A covenant not to compete, also called a “non-compete,” is a promise by an employee not to compete against a former employer. To be enforceable, the promise must be ancillary to or a part of a separately enforceable contract. This type of employment contract usually contains legal intricacies which only a non-compete lawyer well versed in contracts law can decipher. If you need help, contact Gardner Employment Law.
Non-compete wording can be buried in documents
When employees are hired, employers present documents to be signed, usually referred to as “routine.” The employer instructs the employee to sign, and the employee agrees, happy to be working at this company. A non-compete agreement may be tucked into the stack of documents which the oblivious new-hire signs without reading. Many times a non-compete clause is buried within documents on other subjects, such as stock option certificates. Or after an employee becomes dependent on the salary and benefits, the employer presents a non-compete agreement and says, “Sign this or else.” To keep his job, the employee dutifully signs, not knowing the restrictions he will face when he leaves the company.
An employer generally provides no explanation about the non-compete when the employee signs the document. However, when that employee, who may have been a revenue-generator, wants to work for a competitor, the employer quickly calls attention to the non-compete. Companies fight high-dollar battles at the courthouse over such agreement
Why do employers insist on non-competes?
A non-compete agreement is to protect the employer’s interest in its confidential information, which competitors cannot obtain. Examples are trade secrets, client lists, formulas, pricing strategies, customer goodwill – basically any sensitive information that promotes the business interests of the employer which cannot be obtained outside the walls of its company. These are legitimate business interests in which the employer has invested time and money to develop. It is a property interest owned by the employer. To permit someone to work for a company, collect its valuable trade secrets, and then leave to take that information to a competitor would amount to unfair competition.
One of the clearest examples of “confidential information” is the formula for the “Classic” Coca Cola soda, which was created in 1891. The company maintains that the actual formula remains a secret to this very day. “Coke” continues to command significantly more of the market share than its closest competitor, Pepsi, and the crisp, fizzy brown liquid is one of the primary reasons.
Confidential information gives the employer an advantage in the marketplace. With this unique information, an employer many times can overcome and surpass its competition in the particular industry, just as Coca Cola has done. The company does not want its employees leaving with that information without some assurance that it will not be used against the company. Thus exists the need for a binding non-compete agreement.
How are non-compete promises enforced?
When an employer extracts a promise from an employee not to compete, this is a restraint on free trade. Non-competes are governed by state laws which may differ. A Texas statute requires specific elements to be contained in the non-compete agreement, basically that the restrictions must be reasonable so as to not prevent the employee from earning a livelihood. Restrictions on the employee’s activities, the duration of the non-compete, and the geographical area involved all must be reasonable. Also, to be enforceable the competing activities must be tied to company’s confidential information gained by the employee or the goodwill with customers that the employee built during his or her employment.
When a lawsuit arises, usually the first time an employee hears anything about the non-compete is when a constable serves a court order halting all work by the employee at his new place of employment. Only a judge, no jury, decides the employee’s fate as to whether a non-compete agreement is enforceable.
How to avoid being caught by a non-compete
The first basic rule is to carefully read everything you sign. Texas law presumes that you understood every document that you signed. The second is to meet with an expert employment lawyer before even signing a non-compete agreement. Each contract is unique, and you need to understand what you are legally binding yourself to do.
At Gardner Employment Law, we have analyzed many hundreds of non-compete agreements. We can guide you to the best decision. If you need legal advice about a non-compete agreement, feel free to contact us.
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