What You Need to Know About Non-Compete Agreements

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; for example, as a component in the sale of a business. 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-Compete agreements that lack quid pro quo, that is, legal consideration, or which are without any restriction as to time, place, or scope of activity, are disfavored by the courts. This is because they restrain trade in an otherwise free economy, which is against the public policy that encourages a competitive marketplace. This policy is evident in the statute governing non-compete agreements in Texas (§15.50 et.seq., TEXAS BUSINESS AND COMMERCE CODE). Due to this fact, courts may look for reasons to make such an agreement unenforceable, or to reform it to suit what the court considers to be a reasonable restraint.

2. There are ways to make non-compete agreements enforceable against an employee or former employee, provided certain guidelines (provided by the above mentioned statute and certain case law) are followed.

3. Reasonableness is the key word. Courts will tend to uphold reasonable restrictions based on the evidence, 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. 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.