Plano Attorney in Armstrong The Law Firm practices heavily in the area of non-competition agreements, also called “non-compete agreements”.
A SPECIAL REPORT BY RICHARD L. ARMSTRONG, ESQ.
Many of our business clients have from time to time asked us to discuss an item which frequently comes up in their dealings with employees, former employees, and competitors: non-competition agreements. What is a non-competition agreement? As the name implies, an agreement which suppresses competition, usually from former employees or officers of a company. However, it can be an agreement between two ongoing businesses.
Following are some of the questions which seem to come up over and over again with regard to these sometimes pesky little covenants. Perhaps they will be of use to you in your business.
1. Non-competition agreements are generally disfavored by the courts, because they restrain trade in an otherwise free economy. Due to this fact, courts look for any reason possible to make them unenforceable, or to modify them to suit what the court considers to be a reasonable restraint.
2. There are ways to make non-competition agreements enforceable against an employee or former employee, provided certain guidelines (provided by the Covenant Not to Compete statute and certain case law) are followed.
3. Reasonableness is the key word. Courts will tend to uphold reasonable restrictions, but to throw out or rewrite unreasonable ones. This is because courts (especially in Texas) loathe anything that unnecessarily suppresses competition in the free marketplace.
4. What is a “reasonable restriction?” Generally, one that does not operate to completely shut a former employee out of his chosen profession or calling, but merely restricts his ability to conduct work of the exact type he performed for his former employer, for a reasonable time period and within a reasonable territory.
5. Can you be more specific? Yes. While each situation depends on its own facts, a time range of 1-3 years has generally been deemed reasonable by courts. Much, however, depends upon the type of business involved. If the evidence shows that a business is highly competitive and people within the field move around frequently from company to company, a court may be more likely to find a briefer period– such as one year– is reasonable.
6. What is a reasonable territory to cover in my non-compete agreement? Again, there is no hard and fast rule. However, the key criterion is how saturated the market area is with the particular type of business you seek to restrain. For example, dry cleaners are so prevalent that it would be reasonable in a major metropolitan area to require that the former employee not work for one within two to three mile radius. Any area much larger than that would shut the employee out of many, many dry cleaning employment opportunities. Just as important, a dry cleaner in such an area really doesn’t need much more protection than that, because people farther out than that tend to go to another dry cleaner, anyway. By contrast, a high tech manufacturer of cutting equipment may reasonably expect his territory to be county wide, or in some regions, state wide or even larger. The reason is that he may have no serious competition in a large area, and may be able to show that he has already permeated that entire market area. Therefore, it is more reasonable to suppress competition within a broad area.
7. What can I restrain my former employee from doing after he leaves my employment? Generally, you can restrict him from working for, holding significant amounts of stock in, or outright owning a directly competing business. Be prepared, however, to demonstrate that it really is a competing business, if challenged. You may also be able to keep him from working for a company where his know-how (which he acquired while your employee) cannot help but be disclosed to your competitor, thereby enhancing its position in the marketplace. This is called “inevitable disclosure”, and falls more under the heading of misappropriating trade secrets than non-competition agreements.
8. Warning: Watch out, that you don’t define what your employee does for a living too broadly. For example, as an employment agency, she may have been in charge of recruiting engineers for the companies you represent. For another search firm, she may recruit financial types or lawyers. Is she competing? Probably not, according to some case law.
9. Insider’s Tip: One of the best ways to make non-competition covenants enforceable is to offer the employee something in exchange for them other than just his/her continued employment. Some possibilities include stock options, entrustment of valuable trade secrets or confidential information, or tangible benefits not dependant on continued employment.
10. What about non-compete agreements used in connection with the sale of my business? Good question! They are governed by a different set of rules and not nearly so closely scrutinized by Courts as employer/employee covenants. That is because the court presumes free negotiating between two persons (or entities) with roughly equal bargaining power went on. The non-competition agreement is really considered to be part of the purchase price paid by the Purchaser, so that he can sleep nights without worrying that the Seller will reopen a competing business across the street (and steal his customer base). Therefore, territorial restrictions can be broader. Furthermore, I have seen covenants of up to 10 years held to be reasonable under these circumstances.
_____________________________________________________________________________
Richard L. Armstrong is a Plano Business Attorney, and principal of Armstrong the Law Firm. Armstrong the Law Firm is a practice handling all phases business representation, including business litigation, business transactions and negotiation. Armstrong’s business litigation attorneys have represented businesses ranging in size from small family operations to multimillion dollar transnational companies. His separate company, Fractional General Counsel, has pioneered the concept of delivering to businesses ongoing, proactive representation at affordable rates.