business activity.

The first test: an otherwise enforceable agreement

Section 15.50(a) makes a covenant not to compete enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made. A bare promise not to compete, with nothing in exchange, does not meet the test.

In Marsh USA Inc. v. Cook, the Texas Supreme Court applied a two-step analysis: whether an otherwise enforceable agreement exists, and whether the covenant is ancillary to it. It held that the consideration for the covenant must be reasonably related to an interest worthy of protection. Stock options met that test in that case because they were tied to the employer's goodwill. The opinion describes trade secrets, confidential information and goodwill as interests that can support a non-compete.

The second test: reasonable limits

The covenant's limits on time, geographic area and scope of activity must be reasonable and must not impose a greater restraint than necessary to protect the promisee's goodwill or other business interest. The statute does not say how long is too long. A restraint that protects a narrow interest, in the places where the business operates, for a period linked to that interest is easier to defend than a blanket ban on working in an industry.

The statute applies to business-to-business contracts too. Section 15.51(b) distinguishes agreements whose primary purpose is personal services from agreements with another primary purpose, such as a distribution or manufacturing agreement.

Burden of proof

Under section 15.51(b), if the primary purpose of the agreement is to require the promisor to render personal services, the promisee has the burden of establishing that the covenant meets the criteria in section 15.50. If the primary purpose is something else, the promisor has the burden of showing that the covenant does not meet them. "Burden of establishing" means persuading the factfinder that the fact is more probable than not.

What a court can do with an overbroad clause

Section 15.51(c) requires a court to reform a covenant that is part of an otherwise enforceable agreement but has unreasonable limits, and to enforce it as reformed. The court cannot award damages for conduct before the reformation, so the promisee's relief is limited to an injunction.

If the agreement is for personal services and the promisee knew the covenant was unreasonable but tried to enforce it beyond what was necessary, the court may award the promisor the costs, including reasonable attorney's fees, actually and reasonably incurred in defending the action. For a covenant that is enforceable as written, section 15.51(a) allows damages, an injunction, or both.

Section 15.52 makes the criteria in section 15.50 and the procedures and remedies in section 15.51 exclusive. They preempt other criteria for enforceability under common law or elsewhere.

Health care practitioners: the 2025 changes

S.B. 1318 was signed on 20 June 2025 and took effect on 1 September 2025. It applies only to covenants entered into or renewed on or after that date. Covenants made earlier stay under the prior law.

The bill changed section 15.50 for physicians licensed by the Texas Medical Board and added section 15.501 for dentists, nurses and physician assistants. Under the enrolled text:

• the buyout cannot exceed the practitioner's total annual salary and wages at termination;
• the covenant must end no later than one year after termination and cover no more than a five-mile radius around the primary practice location;
• the terms must be stated clearly and conspicuously in writing;
• for physicians, the patient-list, medical-records and acute-care protections remain, and a covenant is void if the physician is involuntarily discharged without good cause.

The federal FTC rule

The FTC issued its Non-Compete Clause Rule in 2024 (89 FR 38342). In Ryan, LLC v. FTC, 746 F. Supp. 3d 369 (N.D. Tex. 2024), the court held the rule unlawful and set it aside, finding the FTC exceeded its statutory authority and the rule was arbitrary and capricious. On 5 September 2025 the Commission voted to dismiss its appeals and accede to the vacatur, and it removed the rule from the Code of Federal Regulations effective 12 February 2026 (91 FR 6507).

State law therefore governs most non-competes. A restriction in a contract with a Texas connection is tested under Texas law, and other states apply their own rules.

Drafting and review points

These points follow from the statute and the cases above.

• Tie the restriction to a stated interest, such as confidential information provided or goodwill, and say what the other side receives for agreeing.
• Limit the time, the area and the activities to what the business actually does.
• Add a severability and reformation clause, but do not rely on it. A court reforms, and the promisee loses damages for the earlier period.
• Check whether the person is a health care practitioner and whether the agreement is new or renewed after 1 September 2025.
• Keep confidentiality terms separate from the non-compete, and define the confidential information, the allowed uses and the return or destruction of documents.