Thursday, February 04, 2021

Ensuring Enforceability in Texas Non-Competition Agreements

 

By Casey Erick and Gracen Daniel

 

One of the most common agreements conditional to employment is a non-competition agreement, sometimes referred to informally as “noncompetes.” It is no surprise that noncompetes  are frequently litigated. The policy behind noncompetes aims to balance an employee’s at-will employment interest with a company’s competitive advantage. Because Texas courts view noncompetes as a restraint of trade, the agreements can be unenforceable if they are unreasonably restrictive.

 

Is My Noncompete Agreement Enforceable?

Drafting an enforceable noncompete requires careful considerations for the term of the agreement, the territory covered, and the type of restricted activity. A noncompete is enforceable if it is “[a]ncillary 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.” TEX. BUS. & COM. CODE § 15.50(a) (emphasis added).

Special considerations arise when a noncompete agreement’s term, geographical area, or scope provisions restrict the employee in his or her future employment. These factors vary depending on the nature of the employee’s role in the company and the territory he or she may serve. For example, a salesperson in Texas may have a large territory covered by a noncompete, but the scope of activity and the term should be limited accordingly. On the other hand, a territory may be hyper-competitive for a common industry, so the geographical restriction should be tailored while still affording the employer reasonable protection. In sum, a noncompete should be narrowly drafted to provide only the necessary protections for the company or else it may be deemed unenforceable.

The noncompete must also be ancillary to an otherwise enforceable agreement. Importantly, the noncompete must be supported by sufficient consideration related to an interest worthy of protection, such as providing an employee with trade secrets, confidential information, or business goodwill. For medical providers, Texas law imposes additional requirements for noncompetes including provisions for patient lists, maintaining medical records, and a buy-out option.

 

Stopping the Bleed: Tolling Considerations 

When an employee breaches a noncompete, the former employer can sue to enforce the agreement and to recover damages. One scenario that may arise is when an employee continues to violate his or her noncompete, even when faced with litigation. A court can issue a temporary restraining order and a temporary injunction to maintain the status quo of the parties while the noncompete agreement is litigated. Texas law disfavors granting injunctions to enforce a noncompete after the contractual term has expired. However, if during the contractual term, a party continuously violates an injunction, a court may craft an injunction to extend a noncompete beyond its contractual expiration date. See, e.g., Travelhost, Inc. v. Modglin, No. 3:11-CV-0456-G, 2012 WL 2049321 (N.D. Tex. June 6, 2012) (citing Travelhost, Inc. v. Brady, No. 3:11-CV-0454-M(BK), 2012 WL 555191, at *6 (N.D. Tex. Feb. 1, 2012)). In Guy Carpenter v. Provenzale, the Fifth Circuit Court of Appeals noted that a court exercising its equitable power to craft an injunction extending beyond the contractual noncompete period might be particularly appropriate when significant litigation delays have occurred. 334 F.3d 459, 464 (5th Cir. 2013) (injunction denied because employer did not have a likelihood of success on the merits). In Travelhost v. Modglin, the District Court for the Northern District of Texas exercised its equitable power to extend the term of the noncompete because Travelhost’s evidence showed that Modglin was continuously and persistently competing against Travelhost while he was still under contract with Travelhost. 2012 WL 2049321, at *15-16.

To avoid the foregoing tolling issue, it is often best practice to include tolling provisions in the noncompete that can extend the term of the agreement itself. This means the restricted period of the noncompete is extended by the length of time the employee breached the agreement. However, tolling provisions should be carefully drafted to ensure the agreement is still enforceable.

 

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