NON-COMPETE AGREEMENTS: A SPECIAL REPORT, PART 2
Following is a continuation of last week’s article on non-compete or non-competition agreements. In that article we gave you five major questions or issues that often arise in the use of these agreements, which you should be aware of in your business. Here are the remaining items 6. through 10.
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 restrict 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 dependent 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, we have seen covenants of up to 10 years held to be reasonable under these circumstances.
If you have any further questions or comments about non-compete covenants in Texas, don’t hesitate to visit www.planobusinesslawyers.com