Non-compete Agreements – Protecting Business Interests

Article by Joanne Cassidy

The validity and enforceability of non-compete agreements is perhaps the fastest  moving target in the area of Texas corporate law.  Because the law is changing so often in very fundamental ways, it is especially important for a business owner to regularly consult with his corporate attorney to update the company’s non-compete agreement to make sure it is enforceable under current law.

Non-compete Agreement Enforceability

Historically, the courts have not favored non-compete agreements.  At one point the Texas Supreme Court ruled that all non-competes which were primarily designed to limit competition or restrain the right to engage in a common calling were unenforceable.  Shortly after that ruling, the Texas legislature passed a law making non-competes enforceable if they:

(a)        are ancillary to (related to) or part of  an otherwise enforceable agreement at the time the agreement is made;

(b)        have reasonable limitations as to time, geographical area and scope of activity to be restrained;

(c)        are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee (the employer).

What this means in real life is subject to ongoing disputes.  Questions abound.

For instance, what constitutes “an otherwise enforceable agreement”?  In Texas law, for an agreement to be enforceable, each party, in this case the employer and employee, must make a promise to the other.  It has to be a real promise, not just a promise of continued employment.  The employer must actually give the employee something related to the purpose of the non-compete in return for the employee’s promise not to compete.  If the employer simply requires the employee to promise that he will not compete and the employer does not give the employee something related to that promise, there is no “otherwise enforceable agreement” and the employer will not be able to enforce the non-compete.

Currently, a typical non-compete agreement states that the employer promises to give to the employee various trade secrets or information not found outside of the company in return for the employee’s promise not to disclose or use the information he acquired from the employer to the detriment of the employer.

The law also requires that for a non-compete agreement to be enforceable, the employer’s promise must be made at the same time the promise to not compete is made.  If the employee has worked for the company for a period of time, he already has the confidential information. The employer has already given the employee the information and he therefore has nothing new to exchange for the promise not to compete.  That non-compete agreement is probably unenforceable.

Reasonable Limitations of Non-compete Agreements

Another leg of the enforceability test is the reasonableness of limitations as to time, geographical area and scope of activity.  What does that mean? What’s reasonable? Each case is different, but generally, an employer can enforce a non-compete for a limited period of time within the geographical area in which the employee worked and with those customers, clients or suppliers with whom he worked while in the employ of the company.  Variations abound, but if a company tries to be overly broad, a court is unlikely to enforce the non-compete agreement, or at least not enforce the parts the court sees as overly broad.

Both the employer and employee have legitimate business interests to protect when considering a non-compete agreement.  An employer may require an employee to sign a non-compete agreement to prohibit the employee from learning the employer’s confidential information and trade secrets and then using that information for his own benefit, or worse yet, for the benefit of a competitor.  The employee, on the other hand, is bringing his own skills and knowledge to the employer-employee relationship and wants to be able to continue to work on his own or with a different employer in the event of termination of employment.

Corporate Lawyer Review of Non-compete Agreements

Although the interests of the employer and those of the employee seem to be diametrically opposed, they can be reconciled by a carefully crafted non-compete agreement.  I would encourage all employers who are concerned about protecting their trade secrets, their customer information and their valued employees to consult with an experienced corporate lawyer to review their non-compete, non-disclosure and non-solicitation agreements on a regular basis.  Make sure they are up to date and comply with the most recent changes in the law.