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When is a Noncompete Agreement Considered Unreasonable in Scope?

A noncompete agreement, also called a covenant not to compete, restricts an employee from leaving an employer to work for a company in the same field of business in the same geographical market. An employee could also violate a noncompete agreement by starting a rival business in the same field. However, a noncompete must be reasonable in its scope, which includes the definition of prohibited activity and where and how long the restriction applies.

The idea behind noncompete agreements is to prevent employees from capitalizing on a former employer’s trade secrets or other confidential information, such as client lists, production methods and future marketing and product plans. Noncompete agreements ensure that employees don’t take this information and then use it for their own advantage by poaching clients, stealing ideas or otherwise.

However, under Texas law, a covenant not to compete is enforceable only if the limitations on time, geographical area and scope of restricted activity are reasonable, which means they do not go beyond what is needed to protect the former employer’s business interests.

Every noncompete agreement must have a time limit. Whether the limitation is reasonable depends on the specific circumstances. A court might consider the importance of the employee’s former position at a company and the amount of confidential information the employee obtained. Texas courts have upheld a two-year noncompete agreement as reasonable for an insurance broker, but a longer period may be justified in the case of a company executive who strikes out on his or her own or joins a competitor.

As to geographic limitations, they typically cannot restrict the employee’s activity beyond the geographic area where they worked during their employment and where their clients were located. Texas courts have found restrictions outside the original work area unreasonable even if the employer does business in the employee’s new region of activity.

Limitations on the scope of restricted activity must be related to the duties actually performed by the employee. A noncompete provision that includes an industry-wide employment ban will not be enforceable.

Finally, the limitations in the noncompete cannot impose a greater restraint than is necessary to protect the employer’s legitimate business interests. The courts will not enforce onerous restrictions that would effectively prevent a former employee from carrying on his or her trade.

If an employee challenges a noncompete agreement in court, the employer has the burden of proving that the covenant not to compete is reasonable in scope and protects the employer’s legitimate business interests.

Whether you are negotiating a noncompete agreement as an employer or an employee, or you are involved in a dispute over an agreement’s enforcement, the Law Office of Paul R. Clevenger in Dallas can help. I have significant experience drafting and litigating Texas noncompete agreements. You can schedule a meeting with me by calling 469-212-9764 or by contacting my office online.

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