Noncompete Agreements: How Solid Is Yours?

There are many misconceptions and assumptions regarding the use and effectiveness of noncompete agreements. This is not too surprising considering that judicial enforcement of these agreements is very fact-intensive and situation-specific.

There are no bright-line rules to help business owners determine whether a noncompete agreement will be enforceable, so it can be challenging to craft one that will provide maximum protection without being vulnerable to a challenge in court. Further, the line determining what is enforceable is constantly changing with new court decisions. What worked five years ago may not work today.

Common Pitfalls with Noncompete Agreements

1. Failing to properly identify what is actually being protected

One pitfall that business owners face is that they fail to put much, if any, time or effort into evaluating what legitimate business interest they are specifically trying to protect when asking their employees to sign a noncompete agreement.

These agreements are often implemented for the simple reason that it seems like a good business practice from a human resources perspective. However, a deeper dive into the desired protections of these agreements is critical to ensure their effectiveness and enforceability.

2. Using a noncompete agreement when nonsolicitation is desired

Similarly, executives may assume that they need to use a noncompete agreement, when in reality they need a nonsolicitation agreement (restricting someone from taking customers, employees, etc.) or a confidentiality agreement (restricting someone from using trade secrets or other information). Business owners and managers should also remember that just because a noncompete agreement may have fit the company’s needs and business activities two or three years ago, this does not mean that such an agreement is still a good fit for the business today.

3. Failing to take steps to protect information you consider confidential or proprietary

Even if the agreement is well-drafted, if the employer does not take actual physical steps to protect the information or competitive advantage that the agreement is designed to protect, it is unlikely the court will either.

Issues to Consider when Requiring Employees or Contractors to Sign Noncompete Agreements

If you want to add another layer of protection to your business by implementing a noncompete agreement, there are a few questions you should ask as you get started:

1. Is the obligation to sign the noncompete coupled with some type of valid consideration?

2. Could the employee or contractor make a valid claim that you negotiated the noncompete in bad faith?

3. Does your company have a legitimate business interest that the noncompete is attempting to protect?

4. Is the duration and geographic limitation of the noncompete reasonable to protect the company’s legitimate business interests?

5. Could the terms or conditions of the noncompete be viewed as being against public policy?

Options Available to Enforce a Noncompete Agreement

Enforceability of a noncompete can vary from state to state. This can be particularly problematic for larger companies with employees or contractors throughout the country. However, even California law, which generally invalidates noncompete agreements, recognizes the need to protect a company’s trade secrets and other confidential information.

In Texas, the general rule (at the current time) is that non-competes are enforceable so long as they are: (i) ancillary to or part of another otherwise enforceable agreement, (ii) reasonable in time, geographic area, and scope of activity, and (iii) no broader than necessary to protect a legitimate business interest of the employer. If too broad, Texas courts can reform the agreement to what they believe is reasonable.

Typical enforcement options include a lawsuit for damages as well as injunctive relief from the court to immediately stop severe damages from violation of the noncompete agreement (often referred to as a temporary restraining order).

Nonlegal Issues to Consider

In determining whether noncompete agreements will be in the best interests of the company, business owners should consider how a noncompete agreement may affect employee morale or loyalty, both as a result of the required execution of the agreement and the enforcement of the agreement. Suing an employee who has quit or been fired might send the wrong message to current employees, even if the lawsuit is pursued for legitimate reasons.

Contact Our Business Attorney Today

Schedule a meeting with one of our business attorneys to ensure that you are using the right document for your business protection needs and to navigate the applicable law in your local jurisdiction. We will help you craft a noncompetition agreement that will be upheld by a court and protect the legitimate business interests that you have worked so hard to build. Call our office today to schedule a consultation.