Tag: Non-Compete Law in Texas

What Employers Need to Know About Non-Compete Agreements in Texas (Part II)

by Leiza Dolghih, posted in Non-Compete Agreements, Non-Compete Agreements in Texas, Non-Solicitation Agreements, Non-Solicitation Agreements in Texas, Texas Employment Law

imagesIn Part I, I described requirements for non-compete agreements in Texas. In Part II, I describe the common mistakes that employers make when it comes to non-compete agreements: 

1. Not signing non-compete agreements with key employees.  It seems like a no-brainer, but there are still a lot of companies out there that do not require their employees to sign any non-compete agreements. This is a mistake.  A reasonable non-compete agreement can benefit both the company and the employees. A company is more likely to invest into training of its employees if it knows that they will not leave to work for a competitor as soon as the training is completed, and fair geographic restriction will not prevent employees from finding future employment.

2. Having restrictions that are too overbroad. Overreaching in non-compete agreements can backfire in that employees end up feeling like they have no choice but to violate them in order to make a living and courts are less likely to enforce such overbroad non-compete agreements. 

3. Not having a legitimate business interest to protect. A Texas employer must share its confidential information or goodwill with an employee in order to create an enforceable non-compete agreement.  There is no legitimate business interest in tying up employees with non-compete agreements if they perform tasks that do not involve specialized training, confidential information or goodwill of their employer. 

4. Making all employees execute the same non-compete agreement. Requiring the same 2-year / 200-mile non-compete agreement for sales people, secretaries, and C-level executives raises a red flag that the company is simply trying to prevent competition and is not protecting a legitimate business interest.  Employees that perform different tasks or serve a different purpose should have different non-compete restraints depending on what they do in the company.

5. Not providing a proper consideration. Different states require different types of consideration for non-compete agreements. In some states, just a promise of future employment is sufficient. In other states, an employer must pay money to an employee in exchange for the promise not to compete.  Texas companies should make sure that their non-compete agreements are supported by the right type of consideration in the state where they plan to enforce the non-compete agreements.

6. Not providing new consideration.  When asking an already-existing employee to sign a non-compete agreement, employers must provide new consideration for the agreement.  For more information, see my previous post here.

7. Not enforcing non-compete agreements. Once proper non-compete agreements are in place, companies should make it a policy to enforce them.  Otherwise, the agreements lose their effectiveness with employees, who quickly learn from co-workers that the company never enforces its contracts. 

8. Not enforcing non-compete agreements fast enough.  This is one of the gravest mistakes for companies in terms of consequences. The longer a company waits to seek a temporary restraining order against an employee who is violating his or her non-compete agreement, the more likely the court is to deny the restraining order because the company cannot show an “imminent” and “irreparable” injury.   In other words, if the company has not tried to stop the bleeding, how bad could the bleeding really be and does the court really need to enter an emergency order?

9. Not providing confidential information. As mentioned above, a proper consideration for a non-compete agreement in Texas includes a company’s promise to provide confidential information to the employees signing the agreement.  Companies, however, must deliver on that promise and actually provide such confidential information in order to make their non-compete agreements enforceable.

10. Not saving an electronic version of the signed non-compete agreements.  Companies must make sure that they save an electronic signed version of their non-compete agreements in a location where employees cannot access and delete them.  

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.

Is Your Non-Compete Agreement Enforceable?

by Leiza Dolghih, posted in Employment Agreements in Texas, Employment Law, Non-Compete Agreements, Non-Compete Agreements in Texas, Non-Solicitation Agreements, Non-Solicitation Agreements in Texas, Texas Employment Law

stevecarelEvery state has its own rules about the enforceability of non-compete agreements, with many technical requirements, carve outs for certain industries like medical and technology, and various presumptions or public policy-driven rules regarding employers’ ability to limit competition from former employees.

Recently, I’ve been receiving a lot of inquiries from Texas employers or companies that are moving to Texas regarding: (1) whether non-compete agreements are enforceable in Texas?  (2) what types of non-compete agreements are enforceable in this state?  and (3) when should I enforce my non-compete agreement against a departed employee? Many of these companies already have non-compete agreements with their employees, but are worried about their enforceability in Texas courts. 

I have previously written about how to enforce non-compete agreements in Texas, here, here, and here.  So, the answer to the first question is a resounding “Yes, non-compete agreements are enforceable in Texas.”

The answer to the second question is that, generally, only non-compete agreements with reasonable geographic, time and scope restrictions are enforceable in Texas. 

Assuming a positive answer to the first two questions, the answer to the third question depends on the circumstances of a particular departed employee and the answer to the following questions:

  • What position is the employee in at your company? C-Suite? Sales? Another position that gives him or her access to sensitive information within the company?
  • What special skills the employee has and what specialized training the employee has received in that position? 
  • Is the company where the employee is going a competitor of your company?
  • What position is the departed employee going to take at his or her new place of employment? Is it the same or similar position to what he or she was doing at your company?
  • How likely is it that the employee will use the confidential information he learned while working for you at his new job?
  • What activities does your non-compete prohibit the employee from doing?
  • For how long?  Remember, it must be reasonable.
  • What area does it cover? Reasonableness is key. 
  • Did you provide the right type of consideration for the employee’s promise not to compete?
  • Do you have a non-solicit agreement that will protect your company without having to enforce the non-compete agreement?

All of these factors will come into play if you decide to enforce a non-compete agreement in Texas. Additionally, you will need to consider where to file the lawsuit, the evidence that you will need in order to obtain a temporary restraining order against the employee, and a host of procedural and discovery issues that come along with litigating a non-compete case. 

Bottom Line: Enforcing non-compete agreements is as much of a business decision as it is a legal one.  Having a non-compete agreement that is legally enforceable, allows you to decide whether it makes business sense to enforce it against a particular employee.  Without a legally enforceable non-compete agreement, however, the business reasons may not even matter. 

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Will Ban the Non-Competes Movement Lose Its Momentum During the Trump Administration?

by Leiza Dolghih, posted in Non-Compete Agreements, Non-Solicitation Agreements

donald_trump_rnc_h_2016It’s no secret that the Obama administration made a push, especially towards the end, towards limiting the use of non-compete agreements by employers around the country. The White House commissioned not one but two reports on this topic, both of which concluded that non-compete agreements stifle innovation, reduce job mobility, and negatively impact economic growth.  

Several states around the country seemed to join the White House’s view on non-compete agreements in passing statutes limiting their use. Illinois, for example, recently enacted the Illinois Freedom to Work Act, 5 ILCS § 140/1 et. seq., which prohibits private employers from entering into non-competition agreements with “low-wage employees.” Utah passed the Post-Employment Restrictions Act, Utah Code § 34-51-101 et seq., in March 2016, restricting non-competes’ length to 1 year.  Massachusetts tried to pass a similar legislation this year, but failed. And New York State Attorney General Eric Schneiderman announced that he will propose legislation in 2017 to limit the use of non-compete agreements in New York.  

Will this push to limit non-compete agreements continue during the Trump administration?  My prediction is that it won’t.  Of course, as with many other areas of the law, predicting what Trump will or will not do, is like reading tea leaves – nobody really knows. However, here are my top three reasons for thinking that the Trump Administration won’t pursue the same stance on non-compete agreements as the Obama Administration. 

First, Trump is a savvy businessmen and an employer. Therefore, he knows the value of non-compete agreements to employers and, without a doubt, has used them himself in his many businesses. 

Second, Trump has demonstrated that he is not above using such agreements in what some would view as overreaching situations.  For example, he did not shun from using non-compete agreements with the volunteers for his political campaign, even though the volunteers were not paid compensation for their services and probably performed tasks that did not involve any confidential information.

Third, Trump’s recent appointment of Andrew F. Puzder – the former CEO of a fast-food franchise – as the Secretary of Labor, suggests that his focus may not be on helping low-wage employees. Mr. Puzder had openly criticized the minimum wage increase that was supposed to go into effect this December and is commonly perceived as an ally for employers.  His position on ACA, minimum wage, and the joint-employer rule promulgated by the NRLB, is contrary to the position taken by the Obama administration. Thus, if he takes a 180-degree shift from the Obama administration’s stance on non-competes, such position won’t come as a surprise. 

Employers should stay tuned to see how the Trump’s policy on non-competes develops in 2017…

Leiza litigates unfair competition, non-compete and trade secrets lawsuits on behalf of companies and employees, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Texas Non-Competes Soon Will Be Unenforceable in California

by Leiza Dolghih, posted in Employment Agreements in Texas, Law, Non-Compete Agreements in Texas, Non-Solicitation Agreements in Texas, Texas Legal News

shutterstock_102117535With so many companies moving their headquarters from California to Texas in the recent years, non-compete disputes involving employees and employers who have ties to both states have multiplied.  

In these types of cases, one of the first questions the courts ask is which state’s law applies to the non-compete agreements in dispute – California’s or Texas’s?  You can find an example of such a case here.  Under California law, non-compete agreements are largely unenforceable.  To the contrary, Texas law recognizes reasonable non-compete agreements and will enforce them. 

Last month, California governor signed into law Senate Bill 1241, which, effective January 1, 2017, will restrain the ability of employers to require employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where the employee was individually represented by a lawyer in negotiating an employment contract.

This new Section 925 of the California Labor Code states the following:

(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

(1) Require the employee to adjudicate outside of California a claim arising in California.

(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

The only exception to the application of Section 925 appears in subdivision (e):

(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

Takeaway:  Texas employers with California employees need to recognize that an attempt to enforce Texas non-compete agreements against their employees who primarily reside and work in California may backfire after January 1, 2017, resulting in employer having to pay employees’ attorney’s fees related to the dispute.  

Additionally, for those employees who might have dual residences in both states and might regularly perform work in both states, the question of whether they “primarily reside and work” in California or Texas may become a pivotal issue to the enforceability of their Texas non-compete agreements. 

Most importantly, employers should take advantage of the exception in the statute as well as identify other legally allowed restrictions under California law that would serve to protect the company’s interests even against California employees. 

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Are Non-Compete Agreements Enforceable in Texas?

by Leiza Dolghih, posted in Breach of Contract, Employment Agreements in Texas, Law, Non-Compete Agreements in Texas, Non-Solicitation Agreements in Texas, Small Business Help, Texas Employment Law, Texas Legal News

kkGenerally, Texas allows non-compete agreements between employers and employees as long as they are reasonable in scope, geographic area, and term, and meet a few other requirements. See my previous posts about those requirements here, here, and here. 

Practically speaking, however, whether a particular non-compete agreement is valid depends heavily on the exact language used in the agreement.  Just as with any other contract, Texas courts will usually look at the precise language of a particular employment agreement to determine what the parties had in mind when they entered into it. 

Last year, a hospitalist group in Houston learned the above principles the hard way when it attempted to enforce a non-compete covenant against a physician who went to work for a competitor and discovered that the non-compete did not prohibit the physician from doing so. 

In Tummalla et. al. v. Total Inpatient Services, P.A., the non-compete clause between the hospitalist group and the physician stated the following:

6.2 Non–Compete. In consideration for the access to the Confidential Information provided by [TIPS] and in order to enforce the Physician’s Agreement regarding such Confidential Information, Physician agrees that he/she shall not, during the term of this Agreement and for a period of one (1) year from the date this Agreement expires pursuant to Section 8.3 or is terminated by Physician pursuant to Section 8.6 (the “Restriction Period”), without the prior written consent of [TIPS], except in the performance of duties for [TIPS] pursuant to this Agreement, directly or indirectly within any Hospital in the Service Area or any other hospital in which the Physician practiced on behalf of [TIPS], in excess of 40 hours, within his last year of employment with [TIPS]:
6.2.1 Provide services as a hospitalist physician to any entity that offers inpatient hospital and emergency department services.
In a separate provision in the same agreement, however, it stated that the physician’s first 12 months on the job were to be considered an “introductory period” during which either party could terminate the employment relationship for any reason. The specific paragraph stated that it applied notwithstanding any other provision in the agreement and it failed to included or mention any non-compete restrictions. 

The court of appeals analyzed these various clauses in the contract and concluded that because the physician terminated his employment with the hospitalist group within the first year, i.e. the “introductory period,” the post-employment non-compete clause did not apply to him. Thus, he was free to compete with his former employer. 

TAKEAWAY FOR EMPLOYERS: Employers should have a qualified attorney draft and/or review their non-compete agreements.  While there are many forms out there, because non-compete agreements in Texas have to be catered towards each employer’s business and because courts will scrutinize the language when determining whether to enforce the agreement or not, using a standard form may result in the employer not being able to enforce it due to gaps in the language or failure to address specific termination situations.

TAKEAWAY FOR EMPLOYEES:  Signing a non-compete agreement without reading it first can result in a major headache down the road and severely limit employee’s career options.  Therefore, employees should always: (1) read the agreement; (2) request a clarification if something is not clear; and (3) keep a copy of the signed agreement for their records.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

The Far-Reaching Claws of the Texas Non-Compete Statute

by Leiza Dolghih, posted in Breach of Contract, Non-Compete Agreements in Texas, Non-Solicitation Agreements in Texas, Small Business Help, Texas Business Law, Texas Legal News

Wait-what-meme-rage-faceA recent case from a Texas Court of Appeals demonstrates that the Texas non-compete statute applies not only to the employment agreements or sale of business contracts, but to any contracts that contain provisions restraining trade.

In Wharton Physician Services, P.A. v. Signature Gulf Coast Hospital, L.P., the Corpus Christi Court of Appeals found that a liquidated damages clause in a recruiting contract was unenforceable under the Texas non-compete statute.

Gulf Coast hired Wharton to provide hospitalist services and to coordinate the hiring of individual physicians for Gulf Coast.  Their agreement contained the following clause that allowed Wharton to demand $100,000 in liquidated damages if Gulf Coast hired any of the physicians that Wharton had previously presented to Gulf Coast if the hiring took place within 6 months after Wharton’s contract’s termination:

If this Agreement is terminated by either party for any reason, then HOSPITAL [Gulf Coast] shall have the right to contract directly with all or some of the Hospitalist Physicians retained by GROUP [Wharton] to perform the services required by the terms of this Agreement . . . In the event that HOSPITAL, or any individual or entity otherwise affiliated with HOSPITAL, for work or services that would be provided at HOSPITAL, desires to contract directly with one or more of the HOSPITALIST physicians previously recruited retained, and presented to HOSPITAL by GROUP for hospitalist services at any time during the six (6) months period following the termination of this Agreement, HOSPTIAL shall pay to GROUP as liquidated damages in amount of $100,000 per physician.

The Court of Appeals applied the standard non-compete analysis to this liquidated damages clause finding that while the recruiting agreement itself was enforceable, the liquidated damages clause was not because it was a restraint on trade that was not supported by independent consideration.  The court explained its reasoning as follows:

“Gulf Coast promised to pay Wharton for services and Wharton promised to perform those services; however, none of those obligations amounted to additional consideration for Gulf Coast’s promise not to hire any physicians if the contract between Wharton and Gulf Coast was terminated.”

In sum, the court construed the liquidated damages clause “as a way to limit competition to Wharton from another company providing similar services.”  As such, it had to comply with the Texas Covenants Not to Compete Act’s requirements, which it failed to do.

Takeaway: When entering into a contract in Texas, the parties should consider whether any contract provisions may be viewed as a restraint on competition and an attempt to enhance or maintain prices.  If that’s the case, then such contractual provision might have to comply with the Texas non-compete requirements in order to be enforceable.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

 

Small Business Corner: Limiting Competition Through Contract Provisions

by Leiza Dolghih, posted in Anti-Raiding Agreements in Texas, Breach of Contract, Confidentiality Agreements in Texas, Employment Agreements in Texas, Non-Compete Agreements in Texas, Non-Solicitation Agreements in Texas, Small Business Help, Texas Business Law, Texas Employment Law

download (1)Whether you are hiring a new employee or entering in a contract with your vendor or supplier, if you are planning on giving these persons access to your business’ confidential information, such as customer lists, financial information, proprietary training materials, etc., you should make sure that the person you are sharing it with is not going to take that information and use it to compete against your business. There are several tools available to business owners to make sure that this does not happen.

When properly drafted, the following contractual provisions will serve to protect a business owner from unfair competition by a former employee or business partner:

  • Non-compete clause.  This clause prevents current employees or business partners from joining or forming a competing business after the end of their employment or business relationship with your company.  It is enforceable in Texas when certain conditions are met.
  • Non-solicitation of clients clause.  This clause prevents current employees or business partners from taking the company’s clients with them after their employment or business relationship with that company ends.
  • Non-solicitation of employees a.k.a anti-raiding clause.  This clause prevents current employees or business partners from poaching their former employer’s or business partner’s employees after the end of their employment or business relationship.
  • Non-disclosure clause.  This clause prohibits employees or business partners from using or disclosing confidential information that a company shared with them during their employment or business relationship.

To be enforceable, each clause has to be drafted specifically for your business.  There are some contract clauses that stay the same no matter what the substance of the contract or the business is – these are not those clauses.

A lot of business owners will adopt a friend’s or a former employer’s non-compete and non-solicitation agreements for their own use, or copy an agreement they found online.  However, those agreements usually work only until a company attempts to enforce them, leaving a business owner exposed to unfair competition at the precise moment when it needs the protection the most.

These copycat restrictive covenants often fail because a company that attempts to enforce them in court must show why a particular geographic area or a specified time period is reasonable for a particular employee, and explain exactly what is included in the definition of “confidential information” included in the non-disclosure clause.  This is virtually impossible to do if the agreement that the company is seeking to enforce was catered to a different company’s business, with different types of confidential information, and different employee structure.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Non Compete Law in Texas: 2014 in Review

by Leiza Dolghih, posted in Non-Compete Agreements in Texas, Texas Business Law, Texas Employment Law

downloadThere is a lot of confusion out there about whether non compete agreements are enforceable in Texas. Some believe that they are never enforceable, others think that they always are.  The truth is, whether a non compete agreement in Texas is enforceable depends on a variety of factors, including: (1) the specific language of the non compete clause in question and (2) the facts surrounding the relationship that the non compete addresses.  Slightly different standards and approaches apply when it is a non competition clause in a business v. business transaction or a similar clause in an employer v. employee situation. The summary of the appellate courts’ decisions involving non compete issues in 2014 shows just how differently the chips fall depending on the particular facts of each case.

And the award for the most active court in the non compete arena goes to…

In 2014, Texas Courts of Appeals addressed various non-compete clauses 22 times.  One case involving a non-compete dispute even made it all the way to the Texas Supreme Court. Out of the fourteen appellate courts in Texas, the most active court on the issue of non compete agreements was the First Court of Appeals in Houston, which lead the way with 8 opinions involving non-compete clause issues, followed by the Fifth Court of Appeals (Dallas) and the Fourteenth Court of Appeals (also in Houston) with 4 cases each.

Temporary injunctions …when dotting the “I”s and crossing the “T”s really counts…

Out of 22 cases involving non-compete issues, nine were interlocutory appeals from either a grant or denial of a temporary injunction by lower courts. In four cases, the Courts of Appeals reversed the injunction order for failure to comply with Rule 683 of the Texas Rules of Civil Procedure. I have previously written about Rule 683 mandates here, here and here. Twice they uhpeld temporary injunctions and twice they reversed the trial courts’ denial of temporary injunctions. Only once did a Court of Appeals uphold a denial of a temporary injunction.

Thus, almost half of the appeals heard by the Texas appellate courts involved defendants arguing that the injunction order was not specific enough for them to know what they were prohibited from doing, and the courts of appeals agreeing with them, which is why knowing what to ask for when seeking an injunction is as important as having a well-drafted non-compete to begin with.

Non competes …so who has them?

The non-compete agreements challenged on appeal in 2014 spanned a wide variety of industries and involved all levels of employees – from high-level directors and CEOs to lower level blue collar employees.  In this limited pool of cases, the non-competes were most often enforced against those in a sales position, but included the following types of employees: insurance brokers; surgical assistants; CEO of a company that manufactured, sold, and rented frac valves; sales associates for an electricity provider; oil & gas refinery equipment inspector; CFO of an energy corporation; a doctor; directors of a solar power products company; an IT department supervisor; tax and research consultants; VP of an apparel company; VPs of a building manufacturer; sales manager for a manufacturer of heat exchangers; sales agent for a company that sold lumber products; mortgage loan officers; marketing director for a court reporting company; a pathologist; a sales agent for a company that sold stucco and masonry materials; insurance sales agent; geologist; a sales agent for a manufacturer of specialty components used in offshore oil and gas drilling and production; and a sales agent for a company that sold oilfield service equipment.  This shows that non compete agreements are not limited to particular industries in Texas.

So, what’s going to happen in 2015? 

This is one area of law that will continue to be hotly disputed in 2015 as economy picks up and more employees make lateral moves or decide to open their own business.  The challenge for business owners in 2015 will be to find the balance between protecting their confidential information and the resources invested in employees and allowing such employees to earn a living after their departure.  The variety of the outcomes on the appellate level indicates that the courts’ analysis of non compete agreements  in Texas is very fact specific and often hinges upon the specific language of the agreement.  The employers should review their non competes, update them, and institute hiring and termination polices that are meant to maximize the effectiveness of such agreements.   And remember that while not every business employee should be subject to a non compete agreement, the key level personnel’s employment contracts should definitely include non compete and non disclosure clauses.

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.

In Texas, a Court Can Rewrite Your Non-Compete For You, But It Might Cost You a Pretty Penny

by Leiza Dolghih, posted in Non-Compete Agreements in Texas, Texas Employment Law

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 argued on appeal that there was not enough evidence to support the findings under Section 15.51(c), but the Court of Appeals disagreed based on the following:

  • 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.