What is a “Reasonable” Non-Competition Agreement?

Most states will enforce reasonable non-competition agreements, but what is “reasonable” and how the courts reach that conclusion varies.  In Texas, there are some rules of thumb regarding what is generally considered “reasonable” when it comes to non-compete agreements.  A recent opinion from a federal court in Austin illustrates those rules as well as what happens when an employer attempts to enforce an overbroad, i.e., “unreasonable” non-competition agreement in Texas.

In this case, a company that provided management services to amenity facilities, spas, and health clubs sued its former employees for breaching their non-compete agreements after they went to work for a competitor.  Among many claims that the company brought in the lawsuit, it specifically asked the Court to enforce the employees’ non-compete agreements and enjoin (i.e. prevent) the former employees from competing with the company for 12 months. 

The employees’ non-compete agreements prohibited them from being “employed in a business substantially similar to or competitive with” the company for a year after leaving their employment.  The agreements were not limited in their geographic scope or in the scope of activities to which they applied.  The court stated that the company prohibited its former employees from working for its competitors anywhere in the country, even if a competitor was based outside the geographic area where the employees worked.  It also barred the employees from working for a competitor “in any capacity” and, therefore, was not related to the employees’ duties while they worked for the company. 

The court explained that in Texas, “the hallmark of enforcement [of non-compete agreement] is whether or not the covenant is reasonable.”  Generally, a reasonable area for purposes of a covenant not to compete is considered to be the territory in which the employee worked. Furthermore, noncompete agreements barring an employee from working for a competitor in any capacity are invalid.  To be valid, the restrictions on the scope of the employee’s activities at a new company have to bear some relation to the activities of the employee at the old company.  In the case above, the court specifically noted that the company failed to “articulate how [its] broad non-compete agreements [were] necessary to protect its business interests,” which is another requirement for an enforceable non-compete agreement in Texas. 

Eventually, the Court entered an injunction limiting the employees’ activities in Austin, San Antonio and Houston, where employees had actually worked for their former employer.

BOTTOM LINE:  When it comes to non-compete agreements, “reasonableness” is the name of the game, and while employers often want to err on the side of safety and put in longer and larger restrictions than what might be necessary, doing so can backfire when an employer has to enforce its agreement in court. Thus, setting non-compete restrictions should not be done off-the-cuff, but should be a strategic and well-thought-out decision supported by legitimate business reasons. 

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

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