Non-compete agreements seek to limit a person’s ability to engage in a specific range of business activities as a result of employment or a business transaction. Earlier this summer, the Ferguson Law Group, P.C. experienced a sharp uptick in the number of clients involved in non-compete issues. Of course, non-compete disputes do not occur unless an employee is hired or a new business is started. It is our hope that this means that businesses are continuing to find ways to succeed even in this economy.
Non-compete disputes are becoming more commonplace as American businesses increasingly rely on confidential business information and practices to maintain a competitive edge. These disputes often involve complicated facts and the laws of each involved State must be considered.
Non-compete law seeks to find a balance between allowing individuals to secure employment in their areas of expertise while at the same time protecting the businesses that employ them from unfair competition. A person is generally considered to have engaged in unfair competition when he uses an employer’s confidential or trade secret information to directly compete against them.
Most States have their own take on how to perform this delicate balancing act. One exception is, not surprisingly, California. California declared non-competes to be invalid except in very limited circumstances. However, even in California, businesses are allowed to protect their trade secrets by means other than non-compete agreements.
Elements Of An Enforceable Non-Compete
In Texas, non-compete law starts with Section 15.50 of the Business and Commerce Code. Texas courts have struggled to interpret this statute for years. Combining court decisions and Section 15.50 we see that a non-compete agreement is enforceable if:
(1) It is ancillary to another enforceable agreement;
(2) The consideration provided in exchange for the promise not to compete gives rise to the need for the non-compete;
(3) The non-compete does not restrain activity more than is necessary to protect the employer; and
(4) The restraint is not unreasonable in terms of duration and geographic scope.
Employment
This somewhat difficult language plays out practically in two different scenarios. First, in the employee-employer context, the employer agrees to provide the employee with confidential information or specialized training. In return, the employee agrees not to disclose that information outside of the business. That is the first agreement. In conjunction with that agreement (think ancillary to) the employee agrees not to compete against the employer. The employer can then argue that the non-compete is necessary and enforceable because it provided the employee with confidential information.
Sale Of Business
The second scenario involves the sale of a business. The Seller agrees to sell her business to the Buyer. The Buyer agrees to pay the Seller for the business. Ancillary to that “otherwise enforceable agreement,” the Seller agrees not to compete against the Buyer’s newly purchased business. The Buyer’s need for the non-compete is born out of the purchase of the business. If the Seller sells her hair salon to the Buyer and then opens up a competing shop in the same strip mall, the Buyer did not get much for his money. In other words, the sale of the business gives rise to the need for the non-compete.
Drafting enforceable non-compete agreements is tricky but not impossible. Enforcing non-compete agreements involves many variables and is more of an art form than a standard courtroom procedure.
At the Ferguson Law Group, we strive to offer the options that work best for the client. Sometimes, solutions can be found that do not involve rushing to the courthouse. On the other hand, there are those instances where nothing short of a court order will suffice.
By Paul Flannigan
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