Let’s assume you recently joined this edgy new Dallas tech firm. The environment is great and your work is interesting. Part of your job packet, however, included this odd “covenant not to compete” section. You brushed it off and signed the employment agreement. Everything was great for a year or so, but one day, you’re not working for this tech firm anymore (fired, laid off, quit; you pick). Now there is this new, edgy Dallas tech firm in the picture. You know you have the skillset for it thanks to your old firm, but that “covenant not to compete” dashes across your mind for some reason. Can you work for this new firm?
Built by common law and reinforced through the Covenant Not to Compete Act, this agreement between parties is an agreement of restraint. Is it enforceable? If so, can it really keep you from taking that new job?
CRITERIA FOR ENFORCEABILITY OF COVENANTS NOT TO COMPETE
Section 15.50 of the Texas Business & Commerce Code is the official source of “Criteria for Enforceability of Covenants Not to Compete.” Under Section 15.50(a), a covenant not to compete is enforceable 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.
Let’s break this down.
The meaning of “ancillary to or part of an otherwise enforceable agreement” means that in order for a noncompetition agreement to be valid, it must be in addition or supplementary to something that actually is an enforceable agreement (at the time the agreement was made, of course). One cannot simply create a noncompetition agreement—called a “naked restraint of trade—and expect it to be enforced by a court. Because a covenant not to compete is, in and of itself, a contract, there must be consideration for it. This consideration is where the “otherwise enforceable agreement” phrase comes into play.
WHAT IS AN UNREASONABLE AGREEMENT?
The meaning of “to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained” means that the noncompetition agreement isn’t overbearing or burdensome in time, place, or activity. Generally speaking, it is unreasonable for a firm to expect its employees to sign a noncompetition agreement that requires all employees to covenant not to compete “in the tech industry, within a 1000 mile radius, for ten years.” A noncompetition agreement like that would render that provision of the contract voidable and, depending on the structure of the contract itself, may render the entire agreement voidable as well.
To be enforceable, there needs to be good evidence that the restrictions on activity are “reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest.” An unreasonable provision may prevent an employer’s contract from holding water, and can even force an employer to have to pay for your legal efforts to prove the contract invalid.
EMPLOYERS AND EMPLOYEES
A covenant not to compete is often a good thing for an employer and employee alike. Done properly, it should foster an environment of innovation, as well as loyalty and security for both the employee and the employer. However, like all contracts, there must be an element of quid pro quo (“something for something”). Simply put, an employer cannot force their employees into servitude under a noncompetition agreement.
WHAT'S NEXT?
To answer the original question: it depends on the specifics of your non-compete clause and the specifics of what happened at your job. Depending on a case-by-case analysis, you may be able to work for the new tech firm; or, the non-compete may prevent you from doing so. This is why it is always important to consult competent business counsel, whether you are structuring a covenant not to compete for your company or trying to figure out where you can work if you are (or were) an employee.
At VLF, we have successfully litigated for the enforcement of, and against the enforceability of different non-competes depending on the specifics of each case. If you are business hiring new talent to develop a new opportunity, or a sought-after professional looking to keep your market options open, give us a call with any questions.