McBride Law Blog

Texas Law Update: Can I Make My Employee Sign a Non-Compete/Non-Solicit? (Part II)

McBride Law Blog

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For a non-compete/non-solicit to be enforceable under Texas law, it must be reasonable as to time, geographic area, and scope of activity.  Needless to say, it is a fact-specific inquiry and there is no one-size-fits-all answer.  Generally speaking, however, a restrictive covenant that does not bear some relation to the activities of the employee or that contains an industry-wide exclusion from subsequent employment is unreasonable.[1]  And as you will see, it is often necessary to look at all the restraints together to determine the reasonableness of a non-compete/non-solicit as a whole.

In Texas, it appears that restraints lasting up to five years have generally been found reasonable.[2]  In Gallagher Healthcare Insurance Services v. Vogelsang, for example, the court found a non-compete/non-solicit clause, which precluded an insurance broker from working with clients with whom she had worked in the preceding two years for two years after termination, reasonable because insurance contracts usually last for a year.[3]  The court noted that “[t]wo to five years has repeatedly been held as a reasonable time in a noncompetition agreement.”[4]  The court also found the geographic area (not specified) and scope of activity (not precluding the employee from competing in the same industry) reasonable in this particular case because the employee could still practice her livelihood in the same industry anywhere in the world, as long as she did not work with the clients of her former employer.[5]  Similarly, in Stone v. Griffin Communications and Security Systems, Inc., Stone, who sold and repaired security systems in a 22-county area in East Texas for his employer, was restrained from engaging in the business of selling and leasing of security systems and soliciting customers with whom he had contact during his employment in those counties for five years after termination.[6]  The court found the covenant reasonable because it was limited to the scope of the business engaged by the employee and did not impose industry-wide restrictions.[7]

That said, a reasonable area is generally considered to be the territory in which the employee worked during his or her employment.[8]  In Butler v. Arrow Mirror & Glass, Inc., for example, the court reformed the geographical area to include only the two countries where the majority of the employee’s activities and the majority of customers he interacted with were located.[9]  In Vais Arms, Inc. v. Vais, the Fifth Circuit found a non-compete restriction encompassing all U.S. states in the context of a sale of business reasonable because of the nationwide scope of the seller’s marketing efforts (“via nationally-distributed trade publications, mail order catalogues, and, importantly, the Internet”), as opposed to just those states in which the seller had actually consummated one or more sales.[10]  Not specifying any geographical area, on the other hand, is generally considered unreasonable, as it imposes too broad a geographical scope.  In Cobb v. Caye Publishing Group, Inc., for example, the court said that a non-compete that restrained a magazine salesperson from working for a competitor or starting a publication for one year after termination without specific geographical limitations was unreasonable, “particularly when no evidence establishe[d] that the employee actually worked in all areas covered by the covenant.” [11]

This post is part of a multi-part series on non-competition and non-solicitation covenants under Texas law.  You can find the other post by searching our blogs at www.mcbrideattorneys.com.  If you have any questions about the content of this blog or other business law issues not discussed here, please contact us.

If you have any suggestions for blog topics, please send them to info@mcbrideattorneys.com.

 

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] Wright v. Sport Supply Gp., 137 S.W.3d 289, 298 (Tex. App. — Beaumont 2004, no pet.) (internal citation omitted).

[2] See Alex Harrell, Light Fades Further: The Texas Supreme Court Changes Direction on Covenants Not To Compete, Texas Bar Journal (June 2012), at 443.

[3] Gallagher Healthcare Insu. Servs. v. Vogelsang, 312 S.W.3d 640, 654 (Tex. App.—Houston [1st Dist.] 2009, pet. denied).

[4] Id. (internal citations omitted).

[5] Id.

[6] See generally Stone v. Griffin Commc’ns. & Sec. Sys., Inc., 53 S.W.3d 687, 696 (Tex. App — Tyler 2001, no pet.).

[7] Id. at 694.

[8] Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 793 (Tex. App — Houston [1st Dist.] 2001, no pet.) (internal citations omitted).

[9] Id.

[10] See generally Vais Arms, Inc. v. Vais, 383 F.3d 287, 295–96 n. 20 (5th Cir. 2004).

[11] Cobb v. Caye Publishing Gp., Inc., 322 S.W.3d 780, 783 (Tex. App.— Fort Worth 2010, no pet.).

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