Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Texas

Texas law allows non-competition agreements provided that they are part of or ancillary to an otherwise enforceable employment agreement.  The restrictions must be reasonable in terms of duration, geographic scope and the type of employment or line of business and must not impose a greater restraint than necessary to protect the goodwill or other business interest of the employer.  If the court finds an agreement is unreasonable, it may modify the agreement so that it does not unduly infringe on the former employee’s ability to work.

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration.The Texas statute specifies that a non-competition agreement must be in addition to an otherwise enforceable employment agreement.  Texas courts have determined that the offer of initial employment (or “at will” employment) is not an “otherwise enforceable agreement” by itself and therefore, is not sufficient consideration.  Another agreement where the relationship is binding on both parties must be executed at the same time in order for the non-competition agreement to be enforceable.  An agreement signed after the employment relationship has begun may not have the requisite consideration unless it is accompanied by additional pay or a promotion.

Reasonableness in Time and Geographic Scope

Examples of non-compete agreements that Texas courts have found to be reasonable include:

• A1-year restriction on a former senior vice president and branch manager of a reinsurance brokerage firm from soliciting clients he had serviced during his employment.
• A 5-year restriction on a former security systems salesperson from soliciting customers he had dealt with in specified counties in east Texas.
• A 3-year restriction on a travel agent.  The court modified the geographic restriction from all of Texas and any other state in which the former employee had conducted business to the single county in which she worked.

The courts have found restrictive covenants unreasonable or used the “blue pencil” rule to modify agreements in these situations:

• A 2-year, 3-mile-radius restriction on a former franchisee of a photocopying business.  These restrictions alone were not unreasonable, but the court determined that because the franchisor had no plans to establish a competing franchise in the area and had changed the focus of his business from the low-end to the high-end copying market, that in this case they were unreasonable.
• A 3-year, 4-state restriction on the former employee of a concrete mixer and truck manufacturer from working “in any capacity … whatsoever” for a competitor because the nature of the work for the new employer was significantly different.
• A restriction barring former employees from accepting employment from the former employer’s clients for 30 days after the termination of the employer’s association with the client because that relationship could exist indefinitely.

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.