Covenants not to Compete in an Employment Contract can be a valuable tool for Employers who are looking to protect their interests in a competitive market. They can allow Employers to freely train, and provide confidential information to Employees that would give their competitors an advantage over them should the Employee leave to join a competitor. Covenants not to Compete can also be dangerous if not drafted or enforced properly. An Employer could rely on an improperly drafted Covenant not to Compete, in disclosing confidential information and trade secrets to an Employee whom they believe to be legally bound not to use that information against them later. There are stark differences between Covenants not to Compete in the context of At-Will employment contracts, and Term employment contracts.
Specifically, a “Covenant not to Compete” is an agreement, in an otherwise enforceable contract, not to engage in the same type of business or trade within the same area as one’s Employer after termination of their Employment. In Contracts that are governed by Texas Law, these Covenants are governed specifically by Texas Business & Commerce Code § 15.50, et.seq., and the rulings of the Texas Supreme Court in the Light, and Johnson cases, and the Texas Courts of Appeals. There are five general requirements for a Covenant not to Compete, under Texas Law. According to Tex. Bus. & Com. Code § 15.50: Criteria for Enforceability of Covenants Not to Compete;
(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;
- It contains limitations as to time that are reasonable;
- It contains limitations as to geographical area that are reasonable; and
- It contains limitations as to scope of activity to be restrained that are reasonable;
- The Covenant not to Compete does not impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer.
The interpretation of these requirements will be the subject of future entries, but for now, the most important take-away from this article is that if you are a party to a Covenant not to Compete, or believe that such protections would favor your business, then it is imperative that you consult a competent attorney to review and advise you on these issues.
Next entry: Definitions and Enforcement of Covenants not to Compete.