A Reminder from the Dallas Court of Appeals That Non-Compete Agreements Without Time Limit Are Unenforceable
August 15, 2014 Leave a comment
Earlier this week, the Dallas Courts of Appeals sided with an employee in Richard P. Dale, Jr., d/b/a Senior Healthcare Consultants v. Hoschar in ruling that her non-competition agreement was unenforceable because it did not contain a reasonable time limitation.
Hoschar, who worked as an insurance sales agent for SHR had the following clause in her independent contractor agreement:
Upon Termination of the Agreement, the Agent shall return to General Agent any and all information and supplies provided to Agent including any and all information and agrees to take no action either directly or indirectly, as an agent, employees, principal, or consultant of any third party or to utilize and [sic] third party, to attempt to replace business with any policyholder by soliciting or offering competing policies of insurance to any policyholder to which Agent sold any policy of insurance pursuant to the terms of this Agreement. During the bench trial, the trial court held that the non-competition agreement was unenforceable as a matter of law because it did not contain reasonable time and geographic limitations.
SCR argued that the covenant not to compete was reasonable. Hoschar argued the opposite. No other arguments were raised, and the Court of Appeals sided with Hoschar. It explained that in Texas, Tex. Bus. Com. Code §15.50(a) requires that a covenant not to compete must contain limitations as to time, geographical area, and scope of activity to be retsrained that are reasonable. The Dallas Court of Appeals and many other Texas courts have previously interpeted Section 15.50 and ruled that a covenant not to compete in an employment agreement that is indefinite in its time limitation is unreasonable and therefore unenforceable as a matter of law. Neither party challenged the application of Section 15.50 to independent contractors, and, therefore the Court of Appeals applied it to the covenant not to compete at hand here.
At the oral argument, SCR argued that the phrase, “attempt to replace business . . . by soliciting or offering competing policies of insurance,” reasonably limits the restrain on Hoschar to the duration of the current policy held by the insured. Thus, the “replace business” restriction was limited to the current policy held by each policyholder and did not restrict Hoschar from soliciting policyholders after they renewed their coverage. Hoschar argued that the language of the non-compete agreement did not contain an express exclusion of renewal policies, which policy holders could renew repeatedly for decades, and, therefore, was indefinite as to time and unenforceable.
Having decided that the covenant not to compete was unenforceable because it did not contain a time limitation, the Court of Appeals did not consider whether it also failed to contain reasonable geographic limits.
TAKEAWAY: Non-competition agreements are enforceable only if they contain reasonable time, scope, and geographic limitations (and meet a few other requirements). A vague, sloppy, one-size-fits-all, or simply an overreaching non-compete, can backfire on an employer when it comes to enforcing the agreement in court. A non-compete covenant may be clear when the company first begins its business, but it can become less than clear as the company expands or begins to operate new businesses. Updating agreements to make sure that time limits, geographic limits, and the scope of activities restricted under the agreement are clear and reasonable is key to maintaining competitive advantage.
For more information on drafting, enforcing or fighting the enforcement of non-compete and non-solicitation agreements please contact Leiza Dolghih at Leiza.Dolghih@GodwinLewis.com.