Covenants not to compete are agreements, generally between employee and employer that limit the ability of the employee to leave the employer and perform similar activities in competition with the employer. The idea is that it would be unfair for the employee to take the training and techniques given by the employer and then use them to undermine or compete with the employer.
Every State has case law regarding covenants not to compete. In general the Courts will uphold these agreements, but only if the meet certain requirements.
Covenants not to compete are not held in high esteem by the courts, especially when they are in employment contracts.
The party wishing to challenge the validity of the clause must show that it is unreasonable and contrary to public policy. Each case is examined individually and strict scrutiny is applied to employment cases.
The elements of an enforceable CNTC are:
- Covenantee must have a valid interest to protect (generally a trade secret, special training, customer lists and then only if it is found that the employee was able to use this info for an unfair advantage)
- The geographical restriction must not be overly broad.
- A reasonable time limit must be set. (can’t say in perpetuity.)
The easiest way to challenge a covenant not to compete and win in is on the basis of overly broad geographic restrictions. For example if a contract contains a provision such as:
“Employee shall not directly or indirectly, enter into or engage generally in direct competition with the Employer…on behalf of any hospital with which Employee has had business dealings on behalf of Employer…”
This clause is ridiculously broad. It essentially means that any Hospital that the employee has ever contacted regarding a business matter, not matter how insignificant, and regardless of whether that Hospital ever became a customer of the employer is off limits to employee for 3 years. There are NO geographic limitations. It can be assumed that there are a finite number of hospitals in Texas and that all of these potential clients could come across employee’s desk for some reason, whether it be as clients or as attempts at sales. Employee is banned from doing business with them, potentially employee is banned from practicing her trade in the state of Texas and possibly the entire United States. That by definition is overbroad.
On the other hand if the contract states something like:
“Employee shall not directly or indirectly, enter into or engage generally in direct competition with the Employer…on behalf of Saint Luke’s Hospital located at 1900 Lake Avenue, Round Rock, Texas 78664.”
The court is much more likely to uphold such a specific statement. This covenant not to compete does not prohibit the Employee from following their trade. It simply limits the Employee’s options, but not greatly. Any other hospital in the area is fair game. Of course if that is the only hospital in 100 miles things might be different.
Another route of attack on covenants not to compete is the duration. If the Employee is not allowed to compete for life the court is much less likely to uphold the covenant. On the other hand if a reasonable time period is established the contract stands a better chance of surviving contact with the judge. What is reasonable depends on the opinion of the court, other options available to the employee and the type of business or industry involved.
In the end from an employers point of view covenants not to compete are a good idea, but should be carefully worded. From the employee’s view point contracts containing covenants not to compete are not insurmountable and can not keep you from working in your field under the right circumstances.