RESTRICTIVE COVENANT DISPUTES
Restrictive Covenants seek to protect an employer’s legitimate business interests by setting parameters on an employee’s ability to compete in the business world against his or her previous employer. Restrictive covenants also are used in the purchase or sale of a business to protect a purchaser from imminent competition from the seller.
Restrictive covenants can address a variety of activities, but what many businesses fail to realize is that a restrictive covenant that is poorly drafted, such as being too broad or restrictive, can render it unenforceable. That is why it is crucial to engage with a law firm experienced in drafting, enforcing, and defending against restrictive covenants in order to protect your business interests.
Because of the unique nature of non-compete agreements, a covenant not to compete that outright bans working for a competitor will be unenforceable in most states. There are four factors that courts generally consider when deciding the enforceability of a non-compete agreement:
- The Employer’s Business Interest
- The Geographic Limitation of the Restraint
- The Duration of the Restraint
- The Scope of Services covered by the Restraint
A restrictive covenant, such as a non-compete agreement, will only be enforceable if the employer can identify a legitimate business interest that the restrictive covenant seeks to protect. In Texas, restrictions on trade, are considered important to promoting business by incentivizing employers to provide employee valuable information and developing goodwill. Simply seeking to reduce competition is not considered a valid business interest that will support a restrictive covenant.
A restrictive covenant must be limited in geographic boundaries to be enforceable. For example, a non-compete agreement covering all of the state of Texas may be appropriate for a sales manager selling a product across the state but considered to broad to a company selling products only within the greater Houston area.
A restrictive covenant must be limited in duration. Generally, a time period under a year and up to two-years would be enforceable. Beyond two-years courts are more skeptical to the interest the company is protecting, as any information or goodwill being protected is likely stale or outdated.
LIMITATION OF SCOPE
A restrictive covenant must be limited in scope. A valid restrictive covenant must be limited to a particular industry, sub-industry or type of work to be enforceable. A covenant drafted broadly that would prevent an employee from working a broad range of jobs would be unreasonably broad; a well drafted restrictive covenant would be narrowly tailored in scope to only apply to the services provided by the employee and apply only to the industry in which the company operates.