PLANO, TX – NOVEMBER 15, 2004 --- Armstrong The Law Firm, a business boutique law firm in Plano, TX, announced today it has released a special report that provides valuable information about non-competition agreements for business leaders.
“It does not matter if you run a small business, mid-size company or a large corporation knowing how to approach non-competition agreements is critical to ensuring the value of a business,” said Richard L. Armstrong. “The last thing a CEO wants is proprietary information in the hands of competitors.”
Many businesses will at some point have issues with employees, former employees, and competitors on the subject of non-competition agreements. Many are not sure what a non-competition agreement is. It is, as the name implies, an agreement which suppresses competition, usually from former employees or officers of a company. However, it can be an agreement between two ongoing businesses.
Following are some of the questions which seem to come up over and over again with regard to these covenants which may be of use to business leaders.
1. Non-competition agreements are generally disfavored by the courts, because they restrain trade in an otherwise free economy. Due to this fact, courts look for any reason possible to make them unenforceable, or to modify them to suit what the court considers to be a reasonable restraint.
2. There are ways to make non-competition agreements enforceable against an employee or former employee, provided certain guidelines (provided by the Covenant Not to Compete statute and certain case law) are followed.
3. Reasonableness is the key word. Courts will tend to uphold reasonable restrictions, but to throw out or rewrite unreasonable ones. This is because courts (especially in Texas) loathe anything
that unnecessarily suppresses competition in the free marketplace.
4. What is a “reasonable restriction?” Generally, one that does not operate to completely shut a former employee out of their chosen profession or calling, but merely restricts their ability to conduct work of the type they performed for their former employer, for a reasonable time period and within a reasonable territory.
5. While each situation depends on its own facts, a time range of 1-3 years has generally been deemed reasonable by courts. Much, however, depends upon the type of business involved. If the evidence shows that a business is highly competitive and people within the field move around frequently from company to company, a court may be more likely to find a briefer period-- such as one year-- is reasonable.
6. The territory it covers must also be reasonable. Again, there is no hard and fast rule. However, the key criterion is how saturated the market area is with the particular type of business one seeks to restrain. For example, dry cleaners are so prevalent that it would be reasonable in a major metropolitan area to require that the former employee not work for another one within a two to three mile radius. An area much larger than that would shut the employee out of a large number of dry cleaning employment opportunities. Just as importantly, a dry cleaner in such an area really doesn’t need much more protection than that, because people farther out than two or three miles tend to go to another dry cleaner, anyway. By contrast, a high-tech manufacturer of cutting equipment may reasonably expect its territory to be county-wide, or in some regions, state-wide or even larger. The reason is that it may have no serious competition in such a large area, and may be able to show that it has already permeated that entire market area. Under these conditions , it can be more reasonable to suppress competition within a broad area.
7. After leaving employment, restrictions on the type of work can be made. Generally, you can restrict them from working for, holding significant amounts of stock in, or outright owning a directly competing business. Be prepared, however, to demonstrate that it really is a competing business, if challenged. The employer may also be able to keep the former employee from working for a company where their know-how (which was acquired while employed by their former employer) cannot help but be disclosed to your competitor, thereby enhancing its position in the marketplace. This is called “inevitable disclosure” and falls more under the heading of misappropriating trade secrets than non-competition agreements.
8. Warning: Watch out that you don’t define what your employee does for a living too broadly. For example, as an employment agency, your employee may have been in charge of recruiting engineers for the companies you represent. For another search firm, they may recruit financial types or lawyers. Is the former employee competing with you ? Probably not, according to some case law.
9. Insider’s Tip: One of the best ways to make non-competition covenants enforceable is to offer the employee something in exchange for them other than just his/her continued employment. Some possibilities include stock options, entrustment of valuable trade secrets or confidential information, or other more tangible benefits not dependant on continued employment.
10. Non-compete agreements used in connection with the sale of the employer’s business are different. They are governed by a different set of rules and not nearly so closely scrutinized by Courts as employer/employee covenants. That is because the court presumes free negotiating between two persons (or entities) with roughly equal bargaining power went on. The non-competition agreement is really considered to be part of the purchase price paid by the Purchaser, so that he/she can sleep nights without worrying that the Seller will reopen a competing business across the street (and steal his customer base). Therefore, territorial restrictions can be broader. Furthermore, we have seen covenants of up to 10 years held to be reasonable under these circumstances.
ABOUT ARMSTRONG, THE LAW FIRM
Armstrong The Law Firm emphasizes the following major areas: Business Tort Litigation, including but not limited to trade secrets and restraint of competition, corporate representation and employment litigation. Litigation prevention, including but not limited to representing top companies in their fields in preventing, or pursuing, employee-related litigation as well as representing top management employees in employment negotiation and litigation. The firm is based in Plano, TX and may be visited on the Internet at www.richardarmstronglaw.com.
