DOES YOUR NON-COMPETE HAVE ANY MUSCLE?

By Charles Moster, Esq.
MosterWynne Law Firm

If you are an employer starting a business and you are wondering how to protect the customer list, inventions, and other intellectual property you are working so hard to develop, you are likely concerned about how the use of non-compete agreements can help or hurt you. Your concerns are well founded particularly in light of recent Texas court cases. While agreements containing covenants not to compete are a familiar topic to many businesses and their employees, Texas courts generally support a public policy position disfavoring restraints of trade. Thus, non-competition agreements must be carefully drafted and reviewed to ensure that they meet certain criteria and will be more likely to withstand judicial scrutiny.

Picture yourself having hired your first five new employees to help get your emerging business off the ground. You have hired one person to handle your financial concerns, three people to promote and sell your product, and one person to manage your employees and assist you in developing your product. At the time each one of these new employees was hired, you asked him or her to sign an agreement containing a covenant-not-to-compete. You also supplied certain training and information at the time of hire to each new employee. During the course of the next year, your intellectual property, and therefore your business, blossoms and you consider hiring additional employees and perhaps opening a second office in a difference location. Life is good and you can finally relax, at least a little bit.

You go into the office the next day and one of your sales people gives you two-weeks notice and says he or she will be opening his or her own office a few blocks from yours. During the course of his or her employment, you have shared information with him or her that you believe to be unique to your business, including sensitive and personalized customer information that you and your team have compiled over time. You remind this sales person of his or her covenant-not-to-compete with your business. Nevertheless, within a month, he or she has opened a business selling your ideas and soliciting business from your customers.

What can you do?

It’s time to test the strength of your non-compete agreement in court. There are several key factors that Texas courts consider when deciding the extent to which a non-compete agreement is enforceable, including the following:

· Was the covenant-not-to-compete ancillary to or part of an otherwise enforceable agreement?
· What consideration was promised by the employer in exchange for the employee’s covenant not to compete, and was it actually received? Is the consideration supplied helpful to the employee in carrying out his employment duties?
· Did the covenant-not-to-compete contain reasonable (1) time limitations, (2) geographical restrictions and (3) scope of activity limitations?
· Was the covenant-not-to-compete more restrictive than necessary to protect the employer’s business interest?

In the scenario described above, you may have given adequate consideration of the right type in exchange for the sales person’s covenant-not-to-compete, and you gave some such consideration at a critical time. Moreover, if the geographical restriction was narrow and specific to your small business, and if your agreement reasonably limited the time in which the sales person could compete with you and the scope of the activity, your company’s non-compete agreement could have some muscle to flex before the former competing employee and before the court.

Nevertheless, this is a very complex and evolving area of the law, and the subject of several Texas cases, including a recent case decided by the Texas Supreme Court. Many factors, including factors beyond the scope of this article, can affect the power behind your business’s non-compete agreements. If you have a non-compete agreement that you are currently using for your employees, it should definitely be reviewed and updated if necessary before its enforceability is put to the test.

Finally, if your business does not have a non-compete agreement, we can help you decide if such an agreement is right for your business and beat the departing employee to the punch when it comes to protecting your valuable intellectual property.