A Texas Court Examines What Is a Reasonable Geographic Restriction in a Non-Compete Agreement

While Texas allows non-compete agreements that are reasonable and meet the requirements of the Texas Covenants Not to Compete Act, the courts in this state will not enforce agreements with overbroad geographic restrictions.  What is overbroad depends on the company’s business, the employee’s duties, and the language of the agreement.   Employers who attempt to impose the broadest possible geographic restrictions may end up having their non-compete agreements declared invalid by the courts.

Recently, a Texas court of appeals found the following non-compete language to constitute an unreasonable geographic restriction and dismissed the employer’s case attempting to enforce the non-compete restraints:

During one year period following Employee’s termination of the employment relationship Employee agrees that he shall not compete, either directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any business that is in competition in any manner whatsoever with the business of Employer in any state or geographical territory in which Employer is conducting, has conducted or anticipates conducting its business.

The Court ruled that the benchmark of a reasonable geographic restriction was usually the territory where the employee worked for an employer and not the entire area where the employer conducted business.  Furthermore, the employer had the burden to show that the employee actually worked in all areas covered by the covenant not to compete.  In this case, the non-compete covenant did not state a definite territory and the employer did not supply any evidence showing that its employee worked in all areas covered by the covenant not to compete.

Hence, the Court concluded that “the geographic restriction in the covenant not to compete here is significantly broader than the geographic scope of [the employee’s] employment with [the employer]” and that the the covenant was broader than was reasonably necessary to protect the interest of the employer.

BOTTOM LINE:  When drafting employment agreements, employers should put some thought into what geographic restrictions they really need to protect their business rather than go for the broadest protections or cookie-cutter geographic limits.   Having the right language in the agreement will make the enforcement of the agreement much easier should an employer seek to enforce it against a departing employee.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s national Trade Secrets and Non-Compete Disputes practice.  Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com  or (214) 722-7108.

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