I decided to share my updated Plain-Language Non-Compete with the world, and not only that, I’m walking you through it step by step to explain why I drafted it the way I did.
In Part 1 we learned:
- You should draft a non-compete in a style and format that is easy to read and present in the courtroom.
- The non-compete should expressly state that the company will give the employee confidential information.
- The non-compete should provide for giving the employee specialized training, if applicable.
- The non-compete doesn’t need a complicated definition of competing.
Next we get into the real heart of making a non-compete as enforceable as possible: reasonableness.
You probably already know that Texas law requires a non-compete to be reasonable in time period, geographic area, and scope of activity. But do you know how to draft the non-compete to meet this requirement?
Don’t worry, we’ve got you covered.
5. Should the non-compete have a reasonable time limitation?
Yes. This is a no-brainer. The statute requires it, Tex. Bus. & Com. Code § 15.50(a), and a non-compete with no time limitation is therefore unenforceable on its face.
But what should the time limitation be? This is harder, and there’s no one-size-fits-all answer.
If the non-compete is part of the sale of a business, Texas courts are likely to allow a longer time period. See Oliver v. Rogers, 976 S.W.2d 792, 801 (Tex. App.—Houston [1st Dist.] 1998, pet. denied) (lack of time limitation did not render non-compete unreasonable when it was part of the sale of a business).
So for the sale of a business, I would recommend something in the range of three to five years.
But for the typical employee non-compete, shorter is better. Your maxim should be “shorten it until it hurts.” When the length of time is short enough that it causes the client some discomfort, you’re probably getting it right.
As a rule of thumb, I say the typical employee non-compete should be limited to one year. Two years max.
Yes, there are Texas cases that find periods of as long as five years reasonable. See Stone v. Griffin Comms. & Security Sys., Inc., 53 S.W.3d 687, 696 (Tex. App.—Tyler 2001, no writ) (“two to five years has repeatedly been held a reasonable time restriction in a non-competition agreement”) (citing cases).
But the analysis in those cases is superficial. I say go shorter, for several reasons.
First, keep in mind that if a court finds the time period as written is unreasonably long, then this effectively cuts off the employer’s right to get damages for breach of the non-compete. See Tex. Bus. & Com. Code § 15.51(c). The employer can still seek an injunction, but the right to get damages is a significant bargaining chip.
Second, the employer usually has the burden to prove the time period is reasonable. If I’m representing the employee, I guarantee you I am going to try to take advantage of this. If I see a time period of two years or more, that gives me something to attack. I can almost always offer testimony from my client that at least creates a fact issue about whether the time period is reasonable.
One year, on the other hand, is pretty hard to attack. I’m not saying you could never prove that one year is longer than needed, but in most cases that’s going to be a tough sell.
Finally, one year is usually enough to accomplish your client’s key business goal: stop a departing employee from immediately moving her key customers to her new company. The first few months are usually critical. In most cases, one year should be enough time for the company to try to persuade the key customers to stay.
6. Should the time period have a “tolling” clause?
I don’t recommend it.
A tolling provision extends the time period of the non-compete by the time that the employee was violating the non-compete. So, for example, if an employee competes for six months before a court enters an injunction to stop the competition, the time period of the non-compete would be extended by six months.
The upside to the employer is obvious. The downside is that it gives the employee an argument that the time period is indefinite and unenforceable. See Central States Logistics, Inc. v. BOC Trucking, LLC, 573 S.W.3d 269, 277 (Tex. App.—Houston [1st Dist.] 2018, pet. denied) (citing Cardinal Personnel, Inc. v. Schneider, 544 S.W.2d 845 (Tex. App.—Houston [14th Dist.] 1976, no writ)).
I wouldn’t say the issue is totally settled under Texas law, so you can include a tolling clause if you really want to, but why complicate the time period unnecessarily?
Simpler = easier to enforce.
7. Should the non-compete have a reasonable geographic limitation?
Duh. Of course it should. The requirement is right there in the statute. Tex. Bus. & Com. Code § 15.50(a).
But believe it or not, I still sometimes see non-competes with no geographic limitation. How can this happen?
To be fair, there are Texas cases that say a limitation on scope of activity can be used in lieu of a geographic limitation, especially where the employee is a high-level executive who is responsible for the company’s operations everywhere, or where customer goodwill is not tied to any specific geographic area. I cover this is in Geographic Area of a Texas Non-Compete – Part 2.
Still, why chance it? Even if you need to make the geographic area extremely broad, it’s still better to have some geographic limitation than none.
But what should it be?
8. What should the geographic limitation be?
In general, the geographic limitation should coincide with the expected area the employee will be responsible for.
For sales employees, that usually means the employee’s sales territory. I call this the Sales Territory Principle. See Geographic Area of a Texas Non-Compete – Part 1.
It gets more complicated with upper-level management. But even for higher-level executives, I think you should try to define the geographic area they will be responsible for, even if that means a geographic limitation like “the United States,” “North America” or “the US Gulf Coast.”
My form geographic limitation looks like this:
It doesn’t have any more specific formula, but for geographic area there’s just no way to get around the need to adapt the clause to fit the circumstances.
9. Should the non-compete have a reasonable limitation on scope of activity?
Yes. Again, the Texas non-compete statute requires this.
But this is probably the most neglected requirement of the statute. I often see non-competes that define the restricted scope of activity too broadly.
Can you keep a secret? If I represent the employee, this gives me the argument that the non-compete is a prohibited “industry-wide exclusion.” See Burning Down the Haas: The Industry-Wide Exclusion Rule in Texas Non-Compete Law.
This is the most common defensive argument I make for employees. For a typical sales employee, if the non-compete is not limited to the customers the employee dealt with at the company, I will argue it is unreasonably broad.
On the other hand, Texas cases tend to allow restricting a broader scope of activity where the employee is a high-level executive who is responsible for the whole company, not one subset of customers.
So my non-compete form provides two options, depending on the type of employee:
Option 1 may strike some employers as too narrow. But again, the advantage is that it will be difficult for the employee to argue that the scope of activity is too broad. That’s a significant tactical advantage for the employer in a non-compete lawsuit. And from a business perspective, it focuses on the key customers that the company if probably most concerned about the employee taking.
Option 2 is broader, because it is not limited to particular customers, but note that it is still limited to customers or prospects. This is usually better than prohibiting competition with the company generally, which could be seen as a prohibited industry-wide exclusion.
I was on the fence about including “prospects” in Option 2. If you really want to make your enforceability argument strong, you could take that out.
Also note that I use the phrase “doing business” rather than some longer formulation. I think “doing business” has a common-sense plain meaning that is usually easy to understand. If the employee’s lawyer wants to try to argue that providing goods or services for money is somehow not “doing business,” good luck with that.
Now you know how to draft the non-compete to be reasonable. That is the most important part of enforceability.
But what else can you include in the non-compete to make sure it is effective and enforceable? Does it need a separate restriction on solicitation of customers? Should it include a lot of self-serving boilerplate in the event of a lawsuit?
I’ll tackle those questions in Part 3.
Zach Wolfe (firstname.lastname@example.org) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm. Thomson Reuters named him a Texas “Super Lawyer”® for Business Litigation in 2020 and 2021.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.