Texas courts have the authority to rewrite non-compete agreements that they find to be unreasonable. Thus, a business might be tempted to draft a broad non-compete agreement thinking that when a push comes to shove, it can just ask the court to reform the agreement to make it more reasonable. However, the recent First Court of Appeals’ decision in Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc., et al., illustrates why relying on reformation as a way of fixing an overly-broad non-compete agreement could end up being very costly to the employer.
At issue in this case was a non-compete agreement signed by Sentinel’s employee, Olson, upon his promotion within the company. The agreement required that he “refrain from competing with [Sentinel] or otherwise engaging in ‘Restricted Activities'” for a period of 3 years after the termination date within a region including 7 cities and 4 counties in Texas, locations in 6 states and 1 country, and “a twenty (20) mile radius around all customers’ job sites and/or project facilities that [the employee] called on or services on behalf of [Sentinel] in all geographic regions, wherever located.” Olson only worked at the Sentinel’s Corpus Christi location.
When Olson left to work for another company, Sentinel immediately sued him and his new employer seeking enforcement of the non-compete agreement under Tex. Bus. & Com. Code Ann. 15.50(a) and, alternatively, reformation of the agreement under Tex. Bus. & Com. Code Ann. 15.51(c) if the court found that the covenant was not reasonably limited as to time, geographic area, or scope of activity.
Until the last day of trial, Sentinel maintained that the covenant not to compete was enforceable as written. On the last day, its counsel conceded on the record that the agreement was unreasonable at least as to the geographic area it covered. Still, Sentinel did not request reformation until after the jury returned its verdict requiring it to pay Olson’s $750,000 attorney’s fees. The trial court reformed the non-compete agreement as requested by Sentinel, but also adopted the jury’s award of the attorney’s fees.
The award was based on Tex. Bus. & Com. Code Ann. 15.51(c), which allows a trial court to award an employee against whom a non-compete is being enforced his attorneys fees if the employee proves that:
- plaintiff knew at the time the employment agreement was executed that the covenant did not contain limitations as to time, geographical area, and scope of activity to be restrained that were reasonable and the limitations imposed a greater restraint than necessary to protect [plaintiff’s] goodwill or other business interest, and
- plaintiff sought to enforce the covenant to a greater extent than was necessary to protect its goodwill or other business interest.
- Sentinel’s manager testified that he purposefully made the geographical area covered by the non-compete provision broad “to cover pretty much all of the general areas that we think or anticipate would be covered” and he relied on a provision allowing a trial court to reform the agreement if necessary;
- The covenant not to compete expressly stated that “Employee and Company agree that the limitations as to time and scope of activity to be restrained are reasonable,” but it was silent on the reasonableness of the geographic area;
- Sentinel’s manager sent an email to Olson prior to his signing of the non-compete agreement assuring him that the agreement would not prevent Olson from working as an inspector;
- Sentinel attempted to enforce the covenant’s ban on competition in “in any capacity” that overlapped with managerial duties at Sentinel, i.e. “inspector, manager, supervisor, dishwasher, it doesn’t matter”;
- Sentinel attempted to enforce the covenant’s general ban on “competing,” including restricting Olson from working in geographic areas that were not tailored to Olson’s work on behalf of Sentinel or even to Sentinel’s own current business.
CONCLUSION: Sure, you can always ask a Texas court to reform a non-compete agreement, and the court will most likely do so. However, if it finds that a company knew at the time the non-compete agreement was executed that it contained unreasonable restrictions and it tried to enforce it to a greater extent than was necessary to protect its business interest, the company might end up paying the other side’s hefty attorney’s fees bill on top of the reformation.
Thus, instead of handing employees a boiler-plate broad non-compete agreement with a hope that a court can later “fix” it if necessary, a business should attempt to draft its non-compete agreements to reflect the particular geographic areas and the job duties of the employees that sign them.
While it is not always possible to know where an employee will end up working over the years, a language in a non-compete agreement that ties the “restricted area” of competition to the area where the employee is going to work, without naming specific geographic locations, plus a reasonable mile radius, can help a company avoid a Section 15.51(c) award.
Similarly, instead of including every possible activity in a list of competitive activities to be restrained, catering the language to the job description of the employee who will be signing the agreement, might help ward off a Section 15.51(c) award.
Leiza litigates non-compete and trade secrets lawsuits on behalf of EMPLOYERS and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete agreement, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.