Hiring employees, training them, and granting them access to industry secrets or client lists exposes employers to the possibility that employees will utilize this valued information against them. In order to protect themselves, employers will often include a covenant not to compete provision in an employment contract, commonly known as a “non-compete.” However, it is important for both employers and employees to understand the legal limits of a non-compete. Drafting a non-compete that is too broad can lead to counterproductive results, while drafting one that is too narrow might be ineffective in protecting your economic interests and business goodwill.
In Texas, a covenant not to compete must state a duration of time, geographical area to be limited, and scope of activity to be restrained that is reasonable to protect goodwill and other business interests of the employer. It is important to also remember that the non-compete provision must be ancillary or part of an otherwise enforceable agreement or contact. The “reasonableness” of a non-competition agreement is a question of law that a court must decide. As a general matter, except for a few unique circumstances, a non-competition agreement that is indefinite or without geographical limitations will be ruled unreasonable and unenforceable.
For example, the Dallas Court of Appeals recently held that independent contractors are subject to covenants not to compete. However, the same “reasonableness” standard applies. In that case, the plaintiff was an independent contractor selling insurance policies pursuant to an agent agreement with the defendant. Part of the agent agreement contained a covenant not to compete that prevented the plaintiff, upon termination or resignation, from “attempting to replace business with any policyholder by soliciting or offering competing policies…to which Agent sold any policy of insurance pursuant to this agreement.” The Dallas Court of Appeals held that this term was unenforceable because there was no duration on time, as policyholders of the defendant could renew their policies indefinitely, thus leading to the plaintiff not being able to solicit or offer policies to them forever. The result of the holding was that the plaintiff could compete with defendant immediately.
The above case is an example of an employer thinking it had sufficiently protected its economic interests, only to find out that its non-competition agreement was ineffective. It is important for employers to understand Texas non-compete law so that they can effectively protect their economic interests and business goodwill. For employees, knowing the limits of covenants not to compete in Texas will prevent them from being unlawfully restricted in offering their unique skills and services.