Does your non-compete restriction unfairly prevent you from taking another job? Texas law holds that any unreasonably restrictive non-compete is unenforceable. This article contains the courts’ explanation of how non-compete agreements will be viewed as “unreasonable.”
At Gardner Employment Law, we have years of experience analyzing and litigating non-compete provisions. If you are bound by an unfair non-compete or faced with signing one, contact us for legal advice about your non-compete agreement.
How Is a Non-Compete Agreement “Reasonable” in Its Restrictions?
To determine reasonableness, the Texas non-compete statute, Section 15.50 of the Texas Business & Commerce Code, focuses on four elements in the contract:
(1) the period of time during which the limitations will apply,
(2) the geographical area where the employee will be prevented from working,
(3) the scope of the activities which the employee will be prohibited from doing, and
(4) whether the agreement imposes a greater restraint on the employee’s ability to earn a living than is necessary to protect the goodwill or business interest of the company.
The first two elements generally do not cause problems. Courts have held that non-competes with restrictions lasting up to 5 years may be reasonable depending on the industry and the technology involved. I see many non-compete provisions that contain either a one or two year period when restrictions will apply, which courts have uniformly held to be a reasonable time. Regarding the geographical area, courts have held that preventing the employee from working in the same area where he or she worked for the former employer is a reasonable limitation. Even if the geographical element is not addressed in the contract, courts have held that this principle, restrictions based on the previous geographical area covered, will be implied.
It is the third and fourth elements where most disputes arise. Employers tend to “cover the waterfront” to cover everything that they do not want the employee to do when he or she leaves. That type of restriction of the employee’s activities would be unenforceable. The fourth element is difficult to apply. In what circumstances will the stated restrictions be “greater than necessary” to protect the company’s interests? Every situation is different. A judge will review all of the facts and then weigh the equities of both parties to make a decision.
As we discuss in “President Biden Moves to Limit Non-Competes,” there is increased concern over restrictive covenants. Some states ban non-compete agreements entirely. For example, in California, non-compete restrictions generally are void and unenforceable. North Dakota and Oklahoma permit non-competition restrictions only in the sale of a business. In Illinois, Maine, Maryland, New Hampshire, Rhode Island, and Washington, employers are prohibited from using non-compete clauses with low-wage workers. While non-competes are not banned in Texas, the four specific elements dictate whether a non-compete agreement is “reasonable.”
What Happens if a Non-Compete is Unreasonable?
The non-compete can itself be a separate agreement so long as standard contract requirements are met, such as sufficient consideration. Or a non-compete clause can be a section within an employment contract. Whether the non-compete restrictions are contained in clauses or agreements, the employer must write the language to fulfill the statute’s requirements of reasonableness. And, both employees and independent contractors can be bound by a non-compete.
If the employer failed to satisfy the reasonableness requirements in the language of the document, even if the employee went to work for a competitor, a court could determine that the non-compete is “unenforceable.” Being unenforceable means that the restrictions contained in the non-compete agreement are not legally binding, that they cannot be enforced against you.
Examples of Unenforceable Non-Compete Agreements
Non-compete agreements generally mean that the employee agrees that whenever he or she leaves the company, the employee will not take a new job or start a business to compete for the same business as the previous employer has cultivated. The company has a right to protect its business from competitors, including the company’s trade secrets and other confidential information that the departing employee may know.
An instance of an unreasonable non-compete is seen in the case of D’Onofrio v. Vacation Publications, Inc. Karen D’Onofrio was sales representative for Vacation Publications. Due to an incorrect email from another company employee, Ms. D’Onofrio drew the conclusion that she no longer worked for Vacation, and she left. Ms. D’Onofrio and her aerospace engineer husband followed a longtime dream and began a joint venture in travel services.
However, they recruited and developed their own clients. Vacation Publications sued Ms. D’Onofrio, among other claims, for breach of her non-compete agreement. The court found in favor of Ms. D’Onofrio stating that “covenants not to compete that extend to clients with whom the employee had no dealings during (her) employment or amount to an industry-wide exclusion are overbroad and unreasonable.”
In Texas state court case, Forum US, Inc. v Musselwhite, the court held that the restrictions stated in Mr. Musselwhite’s non-compete agreement were overly broad and could not be reasonably enforced. The court stated, “In essence, Forum asks this court to rewrite [the non-compete section] of the agreement in the guise of construing it to make the limitations reasonable. This we cannot do.”
This opinion illustrates the “four corners rule” that governs the legal interpretation of contracts. Legal decisions are bound by what is written within the “four corners” of the document. No court will issue an opinion based on what one party meant to say but did not. To enforce a non-compete with legal action, the language must clearly set forth the four limitations found in the Texas statute and those limitations must be reasonable. The courts will not rewrite the contract for the party who failed to properly draft the document.
There is a provision in the Texas non-compete statute which provides that the court “shall reform [meaning revise] the covenant to the extent necessary to cause the limitations . . . to be reasonable.” In other words, to the extent that the court can strike through language that is too broad and leave just the parts that are reasonable, the court must make those revisions and enforce the non-compete as revised. This is called “blue penciling.” The judge literally takes a pen, usually with blue ink, and draws a line through the words that go too far. However, this does not mean rewrite. If the employer never wrote the non-compete correctly, even if too much was included, the court will not rewrite the contract.
Commercial and Physicians’ Non-Compete Agreements
The Texas non-compete statute governs both commercial non-compete agreements and non-compete provisions contained in physicians’ contracts. A physician’s contract must meet the reasonableness test for the four elements that we explained above. Plus, the Texas statute requires additional protections for physicians in the non-compete context.
The law recognizes that broad restrictions on medical practices could have potentially injurious effects on public health. Due to this, physicians enjoy protections in addition to those in the commercial setting. For a period of time after leaving the association or clinic, physicians must be permitted access to patient lists and medical records. Also, physicians must be allowed to treat existing patients with acute illnesses even after leaving the previous association or clinic. And, physicians must be given the option to pay a reasonable amount to the former association or employer to buy out of the non-compete restrictions altogether.
The reasonableness factor can save a physician’s medical practice. In the case of Nacogdoches Heart Clinic v. Pokala, Dr. Pokala, a cardiologist got into a dispute with his supervisor about caring for a patient. Because of the incident, the clinic terminated Dr. Pokala’s employment. Dr. Pokala then attempted to open his own practice in the same city, Nacogdoches, although his non-compete agreement stated that he could not open a medical practice within 10 miles of the Nacogdoches city limits. His previous employer filed suit.
Fortunately for Dr. Pokala, the court concluded that the agreement was non-enforceable because (1) based on the circumstances the agreement prevented him from practicing medicine at all since cardiology is all that he had ever done, and (2) the geographical limitation was unreasonable. Since Nacogdoches is small in population, the court viewed the few cardiologists in the town all to be essential to the wellbeing of its inhabitants. Dr. Pokala prevailed all the way to the Texas Supreme Court. The law is clear: non-competes must be reasonable, especially when it comes to medical practices.
Why Do Non-Competes Restrictions Exist?
As we discuss in “Non-Compete Lawyer,” a non-compete, also known as a restrictive covenant, is designed to protect the employer’s business interests and its confidential information. The most illustrative example is found in Coca Cola’s formula for that wonderful fizzy brown drink. Over the years Coca Cola has invested significant funds to perfect this product and has continued to go to great lengths to protect this very valuable trade secret. The company has a legitimate business interest to protect, as many competitors like Pepsi attempt to emulate the drink. But no other company has ever come close. For over a century, Coca Cola has managed to surpass its competition and maintain its highly competitive edge in the beverage industry.
This is an example of how non-compete agreements provide a legitimate tool for employers to protect their business interests. When a dispute arises, it is the company, not the employee, that must prove in court that it has a legitimate business interest to protect, that the protective restrictions are reasonable, and the limitations on the departing employee’s mobility are not greater than necessary to protect those business interests.
What Should I Do if I Have an Unreasonable Non-Compete?
There are a lot of factors to consider when it comes to determining the “reasonableness” of a non-compete. It depends on the circumstances. This determination can be especially hard to make when you are already grappling with major career decisions. You should not ignore the non-compete and hope for the best, however.
At Gardner Employment Law, we study the language in the contract, ask questions to learn the relevant facts, and then analyze the non-compete agreement to form an opinion as whether it is enforceable. If you need clear guidance about whether your non-compete is reasonable, don’t hesitate to reach out to us.