Texas Court Clarifies Forfeiture-Competition Clauses Are Not Noncompetes
A Texas appellate decision held that a forfeiture-for-competition provision in a shareholders’ agreement was not a noncompete, sidestepping statutory restrictions and underscoring the importance of precise drafting.
On August 6 2026 the Texas Ninth Court of Appeals ruled in Afzal v. Ramineni that a clause in Healing Hearts Clinic’s shareholders’ agreement—requiring a departing physician to sell his shares for a nominal value and, if he continued to practice cardiology within a 20‑mile radius, forgoing a 50 % payment of his receivables—was a forfeiture provision, not a covenant not to compete. Because it does not bar the physician from practicing anywhere, Texas’s noncompete statute (Section 15.50) does not apply, and the court could not reform the clause or grant the physician damages. The decision highlights that employers can structure incentive or bonus mechanisms that tie payments to business choices without invoking the tighter scrutiny applied to noncompete covenants. Counsel should review existing restrictive covenants and compensation arrangements for analogous distinctions and consider drafting language that clearly separates economic incentives from competition restraints to avoid unintended enforceability under state law.