The Fifth Circuit Rules Industry-Wide Noncompete Agreements Are Not Enforceable

static1.squarespace.comThe Fifth Circuit Court of Appeals recently considered whether a travel agency’s noncompete agreement with its employee was enforceable under Texas law.  It concluded that because the agreement did not have geographic limits, was not limited to the travel agency’s customers with whom the employee actually worked during her employment, and included the entire travel agency industry, the noncompete was unenforceable.

In analyzing the noncompete clause, the court in Karen D’Onofrio v. Vacation Publications, Inc., provided a useful refresher as to what types of noncompete agreements are legal in Texas and what types are illegal and, therefore, not enforceable.   The court confirmed that noncompete restraints that preclude employees from working in any capacity in a particular industry are not enforceable. Thus, when it comes to noncompete agreements, bigger is not always better.

What covenants not to compete are legal in Texas?

First of all, Texas law recognizes that reasonable covenants not to compete serve the legitimate business interest of preventing departing employees from “using the business contacts and rapport established” during their employment to take the employer’s clients with them when they leave.

Thus, a covenant not to compete is enforceable under Texas law if it is “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.”  Tex. Bus. & Com. Code § 15.50(a).

In the case of personal services occupations, such as sales persons, the employer has the burden of showing the reasonableness of its noncompete agreement.  Thus, for example, an employer who is asking a court to enforce a 20-mile covenant not to compete, will have to establish why the 20-mile – as opposed to a 10-mile – radius is reasonable.

What types of covenants not to compete are illegal in Texas?

As a general rule, under Texas law, covenants not to compete that extend to clients with whom the employee had no dealings during his or her employment or amount to industry-wide exclusions are overbroad and unreasonable and will not be enforced by the Texas courts.  Similarly, the absence of a geographical restriction will generally render a covenant not to compete unreasonable and, therefore, unenforceable.

Was D’Onofrio’s covenant not to compete enforceable?

D’Onofrio’s noncompete agreement prohibited her — for a period of 18 months after her employment with the travel agency — from, among other things, working “in any capacity” for “any direct or indirect competitor of [the travel agency] in any job related to sales or marketing of cruises, escorted or independent tours, river cruises, safaris, or resort stays” or doing any business with “any person or entity” who had purchased a cruise or other travel product from the travel agency in the preceding 3 years.

According to the court of appeals, this covenant amounted to an industry-wide restriction, which prevented D’Onofrio from working in any job related to the sales or marketing of not just cruises, but also a host of other travel products—and was not limited as to either geography or clients with whom D’Onofrio actually worked during her employment.  Therefore, the Fifth Circuit Court of Appeals concluded that D’Onofrio’s covenant not to compete with her travel agency was unreasonable as written.

When a Texas court finds a noncompete agreement unenforceable, what does that mean for the employer?

If a court determines that a covenant not to compete does not contain reasonable time, geography, and scope limitations, but is otherwise enforceable, then the court shall reform, i.e. rewrite, the noncompete agreement to make it reasonable.  For example, a court can change a 50-mile radius in a non-compete agreement to a 20-mile radius or change an 18-month restriction to a 6-month restriction.  

Texas Bar Association Top TenBOTTOM LINE: In the D’Onofrio case, the court of appeals sent the case back to the lower court directing it to rewrite the agreement.   Texas employers should be aware that any time a court has to rewrite a noncompete because it is overbroad and unreasonable, there are negative consequences for the employer – more attorney’s fees, more time spent in litigation, and an inability to recover damages from the employee.  

Therefore, it is important to make sure that noncompete agreements are written properly from the beginning rather than rely on the courts’ ability to rewrite them during litigation.

Leiza co-chairs Trade Secrets and Non-Competes practice area at Lewis Brisbois Bisgaard & Smith LLP and represents companies in complex commercial and employment litigation.  She can be contacted at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or by filling out the form below.

One Comment on “The Fifth Circuit Rules Industry-Wide Noncompete Agreements Are Not Enforceable

  1. Pingback: Top 10 from Texas Bar Today: Juries, Circuits, and Agreements | Texas Bar Today

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