In the first two installments of this series we discussed the importance of non-disclosure agreements and other restrictive covenants and the importance of careful drafting. In this final edition we are going to turn our attention to the covenants that restrict a former employee’s ability to compete (i.e. non-competition agreements) and discuss the importance of knowing your jurisdiction because different states have their own quirks when it comes to the enforceability of non-competition agreements. To illustrate this point we’ll examine some of the differences in the states of Virginia, California, Texas and New York.
In Virginia the Courts require that the Plaintiff prove the covenant is reasonable by a preponderance of the evidence and that the covenant is no more restrictive than necessary to protect legitimate business interests (i.e. trade secrets) and is not unduly harsh or oppressive in restricting the former employee’s ability to earn a living. To put this in perspective, the burden of proof “preponderance of the evidence” is typically satisfied if there is a greater than 50 percent chance that the proposition is true. In other words, Virginia requires that the person seeking to enforce the non-competition agreement prove that there is a greater than 50 percent chance the non-competition agreement is reasonable and no more restrictive than necessary.
California makes non-compete clauses unenforceable by statute unless the employer is selling the business’ goodwill, dissolving a partnership, or dissolving an L.L.C. What does this mean? If you recall we discussed how to pick your covenant in part II of this series. If your jurisdiction is California, it is advisable not to include a non-competition agreement.
Historically, Texas courts are reluctant to enforce non-competition agreements; however, Texas courts will enforce a non-competition agreement if it meets the requirements of Texas’ Covenants Not to Compete Act, which specifically makes non-competition agreements enforceable provided there is compliance with all provisions of the act. There are several elements that must be present in order for a non-competition agreement to be enforceable including that the promise not to compete must be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made, the promise not to compete must protect a legitimate business interest, the promise not to compete must be reasonable as to scope of activity restrained and durational and geographic limitations.
Perhaps one of the most interesting parts of Texas’ Covenants Not to Compete Act is the requirement that the covenant be ancillary to or part of an otherwise enforceable agreement. The Texas Supreme Court has held that an “at-will” employment relationship does not meet the requirement of an otherwise enforceable agreement.
The Bottom Line
Restrictive covenants such as non-disclosure agreements and non-competition agreements are a valuable resource for business owners. These covenants can help a business protect its valuable and irreplaceable information. However, if drafted poorly or imprecisely the agreements can be rendered unenforceable and, as a result, worthless. It is therefore advisable, to consult with your attorney before finalizing the approach you wish to take to protect your business’ proprietary information.
This article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. This article not create an attorney-client relationship between the author or the Husch Blackwell LLP law firm and the viewer of this article. Any opinions expressed in this article are the opinions of the individual author and may not reflect the opinions of the Husch Blackwell firm or any individual attorney.