How Much Muscle
Does Your Non-Compete Agreement Really Have?
Shari A. Wynne, Esq.
If
you are an employer starting a business and you are wondering how to protect
the customer base you are working so hard to develop, you are likely concerned
about how the use of non-compete agreements can help or hurt you. Your
concerns are well founded. While agreements containing covenants not to
compete are a familiar topic to many businesses and their employees, Texas
courts generally support a public policy position disfavoring restraints
of trade. Thus, non-competition agreements must be carefully drafted and
reviewed to ensure that they meet certain criteria and will be more likely
to withstand judicial scrutiny.
Picture
yourself having hired your first five new employees to help get your fledgling
business off the ground. You have hired one person to handle your financial
concerns, three people to promote and sell your product, and one person
to manage your employees and assist you in developing your product. At
the time each one of these new employees was hired, you asked him or her
to sign an agreement containing a covenant-not-to-compete. You also supplied
certain training and information at the time of hire to each new employee.
During the course of the next year, your customer base, and therefore
your business, blossoms and you consider hiring additional employees and
perhaps opening a second office in a difference location. Life is good
and you can finally relax, at least a little bit.
You
go into the office the next day and one of your sales people gives you
two-weeks notice and says he or she will be opening his or her own office
a few blocks from yours. During the course of his or her employment, you
have shared information with him or her that you believe to be unique
to your business, including sensitive and personalized customer information
that you and the sales people have compiled over time. You remind this
sales person of his or her covenant-not-to-compete with your business.
Nevertheless, within a month, he or she has opened a business selling
the same product as you are selling and soliciting business from your
customers. What can you do?
It’s
time to test the strength of your non-compete agreement in court. There
are several key factors that Texas courts consider when deciding the extent
to which a non-compete agreement is enforceable, including the following:
- Was the covenant-not-to-compete
ancillary to or part of an otherwise enforceable agreement?
- Did the covenant-not-to-compete
contain reasonable (1) time limitations, (2) geographical restrictions
and (3) scope of activity
limitations?
- Was the covenant-not-to-compete more restrictive than necessary to protect the employer’s business interest?
Courts
will also examine whether the employee was “at-will” and the
nature and timing of the consideration given by the employer in exchange
for the employee’s covenant-not-to-compete. In the scenario described
above, you may have given adequate consideration in exchange for the sales
person’s covenant-not-to-compete, and you gave some such consideration
at a critical time. Moreover, if the geographical restriction was narrow
and specific to your small business, and if your agreement reasonably
limited the time in which the sales person could compete with you and
the scope of the activity, your company’s non-compete agreement could
have some muscle to flex before the former competing employee and before
the court.
Nevertheless,
many factors, including factors beyond the scope of this article, can
affect the power behind your business’s non-compete agreements. If
you have a non-compete agreement that you are currently using for your
employees, it may be wise to have it reviewed and updated if necessary
before its enforceability is put to the test. Finally, if your business
does not have a non-compete agreement, we can help you decide if such
an agreement is right for your business and beat the departing employee
to the punch when it comes to protecting your valuable customers and information.
Should
you have any questions regarding the enforceability of non-compete clauses
or other issues relating to your business, please feel free to contact
Moster Wynne.
