Protecting yourself from the departing employee

Part Two - The Non-Compete Agreement



By Barry Greve, Attorney
Board certified labor and employment attorney
Texas Board of Legal Specialization

One of the most important items to consider when hiring any employee, especially one in a management position, is whether to have the employee sign a non-compete agreement. Your clients, pricing structure and strategic planning, just to name a few things, are valuable information to your competitors and should be protected at all costs. Everyone has heard the story of the former security officer or supervisor who left his employer and started his own security company in direct competition with the former employer. Failing to have a valid and enforceable non-compete agreement is a costly mistake. Here is how you can protect your company.

What is a non-compete agreement? As a general proposition, an employer can restrict an employee’s post-employment competition through a non-compete agreement, which is also commonly referred to as a covenant not to compete. A non-compete agreement typically restrains the employee from engaging in a competing business with his or her former employer, in a certain geographic area, for a limited period of time following the termination of the employment relationship.

While Texas courts have been historically reluctant to enforce non-compete agreements, the Texas legislature has enacted the Covenants Not to Compete Act (the “Act”), specifically making such agreements enforceable provided there is compliance with all of the provisions of the Act. Consequently, employers seeking to prevent employees from competing after their termination must carefully draft non-compete agreements to fit within the limited perimeters established by the legislature.

Elements of a valid non-compete agreement. The act provides for certain distinct elements that must be present in order for a non-compete agreement to be enforceable. The non-compete agreement must:

1. Be ancillary to or part of otherwise enforceable agreement at the time the agreement is made;

2. Protect a legitimate business interest;

3. Contain reasonable limitations as to the scope of activity to be restrained;

4. Contain reasonable geographical limitations; and

5. Contain reasonable durational limitations.

A non-compete agreement which fails to contain any one of these elements could be rendered invalid and unenforceable.

At-will employees. Prior to last year, a non-compete agreement with an at-will employee was generally considered to be unenforceable. However, on Oct. 20, 2006, everything changed in what was considered a major victory for employers. In Alex Sheshunoff Management Services v. Johnson, the Texas Supreme Court changed the law by holding that non-compete covenants in at-will employment are enforceable if the employer provides confidential information or training to the employee at any time during employment, in accordance with the promises in its employment contract. Thus, a non-compete agreement that is unenforceable due to the employer's failure to provide the promised consideration (i.e. confidential information) can be made enforceable by the employer simply by following through on its original promise and providing the consideration later. As a result of this decision, employers will now be more readily able to protect confidential information and goodwill through enforcement of non-compete covenants. You should review non-compete covenants in your at-will employment contracts in light of this new development.

Reasonable in scope: Assuming that the non-compete agreement is ancillary to otherwise-enforceable agreement, it must still be reasonable in scope of the activity to be restrained. The non-compete agreement must restrain no more activity than is necessary to protect the legitimate business interest of the employer. Texas courts have consistently refused to enforce agreements that vaguely prohibit all competitive activity or prohibit employment in any capacity for a competitive entity. Texas courts have also refused to enforce agreements that prohibit activity unrelated to the work the employee preformed for the former employer.

Geographic location and duration. Non-compete agreements that contain no geographical limitations or have excessive time limits are unreasonable and unenforceable. Generally, a reasonable area of restraint consists of only the territory in which the employee worked for the former employer. Courts have also refused to enforce non-compete agreements with nation wide applicability when the employee did not have nation wide responsibilities for the former employer. In addition, the duration of the non-compete agreement should bear some resemblance to the employee’s time spent working for the former employer. In other words, a lifetime prohibition would be deemed unreasonable. However, keep in mind that the courts have authority to reform a non-compete agreement to narrow the scope of the geographical area and/or duration of the agreement so as to make it enforceable.

A properly drafted non-compete agreement is an important and effective tool to protect your business. However, a poorly drafted agreement can have devastating implications. Not only will the former employee seek to use the information he learned while working for you to his advantage, and thus to your disadvantage, the former employee could also recover his attorney’s fees if he can prove to a court that the non-compete agreement you have sought to enforce is defective and therefore unenforceable.

Therefore, be cautious when drafting any non-compete agreement and always seek the advice of counsel.


J.E. Barry Greve, Jr., Board Certified Labor and Employment Law, Texas Board of Legal Specialization. 1201 W. Arbrook, Suite 121, Box 960, Arlington, Texas 76015, 214.232.4266, e-fax: 866.489.9041 [email protected]

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