Non-compete covenants are agreements, usually between the employee and the employer, that limit the employee’s ability to leave the employer and engage in similar activities in competition with the employer. The idea is that it would be unfair for the employee to take the training and techniques provided by the employer and then use them to undermine or compete with the employer.
Every State has jurisprudence on non-competition agreements. Courts will generally uphold these agreements, but only if they meet certain requirements.
Non-competition agreements are not held in high esteem by the courts, especially when it comes to employment contracts.
The party wishing to challenge the validity of the clause must show that it is unreasonable and contrary to public order. Each case is examined individually and strict scrutiny is applied to employment cases.
The elements of an enforceable CNTC are:
1. The beneficiary of the agreement must have a valid interest to protect (generally a trade secret, special training, client lists and only if it is discovered that the employee may have used this information to obtain an unfair advantage)
2. The geographic restriction should not be too broad.
3. A reasonable period must be set. (cannot be said in perpetuity).
The easiest way to defy a no-compete-win pact is on the basis of overly broad geographic restrictions. For example, if a contract contains a provision such as:
“The Employee shall not directly or indirectly engage in direct competition with the Employer…on behalf of any hospital with which the Employee has done business dealings on behalf of the Employer…”
This clause is ridiculously broad. Essentially it means that any Hospital the employee has ever communicated with regarding a business matter, no matter how insignificant, and regardless of whether that Hospital ever became a client of the employer, is off limits to the employee for 3 years. There are NO geographic limitations. It can be assumed that there are a finite number of hospitals in Texas and that all of these potential customers might come across the employee’s desk for some reason, either as customers or sales attempts. The employee is prohibited from doing business with them, potentially the employee is prohibited from practicing his trade in the state of Texas and possibly in the entire United States. That by definition is too broad.
On the other hand, if the contract states something like:
“The Employee shall not directly or indirectly engage in direct competition with the Employer…on behalf of Saint Luke’s Hospital located at 1900 Lake Avenue, Round Rock, Texas 78664.”
The court is much more likely to confirm such a specific statement. This non-compete agreement does not prevent the Employee from following her trade. It just limits the Employee’s options, but not by much. Any other hospital in the area is fair game. Of course, if that’s the only hospital within 100 miles, things could be different.
Another way of attacking non-compete agreements is the duration. If the Employee is not allowed to compete for life, the court is much less likely to confirm the agreement. On the other hand, if a reasonable period of time is established, the contract has a better chance of surviving contact with the judge. What is reasonable depends on the opinion of the court, other options available to the employee, and the type of business or industry involved.
In the end, from an employer’s point of view, non-compete agreements are a good idea, but they must be carefully drafted. From the employee’s point of view, contracts containing non-compete agreements are not insurmountable and cannot prevent you from working in his field under the right circumstances.
