The Business Dispute Law Blog by Bill Garrison

Non-compete agreements.  They need not be particularly complicated nor difficult to create, yet these employment contracts are very often the subject of controversy and even litigation.  Why? 

Simply this … such agreements are seldom audited, i.e., considered and crafted in light of the circumstances to which they are meant to apply.  More often than not, neither the employer nor the employee exercises any diligence in formulating these agreements in accordance with basic legal requirements.  Employers use form agreements that they attempt to apply in varying jurisdictions to every new hire, no matter what the new hire’s position.  (I personally have reviewed prominent defense contractor non-compete agreements that were entirely unenforceable.)  On the other side, employees sign "new hire" documents without reading the contents.

So who pays the price for this lack of diligence?  Well, usually the employer — both in not being able to prevent a former employee from harming the business by competing, and in the form of significant legal expense trying to "undo and redo" a bad agreement.  For if the employer fails to sufficiently and orginally customize the restrictions set forth in a non-compete agreement, then the agreement is thereafter unenforceable.  Further, in such states as Texas, a defective non-compete agreement remains unenforceable and cannot be unilaterally fixed by the employer (by concession), but only by judicial order or agreement with the former employee, i.e., the employee is not legally bound in any way by the subject non-complete agreement until the employer devotes significant time and money to the problem. 

Believe it or not, while the above "defect and reformation" consequences seem bad enough, these can lead to other, perhaps unforeseen, problems in the hands of a knowledgeable attorney.  For example, what happens if a business has attempted to restrain 10 employees from competing but, for reasons of defective agreements, has only successfully restrained 7 of those employees?  The 7 restrained employees can make the argument that, given the harm the business will lawfully suffer from the 3 un-restrained employees, it is of no benefit to restrain the other 7 employees, i.e., since there are 3 leaks in the boat that can never be fixed, there is no point devoting resources to fixing 7 other leaks in the boat.  The boat is going to sink.  That a non-compete agreement be of real benefit to the employer is a requirement, in Texas for example.  Peat Marwick v. Haass, 818 S.W.2d 381 (Tex. 1991). 

Why endure such uncertainty when these problems can be avoided with a little advance consideration?  Audit your non-compete agreement(s), whether you are the employer or the employee.  Know your rights and obligations under the agreement.  It could benefit you down the road in ways you never imagined.