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Rethink noncompete contracts after big Supreme Court ruling

by on
in Employment Law,Hiring,Human Resources

A significant Texas Supreme Court decision handed down last month makes it easier for employers to write and enforce noncompete agreements in Texas. The ruling, ASM v. Johnson and Strunk & Associates, provides important protection for businesses that want to use noncompete agreements to limit unfair competition from former employees.

Under the new standard, Texas courts will now focus on whether the agreement is reasonable, rather than technicalities of how the agreement was formed. In effect, employers can require any employee—even at-will hires and those who already work for the company—to sign a noncompete if the terms are reasonable and if the employer follows through on any promises made in the agreement.

Employees must abide by the agreement no matter when their employer finally provides them with any promised confidential information. Under previous case law, based on a 1994 ruling, Texas courts typically tossed out noncompetes if the confidential information wasn't presented at the same time the employee signed the agreement, an often cumbersome or impossible task.

5 pieces of a sound noncompete

The key to a good noncompete agreement is showing a legitimate business reason for the agreement and demonstrating that:

1. The agreement is a valid contract. That is, each of the parties gave something up and received something in return. For example, a current employee who signs an agreement may do so in exchange for specialized training or access to confidential information that ultimately benefits his career.

2. The consideration given by the employer must give rise to the need for the noncompete agreement.

3. The employer delivered on its promises to train or provide confidential information before the employee left and started competing.

4. The duration of the noncompete clause is reasonable. For example, preventing an ex-employee from competing directly for 10 years is probably unreasonable, while a one-year noncompete term is probably reasonable.

5. The agreement limits competition to a reasonable geographic area. What's reasonable will depend on the business. A noncompete agreement for a barber is likely more geographically limited than one for a pharmaceutical sales rep.

Tip: If you're hiring from a competitor, make sure he or she isn't subject to a now-valid Texas noncompete clause. And talk to your legal counsel for advice on how to best take advantage of the new environment for noncompetes.  

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