Texas Non-Compete and Non-Solicitation Agreement
Many large Texas employers (especially Oil and Gas companies and Energy companies) are incorporated in Delaware or refers to Delaware laws in their employment contracts. When an employee with a Non-compete and Non-Solicitation agreement leaves a company, he or she can be sued by his or her former employer for violating the agreements. Often times, the lawsuit filed by the former employer will seek a preliminary and permanent injunction precluding the employee from soliciting it’s customers or competing with them. The success of such lawsuit depends on the application of Delaware law on non-compete and non-solicitation agreements.
Delaware law provides for 3 elements in enforcing non-compete and non-solicitation agreements
Under Delaware law, agreements by an employee not to compete with a former employer “must be closely scrutinized because they are restrictive of trade and should be enforced only to the extent th at it is reasonable to do so.” Caras v. Am. Original Corp., 1987 WL 15553, (Del. Ch. July 31, 1987) (citing Faw, Casson & Co. v. Cranston , 375 A.2d 463 (Del. Ch. 1977); Knowles-Zeswitz Music, Inc. v. Cara , 260 A.2d 1716 (Del. Ch. 1969); Original Vincent and Joseph, Inc. v. Schiavone, 134 A.2d 843 (Del. Ch. 1957)). “A restrictive covenant not to compete which is not reasonably limited geographically, therefore, is unreasonable and unenforceable.” Id. (citing Raven v. A Klein & Co., Inc ., 478 A.2d 1208 (N.J. Super. A.D. 1984); 6A CORBIN ON CONTRACTS § 1394).Under Delaware law, “for a non-compete clause to be enforceable, it must
(1) be reasonable in geographic scope and temporal duration,
(2) advance a legitimate economic interest of the party seeking its enforcement, and
(3) survive a balancing of the equities.”
Avaya, Inc. v. Ali, 2012 WL 2888474, (D. Mass. July 13, 2012) (applying Delaware law) (citing Concord Steel, Inc. v. Wilmington Steel Processing Co., Inc., 2008 WL 902406, (Del. Ch. Apr. 3, 2008)); see also Atl. Diving Supply, Inc. v. Moses, 2014 WL 3783343, (E.D. Va. July 31, 2014) (applying Delaware law).
The plaintiff/Ex-employer “must establish these elements by clear and convincing evidence.” Avaya, 2012 WL 2888474 at . “[W]here a sale of a business is not involved, courts should be less prone to enforce such covenants.” Knowles-Zeswitz, 260 A.2d at 175.
Element #1-Geographic Scope
The restrictive covenant be reasonable in geographic scope, a “non-competition agreement will only be enforced over a geographic area that is reasonable under the circumstances.” Research & Trading Corp. v. Pfuhl, 1992 WL 345465, (Del. Ch. Nov. 18, 1992). Delaware law “condones broad geographic restrictions, up to and including non-competes with a global scope.” Avaya, 2012 WL 2888474 at (citing Pfuhl, 1992 WL 345465). Often, global restrictive covenants are permitted because the restriction only prohibits solicitation of customers with whom the employee dealt on behalf of the employer and, therefore, are self-limiting. See, e.g., Sentient Jet, LLC v. Early, 2013 WL 6210643, (D. Mass. Sept. 11, 2013) (applying Delaware law) (permitting restrictive covenant covering broad geographic area because “its scope is limited to only those with whom Early had ‘material contact’ during the last twelve months of his employment,” thus enabling “Early to readily identify the entities at issue and the scope of the restriction”). Also, a nationwide or global restriction may be enforceable where “the employee would gain from the employment some advantage in any part of that market.” Pfuhl, 1992 WL 345465 (emphasis in original).
Element #2-Economic Interests
The former employer must also demonstrate that the restrictive covenant advances the company’s legitimate economic interest, such as the protection of the employer’s goodwill and the protection of its confidential information from improper use. See Radian Guar. Inc. v. Bolen, 2014 WL 2777450 (E.D. Pa. June 19, 2014) (applying Delaware law). Eliminating competition is not, however, a legitimate business interest. Id. To protect an employer’s goodwill, courts have enforced restrictive covenants precluding “former employees from dealing with the customers of their former employers with whom the employee had contact.” Id. Under Delaware law, “a former employee who has agreed not to compete over a broad area will not be permitted to compete with his former employer in an area reasonably related to his former employment.” See, e.g., Knowles-Zeswitz, 260 A.2d at 175. Therefore, where a restrictive covenant fails to include a reasonable geographic limitation or unreasonably restricts an overly broad scope of activity, the Court can limit the scope of the covenant to what is reasonable. Id.
How Texas Courts Analyze Non-Compete and Non-Solicitation Agreements
Texas Courts will hold that a restrictive covenant is enforceable only to the extent that the former employer (Plaintiff) shows by clear and convincing evidence that the covenant (1) is reasonable in geographic scope and temporal duration, (2) advances a legitimate economic interest of the party seeking its enforcement, and (3) survives a balancing of the equities. See Avaya, 2012 WL 2888474 . The key to Texas Courts ruling for the employer (and upholding a Non-Compete and Non-Solicitation Provisions) depends on whether the company has satisfied the three requirements.