Businesses of all sizes are looking increasingly to non-competition agreements as a means to retaining key employees, protecting confidential information and preserving valuable customer accounts. The concept is simple:  an employee agrees that, for a specified period of time after leaving the employer, he or she will not compete with or work for a competitor of the employer.

A typical agreement might prohibit John Smith from competing directly or indirectly with his employer, ABC Corp., or working for a competitor of ABC Corp., within Texas, for a 24-month period following the termination of Mr. Smith’s employment with ABC Corp.

Why Have an Agreement?

At first glance, such agreements may seem to make a lot of sense. The sudden loss of a key salesperson, for example, often creates a triple whammy.  First, a seasoned member of the sales team is gone, along with her in-depth knowledge of your business, your products, your pricing practices and your customers.  Second, the good will and positive customer relationships that the employee has developed over time are now gone.  Third, if the salesperson has been recruited by a competitor, a significant risk exists that she will be converting your accounts to your competitor’s while you spend considerable time recruiting and breaking in a replacement.  Losing an experienced member of management or R&D to a competitor can be equally devastating.

The existence of a solid non-competition agreement can often serve to deter employees from seriously exploring a jump to a competitor. An employee who thinks that a court may keep him from successfully landing with a new employer, may not risk the leap.  After all, most employees will want to avoid costly litigation against their former employer.  At the same time, the presence of such an agreement may dissuade competitors or their headhunters from “raiding” your staff and cherry-picking your most valuable resources.  These days, one of the first questions a savvy recruiter will ask is whether a prospect has signed a non-competition agreement. Few businesses want to become embroiled in expensive and time-consuming litigation as part of the hiring process¾particularly if the agreement looks like it will be enforceable in court.

Enforceability of the Agreement

The critical question is – does the agreement not to compete look like it would pass judicial scrutiny? If an employee is contemplating a move, the first call is usually to an attorney for an opinion as to the probability of the agreement being enforced by a judge. Likewise, a competing employer, if serious about a potential employee, will consult with an attorney.

In evaluating a non-competition agreement, what will that attorney be looking for (and what will ultimately be evaluated by a judge)? In short – reasonableness and fairness. The interest of the employee, as well as the employer, must be protected and a restriction will be declared invalid if an employee is unreasonably prevented from pursuing his occupation and supporting his family.

Over the years, courts in Texas have developed some major factors that they look to determine whether a non-compete agreement should be enforceable.  1) Reasonableness as to geography; 2) reasonableness as to scope; and 3) reasonableness as to duration.  These factors are identified in Texas Business and Commerce Code Section 15.50.

Reasonableness of Restrictions

The most important factors are the time restrictions and geographic scope of a non-competition agreement. For the most part, if those restrictions are found to be reasonable, the other factors will also be resolved in favor of the employer. On the other hand, if either is found to be an unreasonable restriction, the agreement as a whole will be declared invalid.

Time restrictions: An indefinite time restriction will most certainly undermine a non-competition agreement. Generally, Texas courts have been willing to accept restrictions for several years without a great deal of concern. Longer restrictions have been upheld occasionally, but may decrease the chances the agreement will be enforced. Creative drafting of separate provisions for consecutive time periods may increase enforceability, but reduce the certainty of the time restriction that may be upheld as reasonable.

Geographic restrictions: The geographic scope of a non-competition agreement is usually where an employer trips up. To be valid, the employee can only be restricted from working in areas where the employer does business or is likely to do business. Some agreements specify certain towns, or certain states or regions where the employer does business. Others specify a radius of restriction, such as “within 50 miles of Houston” In either instance, overreaching can kill the agreement – even if the employee voluntarily signs it. If the 50-mile radius covers 3 towns where you do not do business or are unlikely to do business – the agreement may be ruled invalid. Bottom line, the non compete must be reasonable in relation to where the company actually does business.

However, even if the restriction is too large of an area, the courts in Texas may “blue pencil” in a more reasonable and limited geographic area.  Texas courts have been fairly supportive of non-compete agreements.

Scope restrictions:  Finally, the restrictions must be reasonable as to scope.  For example, if a company is in the check cashing business, and the restriction on the employee is for all retail positions that may be too broad.  The specific restrictions on the employee should be narrowly tailored to protect the company—and that’s all.

Many employers play it safe, and still provide themselves with ample protection, by limiting the non-competition restrictions to just the customers and territory that the employee covered prior to leaving, or by restricting employment with specified competitors in a specific territory.

Consideration to Employee

If the non-compete agreement is part of the initial employment contract, the act of hiring the individual is a term and condition of hire and there will be adequate consideration. Problems of consideration arise when non-competes are offered to existing employees. Even if the terms of a non-competition agreement are found to be reasonable, they are often challenged on the basis that the employee was not paid any new “consideration” for signing the agreement.

Some courts say that the continued employment of a current employee is adequate consideration. Others say that it is not. In Texas, generally, continued employment for a long period of time is sufficient consideration.  Also, access to confidential data is also consideration.  Ideally, the best time to get an employee to sign a non-compete is at the beginning of their employment.  Further, the non compete should include specific references to consideration provided.

Practical Considerations

Although non-competition agreements can be quite valuable and can be crafted to be both effective and legally valid, they can create more problems than they solve and might not be for everyone.

For example, in many instances, the question is not “can you” fire the key employee who refuses to sign, but, rather, do you really want to terminate the employee and actually cause the loss that the agreement was meant to avoid in the first place? What if several key employees refuse? Can you afford to have signers and refusers working side by side?

Do you refuse to hire the star player who refuses to accept an employment offer that includes a non-competition agreement? If an employee does sign the agreement and eventually quits to start a competing business or work for a competitor, are you willing to bring suit to enforce the agreement?

The answers to these questions require a great deal of introspection and “what if” planning – with as much input from line management and human resources staff, as from legal counsel.

Please contact Favad Bajaria at Bajaria Law to discuss your business needs and potential protection through enforceable non-compete agreements.  Bajaria Law can also enforce non-compete agreements requesting injunctive relief from the court against rogue employees in violation of non compete agreements and alternatively help employees represent themselves in negotiations with employers regarding non-compete agreements they have entered into.  Please visit ourWhat We Do section to further review the services we provide.