Ten Drafting Tips For Covenants Not To Compete

by Gray Reed & McGraw

A recent article in the Wall Street Journal discussed the rise in litigation regarding covenants not to compete, along with a summary of the positives and negatives of these covenants.  For good or bad, a covenant not to compete is enforceable in Texas if it is ancillary to, or part of, an otherwise enforceable agreement at the time the agreement is made, but only to the extent that the covenant contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other protectable interests of the employer.

Covenants not to compete are becoming more common in the construction and energy industries.  They are commonly used to protect trade secrets, confidential information, and customer relationships.

If you decide to require your employees to sign a covenant not to compete, consider the following issues:

1. Ancillary to Otherwise Enforceable Agreement – This requirement is generally satisfied by incorporating a confidentiality agreement in the contract containing the covenant not to compete.  The agreement should promise access to confidential information and/or trade secrets.

2. Consideration – Simply paying the employee will not work.  Money is not valid consideration for a covenant not to compete.  The safest bets are providing the employee with confidential information, trade secrets, and specialized training.  Each has been held to be valid consideration for a covenant not to compete.  Although unnecessary, it is prudent for the agreement to explicitly promise the employee such consideration.

3. Garden Leave – This is a European concept whereby the employer pays the employee money during the term of the covenant not to compete.  Thus, the employee receives compensation for sitting out and the employer is able to protect its business interests by keeping the employee away from the competition during the covenant not to compete.  Although as stated above, money for a non-compete is not sufficient consideration, as long as the employee received confidential information, trade secrets, and/or specialized training, there is no harm in offering garden leave money in addition to the foregoing.  The reason why this makes sense from the employer’s perspective is two fold: (1) it gives the employee an incentive to abide by the non-compete and (2) it gives the employer a powerful equitable argument if the non-compete is litigated.

4. Time – There is no black and white rule.  But many one year, and some two year, covenants not to compete have been enforced.  Anything over one year may not be enforced.

5. Area – This should be limited to where the employee worked.  However, if the employee was a high level employee, such as an officer or executive, then the court may enforce a covenant not to compete covering the entire territory that the employee oversaw or managed.

6. Activity – The activity that is restrained should be the same type of activity that the former employee performed for the former employer.  Anything beyond that may not be enforced.

7. Non-solicitation of Customers – Such clauses are governed by the same rules as Covenants Not to Compete.  These clauses should generally be part of the agreement containing the non-compete.  The customers should be limited to those who the employee actually called on while he or she was employed.

8. Non-solicitation of Employees – These clauses should always be included in the agreement.  Such clauses prevent one employee from leaving, and then taking additional employees with him/her or shortly thereafter.

9. Waiver – This clause should contain some representations and warranties regarding the necessity of the non-compete and necessity of injunctive relief.  In addition, the clause should waive the employee’s right to object to an injunction or the reasonableness of the non-compete.  Case law is not clear on the effect of this language.  Such language will likely not be dispositive of any future litigation or injunction, but the court may consider this language as a factor in its analysis.

10. Attorney Fees – The agreement should provide that the employer will be awarded attorney fees in the event that the employee violates any of the covenants or the confidential information agreement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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