Picture yourself having hired your first 5 new employees to help get your new business off the ground. If you’re wondering how to protect the customer base you are working so hard to develop, you are likely concerned about how the use of non-compete agreements can help or hurt you. Your concerns are well founded.

It’s important to decide if such an agreement is right for your business based on your industry, the stage and history of your company and your business philosophy. While agreements containing covenants not to compete are a familiar topic to many businesses and their employees, Texas courts generally support a public policy position disfavoring restraints of trade. Thus, non-competition agreements must be carefully drafted and reviewed to ensure that they meet certain criteria and will be more likely to withstand judicial scrutiny.

Let’s return to those 5 new employees. You have hired 1 person to handle your financial concerns, 3 people to promote and sell your product, and 1 person to manage your employees and assist you in developing your product. At the time each one of these new employees was hired, you asked him or her to sign an agreement containing a covenant-not-to-compete. You also supplied certain training and information at the time of hire to each new employee. During the course of the next year, your customer base (and therefore your business) blossoms and you consider hiring additional employees and perhaps opening a second office in a difference location. Life is good and you can finally relax, at least a little bit.

You go into the office the next day and one of your sales people gives you 2 weeks notice and says she will be opening her own office a few blocks from yours. During the course of her employment, you’ve shared information with her that you believe to be unique to your business, including sensitive and personalized customer information that you and the sales people have compiled over time. You remind this sales person of his or her covenant-not-to-compete with your business. Nevertheless, within a month, she has opened a business selling the same product as you are selling and soliciting business from your customers. What can you do?

It’s time to test the strength of your non-compete agreement in court. There are several key factors that Texas courts consider when deciding the extent to which a non-compete agreement is enforceable, including the following:

• Was the covenant-not-to-compete ancillary to or part of an otherwise enforceable agreement?
• Did the covenant-not-to-compete contain reasonable (1) time limitations, (2) geographical restrictions and (3) scope of activity limitations?
• Was the covenant-not-to-compete more restrictive than necessary to protect the employer’s business interest?

Courts will also examine whether the employee was “at-will” and the nature and timing of the consideration given by the employer in exchange for the employee’s covenant-not-to-compete. In the scenario described above, you may have given adequate consideration in exchange for the sales person’s covenant-not-to-compete, and you gave some such consideration at a critical time. Moreover, if the geographical restriction was narrow and specific to your small business, and if your agreement reasonably limited the time in which the sales person could compete with you and the scope of the activity, your company’s non-compete agreement could have some muscle to flex before the former competing employee and before the court.

Nevertheless, many factors, including factors beyond the scope of this article, can affect the power behind your business’s non-compete agreements. If you have a non-compete agreement that you’re currently using for your employees, it may be wise to have it reviewed before its enforceability is put to the test.

It might also be beneficial to consider complementary provisions, such as Non-solicitation, Confidentiality, and Non-disclosure that could help neutralize your former employee’s ability to use the proprietary information she gained while at your company to compete against you. It’s critical to be proactive when it comes to protecting your valuable customers and information.

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(512) 320-0601