07 / 26 / 2021

What is your noncompete agreement worth?

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Is the noncompete agreement you have worth the paper it is written on?

At its heart, a noncompete is a contract. It is a promise between the employer and employee where the employee promises not to compete, and the employer promises to provide the employee something that justifies the noncompete - and not merely an unconstitutional naked restraint on trade. In a right-to-work state like Texas, noncompete agreements are scrutinized. And they should be.

Many of our clients work in specialized sectors. Because key employees often acquire highly confidential and proprietary information relevant to these specialized areas and are often a business' primary contact with customer decision makers in these industries, the information and contacts they acquire leave the company vulnerable to poaching if employees leave. A noncompete seems an obvious way to prevent this. But is the noncompete valid?

Courts must answer three questions to determine whether a valid noncompete exists.

A court's first question is: Why does the employer want a noncompete? Is it merely to stop someone from working in the industry, which is an illegal naked restraint of trade, or is it truly to protect the "goodwill or other business interest" of the employer?

The second question is whether the person under a noncompete is in a position to damage the company's goodwill and business. Just because a noncompete is signed does not mean it is valid. The second inquiry focuses on what was provided to the employee for the noncompete. Surprisingly, dollars mean very little. The employer must show that the information provided to an employee, if turned against the company, could gravely hurt the business (i.e., client lists, contract pricing, sales and marketing strategies, financial information, and how the business is growing and operating). Even a promise by an employer to provide the employee such confidential information in the future, although not provided at the time the noncompete is executed, may be enough to enforce a noncompete.

The third and final inquiry is whether the terms of the noncompete are reasonable. The noncompete must contain reasonable limits to time, geographic scope and activity, and cannot impose a greater restraint than necessary to protect the business' goodwill.

So, what is reasonable? Preventing someone from working anywhere in the U.S. is probably unreasonable if their work is localized to a single city, county, state or small region. Similarly, preventing someone from competing with his or her employer for five years is likely unreasonable if the goodwill or business interests to be protected has a shelf life of two years. Courts look at whether these limitations are actually necessary to protect the goodwill and growth of the business or if it's just an attempt to stifle legal competition.

Even if a noncompete is unreasonable, but the employer has shown that it has satisfied the first three questions/inquiries by the court, the court will, at the urging of the employer, reform the noncompete to be reasonable, and will seek to protect the employer's goodwill and business interests. This is one of the rare occasions where the court essentially rewrites a contract. If the employer asks for the noncompete to be reformed (remember, after satisfying the first three inquiries), it loses any claim to damages caused by the competition prior to the reformation, and may be stuck paying for the employee's attorney fees. For some companies, that may be worth the cost.

This analysis is not universal. Although Texas increasingly favors enforcement of noncompete agreements when all the bases are covered, California does not. If the employee's services will be primarily rendered in a certain state, or where the contract provides that a specific state's law will apply, the noncompete must be tailored to comply with that state's law.

Whether you are a business owner or an employee looking at a noncompete, Vethan Law Firm P.C. looks forward to speaking with you and helping you navigate your options. "At the Vethan Law Firm P.C., Your Problem Is Our Business."

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