Is the non-compete clause in your employment contract enforceable?

August 15, 2010

You can’t believe everything you read – even when it’s your own contract. Many employers believe that their non-compete clause provides legal recourse against employees who leave a company and take its business processes and/or clients. Yet Texas case law has not been very kind to employers trying to enforce these provisions. To avoid loss and heartache, it’s imperative for business owners to get sound legal advice and to make wise decisions in selecting and managing their employees.

Some business owners may be familiar with the basics of non-compete clause enforceability, including the rule that courts will enforce such covenants only to the extent that they are reasonable. Generally, this means that the geographic scope and time duration of the non-compete clause cannot be too overreaching. Three years is a standard threshold for reasonability, while the reasonability of geographic scope is often dependent on case-specific factors such as the company’s area of operation and a community’s need for a particular kind of service, like physician care (See Prime Medical Associates v. Ramani).

Beyond these basics, any employer who hires at-will employees should take heed: you may be harboring a false sense of security about the enforceability of your non-compete clause. Texas courts want to protect employees’ ability to earn a living, and thus, non-compete clauses will not be enforced unless the company makes a genuine exchange of an interest that is worthy of protection. Monetary compensation doesn’t meet this standard (See Marsh USA v. Cook).

So what is worthy of protection under Texas law? Intellectual property is arguably the most rock-solid answer, including trade secrets and proprietary information such as customer data. Yet even a non-compete clause combined with a confidential information clause won’t necessarily make the non-compete clause of your employment contract enforceable. The employee should actually have access to real confidential information, otherwise the exchange could be deemed “illusory” (See Strickland v. Medtronic).

A non-compete clause might also be unenforceable if it was not part of the original employment agreement. Texas courts have held that in some cases, non-compete agreements can’t “tack on” to an existing employment agreement (See C.S.C.S. v. Carter). This can create a real problem for an employer who is trying to fix employment contract issues after the fact, and it can also pose challenges for a company or individual who wants to acquire an existing businesses whose employees were not subject to enforceable non-compete clauses.

The moral of this story is that non-compete clauses and other provisions in employment contracts cannot be taken at face value. Business owners and prospective buyers of existing businesses must seek reliable legal advice to determine the enforceability of contract provisions. Further, there is no substitute for wise selection of employees and fair management practices that cultivate loyalty among employees.

Topics: Legal, Blog Posts

James Blake

The Blake Law Firm, PLLC.

James Blake is a growth-oriented business attorney who strives to be a creative business partner, to identify value-add opportunities, and to crystallize the relationships, structures, and processes that will drive your commercial success. James Blake practices law in Texas and Hawaii, and has protected the interests of businesses across a broad range of industries, including technology, construction, service and retail, food and beverage, franchisors and franchisees, product manufacturers, and investors. His work experience encompasses commercial transactions, litigation, and advising business operations in the U.S., Africa, and Asia. James was an editor of Law Review at the University of Hawaii and conducted international commercial law research for the Institute of Asian Pacific Business Law. He served as the Official Reporter for the 2008 IAPBL China Enterprise Bankruptcy Law Symposium held in Hong Kong, and in the same year worked at a large firm in Singapore. James currently advises clients in international business and investment issues in addition serving his client’s legal and business needs in Hawaii and Texas. Currently based in Austin, Texas, James is an avid writer and enjoys speaking at business-law seminars in addition to his legal practice. In his spare time, James enjoys sculling and kayaking on Ladybird Lake, outdoor photography, and supporting visual and performing arts.
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