The Non-Compete Reasonableness Requirement
For Texas non-compete agreements, what are reasonable limitations on time, geographical area and scope of activity?
In Texas, non-compete reasonableness restricts an employee’s ability to compete against her former employer must comply with the Texas Business and Commerce Code Section 15.50(a). Aside from being ancillary to or part of an otherwise enforceable agreement, the non-compete agreement must:
“contain 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 [employer].”
In short, an enforceable non-compete agreement cannot restrict an employee’s ability to compete with her former employer for a time period, geographical area or scope of activity greater than necessary to protect the employer's interest. Unreasonable limitations could result in the Court modifying the terms of the non-compete agreement and could result in the employer paying for the defending employee’s attorneys’ fees.
So how is an employer to know what constitutes reasonable limitations to time, geographical area, and scope of activity? Generically speaking, an employer could find case law to support a wide variety of these limitations. The generic approach is risky. For example, relying on cases that allow for a three year restriction for an entity within your industry could still be unreasonable if the trade secrets or good will at issue is turned over faster than three years. When establishing reasonable limitations, the employer's best chance of success is to focus on the type of interest the employer is trying to protect as well as the context in which the employee at issue accessed and utilized the protected interest.
Employers utilize non-compete agreements to protect several types of interests. Aside from goodwill, trade secrets are one of the most commonly protected interests. An employer attempting to protect its trade secrets should consider the following when determining the appropriate limitations on time, geographical area and scope of activity:
(a) the nature of the trade secret;
(b) the time and resources it took to develop the trade secret;
(c) the lifespan of the trade secret before the information or technique is common to the employer’s industry or replaced by the employer;
(d) the geographical area the employer and employee service; and
(e) the job duties and responsibilities of the employee in connection with access and use of the trade secrets at issue.
An honest and conservative consideration of these factors will place an employer in a much better position to defend the reasonableness of its non-compete limitations.
Limitations or the length of the restriction should be based on the product or technique lifespan. While other factors come into play here, such as the speed with which competitors catch up, the anticipated lifespan of the product or technique is probably more predictable and therefore more persuasive. If the confidential information is more akin to a customer list, then the time period should be based on the approximate time it took to establish the relationships and/or customer base. Case law routinely supports one-two year limitations for customer lists, but employers should be prepared to back up this time period with specific examples and evidence.
Reasonable geographical limitations must also be included. To have a highly defendable geographic limitation, the employer should consider the markets in which it serves customers and the markets in which the employee at issue is involved. For example, if an employer’s market is exclusively limited to Texas, a geographical restriction that includes other states may be held to be unreasonable.
Reasonable scope of restricted activity is the last item for an employer to consider. The activities in which the employee worked for the employer is the first place an employer should look when determining an employee's restricted activity. A Texas court is more likely to enforce a non-compete agreement if the employee is working for a competitor and doing the same thing for the competitor that she did for you. Another routinely reasonable restriction is a prohibition on a former employee from starting or owning a competing business. If the employer can establish that the employee obtained trade secrets and could utilize them in creating a competing business, the non-compete is more likely to be enforced.
Remember that, in Texas, non-compete agreements are exceptions to the prohibition on the restraint of trade. To be enforceable, the non-compete agreement must strictly comply with the non-compete statute. Each situation is different. A reasonable limitation for one business may not be reasonable for another. As such, an honest assessment of the above-referenced considerations should guide an employer in making its limitations on the length, area and scope of a non-compete agreement. If, as an employer, you cannot justify your current non-compete limitations, you should strongly consider re-writing your non-compete agreements. In the end, an employer cannot be certain that its non-compete agreement is enforceable until a judge says as much. Creating a defendable non-compete will make the judge's decision easier and more likely in your favor. Consultation with your employment counsel and a review of your existing agreements is a good first step.