Basics of the Noncompete Agreement

noncompete agreement in an employment contractEmployers invest a lot in their employees, and this investment includes trust with the employer’s business interests, goodwill, trade secrets, customer or vendor lists, and other confidential information.  Employers have two avenues to protect this investment.

Written Employment Contracts

The first is a written employment contract which contains restrictions that protect the employer and prevent competition.  The second is Texas common law.  Common law rights offer far less protection than an employment contract with confidentiality provisions and a covenant not to compete or noncompete agreement.  An employee that leaves a company is not prohibited by common law from using knowledge gained during employment from competing with the employer or doing business with the previous employer’s customers or vendors.

To increase protections of the employer’s investment in the employee, many employers utilize employment contracts with confidentiality provisions as well as covenants not to compete or noncompete agreements.

Noncompetition Agreement Requirements

In order to be enforceable, a covenant not to compete (or noncompete agreement) must:

  • be part of an otherwise enforceable agreement at the time it was made (an employer cannot enforce a stand-alone noncompete agreement);
  • protect a legitimate business interest;
  • be reasonable on the limit of the scope of the restrained activity;
  • have reasonable geographic restrictions; and
  • have a reasonable time limit.

The noncompete agreement and the ancillary agreement must be made at the same time.  So if the employment agreement is made, and then a week later the employee signs a noncompete agreement, the noncompete is likely unenforceable – the agreements should be made at the same time.  A recent ruling by the Texas Supreme Court also says the employer should provide the employee access to trade secrets or confidential information and should enter into a non-disclosure or confidentiality agreement that extends beyond the termination of employment for a nondisclosure agreement to be enforceable.  There was some question as to when the employer had to give the employee this information.  In a 2006 decision, the Texas Supreme Court ruled that an enforceable noncompete agreement existed where the employer gave the employee access to confidential information at some time after the noncompete agreement was signed.  Employers that want to make sure their noncompete agreements are enforceable should provide the employee with confidential or proprietary information at the time the agreement is signed or as soon as possible thereafter.  It is also the better employer practice to include the noncompete agreement within the employment contract, rather than creating two separate documents.

Protecting Confidential Information

In order for confidential or proprietary information to constitute a “legitimate business interest,” the employer must take steps to protect the confidentiality of the information.  If there is no effort to keep the information secret, it is unlikely to satisfy this requirement.  General knowledge or skills acquired during employment do not constitute protectable business interests.  Thus, it is unlikely an employer can enforce covenants not to compete with employees in unskilled positions.  Best practice is to recite the protectable business interest in the agreement.

Creating the Boundaries of the Noncompete Agreement

Restriction on Business Activity

Texas public policy and laws generally disfavor an employer’s attempts to restrict a former employee’s activities.  Consequently, this portion of the noncompete must be as narrowly drawn as possible.  For example, Texas courts have disappoved language which restricted a former employee from employment in the “employment agency business.”  Best employer practice is to draft the noncompete so that it is no broader than the scope of the actual business conducted by the employer, or the specific business engaged in by the employee if the employer engages in numerous businesses.  The noncompete should also prohibit employee contact only with customers or vendors the employee dealt with, not all customers or vendors the employer has done or may do business with in the future.  It is important for the lawyer drafting this agreement to be familiar with the employer’s business and if possible the specific work the employee will be doing.

Geographic Scope of Restriction

The geographic scope of the agreement must also be reasonable and specific.  This restriction must be reasonable as to the employer’s business and the employee’s work.  To be enforceable, the employer must show that its need for the covenant outweighs the harm to the employee or the public and the covenant is no broader than necessary to protect the employer’s legitimate interest.  Industry-wide or nationwide restrictions have been held to be too broad and have been struck down.  Restrictions as to a single city or town are more likely to be enforceable.  Likewise, restrictions defined by miles from the employer’s principal place of business have been held enforceable provided the distance is not too great and does not encompass an area greater than the territory in which the employee worked.

Length of Restriction

Texas courts have shown an unwillingness to enforce noncompete agreements whose duration exceeds the time the employee was employed.  A noncompete that restricts former employees for an indefinite time is unenforceable.  Best employer practice is to make the duration specific.

Conclusion

Noncompete agreements with current employees require new consideration, or in other words payment, training, access to previously undisclosed confidential information, promotion, bonus or pay increase, or other independent consideration for the agreement.  It is important to seek the advice of good legal counsel in drafting these agreements.

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