Last week, a Texas Court of Appeals ruled that a non-compete agreement between a transportation logistics broker and its freight carrier was unreasonable because it was not clear when the 24-month non-compete period would begin to run. This case serves as a reminder that a confusing, ambiguous, or imprecise non-compete agreement will yield poor results in court. In other words: garbage in, garbage out.
The covenant not to compete at issue was meant to ensure that the freight carrier would not take away the broker’s clients after the broker had revealed their identity to the carrier. Thus, there was a legitimate business reason for the non-compete agreement. However, the following language in the agreement created a problem:
For a period of twenty four (24) months following the Carrier’s last contact with any client or client[s] of Broker the Carrier agrees it shall not either directly or indirectly influence or attempt to influence customers or clients of Broker (or any of its present or future subsidiaries or affiliates) for whom the Carrier has rendered services pursuant to this Agreement to divert their business to the Carrier or any individual, partnership, firm, corporation or other entity then in competition or planning to be in competition in the future with the business of Broker or any subsidiary or affiliate of Broker.
The Court explained that there were two problems with this language that made it impossible to determine how long the restrictive covenant was going to last. First, under the terms of the covenant not to compete, the 24-month restraint period would start from the date of the carrier’s last contact with “any” client of the broker, not just the clients that the carrier had provided services to. Since the broker testified that its client list was a trade secret, the carrier would have no way of determining the date of its last contact with the clients whose identity it had no way of knowing. Second, the non-compete would begin to run from the date of the last contact, regardless of whether the contact took place during or after the broker-carrier agreement had terminated, which meant that it could begin at any time.
Consequently, the Court ruled that a covenant not to compete that extended for an indeterminable amount of time was not reasonable, and as a result, was not enforceable. It reversed the jury’s finding that the agreement had been breached and took away the damages the jury had awarded to the broker.
BOTTOM LINE: There are plenty of “sample” non-compete agreement “forms” online, but there is a difference between a non-compete clause and a non-compete clause that is enforceable. Unfortunately, many companies do not find that out until they are in court trying to enforce their agreements that may not be enforceable. Companies should avoid using “standard” non-compete clauses and make sure that their restraints are tightly drafted to address their specific industry, business model, and particular needs.
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.