By: David E. Cowen
In almost every professional context, and especially in one involving technology or sales, professionals are often required to sign some type of agreement which includes a so-called covenant not to compete or “non-compete” agreement limiting the professional from engaging in certain competitive activities after they leave their employment. Before signing any such agreement it is always advisable that the professional seek the advice of an attorney.
1.Covenants Not to Compete are Often Enforceable
A long time ago Texas courts routinely refused to uphold them for a number of reasons. However, more recently, the Texas Supreme Court has aggressively been upholding these provisions so long as they comply with Sections 15.50-.52 of the Texas Business & Commerce Code. The Texas Legislature expressly stated in the language of the statute that it preempts any other law or common law on the subject.
2. An employee can be required to sign a legally enforceable non-compete after hire
For example, in one Texas Supreme Court case the non-compete in question was signed 4 years after hire. The agreement was still enforceable because it met the requirements of the statute.
3. Covenants Not to Compete can be enforced against an “At-Will” employee
An “At-Will” employee, under Texas law, is an employee who can be terminated from his or her employment at any time, with our without cause. The Supreme Court has held that so long as the requirements of the statute have been met, it does not matter if the employee would otherwise be an “At-Will” employee.
4. It may not matter if you quit or are fired
Under the law, if the agreement is otherwise enforceable under the statute, it usually does not matter if you left your job because you quit or if you were fired.
5. What are the requirements of an enforceable agreement?
Generally to be enforceable, such an agreement must be:
- In writing,
- “Ancillary to or part of” an otherwise enforceable employment agreement; and
- Reasonable as to scope, geographic limitations and duration.
6. What does “ancillary” to an otherwise enforceable agreement mean?
The term “agreement” does not refer to the bare agreement to hire the professional. In legal terms the statute provides that the covenant is enforceable if it is part of or ancillary to another agreement where 1) the consideration given by the employer in the otherwise enforceable agreement gives rise to the employer’s interest in restraining the employee from competing, and (2) the covenant is designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement. In an “At-Will” situation, the “other agreement” often means an agreement, direct or implied, to provide confidential information regarding the employer’s business. That is, the employer promises, as part of the consideration for the covenant, to give the employee access to proprietary information belonging to the employer. This can be customer lists, product and pricing lists, financial data, trade secrets and processes or a number of other types of information that the employer would consider confidential to the business. If the agreement is signed after hire, even several years after hire, the “agreement” could mean the promise to continue to provide this confidential information. Sometimes the “enforceable agreement” could be stock options tied to adherence to the noncompete agreement or possibly a severance payment tied to adherence to the covenant not to compete. The courts have not exhausted the range of agreements that, if enforceable, would allow the non-compete to become enforceable.
7. What geographical limitations are considered “reasonable?”
There are no hard and fast rules or formulas. Courts have to take this issue on a case by case basis. Generally, the area needs to be no greater than needed to protect the interest of the employer and the confidential information and goodwill being protected by the agreement. If the agreement is a “non-solicitation” agreement prohibiting only that the employee not solicit customers of the employer he or she dealt with while employed, that limitation is usually considered a reasonable substitute for the geographic limit. The courts have yet to fully grapple with businesses that may literally have national or world-wide reach, such as an internet based company.
8. What time limits are considered “reasonable?”
Again, there are no hard and fast rules or formulas. Two to five years has repeatedly been held as a reasonable time in a noncompetition agreement. However, in the context of the sale of a business, a longer restriction on the owner of the business being sold could be justified given the need of the buyer to protect the investment in the business acquired.
9. The worst that can happen is not that you have to quit your new job
Under the Texas statute, besides seeking an injunction to stop you from competing, your former employer can sue for any damages that the employer can prove were caused by the violation. This could include lost profits to the employer. If the employer can prove business losses directly attributable to the violation of the covenant not to compete the former employee could be held liable for those losses.
10. There are defenses available under the law
There are many potential defenses, if they actually apply. Proving that no breach of the covenant occurred is the most obvious defense. However, if the contract involves personal services then the employer has the burden to prove that the agreement is reasonable as to scope, geographical limits and duration. An agreement prohibiting a waitress from ever working in another restaurant anywhere in the world again is not likely to be upheld. However, an agreement prohibiting a hairdresser from working in that profession within three miles of his former employer’s shop might be reasonable. Also, in a situation where the employer promised confidential information and did not provide it, or provided only what was readily accessible to the public at large, the consideration could be deemed inadequate. An engineer given access to industrial processes that could be duplicated by a competitor could face a long absence from the industry spanning a large area. Most employers in those situations also require very strict confidentiality agreements which are also generally enforceable.
If the covenant is not reasonable, the law allows the courts to rewrite the agreement to make it reasonable. In that case the employer cannot collect damages, and under some narrow circumstances, might have to pay the employee’s attorneys’ fees.
Physicians have some very special rules that apply to their practice. As with any such issue, consulting with an attorney knowledgeable about this area of the law before signing an agreement or considering breaching one is always the best course of action.