Noncompete Agreements in Texas: Some Restrictions Are Overly Broad
Non-compete agreements routinely provide for the employer to get injunctive relief in the event the employee engages in post-employment competition. In a recent case, the agreement in question subjected the employee to potentially harsher penalties.
The non-compete in question contained the following provisions:
14. Restrictive Covenant. In consideration of the benefits being provided to the Employee pursuant to this Agreement as outlined in Section 12 and elsewhere, and the unique nature of the Firm’s Clients and their business with the Firm as outlined in Section 12, the Employee shall neither call nor solicit, either for himself or for any other Person any of the clients of the firm for a period of twenty-four (24) months immediately following the Employee’s period of active employment (the "Post Termination Period")….
15. Payments to firm. …[T]he Firm and the Employee agree that should any Client of the Firm retain the services of Employee or any Person with whom Employee is associated at any time during the "post Termination Period", regardless of whether or not solicited by the Employee or such Person, the Employee shall pay to the firm an amount equal to 150% of the fees billed and accepted by such client during the twelve month period preceding the time when the client retains the services of the Employee or any Person with whom Employee is associated….
The court refused to uphold these provisions on the following grounds:
First, the court held that the monetary penalty was unreasonable. The court explained it in this way: “[I]f Hardy prepared a $500 tax return for a client, and if the same client paid $50,000 during the previous year for accounting services provided by Mann Frankfort, Hardy would have to pay $75,000 to Mann Frankfort."
The court believed this to be excessive.
Second, the court objected to the “Restrictive Covenant” provision:
Hardy’s restrictive covenant is not limited to the clients that he served. The agreement states that he may not call or solicit "any of the Clients of the Firm" for 24 months. The client-purchase provision similarly refers to "any Client of the Firm." This type of restrictive covenant that does not require a connection between the clients and the person who is restricted by the covenant is overbroad.
The court continued:
The agreement contains no geographical restrictions, no restrictions to clients that were actually served by Hardy while he was employed by Mann Frankfort, and an exorbitant fee for Hardy’s service to clients that did business with Mann Frankfort. We hold the restrictive covenant is unenforceable due to its failure to comply with the requirements of the Texas Business Code. Because Hardy’s agreement fails to comply with the Covenants Not to Compete Act, it is unenforceable, as written. (citation omitted)
In all cases involving non-compete agreements, the non-compete restrictions must be reasonable to be enforceable. In this case, the court held that the restrictions were unreasonable.
Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 2007 WL 1299661 (Tex. App.—Houston [1st Dist.] May 3, 2007).