Noncompete Clauses in LLC Operating Agreements

By Hank FasthoffOctober 2, 2019

An LLC member may serve as an owner, manager, employee, seller, or several of those at once. In Texas, the statutory term for an LLC operating agreement is company agreement. Noncompete law follows the member's role and the substance of the bargain. A restriction in a company agreement can be enforceable when it protects a legitimate business interest and confines its duration, territory, and prohibited activity to what that interest requires.

Your drafting should begin with the business interest at risk. Customer goodwill, confidential pricing, proprietary methods, trade secrets, and specialized training can support a restraint. A desire to avoid competition by itself supplies no protected interest. Your agreement must tie the restriction to information, relationships, or goodwill the member receives through the company.

Ownership and Management Roles Affect the Analysis

Ownership status alone supplies no comprehensive restriction after departure. A member's duties during the relationship depend on the company agreement, whether members or appointed managers run the company, and the member's role in the company. Section 101.401 of the Texas Business Organizations Code permits a company agreement to expand, restrict, or eliminate duties, including fiduciary duties, and related liability within the statute's limits.

The Texas Business Court addressed that distinction in Enosis Investments, LLC v. Jensen, 2026 Tex. Bus. 19. The court recognized that a manager of a manager managed LLC may owe fiduciary duties to the LLC and rejected the asserted duty against a nonmanaging member. It also refused to impose the corporate manager's duty on its president and controlling shareholder without a pleaded basis for piercing the corporate veil. Your operating agreement should separate ownership, management, employment, and access to company information. Those roles may begin and end on different dates.

A postdeparture restraint requires a covenant that satisfies Chapter 15. Managerial duties during service can't substitute for a complete covenant covering conduct after the relationship ends.

Section 15.50 Governs the Covenant

Section 15.50 of the Texas Business and Commerce Code permits a covenant that is ancillary to or part of an otherwise enforceable agreement when its limits on time, geographic area, and activity are reasonable. The restraint can extend only as far as necessary to protect the LLC's goodwill or another business interest.

The first element turns on the underlying exchange. In Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), the Supreme Court of Texas explained that the consideration must have a reasonable relationship to an interest worthy of protection. The stock option grant in that case was reasonably related to the employer's goodwill.

An operating agreement can contain the required exchange, but courts examine its substance rather than its title. Your agreement should state what the member receives and how that benefit relates to the protected interest. Access to confidential information, responsibility for customer relationships, specialized training, and an ownership interest linked to company goodwill may support the required connection. Capital contributions and distribution rights require separate proof of that connection.

Section 15.51 also assigns the burden of proof according to the primary purpose of the underlying agreement. The promisee bears the burden when that purpose is personal services. The promisor bears it when the agreement has a different primary purpose. An operating agreement that combines governance, ownership, and employment can obscure that issue. You can identify the exchange and the burden more easily when you separate service terms from ownership terms.

Time Territory and Restricted Activity Follow the Evidence

Texas courts apply a facts based reasonableness test instead of a fixed duration. You can tie the term to the useful life of confidential strategy, the period needed to protect current customer goodwill, or another interest supported by evidence. A familiar two year term receives the same factual review as any other duration.

You should base territory on the market the member served or influenced. A Houston service business may support a local boundary. A company serving customers across several states may support a broader area when the member's responsibilities and the evidence match that area. Evidence of national operations and member responsibility must support a national restriction.

You should define restricted activity with the same discipline. You can name the products, services, customers, and functions that place the former member in competition with your LLC. When you bar service to any competitor in any capacity, the restriction covers work unrelated to the member's former role and a court may reform it.

The 2026 Texas Business Court decision in Galderma Laboratories, L.P. v. Brenner, 2026 Tex. Bus. 12 showed the analysis. Rejecting the requested global restriction, the court confined the covenant to the United States market for hyaluronic acid dermal fillers. It also limited the prohibited services to roles the same as or substantially similar to those the executive performed during the contractual look back period. On that record, the court found the 12 month term reasonable.

Your definition should distinguish active competition from a small passive investment without management authority. The definition can cover assistance to a competitor, consulting, board service, and indirect competition only to the extent those activities threaten the identified interest.

Nonsolicitation Provisions Follow the Same Statute

Customer and worker nonsolicitation clauses can target narrower conduct than a full noncompete. Their narrower scope may improve the reasonableness analysis, while Chapter 15 continues to govern when they restrain competition.

In Marsh, the Supreme Court treated a customer restriction as a restraint subject to Section 15.50. The Dallas Court of Appeals applied the same rule to a worker solicitation restriction in Nerium International, LLC v. Smith. Galderma granted relief on the reformed noncompete while denying temporary relief on the customer nonsolicitation, worker nonsolicitation, and confidentiality provisions for want of evidence. Each restriction therefore requires its own statutory and evidentiary analysis.

A customer restriction can focus on customers the member served, supervised, or learned about through confidential information. The definition may also cover identified prospective customers that the LLC actively pursued during a stated period. A worker restriction can focus on people with whom the member worked or about whom the member received confidential information. General advertising and unsolicited contact can fall outside the prohibition.

Coordination With Departure and Buyout Terms

Your agreement should define a precise trigger. Voluntary withdrawal, expulsion, termination of employment, removal as a manager, redemption, and sale of the membership interest describe different events. Your agreement can select one event or define a sequence, but the restricted period must have a definite starting date.

Buyout cost and payment timing affect enforcement strategy. A company that removes a member, delays the required buyout, and seeks an immediate restraint may face a dispute over several provisions at once. You can coordinate the covenant with the valuation date, payment schedule, release of guarantees, transfer of company property, and continued access to records. You can also state whether a discharge without cause changes the restriction.

Your clause should address partial transfers and retained interests. A former manager who retains a passive interest presents a different risk from a member who sells the entire interest and begins operating a direct competitor. You can align the restriction with the goodwill and ownership value involved in each exit.

Reformation Has a Financial Consequence

Section 15.51 requires a court to reform an ancillary covenant whose time, territory, or activity limits exceed what Section 15.50 permits. Reformation can support an injunction, but overreach has a direct cost. For conduct before reformation, the statute limits relief to an injunction under the reformed covenant. Damages become available only for a subsequent breach.

The statute also permits a promisor to recover attorney fees in a narrow personal services setting when the promisee knew the restriction exceeded what was necessary and pursued enforcement beyond a reasonable limit. That fee exposure is a reason to document the business interest and tailor the restriction before anyone signs.

Fee recovery depends on Chapter 15 and any separate claim rather than the fee clause alone. In Glattly v. Air Starter Components, Inc., the First Court of Appeals rejected an employer's contractual fee claim because Chapter 15 supplied the exclusive remedies. Separate contract or statutory claims may present different fee questions, so your remedies section should distinguish covenant enforcement from the rest of the dispute.

Health Care LLCs Face Additional Limits

Texas changed its health care covenant rules for agreements entered into or renewed on or after September 1, 2025. Senate Bill 1318 limits a covenant relating to a physician's practice to one year and a five mile radius from the primary practice location. It caps the buyout at the physician's total annual salary and wages at termination and requires clear and conspicuous written terms. The statute also preserves specified patient access and makes the covenant void after an involuntary discharge without good cause.

The same legislation added comparable one year, five mile, buyout, and writing requirements for dentists, nurses, and physician assistants. Administrative management of medical services falls outside the statutory definition of practicing medicine for the physician subsection.

An ownership exception survives for a physician's business interest in a licensed hospital or ambulatory surgical center. In Houston Metro Ortho and Spine Surgery, LLC v. Juansrich, Ltd., the Fourteenth Court of Appeals applied that exception to a covenant in the LLC agreement for an entity that owned and operated an ambulatory surgical center. A physician ownership covenant under the exception follows the general Section 15.50 test rather than the special physician practice requirements.

Injunctive Relief Requires Evidence

An LLC may seek a temporary restraining order and temporary injunction when a former member violates an enforceable covenant. The contract can record the parties' agreement that a breach threatens irreparable harm, but the recital can't replace evidence.

Texas temporary injunction practice requires a cause of action, a probable right to relief, and probable imminent irreparable injury. Nerium denied relief because the applicant lacked evidence of the required injury. Galderma granted limited relief based on evidence about confidential strategy, the executive's new role with a direct competitor, and the market covered by the restriction.

You should build the enforcement record before departure. Access records, customer assignments, board materials, confidentiality designations, device returns, and communications about the new activity can connect the violation to the protected interest. Evidence of ordinary competition without that connection may prove less than the clause assumes.

Existing Agreements Require a Valid Amendment

Adding a noncompete to an existing agreement requires a valid amendment. Section 101.053 sets unanimous member consent as the default amendment rule. Subject to Section 101.054, Section 101.052 permits a company agreement to modify many statutory defaults, so the existing amendment provision controls the required process when it validly supplies a different rule.

Member consent completes only the governance step. The new covenant must also form part of an otherwise enforceable agreement and bear a reasonable connection to the interest protected under Section 15.50. Your amendment record should state the written consent, consideration provided, effective date, and roles covered.

Texas Law Governs After Federal Rule Vacatur

A federal district court vacated the Federal Trade Commission's 2024 Noncompete Rule, and the agency dismissed its appeals in September 2025. The vacatur prevents enforcement of that rule. Texas statutes and case law therefore govern the covenants discussed here, subject to any other federal law that applies to the parties or industry.

Draft the Covenant Around the Deal

You build a stronger operating agreement around the member's role, the information and goodwill received, and the competitive conduct that threatens those interests. You can then align the restraint with management duties, departure events, buyout terms, and the remedies your evidence can support.

Form language built around a standard two year term and a broad competitor ban may exceed the business facts. When you tie the clause to the market served, the member's responsibilities, and the exit structure, both sides receive a clearer rule and a court sees a record grounded in the deal the members made.