Companies have a vested interest in protecting their trade secrets. To do so, they often ask employees to sign non-compete agreements, also known as restrictive covenants. These agreements are meant to prevent an employee from leaving the company and setting up a competing business down the road using knowledge gained from their former employer. Employers also often use non-solicitation agreements or include non-solicitation clauses in their non-compete agreements in order to prevent a former employee from soliciting the clients or current employees of their former employer. For purposes of enforcement, Texas law treats non-solicitation agreements as non-competition agreements, so the information discussed here on drafting and enforcing non-competes also applies to non-solicitation agreements as well. The law in this area can be incredibly confusing and/or detailed so this blog is merely meant to provide a very basic and general overview for employers. We always encourage employers to use legal counsel when drafting or using non-compete and/or non-solicitation agreements.
Requirements for Enforceable Non-compete Agreements
The somewhat murky language of the Texas non-compete statute, found in Section 15.50 of the Texas Business and Commerce Code, has caused a lot of consternation over the enforceability of these agreements. In order for a non-competition agreement to be enforceable in Texas courts, the statute states an agreement must be
Ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee (employer).
The phrase “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made” has vexed employers and the courts for quite a while. Thankfully, in recent years the Texas Supreme Court has shown less interest in a strict interpretation of the statute and has been taking a more practical approach to rulings on non-competition agreements. This has made it somewhat easier for employers to defend their agreements.
New Approach to Analysis
The trend seen in the Texas Supreme Court suggests a two-phased approach in ruling on non-compete agreements. That approach includes consideration of the following two points:
- Circumstances for the non-compete – Why did the employer ask for the restrictive covenant? If the employee knows the recipe for the “secret sauce” then the agreement is likely justified. If the employer does not have a valid reason for the non-compete, it will likely not prevail.
This determination is a subjective one and it often depends on how much sensitive information the employee had access to, and what type of position was involved. Engineers, researchers, designers and the like likely would have access to the kind of information that would make their non-compete enforceable. Drivers, clerical workers, retail clerks, and similar employees may be viewed as a lesser risk.
- Is the agreement reasonable?Are the restrictions on time, geographic area, and scope of activity in the non-compete reasonable, or are they too far reaching? If they are too broad, the court has the option to revise the parameters of the agreement, or to deem it unenforceable.
What is reasonable in terms of time, geography, and scope? Reasonable time periods will vary but are generally in the neighborhood of one to two years. Geography will depend on the nature of the business. Geographic restriction can range from the local area to a global restriction. The scope of activity will also vary greatly. Agreements that describe a more specific scope of activity are more likely to be enforceable. Those that are overly broad may be viewed as unreasonable.
Employers should keep in mind that non-competition agreements will be scrutinized by the courts, should the employer seek to enforce. It is important to draft non-compete and non-solicitation agreements carefully and have adequate justification for the restrictions within them. When composing non-compete and non-solicitation agreements, it’s best to seek the counsel of skilled employment law attorneys. If you need assistance drafting these agreements, or enforcing them, Simon | Paschal PLLC can help.
