Business-Minded Legal Solutions

What could make your noncompete agreement unenforceable?

If a former employee is using what they learned from you to compete with your business, you need to take effective action. Ideally, you would have a valid noncompete agreement in place, but the courts don’t always uphold these. What issues make them unenforceable and how can they be addressed?

Noncompete agreements cannot place unreasonable restraints on trade

By its nature, any noncompete agreement restrains the employee’s ability to work, often in a field in which they’ve dedicated a great deal of time and money. A noncompete that limits the employee from working for competitors in the same metro area for several years could have serious career repercussions on that employee. This is called a restraint on trade, and Texas law requires that such a restraint cannot be unreasonable. Many states have a similar requirement, and some states have more burdensome restrictions on noncompetes or even prohibit them completely.

For the restraint to be reasonable and meet Texas standards, it must be reasonable in time period, geographic reach and the activities to be restrained. The longer the time period, the more extensive the geography and the broader the description of what constitutes competition, the less likely the courts are to enforce the agreement.

In other words, your covenant might attempt to block a high-level employee from competition for longer, in a larger area, and among a broader array of potential competitors than if they were a lower-level employee. Confidential information is an important source of consideration for enforceable Texas non-competes. Employees with no access to proprietary information are generally not able to be made subject to an enforceable non-compete under Texas law.

Ideally, you would tailor your noncompete agreement to each individual employee or class of employees. The time and territory in the restriction would be aimed at the specific personnel in each case.

Noncompetes also must serve a legitimate business purpose. Protecting your business’ confidential information and your company’s goodwill are examples of legitimate business purposes, while simply reducing the number of your competitors wouldn’t be.

Noncompetes must offer valid consideration

In Texas, noncompetes are only valid as long as they are “ancillary to an otherwise enforceable agreement.” One fundamental requirement is that both parties have made binding promises, and binding promises require consideration; each party must get something out of the agreement.

Whatever consideration is given to the employee must be reasonably related to the need to restrain their potential competition with you. For example, an agreement to provide the employee with confidential information can be an essential element of an otherwise enforceable agreement.

If you have questions about a particular noncompete agreement, contact an experienced business law attorney.